End of the Suckers Rally or a Healthy Correction?

[ERICOPOLY]

The latest new housing starts were less than 700k annualized. 

 

New household growth is forecast to be about 15 million over the next 10 years.  (1.5 million per year).

 

House construction will double on an annualized basis -- terrible news, eh?  ;)

 

I believe this is what Buffett is talking about when he says new household creation is going to eat up the oversupply soon.

 

http://www.hks.harvard.edu/news-events/news/press-releases/sonh-2010

 

Over the coming decade and once employment stages a convincing comeback, demographic forces should lift currently depressed levels of household growth and spur increased construction and sales. Bolstered by immigrants, the echo-boom generation is already larger than the baby boom generation, and the baby-bust generation (born 1966-1985) is nearly as large. If immigration matches the pace projected by the Census Bureau and headship rates by age and race hold steady, household growth should come close to 15 million from 2010 to 2020. Even if it falls to half the projected pace, household growth should equal the 12.5 million growth from 1995-2005.

 

[Hoodlum]

One thing to keep in mind about home building is that the continuous supply of foreclosed homes will continue coming on the market for many years yet.  The banks are holding back much of this inventory as they don't want to flood the market.

 

There are also some general trends is house purchasing as mentioned by the NAHB that will influence this as well.  Many of these are new longer term trends.

 

http://www.nahb.org/news_details.aspx?newsID=10898

 

June 14, 2010 - The size of new single-family homes completed declined last year, dropping to a nationwide average of 2,438 square feet, according to detailed information about the characteristics of new homes completed in 2009 that was released recently by the Census Bureau.

 

After increasing continually for nearly three decades, the average size of single-family homes completed in the United States peaked at 2,521 square feet in 2007. It was essentially flat in 2008, then dropped in 2009, so that new single-family homes were almost 100 square feet smaller in 2009 than in 2007.

 

“We also saw a decline in the size of new homes when the economy lapsed into recession in the early 1980s,” said NAHB Chief Economist David Crowe. “The decline of the early 1980s turned out to be temporary, but this time the decline is related to phenomena such as an increased share of first-time home buyers, a desire to keep energy costs down, smaller amounts of equity in existing homes to roll into the next home, tighter credit standards and less focus on the investment component of buying a home. Many of these tendencies are likely to persist and continue affecting the new home market for an extended period.”

 

 

[ERICOPOLY]

One thing to keep in mind about home building is that the continuous supply of foreclosed homes will continue coming on the market for many years yet.  The banks are holding back much of this inventory as they don't want to flood the market.

 

There are also some general trends is house purchasing as mentioned by the NAHB that will influence this as well.  Many of these are new longer term trends.

 

A few things:

1)  the demographic trends I spoke of did not include the natural decay of existing housing stock (disrepair/ teardowns/ fire, etc...)

2)  some of the bank inventory is due to people who lost their jobs

3)  some people moved back in with their parents -- in other words, new household formation is currently depressed

 

Previously I mentioned only the demographic growth, but it's not the only thing that will eat into that housing backlog that the banks own.

 

Perhaps the most effective way to measure where we're at would be to do the following:

1)  count the absolute growth in the housing supply vs the normalized trend household formation over the past 10 yrs.

2)  take that number and weigh it against future normalized trend household formation less current pace of home building.  This will tell you how long it takes to get back to "normal".  Of course, "normal" needs a normal job market in order to get those homes filled.

 

 

[Myth465]

Here is Gary Shilling's view concerning housing.

 

http://www.gurufocus.com/news.php?id=97720

[Smazz]

I like this guy (Shilling) - he doenst try to get too technical - hes a big picture person.

 

FWIW, I am all in cash right now - just got out of an ARB position I was in to make a quick $ but almost got kicked in the nuts with this latest downturn.