By Scott Burns 
Six months ago Fortune magazine went out on a limb “Real Estate: It’s Time to Buy Again,” was the limb they went out on. It laid out how home building had been so devastated, any improvement could turn into a surge in home values. Demand, the article suggested, was about to exceed supply.
We haven’t seen that surge yet.
But the value of our homes is so central to our financial security and middle class prosperity that I went to visit Michael Castleman, the CEO and prime mover at Metro Study, Inc. Castleman and his firm were the primary data source that fueled Fortune’s optimism.
I didn’t have to go far. While his firm has offices around the country, his office is about a five minute drive from my home in Dripping Springs.
My first question: Does he still believe the home market can, and will, turn around?
His answer: You bet. He also has an interesting idea for how to make sure that happens, which I will tell you about next week. But first you need to know something about the guy and his data. Long ago, Michael Castleman wanted to be an astronautical engineer. It still shows in his short haircut and the speed with which he can run through charts and data. He is, quite definitely, an all-out data nerd.
That’s important. While the two most commonly referenced indexes for home values— the Case-Shiller S&P indexes and the Federal Housing Finance Agency indexes— are based on surveys and samples of pricing data, Metro Study works with the whole data source. Every quarter they go out and survey every single development in their 23 market areas. They count the lots created and added to inventory, the houses started on those lots, the completed houses, and the houses occupied by new owners. This is, he points out, “on-the-ground” work. The markets covered account for nearly 70 percent of the new home market in America. Then the data is assembled, market by market, to give a complete picture of the supply pipeline for new single-family homes.
“We are doing a 100 percent new household census every 90 days. We count all the newly occupied homes,” he says. The task means they are tracking about 4.5 million building lots. There is no tracking error. There is no sampling error. What you count is what you got.
“Builders struggled with lot shortages throughout the 90s and into 2005-2006. At the market top builders bought as many lots as they could. They bought more lots than they would ever need, and they did it at the top of the market,” he said.
Home prices, he pointed out, were the result of supply “elasticity”— how long it took a developer to create lots for building. In Houston, he said, it takes about 18 months compared to as long as 10 years in Southern California or Northern Virginia. “That’s why a house you can buy for $190,000 in Houston will cost $800,000 in California. Essentially, it’s a tax that the homebuyer pays to live in a highly restricted community,” he noted.
“In Nevada the federal government owns 90 percent of the land. At the peak, homebuilders there were paying $750,000 an acre for raw undeveloped land. The same land is available in San Antonio for $10,000 an acre.”
Yet today, whatever the supply of foreclosed houses and houses available for short sales, he says many markets are tight. Consider the Las Vegas market— a devastated market if there ever was one— it has only a 2.2 month supply of new homes in inventory when equilibrium is about a 2.5 month supply, he points out.
Other markets, like Phoenix, are in similar condition. However dismal the demand for new homes relative to the boom years (and new home construction is a fraction of what it was during the boom), builders in many areas carry very little inventory.
Soon, Castleman says, they will need to tell would-be customers that they will have to wait while their house is built and, most likely, pay a higher price. That will direct some, but not all, sales to the existing home market. Those sales will start to work down the inventory in the existing home market where many buyers will discover they can buy homes at less than replacement cost.
The result could be a significant recovery in home values. Other than jobs, no single factor is more important to working Americans than the value of their homes.
Next week: How to put the pedal to the metal in housing.
