Checking in on the Coming Boom

 

Pressure in some housing markets (rental markets especially) is beginning to build, translating into rising rents and (in some markets) prices.

A housing boom lurks around the corner: Lots of people said we are not going to see booming construction for a long time and seemed to feel the fundamentals backed that up. Yet, over the beginning of 2011 lots of data series have started to turn in the same direction. We are seeing growing consensus that this is simply not sustainable and something is going to have to give.

Moreover, just like a price bubble, this housing shortage is a growing phenomenon. The longer it goes unaddressed the bigger the correction will be. There’s no reason to think actual housing supply will begin to tick up in the next 12 months. The lead time on home building is just too long.

So we are probably looking at two years minimum before we get a significant reduction in pressure. When housing corrects, it will correct hard. The context for this argument is an American economy in which the decline in home construction has apparently overshot dramatically relative to the prior boom.

The decline in home construction from 2006 has been unprecedented, and if it continues; at the current pace, 2011 would see a record low addition to the housing stock. Meanwhile, the population of working age adults has continued to grow.

Expect the number of households to snap back to a level near the pre-recession trend. To meet that demand, we'd need to see a substantial recovery in construction activity.

There are other factors that are likely to temper a construction boom, not the least of which is tight lending standards. Nevertheless, the odds of a strong turnaround in housing over the next year seem to be fairly good and getting better.

– Courtesy of the Economist