The Coming Housing Crisis (Yes, Another Crisis)
Posted: 08/21/2012 4:41 pm
Just when we are beginning to see the signs of a housing recovery and the housing market, critical to our economy, seems ready to return to normal, major markets across the U.S. are about to be impacted by a new housing crisis.
The National Housing Shortage
While this may seem counterintuitive at first glance, our organization has a long history of seemingly counterintuitive projections in housing which have later proven true. We were one of the first organizations to assert that short sales would not only become the preferred foreclosure alternative for homeowners, but that banks would prefer them as well. We were among the first to predict that investors would flock to the housing market beginning in 2010. We feel confident the same will hold true with the housing shortage that we believe will begin affecting some markets in the next 12 months and the majority of major markets within the next three years.
Consider these year over year numbers from the National Association of Realtors comparing the second quarter of 2011 to the second quarter of 2012:
- Existing home sales are up 8.6 percent.
- Existing inventory for sale is down 24.4 percent.
- Median home prices are up 7.3 percent.
Individually, each of these statistics indicates major a market transition. Collectively, they show unprecedented one-year movement in the housing market.
According to the U.S. Census, the recent history of housing construction has been relatively consistent: between one and two million homes produced since 1968.
- Between 1968 and 2008 at least one million homes were constructed each year.
- The year with the greatest output was 1973 at 2,100,500 homes.
- The year with the lowest output was 1982 at 1,005,500 homes.
- The average output between 1968 and 2008 has been 1,531,900 homes.
In 2008, there were 1,119,700 homes constructed. Of course, we now know that 2008 was a pivotal year in the housing market. In 2009 these numbers began to change dramatically.
Between 2009 and 2011 there have only been an average of 647,600 houses built, and every year since the number of homes built has declined. Each year, the Joint Center for Housing Studies at Harvard University issues a report on the state of he nation's housing. This year's report estimates we need between 1.18 million and 1.38 million housing units per year to meet the demand for new household development that will occur between now and 2020.
Using these numbers one can draw the conclusion: We will see a constrained inventory market in the immediate future. Couple this with the fact that housing is more affordable than it has ever been, and interest rates are at record lows, and the picture of an oncoming national shortage becomes much clearer.
Real estate professionals have been shocked by how quickly markets across the country have transitioned from excess inventory to having constrained inventory. The first markets to experience the housing crisis in 2007 and 2008 have been the first to experience the housing shortage in 2012. Markets in Florida, Arizona, Nevada and California are now experiencing constrained inventories. Year-over-year sales in the sub $100,000 price category has plummeted in these areas by as much as 40 percent.
No Fast Acting Solution
The severity of the housing crash is affecting the speed with which the home construction markets are responding to a housing shortage. Companies in the construction supply chain have downsized or disappeared in record numbers. Given the lead times in housing construction due to permitting, manufacture of supplies (drywall, lumber, etc.) and the availability of skilled labor, the speed with which the market can react to demand has slowed considerably.
If you are one of the millions of Americans that have been sitting on the fence waiting for the ideal time to purchase a property, this may be the time to seriously consider making your move. This is true of individual homebuyers, but it is also true of real estate investors as well. In 2010 investors represented 17 percent of the housing market; in 2011 they represented 27 percent, and all indications are that we are in the midst of another major investor purchase increase in 2012. 34 percent of all homes purchase today are purchased all-cash.
For investors, housing today represents an investment class that outperforms every other class of investment in both cash returns and, for the past year, in appreciation of equity.
It may seem bold to be presenting a housing shortage in the middle of what many consider a housing crash; however, the numbers, market conditions and major market inventories are starting to make this startling prediction real.