NEWPORT BEACH, CA—Post-housing crisis, the residential market needed to return to a “healthy” inventory level to aid the recovery, but the recovery is still hobbling along, Landmark Capital Advisors’ managing director Adam Deermount tells GlobeSt.com. This is evidence that what happens in the present may appear positive or negative at the time but the true impact cannot and will not be known until time passes, he says. We spoke exclusively with Deermount about the housing stock and how perceptions have changed regarding the sector’s health.
GlobeSt.com: What have you noticed about the low volume of home starts and the housing stock over time?
Deermount: During the housing crisis, existing housing inventory ballooned to 12 months of supply, causing new-home development and construction to grind to a virtual halt. In the years that followed, new-home starts remained low as distressed existing homes were gradually bought up, taking inventory off the market. This altered the ratio of new to existing home sales that had been in place since the ’90s, forming what Bill McBride of Calculated Risk coined the “Distressing Gap.” New home sales have stayed at a depressed level ever since, recovering only modestly.
GlobeSt.com: How has the industry’s perspective on this changed?
Deermount: The initial marketplace response was that this was both a good and necessary trend since the market had to get back to the point where inventory was at a “healthy” level in order to set the foundation for a sustainable housing recovery. Well, the reduction in inventory happened. The healthy recovery, not so much.
To get some more historical perspective, let’s take a look at what has happened to new single-family home sales since the 1960s from Doug Short at Advisor Perspectives:
The level of new-home sales in that graph is troublesome enough as it is. However, the reality is worse since there were approximately 189 million people in the US in 1963 and approximately 301 million people in the US today. When you adjust for population, things look even worse:
Short says, “New single-family home sales are about 17% below the 1963 start of this data series. The population-adjusted version is 51.6% below the first 1963 sales and at a level similar to the lows we saw during the double-dip recession in the early 1980s, a time when 30-year mortgage rates peaked above 18%. Today’s 30-year rate is around 4%.”
The lack of new home starts (and, by necessity, sales) may have initially been seen as a positive since there was such a substantial amount of inventory overhang. The trouble is that Americans have continued to form households over that period and eventually the supply demand equation overcorrected. Multifamily starts have risen substantially, but are still a far cry from where they were in the ’70s and mid-’80s, when the population was much lower. On top of that, multifamily starts historically produce less employment than single-family starts. To make matters worse, multifamily starts during the recovery have been highly concentrated at the high end:
GlobeSt.com: So, what is the net result of this?
Deermount: The net result is that rents are soaring and home prices are way up, particularly in closed-access markets like coastal California where exclusionary zoning makes it extremely difficult to add new units. Residential investment can be expressed in two ways: 1) It goes into starts, which create new jobs, keep housing prices relatively stable and create economic growth; or 2) It goes to bid up existing assets, enriching landlords and homeowners while driving up real and imputed rents, creating a net drag on economicgrowth. We are solidly in the second column in California, and it’s not much of a stretch to see how this leads to the income/wealth inequality so widely decried as a detriment to economic growth.
GlobeSt.com: How do you see this situation playing out?
Deermount: Conventional wisdom says that secondary housing markets like the better-located portions of the Inland Empire should boom when the coast experiences good job growth, soaring housing prices and quickly rising rents. However, this time around it’s been strangely quiet as a combination of tight mortgage lending coupled with low FHA-conforming loan limits, families waiting longer to have children and a desire to live closer to employment areas keeps people clustered closer to the coast. The end result is a market defined by pressure: prices and rents continue to climb while creating few jobs through new development in traditional growth markets, perversely pressuring affordability and economic growth at the same time. It’s extremely difficult to get sustainable economic growth with new home sales below 1963 levels. Will 2016 be the year where sales (and for-sale starts) finally take off and pent-up demand gets us back to normal again? Or will home prices and rents continue to climb, choking off economic growth, eating into savings and eventually leading to a recession? We’ll see.