How Long Before Housing Prices Stabilize?

Most economists agree that the key to ending the current downturn is for home prices to stop falling. When exactly that'll happen is the great unknown.

Mark Zandi of Moody's Economy.com and Robert Shiller of Yale University and Case-Shiller housing derivatives fame think it will take until at least 2010.

The other half of Case-Shiller, Wellesley's Karl Case, is a bit more optimistic. In a new paper presented today at the Brookings Institution, he lays out his, er, case.

The reasons why we're nowhere near the end are plentiful: There's a backlog of unresolved and under water mortgages, the inventory of unsold properties is high, there could be legal delays associated with the unwinding of credit derivatives that helped fuel the housing boom, inflation or interest rates could march higher, and higher underwriting standards and rate spreads could make it harder for homes to change hands.

But here are some reasons why we may be closer to a bottom than most think. First, Case notes that in almost all areas where foreclosures have dropped, the Case-Shiller Index for that region has gone up.

Certainly for a broad based index to actually turn up while the auction process is running implies that something is happening.

(By "broad based," Case is referring to the fact that Case-Shiller doesn't make a distinction between sales of foreclosed properties and regular sales.)

Second, Case thinks what happens in California will decide how the national housing picture turns out, and signs are turning positive for the Golden State:

Existing home sales in the state are up to over half a million. With foreclosure sales running at about a third of total sales, prices are down and are continuing to fall, but at a much slower pace in June. And of course Californian's have been here before. Most residents were here to see the three previous boom-bust cycles. Every time home prices fall substantially, within a few years they came roaring back.

Third, in previous housing cycles real gross residential investment hit 3.5 percent of GDP at the trough. For the current cycle, this figure was at 3.1 percent as of the second quarter (though Case adds that there is "no sign of rising soon"). Another indicator also points to a bottom:

Since the early seventies, we have had four major housing cycles...In the first three cycles, starts fell by over 60 percent to less than a million. When it gets below a million, it has historically turned upwards. In the most recent cycle, starts hit exactly a million in December 2007, and then bounced up and down for a few months. The lowest point through August has been the July 2008 figure of 965,000.

Case is hesitant to say that we've reached a bottom, but he does predict that we'll eventually get there:

...maybe not today, maybe not tomorrow, but soon....