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By Jeremy Glaser | 12-02-2009 02:37 PM

Why Housing Could Come Back with a Vengeance

With housing starts well below natural demand, the housing market could power back as the employment market gains strength.

Securities mentioned in this video
MHK Mohawk Industries Inc
NVR NVR Inc

Jeremy Glaser: Hi, I'm Jeremy Glaser with Morningstar.com. It's Ideas Week. One of the things that a lot of investors have had on their minds is the housing market. Here to discuss it with me is Morningstar's resident expert, associate director Eric Landry. Eric, thanks for joining me.

Eric Landry: Sure.

Glaser: So what do you think about the general state of the housing market for 2010?

Landry: Well, as we sit now, as we speak now, we're firmly in a very weak period for housing seasonally. So true to form, housing prices are weakening as we speak. People refer to Case-Shiller and whatnot, which is still rising, although that's short-lived. But that's yesterday's news. Right now, I can tell you affirmatively that housing prices are weakening.

Now the good news is that listed inventories, we're not talking about the shadow inventories, but listed inventories are also going down quickly, and there was never a seasonal build in the spring. So we have that going for us.

It's difficult to tell what exactly we're looking at in 2010, because there are a number of factors. You've got the shadow inventory, which is coming back, several million homes coming back. But at the same time, what you never hear people talking about is what's priced in.

What is the price of homes right now discounting? And I would argue that as discounting, a lot of them are already coming back, because what you are seeing is prices that will support--people can buy houses for less than they can rent an equivalent house in that market.

So people talking, the mainstream press, the pundits are talking about a lot of pressure coming next year when all these foreclosures come back. I'm not so sure that's already priced in, in effect. I believe it's more likely than not that that's already priced in.

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