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Housing bubbles: why are Americans ignoring reality?

By Hugh Pavletich - posted Tuesday, 24 November 2009


Within this article "The comprehensive state of the US housing market", Dr Housing Bubble (a housing commentator based in California) asserts that of the 129 million residential units in the United States, some 15,950,000 are vacant and therefore overall, the United States has a huge oversupply of residential stock.

Other United States commentators are making the same assertions, such as Colin Barr of Fortune magazine with "Housing market still faces a big glut".

However, in reading closely the "US Census Residential Vacancies and Homeownership Report" (PDF 50KB) released on October 29, 2009, the figures are hardly cause for alarm.

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As at the 3rd Quarter 2009, Table 3 illustrates that there are an estimated 130 million housing units in the United States, of which 111 million (85.5 per cent) are occupied, with 75 million (57.8 per cent) owned and 36 million (27.7 per cent) rented. The balance, being some 19 million (14.5 per cent), are described as “vacant” (with a revised 3rd Qtr 2008 18 million units alongside). The “vacant” housing units are loosely broken up into vacant the year round, for rent, for sale only and seasonal. There has been no dramatic shift in these figures during the past 12 months,

The US Census Population Clock states that the present US population is 307 million.

The Census Bureau Residential Report illustrates that in the 3rd Quarter 2009, the estimated vacancy rate for usually occupied rentals was 11.1 per cent (9.9 per cent 3rd Quarter 2008) and 2.6 per cent (2.8 per cent 3rd Quarter 2008) for homeowner housing. There is nothing much to get excited about there, and indeed, it is very pleasing to see that somewhat elevated “rental vacancy”, so the poor are not getting hammered in the United States as they are in Australia, due to Australian state governments created scarcities (lifting land prices for revenue purposes), causing major rental shortages and grossly excessive rents.

The importance of “vacancy cushions” cannot be over emphasised, as they provide the necessary time for the construction industries to gear up, so that unnecessary property inflation does not occur.

The US Census Quickfacts (the Texas page - with US figures alongside) states that the 2008 US population the persons per occupied household in 2000 was 2.59.

As societies become more affluent, people per household should fall (note Texas people per household is slightly higher on these 2000 figures at 2.74 per household, likely due to the higher Hispanic population with larger families).

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Conversely - through these economic downturns, it is likely too that household sizes would increase somewhat.

For example, in using the US Population Clock as a rough guide with the 307 million population figure (and deliberately ignoring for the purpose of this discussion, those in institutional care etc), if the people per household overall increased from say 2.59 per household requiring 118 million residential units - to say 2.79 people per household (as economic conditions worsen), just 110 million residential units would be required for occupation. Around 8.5 million less than was occupied during the peak of the boom.

Further to this - significant numbers of second or vacation homes would no longer be required, as households struggle to lower their expenses through this economic phase.

As an example, during the decade of the 1990s in Australia, as people became more affluent and family sizes decreased, household sizes moved from about 2.8 per household to approximately 2.6 per household, which was a big driver of the residential construction industry. As the population became more affluent, they bought or built more second or vacation homes as well. Australia’s population increased by about 12 per cent through this period, as its housing stock increased by in excess of 22 per cent. (access Australian Bureau of Statistics for further information).

Property commentators “estimates” are always interesting of course, but as with my own, should be treated with greatest caution.

To avoid getting distracted with interesting statistical noise, it is extremely important to focus on the major structural statistics, as I will now explain.

The reality is that the only true measure of scarcity and abundance - is price.

Over the years Dr Housing Bubble, and many other American commentators, have persisted in ignoring the glaring contrasts of the California and Texas housing markets. Let’s consider the latest Houston Association of Realtors September 2009 Monthly Report, which makes very interesting reading indeed.

For the September month 2008 and September 2009, the numbers are as follows - property sales from 4,336 to 5654 (+30.4 per cent), dollar volume from $0.877 billion to $1.102 billion (+25.7 per cent) and median single family sales price $155,920 to $156,200 (+0.2 per cent).

This is because Houston (as with Texas and most of middle North America), is a “normal market”. That is, it is not a political plaything (see "MPs can't escape party donors", The Australian) or a casino as California clearly is.

Not surprisingly, the US based major construction consultants, Hanley Wood, earlier this year rated the Houston residential construction market the healthiest housing construction market in the nation. I touched on these matters within an article back in February this year "Housing Bubbles: Learning From Houston".

Now let’s turn to discussing some numbers about “abnormal markets” and what is accurately referred to as the “Failed State of California” ("Failed states”, Washington Examiner), where it appears the politicians are determined to wipe the residential construction industry off the map.

The state of the residential construction market in California can only be described as “horrific”.

On October 26 2009, the California Building Industry Association released its Report on the residential construction permit activity for the month of September 2009, stating that there were just 2,920 permits issued for the month, and that further to this, they have again revised downwards their permit estimates for 2009 to an appalling 37,700 units.

Unbelievable figures, when one considers that the estimated population of California is 37 million.

The internationally recognised measure for housing production and permitting is the build/permit rate per thousand population. This is to ensure that when housing production is being discussed over periods of time, population changes are taken in to account as well. Something, incidentally, the California Building Industry Association failed to do in its report.

The California residential permit rate for 2009 is therefore a shocking one unit per 1,000 population.

Indeed I cannot recall a permit rate this low in recorded history anywhere in the world.

Yes - it’s that bad.

If Texas was permitting at the same rate for 2009, just 24,000 permits would be issued (Houston 5,600).

On an international basis at 1/1000 population the figures would be - the US overall 307,000, Canada 37,000, Australia 21,000, the United Kingdom 61,000 and New Zealand and Ireland around 4,400 each.

It is to be hoped that US urban researchers and commentators, in using the build/permit rate per 1,000 population, research and report on this serious issue with urgency.

The reason of course for these unbelievably low California permit rates is because the governments at all levels in the state have essentially banned the construction of affordable housing.

The Berlin Wall approach to urban planning if you like.

Meanwhile, back in the normal market of Houston, they are merrily building starter homes of 235 square meters (2,529 square feet) for $140,000 on the fringes ($30,000 for the land, $110,000 for actual house construction).

The Annual Demographia Surveys (5th Annual Edition (PDF 721KB)), the Harvard Median Multiples and many other income to house price studies (e.g. Randal O’Toole of Cato’s extensive work), clearly illustrate that if housing exceeds three times annual household income - there are supply constraint issues to be dealt with.

It appears too that Dr Housing Bubble is “baffled” why California had such an inordinate share of sub prime, Option ARMs and other grossly distorted mortgage structures and delights in blaming the bankers (or banksters as he sometimes refers to them) for the unholy mess that is California (the epicentre of the Global Financial Crisis).

Households should not spend any more than three times their gross annual household income to house themselves, and importantly, not load themselves up with any more than two and a half times their gross annual household income in mortgage debt.

It has not dawned on Dr Housing Bubble to date, that as the California bubble inflated, financial institutions simply had to increasingly lend outside these historic norms, if they wished to maintain market share.

Understandably, the financial institutions - in no doubt being acutely aware of the risks of this obviously risky high multiple lending - were very keen to securitise it and off load the risks to others.

The only mistake they made was not offloading the risks adequately or fast enough! Herb Greenberg outlines this financial circus in "Straight Talk on the Mortgage Mess from an Insider", MarketWatch.

It appears too that Professor Robert Shiller of Yale University is “terribly conflicted” about what is happening, if his recent extraordinary Fox Business television interview ("Shiller on Housing: ‘I am Terribly Conflicted’", Glick Report) is any guide.

Meanwhile, as the Americans are continuing to be confused and conflicted, in Australia and New Zealand there is now widespread recognition there must be structural changes put in place to ensure that these disastrous housing bubbles don’t get underway again (see Performance Urban Planning http://www.performanceurbanplanning.org/ for access to New Zealand Government statements. For recent Australian news and reports see “Bottlenecks choking recovery”, The Australian; “More houses, not taxes”, The Australian; “Home ownership dream fading, say Flinders University researchers”, AdelaideNow.

It needs to be recognised that at their core, these issues are not “ideological” or “environmental”, but have much more to do with deliberately misleading information being generated by professionals (refer my article earlier this year "Housing Bubbles and Market Sense") in collusion often with political and commercial elites, keen to promote housing bubbles for their own ends.

I discussed this at some length, with suggested solutions for discussion, within a paper I prepared last March "Getting performance urban planning in place".

Yet the Americans seem to persist in ignoring the real structural issues - and instead are choosing to “paper over the cracks” by financially bailing out everything in sight. An exercise in futility if ever there was one, as the Japanese have learnt to their cost following the collapse of their property bubble in 1989.

It is to be hoped that the Americans belatedly start getting the public conversation underway, in working together exploring real solutions to these unnecessary housing bubbles. We have done this in Australia and New Zealand these past five years and it is working.

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About the Author

Hugh Pavletich is Managing Director of Pavletich Properties Ltd, a commercial property development and investment company, based in Christchurch, New Zealand. He initiated and co authors the Annual Demographia International Housing Affordability Survey and in 2004 was elected a fellow with the Urban Development Institute of Australia, for services to the property industry. He operates the website Performance Urban Planning.

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