As housing demand in the existing home market collapses, new home sales volume picks up. With affordability & mortgage applications at an all time low, is there light at the end of the tunnel?
In the writeup, I also quantified the structural problem - roughly, there are:
1.7M newborns and net migrants each year
1M+ new households form each year
2.7M millennials looking for their first home, while we have
3.8M to 6.5M homes short
Homebuilders must build more than the current 1.4M homes/year to close this gap. Assuming it could build 1.7M homes each year, closing the current gap would take 13 years.
Thanks for the restack. I love how you have broken down the math top-down to show the housing supply shortage.
One thing that I find interesting is that while housing starts in the single family home market has stagnated, multifamily housing starts are climbing higher.
Does that imply a shift in the overall preference for homes in the economy? What do you think?
I think the push in multi-family is profit based. With all of the newcomers putting extra pressure on housing, rents will only go up towards cost of ownership. Capital realizes most 1st time hopeful buyers will have a difficult time saving a down payment and competing with institutions and will be forced to rent. Current homeowners wealth is approximately 40 times the comparable renter. I would say that it’s already exponential and generational, as these homeowners are able to help their adult children.
@Amrita Roy, to be honest, I don't pay attention too much on the monthly or even quarterly movements of different stats because it could be because of so many reasons including supply tightness in backlog, shortage of xyz....or on the demand side rent, vacancy rates etc...so I don't have an answer there.
Housing should be a right. We could start with not allowing hedge funds and other money managers to bid up the cost of housing and not bailing them out when they bet wrong. Pushing people to renting is Wall Street's dream. We could easily put laws in to prevent un-productive investment and force banks to provide affordable loans for home ownership.
Xi Jingping in 2016 stated "houses are for living in not for speculation". While China isn't without it's housing market problems 90% own their homes (compared to 66% in the US), so we would do well by emulating their model.
I strongly suspect that private equity investment is a factor in the 'shortage' of houses for sale and the resulting high prices. Individuals have little reason to sell at a 'low' price - moving is often discretionary and the homeowner can wait until prices/market are more favorable. Investors who own multiple properties have even less incentive when higher inventory pricing might be helpful to their balance sheets.
I'm not sure what 'housing should be a right' means to you. For me, housing is housing, whether owned or rented. In fact, I believe that the very ideal of owning a stand-alone home is a social problem in the US (as in, what's good for the individual is not always good for all individuals collectively). More dense housing, like town-homes, duplexes, triplexes, etc., would increase the availability of housing and reduce the negative externalities created by single-family homes, even if they reduce the amount of home ownership.
To say that China has its housing market problems seems to be a bit of an understatement. Xi's comment that 'houses are for living not for speculation' sounds more aspirational than an enforced policy- especially when the speculators are the localities making the non-bank loans to get the buildings built. Meanwhile, when Americans talk about housing, I doubt they have in mind the multi-story housing towers that most Chinese live in. Finally, while it might be anecdotal, the young people (25-40 years old) I've met in China must all be in the 10% - they all commented that it was too expensive to buy a home. (And to buy health insurance, and to pay for schooling for their children, etc.)
Nov 27, 2023·edited Nov 28, 2023Liked by Amrita Roy, Uttam Dey
“ The culprit in all of this is a lack of adequate housing supply.”
Here’s my question to those experts, “how did this happen in such a short amount of time? Just three years?” 🤔 Where did massive amount of individuals come from who suddenly needed to purchase a home? Is population increase exploding beyond our wildest beliefs? The same reports will tell you everyone’s ditching California. Which doesn’t add up with the reason for home price increases.
Imagine those people use in their homes as ATM machines as a take out equity? If and when the price of their home falls they’re going to possibly it back to the bank.
Nov 27, 2023·edited Nov 27, 2023Liked by Amrita Roy, Uttam Dey
I haven’t seen any Texans where I live. They are also saying New Yorkers are moving here. 🤔 Taking advantage of the bargain price real estate compared to New York.
I don't think its a huge number yet, Charlotte. I just woke up yesterday morning and saw tons of news outlets carrying this piece. After going through Census data i see that its roughly 42k Texans who made the switch in 2022.
But to your point, the motivation could very well be to take advantage of some bargains in Cal state. For example, SF and LA have seen some sizeable drawdowns in home prices from their peak last year, while home prices in many other cities have seen smaller drawdowns.
Nov 27, 2023·edited Nov 27, 2023Liked by Uttam Dey, Amrita Roy
They are building houses like crazy in my town to keep up with the demand coming from Mexico in the Middle East. I live in an area which would attract Texans but they aren’t moving here. Maybe to the bigger cities.
A little known fact of US real estate is that foreign nationals do not have to prove the source of funds like US citizens do. The global elite, legal and criminal, warehouse their capital in US real estate. Often never even renting out the property, then sell it over time as it appreciates. Dirty capital comes our clean and n the other side. The single largest owner of homes in Cleveland is a Ukrainian oligarch. It is said up to 10% of property in NYC and San Francisco are kept empty, off market safe housing global capital
Hey guys, I just wanted to jump in real quick. There are a lot of folks who’ve moved up here from Florida. They had money to buy a home and stay down there, but companies like BlackRock are buying up entire subdivisions (not hyperbole but literally) and they want to buy as a package deal. The one exception? Foreign nationals.
Any significant retreat in home prices will trigger investors back into the market. Even if mortgage rates come down and supply increases, demand is so hot prices will only increase. The suburbs around NYC are experiencing budding wars on 45% of properties. You will own nothing and be happy is not just a catch phrase. As consumption declines, capital seeks the highest return. Capital seeks to own every home possible. The cost of living is now front and center for capital profits. The divide between haves and have nots will only increase, most likely exponentially
I am with you 100% that any retreat in home prices will trigger capital back into the market, given the pent up demand from demographic forces and financialization of homes. Therefore, we are likely not going to see a repeat of 2008 housing crisis, but to your point, the gap between the haves and haves not widen exponentially.
The mismatch between supply and demand for housing is just another reason I always will advocate for zoning reform at Risk & Progress. Also, let’s stop punishing developers by taxing their property….tax land value instead. It’s vastly more efficient.
I am fully with you on zoning reform. You have a far deeper understanding in matters of tax than I do. Can you elaborate on how shifting the tax from the developers to the land would drive efficiency?
I highly doubt I have more of an understanding than you do. I have read your work :)
Main thing is taxing property means higher taxes on things we want (development) and lower taxes on productive things we generally don't want (vacant land). We are doing it backward.
Switching to LVT will make the price of land cheaper and discourage land speculation. It will also require land use be productive (golf courses and parking lots beware). But from a tax efficiency perspective, LVT is the gold standard because almost every other kind of tax will distort supply and result in deadweight loss. If I place a 10 percent VAT on the sale of chairs, for example, fewer chairs will sell/be produced than otherwise would be. There is that hidden cost on the economy we don't see.
But if I tax land, the total amount is fixed, we don't get "less" land because there is a tax on it. Thus, no deadweight loss...as close to an economic "free lunch" as is possible. Estimates suggest we could raise as much as 20 percent of GDP in tax revenue from LVT, meaning we could abolish some other kinds of taxes, including property taxes and maybe income tax.
Also, since LVT targets land values, it really is targeting "unearned rent." No one created the land, it is not born of the fruits of labor, and so allowing this to be privately captured (as is the case today) allows for growing wealth inequality. It is best, instead, to recover that unearned wealth and return it to society in the form of a dividend or UBI.
If you really want to get into the weeds, some believe that LVT could replace all taxes in one swoop. That's because as we steadily abolish taxes with deadweight loss and redistribute rents, the economy will expand more and more rapidly. This expansion will be transferring into rising land values, which will result in ever more tax revenue.
I am so very grateful that you took the time to explain the concept of LVT and the broader impact to the economy so clearly. This definitely helps me understand the matter much so much better. So, I am assuming the reason we haven't moved to LVT , is because of some form of political pressure?
Two reasons 1) Politically, some very powerful vested interests would lose...big time. They are making unearned wealth after all. 2) It's not always easy to calculate the value of land after improvements are removed. It can be done though. I feel like the latter becomes a convenient excuse for the former.
Since shelter is a basic human need, it is astonishing how much house prices have risen in comparison to wages. Apart from vain promises by politicians, you can't hope for any help from that side. All the more important to take care of it yourself. I'm eagerly looking forward to part 2. Great piece Amrita.
Yes, it is astonishing how much faster home prices rose relative to income over the last 3 years.
To be honest, post GFC, home prices were rising 6% on average per year, while wages were growing around 2%. But what happened over the last 3 years is devastating for the middle class. Oh and when did politicians give a s*** about the middle class.
Lol, that's a very practical question. At this point, it costs less to rent than to pay mortgage payment, so, until that dynamic is changing, no buying homes for the average rational individual. Unless of course, you turn your substack into a million dollar business (like some have) and in that case you don't have to wait that long.
Brilliant analysis Amrita. I have one doubt. What is the major difference between existing single family home market and new single family home market other than the prices?
Thank you Sanuj. To answer your question, existing home market consist of 85% of all sales volume, so it is a larger market compared to the new home market. The only way an existing home comes to the market is when the existing home owner decides to sell it, and given the current mortgage rate and home prices, no one is selling.
New homes are all new single family construction and it is the remaining 15% of all transactions in the single family home market. Though new home is a smaller market, they are the price setters and currently new home prices are on the decline given excess inventory and low demand, but it has yet not tricked into the existing home prices. Probably, because certain cities are seeing excess new home construction vs. others, so regional disparity.
I thought that they were two different official housing market schemes. I understand now that they are just new houses and existing older ones waiting to be resold.
The housing specific vocabulary in the US can be confusing, there are stuff I still double check in investopedia to make sure that I have the correct definition and understanding.
that´s a fantastic data trove, and they reveal some really interesting and weird dynamics. The increase in median home prices does look a bit like a bubble, strange that this hasn´t gained broader attention (I guess, most commentators were transfixed by the mortgage rate spike).
Thank you and that's a great observation. I think the underlying dilemma is that home prices are at the level it is today, because there is limited inventory, not excessive demand. In fact, quite the opposite on the demand front with record mortgage rates. I guess, if the home prices were driven by excessive demand, it would be catching on to the headlines more frequently as being a bubble. But most people, who own their homes have locked in ultra low interest rates or are mortgage free.
Great stuffs Amrita, in my recent in-depth research into NVR Inc and homebuilders, I estimated that it would take roughly 13 years to close the structural supply deficit. For details you can read here - https://www.sleepwellinvestments.com/p/nvr-a-homebuilding-black-sheep-to
In the writeup, I also quantified the structural problem - roughly, there are:
1.7M newborns and net migrants each year
1M+ new households form each year
2.7M millennials looking for their first home, while we have
3.8M to 6.5M homes short
Homebuilders must build more than the current 1.4M homes/year to close this gap. Assuming it could build 1.7M homes each year, closing the current gap would take 13 years.
Thanks for the restack. I love how you have broken down the math top-down to show the housing supply shortage.
One thing that I find interesting is that while housing starts in the single family home market has stagnated, multifamily housing starts are climbing higher.
Does that imply a shift in the overall preference for homes in the economy? What do you think?
I think the push in multi-family is profit based. With all of the newcomers putting extra pressure on housing, rents will only go up towards cost of ownership. Capital realizes most 1st time hopeful buyers will have a difficult time saving a down payment and competing with institutions and will be forced to rent. Current homeowners wealth is approximately 40 times the comparable renter. I would say that it’s already exponential and generational, as these homeowners are able to help their adult children.
That's very insightful, thank you.
@Amrita Roy, to be honest, I don't pay attention too much on the monthly or even quarterly movements of different stats because it could be because of so many reasons including supply tightness in backlog, shortage of xyz....or on the demand side rent, vacancy rates etc...so I don't have an answer there.
@margaritasattheMall is probably right already!
Things would be so much better if we didn't let housing become a commodity. I have too many friends that can't afford homes.
Couldn't agree more.
Samoan, hi. I’m wondering what you have in mind as alternative to housing being a commodity?
Housing should be a right. We could start with not allowing hedge funds and other money managers to bid up the cost of housing and not bailing them out when they bet wrong. Pushing people to renting is Wall Street's dream. We could easily put laws in to prevent un-productive investment and force banks to provide affordable loans for home ownership.
Xi Jingping in 2016 stated "houses are for living in not for speculation". While China isn't without it's housing market problems 90% own their homes (compared to 66% in the US), so we would do well by emulating their model.
Samoan, hi.
I strongly suspect that private equity investment is a factor in the 'shortage' of houses for sale and the resulting high prices. Individuals have little reason to sell at a 'low' price - moving is often discretionary and the homeowner can wait until prices/market are more favorable. Investors who own multiple properties have even less incentive when higher inventory pricing might be helpful to their balance sheets.
I'm not sure what 'housing should be a right' means to you. For me, housing is housing, whether owned or rented. In fact, I believe that the very ideal of owning a stand-alone home is a social problem in the US (as in, what's good for the individual is not always good for all individuals collectively). More dense housing, like town-homes, duplexes, triplexes, etc., would increase the availability of housing and reduce the negative externalities created by single-family homes, even if they reduce the amount of home ownership.
To say that China has its housing market problems seems to be a bit of an understatement. Xi's comment that 'houses are for living not for speculation' sounds more aspirational than an enforced policy- especially when the speculators are the localities making the non-bank loans to get the buildings built. Meanwhile, when Americans talk about housing, I doubt they have in mind the multi-story housing towers that most Chinese live in. Finally, while it might be anecdotal, the young people (25-40 years old) I've met in China must all be in the 10% - they all commented that it was too expensive to buy a home. (And to buy health insurance, and to pay for schooling for their children, etc.)
“ The culprit in all of this is a lack of adequate housing supply.”
Here’s my question to those experts, “how did this happen in such a short amount of time? Just three years?” 🤔 Where did massive amount of individuals come from who suddenly needed to purchase a home? Is population increase exploding beyond our wildest beliefs? The same reports will tell you everyone’s ditching California. Which doesn’t add up with the reason for home price increases.
Imagine those people use in their homes as ATM machines as a take out equity? If and when the price of their home falls they’re going to possibly it back to the bank.
And now...new reports suggest Texans are moving to California in droves. 🧐
https://www.chron.com/culture/article/how-many-texans-move-california-18509867.php
But it’s just not California, Real estate prices are going through the roof everywhere.
I haven’t seen any Texans where I live. They are also saying New Yorkers are moving here. 🤔 Taking advantage of the bargain price real estate compared to New York.
I don't think its a huge number yet, Charlotte. I just woke up yesterday morning and saw tons of news outlets carrying this piece. After going through Census data i see that its roughly 42k Texans who made the switch in 2022.
But to your point, the motivation could very well be to take advantage of some bargains in Cal state. For example, SF and LA have seen some sizeable drawdowns in home prices from their peak last year, while home prices in many other cities have seen smaller drawdowns.
They are building houses like crazy in my town to keep up with the demand coming from Mexico in the Middle East. I live in an area which would attract Texans but they aren’t moving here. Maybe to the bigger cities.
A little known fact of US real estate is that foreign nationals do not have to prove the source of funds like US citizens do. The global elite, legal and criminal, warehouse their capital in US real estate. Often never even renting out the property, then sell it over time as it appreciates. Dirty capital comes our clean and n the other side. The single largest owner of homes in Cleveland is a Ukrainian oligarch. It is said up to 10% of property in NYC and San Francisco are kept empty, off market safe housing global capital
😳😡The same is true for Las Vegas Nevada. Huge blocks of neighborhoods empty.
Hey guys, I just wanted to jump in real quick. There are a lot of folks who’ve moved up here from Florida. They had money to buy a home and stay down there, but companies like BlackRock are buying up entire subdivisions (not hyperbole but literally) and they want to buy as a package deal. The one exception? Foreign nationals.
They are controlling demographics.
Great article! Looking forward to the next one in the series 👍
Thank you Mark, glad you liked it. Stay tuned.
Any significant retreat in home prices will trigger investors back into the market. Even if mortgage rates come down and supply increases, demand is so hot prices will only increase. The suburbs around NYC are experiencing budding wars on 45% of properties. You will own nothing and be happy is not just a catch phrase. As consumption declines, capital seeks the highest return. Capital seeks to own every home possible. The cost of living is now front and center for capital profits. The divide between haves and have nots will only increase, most likely exponentially
I am with you 100% that any retreat in home prices will trigger capital back into the market, given the pent up demand from demographic forces and financialization of homes. Therefore, we are likely not going to see a repeat of 2008 housing crisis, but to your point, the gap between the haves and haves not widen exponentially.
Home Sales Relative to Households:
https://snippet.finance/home-sales-relative-to-households/
Great chart. Thanks for sharing.
Thank you for sharing, I shared it in my Notes and tagged you.
The mismatch between supply and demand for housing is just another reason I always will advocate for zoning reform at Risk & Progress. Also, let’s stop punishing developers by taxing their property….tax land value instead. It’s vastly more efficient.
I am fully with you on zoning reform. You have a far deeper understanding in matters of tax than I do. Can you elaborate on how shifting the tax from the developers to the land would drive efficiency?
I highly doubt I have more of an understanding than you do. I have read your work :)
Main thing is taxing property means higher taxes on things we want (development) and lower taxes on productive things we generally don't want (vacant land). We are doing it backward.
Switching to LVT will make the price of land cheaper and discourage land speculation. It will also require land use be productive (golf courses and parking lots beware). But from a tax efficiency perspective, LVT is the gold standard because almost every other kind of tax will distort supply and result in deadweight loss. If I place a 10 percent VAT on the sale of chairs, for example, fewer chairs will sell/be produced than otherwise would be. There is that hidden cost on the economy we don't see.
But if I tax land, the total amount is fixed, we don't get "less" land because there is a tax on it. Thus, no deadweight loss...as close to an economic "free lunch" as is possible. Estimates suggest we could raise as much as 20 percent of GDP in tax revenue from LVT, meaning we could abolish some other kinds of taxes, including property taxes and maybe income tax.
Also, since LVT targets land values, it really is targeting "unearned rent." No one created the land, it is not born of the fruits of labor, and so allowing this to be privately captured (as is the case today) allows for growing wealth inequality. It is best, instead, to recover that unearned wealth and return it to society in the form of a dividend or UBI.
If you really want to get into the weeds, some believe that LVT could replace all taxes in one swoop. That's because as we steadily abolish taxes with deadweight loss and redistribute rents, the economy will expand more and more rapidly. This expansion will be transferring into rising land values, which will result in ever more tax revenue.
I am so very grateful that you took the time to explain the concept of LVT and the broader impact to the economy so clearly. This definitely helps me understand the matter much so much better. So, I am assuming the reason we haven't moved to LVT , is because of some form of political pressure?
Two reasons 1) Politically, some very powerful vested interests would lose...big time. They are making unearned wealth after all. 2) It's not always easy to calculate the value of land after improvements are removed. It can be done though. I feel like the latter becomes a convenient excuse for the former.
Fully agreed.
Since shelter is a basic human need, it is astonishing how much house prices have risen in comparison to wages. Apart from vain promises by politicians, you can't hope for any help from that side. All the more important to take care of it yourself. I'm eagerly looking forward to part 2. Great piece Amrita.
Yes, it is astonishing how much faster home prices rose relative to income over the last 3 years.
To be honest, post GFC, home prices were rising 6% on average per year, while wages were growing around 2%. But what happened over the last 3 years is devastating for the middle class. Oh and when did politicians give a s*** about the middle class.
So which decade in the future will I be able to afford a house? Maybe the 2030s or 2040s😂
Great post as always Amrita.
Lol, that's a very practical question. At this point, it costs less to rent than to pay mortgage payment, so, until that dynamic is changing, no buying homes for the average rational individual. Unless of course, you turn your substack into a million dollar business (like some have) and in that case you don't have to wait that long.
Brilliant analysis Amrita. I have one doubt. What is the major difference between existing single family home market and new single family home market other than the prices?
Thank you Sanuj. To answer your question, existing home market consist of 85% of all sales volume, so it is a larger market compared to the new home market. The only way an existing home comes to the market is when the existing home owner decides to sell it, and given the current mortgage rate and home prices, no one is selling.
New homes are all new single family construction and it is the remaining 15% of all transactions in the single family home market. Though new home is a smaller market, they are the price setters and currently new home prices are on the decline given excess inventory and low demand, but it has yet not tricked into the existing home prices. Probably, because certain cities are seeing excess new home construction vs. others, so regional disparity.
Was this helpful?
Yes. Got it. Thanks Amrita.
I thought that they were two different official housing market schemes. I understand now that they are just new houses and existing older ones waiting to be resold.
The housing specific vocabulary in the US can be confusing, there are stuff I still double check in investopedia to make sure that I have the correct definition and understanding.
that´s a fantastic data trove, and they reveal some really interesting and weird dynamics. The increase in median home prices does look a bit like a bubble, strange that this hasn´t gained broader attention (I guess, most commentators were transfixed by the mortgage rate spike).
Thank you and that's a great observation. I think the underlying dilemma is that home prices are at the level it is today, because there is limited inventory, not excessive demand. In fact, quite the opposite on the demand front with record mortgage rates. I guess, if the home prices were driven by excessive demand, it would be catching on to the headlines more frequently as being a bubble. But most people, who own their homes have locked in ultra low interest rates or are mortgage free.