In a paper published by J.P. Morgan Asset Management titled “Housing: A time to buy”, the authors Dr. David Kelly and David Lebovitz 
make the case that the housing market is poised for a recovery.
You can read the entire paper by clicking here or read it now in PDF form here Housing: A time to buy.
It is well worthwhile to read and the graphs included paint a very dramatic picture of how things have changed over the past few years. Here are some of the main points made in the paper (my comments are in parenthesis):
- Since 1959 the lowest annualized rate of housing starts recorded for any month was 798,000 and the average was more than 1.5 million units. Since January 2009, the average number of housing starts has been just 575,000 units. (We are now recovering from the early 2000’s building binge and the foreclosure aftermath. The current inventory is being slowly reduced and when it finally is down to normal levels new homes will have had to anticipate well or we will be left with a housing shortage. This is likely.)
- From 2000 – 2009, the U.S. population grew by an average of 2.8 million people per year, with natural population growth contributing approximately 1.7 million people and immigration adding approximately 1.7 million people. On average 600 homes are started for every 1,000 person increase in the population. Given this ratio we should be seeing 1.4 million housing starts compared to the 572,000 that actually occurred.
- From their peak in late 2005, nationwide median existing single-family home prices have fallen by 29% in nominal terms and by 37% relative to inflation. (Single family home prices have actually increased by 1.4%)
- Since the first quarter of 2006, the value of home equity has fallen from $13.5 trillion to $6.2 trillion, a 54% decline.
- Across a wide range of measures, the United States housing market is at its cheapest level in decades.
- Housing prices as a percentage of personal income are about 27% below the average for the past 40 years. (Here we need to look toward the margins, not to the majority. It is the unemployed, underemployed and low net worth households who have been affected most during the housing bubble and those who most could use low interest rates cannot take advantage because of tight lending practices.)
- Low interest rates have caused a 40 year low in mortgage payment as a % of personal income per household. 6.9% compared to the average of 14.4%. (Again, it is not average to have a mortgage payment only account for 6.9% of income.)
- Since the late 1980’s monthly mortgage payments have averaged roughly 5% higher than renting the same home. From 2005 to 2007 the mortgage payment soared to nearly 50% more than comparable rent. It has now dropped and on average it is cheaper to buy than rent by 22%. (This does not hold true for most locations in Boulder County, see second point above)
- Traditionally, houses have sold for 1.55 times the cost of building the home. The ratio peaked in 2005 when homes were selling at nearly 2 times the cost to build. The ratio is currently at 1.26. (Think of the premium above replacement cost as a combination of land cost and equity for resale properties and profit for new construction. Since 2005, both land costs and equity has dropped since 2005. In fact only for a new home developer can land cost be separated.)
All of the reasons suggest that housing should be ready for a quick recovery but alas there are other factors delaying the recovery.
- High inventory of listed homes currently on the market. (Inventories in Boulder County are in check. As of October 31st inventories were down 13.7% from October 31, 2007)
- High number of shadow inventory. Shadow inventory are homes in various stages of the foreclosure process which are yet to come on the open market. (Again, not a big problem in Boulder County)
- In a recent poll, just 13% of Americans expected the price of their home to go up in the next year, and just 36% thought it would go up over the next five. A similar survey was done in 2006 and showed that 81% expected that the value of their homes would increase in the future. (Confidence in the market is a huge factor. Life changes happen despite the economy and life changes is what makes people want to move. There is pent up demand in the market just waiting for good news. Good news for most means that they can sell their home and feel good, not sell at a loss and lock in a great deal for 20 years. Too bad.)
The pieces of the puzzle are there and they point to a recovery. It is just taking longer than many of us had hoped. In the meantime take advantage of the anomalies in the market which are outlined above. Buying real estate is cheaper than renting and you can lock it in for 30 years.
