The latest data releases this week about the state of the residential real estate market confirm my belief that the threat of a double dip in the economy is triggering another down leg in home prices (click here for Residential Home Prices in Terms of Gold).
The latest Case-Shilelr data show that housing is once again in free fall. Look at the stock chart for Pulte Homes (PHM) and it resembles my flight path just before I crashed a twin engine Cessna into the Australian Alps (my engine failed). Ditto for the home builders ETF (XHB).
Anyone who believes that housing is on the rebound, and that now is the time to buy, should take a very hard look at the real numbers. There are 140 million personal residences in the US of which 19 million homes are either directly or indirectly for sale.
According to a survey by Zillow.com, a real estate appraisal website, 5 million homeowners plan to sell on any improvement in prices. Add 4 million existing homes now on the market, 1 million new homes flogged by companies like Lennar (LEN) and Pulte Homes, and 1 million bank owned properties. Another 8 million mortgage owners are late on their payments and are on the verge of foreclosure, bringing the total overhang to 19 million homes.
Now, let’s look at the buy side. There are 35 million who are underwater on their mortgages and aren’t buying homes anytime soon, nor are the 35 million unemployed and underemployed. That knocks out 50% of the potential buyers. Here is where it gets really interesting. There are 80 million baby boomers retiring at the rate of 10,000 a day. Assuming that they downsize over time from an average 2,500 sq ft. home to a 1,000 sq. ft. condo, and eventually to a 100 sq. ft. assisted living facility, the total shrinkage in demand is 4.3 billion sq.ft. per year, or 1.7 million average sized homes. That amounts to a shrinkage of aggregate demand for a city the size of San Francisco, every year.
You can argue that the following Gen-Xer’s are going to take up the slack, but there are only 65 million of them with a much fewer assets and lower standards of living than their parents. Throw in the disappearance of state and federal first time buyer tax credit. You can count on a jump in long term capital gains taxes and state and local property taxes, further diminishing property’s appeal. If you are looking for a final stick to break the camel’s back, how about eliminating, or substantially reducing the home mortgage interest deduction?
Add it all up, and there is a massive structural imbalance in residential real estate that will take at least a decade more to unwind. We could be looking at a replay of the same 26 year period from 1929 to 1955 when prices remained flat, and we are only 3 years into it! A second down leg in the real estate market seems a no brainer to me, as is the secondary banking crisis that follows. Perhaps that’s why hedge funds have been big sellers of the (XHB).What’s a poor homeowner to do? Don’t ask me. I sold everything in 2005 when my research threw up these numbers, and have been happily renting ever since. And, if the toilet blocks up, I just call the landlord.