The Two Faces of Housing

Two sides have formed in the current housing outlook. One says we're set up for a big rebound. The other says, don't hold your breath -- housing could flatline for years.

Who is right?

Both could be, because they're often talking about completely different topics.

I've written about this before, but it's really important: Housing construction is on track for a big rebound. At 780,000, housing starts last year were about a third below the rate of household formation. Harvard's Joint Center for Housing Studies estimates household formation will average 1.5 million through 2020. To meet those projections, new home construction needs to more than double from current levels (housing starts typically run slightly above household formation due to demolitions and structures lost to fires, natural disasters, etc.). This is where housing has the potential to boom. It can drive economic growth and revive the homebuilding sector, which can likely look forward to several years of double-digit earnings growth. NVR (NYSE: NVR  ) is a quality homebuilder to keep an eye on. Home Depot (NYSE: HD  ) is another obvious name that will benefit.

Pushing along the rise in construction is low and dwindling levels of existing home inventory:

When inventory is as low as it is and construction has been as dead as it is, you need a period of above-average production to make up for the gap. As value investor Bill Miller recently told the Financial Times:

He [Miller] says there is a big structural demand for homes due to a growing population and a lack of building during the bust, when fewer than 500,000 new homes a year were built. The long-term trend is for 1.4m to 1.5m new homes a year, so to catch up "we probably need to get to 2m housing starts at some point in the next five years".

Housing prices are a different story. Aside from a few regional discrepancies, it is almost never rational to expect real home price appreciation over time. Yale economist Robert Shiller's data says it all:

From 1890 to 1990, nationwide real home prices actually declined slightly. Construction boomed during most of that period, mind you, but prior to the bubble last decade, rising real prices were almost never part of market dynamic. Expect more of that going forward, Shiller told me in an 2011 interview:

There's technical progress. Homes are a manufactured good. Back in 1900, homes were handmade, you know, craftsmen. But by 1950, we can get all kinds of power tools and prefab, and they were just better in 1950 than we were in 1900, so of course prices will go down. And on top of that progress, there's the outmoding, the out-of-style factor. So what kind of houses will they be building in 20 years? They may have lots of new amenities. They will be computerized or something in some way that we can't anticipate now. So people won't want these old homes. To me, the idea that buying a home is such a great idea is just wrong. They may very well decline for the next 30 years in real terms.

This is the new housing story: Get ready for rising construction, but don't wait around for a long-term boom in prices. 


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