Dan Alpert of Westwood Capital isn't buying the "housing has bottomed" argument.

He thinks we're closer to the bottom than the top (thank goodness), but that we're only 75% of the way there.

The silver lining? Some markets have overshot (See them here...along with the ones that haven't). So here's hoping you live in one.

Highlights:

One year ago, we projected that the U.S. housing market would decline from peak bubble-era levels by 28.2%. Although many observers thought we were overly pessimistic, it turns out we weren’t

pessimistic enough. Now, with the benefit of hindsight and more robust data points drawn from the last

12 months of market activity, we believe that housing will stabilize nationally, when expressed in terms

of the Case-Shiller 20-City Index, at a decline of 43% from peak levels [we're at 32% now], or an index reading of approximately 117.



To firmly return to the upper limits of historically justifiable levels of stabile prices relative to rents in

particular, we believe the Case-Shiller 20 markets must decline, on average (with considerable

differences among markets), by an additional +/-16.9% from May 2009 levels.

In the final years of this decade’s housing mania, home buyers not only assumed the value of the home they acquired would rise to the moon; they were often paying more than 50% of purchase price toward what was effectively a wildly overpriced option on that presumed growth, relative to the portion that could be reasonably attributed to the shelter cost.



In addition to being massively overpriced relative to the value of the embedded option on future growth, U.S. homes completely disconnected from every other indicia of the potential value of owning a home—rents, incomes, construction materials costs and labor costs.



The bubble actually dates back to 1997, when housing diverged from a historical range of average

price/rent ratios (which we have calculated as 11.4–13.8 times prevailing rents, dating back to 1953).

The balloon in home prices accelerated to 15.2 times by the end of the tech bubble in March 2000.

After a slight downward adjustment, and with the Fed’s reaction to the events of Sept. 11, 2001, the

price to rent multiple of U.S. homes commenced its relentless and unprecedented climb to its peak: 25.6 times at the end of 2005.



To regain long-term stability and work off the current housing glut, prices will need to fall (net of

extraordinary tax credits for the purpose of spurring short-term housing demand), such that the price to

rent multiple re-enters its historical range of values. This has already occurred in several markets, as set forth in the appendix to this report, with the others expected to catch up over time. On a national basis, such an adjustment would still result in nominal (before subtracting inflation) growth of 48.5% in

housing prices since 1997, as would be expected—but still a long way from the 163.8% rise to the

bubble’s peak.





Reconstructing American Home Values Dan Alpert Westwood Capital