Housing's Headwinds: Demographics, Rising Rates, Peak Oil and Oversupply (July 23, 2008)
Astute reader Dan K. recently filed this thought-provoking report on housing's many headwinds:
I keep think about the following scenario, and find it rather frightful. Yet, unless I am truly mistaken in some sense, it could well become an all too real scenario -- and one that does not get much discussion.Thank you, Dan, for the cogent analysis. I would add three additional headwinds:
1. massive oversupply of housing
2. the falling "residents per household" in the U.S. could reverse
3. the tidal wave of housing-mortgage-related lawsuits which is already threatening to swamp U.S. courts
Let's start by recalling that there are 18.6 million vacant homes in the U.S.--a staggeringly large number. Here is the Census report: CENSUS BUREAU REPORTS ON RESIDENTIAL VACANCIES AND HOMEOWNERSHIP
There were an estimated 129.4 million housing units in the United States in the first quarter 2008. Approximately 110.8 million housing units were occupied: 75.1 million by owners and 35.7 million by renters.There are a number of interesting facts presented here. Only 4.7 million of the vacant dwellings were "seasonal," i.e. second-homes/cabins; 14 million homes are available right now for occupancy.
A million new units sit empty, and only 20% are for sale. We can presume the builders/developers/lenders are hanging on to the other 800,000 empty new homes, hoping and praying that some miraculous turn-around in the housing market will enable them to sell a million vacant homes in the near future.
Even as the "downturn" worsens, over a million new dwellings will be constructed and added to the inventory this year. So let's just round up and say there are (or soon will be) 20 million vacant residences in the U.S.
With an average household size of about 2.5 people, we have room for 50 million more citizens without building a single additional home. If we subtract the 5 million vacation homes, that leaves 15 million vacant dwellings, and I think it is safe to say that is a massive oversupply of housing.
Household size has been dropping for 100 years: Census: U.S. household size shrinking Wealth, looser social restrictions contributing to trend, experts say. But as the "wealth effect" reverses, maybe that trend will reverse, too.
How many elderly and not-so-elderly people live alone in a big house? A lot. How many couples bounce around a big house, now that the offspring have left? Take the humongous national wealth reduction we are just starting to experience and add in 60 million retiring Baby Boomers, and what do you get?
It seems to me you get a lot of reasons for household size to increase. Kids move back home, creaky retirees open up the house for a live-in assistant, and unable-to-retire folks start renting out all those empty rooms for extra income. And if household size even edges up slightly, that will greatly reduce the number of dwellings the nation needs for actually housing people as opposed to investment/gambling schemes. An increase in household size would radically increase inventory of unwanted/unsold/unrented dwellings.
Last but not least, let's ponder the consequences of lawsuits: against the builders of shoddy/defective homes, against fraudulent lenders, predatory lenders, investment banks which packaged high-risk mortgages and sold then as low-risk "investments," and on and on.
When tottering builders are pushed into liquidation by lawsuits, their inventory (those 800,000 empty new homes) will not be allowed to sit around waiting for better times; they will be auctioned off and the proceeds given to the bondholders and lienholders. What happens to a shaky market when hundreds of thousands of houses get auctioned off, no-minimum bid? It drops.
What happens when insolvent lenders who have been hoarding and hiding hundreds of thousands of foreclosed/distressed properties are finally forced into liquidation? All those distressed properties get sold off, too. More inventory, more auctions, and prices which will be dropping to near-zero in many markets.
Just for fun, here was my 2006 prediction of housing's future, made back when the bubble was still expanding in many parts of the country:
I missed a few headwinds like rising interest rates and Peak Oil, but all in all we seem to be proceeding down the stairs in an orderly wealth-destroying fashion.
Housing will finally bottom when it's no longer seen as an investment vehicle. As long as anxious bottom-fishers are bidding on auctioned properties "because they're so cheap now," the bottom will remain elusive. Only when all hopes of quick profit from buying real estate have been completely extinguished can a bottom slowly form.
A number of readers emailed me this link, which is an organization dedicated to halting the insane bailout of bankers now before Congress: Fed Up USA.
The Shah of Plano also sent in this excellent explantion of just how insane the bailout is: Time to Get Political Folks…Massive Bailouts Front and Center
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