When is the bottom of the housing market coming?

I don't know--and neither does anyone else. Here are three things to consider, however:

(1) A good harbinger of the housing market is the months supply measure. When the months supply rises beyond six months, it is hard to make a case for house prices going up anytime soon, unless builders stop building altogether. The reason: it takes about six months to build a house in most markets (i.e., to get from the beginning of the permitting process to the finished product). Thus prices have to fall until the inventory is absorbed.

The good news is that homebuilding has slowed down a lot, and that the months supply measure for new homes fell well below six months in April. The bad news is that the months supply of Existing Home Sales continues to rise, and is currently at 8.4 months. The other bad news (in a sense) is that the Existing Sales number is much less prone to revision than the New Sales number, and reflects actual closed sales, instead of sales contracts. Until the Existing Home Sales months supply number turns around, it is hard to see when the bottom will come.

(2) While the national number is important from a macroeconomic and mortgage securitization standpoint, it is not helpful to buyers in local markets. Some markets have supplies of less than six months, and buyers in these markets, particularly those who are planning to live in one place for awhile, just shouldn't worry about short-term price fluctuations. But other markets have huge supply gluts; in these markets, potential first time homebuyers are better off renting for awhile.

(3) Housing markets have substantial intrametropolitan variation. The detached housing market can be considerably different from the Condo market; housing near transportation lines can retain its value better than housing in far-flung suburbs. Moreover, there are some opportunities in weakness. I was looking at the San Diego MLS listings recently. Houses that would have been out of range for a finance professor a few years ago (i.e., houses with ocean views) are now within range. The principal reason to buy a house is the consumption benefit of the house--when an opportunity arises to obtain a great place to live, it is worth considering. Just don't be naive about it--make sure you plan on living in one place for a long time (in which case resale value doesn't matter so much), that you can afford the place with a fixed rate mortgage, and that you don't mind knowing that its price might go down for awhile before starting back up again.