US housing sees major change as middle-market is squeezed

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US house pricesJul15US house prices have recovering for 3 years, as the chart from the Wall Street Journal confirms.  It shows two lines:

  • The dark blue line is money of the day: prices rose steadily from 1989, peaking in 2006 at 141% of 1989 value
  • The grey line adjusts for inflation: “real prices” were negative until 2000, and peaked 51% higher in 2006
  • Both prices then fell until 2012, since when they have staged a modest recovery, but are still below 2006 peaks
  • Nominal prices are 8% below their peak, and inflation-adjusted prices are 21% lower
  • Overall, the inflation-adjusted price of the average house has risen by just 20% over the 26 years since 1989

These, of course, are national figures, and the picture for individual cities can be different.  Equally, other national indices such as those from the National Association of Realtors and the Federal Housing Finance Agency have different methodologies and provide slightly different results.

But this does not mean that today’s US housing market is the same as it was pre-2009:

  • One key issue is that starts have virtually halved from their 2.3m peak in January 2006, to 1.2m in June
  • A second is that the price data masks the changes that are taking place in the size of single-family homes
  • A third is that the S&P index only measures single-family home prices, yet the trend is to multi-home living

SOMETHING QUITE FUNDAMENTAL HAS CHANGED IN US HOUSING MARKETS

US housing Jul15

These changes have gone largely unremarked by investors and companies supplying the housing industry.  Yet they have enormous implications for future demand.  They also help to explain the subdued nature of the recovery in US GDP growth since 2008, as housing is such a key part of the economy.

They are another sign of the major paradigm shift now underway in most consumer markets.  The middle ground of “affordable luxury” is fast disappearing, as markets return to being segmented between high-cost luxury and and low-cost mass-market.

The size of the median US single-family home today is 20% larger than in 2000, at 2400 square feet (220 square metres), and 10% larger than in 2006.  Builders of single-family homes have been responding to changes in demand, where sales of homes priced above $600k have trebled, whilst sales of those priced below $400k are down 16%.

The middle market is thus being squeezed quite hard, as the second chart confirms:

  • It shows that a remarkable increase has taken place in the ratio of multi-home starts to single family home starts
  • In 1989, this ratio was around 21%, meaning that 4 out of 5 starts were of single family homes
  • The ratio then dropped to an all-time low of 9% in 1992, when 9 out 10 starts were single family
  • Last month, however the ratio soared to 41% – if this trend continues, half of all starts will soon be multi-home

The future of the US housing market will thus be quite different from the past.  Luxury homes are getting larger and more expensive: mass-market homes are more likely to be smaller – quite probably apartments – and less expensive.

And, of course, the new home market itself remains close to all-time lows.  2014’s volume of just 437k equaled 1981 levels, and was just a third of 2005’s peak of 1.283m.

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