D.R. Horton, Inc. (DHI), KB Home (KBH) & Discussion of a New Bubble In Housing?

The reason home prices are rising right now has little to do with exuberance. Instead, the rate of new-home construction is still below the rate of household formation. Coming off years when new construction barely kept up with the rate of housing demolitions, the supply of homes for sale is now the lowest it’s been eight years.

Homebuilders are trying hard to ramp up production, but doing so is easier said than done, given labor shortages in the construction industry. They’re also enjoying pricing power for the first time in seven years and are unlikely to let go of it until they have to. As Donald Tomnitz of  D.R. Horton, Inc. (NYSE:DHI) recently put it:

We’re clearly raising prices on each and every one of our communities on a house-by-house, on a subdivision-by-subdivision basis. … We do have costs which are going up in some of our markets and with some of our subcontractors, but clearly, our pricing power is exceeding the cost increases that we have today.

There’s plenty of room for the housing industry to run, as Jeffrey Mezger of KB Home (NYSE:KBH) pointed out:

Although the pace of the housing market recovery is gaining momentum, it is important to keep in mind that we are still in the early stages of the recovery. And there’s a long way to go before the industry reaches normalized activity levels.

Economist A.C. Pigou once said: “[T]he era of optimism dies in the crisis, but in dying it gives birth to an era of pessimism. This new era is born, not an infant, but a giant.” With cries of bubbles after home prices show the slightest hint of optimism, I now know what he means.

The article What’s This Talk of a New Housing Bubble? originally appeared on Fool.com is written by Morgan Housel.

Fool contributor Morgan Housel and The Motley Fool have no position in any of the stocks mentioned.

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