Still Plenty Of Upside In Housing

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 |  Includes: ITB, PKB, XHB
by: Steve Sjuggerud

It's about as dumb an indicator as you can imagine... But it works.

This indicator is straight out of "Economics 101."

It's the basic idea that when there's a shortage of something, prices go up. And when there's a surplus of something, prices go down.

Right now, in the housing market, there's a shortage of new homes. (I will explain what I mean by shortage in a minute.)

History shows that, if you buy when there's a shortage, you make the most money in housing. And if you buy when there's a surplus of new homes, you actually lose money (when you take inflation into account).

Let me explain.

A simple measure of housing supply is the "Months' Supply" - that's the number of months it would take at the current sales rate to sell off all the "inventory" of new homes for sale out there.

Over the past half-century, the average months' supply has been about six months. So, in simplest terms, when the months' supply is below six months, there's a shortage. When months' supply is above six months, there's a surplus.

Historically, when housing supply is below six months, home prices rise dramatically over the next twelve months. But when housing supply is above six months, home prices actually lose value, after inflation.

Take a look...

Supply Below Six Months Supply Above Six Months
Return* 3.4% -1%
*adjusted for inflation
Click to enlarge

These numbers might seem low. But remember, they are AFTER inflation.

When supply is low, house prices have increased at 3.4% a year, based on history. And when supply is above average, house prices have historically lost 1% over the next 12 months.

In short, the supply of new homes is limited, and history says we should see higher prices.

But it's not just the months of supply that point to higher prices. We have many other indicators that say the same thing. Most importantly, interest rates are still near record lows, so housing is still affordable.

When you combine a supply shortage with today's low interest rates and housing affordability, you have a recipe for much higher property prices - even from today's levels.

Yes, house prices have gone up in recent years. But based on the numbers, there's still plenty of room on the upside here.

People keep having babies. And those families need roofs over their heads. But those roofs aren't available and aren't being built. As I said earlier, it's Economics 101: When there's more demand than supply, prices soar.

You still have time to get invested in property if you haven't done so yet...

Get on it!

Disclosure: No positions