The U.S. is Systematically Under Building Housing — Rising Home Prices, Sales and Rents

Just a few years ago, U.S. housing markets in aggregate were overbuilt, and that was reflected in declining rents, home prices and home sales. What has happened in the interim has been a quicker than anticipated absorption of surplus property, and when viewed in today’s supply and demand conditions, a market that has gone from surpluses to one today categorized as tight—quite literally a sellers’ market.

Jobs are everything to an economy. Period. I have often said that there are only three groups of people that buy homes that do not have jobs: they have gray hair, blue hair or no hair—they are retirees. As job growth has returned, albeit tepid at best, investors and owners have absorbed the excesses and that inventory has not been replaced.

In the latest 12 months ending February 2013, the U.S. added 1.91 million net new jobs, but issued permits for just 790,935 new dwelling units. That equates to 2.41 net new jobs per each new dwelling unit. I have long contended that we really need 1.25 to 1.5 net new jobs per new dwelling unit. Hence we have just under-built the housing market by 38 to 48 percent, as shown in the following table.

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First, take a look at the snail pace increase in the 12-month moving average of the seasonally-adjusted annualized rate of new home sales, based on the latest March 2013 data released yesterday.


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The net impact of this systematic under-building is rising prices. Earlier this week I wrote about the 12-month moving average median U.S. existing home price jumping 9.2 percent when compared to the 12 month period a year earlier. The next graph shows the 12-month moving average of median new home sales price, as reported by the U.S. Census Bureau—with prices up 9.3 percent in the past 12 months. While existing home prices are still 19.8 percent down from the peak price recorded in July 2006, new home prices are now within $500 of the all time high notched in August 2007. The interaction of supply and demand still rules supreme.

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Finally, the constraint in supply is well illustrated in the following graph. And given the tight supply of developed residential lots and time-requirements to get new inventory to the market, this is not going to improve much in the coming 12 months.

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The bottom line is that housing continues to recover, and as it does, it drags the slumbering economy up with rising prices, rents and sales.


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