The number one question I’m asked is “When do you think the housing market is going to recover?” Teunis Brosen, an economist with ING Bank NV in Amsterdam says 2 1/2 years, and here’s why:
In a note last week, Mr. Brosen estimated that as of the second quarter of 2010, there are 2.4 million units in the country’s “excess supply” of housing, a glut that consumers must make a significant dent in before housing can recover.
Mr. Brosen’s formula for calculating “excess supply” is interesting: ignoring seasonal vacancies and second homes, he combs U.S. Census data to try and determine home vacancy rates for all the houses in the country that are for sale, for rent, or held off the market for other reasons. Right now, there are about 2.5 million vacant homes in the country – 650,000 of them are for sale, 900,000 of them for rent and 950,000 of them being kept off the market. This so-called shadow inventory is being held by investors waiting for prices to appreciate, as well as bank-owned foreclosures that have not yet been listed for sale.
Excess supply started to climb dramatically in 2006, according to ING research, and the average increase in households in the U.S. is about 1.4 million per year. Mr. Brosen, using a fairly conservative projection of 500,000 for the number of housing starts in 2010 (the Commerce department says 549,000), predicts that new households can absorb 900,000 units of the “excess” supply in a year. By that calculation, it should take 2.5 years to clear excess supply and get back on track.
What do I think of Brosen’s estimates? I think he’s overly optimistic. Here’s why–
Mr. Twist and I were involved in the import business for many years. Every now and then we would run into some market segment where the profits were amazing. We could never count on these profits going on for long though. When the high margins became apparent to others, the market would become flooded and then profits would drop to nothing. We’ve never seen the profits in these segments return to anything close to their former levels, because now there are too many players watching the same opportunities, ready to jump in should profitability return.
Our experience in the import business is typical of other markets. Housing’s “recovery” will be hampered by the same problem. There’s a lot of people that made a lot of money in construction in recent years, many of whom are now making significantly less in other industries. Should there be any sort of improvement in the housing industry, it is my expectation that this “shadow inventory” of construction companies and employees will try and make a comeback. Even now we see too much optimism in homebuilding, even in a poor market.
When housing “recovers”, it will not be a recovery to a world of high profits again. Housing prices will eventually stabilize, and individual markets may prosper, but not the national market. There never really should be a “national market” for housing. Housing became speculative when it became a commodity that traded like stocks. Someday the last vestiges of the speculative market will be gone, and I say, good riddance.
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In a commentary from Big Builder magazine November 8, 2009, the author under the heading ‘Find something you’ll never, ever do again’ states that the owner of St Lawrence Homes told him “If I ever buy another piece of raw ground, hit me over the head.” I’m guessing that attitude will change as soon as an inquiry comes into his sales office. Builders are at heart salesmen and salesmen are liars or at best manipulators that drink their own kool-aid. mmmmm, hemlock
Gh-
When you are only making a third to a quarter to what you previously made, I think you are right, it is going to be awfully tempting to try and go back to what you previously made.
L has told me about a lot of the folks in the industry that he has known. It doesn’t matter if their little LLC goes broke. They declare bankruptcy, pick out a new name, and they are in business again. Some habits just die hard.