May 06, 2007

Vacancy rate soars, millions of houses and apartments sit empty, inventory of unsold homes builds, and homebuilders keep adding fuel to the fire




Supply. Demand. Inventory. Prices.

Any questions? It's just Econ 101 folks, playing out to perfection.

From the Businomics blog:

Add together homeowner vacant and rental vacant and we've got a 1.5 million housing units vacant ABOVE NORMAL VACANCY RATES.

OK, what's normal annual demand for new housing? Counting population growth, vacation homes, demolitions and changes in family size, I peg demand at about 1.7 million units. I know that others have estimated demand at 1.6 or 1.8 million units, so let's be generous and use a high number like 1.8 million. Current housing starts are 1.5 million, plus another 0.1 of manufactured housing, so we're underbuilding by 0.2 million units a year now. At that pace, we work off the excess inventory in only 7.5 years.

I don't claim a high degree of precision in these estimates, but they are certainly in the ballpark. And they say quite decisively that the housing problem won't be over next year, or probably even the year after.

Business planning implications: Stay away from the housing construction supply chain. Look for price declines in markets that are relatively overbuilt and undergrowing.

23 comments:

Mark in Zurich/San Diego said...

I find it amazing that even Warren Buffet seems to be vastly underestimating the fallout form housing - perhaps we are in too much of a Panic here??. . .it does seem to be happening in slow motion, but I keep asking myself - is housing worse off this month than last? YES . . .is housing worse off this year from last? YES. . .and each day brings new problems and new revalations - UBS last week - who knows this week. . .sooner or later the house as ATM is have to hit the economy - aparently there is a huge lag time because people who used thier HELOC to pay off the credit cards are now running up the credit cards again. . .SO (as they love to say in Zurich Swiss German). . .we will have to wait for the consumer to drop when both house and credit cards are maxed out. . .which should be about mid-summer I would bet.

Anonymous said...

If we get a serious deflationary turn, governments like China and Japan could buy U.S. stock & corporations with their massive reserves and move their headquarters to Beijing or Tokyo. Even more job cuts will fall on U.S. citizens. Not to mention the loss of prestige of being the home for international business.

Anonymous said...

No way landlords and failed flippers can raise rents with this kind of inventory and vacancy

Anonymous said...

The laws of supply and demand are no longer valid. This is the new paradigm and housing prices have reached a new permanently high plateau. Rental rates will rise 10% a year.

Anonymous said...

Mark, gotta be rough splitting time between Zurich and San Diego. You poor guy :-)

Seeing increased vacancies in Mission Valley. The manager of my complex is always asking me to find new tenants. Rent going up??? I don't think so.

Anonymous said...

From Larry Kudlow's message board...

Irving Fisher and the Crash of 1929
Brian Trumbore
President/Editor, StocksandNews.com
Someday I'm going to write a book on authors writing books. Confused? Well, a viewer, Don K., suggested I write a piece on 1929 and the economist Irving Fisher. So what follows is a brief summary of who Fisher was and his role in the Great Crash.

But first, I have a terrific library in my office which I draw on for my stories. Anyway, in researching the life of Irving, the first 3 sources I employed describe him as being a Yale professor. Then I turn to a book by the eminent market historian Robert Sobel (who recently passed away) and I see "Irving Fisher of Harvard" and "Fisher…was spending most of his days away from Harvard." So since I don't have the time to research the matter further if I'm to meet my deadline, I am officially deducing that Fisher is from Harvard and the other authors, some well known, are just plain lazy. Yes, I'm placing my bet on Robert Sobel. My 3rd grade detective work leads me to believe that since there was a Harvard Economic Society which was a society drawing on the leading economists of "Harvard, Yale, Princeton, Ohio State, and Michigan" (Sobel), somehow someone figured Fisher was from Yale and everyone thereafter copied that author. Now Fisher's own son has a book out there somewhere but, sorry folks, I'm not buying it. [Or else Sobel and I are wrong and this whole last paragraph was a huge waste].

Anyway, in yesterday's Wall Street Journal, in the op-ed section, economist Brian Wesbury, who is humping a new book of his own, said the following: "The U.S. has entered a new era of wealth that is only beginning." Ah yes, shades of Irving Fisher.

Irving Fisher was a leading economist of his time who had authored books with the titles "The Purchasing Power of Money," "The Rate of Interest," and "The Theory of Interest." It's easy to view him as the Abby Cohen, Harry Dent, or Jim Glassman of his day. [Yeah, maybe that's not fair but it's my site!] He was also a member of AAPA, the Association Against the Prohibition Amendment. One of his own main new era arguments rested on the benefits he saw flowing from prohibition, which had begun in 1920. He cited the work of a Columbia professor, Paul Nystrom, who concluded that a "dry" nation would increase the efficiency of workers and switch demand from liquor to "home furnishings, automobiles, musical instruments, radio, travel, amusements, insurance, education, books and magazines."

Edward Chancellor attributes John Templeton with the saying, "The four most expensive words in the English language are 'This time it's different.'" Does this statement have anything to do with today's market environment? Well gather 'round and here what Fisher and other pundits were saying back in 1929.

In the fall of '29, as the market was beginning to hiccup, Fisher continued to believe in the bull's cause. He declared at one juncture, "Stock prices have reached what looks like a permanently high plateau." A few weeks later the market crashed. Chancellor writes that "Fisher fell for the decade's most alluring idea, that America had entered a new era of limitless prosperity."

In 1913, the Federal Reserve was established. By the 1920s the Fed was hailed as "the remedy to the whole problem of booms, slumps, and panics." Bankers and speculators were lulled into a false sense of security. True, as for the economy, better management brought improvements in productivity and lower levels of inventory (mismanagement of which had been a leading cause of boom / busts in the past). Fisher argued that modern production "is managed by 'captains of industry.' These men are specially fitted at once to forecast and to mould the future, within the realms in which they operate. The industries of transportation and manufacturers, particularly, are under the lead of an educated and trained speculative class."

Fisher was also optimistic because of the relaxation of the antitrust laws during Calvin Coolidge's presidency which allowed for a series of mergers in banking, railroad and utility companies that promised greater economies of scale and more efficient production. The gains in productivity, which rose by over 50% between 1919 and 1927, were ascribed to increasing investment in research and development. [For example, back then AT&T was building up to a staff of 4,000 scientists, unheard of until this time]. So the widespread use of technology, the restructuring of corporate America and the Fed's ability to control inflation were the cornerstones of the new era philosophy of Irving Fisher's day.

Fisher was also a big proponent of investment trusts (the precursor to today's mutual funds), a recent innovation and wildly popular by the fall of 1929. "The influence of investment trusts…is largely toward cutting the speculative fluctuations at top and bottom, thus acting as a force to stabilize the market. Investment trusts buy when there is a real anticipation of a rise, due to underlying causes, and sell when there is a real anticipation of a fall," thus ensuring that stocks could move nearly to their true value. The high turnover of shares in the investment trust portfolios was hailed as sound management. It was even argued that investment trusts purchases were providing stocks with a new "scarcity value." In reality, the trusts invested heavily in blue chip stocks and borrowed heavily against their assets in order to leverage profits, thereby, increasing volatility.

Fisher denied the likelihood of a crash by September 3rd, the peak, even while others like Roger Babson forecasted an imminent debacle (Babson said this Sept. 4th). The market began to weaken sharply. Rumors of bear pools, led by Jesse Livermore, which were preparing to drive the market down with short sales, were rampant. [Don't worry, we'll cover Jesse someday].

Fisher was spending his evenings giving speeches to banks and business groups, touting his theories of permanent prosperity. The sharp decline of 10/14-10/19 in the market didn't cause a panic. Fisher thought the ongoing collapse was the "shaking out of the lunatic fringe."

Finally, on Wednesday, October 23rd, the investment trusts began to collapse and real fears of a crash were developing. That night Fisher told a banking group that "any fears that the price level of stocks might go down to where it was in 1923 or earlier are not justified by present economic conditions."

Later, Fisher attempted to explain his errors but he was generally ignored. Who today will suffer the same fate? Who will be "Fishered?" The Shadow knows.

The End

One interesting sidelight to the Fisher story. Back in 1914, Fisher thought the European War would cause the belligerents to sell their American securities to gain funds for munitions; that Europeans would no longer be able to finance American companies, that blockades would cut America from her markets and so destroy the economy. None of this happened. Instead, European gold came to America for safekeeping and Europeans purchased American securities as the safest investment to be had. As a result, share prices rose.

*Here are some random, important dates which give you a sense of the volatility in 1929 and how folks were undoubtedly suckered in after the Crash, only to see their life savings wiped out by July 8, 1932.

The "Roaring 20s" really didn't get off to a spectacular start, at least as far as the Dow was concerned.

1/2/20 Dow Jones - 108.76
12/31/20 - 71.95 [market meandered up then...]
5/20/24 - 88.33 [the low until long after the Crash]
12/31/27 - 202.40 [high close for the year]
12/31/28 - 300.00 [high close for the year, now we're really cranking]
9/3/29 - 381.17 [high for bull market]
9/30/29 - 343.45
10/23/29 - 305.85
10/24/29 - 299.47
10/25/29 - 301.22
10/26/29 - 298.97
10/28/29 - 260.64 [market closed the 27th]
10/29/29 - 230.07 [HELP!!!]
10/30/29 - 258.47 [Buy the dip! Buy the dip! C'mon!!]
10/31/29 - 273.51 [See, I told you to Buy the dip!]
11/13/29 - 198.69 [Homer Simpson: Dohh!!]
11/21/29 - 248.49 [Just your basic 25% one week rally]
12/31/29 -248.48
3/31/30 - 286.10 [Yup, no sweat. I got this market thing all figured out]
4/17/30 - 294.07 [the peak]
12/31/30 - 164.58
7/8/32 - 41.22 [90% decline from 9/3/29...and also the lowest level for the next 67 years]

Sources:
"Wall Street: A History," Charles Geisst
"Devil Take the Hindmost," Edward Chancellor
"Mania, Panics, and Crashes," Charles P. Kindleberger
"The Bear Book," John Rothchild
"The Great Bull Market: Wall Street in the 1920s," Robert Sobel

Brian Trumbore

*If you can prove that Fisher went to Yale, outside of the above sources, please contact me through the "Contact Us" link. I'd be happy to give you credit in my next column."

Anonymous said...

Just wait until the derivatives' market has problems.

Mark in San Diego/Zurich said...

Anonymous Mission Valley - I noticed last month that more "for rent" signs were up all over SD - as I mentioned here before, I rented a much larger place this year in La Vita in Little Italy SD, at not much of a rent increase from my smaller place - nice view, great neighborhood. . .at this rate, I may never buy - I am no longer a "bubble sitter" but might think of long term renting. . .leaving Zurich tomorrow - looked at weather.com, and saw that I will return for a nice heatwave - great - when I left it was pretty cold for San Diego.

Anonymous said...

Vacancy is soaring for shitbox, cookie cutter, bare bones, homes bought by investors. If you want something decent, ie older home, mature neighborhood, large yard, etc it is still hard to find good rentals.

I was in the market about 2 months ago and it took me 3 weeks of actively searching before finding a nice home to rent.

Minimum Wage said...

There is a very low rental vacancy rate in Portland. There is a huge shortage of affordable housing and at the loe end, vacancy rate is close to zero.

Hayley said...

I bet we'll see some real volatility in consumer spending this year as people switch over to credit cards, feel some anxiety, slow down their spending, see the sky doesn't fall as long as they can make the minimums, pick up spending again, etc.

But this could take some time as I would bet people have 30-40K on average to mess with assuming they can meet the minimum payments.

Actually, this may be a great plan, managed properly most of these people will never even be able to think about retiring, even after the gov't bails them out by forcing the banks to restructure their unsecured debt...

It's genius really when you think about it...

Ryan said...

When is going to be the best time to buy a house? How much longer should I wait? I've been waiting on a "deal" to come around.

I don't want to buy something for ~$150,000 and have the market drop out on me and now I owe ~$150,000 on a house that is only worth/sell able at ~$80,000.

FlyingMonkeyWarrior said...

In Dec there were 90 units empty here and now the building I live in is full. 310 condos, Downtown Orlando, FL, with probably 1/3 rentals, but sold out in 2004.

Bitter Renter said...

Move just over to the other side of the hills in Portland and you'll see lots of vacancies and low rents. Just 3.5 miles up from NW 23rd you can get 6 weeks free up front, a washer and dryer in unit, covered parking, fireplace, dishwahser, on bus line (#20), for $750.

But you could also wait for all those apartments that turned into condos to revert to rentals again. They will. The condo boom in Portland is going to end badly.

Anonymous said...

"Fisher thought the ongoing collapse was the "shaking out of the lunatic fringe."

- He was actually correct, but assumed he was not part of that group.

FlyingMonkeyWarrior said...

The condo boom in Portland is going to end badly.
-------------
The condo boom in _______________ is going to end badly.

Fill in the blank with the name of your city.

Paul E. Math said...

Ryan, I suggest you wait one more year. Prices won't have hit bottom by then but there may be sufficient fear to cause some desperate seller to accept a lowball offer. You could try lowball offers now too but I suspect you'll have more leverage next year. By the way, by 'lowball' I mean like 50% below asking, depending on the area.

Back when the last housing slump occurred, in the 90's a friend of my fathers offered $50k for a brand new house in phoenix that was on sale for $150k. Ridiculous, right? The builder had gone bankrupt and the place was being sold by the lender who had a pile of these places on their hands. Initially, the selling agent refused to even submit the bid to the owner so my father's friend had to call the lender himself. He eventually paid $75k but it was with a bunch of upgrades and concessions. All in all a good deal. In 2005 the place would have sold for $500k.

I tell you this story to motivate you to negotiate hard. Sellers will be insulted, they will be angry, they will treat you like crap. But, in the end, they will have to sell to you. Be patient. Have no mercy.

Agent #777 said...

@FlyingMonkeyWarrior

Now tell 'em how many downtown condos were planned at that time, and never got built!

Not that it is a bad thing for the owners in your building...

Anonymous said...

Hey, any Portlanders know how the city of Vancouver has done with it's massive condo development downtown? I think they were seeking $250-$350 a square foot. They wanted to rejuvenate their downtown and have their own Pearl District. I think the development is called The Vancouver Center.

Daniel said...

SmartMoney has an article on why it makes sense to rent a home and buy stocks instead:
http://tinyurl.com/2a4d69

Summary quote:
"Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former."

Anonymous said...

lo ballers just cause sellers to ask twice as much as they expect

Anonymous said...

Ryan,

Move to a non-bubble area. Then you can buy a house immediately. It sounds like there is an opportunity cost for you. The time we spend waiting for prices to normalize (years!) is time we're not in that big Tudor on the 18th hole. Guess that's why we're all "bitter renters".

Dugdale said...

Where did you get the vacancy rate stats?