Back in October I suggested US housing market pessimism was overdone and activity was probably bottoming. The jury is still out but home sales edged higher in September and October – see first chart. One hopeful sign was an improvement in the home-buying conditions index from the University of Michigan consumer survey. As the chart shows, this indicator rose further to a seven-month high in early December.

Weekly mortgage applications for house purchase have recovered to their highest level since January  – see second chart. There are well-known problems with this series – it is biased towards prime borrowers and may be distorted by people making multiple applications – but the recent upward trend is encouraging.

The collapse in home sales from mid 2005 was preceded by a sharp drop in the housing affordability index calculated by the National Association of Realtors. This index bottomed in mid 2006 and has recovered significantly since the summer, reflecting lower home prices and a large decline in mortgage rates for prime borrowers – see third chart.

Construction indicators have yet to show improvement but the NAHB homebuilders index stabilised in November – December's survey is released next week. While still high, inventories of unsold new homes have been falling for over a year, reaching a 22-month low in October. Homebuilders’ stock prices tend to lead housing starts and may be in the process of forming a bottom. As the final chart shows, a recent rally in the S&P homebuilding index broke the downtrend in place since the summer and prices are now retesting the trend line from above. It would be encouraging if the index finds support at the line; a renewed fall below would signal new lows ahead.