The earliest we see a real bottom to housing is late 2010 or 2011. By “real bottom” I’m talking about housing values in general rising (assuming we don’t visit scenario one and have significant inflation). There’s nothing that can be done about that. We have to work through the excess capacity. (More on this below.)

We had the Case-Shiller home-price data come out this week. Home prices are still in free fall, down almost 19% year over year, and 32% from their 2006 highs (see chart below). If we get back to the long-term price-growth trend, we’d see another average 10% drop. And as prices tend to overshoot on the upside and the downside, in some markets they could fall even further.



Yet there’s hope we won’t see a fall-below trend. Housing in many areas is starting, once again, to become affordable to more Americans (see chart from Moody's below) and even first-time home buyers. The cure for the housing crisis is actually lower prices, as that brings more potential home buyers into the market. While housing sales are still quite depressed, it's homes in foreclosure that are selling as buyers correctly perceive bargains.



On the negative side, the supply of homes available for sale is again rising as more foreclosures come onto the market. And as we’ll see, this foreclosure trend is going to slow down soon. (Thanks to Greg Weldon at www.weldononline.com for the chart.)


Click to enlarge

Notice in the above chart that the supply of homes for sale is over 10 months. But that average can be misleading: I read recently that in many areas of Florida, it’s over 40 months; and that’s for homes that can be financed with government-sponsored "conforming loans” - typically up to $719,000. But what if your home cost more than that? National Association of Realtors chief economist Lawrence Yun said the supply of existing homes for sale over $750,000 has reached a 40-month supply.

Diana Olick, the sharp CNBC real-estate reporter, had the following to say:

"That's going to mean a new phase of the current housing recession. So far we've seen the 'correction' of a boom market that was driven by faulty, exotic loan products, investors looking to make a quick buck, and average Americans using their homes as ATMs. Now the losses are being driven by traditional economic factors and by sweeping price drops across the nation.

"Yesterday Fitch ratings estimated that up to 75% of the modifications now being done through the administration's Making Home Affordable program will re-default in 6 months to a year. I'm not talking about the old modifications, which were largely repayment plans that could actually raise monthly payments. I'm talking about the new mods, which lower monthly payments to 31% of a person's income. I couldn't understand Fitch's reasoning, so I called them.

"Diane Pendley, managing director at Fitch, said the problem is not on that 'front-end' ratio, but on the back end, which is all of the borrowers other debt (credit cards, car loans, student loans, etc.). She said that in talking with servicers, she's hearing other debt is so high that most of today's troubled borrowers cannot afford any loan payment at all, even at a very modest debt-to-income ratio. 'Just getting the house payment done doesn't mean their lifestyle is sustainable,' she said.

"Another problem is that with home prices continuing to fall, more and more borrowers, who are essentially just renting their mortgages now because they will never see any home equity, are walking away. Even if the mortgage payment is low, the property taxes and home maintenance costs are padding that payment, and without an upside to the investment, there's simply no reason to pay. Suffice it to say, the foreclosure crisis, on the high and low ends, is not getting any better."

And it gets worse.