Is the Housing Market Finally Ready to Rebound?

| Mon Feb. 6, 2012 4:17 PM PST

As you may recall, Smithianism1 is an economic forecasting model that suggests the economy will turn up this year because (a) So many cars have worn out over the past three years that sales pretty much have to go up at this point, and (b) So many people have been living in their parents' basement for so long that sheer desperation is going to drive them into the home and rental market. This, in turn, will get the economy back on track.

Okay, that's a little oversimplified. But basically true. As regular readers know, I've been striving to believe in Smithianism for the past six or nine months, and it's been hard. I've tried, but I end up backsliding a lot too. Today, though, Calculated Risk provides a strong endorsement:

The Housing Bottom is Here

There are two bottoms for housing. The first is for new home sales, housing starts and residential investment. The second bottom is for prices. Sometimes these bottoms can happen years apart…For new home sales and housing starts, it appears the bottom is in, and I expect an increase in both starts and sales in 2012.

…And it now appears we can look for the bottom in prices. My guess is that nominal house prices, using the national repeat sales indexes and not seasonally adjusted, will bottom in March 2012…There are several reasons I think that house prices are close to a bottom. First prices are close to normal looking at the price-to-rent ratio and real prices (especially if prices fall another 4% to 5% NSA between the November Case-Shiller report and the March report). Second the large decline in listed inventory means less downward pressure on house prices, and third, I think that several policy initiatives will lessen the pressure from distressed sales (the probable mortgage settlement, the HARP refinance program, and more).

If this is true—and the evidence in favor seems pretty strong to me—then the housing market will indeed recover in earnest this year and the economy will recover along with it. And cars? Well, yesterday Clint Eastwood told us it was halftime in America and Detroit is leading the way to recovery if we can all just pull together and quit sniping at each other for a little while. Works for me!

I think I'm about an 80 percent Smithian these days. Basically optimistic, but still wondering just how strong the recovery is going to be, and still worried that Europe or China or Wall Street 2.0 might still derail things. Your mileage, of course, may vary.

1Smithianism (smith-ee-uhn-iz-uhm) n. [Fr. Smith + ISM < Karl Smith, American professor of Public Economics and Government at the School of Government at the University of North Carolina at Chapel Hill] economic doctrine that places considerable emphasis on rising pressure in the housing and automobile markets to drive an economic recovery.

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