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Housing: Partying like it's 1925 By Morgan Housel
From 1960 to 2007, America built an average of about 1.5 million homes per year. That ballooned to 2.2 million per year during the housing bubble, and collapsed to half a million a year in 2010. After rebounding from the depths, about 800,000 new homes were built in 2012.
There's something incredible about that 800,000 figure. I recently came across a chart in a paper by UCLA economist Ed Leamer, showing housing starts from 1920 to 1950. It shows that housing starts in the year 1925 were about ... 800,000.
Think about that. We're building the same number of homes today as we were back when cars had to be started with hand cranks and when the new technological breakthrough was a giant box called a "radio." The U.S. population in 1925 was 115 million and growing by about 1.5 million per year. Today, it's 315 million and growing by 2.5 million per year.
Every weekday JewishWorldReview.com publishes what many in the media and Washington consider "must-reading". HUNDREDS of columnists and cartoonists regularly appear. Sign up for the daily update. It's free. Just click here. The Financial Times spoke with Bill Miller of Legg Mason last month and reported: "He (Miller) says there is a big structural demand for homes due to a growing population and a lack of building during the bust, when fewer than 500,000 new homes a year were built. The long-term trend is for 1.4 million to 1.5 million new homes a year, so to catch up, 'We probably need to get to 2 million housing starts at some point in the next five years.'"
We don't know exactly when that's going to happen. It could be next year or five years from now -- maybe even longer. But we know with a high degree of confidence that it will happen someday. People need roofs over their heads.
And we know what will come with a boom in construction: It's good for jobs, it's good for economic growth, and it's obviously good for homebuilders. A quality builder like NVR has a good chance of outperforming in the coming years.
Some worry that homebuilder stocks look expensive. That's understandable. But valuing a homebuilder based on current earnings might be misleading. If housing starts double from current levels, as Miller and others suggest, earnings growth at homebuilders will surge. A decade ago, people made the opposite mistake, assuming homebuilders were cheap based on inflated earnings. Remember: Busts can be just as distorting as booms.
(Morgan Housel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.)
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Morgan Housel, a columnist at The Motley Fool, is a two-time winner, Best in Business award, Society of American Business Editors and Writers and Best in Business 2012, Columbia Journalism Review.
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