Housing Shortage Looms

In this article

Last week’s new home sales data for January produced a new seasonal adjusted annual rate (SAAR) at a record low of 309,000 units.  This is a big drop from December’s 348,000 sales (SAAR).  Although builders’ confidence is improving, the numbers have yet to show a turnaround in new construction.  While this is accelerating the natural inventory contraction process, something else might be on the horizon; a housing shortage.

While a housing shortage seems like the last thing that could occur based on the foreclosure waves experienced in the last year and the coming peak of 2.4million foreclosures in 2010, foreclosures don’t impact the number of housing units in circulation.  In theory, people simply rent a home or lease purchase home after having their home foreclosed.   So keeping in mind the foreclosures don’t impact the total number of housing units, what about population growth?

Population growth currently requires roughly 1.5million new homes per year according to Brian Wesbury, Chief Economist of First Trust Advisors in an interview with Steve Forbes.  “And if you throw in, you know, fires and tear-downs and just worn-out properties, we need 1.6million or more per year,” Westbury commented.  “The housing starts are between 500,000-600,000. We’re starting one-third of the homes we need just to keep up with population growth.”  Wesbury also told Forbes he thinks real estate is one of the secret investments over the next decade in the interview.

According to Stephen Roseman, a portfolio manager at Thesis Fund Management, the likelihood of a housing shortage is slim to none.  “You need to have an accurate housing turnover number, and right now we have anything but that,” says Roseman.

The turnover rate is the percentage of existing homes which are reselling each year.   This number peaked at 9.5% of all existing homes in 2005 and has now fallen to just above 6%.  The high number of homes turning over during the boom was fueled by home flippers, baby-boomers moving up, and people viewing their primary homes as an investment.

Even if there is housing shortage on the horizon that doesn’t mean prices will rebound anytime soon.  The 2.4million foreclosures coming in 2010 means mostly distressed homes will be hitting the market.  Many owner occupants avoid these transactions, instead holding out for the new home to be built which requires little-to-no work.  Also the 203k renovation loans are more complicated and buyers often can’t visualize the finished product post improvements.   Investors will be buying these foreclosures en mass but desire low prices.  It suddenly becomes possible for a housing shortage to exist with depressed, and even declining values in some markets.

In the meantime, prices are actually increasing nationally, even if only slightly.

I wouldn’t expect this to continue, but rather a choppy up and down 2010 in home prices while the market finds stability.  And foreclosures are expected to peak at the end of 2010 and start declining thereafter.  My prediction;  inventories contract slightly in 2010 moving from a 6-7 month inventory to a 5-6 month inventory by the end of the year.   Prices will remain flat or slightly higher (1-2%) over 2009. The market will be well into the stabilization process by the end of the year.  Although builders want to build they won’t be able to get the money to do so.  The pendulum will start shift the other direction by spring 2011 as foreclosures slow and loan modification programs will be in full swing.  A couple weeks ago I covered an economist that believes a turnaround will be in effect by 2014.  The looming housing shortage likely won’t significantly impact housing prices until then. When it does you’ll wish you’d built a portfolio of investment homes.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.