Vikram Saxena

The WSJ Is Wrong on the Housing Crisis

The arguments presented in this article cherry-pick certain statistics to put a negative spin. The number of homes needed is primarily determined by what is called 'household formation'. A new household is formed when a person or a couple move out from shared housing (parents, siblings) and get a home of their own. Along with demographics, a key factor in the formation of new households are economic. When the economy is good and jobs are plenty, young people move out and get their own homes (rental or owned); when the economy is bad, they move in back with their parents/siblings.

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.