Unraveling the Housing Glut

Estimates of the time needed for the housing industry to work off its excess inventory range from sometime within calendar year 2009 to outside estimates of four to five years, a rather wide range for such a crucial sector that is key to the economic and investment outlook. After a lengthy and careful review of the data, as well as the analysis offered by analysts of widely different perspectives, it is our conclusion that the housing market is likely to hit bottom in 2009. Therefore, housing should contribute to an economic turnaround in the second half of this year.

Overview

The collapse in housing that began in 2006 has reduced GDP by roughly one percentage point at an annual rate for nearly three years. Housing price declines have also depressed household net worth, which has undermined consumer spending. The decline in housing values has also contributed to large losses to investors when households default on their mortgages. The resulting loss of capital at financial institutions has curtailed their ability to lend or invest in the economy. So, the severe weakness in housing has inflicted considerable damage on the economy through a wide variety of mechanisms. And at least a modest recovery in housing is necessary to relieve some of the stress in the financial system.

An examination of the excess supply of housing hanging over the market suggests that considerable progress has already been made and that the housing market is approaching bottom. There are four markets where the inventory excess is still sizeable, notably around Las Vegas, the Inland Empire region of California, Phoenix and parts of Florida and the housing news from these markets should remain fairly negative for some period of time. Elsewhere, the excess inventory is considerably lower. On a nationwide basis, we expect new home construction to flatten in the months immediately ahead, exerting little additional drag on GDP. As excess housing inventories decline, home values should begin to rebound, a necessary condition for home builders to be able to resume construction and earn a profit. The decline in housing inventories will be the key data that will predict the turnaround in housing.

Estimating Excess Housing Supply

There is a very wide range of estimates of the excess supply of housing hanging over the market, from a few hundred thousand units to a few million units. In an editorial in a recent editorial in the Wall Street Journal, LeFrak and Shilling suggest that the excess supply of housing is 2.4 million units, which if correct, would take several years to absorb, if new construction remains severely depressed. In fact, the excess inventory of the nation’s housing stock is poorly captured by the most commonly cited inventory figures of housing on the market i.e. new and existing homes for sale. It is our thesis that the overhang of excess housing inventory is captured by the sum of above normal level of unsold new homes plus the above normal level of vacant existing housing. We will work through the sources of excess housing, as well as sources of demand, to estimate the glut that has depressed housing activity.

Table 1 provided below summarizes our approach and can also serve as a framework to the analysis that follows. (All of the figures should be considered rough estimates.)

Table 1

Excess new housing inventory:

Excess vacant existing housing: 750,000

Excess rental housing: 350,000

Overestimated housing stock: -1,500,000

Second home supply: 750,000

Net inventory overhang (rough): 350,000

The first component, newly constructed homes for sale, is the unsold level of new construction. To the extent newly built home inventories are above normal, that excess is clearly part of the glut. With new construction activity severely depressed, these inventories have been falling for almost two years. Over more than twenty years, unsold new housing inventory has ranged between 300,000 and 400,000. With the inventory down to 342,000 as of January 2009, it appears this supply is now at a level that might be considered normal. So we ballpark the “excess” portion of this inventory at around zero. (Compositionally, there is plenty of excess around the four overbuilt markets, but that is offset by below normal levels in other areas.)

The harder part of the calculation is to discern the abnormal quantity of existing homes for sale, which is the larger part of the puzzle. The total number of existing homes for sale is not a good measure of the excess supply. When a seller sells, they must move elsewhere, either into a home purchase or a rental. Such relocations neither add nor detract from the inventory of units on a net basis. They merely reallocate the existing housing supply. However, some existing homes for sale are already vacant, as occurs when a seller has already purchased another home and moved. In this case, the unsold, vacant unit is part of the inventory overhanging the market and it is just as much of a burden on the market as an unsold newly built home. Thus, the above normal level of vacant existing homes for sale is part of the glut that must be worked off for the housing market to return to normal.

Since the Census Bureau publishes quarterly data on home vacancies, it would seem a simple matter to examine this data to assess the degree to which vacancies are above normal. A review of the historical data suggests that vacancies are about 1% too high, roughly 750,000 units. Vacancies of rental units also appear slightly above normal, but this stock is much smaller, so the excess inventory is likely around 350,000 units. Putting together vacancies from all sources, new homes, existing homes, and rentals, the entire overhang appears to be around 1 million units.

In fact, the quality of the Census data on vacancies is quite poor. The estimates of the total housing stock for 2007 and 2008, is based on trends from 2005 and 2006 (as noted in the footnotes to the press release), although these were peak years for housing and home construction. So the Census Bureau estimated an increase in the total housing stock of more than 2.2 million units in 2008 from 2007, using an above normal growth rate based on 2005 to 2006, while actual housing starts in 2008 were just over 800,000.

By relying on the boom years to project out the nation’s housing stock, the Census Bureau overestimated the total by a considerable margin. A comparison of the estimate of the growth in the housing stock to actual housing starts suggests that the housing supply is over-estimated by at least 1.5 million units, based just on the lower level of actual new housing construction.

The weakening economic activity has also surely added to the supply of vacancies from atypical sources. The weak economy is forcing some home owners to unload second homes or vacation homes because they are under financial stress. There are 4.8 million vacant seasonal homes according to the vacancy data. But in these difficult times, some of those homes have surely been put up for sale. If 10% (a guess) have become available for sale, an additional 450,000 units of vacancy would be added to the inventory overhang. But it is possible the actual figure could be twice as high. So, we added 750,000 units to the housing glut estimate from the supply of second homes placed on the market.

Aggregating all of the factors listed above suggests that the true overhang of excess housing inventory is about 350,000 units, but the discussion associated with each component of this estimate should provide a good sense that the estimates are subject to considerable uncertainty. It is possible the actual figure could be twice as high as the 350,000 figure, but it could also be lower.

Housing Absorption

Any assessment of the housing glut must also account for trends in new household formation, which is needed to absorb this inventory. Underlying demographic trends are very favorable for a rapid rate of household formation, since there is a very large population cohort exiting college, entering the job market, and getting married. These are the children of the baby boomers, in effect the echo of the baby boom, and they are a very large cohort. Our population is growing by about 3 million annually and U.S. household formation should be between 1.3 and 1.5 million annually. In fact, this trend estimate of household formation is surely too high for the moment, reflecting the financial constraints on young people that prevent them from moving out on their own in a weak job market. Instead, college grads may move back home or share housing units with other new graduates until economic conditions improve. Immigration has also surely slowed. Unfortunately, we don’t have very good estimates of how much household formation has slowed down in response to these cyclical pressures. Therefore, the absorption rate of the (unknown) inventory excess is also subject to considerable uncertainty. I will use half the underlying demographic rate of household formation to ballpark this figure, so roughly 700,000 new households being formed in this weak economy.

Table 2

Household Formation Trend: 1,400,000

Overestimated household formation: 700,000

Cyclically-adjusted household formation: 700,000

So how long will it take for the excess to be absorbed? Assuming household formation is about half the underlying rate suggested by demographic trends, so roughly 700,000 households annually, would imply that the excess inventory would be absorbed within about one half year. If the actual glut is higher, or the rate of new household formation is lower, it may take as much as a full year to absorb the excess housing inventory.

Some allowance must also be made for the concentration of vacant housing by geography. If vacant housing is concentrated in Las Vegas, Phoenix, Florida, and the Inland Empire region of Southern California, other areas will start to experience a tightening housing market before those overbuilt markets return to equilibrium. Thus, new construction might need to increase in Texas, the Carolinas, and Northern California before the entire excess is worked off. Watching the behavior of new construction in these markets may provide some insight as to when the housing sector will stop being a drag on overall economic growth. Similarly, location also matters for the incremental supply of vacation homes, since this housing is unlikely to be in the same geographic areas as primary homes and, thus, exert less of a supply deterrent to new construction in cities. The same point can be made even with regard to new primary home construction in the distant suburbs of Los Angeles, Las Vegas and Phoenix, where vacancies may take quite a while to fully absorb without exerting a major influence on the price or sales of homes in the closer suburbs. Thus, the inventory of unsold new homes may exert less of a drag on housing than would be suggested by an inventory level of 342,000 units.

Reality Check

How do these estimates jibe with the actual behavior of the housing market? It does appear to be very likely, even compelling, that significant absorption of the excess inventory is occurring, since both the supply of new homes and existing homes on the market has been falling. The inventory of new unsold housing has fallen from a peak close to 600,000 units two years ago to about 342,000 units as of January 2009. Unsold new housing inventory is now near the mid-point of its long-term historical range, yet enjoys better demographic trends. This is an unambiguous substantial improvement. Existing home inventories have plummeted by more than 20% over the past six months, providing some reinforcement to the implications of the decline in new housing inventory. Qualitatively, this decline is a positive development, although it is impossible to distinguish between occupied and vacant units, so its true importance is difficult to assess.

Conclusions

Our calculations suggest that the housing supply imbalance is falling at a good pace, which leads to the conclusion that the housing sector is likely to bottom this year. The uncertainties surrounding key aspects of the analysis precludes us from reaching a firm conclusion that the bottom will be reached within six months, although such an outcome appears reasonably likely. Even with the wide range of uncertainty surrounding these estimates, it appears quite unlikely that the housing sector will require an additional 3 to 4 year time frame to complete its adjustment, as some are forecasting, barring a dramatic further downturn in the economy.

Monitoring the progress being made in eliminating the excess supply of housing is best done by tracking housing inventories, sales and new starts. Inventories of unsold new homes should decline somewhat further, although the pace of decline should slow now, as inventories in the four badly overbuilt regions sell off slowly, while other regions begin to recover. A continued rapid pace of decline in the inventory of existing homes for sale during the key spring selling season would strongly suggest a nearer term end to the housing glut. However, a rise in the supply of homes for sale might be very difficult to interpret, since more homes may come on the market once owners locked into their current homes believe the market has improved enough for them to be able to sell. Any pick-up in housing selling rates would be a distinct positive. A flattening or pick-up in new home starts, as was reported for February, would also be a distinct positive, since it would signal that builders are running out of inventory and still see enough demand to resume some construction activity.

One broad, diversified way to play for a recovery in housing is via the homebuilders ETF XHB.

Disclosure: I don’t own the ETF, although I do own a homebuilder stock in a family member’s portfolio.

Comments

[HardwoodFlo...:]

Excellent Post. The problem has been that people look at the housing market as one big miopic unit. The truth is that all housng is regional, local at that. There are places, for example, in the midwest that never saw a housing glut or overhang. Sure there are tens of thousands of oversupplied condo units in Miami (there they built in the last six years more units than had been built in the previous 20 years!). But not all these markets are uniform.

Apr 16 10:06 AM

[Brett Cole:]

Important Question: Do the household formation numbers account for all the young adults moving back home to save money or because of a job loss? If not, yes there will eventually be pent up demand, however, this is defintely not likely to be the case in 2009.

Apr 16 10:18 AM

[Charles Lie...:]

Good question. The household formation estimate of 1.5 million represents the underlying trend. It does not reflect the number of college grads who move back in with mom and dad because they can't find a job and so can't afford to pay for an apartment of their own. It also doesn't reflect a likely decline in immigration. We just don't have decent real time data on these factors. However, I did not want to ignore these real negative factors. So I gave the 1.5 million household formation figure a 50% haircut in my calculations and I made that explicit so readers could modify my numbers, or could understand how a different value would imply a different rate of housing absorption. I also labeled my estimates as rough. Unfortunately, there's no way to understand their precision until some years from now when we will have good data on the behavior of household formation from surveys. Still, I think my estimates are in the right ballpark, since they seem to fit well with the ongoing decline in housing inventory on the market for which we do have fairly good quality current data.


On Apr 16 10:18 AM Brett Cole wrote:

> Important Question: Do the household formation numbers account for
> all the young adults moving back home to save money or because of
> a job loss? If not, yes there will eventually be pent up demand,
> however, this is defintely not likely to be the case in 2009.

Apr 16 10:57 AM

[HardwoodFlo...:]

Charles, the question about demographics is an interesting one. have you done any research into the so called "Echo- Generation"? I've heard, not seen confirmed data, that we are amidst the largest and biggest population explosion since the baby boomer generation. Is this accurate?

From a demographic standpoint the three year down turn doesn't make sense. We've been below a million units now for how long? Most economist believe 1.5MM is the sustainable level of housing completions? That's up 300%(3X) from todays number. I guess that shows just how week the broader economy is.

The pent up demand on the backside of this is going to be fierce. The problem is that housing/builder supply companies (e.g. lumber mills, flooring mills & cabinet shops) have been shutting down left and right over the past 3 years. I just can't imaging where the prodcution is going to come from in the turn around. There is going to be such a shortage of material it's going to be ridiculous.

Costs to build right now are cheap up costs in the future are going to be outragous. I think there are only two companies in the North America right now prodcuing 2 x 4s. One is Weyehauser the other one is Canadian. Plywood mills are shutting down, so are OSB palnts. It's a mess.

I still think that remodel will surge first- then housing.

Apr 16 11:12 AM

[Charles Lie...:]

Yes, the "echo" of the baby boom is huge. Think about the baby boom. That huge cohort had kids. Those kids started graduating from college in the late 90's and the flow into the labor and housing market will be very large and ongoing for perhaps another decade from today. (Less precisely, our U.S. population is growing about 1% annually, which on a population of 300 million implies 3 million more people per year. Household formation is slightly below half that.)
We have construction so far below the 1.5 million household formation pace now because we were so far above it during the housing boom. At the peak, new construction ran about 2.2 million at an annual rate and we held near that level for more than a full year. That's where the housing glut came from. Builders built with no regard for the demographic trends. Remember the line from the movie Field of Dreams, "If you build it they will come". That's how builders built. But the population didn't come because they weren't out there. So to absorb the glut, construction must remain below household formation for a while. The key to investing here is trying to anticipate when that glut will be absorbed. Once the glut is absorbed, construction must roughly triple just to keep up with population growth. That's why the strength of the recovery in housing will be such a shock, since everyone seems to focus on the trends without looking at what's behind them. We got into this problem partly because builders ignored the trend in household formation.


On Apr 16 11:12 AM HardwoodFlooring wrote:

> Charles, the question about demographics is an interesting one.
> have you done any research into the so called "Echo- Generation"?
> I've heard, not seen confirmed data, that we are amidst the largest
> and biggest population explosion since the baby boomer generation.
> Is this accurate?
>
> From a demographic standpoint the three year down turn doesn't make
> sense. We've been below a million units now for how long? Most
> economist believe 1.5MM is the sustainable level of housing completions?
> That's up 300%(3X) from todays number. I guess that shows just how
> week the broader economy is.
>
> The pent up demand on the backside of this is going to be fierce.
> The problem is that housing/builder supply companies (e.g. lumber
> mills, flooring mills & cabinet shops) have been shutting down
> left and right over the past 3 years. I just can't imaging where
> the prodcution is going to come from in the turn around. There is
> going to be such a shortage of material it's going to be ridiculous.
>
>
> Costs to build right now are cheap up costs in the future are going
> to be outragous. I think there are only two companies in the North
> America right now prodcuing 2 x 4s. One is Weyehauser the other
> one is Canadian. Plywood mills are shutting down, so are OSB palnts.
> It's a mess.
>
> I still think that remodel will surge first- then housing.
>
>
>
>
>
>

Apr 16 11:34 AM

[HardwoodFlo...:]

Charles great point about the builders over building. The big publlically traded builders sold themselves to Wall Street saying that "We have in house economists and market reseach so we won't make the mistakes made by mom and pop operations." Well, in order to satisfy Wall Street they had to keep the numbers rolling each quarter to keep the share prices up. So they ignored the facts of their building for the almighty share price.

I see a return to a housing market of old whereby smaller local builders do the building and the big Wall Street firms are locked out.

Apr 16 12:11 PM

[GEN X:]

I agree with much of the ideas being discussed in the article and forum. However, when talking about demographics, I wonder if anyone has given much thought to the overall wealth of this "Echo Generation." When you look at the income of your average working 20-30 something compared to their debt (debt to income ratio), the younger working generations don't have the capacity to afford the inflated prices of homes in the last 8 years. Some likely contributors include:

- Tuition costs leading to higher student loan repayments for recent college graduates.
- Inflation of other necessities such as food, energy, transportation, etc.
- Stagnated starting salaries for recent graduates since the late 1990's.

My point is simply this (and I'm sorry I am not full of data and figures, but I am still able to observe the world around me), the Echo Generation, GEN X, GEN Y, whichever you prefer - is having one hell of a time being able to save enough money to find it affordable to get into the housing market, even factoring in reduced prices, foreclosures, interest rates. Until future generations begin reducing their debt/income ratios, the housing market will find it harder and harder to reach the first time home buyer demographic (especially while in their 20's) regardless of stimulus plans and tax breaks.



-

Apr 16 02:28 PM

[Charles Lie...:]

You're correct that the Echo Generation is not ready to buy a home. But that doesn't mean they live in their cars or out on the street. They rent. Someone else must build and own the housing unit that will be rented. Housing starts include all housing units, owner occupied, rentals, and condos. Besides, the recent college grad replaces the 30-something couple that lives in the apartment that now had one or two kids and is now ready to move into a home. So by absorbing rental units, they indirectly help absorb the housing glut.

On Apr 16 02:28 PM GEN X wrote:

> I agree with much of the ideas being discussed in the article and
> forum. However, when talking about demographics, I wonder if anyone
> has given much thought to the overall wealth of this "Echo Generation."
> When you look at the income of your average working 20-30 something
> compared to their debt (debt to income ratio), the younger working
> generations don't have the capacity to afford the inflated prices
> of homes in the last 8 years. Some likely contributors include:
>
>
> - Tuition costs leading to higher student loan repayments for recent
> college graduates.
> - Inflation of other necessities such as food, energy, transportation,
> etc.
> - Stagnated starting salaries for recent graduates since the late
> 1990's.
>
> My point is simply this (and I'm sorry I am not full of data and
> figures, but I am still able to observe the world around me), the
> Echo Generation, GEN X, GEN Y, whichever you prefer - is having one
> hell of a time being able to save enough money to find it affordable
> to get into the housing market, even factoring in reduced prices,
> foreclosures, interest rates. Until future generations begin reducing
> their debt/income ratios, the housing market will find it harder
> and harder to reach the first time home buyer demographic (especially
> while in their 20's) regardless of stimulus plans and tax breaks.
>
>
>
>
> -

Apr 16 04:03 PM

[GEN X:]

Thanks for your response, I can see your logic. Strange thing happening around where I am living is that rental communities are also having hard times finding tenants. There are really great deals for rentals around Austin, TX right now. I wish we had waited a month longer before we signed our lease, we could have saved $200 a month. Any ideas why this might be happening too? Is it possible that so many people are co-habitating (sorry to make up a word). Are rentals also suffering in other markets that you know of?

Apr 16 05:04 PM

[Charles Lie...:]

Another good question. Rentals have historically been somewhat sensitive to the business cycle. When college grads can't get a job, they move home. Or to save money, people do cohabitate. (I think that's a real word, even if Word doesn't recognize it.) According to the apartment REITs, business is fairly good and the housing REITs have performed far better than other segments of real estate. Maybe Austin is having a tougher time because it is a college town. Real estate is inherently local, so one place could boom even as another place could be struggling. (Think Pittsburgh for decades as the steel industry downsized.)


On Apr 16 05:04 PM GEN X wrote:

> Thanks for your response, I can see your logic. Strange thing happening
> around where I am living is that rental communities are also having
> hard times finding tenants. There are really great deals for rentals
> around Austin, TX right now. I wish we had waited a month longer
> before we signed our lease, we could have saved $200 a month. Any
> ideas why this might be happening too? Is it possible that so many
> people are co-habitating (sorry to make up a word). Are rentals
> also suffering in other markets that you know of?

Apr 16 05:38 PM

[mlonz:]

In Metropolitan Boston, both end users and speculators are currently buying, and buying aggressively. The question is whether this is a temporary glitch due to sub 5% rates and the 8k tax rebate, or the start of a new trend. I happen to think this will turn out to be an 12-18 month temporary phenomenon.

Apr 16 11:04 PM

[Jimmy K:]

Here is a well done link for Dr Lieberman... does not support his recovery in 09 theory.

www.oftwominds.com/blo...

Apr 17 07:23 AM

[Charles Lie...:]

Not sure I understand your conclusion. If "both end users and speculators are currently buying and buying aggressively", why would that not remove inventory from the market? Since new construction is very weak and well below population trends, why wouldn't that fit into my thesis of a turnaround in housing?


On Apr 16 11:04 PM mlonz wrote:

> In Metropolitan Boston, both end users and speculators are currently
> buying, and buying aggressively. The question is whether this is
> a temporary glitch due to sub 5% rates and the 8k tax rebate, or
> the start of a new trend. I happen to think this will turn out to
> be an 12-18 month temporary phenomenon.

Apr 17 10:43 AM

[Gedankonomist:]

I think it is you and your neighbors who are out of their minds for buying those plywood mcmansions in the first place.

On Apr 16 09:42 AM Jimmy K wrote:

> are you out of your mind?
>

Apr 17 03:34 PM

[Blues Gal:]

Very interesting article. Well done. Remains to be seen if it's accurate though. I hope it is. Hardwood floor's comments were also interesting to me since my husband is in the lumber industry and his observations about how the housing supply industries have had to close up shop in this country for the last couple of years were right on.

Apr 17 11:17 PM

[Nathaniel C:]

The best indicator of a turn in the housing market is when 1-2 major homebuilders file Chapter 11. That is when I plan to buy into the housing stocks and mayble speculate on some rental properties.

Apr 18 07:48 PM

[cameroni:]

I wish I could share your optimism of housing turnaround.

But I cannot. On the contrary I fully expect the current housing glut to increase over the next several years as house prices continue their slide. The largest factor affecting home sales now is confidence followed by some very dismal monthly employment numbers. Excessive debt levels, low savings rates and the prospect of interest rate hikes all weigh heavily on a continued slide south.

My biggest concern of course are interest rates. We do not need an economics degree to know that rates have only one way to go and that is up. Perhaps not this year but it will happen soon enough. Those tough enough to have survived a massive equity loss and who have continued to pay down their mortgage even when it exceeded the value of their primary investment will look seriously at capitulating as their payments begin to increase. Every point increase will drive foreclosures and bankruptcies higher and in the absence of full employment there will not be throngs of buyers willing to take up the slack of housing availability. Only vultures picking over the bones as they build rental empires.

These concerns though say nothing of the impending burden of increasing municipal taxes that are projected or being contemplated in order to maintain basic local services. All the current and reported job losses start to have more meaning when it is realized that the businesses that were footing a hefty part of the local tax bill don't exist anymore. Nothing could be more stark than a situation where the town's primary employer folds or the local mall is closed due to bankruptcy. Things that are happening across America now. I am not even trying to be pessimistic. I only need read the facts and monthly statistics to know the picture is dismal to declining. The naked facts tell us without a blush that this bursting bubble will not re-flate anytime soon.

So I see quite a different picture emerging from the scenario you presented and that is one where larger numbers of people will co-reside in existing homes. They will cut their costs by sharing. Children will not leave home so readily, Seniors will attempt to unload their homes to help save the kids and then move in with them and almost everyone under pressure will start renting out the spare room or the basement to tenants. We have never been good at sharing space in this country but that is changing. The change is being brought on in part by the tidal wave of debt in the big picture but more so by small changes in our daily lives that our affecting our ability to carry on with life as we have always known it. We are creatures of habit and comforts. Spoiled by easy access to all our wants and needs. The economy may be in decline but we won't be cheated so easily without a fight. Even if surviving and getting ahead suddenly means sharing space. We'll do that well and still make the car payments. We may even have bragging rights to this strategy.

Failures in the economy, fears, real and potential job losses, and the evaporation of nest eggs to dysfunctional market forces are all adding up to sustain real estate devaluations for some time to come. Home sales by and large will languish for many years as we adapt to changes in the economy and learn to live with one another again. But it's a good thing too. I welcome the "new" nuclear family with three generations in one home, a renewed respect and conservatism that is only learned by those living closer together and a rebirth of cooperation.

I would sum up by saying, there is strength in numbers and the real estate bottom is not in yet. Not even close.

Cam

Apr 19 06:27 PM

[Charles Lie...:]

There are several aspects of your comments I need to respond to. First, maybe because it is the easiest point you made that I can respond to, is that you are convinced interest rates have nowhere to go but up. I kind of agree. We clearly differ on the timing and the conditions needed to make that happen. I believe it happens after the housing market and the economy resume solid growth. You appear to think it happens sooner. What I don't understand is why rates would go up when housing and the economy are weak? By analogy, it would be like forecasting a recovery in housing prices, while the housing market is weak and the glut is still pushing home values down. A rise in interest rates would be a very good thing because it can only happen in the context of a healthier economy.

More broadly, much of your argument is based on current weak conditions and their many manifestations. On this, you are stating facts that are not subject to dispute. But, you don't see the basis for a recovery in these conditions. Economic data are always weak in recessions, even mild recessions. So the fact the data are weak does not imply that recession must continue. If that were the case, we'd never emerge from recession, which we know does occur. This is the subject for a whole other analysis, but my bottom line is that a recovery is coming soon because 1) huge fiscal stimulus 2) huge drop in crude oil prices that reduces nominal spending on energy products by about $500 billion annually (just in the U.S.) and acts as a global fiscal stimulus 3) bottoming and recovery in housing starting soon 4) cheap credit 5) globally synchronized (not co-ordinated) fiscal and monetary stimulus and 6) a monster pace of inventory liquidation that cannot be sustained and must shortly reverse. I know its sexy to suggest that the dire times will continue. The media loves to report that stuff. More likely, the economy should bottom the spring/summer.
Lastly, I agree with your arguments that college kids will move back home and people will double up and such. I tried to estimate the impact of those in my analysis. I took down household formation from its trend value of about 1.5 million to half that. In effect, you are making the case that it must fall far more, below 500,000, so that new construction exceeds the rate of new household formation. Your assertion that we aren't even close to a bottom in housing suggests that household formation must fall significantly below 500,000. But you have no data to support your position and I have evidence of declining home inventories on the market from which to infer that household formation exceeds new construction. Also, keep in mind that when people double up or kids move back home, that is not what they want to do. At some point, perhaps their very first opportunity, they want to move into their own place. So, we are building up a large pool of households, surely hundreds of thousands per year, who will represent incremental demand for new housing as soon as economic conditions start to improve. That's surely not a 2009 event, but it might start to show in 2010.

On Apr 19 06:27 PM cameroni wrote:

> I wish I could share your optimism of housing turnaround.
>
> But I cannot. On the contrary I fully expect the current housing
> glut to increase over the next several years as house prices continue
> their slide. The largest factor affecting home sales now is confidence
> followed by some very dismal monthly employment numbers. Excessive
> debt levels, low savings rates and the prospect of interest rate
> hikes all weigh heavily on a continued slide south.
>
> My biggest concern of course are interest rates. We do not need an
> economics degree to know that rates have only one way to go and that
> is up. Perhaps not this year but it will happen soon enough. Those
> tough enough to have survived a massive equity loss and who have
> continued to pay down their mortgage even when it exceeded the value
> of their primary investment will look seriously at capitulating as
> their payments begin to increase. Every point increase will drive
> foreclosures and bankruptcies higher and in the absence of full employment
> there will not be throngs of buyers willing to take up the slack
> of housing availability. Only vultures picking over the bones as
> they build rental empires.
>
> These concerns though say nothing of the impending burden of increasing
> municipal taxes that are projected or being contemplated in order
> to maintain basic local services. All the current and reported job
> losses start to have more meaning when it is realized that the businesses
> that were footing a hefty part of the local tax bill don't exist
> anymore. Nothing could be more stark than a situation where the town's
> primary employer folds or the local mall is closed due to bankruptcy.
> Things that are happening across America now. I am not even trying
> to be pessimistic. I only need read the facts and monthly statistics
> to know the picture is dismal to declining. The naked facts tell
> us without a blush that this bursting bubble will not re-flate anytime
> soon.
>
> So I see quite a different picture emerging from the scenario you
> presented and that is one where larger numbers of people will co-reside
> in existing homes. They will cut their costs by sharing. Children
> will not leave home so readily, Seniors will attempt to unload their
> homes to help save the kids and then move in with them and almost
> everyone under pressure will start renting out the spare room or
> the basement to tenants. We have never been good at sharing space
> in this country but that is changing. The change is being brought
> on in part by the tidal wave of debt in the big picture but more
> so by small changes in our daily lives that our affecting our ability
> to carry on with life as we have always known it. We are creatures
> of habit and comforts. Spoiled by easy access to all our wants and
> needs. The economy may be in decline but we won't be cheated so easily
> without a fight. Even if surviving and getting ahead suddenly means
> sharing space. We'll do that well and still make the car payments.
> We may even have bragging rights to this strategy.
>
> Failures in the economy, fears, real and potential job losses, and
> the evaporation of nest eggs to dysfunctional market forces are all
> adding up to sustain real estate devaluations for some time to come.
> Home sales by and large will languish for many years as we adapt
> to changes in the economy and learn to live with one another again.
> But it's a good thing too. I welcome the "new" nuclear family with
> three generations in one home, a renewed respect and conservatism
> that is only learned by those living closer together and a rebirth
> of cooperation.
>
> I would sum up by saying, there is strength in numbers and the real
> estate bottom is not in yet. Not even close.
>
> Cam
>

Apr 20 11:02 AM

[Charles Lie...:]

Not sure I get this. Are you suggesting that a housing recovery is not possible unless 1 or 2 major home builders go bankrupt first? Or, if 1 or 2 home builders do go bankrupt, how does that insure that other home builders won't also go bankrupt?


On Apr 18 07:48 PM Nathaniel C wrote:

> The best indicator of a turn in the housing market is when 1-2 major
> homebuilders file Chapter 11. That is when I plan to buy into the
> housing stocks and mayble speculate on some rental properties.

Apr 20 11:51 AM

[Accuriz:]

Charles is hitting the nail on the head. In reading his commentary and reviewing input from others, it is clear that housing over supply is fixed to specific regions of the country. I totally agree that builders ignored or diminished the importance of demographics, but so did the lenders who provided the financing for this wave of housing development. We just completed an extensive analysis of the market and have developed similar results, with this one noted exception.
Analysis of Census data indicates that the total housing unit vacancy level is close to 14%, 4% higher than historical levels of the past 40 years. Examination of this data does appear to indicate there is an abundance of housing units to the tune of 5 million units.
We totally agree that this over development exists in specific regions of the country, but until we absorb these excess units housing construction will remain below 700,000 annual units for the next several years. This does not mean that property values will not recover, it simply means that until the excess housing is absorbed a full recovery will be delayed. Most new development starts in the spring season, so we do not expect to see an significant increase until the spring of 2010. One also remember that in order to build, developers need financing and this situation is not expected to improve in 2009.
Our analysis indicates that the overall Median sale price for housing is recovering in most areas and we project a reversal of the past three years annual declines to be positive. According to the Census Bureau, the current Median Sale Price is around $201,000. Our analysis indicates that by year end it should be between $210,000 and $215,000, possibly even higher.
As soon as our report is cleared for publishing, I will provide a link for review.

May 27 11:18 AM