THE BLOG

Too Soon to Call a Housing Bottom

09/23/2009 05:12 am ET | Updated May 25, 2011

Consensus seems to be that the housing market bottomed. The statistics on national home sales and prices are the key to consumer recovery, so it is hugely important.

But I have my doubts.

According to the analysis of Mark Hanson from the Field Check Group, 2009 existing home sales exceeded 2008 by 45,000 units for June and July. With expectations very low, this was taken as reason for great optimism, even though January to May 2009 were the weakest first five months in many years.

But in order to get this small improvement, herculean efforts were needed: A trillion dollars to keep rates down, and hundreds of billions in massive tax credits, mortgage modifications and foreclosure moratoriums, inter alia.

In addition, conditions this year were ideal: Prices were low as some cities suffered a decline of 50% to 70%, mortgage rates are at rock bottom and there is plenty of supply. And yet only an additional 45,000 out 2.8 million housing units sold so far year. Is that a good reason to deduce that housing has bottomed?

Now, the low cost supply of foreclosure has dried up, as banks are postponing them as much as possible. With so many people believing the worst is behind us, a miss next month could disappoint and deliver a body blow to the cheery consensus.

If you look at historical prices, the housing bubble started in 1997, when housing diverged from a historical range of average price of 12 to 14 times prevailing rents, dating back to 1953. It was 15.2 times by the end of the tech bubble in March 2000. After the Fed's reaction to the events of Sept. 11, 2001, the price to rent multiple of U.S. homes climbed to an unprecedented peak of 25.6 times at the end of 2005.

To revert back to the mean and work off the housing glut, prices will need to fall back to the historical range. We are not there yet.

Alan Schram is the Managing Partner of Wellcap Partners, a Los Angeles based investment firm. Email at aschram@wellcappartners.com.