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Related topics: homes, home buying, investing strategy, interest rates, Anthony Mirhaydari

It's no secret: We've just been through an economic nightmare. And it was all because of a corruption of the American Dream.

Instead of being the blessing that promised wealth, independence and self-determination, homeownership became a shackle that still ensnares nearly 11 million Americans. These are the souls who now live with the burden of negative home equity.

You know the story. Ultralow interest rates, caused by Federal Reserve errors and Chinese currency manipulation, encouraged a housing boom, the greatest of all bubbles and the resulting fallout. Unemployment. The bank bailouts. The automaker bailouts. The stimulus package. Even the European debt crisis.

But that's old news. And many, including value investor and hedge fund operator Bill Ackman of Pershing Square Capital, who made billions shorting housing-related bond insurer MBIA (MBI, news) in the last days of the boom, are now calling for its resurrection.

Image: Anthony Mirhaydari

Anthony Mirhaydari

In a leaked research report titled "How To Make A Fortune," Ackman doesn't just say the path to wealth through homeownership has been restored. He says this road has seldom been easier.

Core beliefs unchanged

If you're like most people, you're probably skeptical -- particularly since home mortgage rates kicked higher recently, albeit off record lows.

A recent Fannie Mae survey found that 66% of Americans believe buying a home is a safe investment. Compare this to a high of 83% back in 2003. And the Conference Board's recent report on the number of consumers planning to buy a home in six months fell to 1.7% in November from 2.2% previously.

Recent economic data haven't been supportive either, as the temporary boost from the homebuyer tax credit fades. Sales are down. Prices are falling again. New construction activity is down. It's harder to get a loan. And now, mortgage rates are creeping higher as the bond market prices in higher inflation and stronger economic growth.

But deep down, this is a message that still resonates with people. Another survey by Fannie Mae found that despite what the housing market's just been through, most people still aspire to homeownership.

And as the economy continues to improve and jobs are created (see "2011 -- the most new jobs since 1995?"), the coming rebound in the housing market will become increasingly clear. Barring some unforeseen calamity, another self-perpetuating cycle of higher home prices encouraging increased homeownership and even higher prices is coming as early as next year. Here's why.

Why it's time to buy

Basically, the bull's case as outlined by Ackman can be boiled down to a few simple bullet points:

  • Home prices are at their lowest valuation in at least a generation.
  • A large number of forced sellers gives buyers negotiating power.
  • Attractive, low-rate financing.
  • Still favorable long-term supply dynamics as the U.S. has one of the best demographic outlooks in the developed world.
  • Housing is an out-of-consensus idea that is under-owned by institutional investors.

The most important factor is affordability.

With home prices down by nearly one-third from their high, housing affordability as calculated by the National Association of Realtors has moved to the highest levels since the recordkeeping started in 1971. Also, with rents on the rise again as vacancy rates fall, the required annual home price appreciation needed to "break even" on a comparative analysis of buying versus renting costs has also fallen to levels not seen since the 1970s.

Right now, according to the work of academics Eli Beracha of East Carolina University and Ken Johnson of Florida International University, home prices would need to rise by 4% annually to make homeownership a better deal than renting. Compare this to the high of 10.5% reached in the early 1980s.

Image: 30-year conventional mortgage rates

This is being driven in large part by the massive decline in long-term interest rates over the past 30 years. After former Federal Reserve chairman Paul Volcker smashed inflation in the early 1980s, a "Great Moderation" ensued in which economic volatility and inflation were kept in check by what was believed to be infallible central banking theory. That helped keep interest rates down for years.