Housing Rebound Still Years Away

04/13/2012 11:30 am EST


Gary Shilling

Columnist, Forbes

Encouraging signs from the housing sector are red herrings, says Gary Shilling, who thinks that homeowners will continue to play a losing game possibly as long as 2016 or later.

Gary, we have some fascinating views that the housing stocks surged in October and have been going straight up since. Stocks like Pulte Homes (PHM) are up over 54%.

And there’s all this conviction amongst some investors and some analysts that the housing market has turned around and the bottom is finally in place. But you have a different look at that. Can you tell me what you’re seeing?

Yeah, let me start off by saying if a stock is down 90% and it doubles, it’s still down 80%. You have to be a little careful of those numbers.

I think that housing has another 20% decline in terms of median-priced single-family houses. The reason is actually inventories. We calculate that there are 2 million housing units over and above normal working levels; that’s a lot. Back in the salad days, we only built about a million and a half houses a year, so this is huge excess inventories.

Excess inventories are the mortal enemy of prices. It’s that simple. It simply pushes down prices. A 20% decline would bring house prices back to a long-term trend that actually goes back to 1890. A very well established trend. So I think that’s the odds-on bet, and I would say the enthusiasm right now is likely to be disappointed.

So you’re looking for 20%, and then after 2012, things like might get better?

Well, I don’t think it’ll happen in one year. It’ll probably stretch out over the next two or three years.

After that, with house prices…you adjust for two forms of inflation, one is general inflation (call it CPI inflation) and the other is a tendency of houses to get bigger over time. In other words, as living standards go up, we all want more bathrooms, fancier kitchens.

If you take those out, house prices were literally flat from 1890 until the bubble. They ran up another 20% to bring them back to trend. Beyond that, I would think that they would probably be fairly muted. If we were right that we’ve got really zero inflation or deflation in terms of general prices, house prices wouldn’t be doing much after that.

So it’s a very attractive environment, therefore, for the renter?

Yeah. We just did a report, our monthly report for February in our publication INSIGHT, on the housing outlook…particularly on renters.

We estimate that with the foreclosures, with high unemployment, with tight lending standards, and most of all with people now realizing for the first time since the 30s that house prices can and do fall—in other words, houses are not great investments—we estimate between now and 2016 there are going to be 4 million more renters.

Now the interesting question is OK, how are they going to be split up? Because some of them are going to go into apartments, and right now apartments are hot—vacancy rates are going down, rental rates are going up—and we’re getting to see a lot more apartments built. A lot of them started last year to be completed in 12 to 18 months.

Then you’ve got all these single-family houses. Most of those 2 million in excess are single family. People going to figure out a way that investors can own them, rent them out, get somebody who is going to do the plumbing, the maintenance, take care of the leaky roof, the tree that falls on the porch, and all that kind of thing.

That’s really different than an apartment where you have one outside facing wall. Here you have four walls, a roof, a yard, and all these other things. If that can be figured out, then I think we’re probably going to have at least half of those 4 million rentals who will be in single-family houses.

Interesting. So if someone is looking to buy a house or moving, they should really seriously look at the bottom line in terms of renting or purchasing.

Oh sure, and we’ve looked at this. Unless you expect big appreciation, owning a house is a losing proposition.

Now you do have the privilege of living in it—you’re not renting it if you’re living in it. The idea is that a house, even with the tax-deductible mortgage interest, it’s an expensive asset. Of course, with the prices going down, it’s an even more expensive asset.

So I think a lot of people are going to be…we’re not going to become a nation of renters, but I think younger people are going to say, hey, let’s stay in the rental apartment until the kids are big enough and we really need a single-family house. Empty nesters are going to say, let’s get out of this money pit, I don’t like to mow the lawn. And they’re going to move not into a condo that they own, they’re going to move into a rental, either single family or apartment, and invest elsewhere.

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