David Rosenberg calls the end of house-price declines with only 15% more of a drop to go

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Merrill Lynch economist David Rosenberg has found some good news in January’s worse-than-expected 17% drop in housing starts. In a report, he argues that builders have finally pulled the growth rate of new housing supply below the growth rate of new demand—which means we’re entering “a new and final chapter of this unprecedented decline in residential real estate prices.”

Here’s his math. The Commerce Department reported that construction of single-family homes decreased to an annualized 347,000 last month. Rosenberg shaves about 30% off that number in order to exclude people who are signing up to build houses on land they already own (as opposed to entering the market for the first time). That gets him to an adjusted level of 245,000 single-family starts, which is below December’s new home sales rate of 330,000.

The catch is that we’ve still got all those extra homes sitting around, and it’ll take a while to work through the inventory, kind of an important part of stabilizing home prices overall. Rosenberg figures that if starts and sales stay at their current levels, we’ll get back to a healthy equilibrium in about 13 years. And that even if starts go to zero, it would still take two years to burn off excess inventory.

So let’s hope demand picks up a little. It should. Rosenberg figures that underlying demographic trends would put demand at 520,000 units annually—quite a bit more than the 330,000 we saw in December. Of course, no one necessarily thinks that correction will happen quickly. Rosenberg writes that he’s “extremely confident” that the average price of a home nationwide has got to drop 15% more before we hit bottom. An important caveat to the “good news.”