For the past few years, homes have been the most affordable on record. Low rates and low prices make a wonderful combination. However, this wonder combination may soon be coming to an end. Why do we say this? For one, new home sales are the lowest they have been since the government started keeping records in 1963. While that sounds like bad news, the inventory of new homes for sale is not going up. This inventory is actually one-third of what it was just five years ago. This commentary just appeared in Fortune: “I’m a dirt-road economist who sees what’s happening on the ground, and in 35 years I’ve never seen a shortage of new construction like the one I’m seeing today,” declares Mike Castleman, CEO of Metrostudy. “The talking heads who are down on real estate will hate to hear this, but America needs to build a lot more houses.” Bottom line, we are not building fast enough to accommodate future demand. Even the ominous shadow inventory which has hung over the market is now shrinking. There were 2.0 million units in various stages of “pre-foreclosure” one year ago and 1.8 million units today, according to CoreLogic. This may not seem a huge drop, however, it is the first move downward in several years.
What makes us think that the demand will arise to continue to shrink the shadow inventory? The population of America is rising. We had shrinkage of household formulation during the recession and this masked the continuing rise in population. Tight credit conditions also turned many potential homeowners into renters, though many are renting houses. However, the news that the economy has now produced 400,000 jobs in the past two months is the continuance of a reversal of this trend. As America goes back to work, household formulation will rise again and there will be significant latent demand uncovered. We understand that two months of data does not guarantee the whole trend reverses itself. We lost about eight million jobs during the recession and the workforce grows by 150,000 monthly. So we have a long way to go, but the trend is moving in the right direction. The key is moving from a vicious to a virtuous cycle. More jobs create demand. Demand creates more jobs. And all this will help loosen credit conditions as a stronger economy will help convince banks to have faith in the average American again. You may be hearing the “bad news” regarding home prices right now–but this is a story that may be changing faster than many analysts have envisioned. Even the Federal Reserve Board is taking notice as a member stated this week that the Fed may be raising rates by the end of this year.