Five Signs That We May Be Near a Bottom in the US Housing Market

You may watch television or read your newspaper on a daily basis and come to the conclusion that the US housing market will never recover. The industry housing industry seems to be cloaked in doom and gloom right now - people are losing their houses to foreclosures, banks have thousands upon thousands of foreclosed homes on their books and entire condominium projects are sitting half-empty. How could we possibly be close to a bottom in the US housing market if all of this doom and gloom still exists in the marketplace?

In an article that I wrote a few weeks ago, I talked about "contrarian investing". "Contrarian investing" is when you go "against the crowd" and commit your money to an asset when everyone else seems to be intent on selling it. As a contrarian investor, you are looking for opportunities to buy when assets are oversold due to heightened fear and forced selling in the marketplace. What people don't seem to understand about the real estate market is that it has cycles just like the economy. You have your boom periods, and you have your bust periods. We are currently in a bust period right now, but that doesn't mean that we will stay in one forever, because we won't.

Here are the five reasons why I think that the bottom in the US housing market is close at hand:

1. Supply seems to be hitting a high; demand will eventually pick up. Due to the increased supply in the marketplace (due to foreclosures, people walking away from their deposits in newly built condominium buildings, people trying to sell at a loss because they realized that they can't afford their expensive home), prices have fallen precipitously over the past half a year or so. Some of the price drops have been jaw-dropping - in some cities in the United States, a home that you could have bought for 500k can now be had for 300k. Banks have been forced to drop prices in order to move homes off of their books, and distressed sellers have been forced to do the same. We are starting to reach levels where many buyers are starting to get interested, and this will mean a drop in supply and an increase in demand.

2. Fiscal stimulants. The ferocious drop in interest rates, the money that is being doled out by the federal government - this will all factor into the big equation soon. Eventually people with money and good credit are going to start taking advantage of the rock bottom interest rates and rapidly dropping home prices. For people in this position, there are going to be bargains galore (there already are). Many people have simply been waiting on the sidelines, but once they start to see a drop in supply and a flattening out of home prices, they will jump in, and fast.

3. Perception is reality. People believe what they are told in newspapers and on TV. For the past six months, they have been told that the US real estate market is toxic and that they should stay away. Well over the past few weeks or so, I have been reading more and more articles saying that the bottom is close at hand. This type of optimism will start creeping into the marketplace, as people do not want to miss out on a good deal. There is a definite herd mentality in the marketplace - that herd is about to turn decidedly more optimistic.

4. Recession. We are likely in a recession right now, mainly due to the popping of the credit bubble in the United States. The thing about recessions is that you don't know you are in one until after the fact, due to the fact that economic reports are released once data has been compiled. I say that we are in a recession right now, and this has definitely hurt the housing market. I also believe that we are close to the end of the recession, and that a rebounding economy will have a positive impact on the housing market going forward.

5. Tightening lending standards. This was the stake in the heart for the housing market in the past year, as banks were much less willing to lend money for mortgages. However, this will strengthen the housing market going forward. With more restrained lending policies, banks will be helping to create a marketplace that is stronger and less volatile going forward. People who buy homes will actually be able to afford them, and there will be less "panic selling" going forward. You are not going to get the frothy market conditions of 2005 any time soon, but instead you will get a strong housing market that will reward buyers will stable returns over the next few years.

Whether the market is bottoming now or in a few months, I definitely think that the bottom is close at hand and that sophisticated investors should be turning their attention to the US housing market.


Filed under: Real Estate News | The Economic Meltdown | General Knowledge