HOUSING NIRVANA

There are many blogs and news sources I follow on a daily basis for real estate news and commentary.  Some of these include Bubble Info, Inman News, The Big Picture, RIS Media, Housing Wire and DS News.

Bill McBride, author of respected finance and economics blog Calculated Risk, was one of the first major industry observers to predict mayhem back in 2006.  Today, McBride is calling this market “housing nirvana”, with low rates, affordable prices and demographics all pointing squarely at a major run in home prices over the next few years.

McBride argues that new home construction could essentially double from today’s levels and we would not come close to matching the existing and coming demand for new homes.  With less than 500,000 homes built in the entire country in 2012, new home construction is now at the same level as it was in 1991.  New home construction would have to triple to hit levels seen during the boom, which is simply unlikely to happen given the ongoing tightness of financing in both construction and residential lending.

Additionally, McBride points at the impact the Baby Boomers are about to have on the housing market as a key driver in future appreciation.  In the decade from 1994 – 2003, the number of 55 and older Americans no longer in the workforce increased by 4.3 million.  From 2004 – 2013, however, the number of older Americans no longer in the workforce increased by 8.1 million, an 88% jump in the number of Boomers hitting retirement age.

As these Boomers retire, they will want the same thing… smaller, ranch-style homes with less maintenance and less square footage.  Because builders simply cannot build “affordable” entry-level homes any more (due to increased material costs, labor costs, and land acquisition costs), the homes these booms vacate will be in exceptionally high demand in a thin-inventory market. 

McBride argues that unless material costs, labor costs and land acquisition costs drop significantly, higher prices are essentially a foregone conclusion going forward.

REBOUND, NOT BUBBLE, SAYS LEAD ECONOMIST FOR TRULIA

Lead Trulia economist Jed Kolko issued a report this week saying that home prices nationally are in rebound mode, not bubble mode, despite impressive gains in many parts of the country (including Denver).

Prices today are still 7% undervalued, according to Kolko, based on fundamentals such as supply, demand, new construction capacity, demographics, interest rates, incomes and rents.  At the beginning of 2006, according to Trulia’s formula, US homes prices were overvalued by 39%.

Because mortgage credit remains very tight, the market is still dominated by well-qualified buyers.  Even in a downturn, well-qualified buyers who make real down payments are far more likely to stick things out that the “no down payment” crowd who dominated the buyer pool during the final stages of the last run on housing.

New construction activity is still far, far below history norms, and this year new construction will only amount to about 35% of the number of homes built during 2006.  This cap on supply after years of no building at all figures to protect values for at least the next few years. 

Will there ever be another bubble?  According to Trulia (and me), the answer is yes.  The history of US real estate is dotted with booms and busts.  The question is always, when will it happen and what will it look like? 

As long as mortgage rates remain relatively low, new construction remains muted compared to previous levels, and mortgage finance remains responsible with buyers expected to make real down payments… the market will continue to grow and prices will continue to rise. As long as job growth (even slow growth) continues, as long as demographic trends hold up, and as long as prices remain affordable compared to rents… the upward march in prices figures to go on.

When rates rise, the quality of new buyers falls, builders overbuild, and the economy falters… the tone of this conversation will change sharply.

But for now, housing is clearly the healthiest component of the US economy.