Housing has bottomed, and some market commentary

There have been three data points over the last week that lead me to believe we are at the bottom for housing prices in the US.

Today, Case-Shiller announced the their 20 city home price index rose from April to May 2009, which was the first month to month increase in three years. The data is not seasonally adjusted, but the point is that prices have stabilized enough for seasonality to generate a positive datapoint. For three years, that wasn't the case.

Second, yesterday, new home sales jumped 11% which was the biggest monthly jump in eight years. This one is a little bit ambiguous because we don't really need a lot of new homes being built if we are trying to stabilize housing prices. It does have the potential to be good news if it implies that the builders are either finally clearing out their inventory, or they are seeing real new demand.

And finally, data from the National Association of Realtors indicates that the share of sales coming from foreclosures is dropping. I couldn't find the data on their website directly, but here is a clip from a Bloomberg article. "The share of homes sold as foreclosures or otherwise distressed properties fell to about 31 percent in June, down from 45 percent to 50 percent seen earlier this year, the real- estate agents’ group said last week". This is great news as it means one of the downward levers on prices appears to be coming off a bit.

If I take these three datapoints, and mesh them with the fact that housing peaked in 2006 (we are in 2009 now), and that the housing price index I mentioned earlier is down 32% from that peak, and that there are other indications that the economy is entering a recovery; I come to the conclusion that housing prices have bottomed. This is great news.

This leads me to a second topic: the changing nature of the current bull market. The conventional definition of a bull market is a 20% gain in the market. What I want to talk about though is the change. From the market low on the S&P500 in early March, the market ran from about 670 to over 900 by early May. I consider this run to have been a relief rally. Fundamentals did not improve much at all during that stretch, but the fear of collapse dissipated. Then the S&P500 stagnated from early May through early July. But the markets started to climb again in the back half of July. I think this most recent rally, to about 975, has been more fundamentally driven and that is a very big deal. Technically, it has all been one bull market, but I think the first leg was sentiment driven, and the second leg has had fundamental underpinnings.

Q2 earnings season is not over, but I have been amazed at how many companies are beating estimates and giving positive guidance. I don't have good statistics on this, just my overall impressions from reading the news every day. My guess is that the S&P500 ends 2009 up about 10%, but I think 2010 will be a very good year for the markets (probably 20+%).