Housing factors

Here are the major points a housing bear has:

1. Inventory is now at 9 year highs, having increased in many areas 75-150% over last year; That inventory issue is why the Home builders Index is down 50% from recent highs;

2. Home affordability index is at 15 year lows, as rates AND prices have moved higher during the past 36 months;

3. Real Income gains have been negative for the past 5 quarters, challenging middle income buyers to afford new homes;

4. Home ownership ticked up to record levels after Mortgage Rates dropped to 5.25%; there simply aren't many new buyers coming into the market;

5. Residential construction accounted for about 6.1% of the economy -- close to a 50-year high; When that reverts to the mean, it will take 0.75-1% off of GDP; If, as I suspect, it swings past the mean, as these things tend to do, 1-3% of GDP can get lost;

6. The NAHB Home Builders Index -- a sentiment reading of builders -- fell to a 15 year low last month;

7. Mortgage Apps for new purchases are down 24% year over year; Refis are off 37% year/year; ARMS are still 42% of dollar volume.

On the other hand...
1. The FED is aware of these things. Bernake has written papers specifically talking about how he believes the FED has made mistakes in the past by popping bubbles

2. The economy is prepared for a crash more so then it was in the late 80's crash. For instance, assume you buy a house today for $600,000 with a 0% down I/O loan. In 2008 you lose your job and need to sell but can only get $450,000 for it... This leaves you with one choice: Send your keys back to the bank and move on. PMI insurance companies will take a hit, but they have such juiced up premiums I doubt they will go BK even if nominal prices revert back to nominal prices in 1995.

3. Immigration can save the southwest. If our border opens up with Mexico the population inflow and economy boosting will keep housing afloat. Many of the currently stressed home owners will have problems, as jobs become harder to find - but the economy will likely be fine.

4. The price to build a house has been moving up in the last 5 years, and it will not likely decline back to 1990's levels. Housing starts are dropping fast, and if market prices really are as disconnected from economic fundamentals as the bears claim, starts would not be dropping now. If prices really are 50% inflated, wouldn't starts only start dropping after a 30 or 40 percent decline? If I could build a $900,000 house for $300,000 why would I care if the market value dropped to $860,000 in recent months?