Housing Market...Signs of Improvement?

This is an article from "Real Money by TheStreet.com". I don't know about you but for me...any glimmer of improvement is worth taking a look at!

RealMoney by TheStreet.com
Housing Could Bottom Sooner Than You Think
Tuesday November 25, 10:00 am ET
ByDavid Sterman, RealMoney Contributor

If you took a snapshot of the current housing market, you would find little reason for cheer. A flood of "for sale" signs blight many a front yard in neighborhoods all across America, and buyers looking for foreclosed properties seem to be the only visible signs of support. Also, as Jim Cramer recently noted, it is not helpful that homebuilders keep adding to supply.

Nevertheless, the total supply of unsold homes is steadily dropping. As Tony Crescenzi points out, the rate of new household formation handily exceeds the amount of genuinely new homes on the market. (Some construction is the result of tear-downs or storm-damaged properties.)

Importantly, a number of indicators suggest that the worst of the housing slump may have passed. For starters, the steady drop in home prices is beginning to moderate. Home prices had been slumping 2% sequentially for a good portion of 2007, but those drops are now in the 0.50% to 1.00% range. While home prices may fall a bit more over the next few months, they may finally flatten later this winter.

In addition, mortgage rates are on the decline. After hitting 6.63% last July, the average 30-year mortgage has fallen to around 6%, and rates could head yet lower: 10-year T-bill yields have plunged to around 3.15% (at the time of this writing), which implies that 30-year mortgage rates could fall toward the 5% mark.

More telling is the historical relationship between owning and renting a home. From 1975 to 2000, that ratio was fairly constant, but in recent years, it has been far cheaper to rent than buy a home in many markets, as home prices shot up and rental costs rose only modestly. Now, the stunning drop in home prices has pricked a hole that bubble.

As recently as 18 months ago, the cost of owning was far above historical trends (more than 20%) in 16 out of the 20 cities surveyed by Case-Shiller. Now, only four out of the 20 markets surveyed show a 20%-plus gap. In the other 16 markets, the cost to own has reverted back toward the historical mean and, in some cases, is even below the cost of renting.

So many people insist that there are no buyers out there ready to pounce, but that's not the problem. There are plenty of potential homeowners waiting in the wings, most of whom simply want to see some stabilization in housing prices. When sentiment turns among these folks, the housing market will show real signs of life. We do not need to wait for the glut of unsold homes to fall to zero; we just need buyers' confidence to return.

To be sure, rising unemployment does not instill confidence, and this thesis may not play out until unemployment appears to have peaked, which may not happen until later in 2009. Before then, however, the combination of low mortgage rates and a continuing increase in the economic merit of owning vs. renting is bound to start bringing some buyers back into the housing market.

Of course, the latest read on existing home sales wasn't exactly encouraging, and that's likely to be the case for the next couple of months. That being said, investors should closely scrutinize subsequent readings for clues that this ultra-important segment of the economy begins to show signs of getting off the mat.
Following the old saying "it's always darkest before the dawn," sector share prices have been hitting new lows. The S&P Homebuilders Index hit new lows last week after having fallen more than 75% in the past three years. Many of the stocks in the index are selling not far above tangible book value at this point. For example, Pulte Homes sports a market value of about $2.2 billion yet has tangible book value in excess of $3 billion.

The question for many investors is whether that book value will erode further. That may happen if real estate carried on the books needs to get written down even further, which, again, relies on home prices finding a bottom. As a result, a floor in home prices may bring this sector back into the spotlight in the context of impressive price-to-book-value ratios.

Net-net: While many think that the housing bottom is several years away, it could come within the next two to three quarters.