Case-Shiller Index: Is This the Housing Market Bottom?

Analysts, government officials and certainly homebuyers are spending hours trying to figure out if we have reached the housing market bottom.

Yesterday's (Tuesday's) data would seem to suggest the bottom is a bit bumpier than most people think.

According to the S&P/Case-Shiller home price index of 20 cities, home prices declined 3.5% from a year ago, while the 10-city composite slipped 3.6%. That meant fresh new post-bubble lows for home prices.

New-home sales in March also fell from their February level, the Commerce Department said. Together, they pointed to a more lackluster market.

"We're still in a slow period," said Robert Shiller, who co-founded the index that bears his name. "We're still in a funk."

But behind those numbers, there are reasons to be hopeful.

With borrowing costs near all-time lows, an economy that's bouncing back and cheap foreclosure properties attracting buyers, housing could be on the mend.

Knowing whether the housing market has bottomed out is important because nobody wants to pay thousands of dollars more for a property that could decline in value next week, next month or next year.

"The perception that prices could go lower...that's certainly keeping some people on the sidelines," Louis Cammarosano, general manager at HomeGain told Bankrate.com.

That's a problem because until buyers come back in significant numbers, the housing market can't completely regain its health. And without a housing market recovery, there won't be a real economic recovery.

But while we'd all like to know where the bottom is - pinpointing the exact date really doesn't matter.

Here's why...

The Real Housing Market Bottom

Instead of an exact date or even a range, the real market bottom will be a series of events that set up the real estate industry for recovery, according to Stan Humphries, chief economist at Zillow.com.

"The market bottom is a multi-step affair," Humphries said. First, home sales have to bottom out, which happened in early 2009.

Next, investors, second home buyers, and retirees with longer views will need to move into the market, because they're the ones that can hold out through near-term price declines.

And finally, sideline buyers will need to come in as rising prices and interest rates force them into the market.

So where are we now?

According to the National Association of Realtors (NAR),sales of existing homes in January were the most in the last 20 months. Also, housing starts in March were 10% higher than a year earlier, while building permits jumped 30%. Altogether, builders will start on 750,000 total new units this year -- up 23% from last year.

What's more, the total number of homes listed for sale has dropped - on a year-over-year basis - for 12 consecutive months. Inventory of homes for sale fell to 6.1months in March, down from 12.1months in 2010.

That's the lowest level since April 2006, the NAR says. For the market, dwindling supply is a positive.

Case-Shiller Math: It's More Expensive to Rent

Still, getting window-shoppers to take the leap has been a problem that continues to weigh on the housing market.

"It's an interesting phenomenon," Humphries said. "Despite unprecedented affordability and record-low mortgage rates, buyers remain on the sidelines."

But rising rents and home prices are pushing Americans to pull the trigger on purchasing a home.

"It certainly is a reasonable thing, if you want to own a home, to buy right now," said Shiller.

Today, it's more expensive to rent. As Deutsche Bank AG USA (NYSE: DB) recently reported, the average rent is now 14.9% more than the average home loan payment.

And although national prices continue to lag, many local markets are beginning to rise. That includes Phoenix, which was one of the metro areas hardest hit by the housing bubble and bust.

In fact, Humphries says somewhere in the neighborhood of 90% of ZIP codes are now seeing price increases.

Those factors are bringing back more "traditional elements" of the real estate market, Budge Huskey, president and CEO of Coldwell Banker Real Estate told U.S. News & World Report.

"We are now beginning to see a return of the move-up market and the second home market," he said. "The fact that those buyers are returning to the market is very much a positive."

Interest rates will be one of the keys.

Rising Interest Rates and the Housing Market Bottom

Mortgage rates did hit an all-time low of 3.87% in February, but with economic growth picking up steam, experts say there's really only one direction interest rates can go. That's up.

And for those who are waiting for the "bottom," the threat of losing a few thousand dollars to lower prices shouldn't be their biggest concern. Instead, buyers should be worried about the specter of rising interest rates.

For instance, a $200,000, 30-year mortgage at 3.9% would cost the buyer $139,599 in interest. Meanwhile, the same mortgage at 4.9% would cost $182,120 in interest.

So is it time to call a bottom in the housing market and jump in with both feet? Probably not.

But since it's still fairly early in the cyclical recovery, it's not too late for investors to start nibbling.

One way to benefit from the current state of the housing sector and to position for the eventual rebound is with home improvement stocks such as Home Depot (NYSE: HD) and Lowes (NYSE: LOW).

What's more, the spring season is money for both of them. It's comparable to Christmas for the retail sector.

Finally, take a look at the iShares Dow Jones US Home Construction (NYSE: ITB) ETF for a play on the resurgence of homebuilders.

These stocks should thrive whether we've technically reached the housing market bottom or not.

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