Sunday, September 20, 2020

America's Housing Future Remains A Mixed Bag At Best

Consumers Adding Debt - Not Buying Homes

The housing market in America is not one but many markets that generally share a few common threads. In America, the government, coupled with a slew of builder and Realtor associations control the housing narrative. Many of the messages being promoted as common knowledge do not pass serious scrutiny. As I wrote this post I tried to do a bit of additional research to supplement what I know as a contractor and apartment owner. What I found was more like a pack of lies and half-truths spun to fit an agenda. Those of us in the trenches and with our boots on the ground often see things from a different perspective than what is being presented by the media. 

In September, all three sub-indices of the National Association Of Home Builders hit record highs. The measurement of present single-family sales rose, future single-family sales gauge moved higher, and traffic of prospective buyers increased. Oddly enough, homebuyer sentiment fell. Only time will tell who is right. Another issue is that lumber prices are up more than 170% since April. This is currently adding more than $16,000 to the cost of an average home.

Homebuyer Sentiment Has Not Snapped Back

Home-ownership in America has been in decline and demographics are not supportive of higher prices. It is difficult to ignore the fact that when people "double-up" fewer homes are needed, this adds credence to the argument that if prices rise it most likely will be as a result of inflation. Today, huge discrepancies exist in the cost of housing in the various markets across America and while price variations are not uncommon they should be seen as a red flag and reason for caution.  

Currently, our government is busy encouraging people who have no business owning a house to buy one regardless if they have any idea of how to maintain it. Considering the way our government meddles in housing it is little wonder that roughly 80% of new apartment construction is for the high-end luxury market. The government holds huge responsibility for a rising share of our housing problems in low-income situations because its policies avoid dealing with the growing number of people that are irresponsible. Government housing cherry-picks the best of the low-income renters providing them with very low rents and nice apartments and dumps the rest on the private sector. This discourages landlords from wanting to service this challenging sector. The problem is exacerbated by a legal and political system that often favors tenants over landlords. 

Even with super low-interest-rate mortgages, it is difficult for me to get excited about the future of America's housing market. This topic has been subject to a great deal of debate and can be somewhat confusing. Part of the reason is that we constantly hear about the need for more "affordable housing" and are being told this means increasing the supply by building more units. Unfortunately, this is unlikely to make housing affordable. Ultimately the higher cost for taxes, local fees, utilities, insurance, maintenance cost, general labor, and just about everything flows into the housing market.  

While the market has responded to the housing needs of higher-income households, trends that suggest a growing inability or desire to supply housing that is affordable for middle and working-class people. It appears developers have little interest in, or they simply can't afford to add anything but luxury units. Simply put, there's a huge unhealthy disparity in high-end rents versus low-end rents across the country and with building cost being similar between constructing high-end versus low-income units why would anyone want to deal with the low end of the market and all the trash that comes with it.

Many economists use housing starts as an indicator of the health of the economy but such numbers are only a small part of a much larger picture. This number reflects many things other than just the number of new houses under construction or started in a given period. The data is generally divided into three categories: single-family houses, townhouses or small condos, and apartment buildings with five or more units. Still more important than just the number of units being built and the type is who is buying these units and why.

Housing - Is This As Good As It Gets?

While people talk about the cost of buying a home more attention should be directed towards the ability of the buyer to maintain the home after they purchase it. Another factor looming large in this sector of the economy centers on affordability. When it comes to affordability, much depends on which part of the country you live but in many coastal and popular areas prices remain high. Even with low-interest rates by the time you add in rising real estate taxes and other cost new homes are expensive. 

The reality is new home prices are on the rise and so are real estate taxes and other fees. There is nothing inexpensive about a new home. Sadly, even the construction is often suspect, while code enforcement has increased, many of the items used in new construction no longer outlive the mortgage a buyer takes on. Whether replacing a door after just a few years or windows, it seems everything is expensive and nothing matches the original design. My house is over a hundred years old and still has the same doors and windows. How many homes built thirty years ago support this claim, enough said. 

People sometimes get caught up in the idea that replacing homes lost in a natural disaster such as the wildfires in California will have a huge and instant impact on new home construction but this is often overblown. This construction is often stretched over years. The housing picture is also muddied because it is difficult to get real-time data. this means we often find we are looking back into the rear-view mirror. While the number of permits and building starts give some indication on the direction of housing, this is a complicated and this fickle market  which is subject to attitudes and economic factors which can change on a dime. Adding to the recent discussion are claims of people buying homes away from big cities in an effort to escape growing violence and the effects of covid-19, this is interlaced with stories about surging gun sales.

New Construction Is Still Below 2008 Levels

The chart to the right shows that new construction is still far below 2008 levels. Much of the new construction has been in apartments and not single-family dwellings. In much of the country, housing units are being built using cheap money flowing from the Fed and Wall Street under the idea that if it is built "they will come." 

While many people claim the formation of new households and pent-up demand drives this construction I beg to differ. I contend it is a combination of too much money looking for a safe place to hide. Unnoticed by many Americans is how money from Wall Street has entered this arena and is pushing out the average American. One thing is certain that when inflation raises its ugly head and interest rates increase, housing construction will suffer. The intention of this post is to dispel and explore some of the myths and trends surrounding the future of housing while causing people to think about this subject. Hopefully, it has added some clarity to the discussion.


  1. Do you think that it is a good idea to buy a home at this time or continue to rent? I can see that house prices should fall with an increase in interest rates. Or will inflation and or a weak dollar even further inflate fixed assets such as a single family home?

    1. Mike, I'm sorry it took so long to get around to offering a response but it remains the same as when you put forth your question. Because it is most likely the largest purchase most consumers will ever undertake, buying a home should be a big deal.

      Any way you look at it, buying and selling real estate carries with it some cost but also in the transaction lurks the potential to add a lot of dollars to your net worth. Sadly many spoiled self-centered Americans no longer consider the true economic impact of buying a home because easy financing has been available. More on how we should look at and going about buying a home in the article below.

  2. Your commentary is right on in impact if not necessarily in every detail. I was a realtor in the late 70's early 80's, VA mortgages were 17% - brutal. Even then, however, it was obvious to me that we - realtors and whole real estate industry - were part of the problem. The amount of money that we extract from the system is enormous and preposterous. I thought for sure the internet would cut out a lot of the fat but so far not so much. Housing joins education and healthcare as indicators of total policy failures in this country and a great disservice to the people. Thanks for you work.