Seems pretty obvious that the media meme for a hot housing market is out there. Get out there and buy folks, because now is the time. This is true to a certain extent. This is not the whole truth though. As I wrote on Monday about using construction as an indicator of immigration effects, there are data points that explain this hot housing market and how it is not all that it seems. The system has rigged a market to make it appear healthier than it is.
This is simple supply and demand. America has 25 million more people in it compared to a decade ago so the transactions of buying and selling should increase in absolute numbers. Add to this the secular decline in family size and you have fewer people per home. Readers undoubtedly have single friends that buy homes with no romantic prospect in sight or children. I've connected with single childless friends who have bought 1800 square foot homes and looked slightly confused why they needed a 4 bedroom home at that time. Add to this retirees that stay in their homes because multigenerational living is so lame and terrible, and the demand is there.
Supply is a problem. The banks had a lot of foreclosed homes on their books and slowly parceled them out so they would not have to write the loss on them. They even foreclosed slowly on larger homes in California because the loss would have been too big for their books. Irvine Housing Blog would spotlight homes that had not made a mortgage payment in three or four years with the homeowner still residing in them. The banks had a ton of REO inventory to sell.
Years ago I wrote how big investors were taking their ZIRP money from the FED and big banks and scarfing up properties to rent. This was a hunt for yield in a 0% world. Everyone is chasing yield. Rents had appetizing cap-ex rates, so creating a rental portfolio was seductive to big capital. This has created rent backed securities for private equity, which now has some government guarantees. These homes are off the market and rented, therefore leaving supply a problem.
This of course allows the holders of those rental properties to charge more rent. They are doing so at a high rate beyond the rise of not just inflation but many other goods and services. How are you going to save up for that down payment if your rent eats at your salary at higher and higher rates? Shucks, you can't exit that market though because construction just is not happening to supply you with affordable housing to move into. It is a racket for the oligarchs. Conslidation of banking had a point and goal, and make no mistake, it was never about you.
This all works to save the banks ass though just like eliminating mark to market did. Loans to big biz to rent out homes takes home off the market, which boosts the book value of those REO homes. Banks then can act in another way to help themselves: they can deny lending for developments and new construction. Buried in this article on new home construction, a developer mentions how loans have not been out there for new construction. Hmmm, no loans for new construction but the loans were out there for private equity and hedge funds to buy existing homes to rent, hmmm.
In Monday's post, I shared an image on home construction. The actual new unit construction has slowly risen from the catastrophic lows of 2009. This made some sense as the inflated construction of over 2 million units of the mid-'00s would have hangover inventory that needed to be worked off. Still construction is not at historical averages or levels that one would expect in a hot housing market if you look at longer dated charts that track booms and busts. Little talked about item is that all the regional construction firms of the mid-'00s got cleaned out wit the housing bust. Now just the big boys dominate. The big boys also bought land at firesale prices from bankrupt regionals. They are building higher end to lock in diamond quality buyers.
This is centralization and the elite helping themselves and never taking a loss. This is why a local small town councilman mentions developers wanting to put in $400K housing units when his or her city needs $200K starter homes. They don't care if the land was cheap or bought at a firesale price from the last crash. They are locking in a set buyer with a particular income level. There are corn field where the farmland gets turned into 100 homes at $400K a pop with no reasoning besides the buyer profile.
There is not a hot market in the mode of prior booms. There are just many buyers looking for homes in a suppressed supply. This is not about affordable family formation. There will be no consequences for the high end. They will continue to extract from you the monthly nugget that they feel entitled to, and will have a system completely designed to maximize their gains.