Another Reason to Stay Bullish: A Bottom in Home Prices

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Over the past couple of weeks, I’ve encouraged readers to look beyond the negative headlines and heated political rhetoric from both major political parties and remain optimistic on the outlook for high-quality stocks.

You’ve already heard the national media report all the negatives ad nauseam: weak economic growth, high unemployment, runaway deficit spending and continuing troubles in the Eurozone.

But few seem to recognize the many positives that also exist: low inflation and interest rates, declining energy prices, expanding opportunities in emerging markets, low valuations and record corporate profits.
To this list, it’s also time to add another positive. According to S&P/Case-Shiller and the real estate website Zillow, U.S. home prices are at or near a bottom. That’s a very good thing. Here’s why…

Declining home prices have been a dark cloud over the economy and the stock market for roughly six years now. Having temporarily taken leave of their senses, home buyers bought into the mantra that “real estate always goes up” and drove prices up to the cirrus clouds.
It was bound to end badly and the ensuing adjustment has been painful. A home is most consumers’ biggest purchase. And the drop in prices didn’t just reduce or eliminate their home equity for millions. In many cases, it demolished household net worth. That, in turn, crushes consumer confidence.

“After four months with rising home values and increasingly positive forecast data, it seems clear that the country has hit a bottom in home values," Zillow Chief Economist Stan Humphries said last week. "The housing recovery is holding together despite lower-than-expected job growth.”

Indeed, many homebuyers feel like they can’t hold off any longer, either because prices are so low or because their personal need for new housing is so high.
In the second quarter, values rose in 53 of the 167 markets covered in Zillow’s Real Estate Market Reports. And some gains were substantial. Home prices rose 12.1% in Phoenix, for example.
Similarly, the S&P/Case-Shiller 20-city composite index rose in the month of April, with 19 out of 20 cities posting gains during the month. Then, last Tuesday we learned the index rose 2.2% in May, marking two consecutive months of gains.
Another Reason to Stay Bullish: A Bottom in Home Prices

This doesn’t mean that home prices are set to rocket higher, of course. There are still millions of foreclosures looming
and these fire sales will keep a lid on prices. Yet, Zillow reported this week that only 5.8 out of every 10,000 homes were lost to foreclosure in June, down from 7.9 of every 10,000 homes in January.
With the economy soft and many foreclosures still working their way through the system, it will be quite a while before we see robust growth in home prices again.
But a housing bottom is a necessary first step. And another reason to remain bullish on both the U.S. economy and U.S. share prices.

Alexander Green is the chief investment strategist at See more articles by Alexander here.