Housing Isn't What It Used to Be

 | Apr 24, 2014 | 3:00 PM EDT
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Stocks fell on Wednesday, after a much weaker than expected report on new home sales, and while the equity decline was not large, the drop in new single-family homes was. Sales were down 14.5% to the lowest level in eight months. Even worse, on a year-over-year basis, home sales in March were the weakest in three years.

Blame rapidly rising home prices for the decline. That's really what has been behind the cooling in demand. Some might argue mortgage rates, but although mortgage rates have risen, they are still quite low historically.

Five years have passed since the devastating plunge in the housing market. While prices have generally recovered and even risen to new heights in some markets, the pace of housing starts still remains weak. Consider that from 1960 to 2006, single-family housing starts averaged 1.5 million units per year. At that rate, the nation's entire housing stock is turned over every 75 years, ensuring a well-supplied and high-quality stock of homes.

However, since 2009, the pace has been less than half that, at 704,000 units annually. This spells trouble. At the current rate of construction, it will take 165 years to turn over the U.S.' housing stock. That means we are likely to see many more blighted communities, many more cities following the way of Detroit.

Moreover, the slow growth in the housing stock combined with the current rate of growth in population (and possibly new immigration laws, which could augment the housing trend) means that prices will stay elevated and probably continue to rise faster than the rate of income growth, thus closing the door on affordability for many people.

Sure, there will be periods of cooling, i.e., price corrections, and they will probably not be as violent as the one we went through seven years ago. Moreover, for home buyers and real estate speculators, those will be the times to buy, but the opportunities will likely come and go quickly.

One thing is for certain: Housing will no longer be the driver of the economy that it once was. These days, fewer people can afford to buy homes as credit conditions have tightened and because incomes of the middle class have not really risen much at all.

Housing has already shrunk dramatically as a percentage of GDP. Back in 2006, at the height of the real estate boom, housing composed 11% of GDP. Today that figure is down to 3.0%. That's quite a drop, but the amazing thing is, it's actually up from the paltry 2.5% of GDP in 2010.

It's one of the reasons why stock market investors ought to pay less attention to housing trends. A weak housing report simply doesn't have the clout that it used to have. The stock market will continue to focus on corporate profits, which are now about 12% of GDP, or four times bigger than the impact of housing.

No wonder the market recovered after the close when Apple (AAPL) reported its earnings. Expect this from now on. For society as a whole, a lot may be riding on housing, but for the stock market it will be all about profits.



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