Housing Market - Rehab Event Horizon

[Dion DePaoli]

So I have developed this theory. I have had the discussion with only a handful of folks but was interested to see what the BP Nation thought. I have tough skin, so if you think I am crazy, just let me know, no big deal. I, obviously, think I am sort of close to right.

First let me start off by saying, I do not believe we have seen the bottom yet. I do not think we have progressed through enough of the foreclosures to call bottom. I also have concerns that our waive of new market participants has been severely encumbered from student loan debt and lack of employment opportunity to support entering the housing market. There is still not enough credit in the market place and the government still finances most of all mortgages. So tons of talk on how things are different but I would argue its all pretty much the same, we just went through the first wave of assets, which is a little less than half of the total.

Next our housing starts have been relatively low on a national basis. The cost to build alienates the new homes as foreclosures and short sales have been selling under the cost to build. This has added to the already present gap of "newer" homes being built around the crash of 2005 to 2007. Not too much has been built since really 2006 maybe 2007. That said, the big builders have cash and can flick the switch on pretty easy I believe, but again they are not working at full blast. The builders still have some decent land banking taking place, land has been cheap and they snatch a decent amount up, so they have locations to go build when the market comes around.

My concern comes from the gap of home technology that I believe is slowing starting. Newer construction tends to have more recent technology advancements deployed such as more energy efficient materials like windows and doors, etc. An analogy I like to use is windows, the energy efficiency of windows along with the impact resistance and UV shading has come pretty far just in the last 10 years.

I believe it is fairly safe to say the technology curve for such items is on an upward trend. I also believe that the trend, like computers and other tech, is starting to look more like a hockey stick and not so much as a slow rise.

So then would it not be a matter of time until older homes start becoming obsolete? There is then two contributors to that convergence. One is building codes continue to evolve, which is not new and the market has handled that fine over the years. However I think there might be a volume issue that rapidly builds up. The second, I think, will be consumer demand. New is better and modern tech is safer and better. We want our iPhone / iPad life all plugged in and the tech trend is inverted to age, where younger folks tend to be more tech savvy than older folks.

Some of the housing boom was us over building. Trends were higher for new home starts opposed to existing homes. So fast forward say 4 more years, where maybe things are a little more "normal" and the housing market is chugging along. Then add the most tech built homes on the market. Better windows, doors, siding, appliances, iPhone friendly, networked house...stuff. I believe the demand for these types of units will supersede much of the rehab type units. I also believe this might depress prices on rehab type units as demand for more improvements to bring the unit to market become greater. The large builders can spike this supply as they have the cash and they have the land. If demand follows, as it once did, it could perhaps be bad for older less tech homes.

Using my window analogy, in many markets you can still see single pane windows on 1970 and 1980 built homes. Completely not energy efficiency and I think consumers are and will continue, perhaps more so, discounting those types of issues, which I would also say rightfully so. But is the seller discount present today to absorb that? I don't think so. This tilts the scale in the favor of the large builders in the future to be ahead of the curve.

So then, if my theory is correct and sooner rather than later we hit this upward rise in demand for better tech in homes, does it make sense to get a head of the bubble now, if so how would you do it?

Perhaps some of you are, if so, how are you gauging what to bring current for the various materials and systems in the home?

I am inclined to believe the margin to afford too much of this is still not present sufficiently in the market place but I also think the trend is coming.

Thoughts?