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  1. Home
  2. / Investing
  3. / Real Estate

Don't Wait for an Invite to This House Party

Pent-up demand indicates good times are just around the corner in the housing market.
By SHAM GAD Nov 17, 2011 | 03:00 PM EST
Stocks quotes in this article: BLDR, MWA, MHK, LEN, MDC

The biggest gains usually come to those investors who arrive early to the party and leave before everyone else piles in. It's never cool to be the first to show up at a party, though, unless it pays to do so. And the payoff could be huge for those willing to join the housing party right now, before it even gets started.

By most measures, the U.S. housing sector is scraping the bottom. While nearly all other industries have rebounded from the recession lows, housing and any business related to it remains stuck in the abyss. Construction activity remains weak, housing demand hasn't picked up, and household formation continues to decline.

According to a story in The New York Times, Moody's Chief Economist Mark Zandi says approximately 950,000 households were formed in 2010 compared with 1.3 million new households in 2007. According to the National Association of Home Builders, housing starts totaled 1.4 million in 2007, but that was after nearly 1.8 million housing starts in 2006. By comparison, housing starts totaled 587,000 in 2010. But the bullish case for housing goes beyond the supply/demand gap between housing starts and household formation.

One of the by-products of the 2008 recession was the migration of college graduates back home to live with their parents after graduation. Generally, the past few years have witnessed an increase in extended-family living arrangements: married couples living with parents, siblings moving in together, and so on. The effect on the economy has been painful. Someone choosing to move in with parents or relatives is not only depressing housing demand, but all the economic activity that goes along with it: home insurance, cable service, home furnishings, and even repair services. Moody's estimates that nearly 15% of young adults are living with their parents, up from 11.8% in 2007.

This increases pent-up demand for housing. Embedded in that 15% figure are many young adults who can afford to move but choose instead to live at home for a few years to save money to buy a house. The reality is that the unemployment rate for college graduates is significantly better than the 9% headline unemployment figure.

Statistics are never completely accurate, but the reality is that many of these young adults will soon want to move out on their own. And when they do, they are going to be in fantastic financial shape. And with interest rates likely to remain at historically low levels along with attractive real estate prices, the ability to buy will be easier than ever. The Times article gives the example of a 26-year-old teacher who makes $45,000 a year and lives at home. While he could easily rent his own place, he has chosen to save money to buy a home, which he hopes to do early next year.

Zandi also says in the Times article that  there is pent up demand for about 1.1 million households from these young adults -- enough to eradicate nearly all the excess vacant housing in the U.S. today.

This cycle is the natural economy at work: Depressed housing demand today creates pent-up demand in the future. I don't expect 2012 to be the year this pent-up demand hits the market -- it may be 2013 or 2014 -- but it is closer than many believe. And no, it won't be 2005 or 2006 again -- but you don't need to return to those levels to resuscitate the housing market today. Taking housing starts from 600,000 to 900,000 in the next two to three years will be a tremendous boon to the housing market.

That level of activity is ample to cause rallies in shares of names like Builders FirstSource (BLDR), Mueller Water Products (MWA) and Mohawk Industries (MHK). Quality homebuilders such as Lennar (LEN) and MDC Holdings (MDC)  will likely be big winners also.

When housing does rebound, and it will, it will likely be fast and fundamentally sound. Everyone on the sidelines waiting to buy is well aware of the attractive lending rates and prices of real estate today. Anyone looking to participate in the housing comeback will want to think about making a move soon.

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At the time of publication, Gad had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Real Estate | Economic Data

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