US housing recovery continues

By Leith van Onselen

The US housing recovery continued overnight with the release of Commerce Department data for the month of December showing housing starts rebounding to their highest level since June 2008, lifting to a seasonally-adjusted annual rate of 954,000 dwellings. This represented a 37% lift on December 2011 levels when housing starts were running at 697,000 units, and is 77% above December 2010 when construction slumped to only 539,000 housing starts.

Data from Trulia reveals that the bounce in housing starts was driven mostly by the supply-responsive markets of Texas and the Carolina’s (see below table):

While the lift in overall dwelling starts in December appears spectacular, it’s important to note that the annual level of housing starts in the US remains some -35% below  the 50-year average, and overall dwelling construction remains highly depressed (see below chart).

Moreover, it appears to be a jobless recovery, with US housing construction jobs actually falling by -1.2% over the year to December 2012 and hovering near 20-year lows (see next chart).

Part of the reason for the lack of rebound in construction employment is that the surge in housing starts has been driven by multi-unit (apartment) construction rather than detached houses, which tend to be less labour-intensive (see next chart). Indeed, in 2012, 31% of new home starts were in multi-unit buildings, as opposed to single-family homes, which represents the highest share in the last twenty years, during which time multi-unit buildings accounted for only 20% of new home starts.

Despite the tentativeness of the recovery, US housing construction looks set to rise further. US house prices have rebounded 5% since their January 2012 lows, although they remain -30% below their peak, according to the 20-city Case-Shiller index (see next chart).

Moreover, official unemployment is also falling, down -2.1% over the past three years to 7.8% as at December 2012 (see next chart).

With any luck, the improvement in the US labour market will lift the rate of household formation, thereby stimulating further housing demand. According to the Bank of America, the rate of household formation in the US roughly halved in the wake of the Global Financial Crisis, as the deteriorating economy caused a big rise in shared (group) accommodation in an attempt to save on housing costs (see next chart).

A sustained improvement in the rate of household formation will be critical in determining the strength and sustainability of the US housing recovery.

Leith van Onselen
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  1. With housing so cheap, why wouldnt it be a great time to buy!
    We need our big price correction, supply and demand will then take care of itself.

    • reusachtigeMEMBER

      Totally! Lucky Americans. Taken their medicine and can move on. Here, we talk in weak tones of correction like “oh, a slow melt or stagnant prices until wages catch up is the best outcome”. Boulderdust it is!

    • yeah in US, (large) investors, not FHB, are coming back in force and making a killing, more have and have not.

      • This is true in the areas of the USA where housing supply is unresponsive – California is a disaster. Follow DrHousingBubble blog for a while and see what I mean.

        But in the supply-responsive markets that The Unconventional Economist identifies, there are no killings to be made in capital gains by the investor class. The response to demand all occurs in building of houses, not in price response.

        This is what happens with cars and TV’s. Price stays low thanks to competition in supply, no matter how much more is demanded. In the supply-responsive parts of the USA, anyone can build houses on $10,000 per acre farmland without urban planners stopping them. There is so much of this land around all cities, within a few minutes drive, that it is impossible for land bankers to corner all the supply and still make a profit holding it.

        Therefore the price of sections is dictated by “the cheapest possible cost that developers can do developments and the smallest profit margins they can accept”. The $10,000 per acre base cost of land is passed on to the house buyer with the cost of development and a modest profit added. None of this obscene 1000% capital gains thanks to urban plans handing monopoly powers to the owners of the specified land.

    • There won’t be any recovery in housing construction in Australia until house prices start reflecting their true worth.

      It is interesting that the collapse in housing construction also coincides with the start of the worst excesses in the housing boom ie from 2003 onwards.

      If you want to lift something up, first you must bring it down (apologies for mangling someone’s quote)

  2. There is a good lesson in the US housing market.

    Don’t underestimate the power of a determined government to ‘fix’ a broken housing market.

    It may involve

    * near zero interest rates
    * the govt guaranteeing or buying nearly every mortgage granted
    * writing off billions of dud mortgages
    * forcing the entire population to foot the bill

    But it can be done.

    At least for a while.

    • This only works because the USA has so many supply-responsive markets. In California, all it is doing is re-inflating the bubble. Follow DrHousingBubble blog for a while.

      In the supply-responsive markets, cuts in interest rates actually do stimulate the REAL economy – people can refinance, have more discretionary income, pay off mortgages sooner, form households earlier, and so on. The only “stimulus” in California and supply-unresponsive markets, is from a few more incumbent home owners doing equity-withdrawal spending as the bubble re-inflates. How sustainable is this?

      And guess what examples Australia is following?

  3. I’m glad that you have covered this. So many people in Australia are unaware of the growing strength in US housing. Regarding new starts, you will find that the area of growth is mainly multi-family dewllings (unit blocks in local speak) – the NAHB have some good data on that.
    Essentially it’s investors who are piling into the market, which puts asset ownership into fewer hands.

    The US housing industry is certainly coming back, but there is still a lot to do, and FTB involvement seems to be slow.

    • Does the data point to whether the investors building these unit blocks are primarily local or foreign? Or whether the new unit blocks are being easily sold/rented on completion?

      • Off the cuff I haven’t seen any breakdown BB but there might be something here –

        Anecdotally I have seen many articles of even Aussies piling into the market. I know that Buffet is investing, and a number of hedge funds are piling in, everyone but the USA FTB it seems.

        I an recession people don’t buy, but of course if they did buy, there would be no recession.

        I think this will create an imbalance in homeownership in the USA.

        • If it’s a lot of speculative investors driving this growth in housing starts they might get burned. Aussies piling into the US housing market is hardly a sign of shrewd buying lol

          • Agree entirely

            Speculative investment driven demand is what drove the US market to levels of absurd stupidity not too many years ago.

            Seems that past lessons learned are very easily forgotten in today’s world.

            If a countries real estate market cannot stand on its own two feet without central bank and government intervention then a genuine recovery it is not.

          • BB they have bought at a time when the market was underpriced on fair value, many are not leveraged, rents are rising strongly, and the population is increasing at a fair pace. If family formation is below traditional levels, that just means that it will be above traditional levels when full employment returns.

            North America has always had corporate involvement in housing, but now it will be even more so. Whether they exit when prices return remains to be seen, but either way average Americans who would like to buy a home will pay more in the future.

            Average Americans would like to pile into housing now but most can’t get a loan – so corporations are taking their place.

          • Thanks willynilly – but what does that have to do with corporations and hedge funds in the USA buying housing in the USA?
            I fail to see the connection.

          • “they have bought at a time when the market was underpriced on fair value”

            I agree, but just because something is undervalued, doesn’t mean it can’t remain that way for a long time.

            If it’s hedge funds driving the construction… well all I can say is look out below because if they are buying with expectation of a quick price recovery and they find themselves wrong then we may see them dumping all the stock in a year or two as quickly as they built it.

            And hedge funds hardly have a good track record of outperforming the market (of course there are exceptions):

            Under performing the market



            Heavily exposed to Apple at the recent price peak:


            As Bob Sickle points out, this is not a real recovery until the government stops intervening in the market.

          • “It’s a recovery.”

            lol well it’s hard to argue with those facts. I guess we’ll have to wait and see what happens once the Fed stops the tens of billions in MBS purchases each month and starts raising rates…

          • BB, I suspect it is a private equity led a “pump and dump” operation. Just google it, Blackrock is most prominent among them. I suspect most of talking heads spruiking US housing on TV (and here) are on the sell-side already.

            Also, there are a lot of shadow inventory where the ultimate investor is probably the Fed, with their “trash for cash” program for the banks.

            Under the benevolence of Bernanke, the banks are using all kinds of tricks to make this stock literally vanish into thin air. Reuters published appropriately titled report on this.

            The latest foreclosure horror: the zombie title


            The US merchants of debt (and their Aussie counterparts 😉 ) are trying to engineer a “Fool me once, shame on you. Fool me twice, shame on me.” scenario. Don’t be fooled twice – Don’t Buy Now!

          • Ta coolnik. I am on MB holiday 😉

            Correction : PE firm is Blackstone, not Blackrock.. (as Seanm pointed out below)

            You have to ask yourself – if the market has been taken over by large speculators, do you really want to swim in it?

      • The rental market is very strong vs historical averages:

        Peter is right though that the effect of the housing crash has been a massive concentration of housing assets in the hands of the wealthy:

        This should give pause to those who wish for a housing crash. What will end up happening is those who have little equity will get totally torched while many of those current renters who want to buy at lower prices will lose their job and/or fail to find a lender willing to lend to them at the time they need it.

        • Yes, a ‘slow melt’ would be the best outcome for most people (disclaimer: I almost fully own my home). A US-style crash, and the associated economic turmoil, would be devastating for the majority of Australians.

          • What is an appropriately slow melt? 0% nominal rise for 5-10 years? 5% nominal fall per year for 5 years.

            There are plenty of costs associated with an excessively slow melt.

            At the moment there is hysteria from the usual FIRE suspects whenever even a bead of perspiration forms on the iceberg.

          • reusachtigeMEMBER

            Slow melt means prolonged pain and suffering. get it over and done with then rebuild. The rebuilding would be fantastic for everyone once it kicks in. Slow melt is like bleeding to death out of ones nose.

          • The government will not let a property crash happen, not while there is still some room to move with interest rates, the slow decline will continue as unemployment rises. Remember its an election year.

          • Leith,

            Perhaps time for a new article that takes a detailed look at both the costs and benefits of these two scenarios? Or has it been done already?

          • coolnick – the cycle that is important on a home ownership cost benefit analysis, is the ownership term for the individual, not over 5 years, 10 years, or even 25 years, it’s a life cycle.

            If you buy at 35 and live in the house until you die at 85 what is the cost benefit analysis – to my knowledge no one has ever done that, it’s too hard on a pro-active model due to all of the variables.

          • Peter,

            Can you not think about housing market only in terms of mortgage and think for a moment about how housing market influences economy and society as a whole (if you can help it)?

            The contesting views are whether housing market crash is bad for straya, and a slow melt is the best possible option. How do these two scenarios affect the whole economy on a longer (~2-3 decades terms)?

            If you put your sock puppet away, then perhaps you can possibly see that there is more to housing than simply price and credit growth.

          • Ah – OK you are looking at the macro economic level. Sorry I did give the wrong answer to that question.

    • There is a difference between growing strength in a market and a strong market.

      I would say that the US housing market it still fragile, but is getting stronger. Perhaps this is why many Australians are unaware of the improvement in the US market, because it’s not really news that a weak market is getting stronger but is still weak.

    • Growing strength in US housing, what a load of crap. There was a report in Bloomy this morning about how Florida housing defaults were at a all time high.

      Another report in Bloomy yesterday about how people were buying houses in Detroit for $600 yes, $600, amazingly though there was one specuvestor that had bought around 1000 properties at a average price of $2500, supposedly there were about 30 000 properties sold by the Detriot council in the tax repo sales, in which they recouped about $72 million, my maths gives me a average price of $2400, but somehow the “average” house price in Detroit was $235000, I would guess that they don’t count repos as part of their sales figures when working out the prices.

      Again, take the time to research the facts and stop believing the spruik.

  4. I don’t know about a US residential house price recovery but I do know an attractive investment when I see one, so I’m headed for the US later this month for DD on an apartment complex. The rental yield is over 10% with a lot of possible capital gain and a FX upside.

    It is not a very liquid investment but the cash flow looks excellent, so I’m not overly concerned.

    I suspect, in the near future, I’ll hear loud whoosh noise as hot money leaves the Aussie. That’s when things will get really interesting for the AUD.

      • I expect my US RE exit will be through formation of a Master limited Partnership, as a matter of fact I’m already in discussions with several well cashed up Chinese friends about just such a scheme. In the mid 90’s these were very popular and all the partners made out like bandits when MLP’s morphed into REIT’s. REIT’s had the revenue/cashflow stability the average punter wanted along with the size to compensate for the unknowns that plague individual RE investments. With the right exit timing REIT’s were a gold mine especially for the initial investors. Personally I see no need to write a new playbook when the old ones can be reused with just a little dusting off.

      • Really Leith? Really China Bob? either of you ever actaully been to Florida? Bet neither of you would actually live there.

    • China-Bob,

      There are definitely some good investments out there with excellent yields. I’m currently living in the USA and am in DD mode also (with the help of a brother in-law RE broker who works with Freddie Mac). Here are a couple of pitfalls that I’ve come across.

      1. Clean title. Given mortgages were securitised and readily traded amongst financial institutions, it is often the case that numerous institutions have a claim on the property (liens from > 10 investors are not uncommon). It can be costly to get a court to discharge the liens. It’s also not a simply task to find the lien info out and you may only do so once you’ve spent $ on legal advice.
      2. For mortgagee in possession properties, the bank reserves the right to reject offers at any time before closing. Hence you may find a property, get the liens discharged, go to settle and the bank will increase the price to reflect the market value of a property that has clean title.
      3. Land tax in the USA is significant and varies from county to county.
      4. People who were kicked out of their properties were sometimes disgruntled. It’s not uncommon to find toilets/septic systems filled with cement. Properties left empty for long periods are often missing copper pipes or have black mold which is toxic and costly to remove.
      5. Apartment complexes are often co-ops, meaning you buy a share in the building and not an apartment. Co-ops can have strict rules on leasing out apartments.

      Find someone you trust and get a good lawyer with experience.

      • Good advice Winston.
        I lived for over 10 years in the US so I’m aware of many of the issues that you raise. I’m actually interested in purchasing a complete apartment complex so these and many other issues exist. It is absolutely true that the whole US RE area is a mine field of legal and financial and maybe physical problems, in part that’s why the prices / yields are so attractive, so it means that in doing your DD you need to know the relevant questions to ask, rather than just being bamboozled by the slick RE presentation.

        Trust is a vital part of any business transaction but trust always needs to be balanced by careful inspection, which is why I’m actually going to personally inspect each and every apartment before I make any offers. Fortunately my father was a builder so a little bit of his knowledge filtered down.

  5. Blackstone just bought 16,000 homes and is the largest private real estate owner in the USA.
    “Why This Little-Known Company Bought 16,000 Homes
    But as every homeowner knows all too well, investing in housing is risky and expensive. Broker transactions can easily hit 5% of the value of the home, and when it’s time to sell, homeowners are frequently confronted with the reality of an illiquid asset that’s difficult to unload. These two factors weigh very heavily on the total return of any housing investment.

    That’s why I am such a big fan of private-equity firms when it comes to investing in the housing market. These companies stand to reap huge gains from rising home values and higher lending volumes, which will likely decrease delinquency rates and increase the value of distressed loans and fixed-income assets.

    And my favorite pick from the group is Blackstone (NYSE: BX). The company is a major player in the private-equity space and the largest private real-estate owner in the United States. Beyond residential and commercial real estate, Blackstone also operates in distressed debt, hedge fund solutions and financial advisory.”

    The USA mortgage market has been nationalised and the hedgies/private equity are making out like bandits.

    ProPublica: Govt Now Runs the US Mortgage Marketplace

    Is the threat of shadow inventory truly manageable?

  6. wasabinatorMEMBER

    So I assume the Fed will be carefully making sure that a new bubble is avoided in the US housing market? Not a chance. We’ve learnt nothing in the last 5 years.

  7. So new dwellings are being constructed in the US.
    I remember a while back when I explained that Sydney has a housing shortage and high rents I was abused by many “shortage deniers” on this site. They told me that Sydney housing was an exact replica of Spain, Ireland and the US and prices must soon crash.
    They told me that everyone said there was a shortage in the US and then later everyone could see the US had too many houses.
    Well the US is now building more houses and Sydney prices and rents haven’t crashed.

    What do the “shortage deniers” say now?

    • Funny, what I recall most was that a majority agreeing that Sydney DID have a structural undersupply.

      What I also recall was that most people asserting that Australia wide there was an oversupply, and they always extended that argument to national arguments.

      They also commented on national pricing, which would infer that contagion would likely see prices dropping in Sydney, even with its structural undersupply.

      It sounds like you’re strengthening your argument by reinventing history.

      • I recall that most did agree that Sydney was a different beast altogether!
        Thankfully I live in Melbourne where the beast is being slain!

  8. There is a lot of misguided comments up there where the thread is now too skinny for me to add my 50 cents worth.

    “The US Housing Market” is about the same as “the EU Housing Market”. There are a whole lot of member states with massive disparities in local conditions and economic performance, ESPECIALLY in housing markets. See my earlier comments in the thread – but Leith’s original posting is an superb, informative post.

    It is very difficult for speculative demand to achieve any meaningful role in housing markets where supply is responsive and the prices never bubble, meaning no unearned capital gains and no expectations for them either.

    Suppose 10,000 too many houses get built in one State, at an average price of $140,000 each, with an average section price of $40,000 each. Is this a problem, compared with every single one of the several million homes in the State concerned, bubbling in “value” by an average of $350,000 each? (California – and Australia – mark you).

    If Texas or Georgia or the Carolinas built 10,000 too many homes, a few MONTHS of in-migration and household formation would fix it. Perhaps the average age of a first home buyer would fall from 24 to 23.5 or something.

  9. I am very intrigued at the large numbers of multi-unit buildings getting built in the responsive housing supply cities of the USA.

    I have always argued that inflated land costs thanks to urban growth containment, are an obstacle to “intensification”, due to the cost of land at the locations that are most efficient for such developments. Alain Bertaud’s papers on the spatial distribution of density show that intensification hardly occurs at all in such cities, while fringe development ends up unusually dense because a smaller section at the fringe is the “least unaffordable” option. You can see this happening in every city in Aussie. Besides, you get rural exurbs developing, with ultra-long commutes happening. This results in longer average commutes as well as increased congestion, AND inflated “housing plus transport” costs for young households – the worst of all worlds.

    But the corollary is that in cities where the land is cheap and there is plenty of it to spare in very-low-density mature suburbs, “intensification” can be done with the cost of the end product being really, really affordable. In times of economic uncertainty and high petrol costs, there will be demand for new developments of this type in cities where there has not been much of it in the past. My gut feeling is that this is what has been happening in cities like Houston, and the data Leith has just posted is HUGE confirmation.

  10. my only advice is caveat emptor. I lived in NorCal during the peak bubble.. I was on relocation package so was never going to buy but I saw first hand what people were doing. I had a mexican gardener who bought in Mountain View for 900k this guy was lucky if he was pulling 50-60k in a year, option ARM 100% mortgage… guess he isnt living there anymore or maybe he one of the lucky ones waiting to be foreclosed on.

    anyway, the Govt and the Fed are still balls deep in the market and now private equity funds are buying up everything looking for yields via rental market its re-inflating the bubble in some areas.

    if you are buying units in a block be aware of how joyful having section 8 tenants can be, its Govt rental cheque but I would expect your place to be trashed or turned into a meth lab

    I personally wouldnt touch CA with a barge pole. There may be money to be had in other markets but beware of the risks.

    • But prices there went crazy during the bubble….how do you explain that?

      Certain people are always arguing on here that the markets that did not bubble in prices did so because they were “undesirable” compared to California……