Real estate: It’s time to buy again. After four years of plunging home prices, the most attractive asset class in America is housing.
Mike Castleman “I’m a dirt-road economist who sees what’s happening on the ground, and in 35 years I’ve never seen a shortage of new construction like the one I’m seeing today,” The talking heads who are down on real estate will hate to hear this, but America needs to build a lot more houses. And in most markets the price of new homes is fixin’ to rise, not fall.”
As the founder and CEO of a company called Metrostudy, Castleman has spent more than three decades tracking real-time data on the country’s inventory of new homes. Each quarter he dispatches 500 inspectors to literally drive through 45,000 subdivisions from Baltimore to Sacramento. The inspectors examine 5 million finished lots, one at a time, and record whether they contain a house that’s under construction, one that’s finished and for sale, or a home that’s sold. Metrostudy covers 19 states, or around 65% of the U.S. housing market, including all the ones hardest hit by the crash: Florida, California, Arizona, and Nevada. The company’s client list includes virtually every major homebuilder and bank — from Pulte (PHM) and KB Home (KBH) to Bank of America (BAC) and Wells Fargo (WFC).
The key figures that Metrostudy collects, are the number of homes that are vacant and for sale in each city, and the number of months it takes to sell all of them. Together those figures measure inventory — the key metric in determining whether a market has a surplus or a shortage of new housing.
Today Castleman is witnessing a reversal of the new-home glut that helped sink prices just a few years ago. In the 41 cities Metrostudy covers, a total of 78,000 houses are now either vacant and for sale, or under construction. That’s less than one-fourth of the 343,000 units in those two categories at the peak of the frenzy in mid-2006, and well below the level of a decade ago. “If we had anything like normal levels of buying, those houses would sell in 2½ months,” says Castleman. “We’d see an incredible shortage. And that’s where we’re heading.”
If all the noise you’re hearing about housing has you totally confused, join the crowd. Even Robert Shiller and Karl Case can’t agree. The two economists, who together created the widely followed S&P/Case-Shiller Home Price indices, are right now offering sharply contrasting views of housing’s future.
Two basic factors are laying the foundation for dramatic recovery in residential real estate.
- The historic drop in new construction that so amazes Castleman.
- The steep decline in prices, on the order of 30% nationwide since 2006, and as much as 55% in the hardest-hit markets.
But the new affordability will gradually lure Americans back to buying homes, and the return of the homeowner will start raising prices in many markets this year.
The number of new homes for sale or in the pipeline is extraordinarily low in nondistressed markets. San Diego is typical. It has just 921 freestanding homes for sale or under construction, compared with 4,425 in late 2005.