The National Association of Realtors said today (Wednesday) that sales of existing homes fell to their lowest level in almost 12 years, as prices also fell and are now near their six-year lows.

The trade group said that sales of already existing houses fell a bigger-than-expected 5.3% in January, but buried within that report was one bit of data that may indicate the death-spiral in the U.S. housing market is nearing a bottom.

The indicator: The supply of housing declined again in January, continuing a trend that started during the summer.

“We’ll have to see if that trend continues. Inventory is already down sharply in the new home market, and if the existing home market can follow suit, it will eventually help stabilize housing,” Mike Larson, an analyst at Weiss Research Inc., told the Dow Jones News Service.

The U.S. housing market will play a key role - if not the key role - in the country’s economic recovery. A house is typically the single-biggest investment that most consumers make, which is why a house is also the typical consumer’s single-biggest expense.

• First, although the U.S. still has way more houses for sale than demand calls for, the inventory of new homes for sale is currently 311,000 (10.7 months of supply) - the lowest number since 2001.
• Second, with the average 30-year fixed mortgage rate still holding steady at around 4.8%, it represents an attractive entry point for buyers. However, with the Fed having spent many of its bullets to drive the rate down already, it might not dip much lower. If Ben Bernanke and his fellow bankers make this point, it could tempt would-be homebuyers into the market, for fear of missing out on lower rates if they don’t.
• And finally, there are some pockets of strength across the U.S. - in some of the hardest-hit areas, too. For example, Business Week reports that home sales on Florida’s Gulf Coast, Inland Empire in Los Angeles, and the Las Vegas area jumped around 80% in February, compared with February 2008.

Moreover, the number of available homes in California tumbled from 15.3 months worth a year ago to 6.5 months in February is a good sign in terms of clearing the market and driving up prices. However, this may be the result of speculators or first-time buyers, who don’t put a home on the market in return. The sell-then-buy equation remains very tricky and a lengthy process in many areas.

One measure that California has passed in order to boost its market is a $10,000 tax credit to anyone who buys a newly built home.

As Robert Shiller, economics professor and co-creator of the Case-Shiller index, states, “The market is still doing badly. But there’s always light at the end of the tunnel.”

In other words, while depressed prices, record low mortgage rates, and government incentives worth $8,000 in tax credits for first-time buyers may spark some buying, the current recession, high unemployment, and tight lending conditions mean we’re probably still a long way from the end of that tunnel.

However, when recovery does eventually take hold, it may be perennially popular areas that have suffered the most during the bust - like California, Florida, and Nevada - that will lead the way higher.

Home sales increased 85% in December in California compared with the same period a year ago, while the median price of an existing home fell 41.5%, the California Association of Realtors reported (CAR). Sales of existing, single-family detached homes in California totaled 544,580 in December at a seasonally adjusted annualized rate, according to information collected by CAR from more than 90 local REALTOR associations statewide. Statewide home resale activity increased 85% from the revised 294,520 sales pace recorded in December 2007 (see chart above).

The median price of an existing, single-family detached home in California during December 2008 was $281,100, a 41.5% decrease from the revised $480,820 median for December 2007, C.A.R. reported).

In Florida, existing home sales rose in December, making it the fourth consecutive month that sales activity demonstrated gains in the year-to-year comparison, according to the latest housing data released by the Florida Association of Realtors (FAR). December’s statewide sales also increased over November’s figures in both the existing home and existing condo markets. Existing home sales rose 27% last month with a total of 11,053 homes sold statewide compared to 8,712 homes sold in December 2007, according to FAR (see chart above). December’s statewide existing home sales were 28.9% higher than November’s statewide sales.

Sixteen of Florida’s twenty metropolitan statistical areas (MSAs) reported increased existing-home sales in December; 11 MSAs also showed gains in condo sales, marking the sixth month in a row that a number of markets have reported increased sales activity.

Among the state’s large to medium-size markets, the West Palm Beach-Boca Raton MSA reported a total of 638 homes sold in December compared to 467 homes a year ago for a 37% increase.

With house prices and mortgage rates way down... poof! We're here. Houses are ridiculously affordable once again. But that alone doesn't mean it's time to buy.

"Cheap, hated, and uptrend" – that's what we look for. It's hard to find all three at any time. We have the first in U.S. residential real estate right now. Houses are cheap. We also have the second... Real estate is hated:

The latest survey of homebuilders suggests they don't expect to sell a darn thing today or in the future... The survey just hit record lows in sentiment. But you probably don't need statistics to tell you sentiment is terrible toward real estate right now. You already know it.

So real estate is cheap and hated. But what about the trend? That's the last piece of the puzzle before we'll consider buying again.

Right now, of course, the trend is still down. It's still terrible. And many facts suggest what you probably expect: We might have another year of "terrible" before we enter what could be five great years in U.S. residential real estate.

U.S. residential real estate typically bottoms right after recessions. We've seen two terrible recessions – one ended in March '75 and another ended in November '82. In those two, new home prices bottomed within two months on either side of the end of the recessions.

We also had a recession that hit real estate hard, ending in March '91. New home prices didn't bottom until a year later in that case.

After coming out of recession, new home prices typically do well for about five years. (The last official recession ended in November '01... Home prices went straight up for nearly four years after that.)

Right now, we're in recession. We could be in recession for another year. Based on history, there's no hurry to buy anything yet. Unless you're desperate, you shouldn't hurry to sell either.

If there's any good news, it's that the speed of the carnage was extraordinary. (We've seen a $50,000 fall in home prices already, and they're down roughly 25% from their highs nationwide.) Now, the factors are lining up for a legitimate bull market in real estate: * Mortgage rates nationwide will hit record lows in 2009.

• The supply of housing is at a level not seen since 1981, so prices will likely fall in 2009. But that will probably make U.S. residential real estate the most affordable it has ever been.
• Meanwhile, real estate sentiment is extremely negative.
• The government has promised to "employ all available tools" to fix it.
• Prices will bottom about when the recession ends.

US home inventories declined 5.2%, while at the same time applications to applications for permits to construct new homes dropped 8.5% in March 2009. With the number of unsold homes declining and the fact that new homes are growing at a slower pace suggests that the housing market may be bottoming out and stabilizing. If the bloated home inventory can be drawn down to reasonable levels, the housing market can rebound.

Homebuilder stocks have come out of the penalty box (the group is up ~28% on average YTD, with a couple of names already having doubled in the last quarter alone). If the Dow is indeed bottoming out, it is comfortable to say that homebuilders will have telegraphed a recovery in the major index -- only the future will tell. In the meantime, investors should take the grim headlines with a grain of salt and remember that homebuilders are taking actions to weather the industry blowup: reducing inventories, amending covenants, and maximizing cash flow as they shift to a supply rather than demand driven model. These is an incrementally more positive outlook going into the spring selling season, where there is arguably room for consensus to be surprised -- looking at the charts of some homebuilder stocks.

The worst had already been discounted into some homebuilders at the start of the year. It may be premature in calling these stocks strong buys, but we did want to point out the technical similarities between the Dow Jones and homebuilding space. History has proven over and over again that when headlines are most negative and consumer sentiment can’t get any more pessimistic, the smart money is buying stocks. And no space – other than the financials – has gotten more negative press than the homebuilders.

Given the heavy pessimism that now exists, which suggests that expectations are quite low and that there is a lot of liquidity on the sidelines, it is possible the stock market may hold up reasonably well in the face of bad news and rally on any good news. Psychology could conceivably shift towards the notion that the first quarter will represent the trough in corporate earnings, and that the worst of the housing and credit crisis is behind us. We don't share this view, but it may come to predominate for a period of time.

A catalyst to further the idea that the housing and mortgage markets are at a bottom could come in the form of a government mortgage bailout plan (whereby the government insures hundreds of billions of dollars of troubled mortgages). Bi-partisan momentum is building for such a government mortgage plan, as indicated by John McCain's reversal on this issue last week to support large direct government assistance to troubled homeowners.

The chart above from the Dallas Fed shows scheduled mortage re-sets through the end of 2008, and indicates that mortgage resets peaked in June 2008 at about $55 billion, and will be down close to $30 billion by yearend. In other words, the worst of the subprime problems might now be behind us.