Forget stocks. Don't bet on gold. After four years of plunging home prices, the most attractive asset class in America is housing.
If all the noise you're hearing about housing has you totally confused, join the crowd. One day you'll read that owning a home has never been more affordable. The next day you'll see news that housing starts have plunged to nearly their lowest level in half a century. After four years of falling prices and surging foreclosures, it's hard to know what to think. In an interview with Fortune, Karl Case (creator of the widely followed S&P/Case-Shiller Home Price indices) indicated "The lack of new home building is a huge help that a lot of people are ignoring," says Case. "People think I'm crazy to be optimistic, but housing is looking like the little engine that could."
To see where real estate is truly headed, it's critical to keep your eye firmly on the fundamentals that, over time, always determine the course of prices and construction. During the last decade's historic run-up in prices, Fortune repeatedly warned that things were moving too fast. In a cover story titled "Is the Housing Boom Over?," this writer's analysis found that the basic forces that govern the market -- the cost of owning vs. renting and the level of new construction -- were in bubble territory. Eventually reality set in, and prices plummeted. Our current view focuses on those same fundamentals -- only now they're pointing in the opposite direction.
So let's state it simply and forcibly: HOUSING IS BACK!
A recent study by Metrostudy covers 19 states, or around 65% of the U.S. housing market, including all the ones hardest hit by the crash: Florida, California, Arizona, and Nevada. The company's client list includes virtually every major homebuilder and bank. The key figures that Metrostudy collects, and that those clients prize, are the number of homes that are vacant and for sale in each city, and the number of months it takes to sell all of them. Together those figures measure inventory -- the key metric in determining whether a market has a surplus or a shortage of new housing.
Today we are witnessing an extraordinary reversal of the new-home glut that helped sink prices just a few years ago. In the 41 cities Metrostudy covers, a total of 78,000 houses are now either vacant and for sale, or under construction. That's less than one-fourth of the 343,000 units in those two categories at the peak of the frenzy in mid-2006, and well below the level of a decade ago. That means we are going to see an incredible shortage of inventory in the near future.
Two basic factors are laying the foundation for dramatic recovery in residential real estate:
- The historic drop in new construction.
- The second is a steep decline in prices, on the order of 30% nationwide since 2006, and as much as 55% in the hardest-hit markets.
The story of this downturn has been an astonishing flight from the traditional American approach of buying new houses to an embrace of renting. But the new affordability will gradually lure Americans back to buying homes. And the return of the homeowner will result in raising prices in the San Diego real estate market.
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