So soon after the rapture failed to materialize, I'm aware that the market for spectacularly good news might not be a particularly robust one. But listen, people! A new housing boom may be upon us! Really.
No, my keyboard hasn't been occupied by David Lereah, the former chief economist of the National Association of Realtors, whose cockeyed optimism made him a legend. As we've discussed recently with blogger/money manager Barry Ritholtz, housing could struggle for another five to ten years — or for a generation. Consider: the Dow Jones Industrial Average didn't take out its 1929 pre-crash high until 1954. On March 9, 2000, the NASDAQ composite index closed at 5,046. Today, it's at 2,754. It could be another decade before it rises to the lofty levels of early 2000. Just as time heals all wounds, it also heals all bubbles — eventually.
But housing? Really? It's tough to be positive on the sector. The bad news keeps coming: Housing starts, existing home sales. The New York Times reported Monday that the nation's largest banks are the unwilling owners of 872,000 foreclosed homes. Americans are shucking the shackles of homeownership. Positive news, like the fact that April new home sales rose modestly, is easily dismissed.
And yet, unless we start picking up the pace of new home construction — and soon — the U.S. could face a housing shortage in the not-too-distant future. That's the line coming from one of the most sober, data-driven, non-ideological sources I know: Macroeconomic Advisers. The consulting firm is one of the best short-term forecasters out there, and distributes highly valuable measures of current quarter GDP as new inputs come in. It recently issued a report "The Long View on Housing — There's a Boom out There Somewhere," a summary of which can be seen here.
In the accompanying video, Aaron Task, Henry Blodget and I discuss the report.
MA doesn't arrive at this conclusion based on blind faith, belief, or intuition. Rather, it's a matter of numbers, supply and demand, and a look at historical trends. Times may be tough. But Americans continue to grow up, leave home, get married, form families, and have children. At the end of last year, the U.S. had 130.8 million housing units, of which 112.5 million were occupied. Some 18.4 million were empty, leaving us with a vacancy rate of 14 percent.
Demographic data suggests that "over the next 10 years, nearly 14 million new households are likely to form." Some of those households will sop up excess supply. The current vacancy rate of 14 percent is above the pre-boom level of about 12 percent. "But if the housing vacancy rate returns to a normal, pre-boom level — but not lower —the housing stock will have to expand by about 12 ½ million units over the next 10 years to accommodate 14 million new households."
Another force will help reduce supply: time. Each year a chunk of the housing stock withers away — through collapse, fire, condemnation, or redevelopment. If that .8 percent annual rate holds for the next ten years, 11 million housing units will disappear. And so, "for the housing stock to expand by 12 ½ million units, then, 23.5 million units must be added to the stock over the next 10 years!"
Now, typically only 70 percent of the growth in housing units comes from new construction. The rest comes from mobile homes, conversions, and the recovery of condemned units. Add it all up, and MA believes the nation will need "16 million housing starts over the next 10 years. That's an average of 1.6 million starts per year." And yet in the first quarter of 2011, housing starts came in at an annualized rate of 563,000. In other words, to keep up with demand that is expected to develop over the next decade, new housing construction will have to triple from its current depressed levels and stay at that high rate for several years. (As this historical data shows, the peak year of 2005 saw construction started on 2.07 million new housing units)
Of course, this projection hinges to a large degree on mean reversion. It presumes that over the next decade, population growth, family formation, and the desire and ability of people to live in single generation family units will be generally proportional to what they were in the past 40 years. It presumes that the vicious cycle we've lived through won't lead to some pretty significant structural changes. And sharp downturns and sluggish recoveries have a way of changing behavior in ways that create economic and demographic discontinuities. Look at Japan, where the population is now shrinking after two decades of a low birth rate; or Italy, where it is common for people to live at home well into their 20s and 30s and delay marriage. Our new normal could be one of smaller families and less immigration, or of multiple generations under one roof. Remember The Waltons? And isn't a market in which 12 percent of the units are empty a pretty inefficient one?
MA says that adjusting its formula to account for lower household formation, and for the vacancy rate pushing down to 10 percent instead of 12 percent, doesn't eliminate the bull case. Doing so "lowers the cumulative 10-year total for housing starts to 12.0- million units (an average annual pace of 1.2 million)." That's still nearly twice the current rate.
Still, don't expect builders to start laying plans for new developments that will come on line in 2020, just as the housing market will be tight by historical standards. That's not how we roll in this country. I've read a lot and written some about the history of bubbles in the U.S. And whether it's a telegraph line or a railroad, a fiber-optic cable or a development in Las Vegas, we tend to jump into bubble baths when they're at their frothiest. It's no surprise that the peak years for housing starts came in 2005 and 2006. And it's no surprise that a sector once universally loved is now universally loathed. It's more likely that housing starts will remain at a depressed level for several years, until one day, suddenly, the nation wakes up and realizes there's a very real danger of a housing shortage. Builders will gobble up land and start laying out new divisions in the Sun Belt. Television shows will promise quick riches to be had by flipping condos in Miami. The economist at the National Association of Realtors will issue optimistic reports pointing to a new boom.
And that's when you'll know it's time to get out.
Daniel Gross is economics editor at Yahoo! Finance
Email him at firstname.lastname@example.org; follow him on Twitter @grossdm
Read his columns here.
- NASDAQ composite index
- supply and demand
- Henry Blodget