January New Home Sales, released yesterday, were -- perversely -- good news! Despite the perfectly correct mantra that new home sales continued to cliff-dive, and that, as my friend Bonddad said not once but Twice(!) yesterday, "We're Nowhere Near a Bottom in Housing" the simple fact is that the housing market is showing ample signs of the beginning of a transition.

A great article today
"How the Banks are Worsening the Foreclosure Crises"

The banks cannot help themselves and unfortunately Congress is listening to the banking lobby. Every "new idea" to turn around this economy seems to start out with good intentions and then the banks get involved. Despite the best efforts of some ... the greed is too great.

[..]on Apr. 18, 2007, behind closed doors in an ornate hearing room in the marble-faced Dirksen Senate Office Building. Dodd told them they needed to get out in front of the foreclosure fiasco by adjusting loan terms so borrowers would continue to make some payments, rather than stopping altogether.

A few weeks ago I diaried that, while Housing is nowhere near bottoming, nevertheless there was substantial evidence that the decline may be shifting from the vertical, "guillotine" phase to the more bumpy "sandpaper" phase. I wrote:

In the case of the housing market crash, how would the change from "guillotine" to "sandpaper" look? In the past, Calculated Risk has reckoned that the inflection point between advancing and declining house prices was at about 7 months' supply. So I submit that first of all, we would see a decline in months' supply of houses for sale towards that mark, as sales started to outstrip new house starts and existing homes being offered for sale. In order to accomplish that, you would first need to see that new home building has declined to a level where sales exceed new starts. You would also want to see existing home sales increasing on a year-over-year basis. In other words, the volume of new home starts would transition from guillotine to sandpaper first, well before prices themselves would begin the transition.

And Guess what? All of those conditions have either started or appear to be on the cusp of starting.

My buddy Bonddad occasionally posts items invariably entitled, We're Nowhere near a Bottom in Housing. I agree with that, but there are signs that change is afoot.

As I have previously described, Prof. Edward Leamer has studied all of the post WW2 recessions, and has noted that society needs only so many new houses and vehicles in any given year. Expansions typically end at a point where there has been overproduction of both. The recession ends and the next expansion begins only after that excess has been sopped up by a long and/or deep enough period of underproduction. Needless to say, there was wild overbuilding of houses in the first part of this decade. In fact, the graphs which appear below suggest overbuilding began ever so slightly over 10 years ago.