The Theory of Two Bottoms
UrbanTurf usually avoids publishing dense statistics and economic analysis about the state of the housing market. But we saw something yesterday on the widely-read Calculated Risk blog that we believe warrants coverage here. It’s the theory of “two bottoms” in the housing market.
You’ll recall that yesterday’s surprisingly positive numbers from the Commerce Department — housing starts and building permits both beat analyst estimates — led many pundits (including Jim Cramer) to proclaim that the housing market has bottomed.
Well, not so fast, says Calculated Risk author Bill McBride. McBride espouses the view that the national housing market will reach two bottoms at two different times. The first bottom is the activity bottom; that is, when activity like housing starts stops falling and stabilizes. The second bottom, which comes later, is the pricing bottom, when home prices stop falling and stabilize.
McBride believes that the bottom we may be seeing now is the activity bottom, not the pricing bottom. In fact, he argues that prices could continue to fall for at least another year in the worst cases.
Why is the distinction between the activity bottom and the pricing bottom so important? Because you (the home buyer or home seller) likely care most about the market value of homes so that you can have a sense of whether prices are going down, up, or sideways. Home prices are what affect your net worth, the size of home you can afford, the profit or loss you will take if selling your home, etc. The activity statistics — housing starts, new homes sales, residential investment — are important economic indicators but are less immediately relevant to John and Jane Doe deciding whether to buy a home right now.
Keep in mind: the “two bottoms” theory is just that, so there are surely analysts and market watchers that may disagree with the concept. (Though McBride provides very compelling historical evidence for it.) The important thing is that when you hear the economists and pundits talk about reaching a bottom, confirm whether they are talking about a bottom in housing activity or housing prices. Because as McBride argues, “These bottoms could happen years apart!”
To learn more:This article originally published at https://dc.urbanturf.com/articles/blog/the_theory_of_two_bottoms/1040.
Most Popular... This Week • Last 30 Days • Ever
Roadside Development filed a sketch plan with Montgomery County this month for the 30... read »
The Matthew is located on 9th Street, overlooking the iconic Naylor Court and neighbo... read »
Construction continues humming along on several developments on the uppermost stretch... read »
Today, we take a closer look at home insurance.... read »
Unlike other new residential developments in the city, all of the apartments will be ... read »
- A First Look At The 525-Unit Development That Will Incorporate Silver Spring's Tastee Diner
- Nine Stylish Condominiums Debut in Shaw's Iconic Naylor Court
- The 1,600 Units In The Walter Reed/Takoma Development Pipeline
- A Look at What is Covered By Home Insurance
- 8-Unit Project + Restaurant Proposed Along Georgetown Canal
DC Real Estate Guides
Short guides to navigating the DC-area real estate market
We've collected all our helpful guides for buying, selling and renting in and around Washington, DC in one place. Start browsing below!
First-Timer Primers
Intro guides for first-time home buyers
Unique Spaces
Awesome and unusual real estate from across the DC Metro