Below are 10 reasons why it may finally be time to be bullish on housing … but first, one huge caveat:
The local bottom that the broad housing market experienced in April 2009 may yet be surpassed to the downside. If it is, housing bears will pound their chests, stubborn pessimism vindicated. They will be mistaking the trees for the forest. This recovery, which in many areas remains in full force, has been, and will continue to be, highly local in nature. Fundamentally strong markets have thrived, while weak ones have languished. National, state, and even city-level indicators have been masking trends that are ongoing on a neighborhood level. This will continue, and those that ignore it will miss out on countless opportunities.
1. Jobs. Housing follows jobs. Period. And while the job market is still bunk in many areas, pockets of strength are emerging. After Google (GOOG) announced it would be hiring as many as 6,000 new employees, the Silicon Valley powerhouse received 75,000 applications in two weeks. The company is looking to retain talent in its fight against local rivals like Apple (AAPL), Salesforce.com (CRM) and Yahoo (YHOO), along with social media upstarts like Facebook, Twitter, and Zynga. If housing really does follow jobs, the San Francisco Bay Area may prove to be a bright spot in 2011.
2. Jobs. At the risk of being redundant, housing follows jobs. Consumer confidence is close to reaching last spring’s high point, the most optimistic the US has felt since 2008. And while hiring hasn’t restarted in earnest, firing has slowed to a drip. If you haven’t been fired yet, chances are your job is reasonably secure. Job security drives optimism, planning for the future and … home buying.
3. Pent up demand among young adults. Consider this: 2006 college grads entered the labor market just as home prices began to collapse. Those who still have a job kicked and scratched their way through the Great Recession and are now 27, perhaps married or getting there and kids may be on the horizon. Some were even smart enough to save some money. According to a graph produced by economist Tam Lawler and posted on Calculated Risk, today’s young adults are under-represented as homeowners compared to historical norms, and a disproportionately large chunk are living at home. As the job market crawls back to life, this trend is likely to reverse. And if the apartment market’s snappy performance in 2010 is any indication, it already has.
4. Foreclosures. Frankly, I’m getting tired of people claiming that an impending flood of distressed real estate is going to torpedo home prices. If you’re making that case, ask yourself if you really, truly have any idea what you’re talking about. Banks are rational actors, and as much as Bank of America (BAC), JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC) and the rest are demonized, they rarely willfully destroy the value of their own assets. Which is exactly what flooding the market with bank-owned properties would do. Coupled with political pressure and an ever-increasing maze of foreclosure litigation gumming up the repossession process, foreclosed inventory will continue as its steady stream. It will take years (around four based on current estimates) to work through shadow inventory, but there will be no flood.
5. Inflation. While much is made of inflation in the media, few pundits actually understand it. Inflation expectations, not inflation, is what we should be worried about. Things get scary when consumers start believing that prices are rising, or about to rise. Rational economic actions take hold, and rather than filling their tanks when empty, drivers fill whenever they pass a gas station. The expectation of higher prices, not higher prices themselves, is what changes economic actions. Rising inflation expectations pull demand forward, pushing up prices in an inconvenient self-fulfilling prophesy. Historically, real estate has been a rather good hedge against inflation. Plain and simple, as people start to get nervous about inflation, they buy real estate.
6. Higher rents and low interest rates. Ask a prospective tenant in a major metropolitan area how the apartment search is going and the response will not be pleasant. Rents are rising, inventory is down, and landlords are back in the driver’s seat. And despite a recent bounce, interest rates remain historically low. High rents and low interest rates push would-be renters towards buying, particularly in areas with job markets that are relatively less weak than the country at-large.
7. A booming apartment market. Investors are snatching up multifamily properties as positive demographic trends, low interest rates, and perceived values attract professional and amateur buyers alike. Homeownership is at a 10-year low, young adults are moving out of their parents’ basements and into apartments, and leverage is fantastically cheap. What more could an apartment buyer want? The multifamily space typically recovers first, and if history is rhyming in even the smallest way, this is good news for housing.
8. Investor appetite remains strong. From fedora-hat donning, Hawaiian-shirt wearing, clipboard-scribbling, earpiece-whispering professional investors at the courthouse steps to vulture funds armed with hundreds of millions of dollars, investor demand for real estate remains robust. Distressed opportunities — across all types of real estate — have come to market slower than expected, which means buyers have had more time to hit the pavement and raise money. With limited opportunities, competing buyers are driving up prices of distressed assets: For every well-priced foreclosure there are a dozen all-cash buyers looking for a deal. And don’t forget the baby boomers, the first of which turn 65 this year. While many are eying a trade-down into a smaller, more retirement-friendly home, even more are looking for reliable fixed income to pay for rounds of golf and tennis lessons. More than a few gray-hairs view real estate as their path to comfort during the golden years.
9. The stock market. With the Dow Industrials above 12,000 and the S&P 500 topping 1,300 for the first time since mid-2008, IRAs, 401(k)s and trading accounts are feeling fuller than they have in years. The wealth effect is in full effect, as buyers look to sell stock for a down payment and the confidence to pull the trigger on a new home.
10. Confidence. If you’ve made it this far without either scrolling down to question my sanity on the Minyanville message boards or falling asleep, I salute you. And for the precious few readers who are still with me, consider this very important question: Do you feel better or worse about the US economy, and more importantly your own personal economy than you did two years ago? This is not a political statement: Challenges remain, to be sure, but we Americans are a stubbornly resilient, optimistic bunch. Confidence is relative, and for a country that has been through economic hell and back since 2008, we are in remarkably better shape. Confidence in the present builds confidence in the future, and confidence of all types increases risk-taking activities. Admittedly when you have seen the depths of despair, a single ray of dim light can feel like high noon, but it doesn’t matter. Confidence is a trajectory, a transitory voyage through time that is more accurately measured against where you just were than looking at the last time you were here. The fact that most people believe that we’re no longer headed for apocalyptic collapse is, as they say, a good thing.