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The Housing Market: Have Prices Finally Bottomed Out?

There is an old Chinese curse that says "May you live in interesting times." For those people owning homes over the last five years, that proverb should make more than enough sense. The tragic and

There is an old Chinese curse that says “May you live in interesting times.” For those people owning homes over the last five years, that proverb should make more than enough sense. The tragic and incredible drop in housing prices that accompanied the bursting of the housing bubble may were unprecedented in American history, and may remain so for a long time. All told, the bursting bubble wiped out over $11 trillion in wealth and has sent the economy into a tailspin it’s still just recovering from.

However, the question of the day has become one of whether or not the housing market is finally stabilizing or whether it still has yet to reach rock bottom. A lot rides on this question as a full economic recovery appears improbable before prices have at least stabilized. Continued uncertainty in the housing market could be the sort of anchor that would keep the country from experiencing a robust recovery. The current downturn has already defied conventional logic, baffling even the Oracle of Omaha, Berkshire Hathaway’s (BRK.A) Warren Buffett recently admitted that he was “dead wrong” about the housing market recovering by this point. However, thus is the nature of historical trends. They’re a reliable method for predicting the future. Until they aren’t.

Why Housing May Have Bottomed Out

The sheer magnitude of the market correction that began in 2006 gives reason to believe that the housing market has finally reached a low point. Since 2006, the value of total housing equity in the United States has fallen well over one-third for a total value of over $11 trillion. The housing market was clearly overvalued in 2006, and the collapse of the sub-prime mortgage market was a dramatic example of this. As such, it stands to reason that as dramatic the market was overvalued in 2006, the correction might be equally as dramatic.

In this vein, recent data from the Case Shiller Housing Index showed that 2011 was the worst year for new home sales in over 50 years with only 302,000 sold. However, while this could be a solid sign that things have reached the worst, there were also some encouraging numbers at the end of the year. While the year was poor, December marked the third straight month of rising new home sales.

“Although this decline was unexpected, it does not change the story that housing has likely bottomed,” said Jennifer H. Lee, senior economist at BMO Capital Markets.

Yet, Housing Market is Still Falling

However, while historical precedent and everyone’s best hopes point towards the housing market being on the rebound, it’s still entirely possible that things will continue to get worse before they get better. Tuesday brought more bad news as another report from Case-Shiller showed that housing prices declined 4 percent in December, outpacing analyst expectations of 3.6 percent and beating out November’s figure of 3.9 percent. Given the historic nature of the most recent collapse, it’s difficult to know when things have really reached bottom. Once again, historical data is only useful as a predictive tool until one finds themselves in a historically unique moment.

“In terms of pricing, the housing market ended 2011 on a very disappointing note,” said David Blitzer, Chairman of the Index Committee at S&P Indices.”While we thought we saw some signs of stabilization in the middle of 2011, it appears that neither the economy nor consumer confidence was strong enough to move the market in a positive direction as the year ended.”

It may be telling that one of Warren Buffett’s rare misses came in trying to predict the direction of this housing market. The size of the housing bubble and the size of its collapse both make it impossible to know for sure what to expect. Buffett, though, still took his mistake in predicting a recovery in stride, insisting that things will recover sooner or later.

“Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over,” he said. “And while ‘doubling-up’ may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.”

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