Waiting out Bubble 1.0
I moved to Florida in 2005, just before the housing bubble peaked. Believing that prices couldn't remain high, we bought a smaller home than we otherwise would have. Renting would've been nice, but we couldn't find a rental in a school district we liked.
Home prices marched higher for six months or so, and the S&P/Case-Shiller 20-City Home Price Index reached 206. Then things slowed down. By late 2006, it was obvious that the housing market had changed. We know what happened next.
By 2011, real estate was ugly and millions of people had lost their homes. That's when I sold my house.
The timing on the sale wasn't especially brilliant. I took a hit, no doubt. But I got a pretty good price in an otherwise terrible market because of the location, and the buyer paid 100% cash. I moved the family closer to the kids' schools and rented… for a few months.
But my wife isn't cut out to rent. She wants the freedom to change, rearrange, renovate, and basically do as she sees fit. By the spring of 2012, we'd bought a small home in a nice neighborhood.
Our timing, or should I say my wife's timing, was almost perfect. The housing market was bottoming. The Case-Shiller made a bottom in the spring of 2012, touching 114. That was a 45% drop from the top in 2006. Since then, prices have come roaring back. Our small home has appreciated rapidly. Recently the Case-Shiller was reported at 188, a 65% gain from the bottom.
Now, I'm getting nervous again.
I'm not sold on the logic of "build it, and they will come." And I don't think homebuilders are willing to take such a chance either.
While builders are selling more units than in the last several years, we're still a long way from the boom years. In June, we sold new homes at an annualized rate of 592,000. In 2006 we were selling more than one million a year. Following the financial crisis, that figure dropped below 300,000 and has been just creeping higher since then.
The most recent figure is just as it was in 2008 when sales were plummeting.
This is not Field of Dreams
The last time we sold 592,000 units when sales were trending higher was 1995. We've added tens of millions of people to our population since then, and yet we are selling the same number of new homes that we did before we used email or surfed the net!
The housing market is smaller on other metrics as well. As shown on the chart, since WWII residential fixed investment (home building) has typically represented 4% to 6% of GDP.
It fell below this level during the downturn of 1982 and again in 1990, but remained well above 3%.
In each case, housing made a V-shaped bottom, recovering quickly. After the financial crisis, housing dropped to just 2.5% of GDP, and languished below 3% for years.
It's great that residential construction now adds more than 3% to the national economy, but the fact that we've recently risen to the same level we touched at the bottom of the 1990 downturn is not a cause for celebration.
It's not just a bubble, it's employment
The story is much the same for employment. Many middle-income jobs associated with home building, like plumbers, roofers, electricians, carpenters, etc., thrive along with residential construction. That's one of the reasons Federal Reserve officials want to drive interest rates lower. If they could motivate more home buying, that should lead to more home building, and create more middle-income jobs.
It happened, just not on a scale the Fed would like.
In 2006, the construction industry employed more than 1 million people. By 2011, this number had fallen to 557,000, or, down 43%. As the housing market rebounded, so did construction employment. Today there are just over 700,000 working in construction. That's great, but it's still 30% lower than where it was during the boom years.
Home prices keep pushing higher, with the median new home price above $300,000, a 6.1% gain over last year. The median sale price for existing homes is just under a quarter million dollars, up 4.7% over the past year.
Who's movin' on up?
With median household income at $54,000, how does the typical family afford a home? If wages aren't moving up at a rapid clip, who will buy homes in the years ahead?
For the 64% of Americans that own their homes (including me), I'm glad home prices rebounded. But it looks like prices have moved far past our ability to support them, while housing remains subdued in terms of the number of homes sold, its contribution to GDP, and its effect on employment.
If this is the best we can do with interest rates at historic lows and unemployment below 5%, it's much more likely that housing is topping out, not breaking out.
Anyone considering jumping into real estate for the first time should stress-test their decision. What would happen if prices fell by 10%, or 20%? If they had to move for employment reasons, could they come up with the difference?
While we haven't returned to the heady days of 2005, it does feel like the markets have gotten ahead of themselves. For those who absolutely must, or absolutely want to, buy a home, consider spending a little less than you can afford. Like it did for me, it could trim your losses if the market rolls over.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.