Never did we see a more important dichotomy in the releases on the state of real estate in the past week. First, Standard and Poor’s released a report that stated it will take three years to clear the shadow inventory from the markets, though this number will vary widely based upon location. Three years of shadow inventory indicates that the real estate market will continue to be a drag upon the economy for the next few years. Second, an article from CNN/Money indicates we are heading towards a long-term housing shortage. There is plenty of present excess inventory as the amount of shadow inventory has been estimated at anywhere from 4-8 million homes; however, in the long run, we are not building or replacing enough units to keep up with the long-term demand of population growth. What does this say? It says that real estate is a great long-term investment, especially at today’s prices and rates. The problem always arises when we think about real estate in terms of the short run. During the boom, everyone was looking to make a killing. However, real estate is a long-term investment and anyone purchasing a home should be measuring its worth over decades, not months.
Starts on single-family homes fell 17% to an annualized pace of 468,000 units in May, down from April’s 20-month high. In addition, permits on one-unit homes fell to the slowest pace since May 2009. Nonetheless, household balance sheets have been improving over the past four quarters. In aggregate, households gained $6.3 trillion in net worth in the first quarter from a year ago, according to the Federal Reserve. In addition, homeowners have regained $1.1 trillion in home equity over the same time period.
More homes than households are needed to replace those destroyed by fires, floods, teardowns and neglect. In 2009, only 398,000 new households were formed, according to the Census Bureau. That is much lower than average and one-fourth of the number formed just two years earlier, CNN/Money reports. Those doubting a new bubble are pointing to a large inventory overhang. As many as 7 million homes are vacant but not for sale, according to the Census Bureau, which should provide a cushion to offset increased demand. The inventory number, however, can be deceiving for two reasons: People may not want to live in hard-hit areas where the houses are or the homes may be beyond repair.
If the demographics bode well for the for-sale sector of the housing market, the numbers look absolutely smashing for the rental side of the business, according to panelists at PCBC Multifamily Trends Day, which was held June 9-11 in San Francisco. For every 1% decline in the ownership rate, there is a corresponding increase in renter households, said Clyde Holland, chief executive officer of the Holland Partner Group, a Vancouver, Wash.-based developer. So, if there is another 2% decline in the ownership rate to a long-term average of 64%-65%, there will be a need for 5.5-5.7 million rental units, he told the conference. Holland sees a demand for 2.5-3 million apartments, with 3.4 million potential renters ages 18-34 between now and 2015. Brian McAuliffe, managing director of acquisitions at RREEF, Chicago, says 800,000 persons will enter the rental market this year; that number is expected to jump next year.
Meanwhile, there seems to be some life in the markets. In the past several weeks, the stock market seemed to be taking every piece of news negatively while it adjusted to the fact that the economy was growing more slowly. The past week was not only the second positive week in a row for the markets, when negative news was released the markets seemed to bounce back more quickly. For example, last week’s housing start and permit data were well below expectations and jobless claims rose more than expected last Thursday. However, each day the markets recovered from early losses at the end of the day. Could this be the turn after a correction?
The number of U.S. borrowers failing to pay their home loans has fallen significantly in the last few months, according to a Bloomberg BusinessWeek article. Data from RBS Securities, Inc. showed that, of all borrowers with subprime loans wrapped into bonds issued in 2007 who had never previously missed a payment, an average of 2.6% failed to pay at least once in March, April or May. That’s a drop from 3.7% in February and a 15% decline after seasonal adjustments, RBS calculates.
As the nation struggles to shrug off the worst housing crash since the Great Depression, it may be hard to believe a housing shortage could be on its way. The nation is simply not building enough homes to keep up with potential demand. Just 672,000 new homes were started in April, less than half the long-term run rate needed to meet the nation’s natural population growth. So far, the shortfall has been masked by a weak economy that has put a damper on home buying. Once the job market rebounds, however, people will look to have their own homes again. This pent-up demand could be unleashed on unprepared markets, causing shortages and rising local prices. Household formation has been on hold during the past few years as young people, especially, have been unable to find jobs. In the past, an average of more than 1.3 million households was formed each year, causing demand for 1.5 million new homes.