Lack of new construction sets the stage for eventual real estate

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I get the question so often: “When is housing going to recover?” Instead of asking that question, we need to be asking, “Why did housing slump in the first place?”

The answer is simple. We built too many houses. Speculators who thought buying and flipping would be an instant path to wealth fueled much of the overbuilding. At the peak of the bubble, we built somewhere around 10 million too many homes. That’s a hard number to grasp when you think about the whole country.

So let’s look at just one metro area such as the Orlando market. New numbers from The Orlando Sentinel show that there are just under 150,000 homes vacant in this particular Florida market. If a typical home has 2 occupants or so, the unoccupied housing that’s just in the Orlando metro area could house 300,000 to 400,000 people easy.

I believe the recovery in the United States in under way, in spite of reports about declines in housing prices. Why do I believe that? Because we’ve had practically no meaningful building going on in America for so long now. That lack of building helps to get housing supply and demand back in synch.

With any bubble, when you get too much of whatever it is, in order to get back to what economists call “reversion to mean” you need to have time of too little. Only then can you start to move back to even-steven.

We are on that path and we are poised for recovery, but it will be a slow recovery because the other part of this equation is that we need jobs. The job engine that was the residential housing market got way out of synch during the bubble, accounting for perhaps 3 times the amount of activity that would be normal. So the jobs will have to come from somewhere else now. They will not be from production building.

As we move forward, housing will be about the simplest of all things: Having a roof over your head. And right now that roof is really affordable.



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