2013 Housing Outlook: What if the Consensus Is Wrong?
For this outlook piece, let's not just assume that the consensus is wrong, but let's go against the anti-consensus consensus. Double secret contrarian, if you will.
Particularly in San Francisco, the rental market is painfully constrained and rents are through the roof. For many this means doubling up with friends, picking a cheaper neighborhood, or abandoning the city altogether. For others, high rents make buying a more attractive financial option.
Of course, buyers still have to qualify for a mortgage and come up with down payment money, but with a brisk job market and a tech industry that is stubbornly proving naysayers wrong, for many buying truly does make more economic sense than renting. And as we discuss later in number 8, even those pesky mortgage lenders are doing their part to help out the housing market.
3. Demand Outweighs Supply... by a Lot
Analysts often cite limited inventory as one of the key factors pushing up home prices. But this is only half the story.
Back in early 2009 when the housing market was at its bleakest, inventory was at record lows, just like it is today. The problem of course, was that no one was buying. Now that buying demand is strong, any home that comes on the market with even a reasonable asking price is snatched up — probably with multiple offers.
Expect sellers to step into the market this year to take advantage of strong buying demand, but so long as household formation (more in number 4) and mobility (more in number 5) continue to improve, demand will outpace supply and prices will rise more than most people think.
4. Household Formation Back on Track
It was well-documented that during the so-called Great Recession household formation all but stopped. Kids moved back home, friends more aggressively shared apartments, and couples put off starting families until their economic prospects improved. This put a massive crimp in traditional housing demand, since young people generate most new buying demand.
But about a year ago, this trend quietly reversed and has been gaining steadily over the past 12 months. People can react to changing economic conditions faster than builders can break ground on new homes, and many economists expect household formation-related demand to outstrip new additions to inventory for the foreseeable future (see below number 7 on the prospects for homebuilders).
5. Mobility Is Back
As my firm has written in the past, rising uncertainty curbs risk appetites. And for most people, there isn’t a bigger risk than picking the family up and moving across the country. For some, even moving across town is a decision wrought with hand-wringing. So when home prices collapsed in 2008, the idea of moving became that much more daunting. Not to mention, when your house is underwater, moving is all but impossible.
As a result, mobility — the measurement of how frequently Americans move — dropped off a cliff. Historically, increased mobility has been tied to economic expansion, since the better people feel about their economic prospects, the more likely they are to risk moving for a new job or new opportunities.
In 2011 (the most recent census data), the highest number of Americans moved to a different county than before the Great Recession. Mobility has been notably absent from our nascent economic recovery, and since all signs indicate that this trend continued in 2012, the data point to a shift towards more optimistic economic sentiment. This bodes well for just about all aspects of the economy, particularly housing.
6. Homebuilders on the Rise?
The stock market is a forward-looking pricing mechanism. Markets move based on expectations about future results, not what happened in the past. And if you listen to the markets, housing is looking up in 2013.
In the past 12 months, home building stocks have been on a tear:
PulteGroup (NYSE:PHM): +159.6%
KB Home (NYSE:KBH): +78.1%
Toll Brothers (NYSE:TOL): +57.9%
DR Horton (NYSE:DHI): +53.3%
In other words, investors are betting that homebuilders have a bright future. And homebuilders are putting their money where their mouth is. Single family housing starts are up 24% since last year, and while last year happened to be the lowest on record, remember we are looking ahead, not behind. In fact, December 2012’s seasonally adjusted new construction rate was the highest in the past 50 months.
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