Sunday, April 29, 2012

CR — Housing: The "Long Bottom"

It appears housing starts, new home sales and residential investment have already bottomed and will increase in 2012. All three had a "long bottom" of several years.
 I think house prices have "bottomed" too, but this is just the beginning of the bottoming process. I agree with Ms. Zelman that the "shadow inventory" will probably not push prices down further nationally (it probably will in some judicial foreclosure areas), but I think the "shadow inventory" will limit any price increases for some time.
Read it at Calculated Risk
Housing: The "Long Bottom"
by Bill McBride

I think that things are more "iffy." It all depends on how the foreclosure crisis  shakes out, how the sectoral balances look considering how economic policy decisions coming up are made, and whether there are any shocks globally. There are still many balls in the air resulting in uncertainties, and US residential RE is still fragile. The bottom may not yet be in, and it's not yet time to celebrate anything. The recovery generally seems on track in the US if all proceeds well, but that is hardly anything to bank on now. There are many areas of concern.

Two big areas of concern are structural. First, the housing crash has shaken belief in the maxim that housing always goes up and is the best investment. It may be that the American dream is now changing away from home ownership.

Secondly, the present structure of education is diverting funds away from housing into servicing student loans. This is delaying the schedule of rites of passage like marriage, family, and buying the starter house.

It is as yet unclear if this is a temporary phenomenon or a cultural shift. Looks like it may be the later, which would profoundly affect housing and the US economy as a whole.


hbl said...

Hi Tom. I'm not sure whether your more cautionary outlook than CR is with respect to housing starts, housing prices, or both... I agree the recovery is still fragile and I think there are risks that could impact housing prices in particular -- though absent further shocks I'd guess CR is probably right about prices bottoming.

But I don't envision *too* much downside risk to housing starts, and they play a bigger role in economic growth. Even with delays in "buying the starter house", people would rent something instead, which just changes who owns housing (investors/landlords vs owner occupied). It is true that a shift toward more apartment living could exert a drag on housing starts, but I wonder if that trend is already in place. That might mean slow growth in housing starts but probably(?) not an actual fall.

The US has a growing population and vacant housing inventory has shrunk a lot (according to CR)... A big shock *could* drive larger average household sizes once again, but to some extent that already happened (and may slowly be unwinding?) Just about the only thing I remember seeing CR meaningfully wrong about with respect to housing and the economy's trends was not being bearish enough in 2008. But I bet he'd acknowledge some of the risks too (2013 "fiscal cliff", etc) that can threaten the core forecast.

Tom Hickey said...

Hi, hbl, while CR doesn't mention it here, recent building has been in multifamily units, apparently apartments for rents. While this counts as investment, of course, if it is a trend, it indicates a structural shift of the US economy away from home ownership. This is a big deal, because people tend to a whole lot more discretionary income into housing related expenditures than apartment dwellers. While the same number of family units could be constructed, the lifetime expenditure per unit could shift dramatically. A lot more income would go to rent rather than buying stuff for the house, as has been the case since the end of WWII and the rise of suburbia. It also seem like the higher price of gas and changing preference of young people is creating a rising trend in urbanization and more renting instead of housing, at least in the younger years. In addition, there are signs that the era of the McMansion is over, and that spells less excess and lower housing related spending.

Also, I am not yet convinced the bottom is in. It may be, and I don't think that there is any great exposure in picking some some good property that is presently undervalued. I have some astute frieds that are now doing this and renting, since it is fairly easy to get positive cash flow. In an environment of low interest rates, it's a no brainer for folks with experience.

What I am particularly concerned about is the irrational push for austerity politically in the US, and polls seem to indicate that a majority of the public is on board. This doesn't bode well for sectoral balances, and in a global economy that is not expanding rapidly, will result in either economic contraction, dangerous with the existing private debt level, or adding to private debt, which would be insanity.

hbl said...

Tom- I think you highlight some very important trends and I've appreciated your coverage of them (and other topics). The macroeconomic implication (as I see it) of the trends you mention in the first paragraph is primarily slower than trend economic growth... though that does make recessionary "stall speed" more of a risk.

Agreed on the risk of austerity doing vast damage! I have no real sense for how real that risk is in the US versus simply a repeat of last year's damaging rhetoric that lacked "active" austerity at the federal level.