Disclosure: I am long KBH. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More…)

The real estate market, like any other market, is a numbers game. Demand versus Supply. If one is greater than the other, it tips the balance and creates a turn in the market. Did we turn? Let’s look at the numbers.

Demand can be tracked simply by population growth. Using 2010 US census numbers, we can track back 50 years of population growth and get an average compound growth of 1.4% growth per year. Factors such as birthrate and immigration make this demand stable and consistent through the last 50 years.

(click to enlarge)

Secondly, let’s look at Supply. New supply comes onto the market in terms of new homes built each year. The best way to track this is through housings starts. Let’s track back 50 years of housing starts to see our levels of new supply to the market.

(click to enlarge)

From the graph, the average cyclical real estate market is plotted through 10 year cycles. It’s rather clear that the 10 year cycles have been pretty predictable the last 50 years up to 1997. Instead of the cyclical downturn we should had expected in 1997, we accelerate upward mainly due to the dot-com bubble. This continued to after 2001 when the dot-com bubble popped, and was followed upward with historically low interest rates from the Federal Reserve. It’s no wonder why we had a dramatic downturn in 2006, followed by historically low starts the next 5 years to clear the supply. Excluding the bubble period, if you break down these 10 year averages from the last 60 years, the average new housing starts are close to 14M per decade. There are decades where the homebuilders either overbuilt or under-built, but the demand over time remains consistent to level out this supply. More dramatically though, in the last 4 years, the total cumulative housing starts combined to a number barely over 2.2M homes. To reach the historic 14M decade average, there will need to be 2M housing starts per year or a sum of 11.8M starts in the next 6 years.

If we are able to meet 2M homes per year, the homebuilders would need a dramatic spike in housing starts the next 6 years.

(click to enlarge)

From the latest housing report this month, the homebuilders are currently on pace to reach only 894k (revised, Oct 2012) (seasonally adjusted) new starts this year. It is no wonder why new homebuilders are in “catch-up” mode buying any large developed parcel of land to meet the supply shortage. Furthermore, to support this data, inventory in many local markets are experiencing 50 year historic lows. So in principle, the increased demand due to consistent population growth, combined with decreased supply shortage from the last 4 years, will equal price appreciation in the next 6 years. Do you think we hit a bottom now?

Who are the best homebuilders that are position to take advantage of this shortage?

Any homebuilders that survive the downtown of the last 5 years are all in a great position to take advantage of the next 5 years. More specifically, homebuilders with the largest and key coastal land position will benefit the most. I like KB Home (KBH) as my top pick due to its heavy land position in California. They own more than 60% of their total land holdinsg in California, with the majority of the remainder in other hot markets like Texas. Fundamentally, their balance sheet and cash position is solid with moving a large part of their short-term bond holdings ($585M) well out to 2020 and beyond. In addition, they have a meaningful deferred tax asset of $883M that could be used to potentially offset $2.2B future taxable income. All of this combined will just provide them with a significantly large cash position to fill the shortage the next 5 years in housing.

Additional disclosure: John Chiem is a realtor in the SF Bay Area real estate market.

Article source: http://seekingalpha.com/article/1081501-why-housing-will-surge-in-the-next-5-years

Rental price growth in our market was the highest in the nation for 2011, as much 12.2 percent on average according to a new report.

Researchers at RealFacts, a company that analyzes rental data, also found that occupancy in cities like San Francisco rose only 1.3 percent over the last four years. There’s just nothing available.

Real estate experts agree: “We’ve reached a point where there’s nothing out there,” said Craig Berendt, a broker with Berendt Properties in San Francico. “People are knocking down my door to get an apartment.”

When something good does hit the market in trendy neighborhoods, young professionals come from everywhere and line up for a chance to start a bidding war. And it’s not just Hayes Valley or the Mission — San Jose actually led the pack, with highest rental price increases in the U.S. last year.

For decades, the tech industry has been widely credited with driving-up commercial and rental real estate in the Bay Area, bringing young, high-earning and uncompromising professionals into market that are willing to spend way too much to get what they want. And with Facebook gearing up for one of the biggest tech IPOs in history, we don’t see this situation getting any better for the middle class in 2012.

“I see our middle class really starting to dissipate,” Berendt said. “Obviously we don’t want that. We want a well-balanced class system, but the rents are just going through the roof.”

Article source: http://sfbay.ca/2012/01/19/bay-area-rent-hikes-highest-in-u-s/

Why do we buy if it doesn’t make economic sense?

It’s the age old question, rent or buy? New York Times writer David Leonhardt tackled this timeless issue again in his latest weekly column. As he points out, all sorts of calculators live on the web for anyone to input a few data points to analyze whether it’s better to buy or rent. However, most of these calculators look at it from a purely financial perspective, whether the costs of buying outweigh the costs of renting. Some calculators are more sophisticated, taking into account often overlooked items such as closing costs, property taxes and the amount of interest or appreciation your down payment would have otherwise earned, if it wasn’t used towards a home purchase.

Miami Real Estate Cafe

The never ending debate

He also advises look at rent ratios, where the selling price of a house is divided by the yearly cost to rent an equivalent property. Fifteen is the magic number with rent ratios. Below 15, he advises buying over renting. Rent ratios in most of the Bay Area are still looking “bubbly,” coming in above 30 down in Silicon valley and the East Bay. In San Francisco, the rent ratio is currently at 27, still above 15 but at least closer to its 1986-2000 average of 24. The average rent ratio for the 1990-2000 East Bay and Silicon Valley was 26 and 23, meaning it has gotten more and more expensive to buy, though it’s less expensive now than in 2005 when the housing market was peaking. The rent ratios in 2005 were 47, 43 and 40 for the East Bay, Silicon Valley and San Francisco. So if it doesn’t make economic sense, why do people still keep buying?

Affluent people tend to want to own their houses, even when the dollars don’t make sense, and the Northeast and West Coast are home to much more wealth than a few decades ago.

Yet the fact remains that a lot of New Yorkers and Californians, among others, are paying a hefty premium for the privilege of owning.

A while back, readers commented on this blog that being a homeowner was a way to deal with non performing landlords. How much is that worth economically? Leonhardt says that our area is still in a state of “real estate exuberance,” but that given our current behavior and trends, it may survive.

How do you evaluate the costs of buying vs. renting? Did you buy even if it didn’t make economic sense?

For a full list of rent ratios, click here.

Posted By: Jenny Pisillo (Email) | May 13 2011 at 01:00 PM

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Article source: http://www.sfgate.com/cgi-bin/blogs/ontheblock/detail?entry_id=88931&tsp=1