Friday, June 24, 2011

Noodling Housing and Economists

Nood-ling (nōōd’lĭng) n. 1. Fishing for catfish using only bare hands, practiced primarily by crazy people who cannot afford proper fishing gear. 2. The intentional annoyance by bloggers who are skeptical of the news as it’s reported, as in “Noodling bureaucrats is more fun than fishing bare hand for catfish and a lot more surprising.” This is now an end of the month feature.

Megan McArdle in a brief article arlier this week in The Atlantic Home asks the question, “Are There Too Many Homes in America?” She goes on to say that the issue is not that too many homes, there is, at the moment, not enough buyers. As I have argued in earlier blogs, we are silently developing an extreme shortage in housing units especially when considered against an almost invisible and growing household formation curve. Potential buyers are living at home, renting, sharing, etc. and the housing supply is not meeting any level of a projected demand. As with any product when a tipping point is reached, such as an expected increased demand spike (see the years 1946-1956), bubbles can grow.

Brendan Lowney, macroeconomist with Forest Economic Advisors, said a week ago that there is an oversupply of about 2.5 million homes on the market. This is putting downward pressure on home prices as well as consumer demand. Well, duh! I do ask, and argue though, how can the housing oversupply put pressure on consumer demand. The only pressure I can see would be on prices and that would result in a good result for the consumer. The real issues are the retreat of the buyer from the marketplace (fear), their inability to find a loan (acceptance), and unemployment (qualification). These three factors must be overcome to restart the housing engine.

I have been and will continue to be a firm believer in demographics. Simply put, I believe that people will: 1)continue to be people and have children, 2)grow older and wealthier, 3)tend to want to live where it’s nice. I went to college to come to these conclusions. But since the development industry is more complex than my in-depth knowledge of the human condition, they look at trends, buyer groups, age brackets, and other esoteric issues. The fundamental issue is this: Where is the next customer going to come from? Who are they? and, “How can I meet this consumer and sell them my product? It is, as my economist hero, Lugwig von Mises wrote in Human Action, “The market is supreme.”

My second favorite economists are good friends and fellow associates on many projects; they are Claude and Nina Gruen. Neither has let time push them around, they are still as feisty and irreverent as ever when it comes to the failings of our anointed leaders. They both continue to produce excellent books and studies on the development industry. Claude’s recent Rutgers University imprint is New Urban Development (buy here). It attacks the church of entitlements and points a finger at those that allowed all of the past five years of silliness to happen. It is an economic history course on America’s development past, thorns and roses all.

Nina, on the other hand, has coauthored (with Alan Billingsley of Americas Research) one of the best and most readable essays on the current marketplace in America, titled; Boomers, Echo’s and X’s:Generational and other Structural Shifts and Their Impacts on Future Demand forReal Estate in the Coming Decade.   Nina has forgotten more than most of us have learned about development. I won’t go into the broad study in detail but it does look at the three most dominant generations (i.e. those with the money), listed in the title. She takes a broad cross section through the development industry and teases out interesting details that will be helpful in the coming decade. A caveat that runs through the paper is the development industry’s Prime Directive: “Location, location, location” as always, drives regional markets. I will add just one more word, “and Timing.”

I am also reminded of the old Star Trek Prime Directive, General Order #1 of the United Federation of Planets. “There can be no interference with the internal development of alien civilizations, consistent with the historical real world concept of Westphalian sovereignty.” Oh, if only the tweakers, meddlers, and diddlers in Washington (that includes politicians and industry wonks and lobbyists), understood this directive and allowed the marketplace to be truly free.

Stay tuned . . . .

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