Has the Housing Market Finally Bottomed?

It was the most atrocious bubble in U.S. history pushing tens of millions of Americans into financial misery.

Even today, the last of the lawsuits have yet to be filed.

But five years later it's finally coming back.

The housing market has bottomed and there's money to be made on its return.

The evidence of this case continues to build.

Signs of a Housing Bottom

For instance, the National Association of Homebuilders' Housing Market Index rose five points to 29 in February marking its fifth consecutive monthly increase.

Admittedly, 50 is supposed to be a neutral level for the index. Even still, the current level of 29 is up 20 points off of the low, and is the highest it has been since 2007.

Then there are housing starts, which rose in January to an annualized 699,000 units.

Again, that's not very impressive compared to 2005's total of 2,068,000. But it's still a hell of a lot better than 2009's average of 554,000 and 2010's 586,000.

Incidentally, there's some important data in the details here. Multi-family starts were 175,000, up more than 70% over 2009, while single-family starts of 508,000 were only modestly above the 2009 average.

Meanwhile foreclosures in January 2012 were down 19% from a year earlier.

Since the "robosigning" scandal and the delays that followed it now seem to have passed through the system, that decline suggests that the level of troubled mortgage borrowers is also trending downwards.

The bottom line: Housing has found a bottom and is trending back up again.

But that's mostly downward momentum and the effect of the still large inventory of homes either going through the foreclosure process or waiting for better sale conditions.

Housing's Upward Trajectory

With building activity and builder confidence increasing, and mortgage rates close to record lows, the overall trajectory is clearly upwards.

Of course, a rise in interest rates could derail this. But Federal Reserve Chairman Ben Bernanke has said he is keeping short-term rates close to zero until late 2014.

While short-term rates are so low, any rise in long-term rates would just make it even more profitable for banks and mortgage REITS to borrow short-term and invest in mortgages.

That means mortgage rates won't go up far, and won't derail the housing recovery.

Of course, a surge in inflation could derail Bernanke's plans, but that would make houses more affordable, since wages would rise in nominal terms with prices.

What's more, both political parties are practically committed to continuing a system in which government policy favors housing, with interest tax deductible and many mortgages guaranteed by the government.

Now that we have reached what looks like a solid housing bottom, investors are right to wonder how to invest.

Within housing, the important trend is that towards apartment building rather than single-family homes.

That too makes sense since home ownership is in decline but the population continues to increase and job creation is quite healthy.

Thus the rental market seems stronger than the housing market as a whole.

That's confirmed by the details in the February consumer price index, which show that rents have risen by 2.4% in the year to January, compared to a decline in the Case-Shiller home price index.

How to Invest in the Housing Bottom

For investors there are two possible ways to play it.

First, if the area where you live is in decent economic shape, you should consider taking advantage of current low prices and good mortgage availability to purchase either rental homes or ideally a small apartment block.

With financing cheap and rents rising, the economics of this are especially favorable at the moment.

Of course, you will either need to be good at home maintenance or have good repair people available, because your tenants will need their plumbing fixed. But if you can handle that, local rental real estate, bought cheaply, can be a good use of spare investment capacity.

That doesn't mean you should rush off to North Dakota, which has the nation's lowest unemployment rate.

Not only is it remote, but the costs are much higher, and the chances of being ripped off by the unscrupulous are very great. Buying an apartment in the heart of the "fracking boom" in the Bakken Shale may give you great "cred" at parties but don't get too tempted.

With these types of investment, it's usually a good idea to keep it local.

Another way to invest in this trend is with an apartment REIT such as UDR Inc. (NYSE: UDR).

UDR specializes in middle-market apartment developments, with 60,465 apartments including 2,626 under development as of the end of 2011.

The company recently announced fourth quarter earnings, which showed funds from operations were up 25% from the previous year. UDR also increased its dividend to $0.88 per share for 2012, giving it a 3.5% yield.

For investors UDR offers an attractive mixture of increasing income and capital growth along with rental market strength and incipient inflation both helping its performance.

It's been a long hard road but the worst of the housing bubble has come and gone.

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