This commentary originally appeared at 8:39 a.m. EDT on March 28 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.
The housing market's shadow inventory of unsold homes is starting to clear, certain areas of the country are experiencing signs of more robust activity, and, despite low levels of new-home production (based on historical data), homebuilders are even regaining pricing power in several geographic regions.
Stated simply, the U.S. residential real estate market is about to launch a broad and sustainable multiyear recovery. And, from my perch, the share price strength in housing-related equities is telling the real story of an improving and self-sustaining home market that could continue through the balance of this decade.
- Spring selling season is strong. Over the past five years, Toll's early-spring selling season had sputtered out in late February/early March. In 2012, however, its sales activity is getting stronger as the year progresses.
- Homebuilder pricing power is returning. In fact, Toll Brothers is having its best selling season since 2007. Orders are up "significantly" and nearly 30% of the company's communities have increased home prices. (A year ago, none had pricing power.)
- The sun shines in Florida. Miami, Florida, one of the epicenters of home speculation in the last cycle, which had been previously inundated with foreclosures two to three years ago, has turned around meaningfully, thanks to an inflow of South American and Northeast U.S. buyers. This turnaround has been in place for nine to 12 months.
- Shadow inventory is clearing. Surprisingly, even some areas of the country that have been adversely impacted by the weight of a large shadow inventory of foreclosed or soon-to-be-foreclosed homes, have improved measurably and are turning the corner. A good example is Phoenix, Arizona, which had over 15 months of supply for sale 12 months ago but now has a developing shortage of inventory (under three months of supply).
- West Coast land prices are soaring. In certain areas of northern and southern California, the raw land market is regaining a speculative tone as prices have risen dramatically. The strength of land prices, while well ahead of the health of the home price market, is typically a leading indicator of industry pricing and activity.
To refresh everyone's memory, one month ago, I made the case that the foundation of the housing market was firming and the runway for a recovery is lengthy.
It is my expectation that both new- and existing-home prices, which suffered price declines of close to 34% from 2007 to 2011, face a better year ahead in 2012 and over the balance of the decade.
While the housing recovery of 2012 to 2020 will likely start out slowly, owing to the large inventory of unsold homes, still-restricted mortgage credit and the current preference for renting, there is now ample evidence that residential real estate markets have already turned in a national market that has grown bifurcated. Areas of the country that are unencumbered by a large supply of foreclosed properties -- for instance, the Washington, D.C.-to-Boston corridor -- are doing better. Cancelation rates are down dramatically, and some pricing power is returning for the homebuilders. By contrast, areas such as inland California, Nevada and the like continue to suffer in price and in sluggish transaction activity as a result of the indigestion of the last cycle.
In other words, the weaker regions are masking a developing national recovery in housing that has the potential to be more durable and healthier than the past cycle. (The Case-Shiller index results this week belie the improvement because it is an index of all home prices, not a regional study.)
With a hat tip to Jim Paulsen at Wells Capital Management for providing some charts as evidence, here are the seven main reasons why (in conjunction with the Toll Brothers comments) I expect a durable recovery (in demand, activity/transactions and in prices) in the U.S. housing market:
1. Housing affordability is at a multi-decade high.
2. Reflecting normal U.S. demographic trends (household formations of 1 million-plus per year) and a low level of 2008-2012 new-home production, there is plenty of pent-up demand ready to be unleashed.
3. As rental prices have risen and as home prices have fallen, the economics of home ownership has improved.
4. We have seen a decisive improvement in the jobs market.
5. Mortgage rates are at historic lows.
6. Housing surveys have turned positive.
7. Confidence is improving.
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