March column for Builder & Developer magazine now online

My column for the March 2015 issue of Builder and Developer magazine is now posted online.

For this issue, entitled "The Housing Rebound Continues, Version 2.0" I wanted to revisit the state of the economic rebound as well as the slow recovery in the housing market.  An excerpt:

Last December, I wrote about a slow but steady housing rebound that seemed to suggest an even stronger 2015, and this is certainly still the case. However, more updated economic information from the fourth quarter of 2014 and the first part of 2015 seem to point to a different type of animal: Look for 2015 to be the year that we see the continued return of the retail buyer, and especially the first-time home buyer...

Until the prime-age employment-to-population ratio rises from the current 77.2 to closer to 80 percent, the U.S. economy likely won’t see consistent and meaningful wage growth. It is mainly due to this weakness in wage growth— along with inflation that remains below its target of two percent and the decline in GDP during the fourth quarter of 2014—that Federal Reserve Chair Janet Yellen has continued to postpone any hike in short-term interest rates...

To read the entire column, click here.

To read the entire March 2015 issue in digital format, click here.

February column for Builder & Developer magazine now online

Greetings from the 2014 IBS!  Last night I got to tour The New American Home for this year in Henderson, Nevada.  More on this home and my visit in a separate blog post.

For now, my column for the February 2014 issue of Builder and Developer magazine is now posted online.

For this issue, entitled "The Road to Housing Recovery," I wanted to review why this housing recovery has seemed so anemic in comparison to previous ones.  An excerpt:

Although the housing rebound is definitely here to stay, a major source of frustration for many in our industry is the pace of sales compared with previous economic recoveries. Both housing starts and permits, which grew steadily throughout most of 2013, dipped in December versus November even as prices continued to rise, and there remains plenty of pent-up demand in the marketplace.

Meanwhile, builder confidence is taking a brief rest due to a combination of rising construction costs, a shortage of skilled homebuilding labor, too-low appraisals and a lending environment which continues to be skewed towards only the best candidates with near-perfect credit scores and reliable W-2 income. ..

To read the entire column, click here.

To read the entire February 2014 issue in digital format, click here.

December column for Builder & Developer magazine now online

My column for the December 2013 issue of Builder & Developer magazine is now posted online.

For this issue, entitled "The Rebound Enters Adolescence" I reviewed what happened with the economy and the housing market in 2013 and what to expect in the year ahead.

An excerpt:

A year ago, I wrote about the excitement of a housing rebound that finally seemed to have legs, with all relevant indices showing positive growth. Today, despite numerous economic and political headwinds that have been regularly buffeting the demand for new homes, I think it’s safe to say that the rebound is here to stay, but is transitioning into the next stage which will likely face steeper interest rates, tighter lending standards and higher building costs...

To read the entire column, click here.

To read the entire December 2013 issue in digital format, click here.

2013 in Review

A year ago, I wrote about the excitement of a housing rebound that finally seemed to have legs, with all relevant indices showing positive growth.  Today, despite numerous economic and political headwinds that have been regularly buffeting the demand for new homes, I think it’s safe to say that the rebound is here to stay, but is transitioning into the next stage which will likely face steeper interest rates, tighter lending standards and higher building costs.

For the month of August 2013, seasonally adjusted annual new home sales rose by 7.9 percent over July totals to 421,000 units, and are up by 12.6 percent year-over-year.  At the same time, however, median sales prices rose by just 0.55 percent over the last year, while inventory rose from 4.6 to 5.0 months.  While the relatively tight inventory levels can be traced mostly to negative equity, fewer distressed sales and a depressed supply of new construction, the combination of higher interest rates and slumping consumer confidence is certainly contributing to a potential but temporary pull-back in activity.

According to the most recent outlook from Freddie Mac, we should expect the housing recovery to take some time, especially since the economy won’t be running at its full potential until after 2015.  Nonetheless, their chief economist notes that the market should continue to absorb these economic shocks and improve further in 2014, with 1.15 million new housing units added to the existing stock.

Builder confidence, which had climbed to 58 last August on the NAHB Housing Market Index (HMI), has since settled back to 54.  This recent dip has been largely attributed to the cost and availability of labor and buildable lots, as well as ongoing political uncertainty in Washington.  Still, according to the newly minted NAHB/First American Leading Market Index (LMI), 52 of the 350 metro areas tracked regularly have returned to or exceeded pre-recessionary levels of activity.  With a score of .85 in October based on current permits, prices and employment data, the national housing market is thus operating at 85 percent of normal capacity.

That improvement is also due to builders continuing to pull more permits and start more homes.  In August 2013, they pulled a seasonally adjusted annual total of 918,000 permits, which was down 3.8 percent from July but 11 percent higher than the same month of 2012.  Housing starts totaled 891,000 units per year in August, for an increase of just 0.9 percent since July but up by 19 percent over the last year.

For builders, however, there is definitely a concern about future profit margins, mostly due to these higher costs for materials, labor and especially land.  The Dow Jones U.S. Home Construction Index, which tracks major public builders, has also taken notice, declining by over 20 percent since last peaking at in May 2013.  Nonetheless, there is still enough confidence in the rebound for Toll Bros. to recently snap up California’s Shapell Industries and its 5,200 lots for $1.6 billion as well as for TRI Pointe Homes’ $2.7 billion merger with Weyerhauser’s own homebuilding business, which gives it access to 27,000 lots sold under brands including Pardee, Winchester and Trendmaker Homes.

After hitting the highest level in nearly four years during August, existing home sales fell for the second consecutive month in October to an annual rate of 5.12 million units. Even with this pullback, these sales have remained above year-ago levels for the last 28 months, with monthly sales totals up by 6.0 percent over October 2012.  With just 14 percent of distressed sales in the mix, sales prices rose for the 11^th consecutive month to $199,500, up 12.8 percent over the past year.
  

However, one important consequence of these rising prices has been lower affordability, which has fallen to a five-year low as home price gains have easily outpaced income growth.  According to the NAHB/Wells Fargo Housing Opportunity Index (HOI), 64.5 percent of potential homebuyers nationwide could afford the median-priced home during the third quarter of 2013 -- up substantially from the last trough of 40.4 noted in the same quarter of 2006 but down 13 percentage points from the first quarter of 2012.

Still, for the 49 percent of buyers paying cash in September – at least according to RealtyTrac – rising interest rates aren’t relevant, especially for the institutional funds which have invested up to $20 billion for over 200,000 homes added to the nation’s rental stock.  What remains to be seen is what happens when the low-hanging fruit has been picked off and these deals no longer pencil.

Indeed, may we continue to live in interesting times.

BuilderBytes' MetroIntelligence Economic Update for 10/11/13

Please click here to see the edition of BuilderBytes for 10/11/13 on the Web.

In this issue of the MetroIntelligence Economic Update, I covered the following indicators:

• 52 housing markets have now returned to or exceeded pre-recessionary levels
• Consumer credit rose in August but credit card use declining

Want to advertise in the newsletter and reach over 130,000 readers? Contact National Sales Manager Nick Cosan at nkosan@penpubinc.com.

May column for Builder & Developer magazine now online

My column for the May issue of Builder & Developer magazine is now posted online.

For this issue, entitled "The Housing Market Roars," I reviewed the strength of the housing market and if the rebound is sustainable.  An excerpt:

By almost any measure – and as noted regularly in BuilderBytes’ MetroIntelligence Economic Update -- the housing market is not only on the mend, but rebounding much faster than most economists and housing analysts predicted. Not only did the median price for existing homes rise by nearly 10 percent nationally over the past year, but they continued rising during the seasonally slow winter months, and already show signs of gaining altitude as the spring buying season continues. 

Meanwhile, a combination of reduced new home construction, fewer foreclosures, investors paying cash for homes to rent out and owners still sitting on underwater homes means inventory levels that have fallen to 12-year lows. So is the current scenario just an economic blip, or have we finally launched into a sustained rebound that will last? 

To read the entire column, click here.

To read the entire May 2013 issue in digital format, click here.

Is the Housing Market Rebound Sustainable?

By almost any measure – and as noted regularly in BuilderBytes’ MetroIntelligence Economic Update -- the housing market is not only on the mend, but rebounding much faster than most economists and housing analysts predicted.    Not only did the median price for existing homes rise by nearly 10% nationally over the past year, but they continued rising during the seasonally slow winter months, and already show signs of gaining altitude as the spring buying season continues.

Meanwhile, a combination of reduced new home construction, fewer foreclosures, investors paying cash for homes to rent out and owners still sitting on under-water homes means inventory levels that have fallen to 12-year lows.  So is the current scenario just an economic blip, or have we finally launched onto a sustained rebound that will last?

This answer is that this rebound may have some legs.  For one, home prices nationally are still below their long-run average compared to incomes, and affordability has rarely been higher.  Home builders, who have long struggled to gain traction with skittish buyers and had to compete against discounted foreclosures, are now facing shortages of labor, credit and finished lots to fulfill the rising demand for new housing, pushing NAHB’s Housing Market Index (HMI) in April down by two points to 42 (anything above 50 indicates more builders view conditions as good).  Consequently, whereas housing starts in March rose by nearly 47% over the past year, building permits rose by a much smaller 17% as builders must now address the rough edges of the rebound.

One reason that demand now exceeds supply is that while household formations were in hibernation as people doubled up with roommates, families or simply postponed divorce, population growth continued unabated.  Today, there are potentially millions of renters and households living in shared quarters who are ready to become home buyers given that they pass muster with today’s tougher credit standards.

Another reason for the supply imbalance is that investors -- large and small, foreign and domestic -- have increasingly funneled cash into what is now viewed as a safe investment:  U.S. real estate.  Currently, nearly one-third of all home sales are due to cash buyers, and it was this fairly consistent level of activity over the past two years which put that long-awaited floor under prices (which had foundered as federal and state tax credit gimmicks wore off.)

That fear of catching the falling knife, which froze the housing market for several years, has been replaced by the boom-era fear of missing out on the upside.  For these investors – which include brand-name private equity firms such as Blackstone Group and Colony Capital as well as smaller outfits issuing their own private placements for debt – they’ve managed to ignite a rental property boom, which has in turn put pressure on owners of traditional apartments.  What remains to be seen is what happens to these rentals when prices are no longer rising and rents have stalled, yet fund investors are still demanding the returns they were promised.  In contrast, traditional ‘mom and pop’ landlords can simply pay off the mortgage and then rely on the additional cash flow when they retire.

If there is one unknown which may derail the strength of this recovery, it is interest rates:  what happens when rates return to 5% or 6%, or even the 8.38% average noted over the last 49 years?  It’s hard to over-estimate the power that historically low interest rates have on affordability levels:  the same buyer whose $1,000 monthly payment would allow them to purchase a $165,000 mortgage at 6.1% (the rate in late 2008) could purchase a $222,000 mortgage at 3.5%, thereby boosting their purchasing power by a third.  This provides today’s buyers with a classic dilemma:  pay more today than they did a year ago, or pay even more in the future when interest rates may be higher.

In addition, home equity lines of credit are almost certain to rise as soon as the Federal Reserve ends its current policy of near-zero interest rates.  If the minutes from the most recent Federal Open Market Committee (FOMC) meetings are to be believed, then “QEIII” (the third round of quantitative easing) could end before the end of this year, and that could send variable rates higher – albeit slowly.  But for that to happen, the economy will have likely proven that it’s definitely on the mend, and that’s the sort of problem the federal government –and the yawning deficit – would almost certainly like to face.

2011 in Review: A Rebound Delayed is Not a Rebound Denied

In 2011, a not-so-funny thing happened on the way to the rebound: it was delayed. Whether due to poor consumer confidence, tighter credit standards, high unemployment, delayed foreclosures or some combination of the above, it’s become clear that millions of potential households have delayed the move to their own, private abodes until the economy -- and their aspirations -- improve. But both things are actually getting better – albeit very slowly.

About a year ago, I wrote about how this doubling up with friends or relatives had actually meant that the country was technically under-housed to the tune of well over 3 million households. Given continued population growth, that is even more true now, but with the unusually slow rebound from the Great Recession, builders and developers have had to exercise yet more patience while shepherding future projects along.

However, aside from continued troubling signs from Europe, the economic news is gradually beginning to improve. For example, U.S. GDP, which squeaked along at 0.4% and 1.3% in the first and second quarters of 2011, respectively, accelerated to 2.0% by the third quarter. Retail sales are up, led mostly by gains in cars and electronics. Both business sales and industrial production are rising, and the consumer price index recently declined, suggesting that inflation is being kept in check.

From the point of view of the building community, sentiment is beginning to improve after multiple months of treading water, with the NAHB/Wells Fargo Housing Market Index rising to 20 in November, or the highest level noted since May of 2010. In addition, the national Housing Opportunity Index (which measures housing affordability) has been consistently rating above the 70% mark since the beginning of 2009. According to the Improving Market Index, 30 metro areas made the list for November as the homeownership rate reversed months of decline to rebound slightly to 66.1%, and housing prices seem to have stabilized in most places.

Even building permits, which had struggled throughout most of 2011 to match 2010 levels, are finally rising, although that’s mostly due to the year-to-date performance of the multi-family sector (+32%) versus declines for single-family permits (-8.4%). Still, October’s permits were the highest since December 2010 for single-family homes and October 2008 for multi-family units.

Nonetheless, there remain considerable headwinds weighing on the nation’s housing market. The economy is simply not where it should be at this stage of the business cycle, which has meant continued weakness in the job market. Both pending home sales and the remodeling market continue to struggle, and annualized new home sales remain stuck at about 300,000 units with an inventory timeline of just over six months. Annualized sales of existing homes continue to hover close to the five-million-unit level with an inventory timeline of about 8.5 months

Moreover, looking towards the long term, there is a concern that the weakness in the housing market over the past few years will have a larger impact on household formations, due mostly to both marriages and new births being delayed by those in their 20s and 30s. Indeed, up to two million such households which would otherwise be looking for their own homes have had to postpone those plans due to economic or social duress.

And of course a lower birth rate could certainly put additional pressure on long-term safety nets such as Social Security and Medicare, which require a robust tax base to meet promised obligations. But hopefully that’s a problem which will be more than reversed as the nation’s builders eventually gear up to address the pent-up demand silently but steadily building up nationwide.

Could housing come back with a vengeance?

Due to the extremely low production of new housing units in the U.S., for the last couple of years it's not been keeping up with implied demand as the result of new households forming. For now, those new potential households are back home living with family, doubling up with roommates or staying in college to get that Masters Degree. But eventually as the economy rebounds, so to will the need for new housing. In the following video interview, Morningstar's resident expert Eric Landy explains why:

April column for Builder & Developer magazine now online

My latest column for Builder & Developer magazine is now online, and focuses on staffing up for the eventual housing rebound. For now, an excerpt:

...sometime over the next 18 months, builders and developers will again be staffing up to fill various positions, and yet on social networking sites such as LinkedIn, I see people with 15 to 20 years of doing the exact same thing with different companies. Perhaps they’re good at some specific task, but for the next stage of real estate development, I think hiring people with multiple skill sets will ultimately separate the winners from the laggards.

Being brave enough to try out new things -- whether it’s striking out on your own or switching to an entirely new department – also shows the type of leadership qualities which help mold future executives. In many cases, those hints of future brilliance often occur in places far outside of the building industry, such as volunteering for a local political race, coaching a soccer team or organizing a church event, all of which reveal skills essential for any workplace...

Staffing up for the (eventual) rebound

Back in the early 1990s, I once interviewed for a market research job with a public home builder for which I knew I was perfect. With multiple recommendations from industry contacts as well as from the person who currently had the job but was leaving the company, I figured I was a shoo-in for the position. But I wasn’t. In fact, the job went to a guy who had worked for a well-known accounting firm which focused on real estate. Yet something in my gut told me this guy wouldn’t last because the job was much more than simply figuring out spreadsheets: it also involved the sort of qualitative experience that allows an experienced consultant to identify what makes a community, floor plan or marketing strategy better than the competition’s.

Less than a year later, the winning applicant had moved on, probably to another accounting firm, thus leaving the builder to replace the same position twice in as many years. So what went wrong in the hiring process? I’d say it was because the person making the decision made the very common mistake of hiring the resume, and not the person behind it.

With that experience behind me, I had the chance during the recent boom years to hire a consultant to work with other members of a well-entrenched team. For someone focused too much on the resume, he certainly wasn’t a shoo-in, either, having hopscotched for years between new home consulting and selling existing homes. But I was still impressed with his reasons for trying out new positions in real estate, his easy-going nature and thought that both existing staff and clients would like working with him.

The kicker, of course, was whether or not he could write with the clarity and vocabulary required of the position, so I asked for a writing sample. And not only was he a gifted writer, but he turned out to be a tremendous asset to the team – all because I considered his resume merely a starting point and nothing more. In fact, it was his varied experiences which made him even more qualified for the position, because we could then take on a greater variety of assignments as opposed to the limited menu that had been typical in the past.

I bring this up because sometime over the next 18 months, builders and developers will again be staffing up to fill various positions, and yet on social networking sites such as LinkedIn, I see people with 15 to 20 years of doing the exact same thing with different companies. Perhaps they’re good at some specific task, but for the next stage of real estate development, I think hiring people with multiple skill sets will ultimately separate the winners from the laggards.

Being brave enough to try out new things -- whether it’s striking out on your own or switching to an entirely new department – also shows the type of leadership qualities which help mold future executives. In many cases, those hints of future brilliance often occur in places far outside of the building industry, such as volunteering for a local political race, coaching a soccer team or organizing a church event, all of which reveal skills essential for any workplace.

My own resume still lists some of my own volunteer work from five to ten years ago, and I know some well-meaning experts might declare such things irrelevant. But I think it’s still quite relevant how I managed -- through sheer force of will and preparation -- to convince a nationally known charity, a top television network, a major studio and one of the most successful sitcoms on the air to take a chance on an unproven idea that had never been done in the history of the medium.

In August of 1999, “An Evening With Frasier” was the first of five charity fund-raisers set around a live taping of a top TV show, and that experience taught me that in any business, success is achieved by assembling the right team, constantly leaning into your own zone of discomfort and having the willingness to respectfully ask for the moon but remaining flexible enough to deal with ‘no,’ And you’ll never find those qualities if you simply skim through resumes looking for specific code words.

Has housing turned a corner?

So is December's rise in existing home sales the early sign of a market rebound or a statistical anomaly on the way to further declines? A story in Reuters ponders the question:

Until now, plunging home prices have been keeping many potential home buyers at bay because they were leery of buying an asset that was all but guaranteed to lose value, at least initially.

Now, though, prices appear to have fallen enough in some regions to make buying cheaper than renting, particularly in the West. Add with record low mortgage rates, demand has started to rebound...

Home prices have dropped so much in some areas of California that monthly mortgage payments on single-family detached homes are comparable to apartment rents.

And while distressed properties account for an abundance of sales around the country, the trend is nevertheless helping assuage one of the market's biggest banes: a huge supply of unsold homes.

Existing home sales across the United States rose 6.5 percent to an annual rate of 4.74 million units in December from a rate of 4.45 million in November, a National Association of Realtors report showed on Monday. That said, in 2008, existing home sales fell 13.1 percent to 4.91 million units -- the lowest since 1997...

"The report confirms our forecast that sales have bottomed," said Celia Chen, senior director of housing economics at Moody's Economy.com in West Chester, Pennsylvania.

"The price discounting on foreclosures is helping draw down on inventories, particularly in the West where lower prices are helping pull in new buyers," she said.

Click here for full story.

Signs of a housing rebound?

The cover story for the 7/14/08 edition of Barron's magazine has controversial in that it's calling for a bottom in the housing market. How can that be? Read on:

Home prices are down nearly 18% from the market's peak, according to Case-Shiller, and inventories of unsold homes are at near-record levels. Foreclosures are mushrooming on "subprime" properties, or homes whose purchase was financed with subprime debt. Blowback from the crisis has left mortgage-finance giants Fannie Mae (ticker: FNM) and Freddie Mac

(FRE) financially strapped, while many other lenders lack the stomach -- or money -- to offer new mortgages. Noted market experts such as Pimco bond-fund manager Bill Gross and economist Mark Zandi of Moody's Economy.com predict the meltdown in housing will continue for many months, with home prices declining by 10% or more from today's depressed levels.

Yet, such pessimism appears overdone, based on much recent data. Sales of existing homes are showing tentative signs of increasing, while the plunge in prices likely is nearing an end. Total inventories fell in May to 4.49 million existing homes for sale, or a 10.8-month supply at the current sales pace, down from an 11.2-month supply in April, according to the National Association of Realtors, in just one statistic emblematic of the nascent trend.

YES, THE SUPPLY OVERHANG still is humongous, but at least the numbers are moving in the right direction, as even Treasury Secretary Henry Paulson noted last week. Speaking at a Federal Deposit Insurance Corp. conference, Paulson declared that "we are well into the adjustment process." Inventories of new single-family homes are down 21% from a 2006 peak, he observed, while "existing-home sales appear to have flattened over the past several months, indicating that demand may be stabilizing."

Still other numbers suggest prices are close to bottoming. The S&P/Case-Shiller Index for April, released just last month, showed the biggest year-over-year price decline yet, of 15.3%. Buried in the numbers, however, and widely ignored in the media, was the news that home prices actually rose, albeit slightly, between March and April, in eight of the 20 markets covered by the index (Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Portland, Ore., and Seattle). This was in sharp contrast to the readings for March, which showed prices falling in 18 of the 20 surveyed markets. Also, the pace of monthly price declines is starting to slow in most of the markets with negative readings...

In general, transaction-based home-price indexes, including S&P/Case-Shiller, may be painting a bleaker picture of price trends than warranted. That's because subprime housing, though less than 10% of the total U.S. housing stock, accounts for a far larger share of current sales volume, owing to spiraling defaults and distress sales. In the San Francisco area, expensive homes ($721,548 and up) have suffered a peak-to-trough drop in price of only 10.7%, compared with low-priced homes ($473,711 and under), down 40.9%, and mid-range homes, down 28.3%, according to the latest Case-Shiller numbers. The surge in low- and mid-range sales has been sufficient to push average peak-to-trough prices down by 24.6%, despite the index's valuation-weighting.

Help for the housing market also may be on the way in the form of proposed congressional legislation that would allow the recasting of some $300 billion in troubled subprime mortgages through the Federal Housing Administration. The bill, which some have derided as a bailout, would demand sacrifices by both lenders and borrowers, and could help to ease conditions in the subprime market.

Of greater importance, a government takeover of loss-ridden Fannie and Freddie -- the subject of widespread speculation late last week -- would ease concerns about the continued availability of credit in the housing market. Fannie and Freddie, which buy mortgages from banks and repackage them into mortgage-backed securities, are the biggest source of financing for the U.S. mortgage market...

SURPRISINGLY, CHIP CASE, whose knowledge of the housing market goes back decades and is based on the voluminous collection of data, is among those who think home prices may be nearing a bottom. Case notes, among other things, that new housing starts fell to 975,000 in April from a peak rate of 2.27 million in January 2006, and that three declines of similar magnitude -- from more than two million to less than one million -- have occurred in the past 35 years. "Every time this has happened before, housing-market activity has rebounded within a quarter and caught experts by surprise," he says. "In many areas, particularly outside the overbuilt markets of Arizona, Florida and Nevada and the huge bubble market of California, home prices may well stabilize" and begin to recover before the end of this year.

Case acknowledges history might not repeat, as the U.S. could be on the cusp of a painful recession. Unlike the three prior dips of a million-plus starts -- in the first quarter of 1975, the second quarter of 1982 and first quarter of 1991 -- the latest slide was triggered by insensate speculation and suicidal lending practices rather than the traditional factors of rising unemployment and interest rates and slowing economic growth. Thus, he says, a protracted dip in the economy would temper his optimism, though the official measures of economic growth don't indicate a recession yet.

Jim Paulsen, chief investment strategist of Wells Fargo's primary investment unit, expects home prices to steady by year end, with the pace of foreclosures slackening shortly. Most of the subprime debt at the center of the current crisis already has been written down by financial institutions, he notes, while many subprime borrowers who lost their homes are returning to rental units. "Folks who compare this home-price cycle to the one that occurred in the early '80s obviously have short memories," Paulsen says. "In the 1980s the economy was in a deep recession, mortgage rates were at 17% or more, and unemployment [was] hitting a post-Great Depression high of nearly 12%."...

NAR economist Lawrence Yun is optimistic home prices will stabilize in the next five months and begin to recover next year, despite today's gloom and overly stringent lending standards. NAR officials typically are cheerleaders, but Yun advances some reasonable arguments to buttress his view. Home sales, he notes, currently are running at a pace of about five million a year, around the same level as a decade ago. Yet, the population has grown by 25 million in the past 10 years, and the U.S. has created 10 million new jobs. Though the rate of new-household formation requires the net addition of 1.6 million housing units a year, housing starts likely will remain below one million into next year, creating pent-up demand in the years ahead...

Delinquencies, defaults and foreclosures hit the housing market with a rapidity and virulence unmatched in previous cycles, pushing total loans past-due and foreclosure rates to unprecedented highs. As a consequence, the current residential real-estate cycle has been front-end-loaded relative to past bear markets, which suggests the pain, though excruciating for many, may be shorter-lived than in the past. Early mortgage defaults have blunted the negative impact of subprime-mortgage-rate resets, which peaked in the spring, and are likely to curb the effect of interest-rate resets on option ARMs and other affordability products, expected to peak between 2009 and 2011. Many of these mortgages already are in the foreclosure pipeline, which will lessen the overhang of foreclosed properties in the future...

An ebbing tide of new delinquencies strongly hints that the worst may soon be over for the housing market, at least in terms of burdensome supply. The pig, in other words, is well along the python's alimentary canal.

In hindsight, the housing bust hasn't been nearly as calamitous as depicted in the media, or as Wall Street's woes might suggest. Yes, people have lost their homes, but more than a few were mendacious mortgage applicants and mere speculators, who eagerly sought out 100% margin loans, only to fold just as quickly when prices turned against them.

It is important to remember, as well, that even after a steep drop in the S&P/Case-Shiller Indices, long-term buyers in the top 20 U.S. metro markets have seen their properties appreciate by 70% since 2000. Home prices often take five to 10 years to recover fully from severe declines such as this. But at least the available data suggest the scary dive in home prices soon will be over.

On the other hand, TheStreet.com's Marek Fuchs insists that 'they' just don't get housing in this video:

On the path to a housing rebound?

It's easy these days to get depressed about the news of falling home prices, sales and rising foreclosures, but Fortune editor Shawn Tully thinks it's also the sign of something different -- the seeds of a housing rebound in a very comprehensive article:

The news that housing starts have fallen to their lowest level in 17 years sounds like one more reason to be depressed about the shrinking value of your home. In fact, it's an almost certain sign that the path to a housing recovery is finally in sight.

If prices are going to stabilize, let alone rebound, the United States needs to produce far more first-time home buyers than new houses...

Builders constructed far more homes from 2002 until 2006 - the peak bubble years - than could possibly be absorbed by the normal growth in households.

As a result, the market is now swamped with one million new and existing homes for sale that aren't occupied, and hence need to sell quickly. That's a multiple of the figure in most downturns, and it testifies to the duration and girth of the bubble...

The massive overhang of unsold inventory has remained stubbornly high. Sure, builders cut back, but sales dropped just as quickly.

Now that excess supply is finally beginning to shrink. In April, the number of new homes for sale stood at 456,000 according to the U.S. Commerce Department, still a big number, but 93,000 below the mountainous figure a year ago...

The key player in any recovery scenario is the first time buyer. The housing market operates with a pronounced laddering or ripple effect. When entry-level buyers flood the market, they not only stimulate production of new homes, they purchase existing homes. Those purchases, in turn, allow the sellers to move up to bigger houses.

But when the first-timers are absent, the entire buying chain gets frozen.

Today, newbies are coming back. Why? For the first time in years, entry-level homes are affordable. Builders have slashed prices, and what they're building tends to be far smaller than the McMansions of the boom, selling for far lower prices...

Step 1: First, the return of first-time buyers will shrink the overhang of new houses for sale.

Step 2: Second, because so few new homes are being built, first-timers will start buying existing homes from owners who want to move up but have been trapped by the dearth of buyers. Their improved fortunes, though, come with a big caveat: The prices of new homes are now lower than comparably-sized existing homes. It's as if used cars are selling for more than new ones. That can't last. So move-up buyers are going to have to accept less than they had hoped to get for their current homes.

They'll get a big break as they trade up, however. Unless they bought at the height of the boom, they'll still sell at a profit. They can then use that equity to buy bigger homes at bargain prices. During the bubble, homebuilders started pushing up home sizes to 3,500 square feet or more. It's those behemoths that are selling for the steepest discounts today.

Step 3: Next, housing starts should start rising, probably next year. The increase, however, will be slow and gradual. For the next two years at least, homebuilders will compete ferociously with existing home sellers for customers.

Step 4: Eventually, the glut of existing homes will disappear as well. The excess of new-home buyers over new homes being built makes that inevitable. But the oversupply is so enormous that the healing process could take as much as three more years. Only then will prices in former bubble markets start rising again...

The New Affordability is now in place. But if rates rise, we'll have to establish a New New Affordability - at even lower prices.