Housing: Partying Like It’s 1925

As incredible and out-of-balance as the housing bubble was, I'm becoming more convinced that the housing bust -- particularly in new home construction -- has been even more remarkable.

From 1960 to 2007, America built an average of about 1.5 million homes per year. That ballooned to 2.2 million per year during the housing bubble, and collapsed to half a million a year in 2010. After rebounding from the depths, about 800,000 new homes were built in 2012.

There's something incredible about that 800,000 figure. I recently came across this chart in a paper by UCLA economist Ed Learner, showing housing starts from 1920-1950. You'll notice that housing starts in the year 1925 were about ... 800,000.

Think about that. We're building the same number of homes today as we were back when cars had to be started with a hand crank, and the new technological breakthrough was a giant box called a "radio." The U.S. population in 1925 was 115 million and growing by about 1.5 million per year. Today it's 315 million and growing by 2.5 million per year.

Comparing current housing starts to 1925 levels isn't meaningful in itself. It's just a way to put the current market in perspective. But that perspective should be powerful: Given household formation and current levels of existing inventory, there is no reasonable way you can justify current levels of housing construction. Barring a deep demographic shock like a war, it won't support population growth.

Bill Miller of Legg Mason told the Financial Times this month:

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."

We don't know exactly when that's going to happen. It could be next year, or five years from now -- maybe even longer. But we know with a high degree of confidence that it will happen someday. People need a roof over their heads.

And we know what will come with a boom in construction: It's good for jobs, it's good for economic growth, and it's obviously good for homebuilders. A quality builder like NVR (NYSE: NVR  ) has a good chance of outperforming in the coming years.

Some worry that homebuilder stocks look expensive. That's understandable. But valuing a homebuilder based on current earnings might be misleading. If housing starts double from current levels, as Miller and others suggest, earnings growth at homebuilders will surge. A decade ago, people made the opposite mistake, assuming homebuilders were cheap based on inflated earnings. Remember: Busts can be just as distorting as booms. 

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  • Report this Comment On February 28, 2013, at 6:45 PM, dividendgrowth wrote:

    The 800000 figure already saw a 2x increase vs 2011.

    The bottom of this housing depression reached levels unseen since 1921 when the population was a third of today.

  • Report this Comment On February 28, 2013, at 8:00 PM, TMFMorgan wrote:

    Sorry, the economist is Ed Leamer, not Learner. We'll get it fixed.

  • Report this Comment On March 02, 2013, at 1:13 PM, xetn wrote:

    Another housing bubble in the making complements of the Federal Reserve creating billions of new currency units each month out of thin air.

  • Report this Comment On March 02, 2013, at 2:58 PM, Rustyismydog wrote:

    This analysis is missing a piece: existing inventory left over after the overbuilding during the bubble years, foreclosures, etc. We have to burn through that before the principles outlined in your article kick in. Any information about that? Thanks.

  • Report this Comment On March 02, 2013, at 5:28 PM, lowmaple wrote:

    If people go to renting for life will that change the numbers?

  • Report this Comment On March 02, 2013, at 6:50 PM, UgolinoII wrote:

    Somebody needs to own the house thats being rented?

  • Report this Comment On March 02, 2013, at 7:39 PM, Flynn70 wrote:

    First, you have a banking system that has raised minimum down payments to 10%, a figure very few households can afford.

    Second, you have a mostly jobless recession recovery that is going to further hinder ability to borrow and be longer in recovering.

    Third, the foreclosure market has been mostly tapped of the better deals, and banks have stopped fire-selling the properties. There's not as much inventory out there as there was just last year, and new housing might well be a better investment than what little foreclosures are still unsold but, again, people are renting because after a down-turn they haven't saved enough to buy either one, new or used.

    I wouldn't go jumping on the Builder stocks JUST yet... maybe this time next year. New home developments are going to be mediocre at best for 2013.

  • Report this Comment On March 03, 2013, at 7:49 AM, TMFMorgan wrote:

    Rustyismydog,

    Yes, housing inventory is now at a a nine-year low, and well below average.

    http://research.stlouisfed.org/fred2/series/MSACSR

  • Report this Comment On March 03, 2013, at 10:19 AM, gene132 wrote:

    Yes, all signs point to a depression-WALMART records sales decline, MickyD's records sales drop..meanwhile, our president/king blows $126 million on golf outing. Heck, his visit to India cost $200 million /day. Austerity? Not for Obama!

  • Report this Comment On March 03, 2013, at 11:30 PM, Shawnerz wrote:

    There's something key that we're all missing, but I don't know what it is. People *have* to have a roof over their heads. If the population is continuing to grow then there shouldn't be enough houses for everyone. Also, situations where houses are being town down, like in Detroit, shouldn't be happening.

    Has mortality rate increased? More people moving in together? Vast increase in renters?

    Someting's not right in the numbers but I don't know what it is.

  • Report this Comment On March 04, 2013, at 10:03 AM, Darwood11 wrote:

    The current numbers for housing starts are astounding.

    I don't know where people are living. Perhaps a combination of living at home with parents, staying longer in college, apartments, etc.?

    I do know that at present getting a new home mortgage is difficult for many due to the more stringent financing requirements of banks. FHA is no longer the easy walk it was, either, with the increases in mortgage insurance premiums.

    However, people do have to live somewhere and if residential home construction remains unaffordable, then I would expect to see ongoing decreases in apartment and home vacancies and upticks in apartment construction.

    Apartment and condominium construction 2007-2012 was (-)5.7% annually, according to ibisworld.com. It is projected that such construction will grow at an annual rate of 9.3% for 2012-2017.

    Rental Vacancies peaked at about 10.55% in 2009-2010 (10.6% according to the U.S. Census Bureau in 2009) and have been falling steadily. In 2012 they had fallen to 8.7% for the U.S. as a whole.

    Vacancies in "homeowner units" peaked at 2.8% in 2008 and in 2012 fell to 2.0% according to the U.S. Census Bureau.

    What does this mean? For the interim, possibly more apartment construction and investor interest in condominiums or homes which can be rented. That is not all bad. It provides a place for people to live and an incentive to build more apartments. Ultimately, that means construction and ancillary jobs. This in turn will assist the economy in the long, slow and sometimes tortuous road to recovery.

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