by Norm Conley, RealMoney

I  really don't have much of an opinion on exactly when real estate prices will bottom, but even though I don't have a sense on the exact timing of a bottom, I do believe that the bottom in the residential real estate market (when it arrives) will be an important clue to the timing and magnitude of the eventual economic recovery.

I think most of would agree that real estate price declines were the initial impetus that created what turned out to be a negative feedback loop of epic proportions. Lower real estate prices plus rate resets begat rising foreclosures, which begat securitized paper losses, which begat financial institution stress/bankruptcies, which begat credit market seizure, which begat collapse in economic growth, which begat spiking layoffs, which begat higher foreclosures and so on and so forth. If one agrees with the "real estate as causal" argument, then it could have some validity in the opposite direction. In other words, a stabilizing/bottomed real estate market could foretell an economic recovery by easing the apocalyptic downward pressure on bank balance sheets.

The chart below shows monthly new home sales data all the way back to 1963.

Note that new home sales in December 2008 were the lowest in 45 years. But it's actually worse than that because these numbers are not population-adjusted. The U.S. population in 1963 was only 190 million vs. over 300 million in 2008. I actually view this chart as a positive factor because new home sales need to be terrible if we have are to hold out any hope of working off our bloated housing inventory in the U.S.

The following chart is offered with the caveat that it is based upon data from the National Association of Realtors, so take the data with a grain of salt. That said, it indicates that home ownership is more affordable today than it has been since 1972.

If mortgage rates stay reasonable, and if unemployment does not skyrocket to the mid or high teens, this chart would indicate that housing inventory has gotten cheap enough to draw buyers.

I'm not calling a bottom for real estate, but I think the ingredients for a bottom could be coming into focus.

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