The Housing Boom Is Almost Here

It sounds premature to say that the housing market should be booming again already, but it's true. "[T]oday's level of home construction cannot last," my colleague Morgan Housel observed at the end of last year, "it's just far too low to meet demand."

The economics behind this assertion are straightforward. Every year, the population of the United States grows, leading to an increase in the number of American households, which thereby fuels the demand for new homes.

Here are the numbers to drive these relationships home. Between 2002 and 2007, the population of prospective homeowners grew at an average annual rate of 2.5 million. Over this same time period, the number of households increased by average of 1.1 million. And to accommodate these newly formed households, homebuilders built an average of 1.7 million housing units a year.

But here's the rub. Since the onset of the financial crisis, the relationship between these numbers has broken down. In 2012, while the population grew by 3.2 million people and the number of households shot up by 973,000, homebuilders built a total of only 650,000 housing units. You can see how these figures compare in the chart below.

The main thing to focus on here is the low number of housing units that were constructed last year compared to the growth in both population and household formation. The numbers before the crisis make sense, as there were always more than enough new housing units to shelter the growing number of households. What doesn't make sense is the fact that an estimated 973,000 households were formed last year, yet only 650,000 housing units were built. You don't need to be a rocket scientist to appreciate that this can't persist indefinitely.

Over the past few years, homebuilders have been able to compensate for the difference simply by liquidating their existing inventories of new homes. At the end of 2008, there were an estimated 352,000 new single-family homes in inventory. By the beginning of this year, that number had fallen to 148,500. in the intervening time period, in other words, more than 200,000 new homes that sold did not need to be built.

Fortunately, there's reason to believe that we hit the bottom of this trend in the middle of last summer. You can see this in the chart below. Twelve months ago, the existing inventory of new single-family homes was at the lowest level on record -- that is, since the government started tracking the statistic in 1969. But if you look at the far right, you can make out the beginnings of what could very well amount to a robust rebound.

We were reminded of this on Monday, when the Commerce Department released an estimate of construction spending in May. According to its figures, spending on residential construction was at a seasonally adjusted annual rate of $322.3 million last month. While this was only 1.3% higher than the rate in April, it was an impressive 22.7% above May of 2012, and it still has a long way to go.

We're also starting to see the proceeds of the nascent recovery reflected in the earnings of homebuilders. Last week, Lennar (NYSE: LEN  ) and KB Home  (NYSE: KBH  ) , two of the nation's largest homebuilders, reported markedly improved results. Lennar's home deliveries shot up by 36% on a year-over-year basis while KB Home's increased by 39%. And in PulteGroup's (NYSE: PHM  ) first-quarter earnings release in April, its chief executive officer observed that homebuyers are "feeling a greater sense of urgency given the combination of limited product inventory and rising prices found in many markets throughout the country."

The significance of a full recovery in home construction simply cannot be overstated. In the first instance, there are multiple industries that look to it for revenue. Home improvement retailers such as Home Depot (NYSE: BAC  ) are a perfect example. It's no coincidence that the housing recovery was referred to 19 times on the company's most recent conference call. And lenders like Wells Fargo (NYSE: WFC  ) fit the same bill. In the first quarter of this year, the San Francisco-based mortgage giant underwrote $109 billion in home loans alone, accounting for roughly a third of domestic mortgages.

Beyond this, homebuilding is an important source of jobs in and of itself. Again, as my colleague Morgan Housel has noted, it's estimated that each new home generates between two and three new jobs. This is why Warren Buffett is able to confidently proclaim that, "We will come back big time on employment when residential construction comes back."

At the end of the day, it's no longer a question of if the market for newly constructed homes will recover; it's already in the process of doing so. What remains to be seen, in turn, is precisely what shape the recovery will take. But either way, one this is certain, if you want to profit from this quickly approaching profit tsunami, one of the safest and most profitable ways to do so is to invest in the so-called "only big bank built to last." Unlike the majority of other mega lenders, it's proven its mettle as one of the safest investments around. And on top of that, it pays out a highly respectable dividend each quarter to its admiring shareholders. What to learn the identity of this bank before the rest of the market catches on? Simply click here to download our free report instantly. 


Read/Post Comments (9) | Recommend This Article (9)

Comments from our Foolish Readers

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  • Report this Comment On July 02, 2013, at 10:50 AM, ps8uoipf wrote:

    So here we go again, housing prices come back, banks begin their predatory lending by mega advertising low APR rates that probably 99% of Americans don't understand. Then, Wall Street makes a bundle, crashes, government bailout, CEO's, managers, supervisors get rich, and once again the TRUE Americans in this country get screwed.

    All banks can kiss my royal arse!!! I'll stay with my credit union, yes UNION!!!

  • Report this Comment On July 02, 2013, at 11:59 AM, HCPRO wrote:

    Writer fails to "fully inform" the public that over 80% of real estate sales over the last 24 months has been to institutional investors (chinese) that are buying up inventory as rental investment property.

    Over 30% of homeowners ares still underwater on their mortgages and there is in excess of 3 million homes still held in shadow inventory, this inventory is not being reported or accounted for to skew the numbers and create a false impression of stability in the real estate market.

    No one should buy a home to day under any circumstance unless you fully intend to remain in that home for the full term of the mortgage. there is substantial volatility to come.

    Consumers should completely discount any projections form the real estate industry, they are a commission driven industry that only cares about creating false sense of value for homes today..remember that these are the groups that always claim "it's a great time to buy a home". Discount any opinion from anyone positioned to profit from your purchase..My dad always told me "to never seek advice from ANYONE on commission"

    this advice has protected my wealth, security and future in ways that I can not describe.

    Commission breathe is never good for the buyer.

  • Report this Comment On July 02, 2013, at 12:10 PM, ETFsRule wrote:

    Great article. I agree - housing starts are much too low to keep up with demand.

  • Report this Comment On July 02, 2013, at 12:17 PM, TMFHousel wrote:

    <<Writer fails to "fully inform" the public that over 80% of real estate sales over the last 24 months has been to institutional investors (chinese) that are buying up inventory as rental investment property.>>

    The investor share of of home sales is currently around 20%.

    http://www.housingwire.com/fastnews/2013/06/24/real-estate-i...

    <<Over 30% of homeowners ares still underwater on their mortgages and there is in excess of 3 million homes still held in shadow inventory>>

    The actual figure of homes underwater is 19.8%, and shadow inventory is 2.2 million and declining fast.

    http://blogs.wsj.com/developments/2013/06/12/number-of-under...

    http://www.corelogic.com/downloadable-docs/shadow-inventory-...

  • Report this Comment On July 02, 2013, at 12:54 PM, keithgilabert wrote:

    This report is flawed. The number of new housing available is lower due to limited production not increased demand.

    Also, another factor to consider is the cost of ownership. Housing has definitely bounced off the bottom but to move higher we need jobs.

  • Report this Comment On July 02, 2013, at 1:01 PM, LorrieY wrote:

    Just what we need, more NEW homes when the market is already overloaded with re-sales, short sales,& foreclosures. Why not give a family...young working people, middle aged or older retired people a break on interest rates & low closing costs so they can purchase a home like this, get it off the market & occupied by someone who really wants a home but doesn't have the huge bundle of cash. Of course, they would be pre-certified to make sure they can AFFORD the home purchase, taxes, utilities etc.

  • Report this Comment On July 02, 2013, at 7:31 PM, Crazylegs52 wrote:

    I think that much of this discussion is regionally biased. Detroit and Cleveland are probably not seeing the housing rebound that San Diego is seeing (12-20% year over year based on zip code).

    As such, not everyone will have an appreciation for the current situation.

    I also think the increased value of homes will translate to decreases in underwater mortgages and a higher likelihood to sell for breakeven or even profit in the near future (2013 or 2014). This will increase both supply and demand and help puch prices higher.

    I hope that we do not enter into another bubble.

    I do have a question though. If new housing units traditionally outpace actual new household formation, why is there not an expected time period of "catch up"? It would seem there would be plenty of inventory to go through prior to a need for increased construction if the pattern in the past was an excess housing development of >600,000 homes/year?

  • Report this Comment On July 02, 2013, at 7:56 PM, TMFAimeeD wrote:

    ^Median metro-Detroit home prices up 40% year over year in May.

    http://www.freep.com/article/20130617/BUSINESS04/306170089/M...

  • Report this Comment On July 02, 2013, at 8:16 PM, JohnMaxfield37 wrote:

    Crazylegs52 -

    <<If new housing units traditionally outpace actual new household formation, why is there not an expected time period of "catch up"? It would seem there would be plenty of inventory to go through prior to a need for increased construction if the pattern in the past was an excess housing development of >600,000 homes/year?>>

    You're exactly right. After a boom in almost any type of asset, there's an oversupply, which is then liquidated at lower prices following the bust.

    But at some point, the cycle turns back around, and the liquidation period stops. This happens when the inventory has been depleted.

    And that's where we're at today. In order to satisfy new household formation at this point, homebuilders need to build more housing units.

    - John

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