Hey, it’s ugly out there, but two things happen pretty much every year regardless of what GDP is doing: (1) productivity increases, and (2) the population increases. Over a period of time – this period will be longer than most – time heals economic wounds via the natural increases in population and productivity.
Where housing, specifically, is concerned, we created too many housing units from 2002-2007. Calculated Risk estimates this number to be about 1.8 million excess housing units (which includes apartments). In theory, new housing completions should track household formation, which has averaged about 1.2 million annually for the last 15 years (and household formation is a fairly consistent fraction of population growth over time, as it should be).
Of course, the household formation rate has declined to about 900K annualized due to the crappy economy (folks are doubling up, kids aren’t moving out). New housing completions are estimated to be about 500K units this year, and probably will decline to 400K for a few years (the peak was 1.6 million units in 2006). So, holding the household formation rate at 900K (recall that lower rents and interest rates will help offset the impact of unemployment on the rate of household formations), that means we’re soaking up about 500K units of excess inventory each year at the current pace. But at this rate it will take another 3-4 years to complete the process.
Which means that while SFR prices may stop going down (meaningfully) by next year, they can’t increase on a sustainable basis until the excess inventory is soaked up, which is probably a few years out.
People keep asking where the jobs come from. Increases in population and innovation create their own demand for and supply of goods and services. But clearly we’re in disequilibrium right now – we front-end loaded too much demand (via debt). Now we’ve gotta re-finance debt, charge off a chunk of it, and pay some down over the next decade, and that’s gonna lower GDP growth.
It’s gonna suck for a while. Really suck. But it’s not the end of the world – it’s just more pain than we’re used to.
