Since I have been contributing here on Real Money for the past three years and even before that, I have said housing starts would have to rise to at least 1.5 million units annually, if not more, to provide enough housing supply to curtail further sharp price increases and to cool off the current building boom.
That 1.5 million annual start figure was the average over the past 40 years. In between, we've seen it jump as high as 2.5 million in 1972 and 2.3 million in 2006. Both times precipitated a housing market correction because of inventory oversupply. However, at 1.17 million annually, which is where we are today, starts are nowhere near where they need to be. That's because with population growth, family formation and normal aging of the housing stock, we need more supply.
At a 1.5 million annual rate of housing starts, it takes approximately 75 years to entirely turn over the nation's housing stock. That would be what we'd consider normal. America would look like America in the sense that most of the housing stock would be relatively new or in good repair.
However, in the depths of the financial crisis back in 2009, starts fell to below 500,000 annually. At that rate, it would take 225 years to replace the nation's housing stock. If left at that rate, it would mean totally inadequate supply, dilapidated structures everywhere and blighted communities one after another. America would look like an economically challenged Third World country.
Clearly, prices had to rise and the rise reflected the "replacement cost" of lost housing. That has been happening.
For all the people who supposedly "called" the housing crash, the recovery has gone on a lot longer than the crash and so has the rebound in prices. Some of those people are still calling the crash, which is comical. It's like so many of the "short sellers" or stock market "permabears." They never seem to tell you when to get back in on the long side ('cause they never go long).
The housing recovery still has a long way to go and that's one of the reasons I am still bullish on homebuilders. I would be even more bullish if not for the fact that many people are still having trouble qualifying for mortgages. This has been one of the negative outcomes from the financial crisis and it has been a hindrance to further building activity. Demand could be stronger, but it's tempered by lack of adequate financing.
It's interesting to note that back in 1972, the population of the United States was 200 million. Back then, banks were highly regulated, "plain vanilla" institutions that made mortgage loans, held those mortgages, serviced them, etc. Even so, with those supposed "constraints," we built 2.5 million new homes.
In 2006, banks were no longer subject to Glass-Steagall, loans were bundled, securitized, sold off, we had 300 million in population and guess what? We built 2.3 million homes. So what was accomplished? Not much; just a lot more intermediation and injection of risk. Anyone who says it's a better system today, well, I really question that view. Less real capital, more risk? What's so great about that?
As for the homebuilders, I like Lennar (LEN), Beazer (BZH), Pulte (PHM), KB Home (KBH), Toll Brothers (TOL) and D.R. Horton (DHI). But stick with the ones that pay dividends. Pulte is probably your best choice.
