Thursday, September 20, 2012

The Next Five Years in Housing bright I have to wear shades!

There are over 70 million Baby Boomers and according to my fuzzy math, over 25 million Baby Boomers own homes. And during the next twenty years there will be a strong shift by these Boomers toward the retirement phase of their lives. Their homes will add to the inventory and their retirement will demand more but different types of new housing. This existing Boomer inventory normally has a higher and better quality than many of the recently foreclosed homes and is often in older second and third ring neighborhoods that surround American cities. While these units will help some of the housing need they cannot meet all the demand. We are a suburban nation; each successive ring of suburban growth supports the core. And like a tree, these rings of annual growth support the expanding tangle of roads and neighborhoods. Each part of this urban tree supports the others, and on much of the outlying branches and leaves is where new housing will flourish.

The government and the newest QE3 may help. The continuation of low interest rates at this critical time will support the housing industry. But it must stop sooner than later or it will fuel another round of housing inflation and “bubble time.” The rules of supply and demand cannot be overturned and the market is a cruel mistress. Waiting for the feds to make timely adjustments is like the referees this year in the NFL, they will make the call but it will take three long commercial breaks to resolve. Markets will drive the recovery in housing, but interest rates will have to rise at some point to dampen the exuberance. If not, we will ride that same horse again.

It is in the government’s interest to support housing. But when they begin to offer deals that even a wise thinking investor falls for than they have overstepped their role. Free money and low interest rates led us to much of the pain of the past five years. And none of us were immune to its call.

The government needs housing, especially new housing. It is the catalyst for the economy and like the auto industry is vital to the future of jobs and finance. The American economy is built upon the complex action of buying open land and converting it to a community of homes. Hundreds of thousands of jobs result. Social stability is created. Culture is nurtured. Dreams are fulfilled.

During the next five years there will be a gradual but very real upswing in new home construction. Every region will be different. I have always been a firm believer in demographics and it will be demographics that will drive this growth. Here is the Census Report from 2010, it will give you an overall snapshot.

What is shown in this report is the regional areas of the south and west grew substantially over the census period and, it can be assumed, continues today (though in California there may be some drop off). The key number is the 27 million new folks across the country. Back to my fuzzy math, this translates into the need for maybe 12-15 million more homes for families and singles. We have built since 2000 only 9.6 million new homes according to the Census (GO HERE). Obviously the ground is well prepared for growth, there is a market standing on the sidelines.

Another area of real growth: There are 1,750,000 college graduates per year. There are also over one million college dropouts per year. That translates into an impressive number of young adults looking for housing. How is this market being served? For many it has been their old bedroom at home. This will change. (GO HERE)

Housing is critical to the future of America. Like the auto industry (with its seven to ten year car life) there is a built-in obsolescence to housing. Currently somewhere around fifty years is the replacement cycle. But the technologies and the square footages of older homes, say pre-1970, are out of date. Electrical systems, wi-fi, heating and cooling, and most especially kitchens and bathrooms, all drive buyers into new homes. This is especially true for those in their thirties and forties. In fact I heard that the age when the consumer is at their prime is 46. That is the exact market for many builders such as Toll Brothers.

The next five years may be as exciting as any I’ve seen in my forty plus years in the housing industry. I am optimistic (one has to be in this profession); so the future’s so bright I have to wear shades!

Stay tuned . . . .

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