Constructive on U.S. Housing

Too many are reacting to the bad, backward-looking Case-Shiller data. (The index has a two- to three-month lag and 30% of its transactions are distressed, so it will be under pressure for now.) Driving your car while looking in the rearview mirror is fine if the road is straight and clear, but it's not such a good idea when the road is curved and rife with obstacles. And the U.S. housing market is nothing if not a long, winding and bumpy road.

The real story is that the U.S. home market is now bifurcated (historically, a signal of a nascent recovery), stress pricing has stabilized, new-home prices are going up and so are existing-home prices (none distressed). As The Wall Street Journal article above indicates, inventory is being cleared.

Industry data support the notion that housing demand is now in an uptrend. One company after another is reporting improving weekly metrics -- surveys, traffic, shipments and orders.

My analysis suggests that housing demand and home prices will steadily improve in the years ahead based on the underpinnings of record home affordability, low home prices relative to rental prices, underproduction of new homes, continued household formation growth, steady growth in the jobs market, an easing up in mortgage lending, and low (by historic standards) mortgage rates -- all of which will conspire to unleash pent-up demand.

From my perch, housing is embarking on a durable multiyear recovery that could extend throughout this decade, and residential real estate's broad multiplier effect will likely cushion the U.S. economy from the monetary and fiscal cliffs and some of the plentiful structural headwinds that have served as a governor to expansion.

The economic consequence to the rebound in housing could be profound, providing construction jobs and lifting consumer confidence and spending.

This constructive housing view is central to my thesis that the domestic economy's growth will be self-sustaining and supportive of reasonably healthy corporate profits.

It is also central to my short bond analysis and view.