Housing Bubbles: Why are Americans Ignoring Reality?

Dr. Housing Bubble (based in California), in "The comprehensive state of the US housing market", asserts that of the 129 million residential units in the United States, some 15,950,000 are vacant, resulting in a huge oversupply of residential stock across the country.

Other United States commentators are making the same assertions, such as Colin Barr of Fortune magazine with "Housing market still faces a big glut".

However ? after a close read of the "US Census Residential Vacancies and Homeownership Report" released October 29, 2009, the figures are hardly cause for alarm.

As of the 3rd Quarter 2009, Table 3 illustrates that there are an estimated 130.302 million housing units in the United States, of which 111.459 million (85.5%) are occupied, with 75.339 million (57.8%) owned and 36.119 million (27.7%) rented. The balance, being some 18.843 million (14.5%), is described as ?vacant? (with a revised 3rd Qtr 2008 18.448 million units alongside). The ?vacant? are loosely broken out in to year round, for rent, for sale only and seasonal. There has been no dramatic shift in these figures over the past 12 months.

The US Census Population Clock states that the present US population is 308 million.

The Census Bureau Residential Report illustrates that in the 3rd Quarter 2009, the estimated vacancy rate for usually occupied rentals was 11.1% (9.9% 3rd Quarter 2008) and 2.6% (2.8% 3rd Quarter 2008) for homeowner housing. There is nothing much to get excited about there, and in fact the somewhat elevated ?rental vacancy? could prove a boon to the poor, particularly in regions with grossly excessive rents.

The importance of "vacancy cushions" cannot be over emphasized, as they provide the necessary time for the construction industries to gear up, so that unnecessary property inflation does not occur.

The US Census Quickfacts (Texas page - with US figures alongside) states that the 2008 US population for persons per occupied household in 2000 was 2.59.

As societies become more affluent, people per household should fall (note: Texas persons per household is slightly higher on these 2000 figures at 2.74 per household, likely due to the higher Hispanic population with larger families).

Conversely ? through these economic downturns, it is likely that household sizes would also increase somewhat.

For example, in using the US Population Clock as a rough guide with the 308 million population figure (and deliberately ignoring, for the purpose of this discussion, those in institutional care etc), if the people per household overall increased from, say, 2.59 per household requiring 118.53 million residential units ? to, say, 2.79 people per household (as economic conditions worsen), just 110.03 million residential units would be required for occupation. Around 8.5 million less were occupied during the peak of the boom.

Furthermore, significant numbers of second/vacation homes would no longer be required, as households struggle to lower their expenses through this economic phase.

As an example, during the decade of the 1990s in Australia ? as people became more affluent and family sizes decreased ? household sizes moved from around 2.8 per household to approximately 2.6 per household, which was a big driver of the residential construction industry in that country. As they became more affluent, they bought or built more second/vacation homes as well. Australia?s population increased by about 12% through this period, as its housing stock increased by in excess of 22% (access Australian Bureau of Statistics for further information).

Property commentators' ?estimates? are always interesting of course, but as with my own, should be treated with greatest caution. The critical issue in terms of housing is not necessarily demographics but THE ONLY TRUE MEASURE OF SCARCITY AND ABUNDANCE: PRICE.

Over the years, Dr. Housing Bubble and many other American commentators have persisted in ignoring the glaring contrasts of the California and Texas housing markets. They have treated all markets as the same, without looking into profound regional differences.

The latest "Houston Association of Realtors Sept 09 Monthly Report" makes very interesting reading indeed. For the months of September 2008 and September 2009, the numbers are as follows: property sales from 4,336 to 5,654 (+30.4%), dollar volume from $0.877 billion to $1.102 billion (+25.7%) and median single family sales price $155,920 to $156,200 (+0.2%).

This performance reflects the reality that Houston (as with Texas and most of American heartland) is a ?normal market? where supply is not purposely constrained and politicized. I touched on these matters in an article in February this year.

Now let?s turn to discussing some numbers about ?abnormal markets? and what is accurately referred to as the ?Failed State of California? ("Failed states: Washington Examiner"), where it appears the politicians are determined to wipe the residential construction industry off the map.

The state of the residential construction market in California can only be described as ?horrific?.

On October 26 2009, the California Building Industry Association released its report on the residential construction permit activity for the month of September 2009, stating that there were just 2,920 permits issued for the month, and that they have lowered their permit estimates for 2009 to an appalling 37,700 units.

These are unbelievable figures when one considers that the estimated population of this State is 37 million.

The internationally recognized measure for housing production and permitting is the build/permit rate per thousand population. The California residential permit rate for 2009 is therefore a shocking one unit per thousand population. I cannot recall a permit rate this low in recorded history anywhere in the world.

Yes ? it?s that bad.

If Texas was permitting at the same rate for 2009, just 24,000 permits would be issued (Houston issued 5,600). On an international basis at 1/1000 population the figures would be: the United States overall 307,000, Canada 37,000, Australia 21,000, the United Kingdom 61,000 and New Zealand and Ireland around 4,400 each.

The reason of course for these unbelievably low California permit rates, is because the Governments at all levels in the State have essentially banned the construction of affordable housing. Essentially the planners have erected a Berlin Wall around the state, all but stopping the building of housing, particularly single family units vastly preferred by the population.

Meanwhile, back in the normal market of Houston, they are merrily building starter homes of 235 square meters (2,529 square feet) for $140,000 on the fringes ($30,000 for the lot, $110,000 for actual house construction).

The Annual Demographia Surveys (5th Annual Edition), the Harvard Median Multiples and many other income-to-house price studies (e.g. Randal O?Toole of Cato?s extensive work), clearly illustrate that when house prices exceed three times annual household income it causes inevitable supply constraint issues.

It appears too that Dr. Housing Bubble is ?baffled? why California had such an inordinate share of sub-prime, Option ARMs and other grossly distorted mortgage structures, and delights in blaming the Bankers (banksters as he sometimes refers to them) for the unholy mess that is California (the epicenter of the Global Financial Crisis).

Households should not spend any more than three times their gross annual household income to house themselves, and importantly, not load themselves up with any more than two and a half times their gross annual household income in mortgage debt. As the California bubble inflated, financial institutions simply had to increasingly lend outside these historic norms, if they wished to maintain market share.

The financial institutions ? not all dumb, and no doubt acutely aware of the risks ? were very keen to securitize it and off load the risks to others.

The only mistake they made was not offloading the risks adequately or fast enough! Herb Greenberg outlines this financial circus in Straight Talk on the Mortgage Mess from an Insider on his MarketWatch blog. Professor Robert Shiller of Yale University noted he was ?terribly conflicted? about what is happening in his recent extraordinary Fox Business television interview (Shiller on Housing: ?I am Terribly Conflicted? (Glick Report))

What is really needed here is the understanding ? as is being developed in Australia and New Zealand ? that structural changes need to be put in place to ensure that these disastrous housing bubbles don?t get underway again (refer to Performance Urban Planning for access to New Zealand Government statements. For recent Australian news and reports: Bottlenecks choking recovery | The Australian, More houses, not taxes | The Australian, AdelaideNow... Home ownership dream fading, say Flinders University researchers).

These issues are not ?ideological? or ?environmental?, but have much more to do with deliberately misleading information being generated by professionals in collusion often with political and commercial elites, who are keen to promote housing bubbles for their own ends.

Yet most Americans seem to persist in ignoring the real structural issues ? and instead are choosing to ?paper over the cracks? by financially bailing out everything in sight. This is an exercise in futility if ever there was one, as the Japanese have learned to their cost, following the collapse of their property bubble in 1989.

It is to be hoped that the Americans belatedly start getting the public conversation underway, in working together exploring real solutions ? like unnecessary supply constraints ? to these unnecessary housing bubbles. We have done this in Australia and New Zealand these past five years and it is beginning to work.

Hugh Pavletich is a New Zealander with thirty years experience as a commercial property development practitioner. He served as President of the South Island Division of the Property Council during the early 1990?s. In 2004 he was elected a fellow with the Unban Development Institute of Australia for services to the property industry. He has been involved with changes to local government financial management, heritage and land supply. During 2004 he teamed up with Wendell Cox of Demographia to develop and co author the Annual Demographia International Housing Affordability Survey. The 5th Annual Edition of this Survey was released January this year. His website is www.PerformanceUrbanPlanning.org.