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Sunday, September 19, 2010

More Bullish Signs for Housing

As the U.S. recovery churns into its second year, more bullish arguments for housing are beginning to emerge.

Talk and writings about real estate has finally shifted lately. It looks as if our contrarian view of the housing market is finally beginning to gain traction.

For instance, Credit Suisse analysts say the worst is behind us and that fear of another hit on the housing market is just an overreaction. The bank experts point to U.S. government support of 70% of home mortgages that will likely keep prices from the drops seen in 2007 and 2008. Last week Brett Arends of the Wall Street Journal listed 10 reasons to buy a home. He strongly counters the recent Time Magazine cover story that questions the pros of homeownership. But perhaps the strongest voice comes from Bill Wheaton of Massachusetts Institute of Technology's Center for Real Estate. Wheaton believes the housing market is poised to make a strong comeback. His research points to "a sleeping giant that is about to wake up."

Wheaton modelling shows that much of the excess home inventory will either be sold, occupied or otherwise absorbed by 2013. Furthermore from 2011 onward, buying demand will return to pre-recession levels. Even more encouraging is that he shows that the recovery of home construction could boost overall GDP to levels unseen during recoveries after other previous recessions -- the the exception being that of the massive building that happened right after World War II.

His paper illustrates that, "housing construction will not only rise, but it will stay high for a while, which didn't happen in previous recoveries." Wheaton continues, "It won't just be a one or two year blip."

The heart of the Wheaton argument lies in the rate of residential construction today. It's been historically low – so low that demand is now actually significantly overtaking the level of building going on. This demand-side factor alone sets the stage for a relatively large comeback in residential rebound.

As we've noted here on several occasions, housing drew us into the large slump and it is likely that housing will provide significant bounce to lead us out on the positive side.

Housing construction could hugely drive America's economic growth over the next few years, Wheaton says. Residential investment as a share of GDP is relatively small, averaging about 3% to 4%. But given that there's so little building going on today, it's plausible housing construction could add an average of 0.7% to GDP growth per year over five years – a level far greater than what has been seen during recoveries of previous downturns.

Of course many see Wheaton (and others listed above) as way too bullish given what the majority of "experts" are saying about the housing rut.

But remember when it comes to economics, the majority is always wrong.


  1. The Wheaton paper was published 9 months ago. He may turn out to be right insofar as he advances his dates by 1 year. Stopped clock and all that. Residential investment will be negative in Q3 and cumulatively negative for the 4 quarters since the data in the paper.

  2. Marmico,

    General trends like Wheaton's are almost never exact with respect to dates.

    In fact his point becomes stronger the longer construction remains suppressed. As demand continues to grow, the upside effect will be greater the longer home building stays dormant

  3. Why did you post a 9 month old paper, Eldon?

    Just for some intellectual rigour and your edification:

    1. Housing starts this morning are 600k SAAR.

    2. Housing starts for 2010 will be 600k, not 700k.

    3. Wheaton's "excess" inventory was 1.147 million as of 2010Q2.

    4. Only 400k in household formation since Wheaton's paper was published.

    Okay, let's advance Wheaton's Figure 1 chart by 1 year. Maybe he is right, maybe he is not. I would take the under. The reason. His opening assumptions are poorly constructed.

    5. 2006Q1 inventory as a baseline is not justifiable. You need to look at trends not a specific date. The trend inventory was 20% less than his opening inventory.

    6. Although housing starts may be a proxy for residential investment's contributions to GDP, the actual BEA numbers are from construction put in place. As of 2010Q2 improvements are a higher percentage of GDP than new housing. So the relationship of starts to the residential component of GDP is not linear.

    But remember when it comes to economics, the majority is always wrong. Whatever. Bill Wheaton is one of your heroic minorities, I suppose. His 4 year forecast is off to a rocky start. I'll take the under on the next 3 years. You can place his pink circle on the zero line and his black square on the +10% line for 2010 and look forward to 2011 for the visage of the sleeping giant. Stopped clock and all that.

  4. Aren't housing markets at about a year based on August's buying levels? Wouldn't this mean that excess housing would be absorbed by 2011 instead of 2013?

    I'm not really sure about the housing market returning to pre-recession levels though. Many of the houses were bought on speculation.

    Even given this fact, houses still need to be made since the recession has caused a decreased amount of houses being built since noone was buying them. I expect the housing market to return to a stable build vs demand in 2011.

    I have to say that you were right over a year ago. I think I recall one of your articles stating that the recession was going to be finished by May 2009 or June. The body that announces recessions called it June 2009.

  5. Best leading indicator for the new home market is lumber prices according to McClellan Financials. Since lumber prices seem to have resumed the uptrend we can expect higher new home starts for a year or so.


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