The Bullish Case For Real Estate

How can anyone be bullish on real estate? I know I am also a bear on Real Estate. My main reason for being pessimistic about real estate is not the constant bad numbers coming out in the news. It really is mostly because we have had close to zero interest rates for several years now with ulta low mortgage rates and this still has not propped up the housing market. Additionally, with high unemployment, which will stay extremely high for years unless the US economy starts to produce close to 400-500k jobs a month, which is close to impossible; I do not see how real estate can recover when rates do rise and unemployment is so high. But I wanted to make the bullish case for real estate, because there are some things to be bullish about:

According to the book “Buy & Hold Forever: How to Build Wealth for the 21st Century” some of the key indicators of real estate recovery are low numbers of foreclosures, low unemployment rates, declining inventory of houses, and balanced real estate prices. Also, before we get into the details of the indications which lead us to be optimistic about U.S real estate recovery, it should be noted  that the recovery is a slow process as nothing happens overnight, especially in the real estate sector.

Looking back at “boom”, home ownership rates rose for various reasons (without getting into political nitty-gritty). What this  created, and still persists in the real estate market today, is excessive supply with considerably low demand.

One would question why there is still an increase in the supply or inventory of houses, especially when there are almost no new constructions taking place along with improved sales figures of houses? The answer is still prevalent foreclosure problem that many people face.  Foreclosure still makes up 4% of the total mortgage loans, however, compared to 10% in 2009; that is a huge improvement

Along with the decrease in foreclosure over the years facilitated by decrease in unemployment, real sector economy is clearly not as distant a dream as many claim it to be.  Although, the job market is awful, it is much better than early 2009 when the economy was losing close to one million jobs a month and consumer confidence tanked.  With, the improvement in the employment numbers and the economic recovery in the U.S, the demand for houses should soon start to increase. The rise in the price of rentals will also help this problem.

Graph of home prices vs. rents


Some of areas in America witnessing the primary indicators of recovery are Boston, Dallas, Los Angeles and Buffalo where the days on market of inventory are decreasing and well below the national average of 160. All these facts point towards the revival of the housing sector.

To further strengthen the case, it is quite important to mention comments by Warren Buffett. Buffet in his annual letter to share-holders stated that the housing or real estate problem would be far behind us within a year or so. According to him, currently the supply side of the housing sector is 200 million annually while the demand is only 120 million; however, demand will catch up with the supply by the end of 2011, marking the end of the real estate slump. Bill Ackman, who made a killing with his investment in General Growth Properties , claims confidence is the only thing lacking in a real estate recovery. Ackman predicts the housing sector to fully turnaround by the spring of 2012.

It is also important to remember that despite the big boom, there has been a big bust in the RE sector. Robert Shiller has been very bearish about real estate in recent comments he made. Shiller said housing could remain depressed for 20 years, and home prices could decline 10-25%! However, Shiller is also a big fan of using housing prices to inflation as a metric for measuring whether housing is valued corretly, since on average housing prices rise as much as inflation. According to the latest statistics we would be in the neutral area for housing, the first time in many years:


Graph of historical house prices to inflation

Conclusively, for the real sector to recover or to further facilitate the sector on its road to recovery, various elements play a major role; employment and consumer confidence are the most essential. Increase in employment means improvement in economic conditions which  impact the level of foreclosures and sales of houses. Decreased foreclosures as the citizens become able to pay their mortgage and increased demand ultimately shrinks the gap between supply and demand. This consequentially would lead to stable or balanced prices which would further drive up demand. All that is required is confidence and optimism in the U.S real estate sector, which the media is doing a great job of hindering.


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