Editor’s note: Pat McAlister owns and operates a real estate consultant firm based in Nashville, Tennessee. Pat has worked in housing and real estate for over 15 years both as a builder and an analyst/ consultant. His insights are always unusual and off the beaten path. Today he shares with us why housing isn’t likely to pick up for several years as well as which sectors in real estate will benefit from the continued housing crisis.

Where do we go from here?

By all indications the housing market is a mess. Credit sources have dried up. Builders and developers are going out of business at a quickening pace. So where do we go from here?

Everybody lives somewhere. It may be only a temporary dwelling, but you HAVE to live somewhere. According to the US Census Bureau there are currently 129 million housing units in the US as of 2Q08. Of those, some 18 million are Vacant. The other 111 million are occupied. And 68% of those 111 million are OWNER occupied.

This number is extremely important to understanding the current housing dilemma.

Historically from 1960 until 1995, the average homeownership rate was 64%. Sometimes it was 62%… sometimes it was 65%. But on average it hung around 64%. Bear in mind, this time period includes the growth in housing needs required by the baby boomer generation.

However, starting in 1996, home ownership in the US began to increase dramatically. From 1996 until today, homeownership as a percentage of total housing units has been 67%.

Now, 3% may not seem like a huge increase percentage wise, but in nominal terms it adds up millions of homes and homeowners. Four million in fact.

Remember, today 111 million homes are occupied in the US. Of these, 68% are OWNER occupied. This means that there are roughly 75 million owner occupied homes in the US. If homeownership was in line with its historic average (64%) we would only have 71 million owner occupied homes.
That’s a difference of four million homes.

As with all historic averages, this will eventually revert to the mean. As you well know, foreclosures are already at historic highs. I wouldn’t be surprised if they stay that way until most of these four million extra homes are vacant.

Understand, I’m not saying some four million families are going to pick up and vacate their homes overnight. But eventually home ownership in the US will return to its historic average. It may take time, but it will happen.

Now, according to the US Census Bureau (http://www.census.gov/) there are already 2.1 million homes sitting on the market waiting to be sold. When you add in the additional four million in homes likely to become vacant as we return to the historic average for home ownership, you’re talking about 6.1 million homes sitting on the market.

That’s a heck of a lot of inventory. And the only thing that will swallow it up while maintaining the fundamentals of the industry will be population growth, which will take years, not quarters to accomplish.

On top of this, first time buyers today are entering a market with much tighter credit requirements. So they’re going to have to put down at least 10% on a house. Considering the savings rate in the US, this means a lot of potential first time buyers will be renting for much longer than usual as they save up.

Between the exodus of home owners who can’t really afford to own a house and an increased number of potential first time buyers renting for longer periods, I believe two things:

• The homebuilder industry will continue to suffer for years due to excessive inventory.
• The rental market will experience something of a boom during the next 2-3 years.

It might be worth looking around for a few rental focused REITs. There might even be the makings of a pairs trade here, shorting homebuilders and going long REITs.

Best Regards,

Pat McAlister

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