Misconception 2 – Housing markets won’t recover until the inventory is gone
Once we accept the idea that there are lots of separate housing markets rather than one market (see my blog "Misconception 1 - One Housing Market") it’s clear that the huge amount of inventory of unsold homes in one market doesn’t mean much for another market. So there could still be a huge backlog of inventory in many markets while other markets may need new supply. i.e. those with reasonable economic growth, no huge backlog of inventory and affordable housing.
This is good news for builders and residential housing market investors in these areas. For stock market traders/investors this suggests it will be highly profitable in the coming year or two to buy beaten down builders who are active in stabilising housing markets. Don't be put off by headlines about inventory gluts and falling prices in "the housing market".
However there is bad news for investors in markets with a big overhang of inventory and for holders of CDO’s and other housing market debt that was issued based on these markets. The real value of these (either in an auction or on a “hold to maturity basis) will most likely continue to drop as prices continue to fall and as foreclosures continue to mount. This bad news for the solvency of the financial system in the year ahead.