Has Housing Hit Bottom?

NEW YORK ( TheStreet) -- With unemployment still rising, variable mortgage resets due over the next two to three years on hundreds of thousands of houses with mortgage principal greater than current market values, can we actually be at a bottom?

There have been recent proclamations that a housing bottom has been reached. For example, Jim Cramer declared that the housing bottom occurred on June 30, 2009. There are some data points in sales volume and national price averages to make the case that a bottom may be here, or at least close at hand.

There is a glimmer of hope from new-home sales volumes. In the graph below, we see the remarkably reproducible seasonal sales-volume cycles since 1999. In the first half of 2009, the seasonal rise was stronger than 2008, although weaker than any other year shown.

What is noteworthy about 2009 is that there was a higher volume in June than April. That happened only once before in this 11-year period (2002). What happens in the next three months (July through September) will be go a long way toward determining whether or not the four-year decline in number of new-home sales may have been reversed.

New-Home Sales
Source: U.S. Census Bureau

The U.S. Census Bureau also reports housing starts each month. The average annual rate for the first six months of 2009 is 530,000 compared to 582,000 for June. It does not bode well for a bottom when the number of housing starts is 35% to 40% higher than the number of sales (372,000 average annual rate for six months and 432,000 for June). Something just doesn't add up here.

This cannot be explained by new houses being built under contract (rather than speculation houses) because, for a new house, the sale is registered when the contract is signed. This mismatch indicates the bottom is not in place because more new houses are being built than sold.

The National Association of Realtors (NAR) reports sales data for existing homes. The graph below shows that data since 1999. The seasonal pattern is not as dramatic as in the case of new home sales, but it has been quite reproducible in four of the five years starting with 2005. The pattern shows sales peaking in the third quarter of each year, rising above the level of sales in the first two quarters. This is shown with the horizontal reference lines added to the graph.

1-Family Home Sales vs. Total Existing Home Sales
Source: Realtors.Haver Analytics

There was no sales peak in the third quarter in 2006 as sales fell throughout the year.

Just as with new-home sales, we will need to see the sales volume maintain current levels or rise into the fourth quarter to assure the sales volumes for housing have bottomed. If the seasonal pattern is repeated, it will take another year to determine if the sales volume bottom is in.

Have home prices bottomed? The NAR has reported that the national average existing home price has risen from the previous month in four of the last five months (February through June). The Case-Shiller Indexes, through April, showed no price increases to that point for national averages. However, eight of 20 major markets did show month-over-month price increases for April ranging from 0.3% to 1.8%. (

Homebuilder stocks Pulte Homes ( PHM) and Centex ( CTX) were more than 2% higher Tuesday, while Lennar ( LEN) lost about as much.)

The Case-Shiller data for May shows the first increase month over month in this real estate downturn. Both the 10-city and 20-city indexes have increases from April to May of around 0.4% and 10 of 20 major markets show increases month over month ranging from 0.1% to 1.9%. An eleventh market (Cleveland) shows a 4.1% increase and two other markets had increases indistinguishable from no change (less than 0.1%). Only seven of 20 major markets showed price drops for May, led by Las Vegas dropping 2.6%.

When I look at the historical relationship between average family income and average home prices, it appears that prices still have about 10% more to fall to reach historic trend lines. This is shown in the following graph.

National Average Home Price and Income
Source: Case-Schiller, U.S. Census Bureau

The average ratio of house price to average income was 1.9 from 1987-2001. For 2002-07, the average was 2.7. To return to the 1.9 ratio (using 2007 average income), the average house price should be $128,500. If average family income does not decline in 2008 and 2009, the target average price has been reached with the Case-Shiller 1Q/2009 national average home price of $128,100.

The uncertainty in where we are in the housing cycle centers on continuing foreclosures and how the economic cycle recovery will (or will not) unfold. Those factors will be reviewed in a future article.

-- Reported by John B. Lounsbury in Clayton, N.C.
John B. Lounsbury is a financial planner and investment adviser, providing comprehensive financial planning and investment advisory services to a select group of families on a fee-only basis. He worked for 34 years with IBM, and spent 25 years in R&D management and corporate staff positions. He also was a Series 6, 7, 63 licensed representative with a major insurance company brokerage for nine years.

Specific interests include political and economic history and investment strategy analysis. He holds degrees from the University of Vermont, Columbia University and the Illinois Institute of Technology, where he studied chemistry, physics and mathematics. He is a contributor to Seeking Alpha and his own blog, PiedmontHudson.