Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
A theory I shared with a developer friend of mine a few months ago. At the time, he said I was crazy. The other day, he came back to me and said, "You know. You might be right."
Part of the current credit crisis is because of overbuilt housing inventory over the past several years. Seriously. These guys were building left and right without regard to whether a market existed for their product or not.
Well, about a year ago, they started dropping like flies. There were not enough buyers, so the spec home builders went belly-up and the banks were holding the bag. Today, one in every four homebuilders has declared bankruptcy. The rest are hanging on by their fingernails.
Yet, the amount of actual unsold inventory in this country has begun to plummet. 7% last month in fact.
Right now, that means we have about 10.4 months of inventory left to be sold in this country. That sounds like a glut on the market, right?
Here's the problem. With a fourth of all builders now bankrupt, and bankers extremely gun shy about lending money to the rest, we may very well be looking at very little new construction over the next 2-3 years. If that happens, expect housing prices to surge once again, particularly in markets that maintain positive economic growth such as the South. What's more, with permitting, infrastructure, turning dirt, and actual construction, new homes won't be available for another year, even if developers started today.
Now, I fully acknowledge big huge gaping caveats with this theory. Namely, if the economy completely tanks. If that's the case, nobody is going to be buying a house anywhere. Further, tightening credit rules will mean that fry cooks at McDonald's won't be getting a house anytime soon. So feel free to tell me I'm smoking crack.
Yet, if the economy survives the next couple of months and recovers, don't be surprised to find that your home values start increasing next summer, particularly for homes in the $150-$300K range that remain very affordable for the average middle-class couple--particularly if interest rates remain in their current range. It's an interesting blip in the data that really bears watching.
But seriously there is a bit of logic to your theorem. New construction has dropped to a level below household formation (1.2 million annually). The population continues to grow (over 4 million babies last year).
So sometime in the future there will be a shortage of housing.
On the flip side, the size of single family homes has increased steadily over the years, and in tough times kids stay home later into life. The longer someone takes to go out on their own the less likely that they will ever go out on their own. So we may be seeing a declining rate in household formation.
I don't see housing prices increasing in the near term. Most people need to borrow in order to purchase a home. Lending will be tight for years to come. Many people are seeing their credit erode as inflation and a tight job market make it difficult to make ends meet.
Here's the problem. With a fourth of all builders now bankrupt, and bankers extremely gun shy about lending money to the rest, we may very well be looking at very little new construction over the next 2-3 years. If that happens, expect housing prices to surge once again, particularly in markets that maintain positive economic growth such as the South. What's more, with permitting, infrastructure, turning dirt, and actual construction, new homes won't be available for another year, even if developers started today.
Now, I fully acknowledge big huge gaping caveats with this theory. Namely, if the economy completely tanks. If that's the case, nobody is going to be buying a house anywhere. Further, tightening credit rules will mean that fry cooks at McDonald's won't be getting a house anytime soon. So feel free to tell me I'm smoking crack.
Yet, if the economy survives the next couple of months and recovers, don't be surprised to find that your home values start increasing next summer, particularly for homes in the $150-$300K range that remain very affordable for the average middle-class couple--particularly if interest rates remain in their current range. It's an interesting blip in the data that really bears watching.
There are many holes in your thinking. Just to put it in perspective, there are more homes available for sale now (4.26MM) than since the early 80's. Back in '02 there were ONLY 2.35MM homes available.
Its mind boggling the amount of homes still available.
Even w/permits way down, what's different today is how HARD it is to get a loan and become a qualified buyer. This only puts more strain on potential home buyers. back in the day, if you had a heartbeat, you could get approved....those days are gone.
Surging home prices are nowhere in sight. Right now, most markets should be lucky if the bottom comes in '09....
There will be pain in this industry for a long time to come......
There are many holes in your thinking. Just to put it in perspective, there are more homes available for sale now (4.26MM) than since the early 80's. Back in '02 there were ONLY 2.35MM homes available.
Its mind boggling the amount of homes still available.
Even w/permits way down, what's different today is how HARD it is to get a loan and become a qualified buyer. This only puts more strain on potential home buyers. back in the day, if you had a heartbeat, you could get approved....those days are gone.
Surging home prices are nowhere in sight. Right now, most markets should be lucky if the bottom comes in '09....
There will be pain in this industry for a long time to come......
No doubt there will be pain. But if the economy doesn't completely tank á la 1929, people will still keeping having children and will keep relocating for their jobs.
I also don't assume for a moment that the heady (or shady) days of lending are coming back. But banks are in the business of lending money. Eventually, they'll have to go back to underwriting mortgages, albeit at a higher spread and fewer stunt loans.
To clarify, I don't see home values beginning to soar in another speculative frenzy. I just see them coming back off the bottom in about a year. Further, given how ravaged the homebuilders have been by this downturn, I believe that there will actually be fewer builders to put product on the market in the coming years.
Location: Mokelumne Hill, CA & El Pescadero, BCS MX.
6,957 posts, read 22,317,496 times
Reputation: 6471
I also have been wondering about this. Given that everyone needs some place to live, does the existing inventory turn into rental inventory? Does the baby boomer generation, even though they have a longer life expectancy, represent a "bubble" which will fade over time as we start dropping like flies? Will this equal or be less than the household formation level? What if inflation comes back with a roar? Real estate is a hard asset and subject to inflationary pressure.
Where's Larry Yun when we need him? (That's for you CJ )
Does the baby boomer generation, even though they have a longer life expectancy, represent a "bubble" which will fade over time as we start dropping like flies? Will this equal or be less than the household formation level? What if inflation comes back with a roar? Real estate is a hard asset and subject to inflationary pressure.
The boomer generation won't be dying off in droves for another 10-15 years or so. Plus, we have net in-migration to many areas of the country, especially places with colleges, high tech, and medical. Not all the immigration is of the illlegal south of the border variety-- a lot of tech and med people come from overseas, such as my DH. Also, the lower home prices are starting to attract outright foreign buyers, coming in with cash-- according to NPR.
BTW, if the dollar goes through the floor, imports become more expensive, and American made stuff is a better value. It might even convince people to save and invest rather than spend on foreign junk they don't really need. (Dare we hope?) So that might help some jobs in the longer run. I wouldn't expect the U.S. garment industry to make a comeback, but it could help consumer durables, such as cars. A cheap dollar isn't all bad as long as we don't get into hyperinflation, which doesn't look likely as demand seems to be falling.
In any case, if we can get the credit markets working again, the inventory in housing will eventually be worked through, and many people will have less housing debt hanging over their heads. I'm sure that's not comforting to sellers, but that's reality. Prices must fall. I'm certainly not expecting any equity windfall when I sell my own home. In fact, unless I'm forced to, I won't sell until things get better, and if other boomers think like me, that ought to hold inventory down a bit.
I for one hope that you are correct. There are way too things that will have to fall in place perfectly for the theory to happen, so I won't get my hopes way up. But, it is a very interesting idea on things.
Household formation slows during bad economic times, as kids don't move out, people get roommates, and so on. So fewer houses than normal have to be added to keep up with the reduced demand.
Things have gotten worse since that article was written.
No doubt at some point it will make sense to build again. But with 10-11 months of inventory sitting on the market, plus a lot more soon to be foreclosures waiting in the wings, there's not going to be a shortage for a several years. Once demand starts picking up again (5 years? 10 years?) then it might make sense to worry about this. But until the economy picks up, sales increase quicker than foreclosures, and the existing inventory gets back to a 6 month level or so, it's premature to think about.
''don't be surprised to find that your home values start increasing next summer, particularly for homes in the $150-$300K range'''
HAHAHAHAHAHAHAHAAHAHHAAA. Look I want to get out of this abyss as much as the next guy but surely you don't think this nation's biggest housing crash to date will recover in 2 years???? The last one took way longer and it was smaller! Pass me some of those shrooms, I need some.
Please register to post and access all features of our very popular forum. It is free and quick. Over $68,000 in prizes has already been given out to active posters on our forum. Additional giveaways are planned.
Detailed information about all U.S. cities, counties, and zip codes on our site: City-data.com.
Please register to participate in our discussions with 2 million other members - it's free and quick! Some forums can only be seen by registered members. After you create your account, you'll be able to customize options and access all our 15,000 new posts/day with fewer ads.
)
