Housing May Be Beginning a Decline: UCLA

Why do we believe so strongly that housing is set for a decline? The next chart should drive the point home. Not only is housing construction activity holding at rates that in the past have been associated only with much faster population growth than is now being experienced and not only has housing activity been rising for 14 years after past expansion typically stalled out after four years, but population growth has been slowing for the last few years and is set to slow further in the years ahead.
On top of the demographic influences, of course, are the facts that interest rates hit bottom two years ago and have headed up since, while the 2001 - 2003 tax cuts are fully two years in the past. Both fiscal and monetary stimuli had their full effects on housing quite some time ago, and those factors are working to restrain housing activity at present. Furthermore, our reading of the demographics suggests that home construction is above sustainable rates. Finally, there is evidence in a number of regional markets of outright “bubble” market conditions.

On all these grounds, we believe housing is due for a sustained decline. The remaining questions are how hard the fall will be and when it will begin. Again, the recent anecdotal evidence suggests the decline may be beginning. We’ll soon see for sure.