Recs
By Morgan Housel | More Articles January 23, 2012 | Comments (9)
Last month, Yale economist and housing expert Robert Shiller told me that we should be prepared for the possibility that home prices could decline in real (inflation-adjusted) terms for several decades. It's happened before, and it will probably happen again.
But there's an important distinction to make here. Housing prices could stay flat or decline, but housing construction increasingly looks like it's not only near a bottom, but ready to snap back. That's important, because housing construction tends to be a big driver of economic growth. From 2003 to 2006, construction accounted for over a quarter of all economic growth. Since 2008, it's dragged economic growth down by over 9%.
A few things to keep in mind: The housing bubble that caused the mess we're in wasn't brought about just by inflated prices, but by a massive overbuild. Because prices were so high and credit so easy to come by, homebuilders had a huge incentive to build as many homes as they could. The result was epic: From 2001 to 2006, 11 million homes were built in the United States, but only 8 million new households were formed.
To compensate for that binge, new home construction utterly fell off a cliff in recent years:
Source: Federal Reserve.
That drop in housing construction is a big part of why the economy has been so slow. It's not just construction jobs that get whacked when housing dries up. Everyone from mortgage brokers to Home Depot staff to furniture salesman suffer as well. And as all those workers get laid off and stop spending money, the pain moves down the economic ladder. It's an ugly cycle.
But there's evidence that it's starting to turn around.
Rental prices on apartments are rising briskly, and rental vacancies have dropped like a rock to the lowest level in over a decade. Apartment rental rates in several metropolitan areas are rising at double-digit rates, and nationwide are expected to rise between 4.5% and 5.5% this year. When I signed a lease on my current home of Seattle in 2009, I felt like I could negotiate nearly anything I wanted. When I renewed a few months ago, I could barely get a word in -- it was "take it or leave it." The rental vacancy rate, which was as high as 8% in 2009, is now just 5.2%, according to housing data firm Reis. Even when the economy was booming, the vacancy rate stood at or near 6%.
As more young households that had been discouraged from owning a home suddenly become even more discouraged from renting an apartment -- and as developers receive the demand to build more apartments -- construction should rise.
And it looks like it already is rising. While 2011 saw the lowest level of housing starts since the Census Bureau began collecting data in the 1950s, the numbers are bouncing back ever so slowly. After bottoming at an annual rate of 480,000 in 2009, housing starts have now rebounded to around 660,000, and are expected to total over 700,000 this year.
The numbers have to eventually rebound -- and sharply. Housing construction is at the lowest level it's been in a half-century, but even that figure doesn't show how depressed the industry is. When you adjust housing starts for population growth, you get a better understanding of how abandoned the industry has become:
Sources: Federal Reserve and author's calculations.
Keep an eye on the y-axis. Since 1959, housing starts divided by U.S. population has averaged around 0.006. Today, it's 0.002. Think of it that way, and it's not a stretch to think that housing construction could eventually rebound threefold, maybe more.
The question is: When? And while it's impossible to predict this stuff with any precision (if at all), I have a feeling we're closer to the bottom than some assume. Between housing starts being unsustainably low, low vacancies pointing to pressure in the rental market, and housing numbers already starting to perk up, it looks like the tide has turned.
Several things could pull the market back into decline. There's still a large number of homes waiting to be sold either by banks holding foreclosed properties or by homeowners waiting for a better price to sell. If this number -- called shadow inventory -- is larger than we expect, the market could face another leg down. And if unemployment rises or the economy slips back into recession, that too could send the industry back down.
But I think the most likely outcome is that housing will make a noticeable turn within the next year or two. That could be great for the economy, and great for companies like KB Home (NYSE: KBH ) , MDC Holdings (NYSE: MDC ) , and Meritage Homes (NYSE: MTH ) -- all three of which I've given a green thumbs-up to in my CAPS account.
Disagree? Tell me why in the comments section below.
Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of Meritage Homes. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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I think we've hit the bottom already. Housing vacancies are down to pre-2006 levels. Hopefully they will keep dropping a little more, to around 2%.
The home ownership rate has already dropped to pre-1998 levels, and seems to be levelling off around 66%.
http://www.census.gov/hhes/www/housing/hvs/qtr311/files/q311...
Maybe I'm missing something, but during the "boom", we only barely crossed the average of 0.006 housing starts/population. Compared to the catastrophic effects that had on our economy now, the mid 70s effects of double the housing starts look tame. I guess this was the credit freeze? Trying to wrap my head around this one.
You're assuming that becasue .06 was an average over a certain time period that we would eventually revert to that mean. This could be true or possibly it's not.
It is also possible that the number people per household (boomerang kids, kids leaving the nest later, multi-generation households) has not only gone up but will stay that way. It is also possible that the % of people who choose to rent has not only gone up but will stay that way (baby boomers renting apartment in cities, 20 something's waiting to become 30 somethings before they buy, families having kids later, etc.).
Graphically your .06 average horizontal line could just as easily be seen as a downward slopping one.
Perhaps the housing market is not over-built, but rather under-demolished?
Housing or whatever markets that are being analyzed will have to wait until the elections. Just about every major market will wait to see who comes into power.
If I am not wrong, houses on the market (including new homes and homes for resales) are in the millions. I remember reading somewhere in some .gov website, the new home sales in 2010 was around 315,000 homes. And all homes sales were well below 500,000 in that same year. If we take that and multiply by 5 years, we arrive at 2.5 millions home will be sold (plus or minus) in the next 5 years, and we have millions of home out there for sale, and said to have millions more from the remainder list of bank repossessed homes. Am I missing something here? Would love to have someone point me to the right direction.
Disagree - Sorry have to respectfully disagree here.
In this crisis, there was/is a fundamental change that has occured. the concept of dream house or any house for that matter has disappeared. so most of them are sharing rentals or on rentals & they will NOT return to individual houses even if the economy improves. People have realised the value of Cash & they will hold on to it for the rest of their lives instead of buying expensive houses on mortgages. so a few rich folks will buy many of the houses & rent them as they have always done. the middle class/poor will never buy them in this life time. so housing sector will languish for the next 2 decades. People should sell the houses on rallies & move into rentals.
Go for a rental that is less than 10% of your monthly salary, living expenses of max 20% salary, 40% into treasury bonds, rest 20% into gold/silver (buy on a monthly basis & average your investments), 10% into stocks assuming a salary level of 36000 per year post taxes !!. your treasury bonds will be the emergency fund etc.. In 5 yrs, you will be financially independant !!.
Rent for less than 10% of income? On what planet?
As a landlord I can tell you that none of my tenants would come in at that,maybe a couple at 20% more like 30%+. There Is no place they can move for 10 or less around here.
Housing won't move until after the election and can't move much without the return of higher paying jobs,and who knows when that will happen.
The real trick will be keeping the mortgage rates rock bottom low or house prices won't move at all.
Problem is thats how they slow inflation, raising rates.
Raise rates to say 7-8 to control inflation over the next couple years and that will keep prices down.
Close to the bottom or far from the bottom. Does it really matter if its not going to go up???
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