I’m writing this in August of 2020 and the last six months of the housing market have surprised me. All of the statistics indicate a booming single family housing market:
Low Inventory For Sale
High New Housing Starts
Low Interest Rates
Minimal Days On Market
There could be many explanations for this, but the data is the data, the housing market for single family residential properties is hot. What do I think is driving this?
The demand for more space: The last nine years has seen a boom in new multifamily construction. Apartments were built nicer and nicer. Older units were bought and renovated with rent increases. Places marketed “live, work, play” mixed used communities, with retail and office space near a smaller footprint apartment. Well what happens when the retail is suddenly closed and you don’t need to go to the office? You opt for more space at home.
The country is back to building at….1995 levels!
The last decade saw a collapse in new home construction followed by a slow rebound. A business that was dominated by smaller entrepreneurial home builders has turned into a business dominated by a smaller number of large home builders. Just how far behind is the country in supplying the number of housing units demanded by the population? I’m not sure, but the number of new home starts appear to say there’s a shortage.
(Some) migration out of big cities. Every three months there’s some report about people moving out of San Francisco, Los Angeles, or Chicago. Now New York has been added to that list and the stories have intensified. Some cities and rural areas are beneficiaries, as well as income tax free states. However those cities still manage positive population growth every year. Why? For many, if you want to move up in your career, you need to be close to executive sponsors. In technology, that has long meant you need to be in the Bay Area or Seattle. That’s where corporate headquarters are and sponsors exist. Once someone no longer wants to or can move up, they don’t need to be near that sponsorship anymore. Historically they have remained as their job still requires them to be at headquarters or they’ve settled into an area. The work from home trend suddenly allows folks without upward career trajectory to migrate away from headquarters!
This is a particular boom for lower tax / higher quality of life areas. Colorado, Utah, the Southeast Coast, and Florida are huge winners in this trend. Did this pandemic pull forward some people who were already considering being part of this long term trend? Probably. Plenty of professionals have decided they’ve reached a career level they are happy with and are choosing to take their job/pay and move to a higher quality of life area. My guess is this is both a short term spike and the calls of NYC or San Francisco being dead are overrated. Corporate employees need sponsorship to grow their career and promotions come out of trust and familiarity. It’s just tougher to gain these things as a remote employee.
What is the bearish case for housing?
We must start with the most obvious: Unemployment Rate
The July Unemployment Rate stood at 10.2%. The *peak* of the great recession in October of 2009 was 10%. There are objectively less people with jobs today with the capacity to buy a home than at any time in the last thirty years. This level of unemployment can’t exist without some consequences. We also haven’t seen the possibility of airline, state, and municipal job losses. State and local tax receipts have been hurt in 2020 and this will likely result in a combination of budget cuts and tax increases.
The Rent / Foreclosure Pause: Is this Constricting Inventory?
From 2014 to 2019, the number of houses foreclosed on in the first half of the year slowly declined from around 600,000 to 300,000. In the first half of 2020, there were only 165,530 houses foreclosed on. This is half the amount of inventory that would have normally come available from foreclosure activity. This is inventory that just vanished from the market that should be available! A
The lack of foreclosures has also led to another trend: Falling rents in multifamily housing! The natural (but unfortunate) flow of people moving out of apartments into homes and those who are foreclosed on (or sell under distress) are not moving back into apartments. Why move if you can stay in your home and not pay? FHA loans, the higher risk segment of the mortgage market, just hit a record.
As rents decline and prices on housing increases, the economics of renting get better. Will something finally break here? I personally am enjoying calling the landlord in lieu of going to Home Depot (but don’t stop supporting my HD stock, I need my retirement dividends!) Meanwhile landlords are struggling to deal with the eviction moratorium.
What about the transition into Senior Living?
Another consistent source of home inventory is the elderly moving from a single family out into an assisted living facility. What has the pause been in the natural progression? I’m a shareholder in Ventas (VTR), a REIT that owns/operates senior living facilities. The investor presentations talk about declining occupancy rates in the first and second quarter of 2020. Less residents are moving in than residents are exiting these facilities, which is the opposite of what the demographic trends tell you should be happening. I have one family member that’s delayed this move indefinitely due to COVID-19 concerns and it would seem others have done the same.
Two other factors to consider:
Is there a pending AirBNB effect? I don’t know….the statistics are not easy to obtain, but estimates put the total number of AirBnB listings in the United States at 660,000. Some portions of these units are stand alone properties being used as vacation rentals. How much stress has the last six months put on these AirBNB entrepreneurs? There were a record number of hotel projects in development at the end of 2019 and now all of that space is competing for fewer travelers. Will some of these units be converted back to long term rentals or even put up for sale?
What about property taxes? State and local budgets are hurting. Sales tax receipts, occupancy taxes, and restaurant taxes are down. Interest rates being lower will make pension costs rise. What will this do to property taxes? Property taxes create additional costs per year that should come out of the value of the home. Maybe 2020’s value increases can keep the rates from going up, but there will be an additional tax burden on most properties.
So what does this mean I think will happen? I have no idea.
There are multiple powerful forces at play – the country has underbuilt housing inventory relative to population growth and long term interest rates continue to decline. How will that play out going up against the current unemployment rate and “catch up” that must ultimately happen with foreclosures and seniors transitioning out of single family homes?
Personally the current state of housing has me a bit fearful. I’ve experienced losing 20% on a home after owning it for seven years during the great recession. I’ve also had another house take a beating in part because of a 20% increase in the property tax bill. I don’t expect the great recession to be repeated, but at the same time the gap between the monthly cost of owning a home and renting a home seems to be widening. At some point market forces should correct this, as high enough prices will eventually cause a mom and pop landlord to sell their property to an owner occupant. However favorable tax rules for holding real estate instead of selling cause friction in this process. Add in the proposals for higher capital gain tax rates and I don’t know how high prices get before that happens.
The only two situations I see where it makes sense to buy right now are if:
- There is no comparable inventory available for rent whatsoever
- The hold period of the house is at least ten years
The first is a lifestyle decision, each person places their own value on having the exact house they want in the exact place they want. I know I have that desire. The second isn’t a guarantee of success, but it should be long enough to allow for enough principal paid down to where a small decline in price won’t be detrimental to the homeowner. A home is an asset and the price paid for an asset is important. Today I am cautious with all of the uncertainty.
What do you think about the current state of the housing market? Please leave a comment and let me know!