Housing starts were surprisingly strong this week, while there was improving sentiment from home builders. So should we start to breathe a sigh of relief that the housing market is returning to health? The short answer is no. The headlines say that housing is stabilizing and there are signs of life in the real estate sector. This is true but is only part of the story. Signs of life is far different than a return to healthier times.
While KB Homes and Toll Brothers are reporting sales increases, this does not erase the fundamental problem with the real estate market today; there are too many people wanting to sell and not enough buyers. In some neighborhoods in the United States, every other house is for sale and sitting stagnant with no takers. But this is the obvious sign that the real estate market is troubled; there are deeper problems below the surface.
What is more troubling is in every block in neighborhoods across the United States, there are huge numbers of potential sellers that would sell their house if they could get the price they believe their house is worth. This huge reserve of sellers creates a supply waiting to flood the market when any sign of recovery in real estate capital values returns.
Additionally, banks continue to hold huge inventories of foreclosed properties waiting for a rebound in the market before placing these properties into the real estate market. This phantom supply of houses is another headwind for the real estate market. In my discussions with bankers, they are mortified that they have now become wholesalers of properties and fear this will be the case for many years.
In addition to supply issues, the U.S. economy is far from healthy. While we are in the midst of an uneven recovery, unemployment remains stubbornly high and the prospects of a more normalized employment rate are far off in the distance. In fact, it is our belief that the unemployment rate in the United States will likely stabilize around 7 percent as many jobs that were exported in the last five years will not be returning. Lower unemployment means that there is a lower supply of qualified buyers to purchase a huge supply of real estate.
Some might argue that with aggressive Federal Reserve easing policies, inflation will likely snap back over the next several years thereby increasing real estate values. It is likely that inflation will emerge after years of easy money policies and that will have an impact on the capital value of tangible assets like gold and maybe equities. But the impact on real estate because of the previously mentioned issues will likely be muted. There is simply too much supply for inflation to overcome in the near future.
One should not put too much weight into headlines stating that cataclysmic conditions are improving. Yes, there is progress towards recovery in the real estate market but in all likelihood this sector will remain troubled for years to come until excess inventory is burned off and economic stability returns. So digest the headlines with a grain of salt; things are better but still bad in the real estate sector.
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Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.