Sales of new homes have plunged nearly 60% from their 2005 levels, and are stabilizing. Sales of existing homes stabilized last fall. From comparison to previous housing cycles, we should be at the bottom, but we may be bounce along the bottom for a while. Previous cycles have housing peaking at 5.5% of GDP, then troughing at 3.5% of GDP. In this most recent cycle, we hit 5.5% in 2005, and are at 3.1% now. We would not plan any residential housing purchases yet though. We have maintained for 2+ years that residential housing is over-priced, due for a correction, and will be dead money for years (5 or more). 
Prices could fall further – and break out below the historical trends. Banks are dumping more homes on the market than ever, and Fannie & Freddie may be forced to act responsible in their underwriting – further tightening money available to make mortgage loans. 

Add to this the prospect that a great many people will not be able to afford their homes when mortgages re-set over the next 5 years. We are not referring to the sub-prime mess. We are instead referring to the largely un-reported huge population of option-ARM mortgages. There are approx $1T in sub-prime mortgages, and about $500B in option-ARM mortgages- so the impact will be substantial when is starts to happen in 2009.

 
Option ARMs allow mortgage payers to pay a lower interest rate for a short (teaser) period of a few years. During this time period, the unpaid interest is added to the loan, further burying the home owner in debt while their home value contracts. We are only beginning to see the impact of this : Washington Mutual has seen it’s write-offs from option –ARMs rise from approx 0.5% in the last quarter of 2007 to almost 4% now. The worst is expected in 2010 & 2011 when the majority of these mortgages are re-set to real-world interest rates. Borrowers may see their monthly payments rise 60-80%.  Wachovia’s option-ARM product is called “pick-a-pay”. This accounts for 45% of Wachovia’s consumer lending. Maybe it’s time to short Wachovia’s stock (now at $15. But traded down from $53 to below $8 in the past year).