Realtors across the country are reporting the same thing: There’s no inventory and sale prices are regularly going over the asking price. Inman, a real estate news service, recently published an in-depth discussion on the low inventory and crazy bidding wars and cited examples from Raleigh to Oakland, from Austin to Jacksonville and everywhere in between (Contact Tim here). The reasons for this are many and if you follow my blog, you know I’ve been speaking to the need for housing for a long time. The situation is acute but still, many oppose new development. It’s a bit of a case of haves and have nots.
Just last night I commented on the @Nextdoor App where a discussion regarding a proposed development plan near me in Newbury Park, Ca was taking place. As you can imagine this being in California and all, you’d expect an anti-development slant and there was. As a point of clarification, I am what you’d call a practical environmentalist. Protecting Bear Ears and The ANWR etc., I’m all for it and I’ll even give you money to protect it. But I also recognize we need to house our people. Just visit Los Angeles or San Francisco and you’ll see how badly we need housing with tent cities commonplace. Anyway, I chimed in expressing my thoughts that we desperately needed new construction. Suffice to say, my comments were not particularly well received although, there were a few likes from folks including an executive with @Caruso Affiliated, thanks for that @RickLemmo. One person actually said they wanted things to go back to how it was 30 years ago. My initial reaction was, “Me too, I’d love to be in my 20’s again. Oh, what I would do differently given the chance…” Alas this is what the movies are for, living in fantasy, a break from reality. For those who’ve not read my blog or listened to my podcasts allow me to recap what is going on with our housing supply and demand.
Any discussion of today’s housing market and inventory shortage must begin with the financial crisis and the Great Recession. Created by irresponsible lending practices and Wall Street greed, non-qualified buyers purchased available homes creating artificially driven demand and correspondingly unsupported price appreciation. When those unqualified borrowers could no longer afford the home they’d purchased, they went into default and as we all saw, an epic value collapse ensued. With thousands of distressed properties flooding the marketplace, builders did what any manufacturer would when faced with a flood of cheaper competition, they pivoted and slowed production. Then as their land became worth less than what they’d paid, they too let their property go back to the bank. Consolidation took place with many home builders being acquired by others during this time, while some simply closed their doors.
When the builders did finally come up for air, they found they faced many new obstacles. A large segment of the workforce had left construction completely when the jobs dried up, so there was a shortage of qualified tradespeople to build their homes. They found a shortage of available buildable lots so building never achieved prior to recession levels. Then the pandemic hit bringing shortages of the commodities needed to build a home which has driven up the price of new construction by an industry estimated $24,000 per every new home built in 2021. This has resulted in a further slow-down in new home construction since the increased costs are not easily passed to the consumer. As a result, we have both fewer newly built homes for sale than normal but have also not made up for the lost units from years of limited building due to the Great Recession. This has conspired to make the supply of available homes for sale lower than ever.
With little new construction, all eyes turn towards used homes and the resale market. One obvious source of preexisting homes is long time homeowners moving into assisted care or downsizing to one-stories. However seniors, not eager to go into assisted facilities in the time of Covid and unable to find one stories to purchase and move to, are electing instead to “Age in place.” This is further constricting supply. Moreover, where once people moved every 5-7 years, now according to NAR, people are staying longer only moving every 11-12 years. Finally, there’s the issue that at the tail end of the Great Recession, banks like B of A dumped their bad paper and collected supply of foreclosed homes, by selling to @Blackstone and @AmericanHomes4Rent. These would normally be homes for sale today, but instead are corporately owned rentals. Not only are these homes not for sale, they are largely restricted from sale by FTC rules governing REITs. Ironically, besides being unavailable to purchase, they are also fully occupied with renters! Which begs the question, even if we could sell, where would all those tenants go? Fewer used homes + fewer new homes = lower supply.
OK, so supply is tight we get it, but why is demand so bloody high? Here we need to jump into demographics. Several things have conspired to make this situation so acute. First are the Millennials. They are the biggest generation ever, even bigger than the Baby Boomers. They are just now starting to form households and at a much later age than previous generations. Not only are there lots of Millennial buyers but they also have money. Many have been working for 15-18 years now so they aren’t buying your typical first-time buyer starter home. They are instead, competing with the move up buyer for the same limited supply of property. And if they don’t have enough of their own money don’t worry, they’re getting help from parents and grandparents who are, according to Bloomberg, sitting on more than $66 Trillion in assets.
Then there’s low interest rates. Interest rates are still well below historical averages and would be buyers want to take advantage of these super low rates. For those who may not remember 1981, as a reminder, the Prime rate was at 21%. Today Prime stands at 3.25%. Also don’t forget there’s the reality, that people have to live somewhere and with the shortage of housing for sale, comes an equally short number of rentals. As a result, rents are very high and these low rates are pushing renters into the purchase market at unprecedented levels. This means more buyers yet again for the already scant supply. Finally, there’s the pandemic which has done several things to complicate the situation further.
The Pandemic has made people realize that a home is more than a roof over your head. It’s been the school, the office and the vacation spot everyone’s going to (View Listings Here). This has elevated the need for space. It has also shown us that we don’t need to always live within a commuting distance of the office. Instead, the remote workplace has freed people up to move further out but this demand in turn has put pressure on supplies in areas where supply was never an issue. Add this all together, dramatic under building, restricted availability of homes, people just not selling because they can’t find a place to move, coupled with a huge generation of new buyers, plus all the would be move up buyers, historically low interest rates and a new emphasis placed on a home serving multiple needs and you get the 2021 housing shortage, a shortage of epic proportions. When will it end? Not for anytime soon I’m afraid. I predict we won’t see a measurable drop off in demand until we get to 5% interest rates. And when will that happen? If you believe the Fed, not until 2022. That means we are in for continued and unprecedented price appreciation because sometime in 2022 is a long time from now.