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Housing market continues to stabilize

Sales of existing homes "fell unexpectedly" in May, according to today's headlines, but as the top chart shows, they remain 15% above what appears to be the floor level of sales for the past two years. The housing market is almost certainly not in a V-shaped recovery (I'm discounting strong sales during the April-May period because they were likely influenced by the expiration of the $8,000 tax credit program), but neither is it showing any signs of another collapse. This is a drawn-out "U" shaped recovery if anything. The important things to note are these: the housing market peaked about five years ago; sales and prices declined for about three years; and things appear to have stabilized for the past two years. We're five years into this downturn in the housing market, and sufficient time has passed and enough adjustments have occurred (median home prices have fallen roughly 25% since 2005) to support the view that things are going to slowly get better instead of getting worse.

You don't need to see housing moving up to be optimistic, you only need to know that the housing market has stabilized. Stable prices come first, then higher prices. (Actually, prices in May were up about 2% from a year ago.) As long as prices no longer decline, then the prices of mortgage-backed securities can stabilize and eventually rise. (And actually, some home-equity-backed security prices are up 17% from their year-end levels.)

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