In the 50 years ending 2006, housing starts in the U.S. averaged 1.5 million annually. Interestingly, in 1972 we built 2.5 million homes when the U.S. population was 200 million. Fast forward to 2006, which was the height of the real estate bubble, and we built 2.6 million homes, the difference being the population had grown to more than 300 million.
On average, it takes about 75 years to turn over the nation's housing stock entirely when averaging about 1.5 million units annually. However, since 2008 we've averaged only about 690,000 housing starts annually. Given the historical average, that is less than half what we need to keep up with demand if we are going to have enough housing for a growing population and if we are to avoid seeing our housing stock become totally dilapidated. The shocking truth is, at the current rate of construction it would take 217 years to turn over our existing housing stock, which means that we are concocting a recipe for lots of blighted cities and neighborhoods as homes all across the nation fall into disrepair. Of course, that's if you're going to accept that it will stay at the current, highly depressed rate of construction. I am not. Being a betting man, I'm betting that this won't be the case.
Housing construction is starting to pick up again. Since hitting a 50-year low of 478,000 units in 2009, housing starts have rebounded back up to 890,000 units and recently hit a four-year high of 973,000 units in December 2012, according to data from the Federal Reserve. That's a big improvement from the dismal 2009 pace; however, the pickup must continue to keep us out of the "third world" scenario I described earlier. At the current rates of construction, we are still about half the levels we need to be in order to get back to our long-term average.
One of the problems has been money. Until recently, bank lending had been holding us back. Real estate loans at commercial banks fell steadily between May 2009 and September 2011. After peaking $3.88 trillion, total real estate loans at commercial banks slid to $3.48 trillion in September 2011. That was the sharpest decline on record and clearly contributed to weak construction activity as it resulted in very feeble demand. People couldn't get loans.
Since 2011, however, we've s been steady growth in real estate loans. The total outstanding amount of real estate loans at commercial banks is now back up to $3.56 trillion or, an increase of about $80 billion over 2011. Clearly, we still have a long way to go, but the trend is definitely improving.
When I look at this data, both from an historical standpoint and with regard to the recent years, I honestly can't envision a scenario where this level of underinvestment persists. Having said that, I'm naturally bullish on the homebuilders. I know that the homebuilders have already had a strong run. In the past eight months, the SPDR S&P Homebuilders (XHB) is already up 35%. Moreover, since hitting its low in 2009 it's more than tripled. In addition, some individual homebuilder stocks, like Toll Brothers (TOL), Lennar (LEN) and PulteGroup (PHM) have done even better.
Don't get me wrong, I know some of these stocks are trading at rich multiples, and I like to call myself a value investor, so recommending Ryland Group (RYL) with a price-earnings ratio of 42 is normally not my style. The earnings potential in these companies is still very good, however, with lots of room for acceleration as housing investment picks up pace in coming years.
Again, I just don't see the current, depressed rate of investment enduring, so I am willing to bet on continued gains for these stocks.