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Do We Need to Build?
by David Stanowski
24 November 2009


Abstract:
The Galveston Housing Authority wants to rebuild the 569 housing units that were destroyed in the four Family Housing Projects, and then it wants to go on to build another 1,500 housing units primarily targeted at middle class buyers. Why would anyone want a government agency like the GHA to become the largest developer on the Island?

The Urban Land Institute estimates that there are currently about 9,000 vacant housing units in the City, so in the middle of a world-wide Recession and housing bust; do we really need to build anything?

Introduction:
Government interference in any market always results in the mis-allocation of resources and distortions that end baldly. Since the end of WWII, the federal government has taken unprecedented steps to funnel massive amounts of credit into the residential real estate market to make home ownership "available to more people", to finance multi-family building, and to support a whole variety of subsidized housing ventures like Public Housing Projects and Section 8 vouchers. As they have done so, the real estate industry has created far too many homes, as productive enterprises that provide jobs have been starved for capital. There are now 19 million vacant housing units in the U.S. as millions of people have lost their jobs. But there are still those who continue to assert that we need to pour even more money into housing.

Many people may want to upgrade their current housing situation, but they have lost the perspective that they have to be able to earn a certain level of income BEFORE they can afford to do so.

"Many pundits believe we are going to see a lot of new construction in the U.S. in the months ahead — pent-up demand coupled with new government tax credits. Then again, the last thing the economy really needs is more housing (or consumption in general). What it needs is more productive investments, jobs and less credit."

"Nearly 15% of the total housing stock is sitting empty, so I would have to think that the menu of available product for prospective homeowners to look at is pretty impressive (unless of course they are all run down and in areas that nobody wants to live in). In a nutshell, maybe we don’t need any new housing production, outside of the few who can afford a custom-made home of their dreams, for a long, long time given the size of the existing inventory out there."
David Rosenberg: Chief Economist, Gluskin Sheff

The following graph shows that lending to business has been starved at least as far back as 1974. With the net growth remaining below the zero line, for the last 31 years, the growth in credit was going to non-productive consumer lending, including housing.

Lending to Business


Everybody knows that real estate markets are local and only so much can be gleaned from looking at national trends, but with little data available on the Galveston market, and a world-wide real estate bust overshadowing normal supply and demand forces in all markets, it is prudent to look at the U.S. market for clues.

Notice how total housing starts hit their lowest level, over the 50-year span that the data series covers, in April 2009, at 479,000. The slight rebound that has been cited as evidence of "green shoots" is hardly noticeable on the graph.


Single-family starts (red line) hit their all-time record low in January and February at 357,000.


When breaking out multi-family starts from the total starts, it's no surprise that they hit 50-year lows this year, too.


The following graph shows total housing starts and the percent of vacant housing units (owner + rental) on the red line. The vacancy rate is the highest in 41 years!


The vacancy rate has continued to climb even after housing starts fell off a cliff. Initially this was because there were a lot of units in the pipeline under construction, but some hidden inventory, like second homes, have been put on the market for sale or rent, and lately some households have been lost as they merged with other households, due to the tough economy.

It is very unlikely that there will be a strong rebound in housing starts with at least 19 million vacant housing units overhanging the market. The level of listed inventory for new and existing homes is declining, but listings do not include the "shadow inventory" of  foreclosed properties, which continue to climb, and houses held off the market by owners waiting for "better conditions" to sell. The only way to start absorbing this excess inventory is through new household formation, and that is nearly impossible without job growth. 

The inventory of rental units is at record levels, i.e. the combination of vacant single family homes and rental units. This means that rents are falling in many areas, and incentives are needed to lure new tenants,
as landlords are fighting desperately for residents.

Homebuilders nationwide have assessed the information presented above and expressed their outlook for the market in the Homebuilders Index shown below. The index must be above 50 to be optimistic towards home building. It hit its all-time low of 8 in January, and has rebounded to 17 in November; hardly an endorsement from the industry that conditions are right for more building.


What about renters shifting to home ownership?


The GHA, and others in Galveston, believe that pushing more people into home ownership is the answer for many of the ills that plague Public Housing, and the City's other pressing problems. This drama has already played out on the national stage during the recent bubble when all lending standards were dropped in favor of "putting everyone in a home". The negative effects of that experiment will take many more years to fully dissipate.

The FHA recently admitted that their Downpayment Assistance Program, "created too many homeowners in the FHA portfolio that were not equipped for the financial responsibilities of home ownership." They finally realized that it's not good public policy to push people into homeownership, but the government is a long way from ending this policy.

As millions of Americans go through the foreclosure process, over the next few years, there will be a paradigm shift in the whole philosophy regarding the perceived advantages of home ownership, as many see renting as a better alternative. The percentage of people who are homeowners should have already peaked during the bubble, and will be headed lower for the foreseeable future. Policies designed to artificially increase home ownership are already behind the curve when it comes to trends headed in the other direction.

Government needs to stay out of the housing market, and let the private sector come up with the correct mix of ownership and rental options for its customers. Without GHA pushing to become the largest developer on the Island, using taxpayer money, does anyone in the private sector see a need for large scale development at this time?

Some may argue that 9,000 vacant housing units are not enough to fill our needs, or do not offer sufficient choices for Island residents, but the 19 million vacant housing units, in other parts of the country, may also serve to lure them to other locations, so it is no time to start creating more local supply.



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