Lead Story…. It’s incredible how quickly things change. Just a few short years ago, conventional wisdom was that it would take an eternity to work through all of the excess inventory created by the housing bust and foreclosure crisis. However, in reality banks were incredibly adept at managing their REO inventory, effectively preventing the massive glut that so many expected. In the meantime, very little in the way of new housing was built as financing dried up and builders pulled back in fear of competing with the looming bank REO inventory liquidation that never really materialized. Fast forward to 2016 and the stark reality of a new sort of housing crisis: there simply aren’t enough residential units being built to satisfy household creation. The pivot has been as pronounced as it has been swift and it doesn’t look like things are about to change anytime soon. The Federal Government’s bi-annual report on housing inventory provides a rather bleak outlook, especially for entry level buyers and renters. From ULI (emphasis mine):
Newly released data and analysis from several sources illustrate a major obstacle to a fully healthy housing market in the United States: the nation is not building nearly enough new residential units. The serious shortage of new supply is bottling up housing demand and pushing home prices and apartment rents well beyond what a growing number of households can afford.
A biennial report from the federal government titled The Components of Inventory Change found that the nation’s housing stock increased by a net 270,000 units between 2011 and 2013—the slowest growth measured by the survey over the past decade, which included the worst years of the Great Recession. The report concluded: “Despite the gradually improving economy, there were large declines in both new construction and net additions to the housing stock during the 2011–2013 period compared to the 2007–2009 period.”
A recent Freddie Mac market commentary noted that the total number of housing starts (single family plus multifamily) in 2015 was 30 percent below the historical average between 1970 and 2007. The National Association of Realtors estimates that the country’s supply of for-sale and rental units combined is 3 million units short of current demand.
The most substantial issue here isn’t even the massive shortfall in raw numbers, it’s the distribution of where what limited construction that we do have is occurring: at the high end. Not only are we not producing enough units across the board but nearly nothing is being produced at the entry level in either for-sale or for-rent properties where units are most in need. Again, from ULI (emphasis mine):
Not surprisingly, millions of Americans cannot find an affordable home to buy or an apartment to rent. A survey conducted by the National Association of Home Builders (NAHB) found that 59 percent of respondents said they could and would spend no more than $249,000 on a new home, but only 35 percent of new homes started in 2015 were at or below that limit. The online real estate service Trulia recently reported that the number of starter and trade-up homes available in the 100 largest U.S. metropolitan areas has plunged by more than 40 percent since 2012.
Yes, apartment development has experienced a historic boom: multifamily construction volume nearly doubled in 2012 compared with that seen in 2010, and increased another one-third from 2012 to 2014, according to a new study by the Research Institute for Housing America. New multifamily completions topped 310,000 units last year, the most in at least 25 years, according to the National Multifamily Housing Council. And 1 million more apartments could come on line in the United States in the next three years, according to projections by the market research firm Axiometrics.
But most new apartments and single-family homes are aimed at the top of the market. The median asking rent for a new apartment today exceeds $1,300, which is unaffordable for roughly half the renter households in the United States (based on a rent standard of affordability of 30 percent of income). The average price of new homes for sale in 2015 was $351,000—a 40 percent increase from 2009.
What is driving the trend towards builders constructing a smaller number of higher priced units versus a larger number of lower priced ones? A few factors to consider:
- Post financial crisis, there wasn’t much of any mortgage financing available at the lower end of the market. It doesn’t make sense to build homes for people who can’t obtain financing so builders focused on more expensive price points where buyers were willing and able to obtain financing or buy with cash. Combine this with the higher margins often achieved on luxury units and you have a recipe for builders gravitating towards more expensive units. Availability of financing is improving but it has left certain markets 100% beholden to FHA limits.
- Regulatory burden is soaring. A study that the NAHB released earlier this year found that regulatory fees for new construction jumped nearly 30% (80k per home) over the past 5 years. It’s incredibly difficult to make any profit on lower priced product in that type of environment meaning that builders need more expensive product to absorb the regulatory burden.
- People are staying put longer in their entry level homes since less move up houses are being constructed. The result is less infill inventory which drives up prices. Yesterday’s entry level home becomes too expensive to be classified as entry level if supply does not materialize to meet demand.
- While the development financing market has shown some marginal signs of improvement, it still pretty much sucks for all but the most credit worthy of developers in the best locations.
- Land owners aren’t selling, at least not when it comes to their best lots. One would think that rising home prices would make this a great time to be a land seller. However, that isn’t currently the case as Bloomberg detailed last week. When asked for investment advice, Mark Twain once said: “Buy land, they’re not making it anymore.” Right now, owners of well-located property are taking a similar stance in expectation (or, in some cases hope) of higher prices: don’t sell your well located land because you can’t sell it a second time and it’s likely to be more valuable in the near future. In other words, there is substantial gap between what builders are willing to pay and what landowners are willing to sell for, particularly in the best markets. Landowners will sell today but only if builders are willing to pay them for possible future inflation that may or may not happen. To complicate matters further, a lot of landowners bought during a brief run-up in 2013 thinking that the market was about to take off. It didn’t and now they are holding out in hope of larger profits down the road.
At some point, the laws of economics pretty much dictate that this has to change. We aren’t going to stop creating households and people can’t continue to pay an ever-larger percentage of their incomes towards housing costs without the result being major adverse economic consequences. In reality, demographics are actually improving for household creation through at least 2024, meaning that the housing shortage will get worse as the deficit continues to widen unless we ramp up production in short order. Unfortunately, as you can see it’s not a problem that’s easily solved.
Christmas is Cancelled: The bankruptcy of South Korea’s largest shipper has a lot of cargo stranded at sea just as retailers are stocking up for the holidays. See Also: The shipping industry has a major problem – there are simply far too many ships for current demand.
Yogi Bear, Architect: Brokers are having a difficult time selling a seven story office building in Columbus, Ohio designed to exactly resemble a picnic basket.
Back Up the Truck: investors are bidding up REIT shares prior to real estate getting its own sector in the S&P500.
Good Riddance: Gaudy Mediterranean style McMansions that were all the rage in the 1990s have fallen out of favor and are not rising as quickly in value as other types of houses.
Sound Familiar? Norway’s economy is historically based on oil, which has had a rough go of it lately. Norwegian interest rates have plunged along with the price of oil, leading to soaring housing prices and housing sector investment. This sounds eerily similar to the post-tech bust era in the US to me.
Don’t Call it a Comeback: Cities in California’s Central Valley that were largely left for dead in the wake of the housing crash are making a comeback.
Those Who Fail to Learn From the 90’s Are Doomed to Repeat Them: People are buying minivans again and trying desperately to convince themselves that the soccer mom mobiles are somehow “cool.” Newsflash: minivans will NEVER be cool.
Viva Socialism: Venezuelians are turning to black magic and animal sacrifices to heal their sick due to a lack of basic medical services.
You Should Already Know This: Cheese triggers the same parts of the brain as hard drugs.
Chart of the Day
Super Size Me, urban home edition.
FAIL: There are still 4 months left in 2016. However, I think that we can safely call this year’s Darwin Award for a Florida man (of course) who found an old bulletproof vest in his garage. He wanted to know if it still worked so he put the vest on and had his cousin shoot him. It didn’t work and now he’s dead and the cousin is in jail.
Cultural Literacy 101: Apple’s iPhone 7 launch slogan: “This is Seven” translates to something sort of vulgar in Cantonese.
When You Gotta Go: How NFL players hide it when they have to pee during a game. Spoiler: there’s often more going on in the huddle than you think.
Sort of Impressive: A man was arrested for stealing $3,000….. in pennies.
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