Friday, August 20, 2010

USA Real Estate Restructuring

USA Real Estate Market Recession Depression
Restructuring the Real Estate Market: What It Means for You

By D.R. Barton, Jr. of Van Tharp Institute

“This is like déjà vu all over again.” — Yogi Bera

I have spoken to folks who have recently started to speculate in real estate again. Frankly, the current real estate marketplace is one of the toughest areas to comment on. What happens in real estate is very important to the equity markets, though, so I think we need to dig in a bit and see where the data and analysis trail leads us.

One factor that makes commenting on real estate difficult (as well as commenting on other areas of the economy, by the way) is the 800 pound gorilla in the room throwing around its weight—the US federal government. Trying to discern where market forces might take prices and trends in any given sector is a difficult enough task. When the government, however, makes broad regulatory changes, implicitly and explicitly guarantees debt, and throws out unprecedented amounts of cash, well, they make it nearly impossible.

So with the caveat that any of these government intervention forms could override any credible analysis, let’s take a look at a couple of compelling factors affecting the real estate world. We’ll wrap up with why equities traders and investors need to pay attention to real estate.

Some Useful Data

In March of 2009, I wrote about how both the real estate and equities markets were buoyed by the first economic report of a month-to-month increase in new home sales in over a year. I have included the following chart (current through Feb 2009) to show how small this move up was in the big picture.

USA Housing Starts
(To clarify an acronym, SAAR stands for “seasonally adjusted annual rate,” which means that they take the monthly numbers and project them to an annual number with some allowances for seasonal tendencies.)

In that article almost a year and a half ago, I opined that this was not a reason to get overly excited about the real estate market, since this was just the first sign of the market halting a drastic skid.

And while the real estate sector and its component stocks have improved since then, the argument could be made that the improvement is just the rising tide of the broader equities market lifting all ships. New home sales since that first move up have supported this view.

USA Housing Starts Building Permits
As the chart shows, there has only been a minor move off of the lows and now we are almost back down to the level of the bottom in February 2009. More telling is that the number of new home starts remains at slightly more than 40% of the relatively static rate of the mid-1990s, and at one-quarter the monthly rate of the unsustainable highs seen in early 2006. The outlook for a big move up isn’t that compelling.

Demographics Are Useful, but Take Them with a Grain of Salt

The Barron’s cover story from a couple of weeks ago was entitled “Renter Nation”. The most interesting data from the article centered on demographics. It’s no surprise that the number of households owning their own homes has dropped by almost 4 million since the peak from a few years ago. The interesting part came from the data about the shifting age demographic in the U.S.

While current overall home ownership stands at 67.2%, the number for households headed by someone under 35 years of age is just 38.9%. This is easy to understand—more folks will own homes as their income increases. The aging trend in America for the next five to six years, however, is toward younger households, with American Demographics magazine forecasting substantial growth in households headed by those under 35 and a decline in households headed by those in the prime house buying age bracket of 35 to 49 year olds.

Quite simply, there will be fewer eligible home buyers in the relatively near term. Add to this the tightening mortgage requirements and the outlook for real estate becomes strained. In fact, 2009 was the first year since the early 1990s when less than 10% of mortgages required less than 10% down. The high for this number was just 2 years ago when 29% of all mortgages were written with less than a 10% down payment.

So What?

Real estate speculation is not dead and certainly some there’s some interesting activity in several regions of the country. But those jumping back into that endeavor should do so with eyes wide open. I’m afraid that the days of real estate prices only going up are long behind us. A more likely scenario is another down leg in real estate prices before they can find a bottom and generate the conditions for a more sustained multi-year bull market.

For equities traders and investors, it would be very prudent to keep your eyes on what’s happening in real estate, especially at the national level. It’s a huge part of the economy; it interacts closely with the finance sector and there are big changes afoot. Pay attention to what happens at the meetings currently underway to overhaul what has become a nationalized mortgage financing systems. More on the outcome of that meeting when it concludes. Until then…

Great Trading, D. R.

About the Author: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on and Financial Advisor magazine. You may contact D.R. at the Van Tharp Insitute