U.S. Housing Market Has Bottomed, Now is the Time to Buy

By: Money_Morning

Martin Hutchinson writes: It looks like the U.S. housing sector has bottomed. In fact, if you’ve been thinking about buying a house, this may be the time to make your move.

Let me tell you why.

Congress and the Obama administration are considering whether to extend the $8,000 first-time-buyer tax credit for another year from Nov. 30, when it expires. With cheap money, housing may show strength in the short term, just as we’ve seen with other assets. But there is the potential for a market hiccup next year or in 2011.

When the National Association of Homebuilders released its NAHB Index for October last week, it showed a drop of one point in homebuilders’ view of the market, from 19 to 18.

The good news: The index is at double its level from last spring – when it bottomed out at nine – meaning homebuilders see an improving market.

The bad news: The index is based so that a reading of 50 is the “neutral market” view. That means there’s a long way to go, yet.

But even if Congress doesn’t opt to extend the $8,000 tax credit, 30-year mortgage rates are still down around 5.1% – close to their all-time low. But rates probably won’t remain that low for long: Building inflationary pressures and the huge U.S. budget deficit will combine to push interest rates higher.

In other words, even if housing prices are destined to drop by another 10% (except in the very worst areas, I wouldn’t expect you’d see anymore than that), you still may end up saving so much on financing costs by borrowing now that you’d be mad to wait any longer.

Housing arithmetic is always complicated but one thing I do know: 7% of $90,000 is more than 5.1% of $100,000!

The S&P/Case-Shiller composite home price index bounced nicely in July, with the 20-city index rising 1.5%, after a 1.3% jump the previous month. That’s a pretty good indication that the markets have bottomed out.

What’s more, the $8,000 credit for first-time buyers was still in force for August and September transactions (you need to close to get the credit, so deals done before Sept. 30 should squeeze under the wire). Since interest rates remained low for those months, it’s likely we’ll see further price rises then, too.

That would mirror the market in Britain, where housing prices bottomed out last spring and have risen for the six months since. Indeed, the market in London for houses priced above 5 million pounds (about $7.5 million) is apparently exceptionally strong, because of the likely level of Goldman Sachs Group Inc. (NYSE: GS) bonuses!

For those of us who aren’t about to receive a Goldman Sachs bonus, or buy a house priced above $7.5 million, the short-term outlook is still pretty good. U.S. gross domestic product (GDP) almost certainly rose during the third quarter – probably by about 3% – and is expected to rise again in the fourth quarter.

That should translate into an abatement of the flood of job losses – perhaps from the 250,000-per-month rate of the last few months to around 100,000 per month. That’s still bad, but is indicative of a recovery ahead. At that point, the outlook for the housing market will depend on what region you live in.

In Florida, California and Nevada – where prices have dropped more than 40% – there may still be a large number of foreclosures and unoccupied new buildings left over from the bubble. In those markets, therefore, the excess supply may take time to absorb.

Similarly, even with the government bailout of the automobile industry, I probably wouldn’t invest heavily in Detroit, even though prices there are lower than they were in 1995. However, in such cities as Atlanta and Dallas, prices did not rise too much in the bubble – and haven’t dropped all that much since – so the market should rest on a firm foundation and we can expect it to advance.

Beyond 2009, the prognostication is still murky. On the one hand, even a slow economic recovery should induce consumers to more seriously consider home purchases. And with inflation apparently on the upswing, the prices of those houses can be expected to increase, as well.

On the other hand, if inflation really gets a grip, the U.S. Federal Reserve will have no alternative but to raise interest rates. Housing is the most-interest-rate sensitive sector of consumer spending. So if rates rise sharply, the housing market will inevitably suffer.

As for the $8,000 credit for first-time homebuyers, it doesn’t really matter. It’s like the “Cash-for-Clunkers” program. If Congress extends it, it will prop up the housing market a bit. But if Congress doesn’t, there will be no disaster – the market will simply fall back for a few months until demand catches up with supply.

It makes only a modest short-term difference in activity, and probably only a 1% to 2% difference in the level of housing prices.

If you’ve got the money, go buy a house. You won’t find a better time to strike.

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