Bears on housing love to warn about how the shadow inventory of foreclosures and soon-to-be foreclosures hanging over the market will prevent any meaningful price recovery from happening for years. Fine. Whatever. But the bears inevitably give short shrift to two key influences on the market that have also undergone big changes lately that will likely help speed absorption of that shadow inventory a lot faster than many people realize. The first is pent-up demand. Household formation has been running below-trend by close to 1 million households per year for three years. Those poor kids are going to move out from their parents’ place sooner or later. Once employment improves and they finally do, they’ll provide an enormous jolt to incremental demand.
The second influence has to do with new supply. It has been essentially non-existent recently. The Census Bureau reported last week that homebuilders began construction of just 428,600 single-family homes last year. That’s down from 1.7 million homes at the peak of the housing market, and down from and a long-term average of roughly 1.1 million. It’s also the lowest level of new-home construction since the government started keeping records. Via the New York Times, here’s the chart :
(Source: Commerce Dept.)
But even a drop that large doesn’t convey the magnitude of the collapse in the supply of new homes. First, the housing-starts figure is of course a gross number. To understand its real contribution to supply, you need to net it against the 300,000 or so homes that are demolished each year, via everything from natural disasters to the simple ravages of time. If you take that 300,000-unit annual attrition into account, it turns out that that there have been basically no net additions to the country’s inventory of single family homes—for three years.
What’s more, don’t forget that the country’s population is steadily growing. To account for that, the Times’s Binyamin Applebaum divided annual housing starts by population, and drew a chart that showed a statistic he calls people per new house built, going back to 1959. It is a doozy:
(Source: Commerce Dept., New York Times)
Note that before this cycle, the prior peak in people per new house built was around 350, during the brutal real-estate recession of 1982. The current number is 727, more than twice the highest number on record until now.
All of which is a very long way of saying that while the shadow inventory of housing may be looming, plain, old newly built inventory has disappeared, all while incremental demand is still pent up, but is growing and growing.
My bottom line: I somehow doubt that the absorption of all that shadow inventory that has the bears so worried will end up being the big problem so many people expect.
What do you think? Let me know!