America's Real Estate Boom Isn't Over Yet
The mainstream media just can't help itself... Zillow fumbles as an iBuyer... America's real estate boom isn't over yet... Housing affordability data will surprise you... Supply and demand at work again... How to take advantage of today's market conditions...
If you read the financial news, you've seen it by now...
Zillow (Z) paused its homebuying program last week. And it won't be purchasing any more homes until next year ‒ at the earliest.
The media response was... predictable.
MarketWatch said: "Zillow pauses home buying ‒ raising 'red flags' about the real-estate market."
And Yahoo Finance cautioned with the headline: "Is Zillow's plunging stock price a warning about the housing market?"
Here we are again... talking about the end of the housing market.
The topic is a pundit favorite. Heck, the media has called for a housing bust nearly every year since 2008.
First, it was the prospect of the "double dip" recession... And as soon as home prices started making new highs, the "bubble" talk started back up.
Let's see what is really going on...
We'll begin by asking these questions: What will cause America's housing boom to end? And when should we expect the end to come?
It's the perfect time to address this head-on. After all, in this month's issue of True Wealth Real Estate, I (Vic Lederman) described how iBuyers, Zillow specifically, are using algorithms to make sight-unseen offers on houses ‒ then selling them for a profit.
And now Zillow is out. Does that mean the end of America's building boom is around the corner?
Let's look at why Zillow paused its iBuying program, then examine the housing market as a whole to figure out how we'll know when the building boom is at its end.
The 'everything shortage' pinched Zillow...
I want to be really clear here... Zillow is in a darn risky position.
The company went on a buying spree. And now, it has an inventory of roughly 3,800 single-family homes.
The median sale price of a home in the U.S. just reached an astonishing $404,700. A back-of-the-napkin estimate determines that Zillow has a little more than $1.5 billion worth of homes on its books...
Zillow does not buy these houses as investments simply to sit on them and collect rent like a real estate investment trust ("REIT") might do... Instead, it wants to flip them as quickly as possible, for as much as possible.
That means Zillow is extremely sensitive to price changes in the housing market. And it needs to turn its inventory quickly... Otherwise, the market could drop below the predicted prices that Zillow uses to calculate the profitability of its deals.
But ‒ and this is the important part ‒ Zillow assumed it would have access to contractors to do the restoration work needed to flip its newly bought homes.
If you're even remotely aware of the state of the world, you know that was a mistake. Nearly every industry is fighting for workers these days... And that's especially true in labor industries like construction.
So Zillow is not hitting the brakes on its homebuying program because it fears a collapsing market. The company bought up a bunch of homes, but it didn't have the labor it needed to get them flipped in a timely manner... And now it needs to clear its inventory before it can take on more.
So, what does this say about the state of the housing market?
Mostly it tells us that the U.S. is still in the midst of a labor crunch. And that Zillow is in an incredibly risky position as a result of that, holding a bunch of not-yet-ready-to-sell houses.
This is a big part of the reason why Zillow's stock is down 30% so far this year. But unless you've loaded up on Zillow shares, that doesn't mean a whole lot for you... or the housing market per se.
For most folks, a little cooling in the housing market might be a good thing...
That's right, I might be Mr. Real Estate, but I'm also willing to say that a bit of a slowdown wouldn't be so bad... We simply can't sustain 20% year-over-year pricing increases in the housing market.
High prices will push people out of the homebuying frenzy, at least briefly. And we're already starting to see a downtick in consumer-sentiment data.
Regular True Wealth Real Estate readers know that a recent University of Michigan survey shows us that consumer sentiment plunged last month. Folks are now more pessimistic on housing than they've been since the 1980s – when borrowing costs were five times as high.
But pessimism and frustration aren't the same as action... People are still buying. They're just not happy about the prices.
New single-family home sales currently hover at an annualized rate of around 740,000, according to the U.S. Census Bureau and the U.S. Department of Housing and Urban Development. That's still relatively near what it was from 2016 through 2019.
Despite some wild COVID-19 pandemic fluctuations, consumer behavior in the housing market has mostly stayed on track. And this shouldn't come as a surprise.
It all has to do with affordability...
With everyone grumbling about soaring prices, you might think that we're facing an affordability crisis in housing. But we're not...
Take a look at the chart below...
This chart measures "affordability" by looking at the cost of the average home, the average payment on it, and what percentage of the average American's income it would take to make the payments on that home.
If the affordability factor is at 100, the average American has exactly 100% of the income needed to afford the average home. Today, the average American has around 150% of the income needed to purchase the average home.
In 2012, the affordability index was above 200, then plunged to about 140 in 2018, before shooting back up to 180 in the first quarter of this year... Does a drop to 150 mean that houses have gotten more expensive?
Let's take a look at the data another way...
This chart looks at affordability data all the way back through the 1990s. Since that time, the average affordability index has been around 140... indicated by the horizontal line on the chart above. And it's pretty darn obvious what threw us off that line.
The housing bust in 2009 sharply increased the affordability index by sharply decreasing the average price of homes. Only now are we settling back toward our long-term affordability average of roughly 140.
The takeaway is clear.
People hate that housing prices are up, but that hasn't dramatically slowed purchasing. And more important, the average American is still able to "afford" a mortgage based on this measure.
So, when does this building boom end?...
It all comes down to supply and demand.
After the housing bust a dozen years ago, builders walked away from the market... Housing starts fell to the lowest level on record. It took the country years to get back to normal levels of housing development. Take a look...
The chart above measures housing units ‒ this includes single-family and multifamily development. You can see that supply has clawed its way back from 2009, but we still need a lot more of both types of property to close the gap from a decade of underbuilding.
Current estimates put the housing supply at roughly 5.5 million units below the demand. Two million of that comes from the single-family home shortage. And the remaining 3.5 million missing units are in the multifamily category.
You can't get around supply and demand. It's Economics 101... As a result of these numbers, Goldman Sachs is predicting another year of double-digit growth in 2022.
So when does the housing boom end? Only when supply starts to catch up with demand.
Till that happens, everything else is just a speed bump.
Think about it. America needs more housing... That includes apartments, condos, and single-family homes.
High prices might be one of those speed bumps, slowing the pace of buying. But high prices don't mean that families in need of homes cease to exist. They'll just wait for an entry point that they can afford.
It's the same thing with rising interest rates. If rates rise, home payments rise with them. And that means houses get harder to afford.
But again... people will still need homes.
That's also true of the end of the eviction moratorium. Non-payers being forced out of their home might produce some liquidity in the market, but it doesn't solve the underlying problem...
America needs more homes. And it doesn't seem this need will be met anytime soon.
This continuing boom extends into many aspects of the building industry... not just homebuilders themselves, but suppliers, home-electronics makers, movers, and more. That's why, in True Wealth Real Estate, Steve Sjuggerud and I have focused on finding the companies that are best positioned to take advantage of America's building boom.
See this special message from Steve to learn how you can take advantage of opportunities in this sector today.
New 52-week highs (as of 10/27/21): Automatic Data Processing (ADP), Alphabet (GOOGL), Home Depot (HD), Intuit (INTU), Microsoft (MSFT), Motorola Solutions (MSI), Nestlé (NSRGY), Royal Dutch Shell (RDS-B), and Thermo Fisher Scientific (TMO).
The mailbag is quiet today. If you have thoughts about today's Digest on America's real estate boom or your favorite presentations from the Stansberry Conference in Las Vegas this week, share them with us at feedback@stansberryresearch.com. As always, we'd love to hear what you think.
Vic Lederman
Jacksonville, Florida
October 28, 2021