We’ve heard plenty of reasons to be pessimistic about the housing market. Tight credit markets, overbuilt supply, and high vacancy rates are just a few things I’ve covered. Before you lose all confidence, let’s consider a more optimistic perspective from William H. Lucy, professor of urban and environmental planning at the University of Virginia.
Lucy was my thesis advisor back at U.Va. and I can attest that he was talking housing crisis before housing crisis was popular. I distinctly remember wondering in his community development course: “Why would a planner ever care to know about mortgages?” Fast-forward several years, and we’re talking a lot more about RMBS, or residential mortgage-backed securities, and their role in the crisis.
What’s key to Lucy’s analysis is that things aren’t as bad as they might seem. He classifies four states – Nevada, Florida, Arizona, and California (all notoriously overbuilt) – as “High Foreclosure States.” Seventeen states are classified as “Volatile,” due to a mix of high house values, unemployment, and higher incomes. Most surprising, Lucy classifies ten states as “Stable” and nineteen states as “Improving.”
This analysis is based, in part, on shifting demographics. I think Lucy is onto something profound here. If new households are forming in different ways than they did 10 years ago, most of our models and estimations (including those in RMBS markets) are off the mark.
This sentiment was echoed by Laurie Goodman (a brilliant analyst, now senior managing director with Amherst Securities). In a recent talk I attended, Goodman pointed out that this sort of household formation analysis is not currently being done, though it’s desperately needed. We’ll have to stay tuned…