If you haven’t already read it, Cyril Moulle-Berteaux’s excellent piece in the Wall Street Journal entitled “The Housing Crisis is Over” makes a very convincing argument that the housing market is at, or extremely close to, a bottom. Moulle-Berteaux centers on two of the primary pieces to solving the housing market puzzle: affordability, and psychology.

On the affordability front, he notes that mortgage payments for a typical home as a percentage of income has now reverted to the lowest it has been since the housing bust of the early 1990s, and as lending standards in the mortgage market ease off the extreme tightness at present, people will be able to take advantage of low rates to purchase homes at depressed prices.
Moulle-Berteaux says that in each of the previous five major housing declines, the pace of home-price declines has been halved within a month or two of home sales hitting a bottom. If he is correct and the rate of price declines halves by the end of summer, as is implied, it will do a tremendous service to the confidence in the financial institutions responsible for writing these mortgage loans. As additional credit becomes available, outstanding inventory in housing markets will rapidly decline, allowing prices to stabilize.

The obvious question to ask here is whether this guy is correct or not. In the interest of full disclosure, it should be known his firm (Traxis Partners) showed holdings of a number of homebuilders in their last 13F, dating from the end of 2007. Regardless, his argument is logical, and he joins a growing chorus of voices who suggest a tentative bottom (though not recovery) is in store for the housing market, likely through the middle of 2009. Ron Peltier of Berkshire Hathaway’s (BRK-A) Homeservices of America said last week that he is seeing a “light at the end of the tunnel,” and with both housing starts and buildings permits at levels below what would be needed to sustain current inventory levels, it seems reasonable to believe the Moulle-Bertreaux’s crucial indicator – rate of decline in home prices – is set to turn positive.

Further backing up this idea is the outlook from a variety of building products companies, who say that the current pain is necessary but seems to have reached a crescendo. Both Eagle Materials (EXP) and USG, makers of wallboard, said in their latest conference calls that the market is challenging, pricing is very competitive, and something needs to give between the lack of demand and the excess capacity, particularly of the older and higher-cost lines. While USG tried to push through a pair of price increases in the last three months, it seems only one of those has been taken by the market, and Eagle suggested that most realizable increases will go to offsetting increased delivery costs.

USG’s call about two weeks back was interesting, as was how the stock traded since then. The stock is down about 10%, but with extremely low volume. Ten consecutive trading days have failed to clear 1 million shares changing hands, a situation that (excluding the start of April) we haven’t seen since USG was topping out above $110/share in the spring of 2006. I continue to believe that the accumulation of USG shares into the hands of dedicated long-term holders, as well as the unwinding of the short position, will lead to this stock moving higher. While the gains may be moderate (I feel $40 is a reasonable target price for the next 3-6 months), I feel the buildings materials companies themselves are much safer plays than the non-diversified, overleveraged, and liquidity-crunched homebuilders.

Read the USG Stock Report.