Thoughts & Comments
A Shadow Over Housing's Shadow Inventory
Plenty of it will be absorbed by pent-up new demand and an absence of new supply

Thomas Brown  ( about me )
Posted 01/24/2012
bankstocks.com
tbrown@bankstocks.com

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!


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Milkweed Posted On 1/24/2012 4:23:02 PM

I think the latest number on new home inventory is an all time record low of 160K. This is in a land of ~120M homes. If you think the bounce back in bank stocks is going to be big wait till you see the bounce back in the large home builders. Housing starts were up about 33% from a long term average of ~1.5M starts a year at the beggining of the last decade to an average of ~2M/ year at the height of the bubble. The large public home builders revenues were up 3X-4X over the same period as they were taking massive market share from traditional smaller regional builders. Right now LEN has revenues equal to their 1999 level while industry wide housing starts are at 1/3 of what they were in 1999. So you are going to see market share gains laid over a roughly tripling of the over all market for the large public builders as the industry normalizes. You might want to think about expanding the scope of your fund Tom, this is a trend that can make up for a lot of past sins.

kim Posted On 1/24/2012 4:46:35 PM

Tom -given this -what's a levered equity vehicle to play ???-HHC?homebuilders -?lowes?

Blindspot Posted On 1/24/2012 5:05:21 PM

Well, this is a pretty accurate conconclusion and very cogent. Combined with the significant drop in house prices in almost all areas, combined with low interest rates, the point is very well made and one the Joint Center for Housing Studies at Harvard, as well as other housing research groups, would probably concur on. The people per house statistics are very revealing. Much better assumptions here than weeks ago targeting Freddie and Fannie without pointing out the lead culpability of Wall Street, who like Picket and Custer led a a charge. Unfortunately, Picket and Custer charges were ill fated with the Yankees (Union) and the Sioux (Indians) deciding not to bail out those who led those respective charges but took them down: unlike the Fed and Treasury that bailout Wall Street bank charges of aggregating and selling MBS's and CDO's that they knew were junk (something Boseky and Miliken had to love) and then shrank back to let the Conservative politicians point their fingers at Freddie and Fannie as the culprits. Not so; complicit. Not the leads though. (Oh and Blindspot is no bleeding liberal. Merely someone who detests hyrpocrisy where ever it exists, and believes placing blame squarely where it belongs.). But, the housing information contained here and the information is quit informative. Thus, better to stick to quantative information.

Lacy Cross Posted On 1/24/2012 6:34:48 PM

I do not agree nor disagree with the information posted but I have another theory. I do not believe there is this pent up demand that people are thinking there is due to the change in dynamic that is taking place in the home ownership arena. Communal living! Down Payment!, Credit! Not everyone needs to own a home and I believe more than ever people will choose not to own a home going forward. Even if you take the current home owners that lost their home due to credit, income, or job lost; I believe they will wait to become home owners again in the future. If that is what they want because of the recent downturn in the housing market. If you look at the multi-housing sector in your areas, these industry builders are leading the way and are betting this to be the case for the next 5-10 years.

Bill Dunnell Posted On 1/24/2012 7:31:28 PM

To comment on Lacy Cross I woud beg to differ. I talk to young people day in an day out and those that do not own a home are saving and paying off student debt so that someday they may buy a home. Tight rents will aid this dynamic. Condos and single family homes are still the dream of the younger generation.

rivvir Posted On 1/24/2012 8:06:13 PM

" Condos and single family homes are still the dream of the younger generation." I lean to agreeing with that even without talking to many people. Just a gut feeling that the "American dream" just doesn't disappear in a puff of smoke over a couple of years. Also agree with Blindspot, including the thanks for the quantitative info. I just hope your surmise about a growing population is correct and we haven't evicted so many illegals that we've reversed that - lol

Oxford colleague Posted On 1/24/2012 10:05:59 PM

Hey Little Red Haired Boy, pull a (credible) demographic study...we're not Japan, but not far off.... you are, as Bugs Bunny would say, a maroon! Oh sorry, gotta hurry back to hear Odummy give his stae of the union. Hahahahaha!

Charles "Hank" Bankowski Posted On 1/25/2012 12:13:12 AM

Analysts often make bad predictions because they fail to understand social and demographic trends. Here's why such analysts will be wrong, yet again, about their prediction of a housing market surge: 1. Baby boomers will be retiring in increasing (huge) numbers from this year forward. This means more downsizing to condos and retirement communities, freeing up more expensive larger homes on the market. Retiring baby boomers are unlikely to trade up to new, larger single-family homes. 2. Massive student debt will severely limit housing affordability in the first-time home-buyer market. 3. Many of the largest markets (e.g., coastal California) are still overpriced--and most residents believe prices will continue to decline, thus prolonging the diminished interest in buying a home among the small pool of financially-capable potential homebuyers. 4. If the economy miraculously improves substantially, interest rates will quickly rise to take the gas out of the "homes have never been more affordable" sales pitch. The Fed knows that artificially suppressed interest rates are not a "free lunch" to consumers and the economy. 5. You have to be a realtor or a baby boomer to be unaware that the younger generation is less interested than the baby boomers were about buying into the corporate-promoted home ownership dream/sales-pitch. What should an investor do in the current environment? Short the homebuilders & buy income property stocks/REITs. How many times do the housing shills on Wall Street have to be proven wrong before they stop making their annual optimistic speculations about the housing market? The old Wall Street analyst playbooks don't work anymore. It will be another five years before the analyst community and their followers realize that their recycled investing themes are obsolete--as are their jobs, in general.

vollrath Posted On 1/25/2012 11:11:43 AM

very good

c smith Posted On 1/26/2012 7:33:51 AM

Allow mortgage rates to rise to a level that clears the market (home prices another 15% to 20% lower) and THEN these "potential" new housholds will at least be within range of buying a new home. Today the price disparity between a foreclosed existing home in FNM's or FRE's REO portfolio and and newly built home is still huge. Until prices fall further, the only activity will be investors buying up REOs and renting them out. The price disparity is still way too big.

DLB Posted On 1/30/2012 5:10:50 PM

Now that the delusion that home prices always go up has been broken, it will take a long time for this market to come back. Most people in their 20's have friends who are underwater in the homes they bought. Plus, they have learned home prices AND interest rates just keep making things cheaper for them the longer they wait. Throw in high student loan debt and poor job prospects the only young people wanting to buy are young couples with kids. My son and his wife could buy this summer but now that Bernanke has pinned rates for a few years they are going to Yellowstone instead. No kids yet they'll wait a year or two. My nephew just started his first job out of college, moved from home into a house with three roommates. There has been NO NEW HOUSING UNIT FORMATIONS TOTAL IN THE LAST FOUR YEARS. Excess supply of housing remains huge even if new housing inventory is low.

rsd57 Posted On 1/31/2012 11:10:28 AM

We are 2/3 of the way through our balance sheet recession. Housing will recover, just take a look at the auto market for a glimpse. Autos on the road average almost 11 years and whether folks want to or not they are back in the market replacing their worn out wheels and US auto sales will trend up unless we have an economic collapse. The dynamic in housing is a little different, yes rentals are up but rents keep rising, and the rent vs. buy trade off is becoming more and more compelling in more and more cities around the country (renting is becoming less and less attractive)- low interest rates and high rents eventually translates into higher sales- I have seen this many times before. But it will take time.

Hank Bukowski Posted On 2/16/2012 1:37:18 AM

The Baby Boomer viewpoint in the article ignorantly and arrogantly assumes that the younger generation wants to be just like the Boomers. A recent Pew study reported this statistic (via The Atlantic): --Just 12% of whites between 18 and 34 told Pew that owning a home was "one of the most important things' in their life.-- If you think investments that depend on a strong home purchase market are going to be big winners in the future, dream on Boomers. The smart money is investing in rental housing, not homebuilders or mortgage-dependent financial service companies.
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