Every day (for the past 3 years) we hear countless fairy tales why housing has bottomed and will improve any minute now. Just consider the latest kneeslapper from that endlessly amusing Larry Yun of the NAR, uttered just today: "pent-up demand could burst forth from the improving economy." Uh, right. Here's the truth - it won't and here is why, in 5 charts from Bank of America, so simple even an economist will get it.
Epic supply backlog...
From BofA: "The foreclosure inventory pipeline that must be cleared in the next few years is very large. Our mortgage strategists forecast that another 6.6 million homes will need to be liquidated over the next five years."
Coupled with a secular shift from plunging demand via habitation patterns, as more and more simply opt to live with their parents...
"Live at home children: Since the recession, the share of young adults that still live with their parents has climbed. Of the 25-34 year age group, 14.2% live at home compared to an average of 10.5% in the first half of the last decade. Similarly, of the 18-24 year age cohort, 54.6% live at home, which is up from the low of 50% early in the last decade, but is close to the longer-term average. We should expect to see the 25-34 year olds move out of their family homes once the economy heals. It may take more time for the younger age cohort."
Means more and more are forced to rent...
"We forecast household formation to gradually turn higher over the next two years with a notable pickup starting in 2014. This inflow of new households will be supportive of the renovation market. Many of these new households will initially move into the rental market due to slow wage growth and tight credit conditions, as well as the typical attraction to renting for the young adult age cohort."
Which means home prices will slide ever more as the American Dream of home ownership is forgotten, leading to even less wealth extraction via home equity loans...
"Typically, the decision to renovate a home is a function of the value the homeowner sees in the home and the ability to finance the improvements. Rising prices is a signal to homeowners that the home is a good investment, so renovating would only increase the potential return on investment. In addition, when home prices are rising, homeowners can borrow against home equity to finance renovations. The housing boom brought a notable increase in home equity lines of credit and second liens, which were used to finance renovations. This has since collapsed along with home prices."
Which means no hope for a long, long time.
...
Actually, there is hope... in 2020.
"The gain in renovations and multifamily building in the next two years should provide some support before the eventual turn in single family construction begins. Assuming housing starts return to the historical average of 1.5 million by 2016 and renovation spending remains healthy, residential investment will once again become an important part of the economy. We expect residential investment to reach 3.5% of GDP by 2016 and return to the historical average of 4% by 2020."
