About the housing affordability problem.......

 

............................there are two main culprits.   The first is the huge swath of the local building companies that could not survive the Great Recession.  Since we decided several decades ago that every high school graduate needed to go to college, there was no back filling in the building trades.  No local builders building equals a shortage of supply.   The second is the following chart.  Don't let anyone tell you differently, very low interest rates are inflationary for the single-family housing markets.  Since buyers tend to pay based on their monthly payment, low interest rates enable buyers to borrow more, thus pay more, which is a great boon to sellers.   Very low interest rates combined with limited supply quickly allowed the sharp increase in home values.  Voila—an affordability "crisis".

chart courtesy of this post

A few more years of this.........................

 

.................and the supply/demand scales will level out.  Then, and only then, can we talk seriously about solving the affordability problem.   Historically, one million housing starts per year is the magic number. 

A Wall Street guy...........

 

.................................................who gets it.

Morgan Housel is one smart dude.....

 

I think the majority of society problems are all downstream of housing affordability. . . . Every economic issue is complex, but this one seems pretty straight forward: we should build more homes. Millions of them, as fast as we can. It’s the biggest opportunity to make the biggest positive impact on society.

-from this post

More about that affordability thing..............

 

Perhaps the largest barrier to housing availability and affordability in places like California are permitting rules, land use restrictions, and construction codes that make it absurdly expensive, or even outright impossible, to construct new single or multi-family housing.  Part of this is a conspiracy of current homeowners to protect and increase the value of their property -- after all, new home construction inevitably reduces their property value (or future escalation) by adding competing inventory and/or by creating congestion and loss of property-value-enhancing open space.  Another part of this is "everything bagel liberalism" where every program has to achieve every Leftish goal -- eg we want new housing but it has to have solar and appliances with a minimum SEER and use recycled materials and have a certain number of units set aside for protected groups and create a conservation easement on part of the land, etc etc -- until even units that can get permitted are too expensive for all but the very wealthy.

-Warren Meyer, from this post

indulging.....................

 

     The house gives signs of enjoying the emptiness.  It is rearranging itself after the night, clearing its pipes and cracking its joints.  This dignified and seasoned creature, with its coppery veins and wooden feet nestled in a bed of clay, has endured much: balls bounced against its garden flanks, doors slammed in rage, headstands attempted along its corridors, the weight and sighs of electrical equipment and the probings of inexperienced plumbers into its innards.  A family of four shelters in it, joined by a colony of ants around the foundations and, in spring time, by broods of robins in the chimney stack.  It also lends a shoulder to a frail (or just indolent) sweet-pea which leans against the garden wall, indulging the peripatetic courtship of a circle of bees.

     The house has grown into a knowledgeable witness.

-Alain de Botton, The Architecture of Happiness

My crystal ball is a bit cloudy...........

 

We’ll get another recession someday. Maybe in a year. Maybe in 7 years. Who knows?

Whenever an economic contraction occurs, we’re likely to see lower rates. These things aren’t scientific but mortgage rates have fallen by an average of around 1-2% during past recessions.

If that happens this time around I think you’re going to see an explosion of housing activity from pent-up supply and demand that has been sitting on the sidelines. We could also see a big uptick in cash-out refis and HELOCs if rates are at more reasonable levels because so much equity is tied up in homes these days.

People would be very confused by this but the housing market already went through a recession so it wouldn’t surprise me to see it lead us out of the next one.

-Ben Carlson, as cut-and-pasted from here

Got it half right............................

 I would love to see a situation where politicians make housing their entire platform. Tear up all of the red tape. Incentive homebuilders to build more homes. Offer first-time homebuyers low mortgage rates they missed out on.

-Ben Carlson, from this post

The affordability problems in our current housing market is being caused by that pesky law of supply and demand.  The supply has been constrained for the past thirteen years for multiple reasons.*  Demand was unleashed seven or eight years ago by absurdly low interest rates and by a generation that ignored the experts that said they would be "urbanized."  Left to their own devices, our kids said "screw the big cities, we want a single-family house with a two-car garage and a yard."  When overheated demand meets constrained supply, you get doubling of prices in a very short time frame—and an affordability problem.  Slowly but surely, supply is picking up—but it will likely take another five years before the supply actually meets the demand.  Be very careful of offering subsidies to buyers in a market like this.  Those subsidies will just end up in the pockets of sellers.  Stoking demand in a tight housing market is a recipe for higher home prices.

If you want to solve the affordability problem, subsidize homebuilders and developers.  They will then do what they always do when incentivized—over build.  Then, and only then, will affordability stand a chance.

*The supply of housing has been constrained by a combination of factors that include, but is not limited to, the following:

    1.  The Great Recession of 2008ish was caused in part by super-heated housing construction.   After the dot.com bubble burst, the construction industry became a major engine for keeping the economy perky.  By 2003 more homes were being built than could be sold to traditional home buyers.  Not wanting to stop the gravy train, politicians decided we should sell those new homes to buyers who could not afford them.  This was cleverly done by fiddling with the requirements for securing a mortgage.  2004-05 was the wild west of mortgage lending.  All you needed to get a loan was to be able to fog a mirror.

    2.   The Great Recession caused multiple defaults on those non-traditional mortgages.  All of a sudden there was a massive supply of available homes and no demand.  Naturally, prices fell.  Homebuilders could not compete with prices of this surplus inventory, so they did the sensible thing and left the industry.

    3.  About the same time all this was going on, our society decided that everyone needed a four-year liberal arts college experience.  We suffered a collective amnesia about the importance of training the next generation of plumbers, electricians, HVAC technicians, carpenters, roofers, etc.

    4.   In 2003 there were probably 15 home building companies in our community (of about 80,000 folks).  By 2013 there were only three remaining.   

    5.   Guess what happens when there are only a handful of tradespeople in a market that needs a bushelful?   Those trades people, for the first time in memory, had pricing power.  All of a sudden, construction labor prices started rising—quickly.

    6.  The onset of Covid led to the snarling of supply lines and the interruption of the production of building materials.  The just-in-time theory of inventory doesn't work very well when there are disruptions.  Those building product suppliers, for the first time in memory, also had pricing power.  Prices for plywood, concrete, drywall, etc. all shot through the roof.

    7.   Increasing governmental regulations (zoning and NIMBY opposition to change, density restrictions, subdivision regulations, green space requirements, turn lanes and deacceleration lanes, impact fees, sewer/water tap fees, and a myriad of other useful improvements) confronting developers of subdivisions has made the development process more expensive and more time consuming—a tough combination which impacts affordability,

    8.   We should not forget that residential real estate markets are local in nature, and while your results may vary, the affordability problem is a supple and demand problem, and it will  take time to resolve.

Until we start building 1,000,000.....................

 

..........houses per year expect housing prices to keep rising.  It's that old supply & demand thing.

That's a lot of equity........................

 

Since the start of the pandemic, U.S. homeowners have added more than $13 trillion in home equity. As recently as 2015, that was the total amount of home equity.

-Ben Carlson, as he looks at the housing market

For a stock market guy...................

 

...........he has a pretty good sense of the real estate market:

We won’t be in this situation forever because something unexpected always happens eventually, but for now, we’re in a damned-if-you-do, damned-if-you-don’t housing market.

If anyone tells you low interest rates help buyers, ignore them.  Low interest rates help sellers - because low rates enable a buyer to pay a higher price while maintaining a lower monthly payment.  Much of the "affordability" crisis in housing has been brought on by over a decade of ridiculously low interest rates.  In real estate, low interest rates are inflationary.

You didn't ask, but I'll tell you anyway: any interest rates for borrowers that do not allow financial institutions to pay an interest rate to savers that exceeds the rate of inflation is too low.

The tough housing market...............

 

No matter how you slice it, the home building sector seems strangely slow given our population growth . . .

Brian Wesbury offers a pretty good take on why the housing market is so tight.  He includes governmental hurdles as a major problem.  Maybe.  We think the major problem (that he fails to mention) is the wipe out of the small homebuilder - the company that would build 10-12 houses per year - after the 2008 meltdown.  Those guys never recovered and/or aged out, and have not yet been replaced.  We were so focused on sending all high school graduates to college, we forgot the importance of the building trades.  There is still a screaming need for plumbers, electricians, carpenters, drywallers, etc.  The earning potential for those high school graduates entering those trades now seems significantly higher than college graduates with BA degrees.  Just saying.  As an honorable mention for housing problems, we should not forget the serious inflation of building material costs that the covid/broken-supply-chain-years brought us.  Prices have moderated a bit, but not much.  All in all, no quick fix to the housing problem is on the horizon.

 

One things us Ohioans do.............

 ..........pretty well is build, build, build.

In fact, blue states’ failure to allow development is a pervasive feature of their political cultures. Housing scarcity doesn’t just cause population loss — it’s also the primary cause of the wave of homelessness that has swamped California and New York. Progressives’ professed concern for the unhoused is entirely undone by their refusal to allow the creation of new homes near where they live. Nor is housing the only thing that blue states fail to build — anti-development politics is preventing blue states from adopting solar and wind, while red states power ahead. And red states’ willingness to build new factories means that progressive industrial policy is actually benefitting them more.

If blue states are going to thrive in the 21st century, they need to relearn how to build, build, build.

-Noah Smith, as excerpted from here

Faithful readers.........................

 .............may remember a series of posts about the Hopeful Birth of a Subdivision.  We started the process of developing 113 single-family residential building lots in 2021. We are 97% finished with our part of the development.  Our home builder partner, D. R. Horton, is about 60% finished with their portion of the project.  Drone photography is pretty cool.  This is what progress looked like this hazy afternoon:

The whole development

Phase 1 95% built out

Phase 2 is now really getting started

While not finished, we are announcing the successful birth of Conor's Pass Sub-division. There will likely be a wrap-up post, celebrating the development and construction and sale of all 113 houses next Spring.  Stay tuned.

About time...................

  Housing starts surged well above expectations in May, crushing the forecast from every economics group and putting in the largest monthly gain in the number of homes started since January 1990.  Looking at the details, gains were broad-based with three of four major regions and both single-family and multi-unit starts contributing.  While one month doesn’t make a trend, housing starts are now at the highest level since the previous peak in April of 2022, before mortgage rates began to surge.  This signals that the developers may have finally found their footing in what has been a challenging environment for sales. While 30-year mortgage rates continue to hover near 7% it looks like some of the sticker shock from the rapid run-up in financing costs last year is wearing off.

-Brian Wesbury, from here

Faithful readers....................

 .............are aware I am a big fan of Ben Carlson and his A Wealth of Common Sense blog.  While that hasn't changed, there is a rather large bone to pick with his recent "How the Fed screwed up the Housing Market" post.  Any discussion about the housing market between 2015 and 2022 that does not focus on the lack of supply of housing options (both single and multi family) will miss the main point.  No matter how hard economists may try to repeal the law of supply and demand, they can't.  The supply/demand imbalance in the housing market has never been greater since the early 1960s.  The Fed can play with interest rates to their hearts' content.  Such actions may help or hinder specific buyers/sellers, but until the supply of new homes catches up with a decade of under-building on a national scale, the culprit behind a screwy housing market will be the shortage of new construction.

Home sales go oops...............................

 

explanation and enlargeable graph here

On the magic of compounding.............

 It’s not until you consider the time factor of compounding that you realize maximizing annual returns in a given year and maximizing long-term wealth are two different things.

Carl Richards once made the point that a house might be the best investment most people ever make. It’s not that housing provides great returns – it does not. It’s not even the leverage. It’s that people are more likely to buy a house and sit on it without interruption for years or decades than any other asset. It’s the one asset people give compounding a fighting chance to work.

-Morgan Housel, from this post

If you had told me.........................

..................in 2009 that the single-family housing construction business would not recover for more than ten years, I a) wouldn't have believed you, or b) acted differently if I had believed you.

source (and enlargeable image) here

Have I told you lately that we have lovely wooded building sites available at very reasonable prices?

Priced out of the housing market.............?

......................Choices people, choices.  Try something radical, like moving to Ohio where housing is affordable and jobs are aplenty.   Just saying.