Housing Recovery Finds Foundation
This commentary originally appeared at 8:06 a.m. EST on Feb. 28 on Real Money Pro.
I would say the single-family homes are cheap now, too.... If I had a way of buying a couple hundred thousand single-family homes and had a way of managing -- the management is enormous, is really the problem because they're one by one; they're not like apartment houses -- I would load up on them, and I would take mortgages out at very, very low rates. But if anybody is thinking about buying a home, five years ago they couldn't buy them fast enough because they thought they were going to go up, and now they don't buy them because they think they're going to go down. And interest rates are far lower. It's a way, in effect, to short the dollar because you can take a 30-year mortgage, and if it turns out your interest rate is too high, next week you refinance lower. And if it turns out it's too low, the other guy's stuck with it for 30 years. So it's a very attractive asset class now.
-- Warren Buffett, CNBC's "Squawk Box"
I have been planning to discuss the brighter outlook for the U.S. housing market for several weeks. Warren Buffett's remarks (above) on "Squawk Box" have pushed me to expand on that optimistic scenario this morning.
Recent Housing Statistics Are ImprovingOn Monday, the government reported that pending home sales in January (which historically have foreshadowed actual existing-home sales) rose by 2% vs. expectations of +1% and a reading of -1.9% in December). On a year-over-year basis, pending homes sales were up 10.3%. (Regionally, the South and Northeast experienced growth in January, while the Midwest and West showed declines.) January existing-home sales (previously released) were at the highest level since May 2010, and yesterday's pending home sales suggest more growth ahead. Last week, January new-home sales came in at 321,000 -- expectations were 315,000 - for year-over-year growth of +3.5%. January's report was well above the August 2010 cyclical low of 278,000. Ironically, new-home sales are supply-constrained -- that is, the inventory of new homes stand at a record low of 151,000 units; the months' supply is near five months, which is the lowest level since 2006. By contrast, existing-home sales (unconstrained by low inventory and, thus, a better gauge of housing demand) are faring better than new-home sales. Year over year, new-home prices (pressured by burgeoning foreclosed properties) are down by nearly 9.5%, while other home prices are basically flat. It is my expectation that both new- and existing-home prices (which suffered price declines in 2008-2011) face a better year ahead in 2012 and over the balance of the decade.
A Lot of Runway LeftThough housing demand has improved, it is important to note that we are still at low selling levels relative to history and relative to demographics. (Household formations average over one million a year.) As an example, January new-home sales of 321,000 compare to a 30-year annual average of 714,000 per year and a mid-2005 peak of 1.4 million units. Existing-home sales are now at about 4.5 million units vs. a 5.5 million-per-year average over the last 12 years -- the series started in 1999 -- and a peak of 7.4 million homes in fourth quarter 2005.
The Foundation for a Sustained Housing Recovery Is in PlaceWhile the housing recovery of 2012-2020 will likely start out slowly (owing to the large inventory of unsold homes, still-restricted mortgage credit and the current preference for renting), there is evidence that residential real estate markets have already turned in a national market that has grown bifurcated. Areas of the country that are unencumbered by a large supply of foreclosed properties -- for instance, between Washington, D.C., and Boston, Mass. -- are doing better. Cancellation rates are down dramatically, and there is even some pricing power for the builders. By contrast, areas such as California, Arizona, Nevada and the like continue to suffer in price and in sluggish transaction activity as a result of the indigestion of the last cycle. In other words, the weaker regions are masking a developing national recovery in housing that has the potential to last throughout the balance of the decade. With a hat tip to Jim Paulsen at Wells Capital Management for providing some charts as evidence, here are the seven main reasons why I expect a durable recovery (in demand, activity/transactions and in prices) in the U.S. housing market: 1. Housing affordability is at a multi-decade high.
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