Affordable Housing Institute : US

[Continued from yesterday’s Part 1.]

 

More gleaned from Kurt van Kuller’s fascinating Housing Bubble: Implications for Municipal Bonds.

 

4.         Housing demand changes over the decades

 

As I previously posted, the evolving modern home continues to grow larger:

 

 

In 1975, the typical home was 1,500 square feet; in 2004, it was 2,180.  That’s a 45% increase in square footage at a time when household size has dropped from about 3.00 (1975) or more to 2.67 (year 2000).  So in 1975, the typical American had 500 square feet of personal homeownership share, and by 2004 that was up to 815 square feet per person, a 63% increase in average living space in the evolving American home.

 

Why do people want more square feet per home, and have fewer people per household?  Family configuration has something to do with it:

 

The proportion of non-traditional households led by singles of diverse circumstances is growing rapidly, especially among the non-minority population.

 

This trend is likely to continue, for the immigrants driving much of America’s demographic growth are themselves moving up:

 

Median income levels of second generation Americans are slightly higher than that of natives here more than two generations.

 

The only big driver Mr. van Kuller declines to mention is the extraordinary growth — one might say explosion — of multiple-home households, a subject so important it deserves its own (future) posts.

 

 

5.         Still, “signs of an incipient slowdown are multiplying.”

 

Amidst the cheer, clouds are gathering, starting with a big jump in homes for sale:

 

 

Observe that the jump occurs at year-end, just about when AHI was calling the market top.

 

“Everybody dive for cover!  AHI says the market’s peaked!”

 

Some worrying signs are national:

 

Ratios of house prices to median household income are at a 25-year high in the majority of major metropolitan areas.

 

Truth in advertising.

 

Some are financial:

 

The rapid growth of interest-only loans introduces more risk into the markets.

 

When loans are interest only, none of the payment goes to reduction of principal, so there is no inherent equity buildup, only appreciation (if that occurs).  And the borrower who got into an interest-only loan is probably tapped out on payment capacity, so has fewer options to refinance.  It’s like inflating tire pressure to the maximum: you feel every bump, hard.

 

It was just a periodic rate adjustment!

 

Low-documentation loans and subprime lending have also soared, and increase the risk of a crash due to a spike in delinquencies and a curtailment of credit.

 

6.         Booms and busts are regional

 

The report’s real strength is in its metropolitan area historical analysis.  Check out three representative market clusters, starting with the Northeast:

 

Home prices in three Northeast states have moved in close proximity over the last three decades.

 

 

Two things leap out of that chart: the extraordinary synchronicity of the pricing dynamics, and that only once, in the darkest days of 1990, did prices actually fall.  Instead The late-1980s boom came to a screeching plateau in the early 1990s, and has spent the last half-decade gradually building up steam.

 

 

That pattern is largely replicated, even more sharply, in California:

 

 

 

Compared with the Northeast, California had a faster climb (20% plus!), a harder crash (10% drops in some markets), and a longer penance (three or four years) … but the overall pattern is much the same: steep inclines, sudden plateau, gradual resumption of real appreciation.

 

No wonder that, of the 30 metropolitan statistical areas (MSAs) experiencing the highest home price appreciation over the last five years, no less than 19 of them are in California.  Ten are in Florida, and only one elsewhere: Washington DC.

 

How about heartland America: Detroit, St. Louis, Chicago?  “None appear to be in the forefront of the current boom.” 

 

 

Except for Detroit, where 1982’s absurd short-term interest rates (over 18%) killed new-car sales and thus cratered home prices, the Midwest has puttered along with reliable 5-10% annual increases.  If no booms, at least no busts.

 

 

The inescapable conclusion of these historical charts? 

 

Some markets are due for a correction, whereas others are solid and may even be under-priced:

 

 

That chart indicates that if you believe 5% appreciation is the equilibrium rate uniformly across the country, then the coasts are due to skid, the center to rise.  But even in so stating, we see the refutation, for the demographic trends are coastal, middle America losing population to the ocean fronts east and west.  Nevertheless, it’s hard to see Midwest prices falling hard, and hard to see coastal prices continuing to climb … at least for a while.

 

Will the correction be a bust or a soft landing?

 

A bust need not always follow a boom.  According to an FDIC study of 54 local metropolitan area booms between 1975 and 1998, only 17% experienced a bust within the subsequent 5 years.  Stagnation is the most frequent outcome.

 

Soft landing, or other-worldly prices?

 

Interested in knowing more?

 

Kurt van Kuller may be reached at +1 (212) 449-4743, or kurt underbar vankuller at ml dot com.

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