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Logan Mohtashami says

New Home Sales: 2015 Report Card

Thanks for posting, Logan.
From what I've been reading 2007 had a surplus of 2.5 million housing units. Today we have a shortage of 4 million housing units. We need to build 1.5 million housing units per year just to keep with demand. Today we are building 1 million units, thereby adding to the shortage. The building industry is expected to build 1.5million units in 2017, after which they will need to ramp up production further, just to eliminate the 4 million shortage. Catching up could easily take another 6 to 8years beyond 2017. Until then, the shortage of homes will result in higher home prices and higher rents, well above the inflation rate.
My friends, the best investment you can ever make will be in homebuilder stocks, which can easily gain 400% over the next 8 years. Buying property with leverage will get you similar returns.

Strategist says

Today we have a shortage of 4 million housing units

This thesis on shortage was what got Ivy Zelman in trouble when she talked about Housing being Nirvana in 2013 which concluded her 3 worst years in terms of housing predictions on the demand curve, because the capacity to own the debt of housing isn't that easy to what the prediction were.

The core thesis from 2010 was simple

"We don't have enough qualified home buyers in this cycle once you exclude the cash buyers to have a real recovery in housing"

Just look at the demand curve in this cycle with rates being below 5% since early 2011 and being between 3.25% -4.5% since 2012

Purchase applications

New home sales

Existing homes, which if you just take out the extra % of cash buyers even this year, your demand curve is not that much higher from the Great Recession low

Strategist says

My friends, the best investment you can ever make will be in homebuilder stocks, which can easily gain 400% over the next 8 years.

One item about the 400% call in the next 8 years

Every single housing cycle since 1981 has had a 2% lower rate curve in it to boost demand. This year that demand curve didn't get boosted and for that cycle to continue you would need to see at least a 30 year fix at 1.25% - 2.25% coming in the next cycle which should be at the start of the next decade

One thing if I was a housing demand curve future bull I would be saying with mega blaster that this cycle was the worst demand curve ever post WWII that sales can't be possible any lower than what the curve was in this cycle.

That at least has demographic future demand merit

Logan Mohtashami says

Strategist says

My friends, the best investment you can ever make will be in homebuilder stocks, which can easily gain 400% over the next 8 years.

One item about the 400% call in the next 8 years

Every single housing cycle since 1981 has had a 2% lower rate curve in it to boost demand. This year that demand curve didn't get boosted and for that cycle to continue you would need to see at least a 30 year fix at 1.25% - 2.25% coming in the next cycle which should be at the start of the next decade

We did have a 2% drop in rates from 2007 to the bottom a couple of years ago or so.

Logan Mohtashami says

Strategist says

Today we have a shortage of 4 million housing units

This thesis on shortage was what got Ivy Zelman in trouble when she talked about Housing being Nirvana in 2013 which concluded her 3 worst years in terms of housing predictions on the demand curve, because the capacity to own the debt of housing isn't that easy to what the prediction were.

The core thesis from 2010 was simple

"We don't have enough qualified home buyers in this cycle once you exclude the cash buyers to have a real recovery in housing"

If the demand does not materialize, the shortage of homes will continue. Eventually, people will buy whatever they can afford.

Strategist says

We did have a 2% drop in rates from 2007 to the bottom a couple of years ago or so.

That is for this current cycle, and velocity on low rates to housing net demand curve adjusted to population was the worst ever post WWII , looking ahead for the next 10 year, the next recession/ recovery cycle rates have to fall to 1.25% - 2.25% to match the streak, now I am not saying that can't happen with the demographic deflation going on the world today.

However, that is the one X variable that can stop the

Limf (x) = sky
x-a

equation on falling rate to housing demand curve in the next cycle

Strategist says

If the demand does not materialize, the shortage of homes will continue. Eventually, people will buy whatever they can afford.

I don't blame the builders at all for this cycle pushing the higher end homes, they know they can't compete with exiting home inventory, however, it's time for them to start pushing the lower end homes if they want to increase sales

However, the sales level that we saw this year even with 5 months of inventory amounts to what we would see in a recession

even on a headline level as well

Logan Mohtashami says

however, it's time for them to start pushing the lower end homes if they want to increase sales

agree, but doesn't seem likely. the new stuff at the higher end can be brutally squeezed together, so the lower end would be what, a toolshed? that won't compete very well with existing homes on bigger lots i would think.

landtof says

agree, but doesn't seem likely. the new stuff at the higher end can be brutally squeezed together, so the lower end would be what, a toolshed? that won't compete very well with existing homes on bigger lots i would think.

When you're working from a 500K level with over 153 million working people, it doesn't take much to move the needle. Some of the Builders are starting this process now, but the question really what is the level of the growth going out for the next 15 years.

It's really remarkable how soft new home sales have been in this cycle when you think that years 2013, 2014 and 2015, years 5,6, and 7 the years that were forecast to have 25%-40% growth in each year are really running at 10% growth 3 year average with higher inventory levels

These are very low level rate of sale to population with the rate curve being the lowest post WWII

Ironman says

Strategist says

Until then, the shortage of homes will result in higher home prices and higher rents, well above the inflation rate.

Really??? Higher Prices??

400% over the next 8 years??

Tell me where? I got some idle cash I would love to invest.

OC. 20% down. Simple.

What will be interesting in 2016 is this

2016 won't have a the low bar like 2015 had. In fact YoY sales would be negative year over year now if their wasn't a massive miss in 2014

However, going into year 8 of the economic cycle, adjust to sales population is so low that it's really hard to get a negative trend line data next year.

Key for new homes since they're so sensitive to mortgage rates is how will the market react ... if... BIG IF ... if rates go to 4.5% -5%, new homes at that point with the amount of debt needed to buy one will be very expensive on all fronts.

So, it should be interesting to see all housing data next year without the low bar to work from, demographics are starting to get better for housing but still need a few more years

Ironman says

Strategist says

Tell me where? I got some idle cash I would love to invest.

OC. 20% down. Simple.

Except, I don't live in OC..

Got any other good ideas?

You don't have to live in OC to invest in OC. I'll help you find the right tenants, and you can visit us whenever you want and get a tax write off. See, you are already ahead of the game.
Hey, you can always invest in builder stocks. ITB is outperforming the S&P by almost 20% this year.

Logan Mohtashami says

demographics are starting to get better for housing but still need a few more years

And where are the jobs?

It seems to me that home prices going up are the real estate version of stock buy backs. IOW the price can't go up.

indigenous says

Logan Mohtashami says

demographics are starting to get better for housing but still need a few more years

And where are the jobs?

You are only unemployed, because you want to be unemployed. UBER.

Strategist says

You are only unemployed, because you want to be unemployed. UBER.

Uber jobs don't buy houses.

indigenous says

demographics are starting to get better for housing but still need a few more years

And where are the jobs?

We are pushing near 6 million homes sold this year

The problem I have with the job thesis is that, sometimes people categorize full time renters with their jobs as a potentinal home buyers
These Americans are simply going to rent for the rest of their lives because they're

The least educated
The least skilled
The least value to a business

However, millions and millions of renters now working who will be the future home buyers. They tend to have the

Most educated
Most skilled
More value of their service to a business to where they can get paid enough to own the debt of housing

One of the reasons why we don't have more home buyers is that millions of Americans work in renter paid jobs and their isn't any real upward mobility for them. So, you almost just have to count them out of the equation

From what I read about robotics, that job thing is not guaranteed no matter the level of education. Half the code writers here on Pat.net could be looking for work