Short-Run Pain Can Lead to Long-Term Benefits

As the building industry continues to wait for a sustained rebound which stubbornly refuses to appear, it’s easy to grow frustrated with economists and prognosticators who seem to constantly update their forecasts. So what’s going on?

One reason that it’s hard to get a handle on the economy is because the federal government has pursued various policies which have simply postponed the inevitable consequences of the past. In times of great economic duress, this makes sense, as too many negative hits at once can send an economy into a tailspin leading to a depression. But by spreading out these hits over time so the economy can adjust, any recovery is also muted.

Another reason it’s been difficult to gauge the timing of a rebound is that the bust in housing demand and prices hasn’t been uniform across the country: while Arizona, Florida and Nevada continue to suffer disproportionately, places like Texas and Washington, D.C. are on the mend. In addition, when real estate bubbles pop, it’s not like they re-inflate immediately – the market tends to bob along the bottom for two or three years before sustained demand is possible. An even with mortgage rates now at generational lows and home price affordability far higher than during the boom years, the demand for housing now simply needs ample time to recharge its batteries.

In the meantime, this recharge is continuing unabated, only instead of living in their own homes, potential new households are doubling up with roommates and with family members while waiting for job growth to return. In general, between 1960 and 2005, the United States has averaged 1.2 million net new households per year. In some years builders have certainly over-built relative to demand, but in many others years (such as during recessions), they can’t build enough homes.

According to a recent study conducted by the NAHB, although the nation’s builders certainly over-built single-family homes from 2003 through 2005, the cumulative surplus relative to population growth was completely worked off by the end of 2007. That’s not to say we still don’t have a huge over-supply relative to buyers’ ability to buy or qualify for mortgage loans – it just means that based on historical precedent and average household sizes, the nation is technically under-housed.

In fact, between the end of 2007 and 2009, the sharp declines in new building led to a projected deficit of nearly 2.2 million units. By the end of this year, that deficit will have reached nearly 3.3 million units. In other words, as the foreclosure pipeline is eventually addressed – and it must be in order to clear the inventory of homes in default -- this country will face a tremendous pent-up demand for new housing across the entire income spectrum.

And yet, much like the nascent recovery, this pent-up demand differs from state to state. A similar analysis conducted by the NAHB for each state showed some of the states with the most foreclosures – such as Arizona, Florida, Nevada and California – have still racked up single-family housing deficits relative to population growth ranging from 50,000 to 145,000 homes.

At the recent Building Industry Show in Southern California, the energy this year was much different than in 2009. Not only was it more hopeful, but I heard stories of multiple deals getting done in order to start prepping for the rebound. While it was still gallows humor from land brokers and lenders opining on panels, the general consensus was that 2010 would go down in history as one of those years in which the industry’s survivors hang on because they know that the rebound – when it comes – will be formidable.