Evan Soltas
May 15, 2012

Bringing Down the House

I think we should all start getting really bullish about housing right now.

While Europe's been grabbing headlines and souring the mood, there has been remarkable news coming out of the housing sector which hasn't seen the sort of coverage it should. Looking at the data all together, it's enough to convince me to revise forward by at least a quarter the recovery path I've seen coming in housing for a while now.

Karl Smith of the "Modeled Behavior" blog is the only other one I know out there who's been talking about the possibility for major upside surprises in housing -- I'm sure there are others -- and for Smith, particularly in multifamily housing.

So here's the news.

First, multifamily housing permits were up 63,000 units in March -- that's a 30 percent monthly increase from the February level of 221,000. That is simply huge, and there's really no other way to put it. Multifamily matters because even though it's a relatively small section of the broader market for housing in the United States, what it tells us is that once-in-a-lifetime tight supply conditions -- even despite in the much-feared "shadow inventory" -- may mean that even the intimation of increases in demand for housing will set off a round of building and buying, in the way that Bank of America's forecast that it would run a profit in March '09 set off a round of "panic buying" in which the S&P 500 rose 20 percent in two months. Nobody thought that financials were out of the woods in the spring of 2009, by any measure, but the sector actually led the stock market recovery in the beginning before petering out.Median home prices are rising again, an increase of $17,500 or 7 percent since January. Since mean home prices continue to fall, I'm beginning to suspect that the mean numbers are being dragged down by foreclosure sales, which give us a misleading reading of housing market conditions. Notably, the Case-Shiller indices, one of the most common measures of housing prices, uses a mean value derived from repeat sales. The reason it could be misleading is because once those foreclosure inventories clear out, mean prices will rise swiftly and substantially. That could still be a while from now, but my view is that the median numbers are less exposed to such distortion.We're also seeing construction permits begin to accelerate beyond the rate of growth of actual starts, and what I read into that gap is the possibility that "when it comes to starts, we're just getting started," so to speak--unless people walked away from their plans, which is possible in a deteriorating environment, then such a permit-starts gap is a highly optimistic leading indicator.The National Association of Realtors' Housing Affordability index, which technically is a measure of the sufficiency of income made by the median family to meet the borrowing qualifications for a conventional mortgage on a median priced home -- and it has risen substantially in recent months, now standing at 204.3, which means the median family has double the income required to qualify for such a mortgage. That's the highest on record. What this means is that it is possible that demand could return -- there are no "structural obstacles" coming from banks -- but it's a question of borrowers' willingness to borrow.I understand the concerns about shadow inventory, but for those people which think it dooms housing to a non-recovery, I have a graph to show them. First, the United States has almost entirely depleted its stock of newly-built homes. There are 144,000 new single-family homes on the market in a country of 300 or so million people, and only 600,000 new housing units were completed last month. Does that sound even remotely sustainable to you? Second, we're not completing enough of them right now to keep up with future demand -- in the long run, inventory is irrelevant, what matters is the rate of completions.That's my best optimistic case for housing. I'm sure you can think of the pessimistic story. But think about it this way -- if we're revising upwards our optimistic case, and on average what actually happens is the optimistic-pessimistic midpoint, then it's eminently reasonable to start getting excited about the return of the bull market in housing. You don't exactly need pom-poms to see the good in housing anymore.