Light at the end of the tunnel?

Amid continued erosion in housing prices and the banking industry's subprime-mortgage bloodbath, there's anecdotal evidence that a bottom is in sight for the housing market.

Some industry analysts predict that it will take two years for buyers to sop up existing inventory on top of the human and neighborhood trauma of record foreclosures and abandoned houses.

But the recently upticking stock market indicates an end to the bloodletting.

"Housing activity, homes on the market and other leading indicators have stopped getting worse," said Keith Tufte, president and CEO of Longview Wealth Management in Eden Prairie.

"Homebuilding stocks have started to outperform the overall stock market. Mortgage rates are down about 1 percent since last summer," Tufte said. "Housing affordability has improved significantly over the past six months [thanks to falling prices]. Home refinancings are up significantly. And applications recently jumped all the way back to the highest level since 2004."

You'd have had a hard time making that case last week at the National Association of Home Builders meeting.

"Foreclosures keep getting worse," David Seiders, the association's chief economist, told the Wall Street Journal. "Where in the world does it stop?"

Shiller, who has a reputation for being bearish, said home prices rose about 85 percent from 1997 to 2006 after adjusting for inflation. And he predicted they would lose about a third of that gain by year's end.

Now come Tufte and John Lee, portfolio manager at Manu Capital in San Diego. They said in separate reports that the stock market shows things stabilizing faster than expected.

Lee pointed out in a recent report that subprime mortgage debt is selling for 10 to 20 cents on the dollar, even though mortgage analysts say 70 percent or more of the underlying mortgages are performing.

The huge discounts result from writedowns by the big Wall Street investment banks that couldn't dump the stuff anywhere near par value as the crisis deepened last fall and winter. The market is loosening a bit now, but the buyers expect deals.

Lenders are starting to avoid foreclosures when at all possible, or selling mortgages to firms that try to work out terms with homeowners rather than incur foreclosure costs and ownership of an empty, value-eroding house.

"Things are still gloom and doom right now and housing prices could go lower," said Tufte, a one-time hedge fund manager and director of equity research at Ameriprise Financial. "Markets overdo on the upside and downside," he said.

"There are funds being formed right now to buy mortgages [at a discount] and eventually the housing market will be within balance, sometime within a year," he said. "The Federal Housing Administration has raised the limit on the size of mortgages it will insure. The Federal Reserve bailed out Bear Stearns and that put a floor on how bad things will get," he said. "The overall market took a cue from that and it has had a nice rally."

This is no reprieve if you are a bankrupt suburban home developer, homeless family or unemployed carpenter.

Mark Zandi, chief economist for Moody's Economy.com, said last week that he expects three quarters of the country's major markets to experience decreases in prices of new and existing homes this year.

But if Tufte and Lee are right, then the stock market seems to have already accounted for the worst.

US Bancorp, which avoided the subprime-mortgage mess and has less exposure to housing than some of its rivals, has emerged as one of the country's best-performing banks. Minneapolis-based USB provided a total return to shareholders of 5.5 percent, thanks partly to a huge dividend that is about two-thirds of its earnings.

By comparison, Wells Fargo, the country's biggest residential mortgage lender, has seen its total return to shareholders drop by 10.7 percent in the year concluded last Friday. And the S&P 500 index of the nation's largest financial companies was down nearly 25 percent over last year, according to Bloomberg.

Over the last decade, USB returned 130 percent to shareholders compared with 95 percent by Wells Fargo and 37 percent by the S&P 500 financial stocks.