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Housing fundamentals are starting to improve

The top chart shows the rate on 30-yr fixed conforming and fixed-rate mortgages, and the bottom chart is an index of new mortgage applications. Mortgage rates have been at all-time lows for the past several months, and new applications for mortgages have jumped 30% since last August. It's looking like the appeal of cheap financing and the unprecedented affordability of housing prices have finally gotten the attention of consumers. Demand for home purchases is finally responding to favorable prices. Or, to put it another way, prices and financing costs have finally fallen by enough to stimulate demand. The recent upturn in new mortgage applications may prove to be the signal that the housing market has finally hit bottom and is beginning to pick up. Very encouraging.

This chart shows the housing affordability index published by the National Assoc. of Realtors. It is saying that a median family income is now almost double what is needed to purchase a median-priced home using conventional financing. Homes are more affordable than ever before.

This chart shows the S&P Homebuilders ETF, which is behaving in a manner consistent with the housing market having seen the worst, and the beginnings of improvement, albeit still modest. Homebuilders' stocks are down almost 70% from their 2005 high, and new housing starts are down by a similar amount. If the outlook for housing is indeed beginning to improve, homebuilders' stocks could have some tremendous upside potential in the years to come.

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