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I'm sorry, Morgan Housel.
I don't agree with you this time.
"Housing is going to recover," my brilliant fellow Fool wrote last week. "It might be years from now, but it's going to happen. You can guarantee it."
He was kind to push out the potential turnaround several years away, but what if that isn't enough? What if even decades aren't enough? What if this seemingly cyclical rebound never materializes because certain demographic trends and supply vs. demand issues continue to work against developers? What if homebuilders will never be great again?
I'm fully aware of the stupidity of what I'm attempting to do here. My friend Morgan is a financial genius. When it comes to macroeconomic issues, he can think me under the table. However, I don't see things his way -- and I don't think I'm wrong.
Too many roadblocks on the road to recovery
What has to happen for real estate developers to bounce back?
Obviously, home prices have to stabilize. No one wants to buy new digs that they know will be worth less later.
We're living that nightmare right now. Real estate data firm CoreLogic reports that nearly a fifth of us owe more on our homes than they're actually worth. For those who figured that there wasn't a problem using a house as collateral to take out second mortgages and home equity loans, that figure bumps up to a spooky 38% of us underwater.
Can it get worse? It can. Noted economist and worrywart Robert Shiller doesn't think the market has bottomed. He says home prices can drop another 10% to 25%.
If you think things are bad now -- and credit agency TransUnion reports that 6.19% of borrowers are at least 60 days late on their mortgage payments -- stick around. Home prices have fallen despite unsustainably low mortgage rates. One can only imagine the doomsday scenario as selling prices head even lower if affordability becomes a bigger problem when rates climb higher.
Lower prices may be a nest-egg-smothering inconvenience for someone looking to sell an existing property that has already been paid off, but it's also a model-obliterating adventure for a developer that has to start from scratch given today's component costs.
Economic recoveries and setbacks do come and go, but what if the housing market at the other end of the bounce looks nothing like the one we left behind when the real estate bubble popped?
Lennar (NYSE: LEN ) took a bulldozer to nine partially built homes two weeks ago. It had acquired the project from a bankrupted developer, and instead of salvaging the eventual McMansions, it chose to raze the property to build smaller, cheaper homes.
Standard & Poor's lowered its corporate credit rating on luxury homebuilder Toll Brothers (NYSE: TOL ) last week because of a weak housing recovery, despite the fact that Toll has one of the healthiest balance sheets outside of NVR (NYSE: NVR ) .
This is the reality of the housing industry's future. Folks no longer want gargantuan homesteads in the burbs. Smaller family sizes that are starting to form later are gravitating to revitalized metropolitan areas that swap picket fences for commutability and accessibility.
I'm not just thinking out loud here. The U.S. Census data show that the median age at first marriage is a year and change older than it was a decade ago. The average household size has also declined slightly between 2000 and 2010, and the same can be said for the percentage of households headed by a married couple with children.
In other words, apartment rentals and high-rise condo buildings are becoming the new suburbia.
We just don't need fancy digs anymore. We already have a glut of underutilized existing monstrosities. HomeAway (Nasdaq: AWAY ) was a hot IPO last week, largely because 560,000 owners of vacation properties are making the second homes that they can't unload available to other travelers.
Pack a passport
If you have to play the real estate market, think internationally. Mexico's Homex (NYSE: HXM ) and Brazil's Gafisa (NYSE: GFA ) trade at single-digit forward earnings multiples. Don't kid yourself and compare them to Hovnanian Enterprises (NYSE: HOV ) , a stateside disaster that posted a wider than expected quarterly loss last week and continues to write down its assets.
Contrarians will dismiss everything that I have pointed out. They'll point out that the rampant pessimism makes this the ideal time to go against the crowd and arrive fashionably early.
Well, it's too late for that. At 2004 and 2007 prices, respectively, shares of Toll and NVR are trading closer to their 52-week highs than their lows, and have you seen Lennar lately? Shares of Lennar have popped fivefold since bottoming out three years ago, even though revenue has fallen every single year since fiscal 2006.
Think about that for a bit. Buyers have ignored the decaying fundamentals, bidding some of the stocks to higher price points than when they were when they were better companies. Maybe they're wooed by upbeat CEOs. I took Toll CEO Robert Toll to task last year because he's been calling for a market bottom seemingly every year since 2006.
Don't believe them. Believe me.
By the time the market does work through the ridiculous excess of existing properties, the undeniable lifestyle trends and permanent lessons learned by scorched condo flippers and property collectors will still hold the housing recovery back.
Real estate development -- in this country -- will never be great again.
Is Rick right? Is Morgan right? Share your thoughts in the comment bow below.