Friday, November 11, 2011

The Economist Makes a (Somewhat) Bullish Case for a Housing Recovery

I just had someone email me yesterday on the prospects for a recovery in the housing market by 2013/2014, so the timing of this story from The Economist is good.  Generally these mega busts in real estate take around 7 years to play out from peak, so if your peak was 2006 you are looking at 2013... and if your peak was 2007, then 2014.  If all goes according to schedule.  Of course in the U.S. we have mega structural changes happening in the job market due to globalization and automation, a Federal Reserve which punishes savers (but worships borrowers), and an army of underwater homeowners.  All things equal, the prospects in the job market are the most daunting as many in the bottom 40-50% have seen their jobs go overseas, and not much hope for something similar (or dare we hope... better!) to replace them.  Indeed, most of the jobs being created nowadays are worse paying than what was lost. [Feb 3, 2011: Jobs Coming Back, but the Pay Stinks!  [Sep 2, 2010: NYT- New Jobs Mean Lower Wages for Many
  • Bernhardt's analysis of the first seven months of 2010 found that 76% of jobs created were in low- to mid-wage industries -- those earning between $8.92 to $15 an hour, well below the national average hourly wage of $22.60.
  • High-wage sectors -- made up of jobs that pay between $17.43 and $31 an hour -- accounted for nearly half the jobs lost during the recession, but have produced only 5% of the new jobs since hiring resumed, Bernhardt's study showed.

If not for that factor, I'd be more bullish on a recovery in the 2013-2014 time frame.  We also have the small matter of a recession that should be hitting sometime in 2012-2014, if for nothing else other than "we'll be due".

That said, the rental market has been booming [May 24, 2011: Troubled Home Market Creates Generation of Renters[Apr 8, 2011:  Apartment Vacancies Drop to 3 Year Low, as Rents Riseas displaced homeowners (many of which should never have been homeowners) flee to apartments, condos, and investor owned houses.  The Economist takes an in depth look at the U.S. housing market, and makes the case that the strength in the rental market is laying the framework for an eventual recovery.  The question of course is... what does 'eventual' entail?

  • THERE are two things everyone knows about American economic recoveries. The first is that the housing sector traditionally leads the economy out of recession. The second is that there is no chance of the housing sector leading the present economy anywhere, except deeper into the mire. 
  • In the two years after the recession of the early 1980s housing investment rose 56%; it is down 6.3% in the present recovery. America is saddled with a debilitating overhang of excess housing, the thinking goes, and as a result is doomed to years of slow growth and underemployment.
  • The economic landscape is unquestionably littered with the wreckage of the crash. Home prices languish near post-bubble lows, over 30% below peak. The plunge in prices has left nearly a quarter of all mortgage borrowers owing more than the value of their homes; nearly 10m are seriously delinquent on their loans or in foreclosure. 
  • Housing markets are far from healthy. Yet current pessimism seems overdone. A turnaround in sales, prices and construction may be closer than many imagine.
  • The potential for a strong housing recovery lies in the depths of the bust. America’s housing boom was remarkable for its impact on prices and for the flow of new households into the market, which pushed the home-ownership rate above 69%, the highest on record. Construction also boomed, but less wildly. Housing completions were above average during the boom, but not unusually so, particularly in light of the relatively restrained growth in housing supply during the 1990s. The bust, by contrast, dragged new construction to unprecedented depths. At the current rate, fewer homes will be added to the housing stock this year than in any year since records began in 1968.
  • America therefore has only a minor problem of excess housing supply. Under normal conditions, that small glut would quickly have disappeared. But America is now adding new households at a rate well below normal—not because the population is growing more slowly, but because, for example, young people are opting to stay longer in their parents’ home. [Sep 16, 2011: 7.5M More Americans Living in "Double Up" Situation Versus 2007]  [Apr 8, 2009: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces. Housing Bubble 2.0? (Not)]  According to one analysis, there are now 1.5m more young adults (aged 18 to 34) living at home than would be expected, given long-term trends.Better prospects for young adults would encourage the forming of new households, buoying the demand for new homes.
  • Although total housing supply is not far out of line, the distribution of supply between the rental and owner-occupied markets remains distorted. In September the inventory of newly built houses for sale fell to its lowest level since record-keeping began. But the inventory of existing houses, while falling, remains high. In September the figure dipped below 3.5m, down from over 4.5m in 2008 but still above the 2.5m registered early in the last decade. The total number of vacant homes for sale has steadily declined and is at the lowest level since 2006. But the pace of sales remains extraordinarily low, and foreclosures will continue to prevent a faster decline in inventory.

  • Rental markets, by contrast, look far stronger. America’s rental vacancy rate stood at 9.8% in the third quarter of 2011, down from a high above 11% in 2009. Vacancy rates in some cities are strikingly low—2.4% in New York City, for instance, and 3.6% in San Francisco—which translates into rising rents. Nationally, rents rose 2.1% in the year to August, in stark contrast to house prices (see chart 2).
  • Strength in the market for rentals is beginning to seep into the more troubled owner-occupied sector. Rising rents help housing markets heal on both the supply and demand side, by encouraging renters to consider buying and through the movement of supply into the rental market, easing the glut of houses for sale. 
  • The Obama administration hopes to take advantage of better rental conditions to unload some of the more than 200,000 foreclosed-on homes held by the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac, and the Federal Housing Administration (which account for roughly half of all such inventory), on to investors who may rent the properties out.
  • The convalescence, however, may be complicated. Housing recoveries have seemed imminent before, only to peter out when the economic outlook weakened. Foreclosures are falling, but they continue to place downward pressure on prices. 
  • The macroeconomic environment, too, remains troublesome. Housing markets could lurch sharply downwards if a new shock, perhaps from Europe, disturbed the global economy. A new financial shock could rattle confidence and send buyers fleeing, while the flow of mortgage credit from exposed banks would dry up. Lenders carry the scars of the housing crash. Cautious banks are reluctant to lend. Housing-finance institutions, having kept credit standards too loose during the bubble, now seem to be setting them too tight, preventing rising demand and low rates from translating into new sales.
  • Yet once the housing sector finds its footing it may quickly gain momentum. A switch from falling to rising prices should encourage banks to make more loans. Higher house values would chip away at negative equity, stanching the flow of defaults and foreclosures.
  • Such hopes for housing would smack of an effort to reanimate a corpse, had the bust not so far outpaced the boom. But a turnaround now seems probable on many measures. If it happens, the recovery should become much more vigorous.

[Sep 22, 2011: Interesting Statistic of the Rental Market  - Over 27% Pay Half their Income in Rent!]

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