Is a Boom in U.S. Homebuilding Coming?

Crazy headline, right? At first I thought the same thing. After all, with nearly 10% unemployment and a flood of foreclosed properties hitting the market, why would anybody need to dramatically boost new home construction anytime soon? Last week I saw a statistic from a former Goldman Sachs economist that estimated new home demand in the United States (from the combination of new household formation and the replacement of old homes) of approximately 1.5-1.6 million units per year. Given that the U.S. population is around 300 million, this figure does not really stand out as being unreasonable, and it is in-line with other forecasts I have seen.

In the short term, current inventory combined with foreclosures, weak loan demand from the recession, and tighter credit standards all contribute to the fact that new housing starts in the U.S. today are near record low levels, coming in at an annualized rate of around 500,000 per year. At some point, however, it does seem likely to me that housing starts would have to begin to trend upward toward that 1.5 million figure, which is three times the current annual run rate.

Before you dismiss this potential need for new homes as being years and years away, consider the graph below showing annual U.S. housing starts from 1991 through 2009.

ushousingstarts1991-2009
You can easily see the effects of the housing bubble (from the early 2000′s through the 2005 peak of more than 2 million units), which resulted in home construction far outstripping demand (by 400,000-500,000 units if you use the 1.5-1.6 million base demand estimate). However, we also see if we ignore the bubble period that housing starts of 1.5-1.6 million per year would simply put us back to the level housing starts were in the mid 1990′s, when the U.S. population was much lower than today.

Despite the foreclosure glut we have in many states nowadays, this chart makes me think that the current housing start rate of 500,000 or so per year really is not sustainable for any prolonged period of time. Such a thesis would lead one to consider analysing the leading homebuilding companies to try and find some attractive long term investment opportunities. Accordingly, I will share some data and thoughts on specific companies with you once I conclude my work on the leading publicly traded U.S. homebuilders. Do you have any favorites, or do you think this investment thesis is unattractive?

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2 Thoughts on “Is a Boom in U.S. Homebuilding Coming?

  1. Tariq on April 12, 2010 at 6:34 PM said:

    This is definitely a very interesting idea – I agree that it could make now a great time to enter a long-term investment position.

    After looking at that graph I think that a lot of it rides on the ‘normalized’ new home demand of 1.5-1.6m per year. I’d be interested to read the report (and indeed see if that old estimate needs revision).

  2. I don’t think the thesis is unattractive, just maybe about one year early. I have been a real estate appraiser and observer for 30 years now, and these things usually take longer to work out than thought.

    Really, the housing market, for all intents, really started slowly rolling over in 2007. That’s only 3 years from the top of one of the craziest housing markets ever.

    Further, with interest rates bound to rise and employment continuing as weak, new household formation will run below this trend (which covered some pretty buoyant economic times) for some time – I think it’ stabilize between 1.2m to 1.5 in a few years from now, and that’ll be the “new normal” for a while thereafter.

    It wouldn’t be a crazy investment, probably just 12-18 months before the turnaround really starts happening. I just finished mulling this over for my own portfolio, and concluded it was probably still too early (with a bit too much risk) to depend on household formation to soak up all those foreclosures yet to come.

    The other thing I wonder about is whether all these large companies have PROPERLY written down their landholdings – they have probably declined by about 45-65% in inflated coastal areas – have the written-downs matched that?

    (go to page 40)

    Best Regards,
    Jay Walker
    The Confused Capitalist

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