I bought my first house in 1998 for $73,000 in what was then South Baltimore.
A year and a half later, I sold it for $125,000 in the rebranded neighborhood of “South Federal Hill.”
It was a row house with neighbors on either side. During the open house, I was upstairs smashing cockroaches, and I could hear the realtor pontificating on the joys of walking to an Orioles game as she took potential buyers through the living room.
Needless to say, the bugs, slashed tires, and smell of urine after stadium events didn’t make the sales brochure. It sold in a week.
That house is currently on the market for $350,000. Not that I have any regrets — I was overjoyed to get enough for a down payment on my next home almost as much as I was to get away from the crack-neighbor clown house next door. That was a hell of a boom and a lot of fun while it lasted.
Next Bubble
With interest rates at historic lows and the population continuing to grow, the question is, can it happen again? Of course it can.
The nature of Fed-induced liquidity is one of an endless rehashing of bubbles — though they only happen in the same place once in a generation.
I am old enough to remember the last biotech bubble, and here is it again 18 years later. There is a sucker born every minute, but you have to wait until the new rubes age before running the same scam.
Lucky for us, we have a new crop. Over the past 20 years, the population is up some 20 million people in the United States. We are now the world’s third-most populous country at 321 million souls.
Furthermore, the millennial cohort is bigger than the baby boomers and is about to hit its prime house formation years. The front edge is 30, but the large bulge is 22, 23, and 24 years old. Here is a great interactive chart.
All of these people will need somewhere to live. And there is a shortage.
Starting to Build Again
As you can tell by this table, we remain roughly 500,000 units below the average going back to 1959. Not only that, but there were some 5 million houses that weren’t built during the Great Recession. This is at a time when the U.S. population is adding more people than it ever has.
Click Image to Enlarge
Source: U.S. Census
So you have a population increase and fewer homes.
Part of this can be explained by the number of forecloses on the market holding down prices with ample supply. This, too, is changing.
Foreclosures are Down
According to CoreLogic data:
…there were 39,000 completed foreclosures nationwide in February, down from 46,000 in February 2014 and representing a decrease of 67 percent from the peak of completed foreclosures in September 2010…
CoreLogic also says in its newest report that the number of mortgages in serious delinquency declined by 19.3 percent from February 2014 to this past February with 1.5 million mortgages, or 4 percent, in serious delinquency (defined as 90 days or more past due, including those loans in foreclosure or REO). This is the lowest delinquency rate since June 2008. On a month-over-month basis, the number of seriously delinquent mortgages declined by 1.1 percent.
The great bulk of foreclosures have been worked through the market just in time for those who lost their homes seven years ago to regain credit.
Furthermore, the FHA recently eased credit requirements for getting a loan. Three percent down loans are back, and PMI has been cut in half.
It is no wonder that the National Association of Home Builders’ confidence is about to break out:
This all sounds good for the long term, but this morning’s numbers were mixed.
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Housing Starts Slip Today
I can’t ignore this morning’s housing starts for March, which show that the growth of starts climbed 2.0% to an annualized rate of 926,000 units — slower than expected. The pace of building permits dropped 5.7% to 1.039 million units, missing expectations for 1.081 million units.
This is mixed news, as the Mortgage Bankers Association’s latest Builder Application Survey data for March 2015 show mortgage applications for new U.S. home purchases increased by 17% relative to the previous month. And applications were up 20% for the first quarter over last year.
I’ve read a number of the most recent conference call transcripts, and builders seem to think that 2015 will be a breakout year. Deliveries are up, sales prices are up, and the number of spec houses have been reduced, which you may remember was a problem last spring.
Furthermore, the first quarter is typically the slowest quarter of the year. The companies I’m looking at were profitable in Q1 2015 despite losing money in Q1 the two previous years.
One way to play housing is through an exchange-traded fund, or ETF, which, as you know, is like a mutual fund without the management fees.
Here is a five-year chart of the iShares U.S. Home Construction ETF (NYSE: ITB):
After a two-year consolidation pattern, the price chart is breaking out.
Though I was right when I called the bottom in housing in 2010, there is still upside today.
Perhaps what I like best about housing is the visceral hate any positive commentary receives on message boards. Real estate remains a hated sector for the great unwashed and is therefore a contrarian buy.
Given the demographic and supply/demand numbers, you should own some housing investments in your long-term portfolio.
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
