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Karl Case: I See a Bottom in Housing Crisis

Wednesday, 16 Jul 2008 10:50 AM

Government mortgage banks Fannie Mae and Freddie Mac are on the edge of implosion. California mortgage bank IndyMac, despite $18 billion in assets, is unable to withstand mortgage-related losses and has failed.

Through the gloom, at least one expert thinks the housing market is bottoming.

Karl Case, co-creator of the Case-Shiller Home Price Index, told Bloomberg in a recent interview that he felt there was more positive than negative news in recent reports on the state of the housing market.

"I'm beginning to hope that there are going to be some surprises in the next few months that would indicate we are at or near a bottom in probably a third to half the country," Case said.

Case points to the fact that new housing starts fell to 975,000 in April from a peak rate of more than 2.2 million in January 2006.

In the past 35 years, only three other times have starts fallen from more than 2 million to less than 1 million.

That's a clear signal, says Case.

"Every time this has happened before, housing-market activity has rebounded within a quarter and caught experts by surprise," he says.

"In many areas, particularly outside the overbuilt markets of Arizona, Florida, and Nevada, and the huge bubble market of California, home prices may well stabilize."

Sales of existing homes, by far the largest component of the housing market, also look like they have put in a bottom. These sales peaked at an annual rate of 7.25 million in the fall of 2005 and fell to 4.89 million in January.

By May, sales have shown a slight improvement and are now on an annual pace of 5 million.

Home prices are more problematic. The S&P/Case-Shiller index for 20 metropolitan areas was down 15.3 percent in the year ended in April, a record annual rate of decline.

But the Case-Shiller monthly figures show prices rising in eight of the 20 metropolitan areas in April, and the index's overall month-to-month decline was 1.4 percent, slower than the 2.2 percent recorded in the previous month.

This time, however, things might be different, Case cautions.

The decline has been caused by speculation and lax lending standards, not just slowing economic growth. That makes it more difficult to forecast the exact bottom, he warns.

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Government mortgage banks Fannie Mae and Freddie Mac are on the edge of implosion. California mortgage bank IndyMac, despite $18 billion in assets, is unable to withstand mortgage-related losses and has failed. Through the gloom, at least one expert thinks the housing...
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