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Housing market stabilizes

The evidence continues to suggest that the housing market has stabilized, and may even be improving. The Case Shiller Home Price Index for 20 major metropolitan markets hit bottom in the second quarter of last year and has been rising gradually ever since. Given the lags used in constructing the index, this means that prices likely hit bottom around March of last year. Even after adjusting for inflation, as this chart shows, home prices are up at a 3% annualized rate over the past 8 months.

We're now seeing the dimensions of the housing "bubble" with more clarity: in real terms, prices rose about 54% more than they should have, from 2002 through 2006, but now that they have fallen by 35% we have returned to some semblance of normality. Markets have found their new clearing price. Excess home inventories are being rapidly reduced due to an unprecedented decline in new housing starts. Since the rate of new household formation is still way above the current pace of construction, we should expect to see a pretty impressive increase in new construction over the next year or two.

This is excellent news all around, but the market still seems very reluctant to buy into the notion that the housing market might actually be improving. In typical bull market fashion, the market continues to climb walls of worry.

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