Financials sector head Josh Steiner put out a posting in December plotting two possible trajectories for housing growth: “linear,” and “parabolic.”
Steiner says the market sees Linear growth in the housing sector. He believes they are wrong. His work indicates the issue in the housing sector will not be weak demand, but shortage of supply.
New construction slacked off in recent years over fears of a slowdown. This led to reduced capacity in the building industry, which will now hold back an acceleration of new construction. Tuesday’s housing starts number for February was strong (see chart below), but Steiner says the industry remains below capacity to build new homes to meet current demand. This will be something of a headwind for overall growth, but should drive prices substantially higher in the near term, as there will simply not be enough homes to meet demand.
A recent look at a major Harvard study shows immigration tracking above the high end of the estimates range. New immigrant statistics are a significant component of standard models of growth in new household formation.
This provides one more metric on top of earlier Hedgeye work that saw an increase in live births and pet buying, for example – key components of the housing equation – that should keep housing demand extremely robust.
Finally, Steiner characterizes housing as a “Giffen Good,” an economic term meaning an item where demand increases as prices go up – a seeming inversion of the Law of Supply and Demand. The coming shortage in new homes should drive a surge in price – which should continue to drive demand beyond current linear projections.
Welcome to the Housing Parabola.