We here at Running of the Bulls spent the first few years of this blog warning about the utterly insane things going on in housing, so much so that we made it a frequent topic.  Just click on the Real Estate link to the right of this article and scroll through some of the older posts to see what we were saying.

We are not smug and self-congratulatory over warning about the housing bubble.  We are professionals.  We get paid to to allocate capital.  If there is one single thing an investment professional should be able to do, it is to spot a bubble.  If you have a financial adviser who did not think housing was a bubble, fire your adviser! 

No, identifying a bubble is not an act worthy of commendation for an investment professional - it is the minimum requirement to get into the club.

The expansive staff at Running of the Bulls looks fondly upon contrarian thinking in capital markets.  We have made (and lost) money over the years executing other strategies, from growth investing to arbitrage to short-term momentum trading.  And though we have had a few money-losing dogs, our biggest successes have come buying where others do not wish to tread and selling when things look too good.  In other words, we lean towards what is known as "value" investing.

But fair warning, for those of you not intimate with the idiosyncrasies of the money management world, we value investors have an obvious sin.  We are almost always early.  Thus, we usually lose money at the beginning of our investments.  That is the cross we bear. 

Which gets me back to housing.  I think we are nearing the end of the collapse in housing prices.

Now, some caveats. 

First, I am not saying this is the bottom.  Far from it.  I think we have some more to go.  And when it bottoms, I have no idea.

Next, a new bull market in home prices is not in the offing.  Home prices are most likely to go "thud!" and stay there for some time.  There is still too much inventory, too many mortgages that have to reset and the economy is too anemic to support a dynamic recovery, or maybe even a weak recovery.

Finally, I refer to the nationwide price of homes.  Local markets vary widely.  Florida and California have seen the worst of their collapse.  But if you live in New York City, ho-boy, get ready for a beatdown.  It is just starting for you.

So I present to you the evidence why I believe that the housing price collapse is near the end.

From Calculated Risk, two graphs.  First, the price-to-rent ratio, which measures the relative cost of owing a house to renting, has seen the bulk of its downward move.

It still has more to go but most of the decline is over.

Second, the price of a home relative to household income has collapsed.

Yes, it is still too high, but most of the downdraft has occurred.

According to the most recent Case-Shiller data, home prices have declined 26.7% from the peak in 2006.  The graphs above imply another 10% downside, if that.  And note, the decline in the ratios from 1990 to 1998 did not occur because prices fell.  They did not.  Instead, rents and incomes rose faster than home prices.

Of course, simply because price ratios are falling back into range does not mean ratios will stop there.  They could collapse to ridiculously low levels.  After all, what rational person knowledgeable of financial history would have ever thought these ratios would ever have become so crazy on the upside?  Valuations can get just as stupid on the downside as they can on the upside.

There is also the denominator effect, meaning that even though prices are falling, if incomes and rents fall even faster, the ratios above may remain elevated. 

However, one measurement is already indicating that homes are inexpensive.  The National Association of Realtors' Affordable Housing Index is near highs, meaning given incomes and the cost of financing a mortgage, homes are currently cheap.

We are not at a bottom in home prices yet, but we are much closer to the end than the beginning.