johnnymk

Note: All data up to 2005Q2 is based on the official source – US Census Bureau Surveys published quarterly. I simply cannot overemphasize the important of the current US housing situation to the world economy. Please forward and spread the truth.

There is no claim that is made more often and with greater zeal in the US financial media than that the rapid rise in the housing prices is due to the basic Demand for housing (a place to live) exceeding the Supply in the recent years, especially, at the present. A July 28, 2005 article in Wall Street Journal by Neil Barsky, What Housing Bubble?, created lot of stir among those who do see all the signs of a Housing Bubble in the US. Here is Mr. Barsky’s basic claim:

“According to Census data, over the past 10 years, housing permits have averaged about 1.63 million units per year -- including multifamily units.

Household formation has averaged 1.49 million families per year. Roughly 6% of the new home sales (.06x1.63million = 100,000) were for second homes (I have seen estimates that the number is actually twice as high), according to UBS. Approximately 360,000 units every year were torn down. When the latter two numbers are taken into account (100,000 + 360,000 = 460,000), the real number of new homes is closer to 1.2 million (1.63 million minus .46 million), or 19% (1.49 million less 1.2 million, divided by 1.49 million) fewer than the average number of new households formed each year.”

One would think that someone at WSJ, or anyone else in any media for that matter, would bother to check the facts, especially that Mr. Barsky gives his source, US Census Bureau. Well, I did check the facts and the results are tabulated below. First and foremost, we know the current rate of new permits; so, why bother about using a 10-year average when the new housing construction activity level in the second half of 1990s was almost half, or even lower, than the current level, especially, in California. Therefore, you can see a fundamental misrepresentation of the Supply by Mr. Barsky. Do you think that it is unintentional? (Mr. Barsky is heavily invested in housing). The Census Bureau takes into account teardowns, because a house torn down and rebuilt is not two “housing units.” Most importantly, there aren’t too many interpretations of Vacant Housing Units. If the number of Vacant Housing Units is increasing then the Supply is exceeding the Demand.

No?

Table 1: Supply-Demand for the Past SIX MONTHS Ending 2005Q2
(all data in round numbers to 50,000)

Number of Housing Units Added (net new supply) +1,000,000
Number of Additional Housing Units Occupied (new demand) +300,000
Number of Additional Owner-Occupied Housing - 450,000
Number of Additional Renters +750,000
Number of Additional Vacancies (supply in excess of demand) +700,000

The most important thing to note in Table 1 is that the Owner Occupied Housing has gone down substantially. Yes, many former owners are glad to sell at the recent high prices and rent from rapidly increasing purchases by “investors.” Also, the Demand seems to be shrinking due to extremely high prices, as one would rationally expect. Believe it or not, even in America quite a few households share a housing unit; it is especially true of the fastest growing population of Hispanics. One phenomenon that might be taking place, due to very high prices, is that unmarried couples who were living separately have decided to move into one house. When housing becomes unaffordable it does change the behavior of some. That is if you believe that incentives play a role in economics.

Since data for six months is not as reliable as for a longer duration, I have looked at the past three years, a good representation for the current housing climate, which many think is a bubble.

Table 2: Supply-Demand for the Past THREE YEARS Ending 2005Q2
(all data in round numbers to 100,000)

Number of Housing Units Added (net new supply) +4,600,000
Number of Additional Housing Units Occupied (new demand) +2,900,000
Number of Additional Owner-Occupied Housing +3,000,000
Number of Additional Renters - 100,000
Number of Additional Vacancies (supply in excess of demand) +1,700,000
Average ANNUAL Demand for Net New Housing 1,000,000



From Tables 1 and 2 it becomes evident that for the 30 months up to 2004Q4 the Owner Occupied Housing, or homeownership rate, was rising, not smoothly but steadily. Fig. 1 shows the trend.

We have pretty good idea of the new permits as well as the pipeline for new homes, i.e., Supply, for the next two years. Also, the Demand trend is not going to change much. Therefore, we can make reasonable estimates for both and see how much greater the Supply is in relation to the Demand is and going to be.

Table 3: ESTIMATED Supply-Demand for the NEXT TWO YEARS Ending 2007Q2

Estimated ANNUAL Supply For NEXT TWO YEARS Based On Pipe-Line +2,200,000
Estimated ANNUAL Demand For NEXT TWO YEARS Based On Trend +1,050,000
Excess of Supply Over Demand Over the NEXT TWO YEARS 110%!


By combining Tables 2 and 3 we can get a five year picture ending in 2007Q2 and what we see is a disastrous imbalance between the Supply and Demand.

Table 4: ESTIMATED Supply-Demand for the NEXT FIVE YEARS Ending 2007Q2

Number of Housing Units Added (net new supply) +9,000,000
Number of Additional Housing Units Occupied (new demand) +5,000,000
Number of Additional Vacancies (supply in excess of demand) +4,000,000

Excess of Supply Over Demand For Five Years 80%!

There never was a Demand-driven need for the new Supply. It was strictly a low-interest rate and loose lending standards driven rise in prices that drew in speculators beginning in 2003-4. For the past three years 1/3rd of the new units added are lying vacant and in the past six months 2/3rd of the new units added are lying vacant. At some point the reality of the Supply and the Demand for housing (as in living in a house and not speculating) will assert itself and all the speculative buyers will have hell to pay.

As to Mr. Barsky’s claim of purchases of second homes, anyone who is borrowing 80-100% to buy a second home at the current prices is courting disaster. Mr. Barsky’s article is a perfect example of self-serving propaganda that is the norm in the US financial media including the WSJ.

The data from the Census Bureau is a box of dynamite for the Housing Bubble -- the primary source for the worldwide liquidity -- and the last stand before the Global Depression. Chinese and Indians have a nasty surprise waiting for them as to what was the real source of their boom for the past 3.5 years. Those ignorant of history find all kinds of explanation for bubbles and booms. There is nothing secular about liquidity-driven, or Debt-driven, booms. They always go bust.


2005 Jas Jain
Editorial Archive

Contact Information
Jas Jain
Tehachapi, CA USA

__________________
“Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy, its inherent virtue is the equal sharing of misery.” (Winston Churchill)

InfiniteNothing

Are you going to hot link the tables? (got|link?)

I've always thought that it's not a matter of if but a matter of where and when. Lets watch the 30YM intrest rate and see what happens because I wouldn't be suprised to see specutation continue until people start seeing themselves losing money tens of thousands at a time.

But on the good side, like greenspan said, it'll be personal ruin of the creative financers... not national ruin.

__________________
As for our common defense, we reject as false the choice between our safety and our ideals.

johnnymk

http://www.financialsense.com/fsu/ed...2005/0731.html

The website looks somewhat radical, but it appears that the facts speak for themselves regarding the real estate market