As an analyst back in 1970, I covered building materials companies like GP, US Gypsum, Masonite, American Standard and Carrier. Those were not bright days for the industry, but based upon baby boomer demographics, all knew a great residential boom was coming. The perfect time sequence would have been 1975 - 1995. The boom actually got off to an early start, but with several interruptions for rising interest rates and subsequent recessions, it has been extended well beyond 1995. The most difficult period was from the late 1980s through the mid 1990s, when housing languished. It took the Tax Relief Act of 1997 and the low interest rates since 2001 to bring the last stage of development to fruition.
Looking back to the promise for housing in 1970, I would have to say the eventual reality had only a few high points. Financial de-regulation and innovation provided the means of home ownership to many more families than one might have anticipated, but archaic zoning and building restrictions coupled with a profound lack of architectural imagination and a disappointingly small commitment to technological innovation produced a boom of mundane, boring and unnecessarily costly homes from which to choose. There are many upscale Levittowns out there.
But the boom has satisfied a strong desire for thirty and forty somethings who started families later in life to live in secure neighborhoods with better schools and community services and facilities. It has been a period of powerful demand based primarily on strongly felt need and not speculation. The strong pricing trend of houses since 1997 or so reflects the final boomer and early post boomer family demand crunch against light supply.
Looking forward, demand growth should progressively slow over the next five to seven years and may even contract in certain segments of the market from 2012 out to the beginning of the next decade. Over this same period, more supply will gradually become available as more and more boomers cross the thresholds of sixty and sixty five. The developing excess in the market will be seen most heavily in homes with square footage which tops the 3,000 mark.
The smarter builders will focus on the elder boomers' desire to downsize and acquire facilities and amenities that suit new needs and wants. Maintaining the value of expensive larger homes will require a new round of financial innovation, which will surely come, as maintenance of the Nation's housing stock will remain a continuing political priority. However, there will likely be no getting away from the fact that the US will have a five to ten year period of a buyers's market in residential real estate that should fall within the 2008 - 2020 time frame.
I expect to see another major boom in housing starting sometime around 2020 which should last for a generation, but which will not likely exceed the recent one in dimension or price inflation.
From an investment perspective, it is late to play the end of the current boom, not because of excess valuation, but because of the prospect that many builders and suppliers will experience a period of deceleration of earnings growth and, subsequently, down earnings. It may also be a little early to pursue the boomer downsize play, but this one is on my long term radar.
Do we have a BUBBLE now in US housing? It's a hot, buzzy word these days and in my view more apt to confuse than enlighten in this context. Is the end of the present boom drawing nigh? Yes, and house pricing will cool at some point and remain so for some extended time. That should figure in your thinking not only about stocks, but your own needs and desires regarding shelter.
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