Lead Story…. It seems like nearly everyone in the real estate industry likes to use the baseball analogy to describe the real estate cycle. There’s a little known rule that every home builder/developer conference has to have a panel where participants are asked what inning the current cycle is in by a moderator. I suppose that this was considered either novel or informative at some point but today it’s neither. The problem is that it’s difficult to classify real estate, especially real estate development in such broad and generalized terms. Whenever I’m asked such a question, I answer the same way: what asset class and what market? Another important clarification is the time frame of the recovery that began the cycle in question. Most people consider our current cycle to have begun in June of 2009 which was when the National Bureau of Economic Research (NBER) marked the end of the last recession. However, when it comes to home building and by extension the economy as a whole, it’s not that simple as Bloomberg’s Conor Sen wrote this week (emphasis mine):
The National Bureau of Economic Research marked the end of the last recession at June 2009. Similarly, the stock market hit bottom in the first half of 2009. The four-week moving average of initial jobless claims peaked in April that year. And the unemployment rate peaked in October. All of these suggest a broad-based trough at some point during 2009, making the economic expansion at least seven years old by now.
But given the severity of the financial crisis and the shock to the economy, the beginning of the recovery was not like moving from recession to expansion. It was more like moving from depression to recession. Rather than a normal business cycle in which four steps forward are followed by two steps back, the Great Recession was more like five steps back. Should the ensuing first two or three steps count as part of the next expansion, or something else?
The growth in the early part of this recovery was abnormal. Part of it was caused by government fiscal stimulus, which proved to be inadequate and was then followed by federal, state and local austerity. Part of it was caused by a “dead cat bounce,” as output fell so hard, below consumption in industries like the auto sector, that a certain amount of recovery was inevitable as producers had to increase output merely to match consumption. And then some part of the recovery was caused by the energy sector and the boom in fracking, a localized boom that eventually went bust.
So what went missing in those first few years of “recovery”? The answer is home building which is the reason that I think much of the current cycle’s math is a bit off. More from Sen (emphasis mine):
The missing piece was housing, the bread and butter of the American economy. The Housing Market Index from the National Association of Home Builders didn’t begin to increase from depressed levels until October 2011. Similarly, single-family-building permits didn’t begin to increase from depressed levels until 2011. It’s here, in late 2011, that I would claim the current expansion began, making it barely five years old, quite young in the context of a downturn that lasted four or five years rather than just two.
Ultimately, housing is the driver of the U.S. economy, which is why any understanding of the recovery of the economy must factor in the recovery of housing. Single-family-building permits peaked in the second half of 2005. Subprime mortgage originators started going bankrupt in 2007, the same time that housing prices started falling significantly. Outside of globally attractive real estate markets like San Francisco, New York and Miami, housing prices and activity continued to fall well into 2011.
The early years of the housing recovery, from 2010 to 2012, were more driven by investors and institutions buying foreclosures and investment properties with cash than by owner-occupiers coming back to the market. In the past few years, housing demand has been soaking up inventory created during the bubble years and pushing home prices back toward their mid-2000s levels. First-time home-buying remains below normal.
Only now are we seeing tertiary markets like exurban areas start to expand again, and construction remains below the level of household formation. One of the metro areas that was a poster child of the housing bubble, the Riverside-San Bernardino metro area in Southern California, is still building 80 percent fewer single family homes than it was at the peak of the last cycle.
That last highlighted section is something that I’ve written about frequently. Although LA, Orange County and San Diego get a lot of attention for their great weather, beautiful beaches and affluent communities, it’s actually the Inland Empire that is the engine of growth in Southern California. Especially when it comes to creating new housing for first time buyers and blue-collar workers that can’t afford to live closer to the coast. That this region is still building 80% fewer markets than it was at the peak of the last cycle is nothing short of shocking. IMHO, it can’t be classified as much of a recovery at all. As Sen points out in his article, every economic sector doesn’t necessarily recover in unison. Just because tech has boomed or energy has boomed then busted doesn’t mean that other sectors are doing the same. When it comes to a traditional growth sector like housing, this can have a massive impact on a regional (or even national) economy. For some traditional growth markets like the Inland Empire, perhaps the appropriate question isn’t what inning of the cycle we are in but rather when the recovery will actually begin in the first place.
Even Keeled: Calculated Risk’s Bill McBride is still not on recession watch.
Setting the Stage: The Fed didn’t raise rates at their November meeting but certainly indicated that they are open to doing so in December. See Also: The Fed’s latest statement indicates that they are not going to target inflation rates above 2%.
Going Strong: Chinese investment in US commercial real estate is still on the rise.
Put a Lid on It: Low FHA limits are killing home building in California’s secondary markets.
Imagine That: San Francisco home sales surged in September thanks to a large supply of newly-completed condos.
The Oracle of Home Building? Berkshire Hathaway just purchased the largest home builder in Kansas City. It’s the just the latest purchase for Warren Buffett who has been buying up builders in the south and Midwest.
Ain’t No Free Lunch (Or Shipping): Why the free shipping that you love so much from online retailers is mostly a lie.
Shocker: This years Black Friday deals will probably be exactly the same as last year’s Black Friday deals.
Subprime Redux: Rising automobile repossessions show the dark side of the car buying boom.
SMH: The University of California at Irvine, which is in Landmark’s back yard wants to be the Duke basketball of online gaming (aka video games). Ok, fine but can they please stop calling it a “sport”?
Chart of the Day
Hero: A woman sustained burns after causing a fire by farting during a surgery, igniting a laser. Pain is temporary but glory lasts forever. See Also: Ten people who were arrested for farting.
Guaranteed Contract: Former NBA star and certified crazy person Gilbert Arenas just received the final check from the $111MM contract that he signed in 2008. If you’re not familiar with Arenas, he once got into a locker room altercation with a teammate that involved a firearm and hadn’t played in the NBA in nearly 5 years. Great investment. (h/t Tom Farrell)
That’s Going to Leave a Mark: A drunk 28-year old Florida man fell out of his pickup truck on the way home from a strip club and immediately ran his leg over before it crashed into a house. He’s apparently still at large.
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