The WSJ Is Wrong on the Housing Crisis 31 comments
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The Wall Street Journal editorial page had a piece yesterday titled 'The Housing Crisis is Over'. In my view, this assessment is premature by many years.
The article's main flaws, based on my own research, are its emphasis on pricing as the key driver of housing demand, and its sole focus on the inventory of new homes, ignoring existing homes. The author puts his faith in a rebound based on the issue of affordability: house prices have come down enough that people can afford them again. Fair enough but he treats the inventory of homes with a nonchalance that ignores underlying demographic trends, writing:
Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.
Flip, yes. True, no. This time it will be different because of two demographic factors:
First, the supply of homes is made up not only of new home construction but also of existing homes coming back to market. And we are facing a wall of existing homes coming to market in the next 15 to 20 years. How so? Quite simple: older people will leave their homes as they age or pass away. Some of these homes will be demolished, but most will come back to the market.
Average life expectancy in the United States is 78 years but many people leave their houses before their final years, to live in smaller quarters, with relatives, or at nursing homes. If we set somewhat arbitrarily the average age of a person who leaves his/her home at 70 years, we can see that the number of people turning 70 every year in the US will skyrocket from fewer than 2.5 million today to 4.3 million in 2025. The adjoining chart shows that this trend was quite favorable to housing in the last 25 years with the number of 70-year olds stagnating in 1984-1994 then falling in 1995-2003.
Conclusion: the number of existing homes coming back to market will see a dramatic and steady rise for the next 17 years. There will be somewhere between 1.5 million to 2 million homes coming back to market every year, equivalent to over 2 years of new home supply. This trend may provide a big boost to home remodeling, but it will erase the need for new homes in many parts of the country.
Second, the vast majority of home buyers fall in the 30 to 60 years age bracket. Here again, the trend was favorable from 1975 to 2005 as the number of people in this bracket was rising steadily. But it will now flatline for the next 12 years, as shown in the chart below.
So is the housing crisis over? Hardly. Some areas of the countries will rebound sooner due to the migration of retiring baby boomers, or due to foreign buying stimulated by the weak dollar. But the housing picture nationwide is likely to remain difficult for another decade and a half.
Disclosure: None
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This article has 31 comments:
* 80,000 shares of Lennar
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From a Calculating Risk comment
Various factors, such as declining consumer purchasing power; auto financing crisis/defaults; credit card defaults; rising gas prices; declining traditional retirement programs; lack of boomer financial preparation for retirement; and purchasers "waiting" for bigger bargains and waiting for the price decreases to bottom...all also factor in as delaying the recovery of the existing houses on the market.
Another indictment of the 'new' WSJ, that seems to like to sensationalize headlines to sell newspapers.
What's also at work is the inventory glut that's appeared in the high-cost areas. 11.5 months of existing inventory in northern NV based on current sales rates means that housing prices will continue to drop until the inventory is worked off. Add to that the tightened lending criteria that require down payments (unlike in 2005) and you have a long, slow, recovery, but only to the sales levels of pre-2003. Since exotic mortgage products are history, the standard underwriting criteria will now apply in the vast majority of cases.
And through it all, builders continue to build, albeit more slowly than before.
Recovery? Perhaps return to a 2003 baseline by the next election is the best the industry can hope for.
Bearfund, agree with the folly of the "pent-up" demand theory for first-time buyers who will suddenly rush in and save falling prices. When are these first-time buyers converting from savings-less, maxed-out credit card users to a group who can afford a down payment on even a $100K home or condo? No time soon...
At 87, my grandfather is still living in his house with his wife. Yes, she has had 3 heart attacks and he has had colon cancer, but they are on their own, at home.
If you think 70 is "time to retire to a nursing home" you are seriously out of touch.
Mike, where do you get the charts?
Also, it appears that the age of materialism is largely over, thankfully, and that "Less" in the "new more."
Welcome to Century#21.
Time to some REAL crises ... like health care and energy.
For the article to be credible, the author should have compared the new household formation rate instead of selected demographics. A decline in home ownership rates does not mean a decline in housing demand. A lot of people rent their homes. The distribution between renters versus buyers which may change, not the overall demand for homes.
There is a misconception that as soon as boomers hit retirement age, they will sell their homes and go and live in a nursing home. Thanks the advances in health and technology many boomers are in no rush to quit their lifestyle. In fact there are many studies which suggest that the anticipated rush to the sun-belt by retiring boomers is over-hyped. People do not dump the community they have spent a life-time in just to enjoy warmer weather. Even if they decide to down-size and move to a smaller home, they are likely to buy another home in the same community.
When it comes to state of the housing market, new homes are a critical metric since they correspond to the additions to the housing stock; existing homes do not change the total number of homes. Further, unlike home owners, who in many cases are not in a rush to sell, home builders are much more likely to reduce prices to drive sales since an unsold home costs them a lot of money. Home owners continue to live in their home, while they wait for their home to sell; something which contributes to the stickiness of home prices in down-cycles. The downward pressure on home prices is primarily driven by sales by builders; home owners typically are the last to reduce their price. As a result if new home prices stabilize, existing home prices will follow quickly; existing home market lags the new home market by a few months, but it still follows it.
And finally the comment about Traxis' equity exposure to home builders and financials are irrelevant. Any smart money manager will be building a position in these cyclical sectors after they have been beaten down so much; they will recover as the economy moves out of the downturn.
You have generated a solid threat of discussion. That's a good thing.
Even though comment threads have a general tendency to lean toward criticism more than toward praise, stimulating a critical discussion is better than writing articles that receive no comments at all.
Demographic trends are one of the most powerful drivers of long-term investment trends. You are on track by focusing on demographics as a force in the market.
I don’t have a view on whether the particular data you chose is the "right" data or if your conclusion would be modified by incorporating some of the additional factors mentioned by some of the commenters, but I do believe your intent to uncover the demographic underpinnings of the long-term housing market is a good idea.
In addition to housing, demographics will drive other key elements of our economy and the economies of other countries. One that may be of interest to someone out there is the likely portfolio allocation decisions of that growing 70+ cohort in terms of stocks versus bonds.
If they use traditional rules of thumb and heavily allocate to bonds, there may be noticeable interest rate consequences, or equity demand consequences. On the other hand other strong forces such as international investor behaviors, government deficit or surplus budget conditions, and the proportion of the population in an asset accumulation stage versus those in an asset consumption stage will be apply other forces. That area might be fertile ground for research.
Some high profile demographics are likely to drive economics in other parts of the work too. The excess of young males in China is an issue. The graying of Japan and Europe versus the slower graying of the US due to immigration rates is an issue.
The apparent fact that literacy is a driver in economic development, and the fact that literacy is very low in some countries may help predict where economic growth in the emerging world is more likely to be high and low.
The current and future shape of the population pyramids (which you are in effect describing in a different graphical format); can be useful in predicting consumption patterns for a number of goods and services.
As a baby-boomer myself, I have watched my cohort distort every thing it encountered. We were like the picture in Antoine de Saint Exupery's children's book "The Little Prince" of the snake that swallowed the elephant. We expanded demand beyond supply for each new private or public good or service appropriate for our then attained age. As we aged further, we left supply greater than demand for goods and services no longer of demand to us – the follow-on group was smaller in size than our own. That created real economic consequences and flux.
Anyway, I am happy to see dialog around demographics as an investment driver and hope that you and others will keep it going here and with other articles.
Richard Shaw
QVM Group LLC
My first reaction as a housing bear was that the author thought he could talk the market into bottoming out. Won't happen.
Having said that, has anyone looked at the new housing and existing housing markets not just as markets that are correcting cyclically but as as a new price war? One reason builders PEs remained low during the boom was that investors anticipated this correction and weren't willing to overpay for companies that historically have gone through booms and busts like the one we're experiencing.
Why, then, have builders' stocks rallied this year? Fools rush in? Speculators and swing traders play the bounce? HIgher interest rates, tighter lending standards, poor consumer sentiment and rising unemployment will restart the housing boom at still very high and unaffordable prices? I never trade against the tape, but sometimes I refuse to go along.
Have a nice day...
While argument is plentiful for the law of supply and demand to be the governing factor for pricing and valuation, one need not forget that it is financing itself (or FACT) that keys the pricing that directly affects and determines real estate supply and demand cycles.
Demand for desirable, affordable, and well priced real estate is a given. To measure or predict housing and real estate pricing/valuation trends use the FACT gauge.
And most glaring is the WSJ author's failure to either realize or acknowledge that his affordability argument fails to acknowledge that we are arguably in an affordability TROUGH. Mortgage rates may not get back up to the 18% of the 80's the author cites but they are unlikely to go lower any time soon. The author fails to mention that the '91 rate was better than 9%.
But doesn't that make his argument for him?
No, because what house owners want to see is rising LIQUIDITY in the housing market. And that's where the WSJ author's argument falls apart. Since the 80's the US market has not only seen a reduction in interest rates, but also a tremendous increase in total credit available for housing. Thus we have seen home ownership RATES in this country have increase dramatically since '94 and peak in 2004. The WSJ author fails to note that the '91 crash in real estate prices was in the middle of ten years where home ownership rate basically went sideways.
To speak to Vikram's point about household formation, the last time home ownership RATES peaked and fell like this was '80-'81 to '86-87.Banks are lending cheaply, yes, but it is unlikely they will lend more cheaply. During the last fall in home ownership rates, mortgage rates fell about 45% or eight thousand basis points - eight thousand.
Does anyone think we're going to see 3% mortgages? In 2002 the US mortgage security market surpassed the Treasury market in liquidity. Is anyone anticipating that kind of increase in securitization?
The problem is exactly household formation. You can call a two-percent drop in home ownership rates a loss of two million *owner-occupied* households. I would not expect landlords to offer a price subsidy for taking up that slack. If we need two million new landlords then housing prices have to get to a place where it is profitable to rent.
Good jobs...Americans need to buy GOODS and services made and provided by Americans. Look on the bottom of your toaster. That's where the good jobs went.
Have a nice day...
Suppose I'm in Chicago and want to move to Denver. I put my home on the market (that's 1 home in existing inventories). But I ask too much and it doesn't sell. And I won't buy a house in Denver until my Chicago home sells.
Jim lives in Denver and wants to move to Miami. He puts his house on the market (that's 2 homes in inventory). It's ideal for me, but I won't buy it because my house hasn't sold.
Sallie lives in Miami and wants to move to Chicago. She puts her home on the market (that's 3). It's ideal for Jim, but he's not biting because I haven't bought his house.
This situation creates an "existing inventory" of three houses for sale. Months of inventory looks even worse, because homes aren't being sold at a very fast pace.
But then I finally get realistic I finally get realistic about price and sell to Sallie. I buy Jim's house. Jim buy's Sallie's house. POOF! The "existing inventory" is gone - without any need for household formation...
Because of this, many people focus on the number of vacent houses. This number looks big (all time high, they say), until you realize that it's been on an uptrend for 40 years - and it really isn't that much more than it was 1, 2 and 5 years ago.
The builders are currently building at a rate much lower than household formation, whereas the problem was created when they built at a rate much higher than household formation. This will eventually work itself out - just like any commodity cycle.
The investment decision rests on just how long you think this will take...
If the planning departments allowed “granny flats” where possible, Mom and or Dad could easily allow one of the kids to take over the house by either selling or a multiple of other means including gifting and move into the newly built “in-laws” quarters built over the garage, on the side by the pool or wherever.
It seems that the change to allow more in-laws quarters solves a whole raft of problems such as less housing coming on the market, the added work of construction and the ability to have someone near an aging loved one.
But the big problem is that politicians and bureaucrats need to get going. That is a slow moving bus!
I forgot the Sheriff of Nottingham is still alive and well and in competition for our own money.
The company I worked for was fortunately at the end of the list to be taken out so I had a job for eight years.
The post Sept. 2001 boom eventually overheated from factors that included very loose lending standards that allowed prices to continually be pushed up. That has ended.
In each area of the country home prices will have to fall to levels that are affordable for buyers who pass very strict and conservative lending criteria. Meanwhile, rising energy and food inflation is hampering consumers ability to pay down credit cards etc to meet higher standards, I would assume. Plus wages are not soaring 7 or l8 percent a year because the continual influx of illegal labor is depressing wages.