My friend Mike Simonsen of Altos Research recently put up an excellent post explaining why he thinks the housing inventory levels remain so low. Read the whole thing, since Mike is one of the sharpest guys in the industry, and he uses data that the other analysts often do not.
In summary, Mike thinks that lack of new construction, the “reverse shadow inventory dynamic”, and government policy are keeping homes off the market.
I think his explanation makes sense, but still, I end up with questions.
I figured I’d share them with you all and we can speculate further together. Of course, I hope Mike will swing by and share his thoughts as well.
Lack of New Construction
The first point that Mike makes is that builders aren’t building anymore.
Since 2007, new housing starts have been anemic. The long-term average construction rates are about 1.5MM homes per year. In the last six years, we’ve averaged well under 1MM. And since 2009, the average is closer to 500,000. Meanwhile population and household formation keeps on trucking.
He’s correct of course, but this particular reason — under-construction — never made that much sense to me. Because housing is not an optional good.
I’m a shooter, as some of you know, and I’m dealing with an ammo crunch the likes of which we have never seen before. Popular calibers are simply unavailable these days. 9mm which used to sell for about $0.25 per round are easily going for $0.50 per round on the secondary market (since you’ve got to be lucky to get them from an actual store). So I’m pretty familiar with dramatic imbalance between supply and demand.
But the response to that is, “don’t shoot as much”. No more weekly range trips; now, maybe it’s monthly. Unless you’re a firearms trainer or a cop or something where you need to shoot guns as part of your job, it’s an optional activity.
Living somewhere is not.
So yeah, Mike is correct when he points out that household formation and population growth are still moving along (although you all know I have questions about household formation among Gen-Y), and new construction — at least single family residential — isn’t happening.
But they all have to live somewhere, right? So where are all these people living?
The only possible answer is that they’re renting or living with mama. Leaving the mama option out of it — since then, we’re talking about folks who aren’t likely able to buy at all — the only possible answer is that landlords aren’t selling because they’re getting substantial rental activity plus asset appreciation in a ZIRP environment.
Which then suggests that the current prices aren’t high enough to tempt a landlord/investor to part with a cash cow on a discounted cash flow basis.
The question is, Mike is correct that SFR construction is way under long term averages. What about multifamily construction starts?
This US News and World Report (yes, I know…) article touches on multifamily starts, citing something that appeals to my confirmation bias:
As a result of the housing crisis, homeownership is down, particularly among younger households. In addition, the overall number of households—homeowners and renters combined—is down compared to where it should be given the population growth.
This trend has translated into a lot of potential in household formation—as many as two million future households according to some estimates, with most of them expected to become rentersas economic and labor market conditions improve.
So we’re seeing multifamily construction like this:
So just wondering what the construction levels look like if we put together the SFR construction with multifamily construction. Then take into account any overbuilding during the bubble years which are now getting renters in there.
Reverse Shadow Inventory
The deal here is that formerly underwater sellers, and the banks that own REO units, are choosing to ride the hot market a little while longer, instead of putting units on the market as soon as properties went over. As Mike says:
In actuality, it seems the psychology has been reversed: As prices have climbed, those who (still) own their underwater homes finally see light at the end of the tunnel. The longer they hold, the closer they are to recovery. Why sell now if you don’t have to? Maybe you’ll make it out alive!
That makes eminent sense to me. But I have two questions on this.
One, what percentage of homeowners who are underwater are living rent-and-mortgage free? I mean, the assumption is that Joe and Sally Homeowner are still making their mortgage payments to the bank even though their home is underwater by $150K, right? I don’t know of any actual stats on how many people are literally squatting in their old homes, fighting every effort to get them out, but blogposts like this one suggests to me that maybe the scenario isn’t as rare as one might think (and hope). So does anyone know how many people have been and are living in homes without spending a dime on housing? (More on this below).
Two, if the home has already been foreclosed, and is on the books of banks as REO’s… normally, one would expect that the bank would want to move those along ASAP. Banks aren’t in the business of holding unsold inventory; they want to recover what they can and move on, make new loans, etc., right?
What I’m wondering is if most of the REO units are in fact owned by banks at all these days. Remember how NAR opposed “bulk sales” of underwater properties last year? I don’t know what happened to that FHFA program (may investigate it later), but anybody know?
Thing is, there’s no reason to think that only the government agencies got into that action. Private banks and investors are smart people. Is it unthinkable that perhaps private MBS pools simply sold off all of its nonperforming loans to some hedge fund with a giant rental/property management wing for $0.40 on the dollar? And those institutional dudes aren’t in any hurry to be unloading properties that are renting out like hotcakes?
Eh, I don’t know without further research. Maybe Mike knows though.
For what it’s worth, I agree with Mike 100% on his government policy observations. Don’t really have a whole lot to add there, except that living on Debt Row as we do these days, who knows what policy will come down the pike at any given moment?
Your thoughts are, as always, welcome.