When Will Housing Hit Bottom?

My FOX INDEX, which measures the distance to a healthy market (12,000 Dow, 1,300 S&P, 2,500 NASDAQ), hit a new bottom of -7,013 (we run the 7-months-old FOX INDEX whenever it hits new lows), 44% of the way from healthy to zero [see chart]. That’s bad. The market hasn’t been lower in 12 years.

To be contrary, let’s suggest reasons to be calm. What’s happening in finance pretty much makes sense. In the late 1990’s, people said there was too little reason for the dot.com boom to keep ballooning. They were right. Dot.com went bust in 2000.

In 2005, people warned low interest rates and subprime financing were pushing housing prices to unnatural highs. They were right. Housing ballooned in 2005-6, and went “pow!” in 2007-8. Now we are paying the price. Markets move in cycles. Boom-bust-boom-bust. Good times follow bad, and we always overshoot in both directions. When will we hit bottom? When we do, the bottom will be irrationally low. It always is.

Robert Samuelson writes about the problem with the current housing crisis:

➢ home prices are down 26% from their peak. Since late 2007, housing-related jobs -- carpenters, realtors, appraisers -- have dropped by 1 million, a quarter of all lost jobs.

➢ the problem is too much supply chasing too little demand. Huge unsold homes inventories depress prices and construction.

➢ housing may be more affordable now than in decades, thanks to lower prices and falling mortgage rates. The National Association of Realtors’ "affordability index" estimates the family income needed to buy a median-priced house is now the highest since the index's start in 1970.

Samuelson speculates as to why lower prices don’t spur demand. He blames deflationary psychology: if yesterday's $250,000 house is now $200,000, it may be $175,000 by June. Waiting is better.
This deflationary psychology is self-fulfilling since the more buyers wait, the more prices fall. Samuelson wants to bribe prospective buyers not to wait by giving them a 10% tax credit, up to $15,000, on a new home purchase.

Whatever the specifics, government does have to act to break the deflationary spiral before our recession becomes a depression, and the wait for the next boom costs us all too much.