Five Reasons Why U.S. Real Estate Won’t Rebound Anytime Soon
Anyone calling for a bottom in the residential housing market should see a doctor.
Not a single statistic that I’ve come across suggests a rebound is imminent. On the contrary, in fact. All the data points to more pain and suffering (and prices declines) ahead.
Consider these five sobering statistics:
1. New Home Sales:
Some folks blame it on the weather, too much inventory, or seasonality. Whatever. I don’t care how you try to rationalize it… the fact remains that new home sales just hit a record low, dropping 16.9% in February to an annual rate of 250,000.
Bespoke Investment Group does a good job of putting that annual rate into perspective. It’s equivalent to one new home sold for every 1,246 Americans, compared to a long-term average of one new home sold for every 370 Americans. Clearly, we’re far from getting to any semblance of a normal real estate market.
2. Building Permits:
You can’t officially sell a new home until you build it first. And you can’t build a new home until you get a permit for it. So if we monitor the number of building permits issues, we can get a gauge on upcoming demand.
Well, it doesn’t exist. The latest reading from the U.S. Department of Commerce shows that building permits fell to a new all-time low. Even more depressing, the February 2011 reading is 20% lower than the February 2010 reading. Even five years into the downturn, things are still getting worse.
3. Home Prices:
Months ago, I railed against economists calling for a double-dip recession. It’s just not going to happen. But a double-dip for home prices is another story altogether.
Actually, forget possible… it’s materializing. After rebounding – or should I say stabilizing – for much of last year, home prices are falling again. The latest S&P/Case-Shiller Home Price Index reading reveals that home prices fell for the sixth month in a row.
4. Vacant Properties:
Approximately 11% of all homes in the United States are now vacant. In individual states like Ohio and Louisiana, vacancy rates stand at 18.9% and 21.5%, respectively. Indeed, walking away from homes is becoming the new American pastime.
5. Foreclosure Filings:
Excess supply all but guarantees to keep home prices in the basement. And trust me, there’s plenty of pressure weighing on prices, thanks to foreclosures.
In the last year alone, a record 2.87 million Americans received a foreclosure filing. What’s worse, the foreclosure numbers are getting worse. Almost three-quarters of all metropolitan areas witnessed more foreclosures in 2010 than they did in 2009.
The conclusion here?
We’re still slap-bang in the midst of the real estate downturn. Forget that it’s been almost six years since the peak in the housing market and that home values have already fallen by a whopping $6.3 trillion since the peak, all signs clearly point to more losses ahead.
If you’re even thinking about jumping into the stock market to buy real estate in the midst of such sobering statistics, be smart about it.
Specifically, use a pairs trade to scoop up attractive, dividend-paying apartment REITs and residential homebuilding stocks at the same time. Simply put, it’s the only way to profit, no matter what happens next with real estate prices. And I wouldn’t buy real estate any other way right now.
Ahead of the tape,
Louis Basenese
Related Topics: Real Estate, Think Contrarian
You mention permits as a measure of homebuilding activity – that only applies in areas that require permits for homebuilding; where I live the only permitting required is for a septic system if you are not close enough to connect to a sewer system.
While I like your work, like most people you focus on the country as a whole or on a few areas with pendulum swings – neither of which helps people in non boom/bust areas!
For example, in the last 2 years my area has gone up 15% in sales and 10% in price but no one mentions it or the others like it.
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Art Reply:
June 4th, 2011 at 8:05 pm
Jonathan,
You say “no one mentions it”, but that seems to include you. Where is this magical area you live in (and what are the others like it)?
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I live in Southeast Ohio, near West Virginia. In some former industrial/ mining areas like much of West Virginia, rural Eastern Ohio, and similar places, the last “boom” ended 30 to 50 years ago. Many of these places have lost population for years and are now finally stabilizing.
The discussion I have seen about house price drops has been centered around urban and suburban areas, which while they have alot of people in them, they don’t cover that much land area of the country. I’d like to see more info on how rural prices have been over the last decade. I’ve read that Iowa and Kansas have had big increases in farmland values, but not anything about the countryside in general.
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Dear Louis,
Part of the picture many are missing is that real estate is not universal, and that there is maybe a new trend to look for. Urban centers are heating while suburban and rural areas are not seeing daylight. Catching my drift? I would rather spend my money in Detroit than Southeastern Ohio. Its all about the dirt. If there is plenty of it, well I would be weary, but where it is scarce the story is different.
I think we are moving to a new dawn of urban living. Big is out, smart is in. More efficient, smaller spaces near amenities is what we will soon see. The days of the beautiful suburbs will be come more like Europe, where the suburbs are the projects.
So on some points your article may be right, but on others you are missing the boat. Whether we are on the bottom or near the bottom, I truly think the affordability can be better and will not be better in my life time.
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