patrick.net

Respectfully, I think you are looking at national data when real estate is always local. Also, the correlation between cost and value is always imperfect. Housing in flyover states might be getting bigger, which might cost more to build, but making a Mississippi house bigger does not make it more valuable to someone who wants to live in the SFBA.

Recessions don't build supply. They can reduce demand, and they can free up some existing local supply as people move away, but ultimately the only way to increase supply is to build at rates above the rate of depreciation/replacement.

Some cities have zoning and planning rules that have cannibalized supply. For example, in Manhattan, smaller older units get replaced by premium luxury buildings designed by celebrity architects and featuring Italian marble tubs to attract the TV cameras of Robin Leach. In that scenario, they are replacing more units with fewer units, reducing supply rather than increasing it, due to zoning and planning.

Cost does not determine value. If somebody tells me that an analog CRT television was handmade, with each winding carefully done by artisans trained in Bhutan, that doesn't make me want to pay more for it than I would pay for a better TV made at a fraction of the cost. Likewise houses: a palatial mansion might cost more to build than a tiny apartment, but if the mansion stands in northern Kamchatka, I'm not buying.

curious2 says

Recessions don't build supply

1996-2016

The only time we had over 6 months supply in both new and existing homes together was due to the housing bust and the recession, outside of that we have been under 6 months. New homes can be controlled to a degree by the builders, but the existing home market is simply too big

Housing bust really started late 2005 with the first waive of sub prime delinquencies and the rest followed

But we had a major build up in home construction from 2002-2006... none of that made housing more affordable in either both new and existing homes

Since 2012... existing home inventory has never breached over 6 months annual months inventory and it has never been close either

As I wrote above, recessions "can free up some existing local supply as people move away," and your charts add a good point that recessions can have the same effect nationally if people shed second homes or downsize and double up. The OP headline is, however, about building. Building more units than depreciation/replacement would result in more supply and thus lower prices, at least if you can build them in the places where there is demand. Cities are becoming less affordable because they restrict the number of new units below the level of supply that would make prices affordable. Flyover areas might be affordable to retired people, but not to people who need to work where their employers are.

Logan Mohtashami says

we had a major build up in home construction from 2002-2006... none of that made housing more affordable

I think that resulted from excess demand created by the subprime mortgage bubble. When that bubble burst, the various bailouts (by whatever alphabet soup acronym, TARP+ZIRP+QE+HAMP) propped up prices that would otherwise have become affordable.

curious2 says

I think that resulted from excess demand created by the subprime mortgage bubble

Sub prime buyers weren't really buyers of new homes, they were more existing homes. However, exotic A paper loans did boost new home purchases as they were very expensive back then.

A good example was the 80/10/10 option arm stated income loan up to 1.5 and 2 million here in CA

At 2003, thats when I saw personally more and more exotic loans added into the supply chain of loans because that kept the fuel burning and then you had the mass cash out boom but you saw a big expansion on home building from 2002-2006

That didn't necessarily impact existing homes prices but again the supply of homes were bigger and bigger thus leaving the market place to the existing inventory with bigger homes to work from

Check out this interactive graph on a regular basis:

https://fred.stlouisfed.org/series/HOSSUPUSM673N

It really went hay wire in 2000.. the the trend to build bigger homes started decades ago...

Strategist says

Check out this interactive graph on a regular basis:

https://fred.stlouisfed.org/series/HOSSUPUSM673N

Exactly what I am talking about... annual months of inventory 6 months has never happened in America post 1996 outside a recession it won't happen next year either

The ability to move up in American and release 1st time home supply is limited as you're chasing a higher velocity priced home

That is where I came up with that conservative model of needing 28%-33% equity to sell and move up based on the affordable index

Clap clap

I think you guys are now getting what I am saying here

Logan Mohtashami says

Why Building More Homes Won't Help Housing Affordability

You haven't convinced me. What you're saying is that it's all about land prices being bid up as high as they are.

It seems unlikely to me the following two facts are coincidental:

1) Banks and the Fed have a lot of bad mortgages on their balance sheets (they need values to be high to support these questionable mortgages)

2) There isn't a lot of lending going on for new construction.

Logan Mohtashami says

marcus says

1) Banks and the Fed have a lot of bad mortgages on their balance sheets

Supply of distress homes and home that are foreclosed on and not in the market are at cycle lows today as we speak

marcus says

2) There isn't a lot of lending going on for new construction.

Nor should they.. this is where I give the builders great credit, they always knew the demand curve in this cycle was going to be terrible so they had to make their $$$ on the high end to meet their numbers because they weren't going to make it on volume.

Even today in year 8 of the cycle after 3 straight years of missed new home sale estimate in a later economic cycle period, we are still at headline recessionary levels and adjusting to population we are 45.8% below the levels of set in 1963

This is fine for now, our demographics are for renting anyway.. but in a few years this won't the be case anymore ... we are going to have a massive ages 28-42 demographic profile and they need someone to live

Just want to remind everyone

It was June 5th when I went on CNBC and warned that the builders were over valued and it was in Jan of 2016 that I said this was the better entry point because sales aren't going to collapse ;-)

Logan Mohtashami says

Just want to remind everyone

It was June 5th when I went on CNBC and warned that the builders were over valued and it was in Jan of 2016 that I said this was the better entry point because sales aren't going to collapse ;-)

Good call. What was the reasoning?

Strategist says

Logan Mohtashami says

Just want to remind everyone

It was June 5th when I went on CNBC and warned that the builders were over valued and it was in Jan of 2016 that I said this was the better entry point because sales aren't going to collapse ;-)

Good call. What was the reasoning?

Sales weren't going to collapse.
Maybe if they made more, their stocks would go up even more.

Strategist says

Good call. What was the reasoning?

Jan- June.. way too much public hype on the builders, in fact all my wall street friends who were pushing the builder trades had 26%-41% sales growth on their data lines

First 2 months led them a stray... it was showing 20% growth YoY but that was a low comp... then the 10 year made its move from 1.64%-2.47%

But the key in tracking new home sales is revisions, revision trends are the best follow through for new homes and they were all negative even though the headline was decent...

That lead them to go into June being way too bullish... Because 4-5 months negative trend and we were looking at low double digit growth... that wasn't what they were looking for at it was TOLL brothers that was being hyped

Never had a new home sales year beat when the first half of the year had 4 plus negative revisions..

Correction came and of course certain stocks got way beat up too much...

Once Jan came... The 2016 numbers weren't so off... and people were negative on the builders in Jan.. that was a nasty price correction.. but working from a 500K level we can easily get at least 4%-8% growth with upside if median price cooled and it did... we have slow and steady growth

Reason for the concern and reason for the bullish take in Jan...

Very Very hard to call peak housing with 500K sales and I remember that was the thesis being throw out on T.V. have we hit peak housing... impossible with sales around 500K

Logan Mohtashami says

@Logan - doesn't this graph insinuate that we're in a housing bubble now? The pre-bubble trendline is way down below where we're at today. Or, are you saying that we're building bigger homes, therefore, the ratio of house price to income will naturally go up?

just any guy says

@Logan - doesn't this graph insinuate that we're in a housing bubble now?

I suppose everyone has their own definition of what a bubble is.

To me a bubble needs speculation demand, this is the worst demand curve ever in U.S. history, so .... no boom.. no bubble and majority of the heat is coming from the fact that there has been a disproportional level of home sales coming from bigger homes.

So, no bubble in my eye, the demand has been weak and there is no speculation happening in housing, especially in new homes

just any guy says

@Logan - doesn't this graph insinuate that we're in a housing bubble now?

If you define a bubble as an irrational bidding up of prices, this is not what is happening now.
What we are seeing is a deliberately maintained scarcity. Housing gets more and more expensive. Only rich people can afford to participate in the market and they compete for what is available. Young and poor people live with parents or roommates. Those who can rent, and even that is expensive.
Prices are not irrational: they reflect the underlying scarcity of housing.
At the same time builders build less than the demand is and focus on the upscale segment. This is what this chart shows.

I guess it truly is different this time.

Heraclitusstudent says

At the same time builders build less than the demand is and focus on the upscale segment. This is what this chart shows.

I am perplexed by the lack of building new homes by the builders. I don't buy the usual excuses of "land shortage" "bureaucracy"

It's always different this time, except when it isn't (every time).

just any guy says

I guess it truly is different this time.

epitaph says

It's always different this time, except when it isn't (every time).

It's not different this time

Mortgage demand is only back to 1998 levels and all loans are very vanilla

New home buyers are even much better qualified than existing home buyers..

Best home buyer profile we all will ever seen in a single cycle

Strategist says

Heraclitusstudent says

At the same time builders build less than the demand is and focus on the upscale segment. This is what this chart shows.

I am perplexed by the lack of building new homes by the builders. I don't buy the usual excuses of "land shortage" "bureaucracy"

I think it is controlled.
They want prices to be high.
They want the mortgage debt to be created.
They want bank balance sheets to be well padded.
They want homeowners to feel rich (but not renters) and spend money they don't have.
This is a system that is destroying the quality of life of millions just to maintain things as they are.

Strategist says

I am perplexed by the lack of building new homes by the builders. I don't buy the usual excuses of "land shortage" "bureaucracy"

Builders are the touchstone of housing demand. It is not like the 60s where they would build phases in the 100s.

Logan Mohtashami says

It's not different this time

Mortgage demand is only back to 1998 levels and all loans are very vanilla

New home buyers are even much better qualified than existing home buyers..

Best home buyer profile we all will ever seen in a single cycle

Then there's something you're not thinking of. Prices at these levels just can't be sustainable.

just any guy says

Then there's something you're not thinking of. Prices at these levels just can't be sustainable.

In a few years we will have a much higher supply of prime age buyers and nothing yet I see where dual income college grads can't buy ...

A better thesis is that the housing inflation can cost sales demand.. but again we are already working from the worst demand curve on record and today...

Mortgage demand is at cycle highs, so, people can still buy homes, but maybe not as much

At some point we need to supply the market with smaller homes.. we can't live off bigger and bigger homes with the positive supply demand curve coming ..

People are looking for 562K tomorrow... as long as the sale growth trend is over 540K with the revisions, which it should be 2016 will be another positive year for demand

Logan Mohtashami says

At some point we need to supply the market with smaller homes

the renovation market is one area that can and will help. lots of smaller affordable houses but they need some work. i don't buy the higher-density line, that's not what people desire in a SFH. so, certain neighborhoods will end up being modernized. this will hopefully fuel a move-up cycle next decade.

landtof says

lots of smaller affordable houses but they need some work.

Existing homes being cheaper will always be the case, my thesis is that the 4 decade run of building bigger and bigger homes has permanently supplied a higher net inflation of housing that can only be addressed if there is a long term reversal of this trend

At current pace in the next decade we will have a median sq ft. build out of over 3,000.

The builders have worked this cycle well because the demand for new homes hasn't been strong nor should it have been, but in next decade they don't have that luxury anymore.

The builders can counter by simply limiting construction to a degree in the next cycle as well.

It all goes back to the statement that I have heard for years now

If builders need to build more homes... what I am hearing ;-) ...... The builders need to build more expensive bigger homes to make housing more affordable but that thesis has terribly failed in the ramp up in construction and the slow and stead drive of construction.

If they push smaller homes, this can really help the supply chain and a few builders are trying this but all have admitted that this isn't the best money maker for them

Logan Mohtashami says

People are looking for 562K tomorrow... as long as the sale growth trend is over 540K with the revisions, which it should be 2016 will be another positive year for demand

592,000 blow out numbers.

Strategist says

592,000 blow out numbers.

This is why I wrote that article earlier

Time for New home sales to show growth

Working from recessionary headline numbers in year 8 of the expansion, these sales are way to low to be calling for peak housing

More important factor, is that revisions were positive... that's what you want to see... !!!

One of the key points I talked this year to my super bearish housing friends

They believed housing was peaking...

What I try to present is that ... when you have 154 Million working people and you have net 35 million of them making good money... New home sales around trend 560K isn't a lot homes to be calling for peak housing..

This is the best data point on why housing has legs and not peaking

Population adjusted data you're 41.8% below 1963 levels and headline is about 0.2% above 1963 levels

Ironman says

Until next month...

4 revision positive this year before August, that means the trend is fine and the only negative revision really came from that 600K print, this year is different than last year

I believe it was April 23, 2016 when I wrote the article "Time for New Home Sales To Show Growth"

Updated data line .. now you can see what I was talking about

I think the UK/US provide more than enough historical data.

Low Wages can only create a "Middle Class" if housing costs are kept to a minimum via subsidized construction for builders to use land to build for modest homeowners.

Ever since the US/UK stopped encouraging affordable housing, real estate costs have skyrocketed far higher than the rate of inflation. The correlation is almost perfect in both countries.

The government AND private industry can make money on it, while providing hundreds of thousands of jobs.

I am driving the Market Urban-ism people nuts with this thesis but none of them were versed in the data on the big home thesis and are trying to convince me that this isn't an issue

Always tell after 3 sentences if a group of people ever bothered to study the data .. then the best is just letting them talk, talk, talk until they realize they're not educated enough in the data lines they profess to be talking about