Houses As Places To Live In

What a shocking idea, eh? Imagine that... Houses simply being structures that house families, instead of assets that may be sold for immediate gains, or cash cows that can be milked indefinitely. There is a logically simple way to estimate the fundamental demand for housing: all other things equal, the more people that are around the more housing is needed. let's examine this correlation...

First a chart of annual new housing completions (click to enlarge), i.e. how many new houses were actually being built per year. This is probably the most striking housing "bubble" chart that I have seen: since 1970, previous housing booms lasted just 4 years, trough to peak. However, the last one started in 1992 and went on for a full 14 years.

This means that there have been a heck of a lot of new houses built in this 14-year uninterrupted boom phase, many times more than any other cycle. Comparing the number of new houses with the increase in population is revealing. Following is a chart for the 1992-2006 period comparing how many houses were built every year to the annual increase in population. More and more new houses were being built, even as fewer people were added to the population.

For the 14 year period, there were a total 23.1 million housing units built, while population increased by 46.4 million people - one new housing unit built for every 2 additional people. The chart below shows the progression of this ratio during the boom phase. At the end of the bubble, there was an incredible one new house being completed for every 1.5 new persons! And remember, this was not something that happened over a short 4-year boom, but went on for a full 14 years.


Bottom line? There were A LOT of houses built, outstripping by far the "natural" demand that arose from population increases. The current glut in housing was a long time in the making and will take a long time to go away, certainly more than 2-3 years. This is quite simply just the beginning of the bust cycle: assuming it bottoms out at the previous ratio of 3 new people per 1 new house, it would result in 960.000 housing completions per year. To give you an idea of where we are right now, last month (August) completions were running at 1,523,000 per year and starts at 1,331,000 per year.

I think we have a very long way to go. I wouldn't want to be near a mortgage-related investment, no matter if it is prime, AAA, backed by an agency or Mammon himself.