I was encouraged to hear a recent report from JPMorgan strategist Thomas Lee that listed 10 solid reasons why we will see significant gains in the U.S. housing market over the next five years. After languishing between 450,000 and 550,000 between 2009 and 2011, U.S. housing starts could grow between 1.3 million and 1.8 million annually after 2012.
From a supply standpoint, Lee says, housing starts are unsustainably low at 750,000, well below the 1.5 million long-term average. He believes we are at the front end of a construction boom. Vacancy rates are also reaching equilibrium. Lee estimates fewer than 700,000 excess homes, down from a 1.7 million peak. With a scrappage rate of 250,000 homes per year, that modest surplus would whittle away relatively quickly.
From a demand standpoint, the U.S. population is forecast to increase by 15 million between now and 2017. This will require about 6 million incremental units of housing organically. Homeownership rates are likely to reach 67 percent by 2017 from 66 percent today as the over-55 population increases by 11 million. There is also pent-up formation of more than 2.3 million households, delayed due to economic conditions.
Lee also forecasts good news for home values. Home prices are currently low on an absolute basis, with the lowest price-to-rent ratio since 1987 and the largest discount ever versus 10-year Treasuries. Prices are beginning to rise, creating a $1.6 trillion “wealth effect” since the beginning of this year. Homeowners’ household equity should rise between $4.2 trillion and $7.8 trillion over the next five years. There’s also a bit of a “rental bubble” — renting is now 20 percent more expensive than buying a home.
Financing should also open up as bank lending begins to ease. Lee also notes that households have the capacity for leverage with total mortgages down $4 million since 2007 and debt service ratios the best since 1994.
While our industry has gotten very resourceful in recent years about making sure its success was not entirely tethered to the housing market, we’ll certainly benefit from these welcome gains.