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:
Individually, each of these statistics indicates major a market transition. Collectively, they show unprecedented one-year movement in the housing market.
Consider History
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.
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.
Conclusion
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.
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Alex Charfen is the CEO of the Charfen Institute and the author of the CDPE and CIAS Designations and the AgentGPS Productivity System and the LEAD Experience for business owners and leaders. With over 41,000 members The Charfen Institute is the largest independent membership organization in the history of the real estate industry.
The Charfen Institute has been ranked one of the 500 Fastest Growing Companies in the US in both 2010 and 2011 by Inc Magazine and has been voted by its employees as one of the Best Places to work in Central Texas every year it has been eligible.
Alex is a regular contributor to CNBC and Fox News and is considered one of the foremost experts on the US Housing Market and Foreclosure Crisis. He lives in Austin Texas with his wife Cadey and daughters Reagan and Kennedy.
Follow Alex Charfen on Twitter: www.twitter.com/@alexcharfen
Anjali Kamat: Homeownership: An American Fantasy
real estate....Hold onto your money and let the bottom fall out of the housing market so that we can start all over....
I am really curious what Mr. Charfen thinks about that break even time frame?
Alex and I have had this discussion a couple of times and I think it's a very interesting one. On the one hand, inventory constraint as describe by Alex above is driving prices up. This is evidenced even today by the Case Shiller numbers that shows prices really going up to a point where people are asking, "Recovery?"
On the other hand, there is clearly a lot of foreclosures that will continue to hit the market. I agree with you that this isn't a "Shadow" inventory in the sinister form of the word (there's no bank conspiracy to hold back inventory). This is clearly going to drive prices down.
So, there are these two competing market forces and it isn't clear to me which one will win out. Alex has a lot of evidence backing up the fact that the housing shortage (at least in the short term of the next couple of years) is historic enough that it should be the predominant market force. I haven't necessarily agreed, but the more months that go by since he and I first started talking about this, the more evidence is mounting on his side.
Now that labor is in surplus globally, wages are not keeping pace with inflation. This completely changes the dynamic of "mild" (3%) inflation: as the purchasing power of earned income declines, servicing debt becomes more burdensome. Inflation only renders debt less burdensome if wages rise at the same rate as the cost of goods and services.
In a decade of "mild" inflation and stagnant wages, households will experience a very real-world 30+% decline in their income. Meanwhile, their debt payments remain unchanged.
"Mild" inflation in an era of stagnant earned income will crush households, forcing liquidation or renunciation of debt. What happens as debt service costs rise as a percentage of real net income? There is less cash for consumption, and so the consumer-dependent economy spirals down. Credit is poured into the banking sector, but little trickles down to high-debt, stagnant-income households. This is deleveraging writ large.
What happens when central bank financial repression--lowering the yield on cash to near-zero--causes pension plans to fail and savings to earn negative real returns? Households must save more income to compensate for the destruction of yield by Central Planners.
These mutually reinforcing dynamics feed the self-destruct sequence's inevitability. Add up the self-destructive forces: declining purchasing power, negative real returns on savings, rising debt based on newly issued phantom assets, and promises unbacked by real assets or based on declining national surpluses.
Often these articles totally disregard the fraud and the lack of regulations that created this market in the first place.
We have become a people divided, as if the millions of people that are losing a lifetime of assets and personal wealth and future pension fund earnings do not matter.
I cannot help but wonder about the accuracy of these figures considering that during the crisis the spin on the crime and culpability of Wall Street was continually swept under the rug.
In lieu of the LIBOR scandal, and Neil Barofsky's new book "Bailout", a more important question to the housing crisis is how will we restore integrity and transparency to the housing market? How will we fix the problem with the titles? Is it any wonder new families hesitate to move forward with purchases?
Do you believe that the home construction figures are inaccurate? If so what would be the point of falsifying such readily and publicly available data?
I do not believe that the home construction is inaccurately, just overly optimistic. I believe it is another ploy to convince the public at large that things are "bottoming out" and getting better, when as the referenced article in my last post clearly points out...there is a still a glut of unoccupied and foreclosed homes.
In order to get the previous securitized homes off the market, the institutes that "own" them must first destroy them because many of these foreclosed homes cannot be insured due to the break in the chain of title.
The above referenced article is a transcript from the latest meeting at PennyMac (PNMAC). following is a quote:
"The offering was met with both strong institutional retail demand and the underwriters green shoe option was fully exercise, we expect to use a portion of the capital assurance to purchase a $452 million pool of nonperforming loans. This purchase alone would make the third quarter 2012 the highest quarter for distress loans purchased since the first quarter of 2011 and we are actively pursuing additional distressed home loan pools."
"Nonperforming loans" usually families struggling to stay in homes. PennyMac anticipates the third quarter of 2012 to be the highest quarter since the 1st quarter of 2011....which seems contrary to the report that purchases are on the rise, unless those purchases are by institutional investors.