by Jean Sealey
Northeast Florida Builders Association
Much has been made in the media of the housing bubble, which when it breaks, will mean collapse of home prices.
“I hear people talking about the housing bubble a lot these days,” said Bryan Lendry, president of the Northeast Florida Builders Association. “There are a lot of misconceptions circulating, and it’s hard to know what to believe.
“The National Association of Home Builders has prepared a package of materials to address some of these issues, and the facts are very reassuring. We’ve always maintained that our local market is strong, particularly because we’ve experienced steady growth over a number of years, rather than the spikes that are showing up in a few markets across the country.”
The Northeast Florida Builders Association has assimilated some of the some facts from the NAHB information about the housing market and presents them here for you to consider when evaluating reports on the industry.
Size and scope of the market
• The U.S. housing market consists of 107 million occupied units, including 74 million owner-occupied homes and 33 million rental units.
• The total value of the nation’s housing stock exceeds $17 trillion.
• Equity – the value of a home minus any debt – now exceeds $10 trillion in the United States.
• More than 69 percent of all U.S. households own their home – the highest homeownership rate ever.
• In 2005, more than seven million single-family homes will be sold, including nearly six million sales in the existing housing market and about 1.2 million in the new housing market.
• The “churn rate” of about six million per year is considerably lower than the turnover rate in stocks and bonds because – as one might suspect – housing is first and foremost a place to live. Although significant, its value as an investment is still secondary for the vast majority of American homeowners.
• Housing has led the nation’s economic expansion for more than three years. The industry recorded back-to-back, record-breaking performances for new single-family housing construction and home sales in 2003 and 2004, and is on pace to set new records in 2005.
• The production of housing and the value of housing services produced by the housing stock account for more than 16 percent of the nation’s Gross Domestic Product.
• The most recent national statistics show that the fundamentals of the housing market are sound. New homes and apartment units are being started at an annual rate of about 1.9 million. Combined with about 140,000 manufactured homes, that’s roughly the level required to meet the underlying demand for new housing. Sales of both new and existing homes are running at a healthy pace in virtually every region of the country. Unsold inventories of new homes are lean. And rates on 30-year, fixed-rate mortgages are still well below 6 percent.
Housing markets are local
• All markets march to the beat of their own drummer as determined by a unique mix of demand and supply pressures.
• Housing appreciation rates will vary significantly from one market to the next — and even within a single market – depending on demand, supply constraints, topography, consumer preferences and other factors.
• Because of the unique local nature of individual housing markets, any nationwide decline in home values is very remote, a point that Federal Reserve Board Chairman Alan Greenspan has repeatedly made in recent months when questioned about the possibility of a housing bubble.
• A few super-hot markets will cool in the near future, with values leveling off or even declining a bit. But even in markets where values might stagnate or decline somewhat, the vast majority of home owners will escape unfazed because values increase over time, and most home owners are in the market for the long term – not a short-term gain.
Market booms are seldom followed by busts
• According to a study released in May by the Federal Deposit Insurance Corporation (FDIC), most local market price booms in the past were followed by periods of price slowdowns or stagnation that allowed other economic fundamentals – including household income and housing supply – to catch up.
• Furthermore, the limited number of FDIC documented price busts occurred in markets where the local economy was under considerable stress and job losses were heavy, along the lines of what happened in Houston and other oil patch markets when the price of oil collapsed in the mid-1980s.
• Virtually all local economies are now moving ahead, and the national economy’s forward momentum is likely to continue for years.
Super-hot markets are concentrated
• According to the Office of Federal Housing Enterprise Oversight (OFHEO), well over half of the more than 375 metropolitan markets around the country experienced housing appreciation rates under 10 percent from the first quarter of 2004 through the first quarter of 2005.
• The super-hot housing markets reporting appreciation rates of more than 20 percent are concentrated in the fast growing markets of California, Florida, Nevada, Arizona and the Northeast Corridor. Out of the markets reporting appreciation increases of more than 20 percent from the first quarter of 2004 to the first quarter of 2005, 25 were located in California, 12 were in Florida, five were in the Washington-Maryland-Virginia area, and Nevada and Arizona had three each.
• The fundamental point to remember is that speculation about a housing bubble is not really relevant to the vast majority of the nation’s 74 million home-owning households because their markets are not experiencing super-hot appreciation rates.
Demand drives the market
• Today’s housing market is not overbuilt, and inventories of unsold homes are remarkably lean despite record levels of production. Supplies are especially tight in markets where growth restrictions have limited new construction.
• Population and household growth are driving today’s market. For the next 10 years, about two million new houses, apartment units and manufactured homes will be needed annually to meet the underlying demand for housing.
• During the decade ahead, new households will be formed at a rate of nearly 1.5 million per year, and more than a million immigrants will reach the shores of America annually. Overall, the population is expected to grow by close to 30 million.
Speculation reports inflated
• Reports about the impact of speculation and excessive investor activity in the new-home market – while worth taking seriously – tend to be overblown, according to a series of surveys of home builders conducted by NAHB over the past three months.
• An April survey among 12 large home-building companies found that 93 percent of their single-family home sales during the previous six months were for primary residences, 4 percent were for vacation homes and 3 percent were for investment. Ten percent of their condo sales in new multifamily buildings were for investment during that period.
• A separate survey of builders of all sizes located in 30 hot metro markets found an 11 percent share of investors in single-family sales and a 15 percent share in condominiums.
• A more recent national survey of more than 500 home builders conducted by NAHB in June showed that investors purchased only 4 percent of single-family homes sold in the first half of this year, compared with 13 percent of new multifamily condo units sold during the same period.
• Even more importantly, the NAHB survey also found that all of the large builders and 89 percent of the builders in the hot markets are taking steps to reduce sales of new homes to investors.
• 82 percent said they are only selling to buyers for owner occupancy.
• A majority of the builders polled are not allowing buyers to sell the home before closing or allowing the buyer to sell the home during the first year after it has been purchased.
• Builders don’t welcome the prospect of having to compete with investors, and they don’t like to see investor-owned units standing empty in new communities they are developing.
• The NAHB surveys found that the industry also is pursuing a variety of other approaches to keep speculation from getting out of hand.
Apples and oranges
• Comparing real estate sales to selling stocks and bonds is like comparing apples and oranges.
• Stocks are bought and sold in a matter of seconds over the Internet; but real estate purchases take a considerable amount of time and involve significant transaction costs. Stocks can be bought and sold on impulse; buying or selling real estate takes time and requires a considerable amount of time and mental and physical energy to pack up a household, pull the kids out of school and then start all over in a new neighborhood.
• Any comparison between the dot.com bubble and housing is simply irresponsible.
Supply constraints
• The demographics of housing remain quite strong. The population is growing, and new households are being formed at a healthy clip. The desire to own a home has never been higher, particularly among minority households and recent immigrants who are assimilating into American culture very quickly. Although housing demand can be temporarily postponed during bad economic times, it cannot be bottled up indefinitely without serious social and economic consequences.
• At the same time, supply constraints – fees, no-growth and restrictive land use policies in particular – are slowing production and pushing up the cost of housing generally. This is a major problem in the high growth markets.
• The cost of building housing – everything from land, development fees and taxes to the cost of building materials and labor – continues to increase year after year.
To make a persuasive argument about an approaching collapse in home prices, one has to make an equally convincing argument that the actual cost of building the same home will decline in the years ahead. That’s very unlikely to happen short of a major and prolonged economic recession.