Defending our optimism
Since our client webinar last January, we have been defending our realism, which was viewed as optimism by most of our clients, whether they are builders, developers, product manufacturers, private equity investors or public markets investors.
We called for home prices to fall slightly (we projected a 3% decline in the Standard & Poor's/Case-Shiller in our March 11 U.S. Housing Analysis and Forecast report), a tough three years selling homes, and a construction recovery that is exactly the time for patient money (five-year to 10-year money) to invest wisely. Most money is not that patient, so the challenge for each of our clients continues to be when to increase their investments.
One year later, despite almost every statistic showing that housing has been bouncing along the bottom since mid-year, even Shibani Joshi of Fox Business News, a former Morgan Stanley real estate analyst, is calling us optimistic.
I hardly view our outlook as optimistic, but I guess when consensus is negative, projected stabilization and a modest recovery is considered optimistic. See last week's interview HERE.
Interviews never go as planned, and I still have to figure out how not to have a stone face while staring into a blank camera with a delayed audio feed in one ear, so here are the notes I provided to the producer beforehand. I hope they help you make the right decisions for your business in 2012, and I hope we are right!
The housing market has returned to being a very local business.
Prices are still falling in the highest-priced neighborhoods where listings are still at 2004 levels or higher, but prices have generally stabilized where investor activity is high or renters can become homeowners without increasing their monthly payment, which is in many neighborhoods.
New home construction bottomed in 2011 and we believe it will grow 21% in 2012, which will still make it the fourth-lowest year on record.
Apartment construction bottomed in 2009 and we believe it will grow 30% in 2012 and even faster thereafter as renters are in for a steady dose of rent hikes the next few years.
There are four hurdles facing housing: the economy, excess vacancy, distressed home sales and mortgage availability.
- Economy — This goes without saying, but the economy has to grow for housing to recover and our view is that it grows slowly, with a lot of volatility, due to the excess leverage worldwide.
- Vacancy — Construction won't return to normal until the excess vacancy clears. We have already reduced excess vacancy from 3.2 million to 2.4 million and we are on pace to clear it all out in some markets in 2012, but in most markets in 2014. The faster the economy grows, the faster the vacancy clears out.
- Distressed home sales — This is the real wild card and where government policy can make a huge difference. Lawsuits, understaffing and government intervention have kept many foreclosures stuck inside the loan servicing system. If they allow them to come out quickly, housing will take a huge nose dive and everything I said earlier about housing bottoming will be wrong. I don't think this is the most likely scenario.
- Mortgage availability — I am betting on continued aggressive credit being provided by FHA and the GSEs that will become slightly more expensive as FHA and the GSEs increase fees, which they should. I am also betting that we will get some more underwriting clarity, which will make it easier to get a mortgage. Right now, the banks don't know what the putback risk and risk retention rules are, so they are lending more conservatively than they would otherwise.
The National Association of Realtors revision is big news to national firms that make investment and policy decisions based on the data, which they use because it is free. Local real estate executives have been relying on their local MLS and therefore using the correct data the whole time. We have been reporting this misstatement to our clients since 2007 because we buy the correct data locally.
The most-recent Case-Shiller home price index is for October data, but it is really only telling us what was going on in the housing market in July. Again, this is a big deal to national players who don't do their homework, but it is old news to those who work in the industry full time.
We purchase and study a dizzying array of proprietary home price metrics, some of which have very comprehensive sample sizes and others of which are far more timely but have smaller sample sizes. We built our own price measure to summarize it all, and it has been showing that the typical American home is declining in value at an annual rate of about 0.2% per month, which isn't very much.
If I had to wager on three things going up in the next five to 10 years, it would be home prices, mortgage rates, and rental rates. Things could get more affordable next year, but if you are a qualified, prospective homebuyer sitting on the fence waiting for affordability to get even better, at some point you are going to get burned. I would buy now.