The "Housing Crisis" is a hyped-up media falsehood - change my mind

[ChpBstrd]

Lots of financial media authors are writing dramatic headlines about a collapse in the housing market or a shortage of houses - which would seem to be contradictory. These explanations are an attempt to apply supply-demand explanations to the sudden rise in home prices which started in 2020 - about the time government direct deposits started appearing in our checking accounts.

The fallacy is to assume changes in the price of investments like houses must necessarily reflect changes to supply or demand. Investments have a lot more inputs! So let me debunk both the idea that there's a housing shortage and the idea that the housing market is in a state of complete and utter collapse.

While housing market transactions are below the levels of recent years and home prices had a little dip, I'd argue they're well within the normal ranges and we have a functioning, normal market.

Evidence:

1) New Home Sales are at historically typical levels. So despite all the media talk about a housing "shortage", with the evidence being high prices, supply is being added at a pace that is historically unremarkable. Additionally, we were at 7.8 months' of supply in August 2023, which does not at all suggest a shortage. According to the NAR, new home sales were up 5.8% YoY in August 2023.

2) Existing Home Sales are still over 3.65 million (seasonally adjusted, annualized) compared to the 5 million range typical in the 20-teens. That ~27+/-% decline is useful banter for headlines, but it reflects a slightly increased home ownership rate - which is a reduction in demand for houses or rentals. Several million more people are homeowners now compared to in 2018 or 2019 and that simply shows up as a smaller marketplace. Many homeowners have low-rate mortgages that make it unattractive to move again for jobs, family, tastes, etc. Overall, take a look at these data, which only go through May 2023, and tell me if 2023 could possibly be a "crash" year:



3) Housing Starts are at levels considered normal in the recent past. E.g. Annualized starts as of September 2023 were higher than they were from 2007 to 2018, than from 1989 to early 1993, and for periods of time in the booming 1960s. There was little to no talk about shortages during most of these timeframes.


4) Housing Supply is at 3.4 months for existing homes and 7.8 months for new homes. This data series doesn't go back very far, but these seem like reasonable estimates of how long one might expect a house to sit on the market in normal times. If there was a housing shortage, supply would be lower and people wouldn't spend this much time to buy their house. If the market was crashing, it would be hard to sell one's house. Either condition might exist in specific places but on a nationwide scale the numbers don't add up.


Caveats:
None of this is to say there isn't a housing bubble. Prices could be irrationally high in many places, and due for a correction. But it's not always due to supply and demand factors. It could be due to investor expectations of high appreciation or inflation, cash-flush consumers who spent 2020-2021 getting stimulus checks and spending less on restaurants and theater tickets, low mortgage underwriting standards like the now-typical 3% down payment, media hype around landlording as a way to get rich quick, or simply irrational exuberance and herd behavior.

Similarly, none of this is to say prices won't go up or down in the future, or supply and demand factors won't be important in the future. It is to say the data on transactions and supply are remarkably bleh. They don't paint the picture we're hearing about in the financial media. Headlines should say "The Housing Market is Normal!" but who would click on that?

Finally, even though the market is functioning normally with no significant supply or demand problems, that doesn't mean housing prices and mortgage rates are affordable or sustainable. This is not to say housing is a bargain or that anyone should make a buy decision just because of a lack of marketplace problems.

In fact, it is completely consistent to look at breakneck housing price appreciation of the past few years, low affordability, still-high levels of HGTV hype, FOMO statements made by buyers, and rental-equity millionaire stories, and conclude much of today's prices have nothing to do with supply and demand, and therefore we have a psychology-driven investment bubble.  Others may conclude markets are functioning normally and there is no bubble, also without self-contradiction.

Regardless, the market is normal. Change my mind with something other than anecdotes.

[reeshau]

I don't know that I would use the term crisis.  But the market is certainly imbalanced.  The primary thing I point to is that new home sales make up almost 30% of market transactions this year, which is 3x the normal 10% pace.  And in a number of metros, it's even steeper.  It's why I bet on homebuilders, and why that bet is working out very, very well this year.

Now, whether 10% was the post-GFC norm, when homebuilding was depressed, or whether that has held true for longer...I don't know.

I still view the homebuilding trough as more significant than I think you do.  But none of this data is normalized to population, anyway.  So, trends from the 90's are with a population 30% smaller than today.  We should be in an upward trend, but so much around this information seems flat.  For decades.  I think the supply imbalance isn't necessarily expressed in year-over-year numbers.  It has been developing for at least a decade, if not multiple ones.

[Morning Glory]

I think a big piece of the available housing shortage/ price increase is that many units are tied up as vacation rentals or second homes, especially in popular cities that get most of the news coverage.  It's not the only problem but it certainly does contribute to housing cost increasing faster than wages in those areas.

[seattlecyclone]

Finally, even though the market is functioning normally with no significant supply or demand problems, that doesn't mean housing prices and mortgage rates are affordable or sustainable. This is not to say housing is a bargain or that anyone should make a buy decision just because of a lack of marketplace problems.

I think we need to start this discussion by agreeing on what the term "housing crisis" even means. You seem to place great weight on whether the market is "functioning normally," while affordability is more of a minor caveat.

I take a different view. I believe affordability defines the crisis. Housing is not merely an investment, but a basic human need. If people are having a harder time affording basic housing than their parents did, that's a problem. If people in many places feel the need to relocate far away from friends and family because they lack the earning power to afford decent housing anywhere near where they grew up, that's an even bigger problem.

I agree with you that supply relative to demand are in normal ranges compared to historical averages, but in my mind that's a relatively minor factor in terms of whether we have a "crisis." Let's not forget that demand itself depends heavily on prices.

As we see below, house prices nationally are about 50% higher than they were a decade ago, and roughly double what they were in the mid-1990s, after adjusting for the CPI.



The difference is slightly lower when you adjust by median household income instead of the CPI, but even there we're still significantly above where we've been for most of the past generation, and even slightly higher than the height of the pre-Great Recession housing bubble.



Meanwhile places such as California have seen their home prices rise faster than national averages. This has coincided with net migration out of the state almost every year for the past three decades. This out-migration had historically been dominated by folks with lower incomes and educational attainment, with the state actually gaining college-educated high earners from other states. In recent years even the high earners are leaving, perhaps now that remote work has started to equalize salaries between states enough that the salary bump you get from moving to California no longer comes close to paying for the difference in housing prices.

All this is happening despite the fact that California still has a lot going for it in terms of weather, job opportunities, cultural opportunities, and all the other stuff the historically attracts people to move to a place. That stuff is still present, but the high housing prices are a big factor pushing people away.

[ChpBstrd]

Finally, even though the market is functioning normally with no significant supply or demand problems, that doesn't mean housing prices and mortgage rates are affordable or sustainable. This is not to say housing is a bargain or that anyone should make a buy decision just because of a lack of marketplace problems.

I think we need to start this discussion by agreeing on what the term "housing crisis" even means. You seem to place great weight on whether the market is "functioning normally," while affordability is more of a minor caveat.

I take a different view. I believe affordability defines the crisis. Housing is not merely an investment, but a basic human need. If people are having a harder time affording basic housing than their parents did, that's a problem. If people in many places feel the need to relocate far away from friends and family because they lack the earning power to afford decent housing anywhere near where they grew up, that's an even bigger problem.

I agree with you that supply relative to demand are in normal ranges compared to historical averages, but in my mind that's a relatively minor factor in terms of whether we have a "crisis." Let's not forget that demand itself depends heavily on prices...

If prices were high due to a problem with the market, such as a supply/demand imbalance, then we could say prices are fair, being set by market forces, and likely sustainable over the next couple of years.

However, if we can rule out market malfunctions as an explanation for very low housing affordability, then it becomes necessary to explain the phenomenon some other way, such as saying it's an investment bubble. If we take the bubble route, that means we're making a dire prediction about sometime in the next couple of years when the bubble bursts. We're saying another GFC and housing correction is likely.

So the specific diagnosis matters a lot to our concept of what happens next. Extreme prices for a basic human need are problematic from a humanitarian point of view, but that doesn't mean prices can't stay high; lots of places have had unaffordable housing for a very long time. Bubbles though, tend to pop.

[GilesMM]

Housing has been considered a crisis as long as I can remember.  Currently something like 99% of US market medians are out of reach for average earners.

[Log]

Apologies for the whole essay, I'm very passionate about this.

How about this as a place to start: The housing crisis has localized origins that are now bubbling over into more and more metros throughout the country. Looking at nationwide stats overlooks acute suffering in specific markets, and fails to account for how those localized housing market failures prevent people from moving for better employment opportunities and upward mobility. Crushing supply shortages in specific markets that are culturally and economically influential mean that there's a lot of noise about the problem in the media, while people living in "poor and backwards" places (as you yourself describe it) wonder what the hell us city snobs are complaining about, because there are plenty of cheap houses near you.

"For the past 40 years, housing supply has not kept pace with population growth. A simple way to observe this fact is by looking at housing starts (i.e., new residential construction) as a share of the U.S. population. The figure above shows that housing starts as a share of the population has been on an overall decreasing trend since the 1970s. This decrease became particularly pronounced after the peak of the 2000s housing bubble."^{[From whitehouse.gov]} That whole report is helpful.

Note the cultural moment of the '70s* that kicks off the decline in housing starts: urban crime had spiked out of control, and anyone who could afford it was fleeing for the suburbs. People were legitimately terrified of urban density leading to crime—single family zoning and minimum lot sizes were all about keeping housing expensive enough to keep the riff-raff out. Trust in government had plummeted after the excesses of "urban renewal" and highway building in the '50s and '60s, so most municipal decision-making processes started to include far more "community involvement", which empowered NIMBYs to keep development OUT. In regions with particularly environmentally-minded voters, people thought that if they simply stopped building housing, that might inhibit population growth. All these factors reduced housing construction, and pushed what development there was out to increasingly far-flung exurbs, or to sprawl-friendly sun belt country - hence the massive and continuous population growth in states like Texas and Florida since this time.

Fast forward a few decades to the GFC, and these kinds of far-flung super-commuter exurbs were the epicenter for foreclosures. That housing crash led people to believe we had over-produced housing, when we had actually just overproduced housing in stupid locations where only desperate people would live, while actually not making any meaningful progress at fixing the blooming shortage in increasingly desirable urban locations with convenient access to booming job markets.

Look at figure 1 there—more than triple the jobs added compared to housing starts in both Bay Area metros from 2008-2019. Also more than 2 jobs per housing start in LA, NYC, Riverside, and Boston metros. That's just the 6 metros where the new jobs:housing ratio was >2:1, but those 6 metros make up over 16% of the national population. That doesn't even take into account all the other metros where the ratio was greater than 1, nor all the markets where the people being priced out are moving in droves. Overall, this is a large portion of the US population who are feeling the crunch of an increasingly tight housing market, even if it might not be so bad in certain low-demand regions.

All the while, affluent people who can afford it are increasingly living in smaller households, meaning a smaller proportion of the population taking up a larger piece of the pie in these supply-constrained markets. This just pushes more of the bottom-end of the income distribution into over-crowded housing, or onto the streets.

To reiterate - that's 3 different points at which demand is growing, and supply is not even keeping up with the first of them, let alone all three. First, that's national population growth. Second, it's job growth in specific regions. Third, that's the change toward increasing demand of housing-per-person, as affluent young professionals are increasingly living alone (delaying or foregoing marriage), fertility rates are dropping, and empty-nesters are living longer, leading to more smaller households.

///

And to note an additional pet peeve: your first two points are entirely focused on home sales. Looking at the housing market specifically through the lens of home ownership is to look at a portion of the market comprised only of more affluent people, and then say, "yep, everything looks fine!" To understand the harm caused by the housing crisis, we need to be looking at renters, young adults living with their parents, homeless people... All these people are excluded from just looking at data on home sales and ownership.

---

*ETA: Also note, the '70s is where your data starts from which you assert that our current level of construction is "normal." The fact that construction not meeting demand has been "normal" for 50 years IS the problem in a nutshell.

[seattlecyclone]

So the specific diagnosis matters a lot to our concept of what happens next. Extreme prices for a basic human need are problematic from a humanitarian point of view, but that doesn't mean prices can't stay high; lots of places have had unaffordable housing for a very long time. Bubbles though, tend to pop.

Right, I would again frame the term "housing crisis" as a humanitarian crisis, not as a bubble that I necessarily expect to cause an imminent financial crisis for investors in housing.

I do believe that the markets have not yet fully adjusted to higher interest rates. Someone with a $2,000/month mortgage budget can afford to borrow about $275k on a 30-year mortgage when rates are at 8%, while they could afford to borrow $475k when rates were at 3%. That's a big difference, and gross home prices have dropped a bit in many markets, but not by nearly this big of a fraction. That means people who aren't in a position to pay cash for a home are either seeking smaller homes, accepting larger mortgage payments, or they're sitting out of the market entirely. These are market-based outcomes that are exactly what we might expect to happen in this situation, and they're nevertheless all bad from a humanitarian quality-of-life perspective.

Meanwhile on the supply side the construction industry has seen their cost of financing a building project increase. Combine this with the weakness on the demand side and building a home looks a lot less lucrative now than it did a year or two ago. We're definitely seeing a slowdown in permit applications here locally in the Seattle area. Five of the first eight months in 2023 have seen permit applications for fewer than 1,000 new apartments/condos (in 5-unit or larger buildings), while there were no such months in all of 2022 and only three in 2021.

So, we are seeing some changes in market conditions that coincide with a higher interest rate environment. I suspect it will take another couple years to fully hit a new equilibrium. Again, the market is doing what it's supposed to do. Zooming out to the overall humanitarian effect of slower rates of construction and higher monthly cost to finance a home, it doesn't look like a positive change, and the baseline we're starting with is already pretty bad in many areas.

The affordability issue has gotten into the ears of state and national governments over the past several years, which is encouraging. Various items to deregulate housing construction to make new housing cheaper (including allowing more homes per unit of land, reducing time and process to get a building permit, and reducing/eliminating mandatory minimum parking requirements) have been passed in several states and discussed in several more. I do see these political movements as something of a threat to financial returns on rental real estate over the medium term, as there is now a concerted effort to make housing cheaper (and therefore less profitable to own). Previously the politicians seemed to have a single-minded goal to maintain or increase prices of existing homes.

[ChpBstrd]

Crushing supply shortages in specific markets that are culturally and economically influential mean that there's a lot of noise about the problem in the media, while people living in "poor and backwards" places (as you yourself describe it) wonder what the hell us city snobs are complaining about, because there are plenty of cheap houses near you.

In 2004-2007, housing prices in my poor and backward place grew at their typical 2-3% pace, basically keeping track with inflation and in alignment with construction costs. The housing bubble was a phenomenon of coastal places and, oddly, Las Vegas, Nevada. We all thought it was a little crazy people were getting into bidding wars over $500k tract homes in the desert, when wages in such places were only 5-15% higher than poor and backward places where those same houses could be had for $160k.

This time is different though. The large house I sold for $220k in 2018 is now worth $330k per Zillow, and 2BR cottages that would have drawn $125k five or six years ago, depending on condition, are now asking $185-$200k. At the lowest end of the market the increases have been most dramatic. The classic serviceable-but-rough rent houses in poor neighborhoods which had always sold for $50k-$75k (basically the cost to remod) have doubled in the past 5-10 years. Yes, our wages and construction costs have gone up in that period along with general inflation, but not nearly to an extent that could explain the price increases. This has happened with NO population increases, NO new NIMBY zoning, NO geographic constraints on development, and NO change in the jobs picture (unemployment <4% since 2016 and desperate headhunters everywhere).

So the issue is none of the usual explanations work for why housing prices in poor/backward places have increased to unaffordable levels just like they've done in big cities. Mortgage rates between 4% and 4.5% were available from 2010 to 2019 and did not lead to rapid appreciation during those times. When rates approached 3% in 2020-2021 payments didn't change by all that much but prices took off. More importantly, 2020-2022 was when households started receiving stimulus payments - which go a lot further toward a down payment in a LCOL area.

All the while, affluent people who can afford it are increasingly living in smaller households, meaning a smaller proportion of the population taking up a larger piece of the pie in these supply-constrained markets. ... that's the change toward increasing demand of housing-per-person, as affluent young professionals are increasingly living alone (delaying or foregoing marriage), fertility rates are dropping, and empty-nesters are living longer, leading to more smaller households.

I agree 100% on this point. People aren't living in large family structures anymore; they're living solo or as DINK couples. This means more houses are needed to shelter the same population.

However, I am reluctant to call this voluntary/cultural behavior a supply shortage, because basically people are choosing to live this way and housing prices are not high enough to convince them to move in with roommates, lovers, or as parent-child households. This is not at all like the residents of a post-earthquake city scrambling to rent the few undamaged apartments, it's more like millions of people competing to buy themselves the luxury of a 4BR house on a half acre lot all to themselves, because that's the desired lifestyle at the moment.   

And to note an additional pet peeve: your first two points are entirely focused on home sales. Looking at the housing market specifically through the lens of home ownership is to look at a portion of the market comprised only of more affluent people, and then say, "yep, everything looks fine!" To understand the harm caused by the housing crisis, we need to be looking at renters, young adults living with their parents, homeless people... All these people are excluded from just looking at data on home sales and ownership.

It has always been the case that affluent people are more likely to be homeowners than poor people. Even in LCOL areas where $20k can be a 20% down payment and owning is much cheaper than renting, the bottom third of the income spectrum can't raise those funds. On the flipside, in HCOL areas it is usually cheaper on a cash basis to rent rather than to be house-poor. We can't frame people's lack of home ownership as a problem if it is the option which makes the most financial sense in their circumstances. We also can't say there's a crisis where nobody can be a homeowner when the homeownership rate is in line with historical norms.

That said, declining affordability of both the own or rent options is a problem causing lots of suffering. We could ignore the affordability problem in 2005-2007 when it was limited to parts of the country where real estate speculation was rife. We could say people seeking affordable housing should just move elsewhere where the classic advice to spend <30% of net earnings on housing could be applied. Now, however, even the decidedly un-trendy places are becoming unaffordable, despite most supply-demand metrics being within historical norms. It simply can't be true that everywhere is trendy now, or that everywhere has a housing shortage. It's more likely IMO that prices in HCOL and LCOL places have yet to adjust to a new reality of 7.6% mortgage rates and the stimulus money all being spent. 

[Ichabod]

If we define the housing crisis as a market bubble, I agree with you. I don't think there's anything propping up demand that will suddenly pop everywhere like the poor loans of 2007-2008.

Re: claims of a housing shortage and a housing collapse being contradictory: If talking about the same market, these claims are contradictory. But as @Log pointed out, the housing market varies by location. San Francisco and many other large cities have shortages while "fly-over country" could be in a bubble. Again, if I'm looking at the national picture, I don't see much of a bubble, but markets like Boise are a little frothy.

Re: origins/causes of the affordability crisis. The US housing market is huge. There are obviously multiple factors.
1. Econ 101 is prices are impacted by supply and demand. Investments are no exception. Investments have inputs besides consumer utility, but but those other inputs are ultimately still impacting demand.
2. Log and many others suggests that restricted supply is the driving factor. If new home builds are steady, but population and household formation is rising, then we'll get rising prices. Or if the new units are the wrong type and/or location.
3. COVID stimulus payments probably did increase demand for housing. But I don't think it comes close to explaining the whole problem. Most households received a few thousand dollars in assistance, a small fraction of the runup in housing prices.
4. Interest rates. 100% For millennials and Gen Z, interest rates have been at historic lows for our entire adult lives. Many people think we'll return to those low rates, and we'll be able to refinance our previously unaffordable homes.

You're harping a lot on the COVID stimulus payments. In hindsight, it was obviously too much. But other contemporary factors are doing the heavy lifting with housing prices. COVID and the rise of remote work increased household formation and changed the preferred type of housing. Living with roommates or family is okay when you're at work 45 hours a week, but if you're working from home, now you want your own place. Or you don't want to get Grandma sick. Then we have historically high employment numbers, which again increase household formation. Then we have interest rate lock-in where retiring Boomers can't afford to lose their existing low-interest mortgage and down-size, so they're stuck in a big house that'd be perfect for a middle-aged couple with a couple of kids.

Focusing on supply issues is attractive because it makes the problem tractable. Upzoning improves supply and lowers prices.
If we attribute it to monetary policy, it's a dead-end. The Fed's mandate is inflation, not housing prices. And hoping for Congress to tackle inflation via deficit reduction seems like a pipe dream at this point.

The rise of remote/hybrid work should have a flattening effect, and it probably explains some of what you're seeing your location. If I'm from the Rust Belt, but moved to Silicon Valley for my career, I might be very happy to relocate back home for some sweet housing arbitrage. If I live and work in Big City, but now only have to go in two days a week, maybe I'm willing to commute from an exurb 75 minutes away.

[reeshau]

Could be a bit of buyer capitulation, or a further demonstration of the demand / supply imbalance.

"Sales of new homes increased 12.3% to a seasonally adjusted [annual] rate of 759,000 units last month from the revised August rate of 676,000, according to the Census Bureau on Tuesday. That exceeded the Bloomberg consensus expectation of 680,000 units for September and the pace was 33.9% above last year's levels."

In contrast, existing-home sales slid 2.0% in September to a seasonally adjusted annual rate of 3.96 million. Sales retreated 15.4% from one year ago.

[Log]

Crushing supply shortages in specific markets that are culturally and economically influential mean that there's a lot of noise about the problem in the media, while people living in "poor and backwards" places (as you yourself describe it) wonder what the hell us city snobs are complaining about, because there are plenty of cheap houses near you.

...
So the issue is none of the usual explanations work for why housing prices in poor/backward places have increased to unaffordable levels just like they've done in big cities. Mortgage rates between 4% and 4.5% were available from 2010 to 2019 and did not lead to rapid appreciation during those times. When rates approached 3% in 2020-2021 payments didn't change by all that much but prices took off. More importantly, 2020-2022 was when households started receiving stimulus payments - which go a lot further toward a down payment in a LCOL area.

I would suppose the difference in prices in lower demand markets in 2020-2021 comes largely from the availability of remote work and the generational timing of Boomer retirements. Even if the population isn't growing, the equilibrium shuffle could be bringing in more people with money from other places? Or could be a portion of the housing supply being transferred from the ownership market to the rental market? I will admit my perspective is highly biased towards the high-demand markets I've lived in for the last few years.

All the while, affluent people who can afford it are increasingly living in smaller households, meaning a smaller proportion of the population taking up a larger piece of the pie in these supply-constrained markets. ... that's the change toward increasing demand of housing-per-person, as affluent young professionals are increasingly living alone (delaying or foregoing marriage), fertility rates are dropping, and empty-nesters are living longer, leading to more smaller households.

I agree 100% on this point. People aren't living in large family structures anymore; they're living solo or as DINK couples. This means more houses are needed to shelter the same population.

However, I am reluctant to call this voluntary/cultural behavior a supply shortage, because basically people are choosing to live this way and housing prices are not high enough to convince them to move in with roommates, lovers, or as parent-child households. This is not at all like the residents of a post-earthquake city scrambling to rent the few undamaged apartments, it's more like millions of people competing to buy themselves the luxury of a 4BR house on a half acre lot all to themselves, because that's the desired lifestyle at the moment.

I would say we need to understand this by looking at separate segments of the market. Yes, the preference for smaller households is merely a preference, not a humanitarian crisis. Middle class people not having as much house as they wish they had is not a crisis. But the fact is, a lot of affluent people are able to afford this preference, which eats up a larger quantity of housing and leaves less supply remaining for the lower end of the distribution.

If, as a silly hypothetical, rich people started eating way way more food, leading to rising prices and poorer people going hungry, we would make it a priority to produce more food so poor people don't go hungry.

And to note an additional pet peeve: your first two points are entirely focused on home sales. Looking at the housing market specifically through the lens of home ownership is to look at a portion of the market comprised only of more affluent people, and then say, "yep, everything looks fine!" To understand the harm caused by the housing crisis, we need to be looking at renters, young adults living with their parents, homeless people... All these people are excluded from just looking at data on home sales and ownership.

It has always been the case that affluent people are more likely to be homeowners than poor people. Even in LCOL areas where $20k can be a 20% down payment and owning is much cheaper than renting, the bottom third of the income spectrum can't raise those funds. On the flipside, in HCOL areas it is usually cheaper on a cash basis to rent rather than to be house-poor. We can't frame people's lack of home ownership as a problem if it is the option which makes the most financial sense in their circumstances. We also can't say there's a crisis where nobody can be a homeowner when the homeownership rate is in line with historical norms.

That said, declining affordability of both the own or rent options is a problem causing lots of suffering. We could ignore the affordability problem in 2005-2007 when it was limited to parts of the country where real estate speculation was rife. We could say people seeking affordable housing should just move elsewhere where the classic advice to spend <30% of net earnings on housing could be applied. Now, however, even the decidedly un-trendy places are becoming unaffordable, despite most supply-demand metrics being within historical norms. It simply can't be true that everywhere is trendy now, or that everywhere has a housing shortage. It's more likely IMO that prices in HCOL and LCOL places have yet to adjust to a new reality of 7.6% mortgage rates and the stimulus money all being spent.

I 100% am in agreement with the bolded. There are a lot of people living comfortably as renters in places where purchase prices are out of whack and renting makes way more financial sense, who are endlessly moaning that they'll never be able to afford a home in their market. Those people have cultural sway and make a lot of noise, but their whining does not equal a crisis. I'm not saying that people renting instead of owning equals a crisis. I'm simply saying that "home ownership rates are steady" is basically an irrelevant statement as to whether or not there is a humanitarian crisis that is being shouldered by a subset of non-owners who are less affluent.

To say "X% of households could afford homeownership then, and X% can afford home ownership now" says nothing of the living conditions of the other half of the population. Look into those details, and you see some of them are doing great, living in luxury and rationally choosing renting as the better financial choice for their circumstances... and some are living in tents on the sidewalk.

As to the italicized, I must reiterate the data from that White House report I linked before: at a nationwide scale, housing construction has not kept up with population growth since 1970. That inherently points towards a supply shortfall over time, before we even consider the rising consumption of housing amongst the affluent. Before remote work and the mass wave of Boomer retirements, the shortage was more heavily localized in attractive job markets. Having an acute shortage in "elite" markets and an abundance of homes in less desirable markets kept it a localized problem, but in 21st century, local problems bubble over.

I remember people in the Portland area moaning about "those damn Californians moving here" my whole life. My parents were two of them, in the early '90s. As these expensive housing markets have pushed people out, most of the popular markets that absorbed those emigrants repeated the exact same policy mistakes that inhibited adequate housing construction*. Portland continued to spend the three decades complaining about traffic and rising rents, instead of just building enough damn housing to meet demand. California wasn't unique, it was just first.

*Places in the sunbelt gladly absorbed a lot of population growth through abundant suburban sprawl, but their construction still wasn't enough to keep up with population growth, and it obviously has absolutely horrific environmental implications.

[Radagast]

[In 2004-2007, housing prices in my poor and backward place grew at their typical 2-3% pace, basically keeping track with inflation and in alignment with construction costs. The housing bubble was a phenomenon of coastal places and, oddly, Las Vegas, Nevada. We all thought it was a little crazy people were getting into bidding wars over $500k tract homes in the desert, when wages in such places were only 5-15% higher than poor and backward places where those same houses could be had for $160k.

I'm not sure how how well you recall the 2000's housing bubble. It was not a coastal phenomenon, it was a true growth bubble centered on places with high historic and recent population growth rates. Those places did happen to be sun belt locations, and Arizona, Nevada, Florida, and California were the worst hit. Las Vegas of course was the poster child for this. It is not an exaggeration to say that as of 2005 the population of Las Vegas valley had on average doubled every decade since George Washington was president (Well maybe a little bit, perhaps the population then was 10 rather than 1. But it is an understatement to say it had on average doubled every decade since the Civil War). Looking at that trend, people of the time assumed that trees would grow to the sky and that housing for 2,000,000 more people would be needed in Las Vegas by 2015. Based on that assumed trajectory, reinforced by the past few years price increases, there was an obvious looming housing shortfall which would inevitably see prices quadruple, and everyone was rushing to build and buy housing before that happened. Then it turned out trees don't grow to the sky and the exponential trajectory was not sustained, and the bubble popped. Las Vegas is still 100,000's more populous now than then, but it did not double twice since then as had been the flawed assumption. And similar for the other places in the bubble. The bubble generally existed in proportion to trailing population growth trends.

I was in school in one of the bubbliest places and there was genuine euphoria. Civil engineers 1 or 2 years older than me were graduating to work for real estate developers and making absurd money and bonuses for new graduates. They would swagger about speaking in jargon and saying stupid asphorisms just like participants in the tech bubble or Bitcoin craze, and buy gigantic new houses of their own despite student loans and no employment history. At the very peak I visited a house owned by a couple 1 or 2 years younger than me, friends of friends. At best they were barely old enough to legally buy alcohol. They had not received 4 year college degrees and had at best 3 years employment in mid-low paying jobs. That hadn't stopped them buying a fancy new 1,800 square foot house with three bedrooms and three bathrooms, which was nicer than my well educated high paid parents had owned until they were in their 40's. Back then there was plenty of housing inventory and plenty of (with hindsight not) free money for them to afford that.

Fast forward 17 years and there is no euphoria, no inventory, and money is comparatively tight. Many people want to buy a house but there is a little sense of dread when doing so. The former swaggering civil engineers now with 17 years of job experience can afford to buy the exact same house now that they could 6 months out of school 17 years ago. Sure their income has more than doubled, but the combination of interest rates, prices, and lack of dumb loan products means the monthly payments on the houses have more than doubled as well. Which is fine for them, they went from bubble to reasonable behavior and have all the house they need. Far from a median 21-year old couple being able to afford too much house, it is actually difficult for them to afford any house at all or even rent in a 1-bedroom apartment, with no sign of that improving soon. All the price pressure is at the bottom of the market, so the older and wealthier crowd still aspire to similar or greater dwellings as 20 years ago but the young and poor are struggling. Basically, there is no bubble right now. Price increases are being driven by the bottom of the market because there isn't enough inventory there.

[ChpBstrd]

Crushing supply shortages in specific markets that are culturally and economically influential mean that there's a lot of noise about the problem in the media, while people living in "poor and backwards" places (as you yourself describe it) wonder what the hell us city snobs are complaining about, because there are plenty of cheap houses near you.

...
So the issue is none of the usual explanations work for why housing prices in poor/backward places have increased to unaffordable levels just like they've done in big cities. Mortgage rates between 4% and 4.5% were available from 2010 to 2019 and did not lead to rapid appreciation during those times. When rates approached 3% in 2020-2021 payments didn't change by all that much but prices took off. More importantly, 2020-2022 was when households started receiving stimulus payments - which go a lot further toward a down payment in a LCOL area.

I would suppose the difference in prices in lower demand markets in 2020-2021 comes largely from the availability of remote work and the generational timing of Boomer retirements. Even if the population isn't growing, the equilibrium shuffle could be bringing in more people with money from other places? Or could be a portion of the housing supply being transferred from the ownership market to the rental market? I will admit my perspective is highly biased towards the high-demand markets I've lived in for the last few years.

This is where using supply-and-demand logic to explain house prices gets awkward. Vast differences in price open up over time and over seemingly minor nuances in location. Houses clear the market within a few months in either kind of place, seeming to contradict the "low demand / high demand" labels. But we have to make supply and demand theory fit the price data so we say price changes must be because demand shifted, and then we're casting about for explanations for why demand for housing would shift so dramatically since 2020 when the population, housing supply, and ownership rate didn't change so dramatically in that time.

There are far fewer hoops to jump through with the simpler bubble explanation, and plenty of anecdotal information - even in this forum - about people buying vacation homes in hopes of appreciation, rental homes in the hopes their kids will be able to inherit a place to live, duplexes and SFHs as investments/jobs, flipping, etc. As these tactics continue to work, more people pile into them.

All the while, affluent people who can afford it are increasingly living in smaller households, meaning a smaller proportion of the population taking up a larger piece of the pie in these supply-constrained markets. ... that's the change toward increasing demand of housing-per-person, as affluent young professionals are increasingly living alone (delaying or foregoing marriage), fertility rates are dropping, and empty-nesters are living longer, leading to more smaller households.

I agree 100% on this point. People aren't living in large family structures anymore; they're living solo or as DINK couples. This means more houses are needed to shelter the same population.

However, I am reluctant to call this voluntary/cultural behavior a supply shortage, because basically people are choosing to live this way and housing prices are not high enough to convince them to move in with roommates, lovers, or as parent-child households. This is not at all like the residents of a post-earthquake city scrambling to rent the few undamaged apartments, it's more like millions of people competing to buy themselves the luxury of a 4BR house on a half acre lot all to themselves, because that's the desired lifestyle at the moment.

I would say we need to understand this by looking at separate segments of the market. Yes, the preference for smaller households is merely a preference, not a humanitarian crisis. Middle class people not having as much house as they wish they had is not a crisis. But the fact is, a lot of affluent people are able to afford this preference, which eats up a larger quantity of housing and leaves less supply remaining for the lower end of the distribution.

If, as a silly hypothetical, rich people started eating way way more food, leading to rising prices and poorer people going hungry, we would make it a priority to produce more food so poor people don't go hungry.

It may be true in a moral sense that housing policy should not unduly burden the poor, and it may be true that *we ought to* build smaller and more affordable housing, but we cannot explain facts about the actual supply, demand, and prices with moral statements. Prices aren't high because they ought not to be and they won't necessarily go up or down because they should. The only should statements we can make might be in the form of advice, such as "you should refuse to buy or rent a home for >30% of income if you want to be financially stable".

And to note an additional pet peeve: your first two points are entirely focused on home sales. Looking at the housing market specifically through the lens of home ownership is to look at a portion of the market comprised only of more affluent people, and then say, "yep, everything looks fine!" To understand the harm caused by the housing crisis, we need to be looking at renters, young adults living with their parents, homeless people... All these people are excluded from just looking at data on home sales and ownership.

It has always been the case that affluent people are more likely to be homeowners than poor people. Even in LCOL areas where $20k can be a 20% down payment and owning is much cheaper than renting, the bottom third of the income spectrum can't raise those funds. On the flipside, in HCOL areas it is usually cheaper on a cash basis to rent rather than to be house-poor. We can't frame people's lack of home ownership as a problem if it is the option which makes the most financial sense in their circumstances. We also can't say there's a crisis where nobody can be a homeowner when the homeownership rate is in line with historical norms.

That said, declining affordability of both the own or rent options is a problem causing lots of suffering. We could ignore the affordability problem in 2005-2007 when it was limited to parts of the country where real estate speculation was rife. We could say people seeking affordable housing should just move elsewhere where the classic advice to spend <30% of net earnings on housing could be applied. Now, however, even the decidedly un-trendy places are becoming unaffordable, despite most supply-demand metrics being within historical norms. It simply can't be true that everywhere is trendy now, or that everywhere has a housing shortage. It's more likely IMO that prices in HCOL and LCOL places have yet to adjust to a new reality of 7.6% mortgage rates and the stimulus money all being spent.

I 100% am in agreement with the bolded. There are a lot of people living comfortably as renters in places where purchase prices are out of whack and renting makes way more financial sense, who are endlessly moaning that they'll never be able to afford a home in their market. Those people have cultural sway and make a lot of noise, but their whining does not equal a crisis. I'm not saying that people renting instead of owning equals a crisis. I'm simply saying that "home ownership rates are steady" is basically an irrelevant statement as to whether or not there is a humanitarian crisis that is being shouldered by a subset of non-owners who are less affluent.

To say "X% of households could afford homeownership then, and X% can afford home ownership now" says nothing of the living conditions of the other half of the population. Look into those details, and you see some of them are doing great, living in luxury and rationally choosing renting as the better financial choice for their circumstances... and some are living in tents on the sidewalk.

As to the italicized, I must reiterate the data from that White House report I linked before: at a nationwide scale, housing construction has not kept up with population growth since 1970. That inherently points towards a supply shortfall over time, before we even consider the rising consumption of housing amongst the affluent. Before remote work and the mass wave of Boomer retirements, the shortage was more heavily localized in attractive job markets. Having an acute shortage in "elite" markets and an abundance of homes in less desirable markets kept it a localized problem, but in 21st century, local problems bubble over.

I remember people in the Portland area moaning about "those damn Californians moving here" my whole life. My parents were two of them, in the early '90s. As these expensive housing markets have pushed people out, most of the popular markets that absorbed those emigrants repeated the exact same policy mistakes that inhibited adequate housing construction*. Portland continued to spend the three decades complaining about traffic and rising rents, instead of just building enough damn housing to meet demand. California wasn't unique, it was just first.

What should we expect the White House to say?

"You Boomer suburbanites created this problem with your support for NIMBY policies, refusal to tackle social problems instead of sprawling away from them, opposition to mass transit, and racist/classist zoning and school funding policies. We want to change the rules so subsidized housing skyscrapers can go up in your neighborhood!"

That message would obviously go over like a lead balloon. So it's far easier for our leaders to say we've suddenly got a shortage because we under-built housing. Whose fault is that? Nobody's! Who has to change or give up something? Nobody! Whose house could potentially lose value because of political actions? Nobody's!

There's literally nobody who will vote or donate against a politician because they gave a sensible sounding supply and demand explanation. So guess what we'll get from both sides, alongside the usual culture war red meat?

Re: origins/causes of the affordability crisis. The US housing market is huge. There are obviously multiple factors.
1. Econ 101 is prices are impacted by supply and demand. Investments are no exception. Investments have inputs besides consumer utility, but but those other inputs are ultimately still impacting demand.

I think the recent run-ups of meme stocks and crypto assets suggest investment prices can rise beyond any fundamental explanation of supply, demand for shelter, or future prospects to deliver utility. People will buy into a thing at far above its fundamental value if they expect to be able to sell it to another investor for more money in the future. That is to say, there is value in playing musical chairs with hot investment trends because one can assume other market participants will join in chasing returns, and if one gets in and out quickly, one is unlikely to be the bag holder when the music stops.

For example, suppose an investment bubble in a type of stock might last up to 4 years, and you are evaluating the opportunity of holding the stock for one year. To keep it simple and applicable to real estate, we will assume stop-loss orders are not available. If you win, you exit the position with an expected 200% return. If you lose, your stock falls 80%. You have 3 possible years to earn the upside and 1 possible year when the downside could hit. Thus your expected one-year return is ((3*200%)+(1*-80%))/4 = 130% and it makes sense to take this bet. With real estate, the bubble cycle might be longer and different market participants might guess different odds and possible payouts, but it's still a similar game. Obviously if you play this game every year you eventually hit gambler's ruin, but I don't think most people understand that concept. For any particular year or decision, the odds seem to be in your favor!

Of course, housing prices don't swing this radically, but home equity absolutely can, especially for people with low down payments! In non-recourse states like California, Oregon, Idaho, Texas, Utah, Washington, etc. there is the added incentive of being able to walk out on the mortgage if you happen to hit the correction year and your equity goes negative. So why not gamble?

I think we need to break out "demand for shelter" from "demand for speculative investments" because the former is part of the fundamental stuff some people are calling a crisis and the later is what's driving the possible bubble.

3. COVID stimulus payments probably did increase demand for housing. But I don't think it comes close to explaining the whole problem. Most households received a few thousand dollars in assistance, a small fraction of the runup in housing prices.

But getting a few thousand dollars could make a big difference toward the 3%-6% down payments which are now common. For example, in 4Q2020 the median house price was $358,700. A 3% downpayment would be $10,761. A couple thousand dollars in stimulus checks or business loans could have accounted for a large percentage of that down payment. If you were looking for a $150k home in a LCOL area it would go even further, covering maybe half of a minimum down payment!

The result is the same as with the NINJA loans of 2004-2008: Lots of people who would not normally have the financial means to purchase a home - i.e. they were previously unable to save up a down payment - were suddenly converted into homeowners because they got a one-time cash injection. Luckily, the home ownership percentage is nowhere close to as high as it got prior to the GFC, but it's fair to say a few million people bought homes who wouldn't have otherwise.   

4. Interest rates. 100% For millennials and Gen Z, interest rates have been at historic lows for our entire adult lives. Many people think we'll return to those low rates, and we'll be able to refinance our previously unaffordable homes.

Add this sort of mental anchoring to the reasons to gamble on a home one cannot afford. Even if you lose the bet and hold through a housing correction, that's probably the kind of year in which interest rates will fall and you'll be able to refinance.

Focusing on supply issues is attractive because it makes the problem tractable. Upzoning improves supply and lowers prices.
If we attribute it to monetary policy, it's a dead-end. The Fed's mandate is inflation, not housing prices. And hoping for Congress to tackle inflation via deficit reduction seems like a pipe dream at this point.

The rise of remote/hybrid work should have a flattening effect, and it probably explains some of what you're seeing your location. If I'm from the Rust Belt, but moved to Silicon Valley for my career, I might be very happy to relocate back home for some sweet housing arbitrage. If I live and work in Big City, but now only have to go in two days a week, maybe I'm willing to commute from an exurb 75 minutes away.

I get the impression the no-doc loans of the mid-oughts were primarily used as a way to get sales done in HCOL places where people's wages were insufficient to qualify them for traditional loans at the prevailing high prices. The bubble didn't extend into LCOL areas because owning 3BR SFHs was less expensive than renting a 2BR apartment, and because affordability was so much better that financial gymnastics were unnecessary to qualify almost anyone with any kind of job for some kind of house. I.e. if you could afford an apartment, you could afford a house, so if you weren't already homeless, you could qualify with standard loan products. I put down 20% on a 1600sf SFH at the age of 23 while making $10 an hour!

Now is a little bit different because low interest rates have an effect on LCOL places unlike no-doc loans. Low rates encouraged people to trade up, speculate, and to buy lots of rental properties just like in HCOL areas. So maybe the bubble will pop in LCOL areas too, or maybe we have plenty of space in our budgets to start paying >30% of our income for housing like our MCOL/HCOL friends been doing for years!

I do agree that the WFH technologies made widely available since 2020 will eventually flatten prices across geography, even with the bullshit "geographic adjustments" some companies talk about (soon to be arbitraged away, because outputs are outputs). It will only affect maybe 20-30% of jobs at today's technology, but that's more than enough to make LCOL areas more competitive for millions of people who'd like to own a home someday or increase their savings rate.

Overall this is a good thing: Less commuting / pollution, less NIMBY influence on prices, fewer people on the lifelong hamster wheel of being house-poor, revitalized small towns with professional populations, and a higher variety of job opportunities in any locale. However we should be aware that step 2 of the process involves a near-infinite supply of foreign workers, and the ability to work from anywhere might level whatever premium people are placing on specific locations today. Silicon Valley really could be the next Rust Belt, and if that seems implausible imagine how people thought about the Rust Belt in the 1960s.

[ChpBstrd]

[In 2004-2007, housing prices in my poor and backward place grew at their typical 2-3% pace, basically keeping track with inflation and in alignment with construction costs. The housing bubble was a phenomenon of coastal places and, oddly, Las Vegas, Nevada. We all thought it was a little crazy people were getting into bidding wars over $500k tract homes in the desert, when wages in such places were only 5-15% higher than poor and backward places where those same houses could be had for $160k.

I'm not sure how how well you recall the 2000's housing bubble. It was not a coastal phenomenon, it was a true growth bubble centered on places with high historic and recent population growth rates. Those places did happen to be sun belt locations, and Arizona, Nevada, Florida, and California were the worst hit. Las Vegas of course was the poster child for this. ...

Yes, Vegas is still growing. My understanding is a lot of priced-out Californians move there. But it's also a rebuttal of supply-and-residential demand theory.

The population of Las Vegas grew steadily through the housing bubble, through the housing crisis, and through this latest round of fast-rising home prices. If this were a supply-and-demand issue, we would expect a different pattern: steady price growth as residential demand increased, offset by the addition of new supply in the sprawling desert. Instead we see a yoyo like bubble pattern, and hear amusing anecdotes about the nouveau riche in different eras whose wealth was, in hindsight, due to an economic anomaly.

Meanwhile, California is also a rebuttal. The state lost over 400k people since 2019, probably hasn't lost 400k houses on net, and yet has seen skyrocketing prices since then. Again, the expected result from a strictly supply/demand perspective would be for a housing correction, or at least real stagnation. The exact opposite happened, so something else is at play.

[Log]

I have to confess I don't even know what you're saying or what point you're trying to make anymore. You seem to simultaneously be saying there is and is not a bubble, and there is and is not a shortage, and if there is a bubble/shortage it is and is not a problem.

Again, I think you need to be more deliberate in your thinking about sorting out the asset price of housing and the cost to the consumer of housing.

There are far fewer hoops to jump through with the simpler bubble explanation, and plenty of anecdotal information - even in this forum - about people buying vacation homes in hopes of appreciation, rental homes in the hopes their kids will be able to inherit a place to live, duplexes and SFHs as investments/jobs, flipping, etc. As these tactics continue to work, more people pile into them.

Here you seem to concede there is a bubble in the asset price of housing - people are continuing to buy into housing because of an expectation that in real estate, "line go up." (This is something of a self-fulfilling prophecy, because people who own real estate want the line to go up, so they vote for politicians who will pass policies that will restrict housing supply - the "homevoter hypothesis.")

It may be true in a moral sense that housing policy should not unduly burden the poor, and it may be true that *we ought to* build smaller and more affordable housing, but we cannot explain facts about the actual supply, demand, and prices with moral statements. Prices aren't high because they ought not to be and they won't necessarily go up or down because they should. The only should statements we can make might be in the form of advice, such as "you should refuse to buy or rent a home for >30% of income if you want to be financially stable".

Here, you admit that cost to the consumer is high enough to be causing social ills, and then say...? I don't really get it. People complaining about the housing crisis aren't saying the moral arc of the universe should bring housing prices down. And we're not saying poor people deserve to live in mansions. We're saying that prices are high because a supply shortage gives sellers (landlords) more leeway to raise prices and still find tenants, and so we should change policies to build more housing, because it will improve the economy, improve social trust, and otherwise help society function better.

Making moralizing statements towards poor people about not overspending on housing ceases to be particularly relevant to the problem when there are apartments packed full of immigrants who sleep in the same bed in shifts, people living in tents by the freeway, families forced apart, and promising young people whose potential is being squandered because they can't afford to access education or work opportunities in expensive housing markets.

What should we expect the White House to say?

"You Boomer suburbanites created this problem with your support for NIMBY policies, refusal to tackle social problems instead of sprawling away from them, opposition to mass transit, and racist/classist zoning and school funding policies. We want to change the rules so subsidized housing skyscrapers can go up in your neighborhood!"

That message would obviously go over like a lead balloon. So it's far easier for our leaders to say we've suddenly got a shortage because we under-built housing. Whose fault is that? Nobody's! Who has to change or give up something? Nobody! Whose house could potentially lose value because of political actions? Nobody's!

There's literally nobody who will vote or donate against a politician because they gave a sensible sounding supply and demand explanation. So guess what we'll get from both sides, alongside the usual culture war red meat?

Here you seem to be admitting that cost is caused by a shortage, but then just shrug your shoulders and say it's too hard of a political problem to solve, so we might as well just let people suffer?

Literally no serious politician who is working on this problem is saying that the problem is "nobody's" fault. If you want to look at what real political action around this issue looks like, look at the recent successes of housing policy change in California. Look up CAYIMBY, look up Scott Weiner. There are activists and politicians who are succeeding on (a more carefully worded version of) the very message you say would go over like a lead balloon. The WhiteHouse statement I already linked does explicitly call out racist zoning, and that's literally nothing new - Obama did too. We've known this stuff for a long time.

They are explicitly calling out NIMBYism and calling out the racist origins of zoning, and getting laws passed that prevent municipalities from blocking many forms of desperately needed housing. Again, California is not unique, but it is first. Oregon, Massachusetts, and Montana have all passed state-wide laws too, allowing ADUs and multiplexes in many areas that were previously zoned single-family only. The problem is that we held sacred the idea that larger forms of government could not step on municipalities right to make their own zoning code. But there's nothing sacred about a zoning code. It's just politics, and when we realize that up-zoning and housing density is a sort of prisoner's dilemma for suburban municipalities, then the state stepping in is the obvious solution.

It's worth noting, lots of individual cities are also making progress, either in the absence of state-wide policy, or going above and beyond statewide policy. Minneapolis got there first, though they've been caught up in frivolous environmental lawsuits.

I think we need to break out "demand for shelter" from "demand for speculative investments" because the former is part of the fundamental stuff some people are calling a crisis and the later is what's driving the possible bubble.

Here! You literally say it! So why all the pushback?

Meanwhile, California is also a rebuttal. The state lost over 400k people since 2019, probably hasn't lost 400k houses on net, and yet has seen skyrocketing prices since then. Again, the expected result from a strictly supply/demand perspective would be for a housing correction, or at least real stagnation. The exact opposite happened, so something else is at play.

I can't speak with as much knowledge on California as a whole, but in San Francisco population has declined since 2020 (it's still higher than the population was in 2010), and rents have flatlined in nominal dollars, meaning rents are technically falling. Rents will reflect supply and demand faster and more accurately than purchase prices, because of the asset speculation component we've already established.

Remember when discussing the California, the component of affluent people consuming more house. There is a lot of latent demand here. Middle class folks might move out and get replaced by new high-income professionals from out of state. Some yuppies might have gotten remote work and left, but maybe their former roommates decided their careers are going well and they can afford to leave that room empty and use it as a workout room or a guest room now. A college student who lived at home for college finishes their degree and gets a job and a studio apartment. Net neutral on population, but more housing being consumed. This stuff is happening all the time.

California is also a MASSIVE state, so there's a lot of internal migration. In 2020, people left SF and LA in droves, and the media made up this narrative that people were "fleeing California." But once people dug into the data, it became apparent that most people leaving the major cities in California were staying in state. The statewide population decline since 2020 has not been that significant as a percentage of CA's population. But in sheer numbers, that still seems like a fuckton of new Californians if you're living in some currently trendy boomtown like Austin or Boise.

[roomtempmayo]

All the while, affluent people who can afford it are increasingly living in smaller households, meaning a smaller proportion of the population taking up a larger piece of the pie in these supply-constrained markets. ... that's the change toward increasing demand of housing-per-person, as affluent young professionals are increasingly living alone (delaying or foregoing marriage), fertility rates are dropping, and empty-nesters are living longer, leading to more smaller households.

That's been the story for the past fifteen years - people have formed independent households because they've had the means to do it. 

But that ratchet can turn both ways.  During the last housing bust, mass foreclosures didn't lead to a commensurate rise in homelessness.  Instead, people moved in with family or roommates.  Two households became one. 

The number of households is largely a product of economic conditions.  Many people may think it's good for kids to move out and get their own place at 18, 19, or 20, but there's nothing universal about that trajectory, either in other societies or in human history.

One way to turn the issue of housing around is to note that even in the most expensive cities, there's a massive number of empty bedrooms every night.  The problem might be as much one of expectations as it is construction.

[ChpBstrd]

I have to confess I don't even know what you're saying or what point you're trying to make anymore. You seem to simultaneously be saying there is and is not a bubble, and there is and is not a shortage, and if there is a bubble/shortage it is and is not a problem.
...

I think we need to break out "demand for shelter" from "demand for speculative investments" because the former is part of the fundamental stuff some people are calling a crisis and the later is what's driving the possible bubble.

Here! You literally say it! So why all the pushback?

Sorry for not being clear enough @Log but this is the essence of what I'm saying.

Supply is well understood - it's the presence of physical houses on the market.

Demand has two components:
     1) Fundamental Demand, from people who need to purchase or rent shelter for themselves.
     2) Speculative Demand, from people who want to sell at a higher price to someone in the future, pocketing the difference.

A "Bubble" is an excess of Speculative Demand in the absence of an increase in Fundamental Demand or a decrease in Supply.

The tricky thing is determining whether an increase in Demand in general is due to Fundamental Demand or Speculative Demand. For some purchases, it is unclear what the motive was, and not all speculative purchases are by landlords. To illustrate: a single person might be buying a 4BR suburban house because they need a nice status-symbol place to live (Fundamental Demand) while at the same time expecting it to appreciate rapidly and increase their wealth even though it's more expensive than the 1BR apartment that would meet the need (Speculative Demand). Similarly, I would include FOMO purchases and purchases made out of fear of having to pay more later in Speculative Demand. So we can't just look at owner-occupied housing and say that's all Fundamental Demand.

As @roomtempmayo correctly notes, new households are formed based on when people have the money and households consolidate when they don't. I'll add that Speculative Demand could be creating households too (think of the FOMO experienced by those living in the parents' house, or renting), and pushing up the home ownership rate.

For the person in the example above, renting the 1BR apartment would have made more sense IF they didn't have beliefs and expectations about future homebuyers being willing to pay considerably more than 4BR suburban houses are selling for today. If they expected home prices to pace inflation, there'd be much less incentive to go out on a financial limb with a mortgage, or to put one's money into real estate instead of paper investments.

As noted, when enough people believe house prices will go up faster than inflation, Speculative Demand can create a self-fulfilling prophecy. As prices go up, more people become believers and develop Speculative Demand themselves. Thus people who wouldn't otherwise be homeowners become homeowners, people who wouldn't otherwise be landlords become landlords, people who wouldn't otherwise buy vacation properties buy vacation properties, and people who wouldn't otherwise move into a hot real estate market do so to get a piece of the gains.

Speculative Demand is juiced when buyers perceive they face favorable odds, as I noted earlier. The odds say you'll probably double or triple the value of your down payment in most years. In the unlikely event house prices crash, then you just quit paying the mortgage, squeeze out another year of rent or free housing until foreclosure happens. The most you can lose is 100% of your down payment in a non-recourse state, or realistically most recourse states. Ultra-low 6% or 3% down payment mortgages mean it is possible to obtain 17X or 33X leverage on something which usually goes up, and has recently been going way up! That's a rational gamble to take.

This is the anatomy of a real estate bubble and the source of Speculative Demand. Bubbles don't crash when beliefs change; they crash when the market for whatever it is inevitably runs out of new buyers, and then beliefs change in response to falling prices.

[Log]

I'll be honest, I still can't tell whether you're agreeing or denying that there is a supply shortage. Yes, I understand that housing is a complicated market with lots of different demand inputs (and a lot of cultural baggage about home ownership pressuring people to make irrational decisions), but that doesn't help me understand what you mean when you say "The housing crisis is a hyped-up media falsehood," which is where I'm strongly disagreeing with you.

Defining terms here, what the people I read are referring to when they say "housing crisis," in the simplest terms I can come up with, is the following: housing costs rising faster than inflation for decades on end was always unsustainable, and is proving bad for society in innumerable ways. Building more housing would be the most effective way to bring housing costs down in order to help address those social ills*.

Are you saying that is wrong?

Spoiler: show

I kept this out of the main body of the post because I wanted to be as simple as possible for clarity's sake.

But since I get carried away, here's just a few examples of these social ills and how housing helps. Some of these are about building more housing in general, and some of it is about building more housing specifically in dense, walkable cities, which is a general undertone to much of the housing discourse.
1) Upward economic mobility would be more attainable, and inequality would go down, if regions with booming job markets built more housing so that it were more affordable to move there. It would would also boost the growth rate of the entire national economy, because important industries in high-cost markets would have an easier time recruiting more productive workers, and more of those professional's incomes would recirculate locally through the service economy rather than getting sucked up and out by landlords.

2) More people getting evicted out of their homes in markets with increasing demand ("displaced" would be the typical term in the housing discourse) is not only terrible in and of itself, it leads directly to homelessness and urban disorder, and disrupts the education and development of children whose families get evicted. While housing construction can temporarily cause displacement if an older building has to be demolished for new development, neighborhoods that build more housing displace fewer low income residents in the long run.

3) Cheaper housing is an important piece of ending the "vibecession." The general nihilistic/pessimistic social outlook and distrust of institutions that so many Americans have these days is corrosive to society. Households being burdened by escalating rents is a big part of why even though economic fundamentals have been good for the last several months, Americans still feel shitty about the economy.

3.5) Even if a piece of this is entitled middle class people whining that they can't afford as much house as they want, or under-employed college grads complaining about living with roommates or with their family, that still brings down the vibe. That aspirational class has a lot of journalists (and influencers and researchers and congressional aides), and if they're dissatisfied with how things are going, the negativity of their punditry exacerbates extremism, distrust, etc.. These kinds of middle class complaints about the housing market are all over Reddit, TikTok, Substack—whatever one's media niche may be, if everyone is saying that something about society is breaking down, that is in itself a problem, regardless of whether you agree with them.
 
4) More housing in walkable cities with good public transit would help reduce greenhouse gas emissions, and generally help other environmental/preservationist causes such as preserving wildlife habitats from greenfield development. Failing to build housing in dense cities just pushes development outward in ways that are environmentally disastrous.

4.5) These exurbs where cheap housing is getting built are often very isolating, alienating places, that are also bad for social cohesion and trust. Between the known health risks of loneliness, and of a sedentary, car-oriented lifestyle, trying to solve the housing issue with sprawl instead of urban infill is also a public health failure.

[wageslave23]

I have to confess I don't even know what you're saying or what point you're trying to make anymore. You seem to simultaneously be saying there is and is not a bubble, and there is and is not a shortage, and if there is a bubble/shortage it is and is not a problem.
...

I think we need to break out "demand for shelter" from "demand for speculative investments" because the former is part of the fundamental stuff some people are calling a crisis and the later is what's driving the possible bubble.

Here! You literally say it! So why all the pushback?

Sorry for not being clear enough @Log but this is the essence of what I'm saying.

Supply is well understood - it's the presence of physical houses on the market.

Demand has two components:
     1) Fundamental Demand, from people who need to purchase or rent shelter for themselves.
     2) Speculative Demand, from people who want to sell at a higher price to someone in the future, pocketing the difference.

A "Bubble" is an excess of Speculative Demand in the absence of an increase in Fundamental Demand or a decrease in Supply.

The tricky thing is determining whether an increase in Demand in general is due to Fundamental Demand or Speculative Demand. For some purchases, it is unclear what the motive was, and not all speculative purchases are by landlords. To illustrate: a single person might be buying a 4BR suburban house because they need a nice status-symbol place to live (Fundamental Demand) while at the same time expecting it to appreciate rapidly and increase their wealth even though it's more expensive than the 1BR apartment that would meet the need (Speculative Demand). Similarly, I would include FOMO purchases and purchases made out of fear of having to pay more later in Speculative Demand. So we can't just look at owner-occupied housing and say that's all Fundamental Demand.

As @roomtempmayo correctly notes, new households are formed based on when people have the money and households consolidate when they don't. I'll add that Speculative Demand could be creating households too (think of the FOMO experienced by those living in the parents' house, or renting), and pushing up the home ownership rate.

For the person in the example above, renting the 1BR apartment would have made more sense IF they didn't have beliefs and expectations about future homebuyers being willing to pay considerably more than 4BR suburban houses are selling for today. If they expected home prices to pace inflation, there'd be much less incentive to go out on a financial limb with a mortgage, or to put one's money into real estate instead of paper investments.

As noted, when enough people believe house prices will go up faster than inflation, Speculative Demand can create a self-fulfilling prophecy. As prices go up, more people become believers and develop Speculative Demand themselves. Thus people who wouldn't otherwise be homeowners become homeowners, people who wouldn't otherwise be landlords become landlords, people who wouldn't otherwise buy vacation properties buy vacation properties, and people who wouldn't otherwise move into a hot real estate market do so to get a piece of the gains.

Speculative Demand is juiced when buyers perceive they face favorable odds, as I noted earlier. The odds say you'll probably double or triple the value of your down payment in most years. In the unlikely event house prices crash, then you just quit paying the mortgage, squeeze out another year of rent or free housing until foreclosure happens. The most you can lose is 100% of your down payment in a non-recourse state, or realistically most recourse states. Ultra-low 6% or 3% down payment mortgages mean it is possible to obtain 17X or 33X leverage on something which usually goes up, and has recently been going way up! That's a rational gamble to take.

This is the anatomy of a real estate bubble and the source of Speculative Demand. Bubbles don't crash when beliefs change; they crash when the market for whatever it is inevitably runs out of new buyers, and then beliefs change in response to falling prices.

I think your premise that there is an abnormal amount of speculation going on or that the speculation has abnormal effect on the housing market.  Most truly speculative buyers are landlords and there is a shortage in rental homes available as well.  So housing like energy is never destroyed (unless a home is literally demolished) just changed from owner occupied to tenant occupied but you still have one family living in each unit so it doesn't effect demand/supply.  I think with prices and interest rates where they are, everyone is trying to live as efficiently with their living arrangements as possible.  And everyone, literally every media source, person on the street thinks we are in a housing bubble and that these prices can't last, so I don't think anyone who doesn't have to is buying right now.  I think that bubble is created by two things - lack of building because of high interest rates and high input costs, and the flood of money that has been pushed into the economy over the last 3 years.  Its created the perfect storm to make housing out of reach for many families.

[reeshau]

@wageslave23 , you're right that not every non-occupier buyer is looking to flip a house.  The aftermath of the GFC also created large landlords of single family homes.  Invitation Homes, started in 2012, now has 80,000 houses.  Tricon Residential has 36,000.

They have and do sell homes when the sale value outstrips the rent they could get, but as you also say, rents are high, too.  And in the event that circumstances might cause a crash in home prices, these companies see an increase in demand, as those former owners need to live somewhere.  I would never believe this activity could fully offset a down housing market, but we also have never gone through one with the large companies active--they all began in the aftermath of the last one.

Ther is also the phenomenon of build-to-rent housing, where landlords can fully specify rental house characteristics, and also add community amenities similar to denser apartment buildings.

[ChpBstrd]

@Log and @wageslave23 the distinction I'm making between a "Bubble" and a "Housing Crisis" is the difference between an increase in prices driven by speculative motives and a supply/demand mismatch.

Speculative Bubble Looks Like: Speculative demand, a component of Total Demand, increases when enough people believe future buyers will pay more for houses than they can pay right now. Speculative demand drives up prices beyond inflation and in the absence of an upward change in Fundamental Demand or a downward change in Supply (e.g. population stays about the same and construction is merely sufficient to replace old homes). Lots of media attention is on the six-figure gains being experienced by middle class homeowners and landlords. Frequent comments about FOMO and worry about missing the opportunity before prices go up further. Lenders bending over backwards to qualify edge-case buyers (e.g. 3-6% down payments, weak tracking for the source of down payments). General public obsession about saving up down payments, remodeling, getting approved for loans, getting into the fanciest neighborhoods before it's too late, etc. as opposed to other investment opportunities.

Fundamental Supply/Demand Mismatch Looks Like: Something suddenly disturbs the market's equilibrium so there are not enough sellers, too many sellers, not enough buyers, or too many buyers. Examples: a natural disaster reduces the number of sellers or a baby boom increases the number of buyers or a war/depression forces household consolidation. The pace of new construction either can't keep up with the speed of the change or exceeds the speed of demand creation. The change has to be sudden, because eventually the demand imbalance incentivizes a change in the pace of new construction, in or out-migration from places with surpluses/shortages, household consolidation/formation, and decisions to invest in real estate or elsewhere. On a local scale, S/D Mismatches can be explained by the opening or closing of new large employers in small cities, demographic changes such as the migration of elderly New Englanders to Florida, and the trendiness of various activities such as beach sitting, skiing, urban amenities and living downtown, micro-farming, etc. but when the national statistics are moving we cannot rely on local anecdotes or one-place-to-another trends.

If anything defies the laws of supply and demand, it's this talk about under-building houses over the course of decades. Millions of people across generations would have to choose to miss out on enormous profits for that to happen. Legal restrictions can suppress supply to an extent, but economic theory suggests they'd only decrease demand for land with legal restrictions and increase the demand for land without them. The exact opposite has been happening, because the legal restrictions became a narrative to support speculative attitudes.

I'm sure in places like San Francisco, it may seem like there are not enough houses because of local factors. But this cannot explain national statistics because anyone with a small down payment for a place in SF could probably pay cash for a house in most other places - places with plenty of jobs and opportunities. So it's really that buyers are trying to get into a "hot" market where they expect to leverage future growth. I.e. if they are going to buy one house and have one job in either place, why put down 6% on a $200k home in Kansas City when they could put down 6% on a $2M home in SF? If you expect your home equity to double in either place over the next year (i.e. a 6% house price increase would do it), wouldn't you rather double $120k instead of $12K? Seen through this speculative light, choosing the KC house is leaving money on the table. That seems true even if living in KC makes more sense from a wage/COL perspective, which it does.

When lots of people are fighting to buy assets that don't make economic sense, we can say the demand is Speculative, not Fundamental.

The media falsehood is that there's suddenly a Supply/Fundamental Demand Mismatch, when we have close to the same national population and number of houses as existed in early 2020. How did a S/FD mismatch occur just in the past 3 years, causing prices to go up 31% nationwide, if the fundamentals didn't change significantly in those years compared to years in which housing prices rose in pace with inflation? I don't believe for a second that sub-4% mortgages and massive leverage opportunities in no-recourse states had nothing to do with it.

----------------------

Finally, I'll agree that Speculative Bubbles are bad for human thriving - arguably worse than Supply / Fundamental Demand imbalances. When the dot-com bubble imploded, a recession put many people out of work, ruined many retirement plans, and caused significant stress and misery spread across tens of millions of people. When the Real Estate Bubble 1.0 burst, it took down important financial institutions, wiped out more retirees, increased the national debt, and put more millions of people out of work. This current nationwide possible-Bubble has been particularly brutal because it priced low-earners out of houses and apartments in most areas, not just the most expensive metros. If it causes a recession, the lowest wage earners are likely to be the first ones to lose their jobs. All this pain, and for what? 

Speculative Demand has also directed the designs of our homes and cities. Huge homes are the norm and people buy more than they need because of the cube-square rule and because people want to leverage as many square feet/meters as possible. Plus, they anticipate the "greater fool" who pays them double someday in the future will have to be a rich person who wants a rich person's house in a neighborhood of above-average size houses (and everyone in the game better stay above average!). Finally, why invest in walkable infrastructure if you're going to flip the house to semi-elderly workaholics in 2-3 years? It's seen like a waste of money to build a sidewalk in front of an investment, when the next speculator will price your house as a commodity, by the square foot. And if prices crash and you walk away from the loan, having invested in that shared community infrastructure would only increase the loss.

We might get off the speculative roller coaster and bubble economy by:
(a) getting government out of the business of guaranteeing mortgages - privatize Fannie and Freddie Mac,
(b) embracing remote work, thereby defeating the narrative that NIMBY rules = higher property values,
(c) requiring higher mortgage standards, such as higher minimum down payments or more verification primary mortgages aren't being used as rentals,
(d) developing technologies like 3D house printing that could reduce construction costs and increase the speed at which builders could respond to price incentives,
(e) increasing the timeframe for capital-gains-free home flipping, and raising capital gains taxes
(f) keeping inflation low for another decade,
(g) removing regulatory disincentives against housing density, new construction, and remods,
(h) demanding more livable neighborhoods, living and investing in them long-term, and refusing to buy bean field tract homes on half-acre lots as "investments",
(i) higher taxes on short-term rentals,
(j) actually trying to tackle urban blight problems that lead to sprawl, like mass addiction, untreated mental illness, and people who are unemployable because they plea bargained

A lot of these actions would prevent people from buying homes, some would put people out of business, and others would deflate property values, so I'm not optimistic about the prospects. But the list serves as a reminder of the incentive structure propping up Speculative Demand, and the odds of it being permanently overturned. If anything, we're more likely to get additional housing subsidies ostensibly aimed at poor people but actually having the effect of reinforcing the speculation narrative.

[roomtempmayo]

So housing like energy is never destroyed (unless a home is literally demolished) just changed from owner occupied to tenant occupied but you still have one family living in each unit so it doesn't effect demand/supply. 

I don't think this is quite right.

Take a family of four, two parents and two kids, where the kids grow up in a three bedroom house.

The kids move out on their own, and they each rent a one bedroom apartment.  Meanwhile, the parents stay put.

Six bedrooms are now serving four people.  1/3 of the housing stock just became dormant in this situation, which is a pretty common one.

That's not exactly the same as a destruction of housing stock since it could come back online later, but in the short term it's the same as destroying two one bedroom apartments if the kids were to live at home.

One of the troubles with an aging population that's also prosperous is that this sort of dormant housing stock is becoming more and more common.  Mom and Dad don't downsize once the kids are gone, so the amount of housing the family consumes only increases and does so independent of the number of people.

That's before even getting into the AirBnB issue.  A tourist town near us recently cracked down on short term rentals after commissioning a study that showed over 20% of the SFHs in town were both short term rentals and owned by people from outside their city limits.

That's not to say that in a handful of the superstar cities (basically LA, SF, NYC, and SEA) don't have some fundamental numbers problems driven by NIMBYism.  They do.  But what I think is far more common is what I see looking up and down my block, which is big four and five bedroom houses with one, two, or maybe occasionally three people living in them.  We just don't use our existing housing stock very efficiently at all.

[Log]

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I think your premise that there is an abnormal amount of speculation going on or that the speculation has abnormal effect on the housing market.  Most truly speculative buyers are landlords and there is a shortage in rental homes available as well.  So housing like energy is never destroyed (unless a home is literally demolished) just changed from owner occupied to tenant occupied but you still have one family living in each unit so it doesn't effect demand/supply.  I think with prices and interest rates where they are, everyone is trying to live as efficiently with their living arrangements as possible.  And everyone, literally every media source, person on the street thinks we are in a housing bubble and that these prices can't last, so I don't think anyone who doesn't have to is buying right now.  I think that bubble is created by two things - lack of building because of high interest rates and high input costs, and the flood of money that has been pushed into the economy over the last 3 years.  Its created the perfect storm to make housing out of reach for many families.

@ChpBstrd, from my perspective, this is your fundamental misunderstanding. You're still too fixated on the sale price piece of the housing market, and not the holistic perspective that looks at cost-to-own and cost-to-rent as two pieces of one larger housing market that operate in equilibrium with each other.

Higher interest rates should drive sale prices of homes down, because the cost of a mortgage is now higher and is out of equilibrium with rents. Of course this equilibrium is always a little irrational because many people have a cultural preference for ownership, but they'll remain approximately related, or owners and prospective buyers will change their behavior.

Right now in 2023, regardless of whats going on with sale prices and speculation, the rent is too damn high. Real estate investors are not holding some massive supply of vacant units - they are renting those units out, and yet the supply remains low enough that rents continue outpacing inflation. At the fundamentals of all of this, you have to see that housing prices outpacing inflation decade after decade is a fundamentally unsustainable dynamic, and yet that is exactly the situation we find ourselves in.

You can write ever-longer essays trying to explain "speculative demand" to us when we already get it, but the fact remains those units aren't evaporating out of the supply, they're just moving between the owner-occupied portion of supply and the rental portion of supply.

The media falsehood is that there's suddenly a Supply/Fundamental Demand Mismatch, when we have close to the same national population and number of houses as existed in early 2020.

I think you're equating two entirely different different media narratives. There are finance/real estate wonks saying the sale market is out of equilibrium with the rental market, and therefore sale prices have to fall. Then there's the housing economics/public policy wonks saying that there is a shortage, and we should pursue policies to address that shortage in order to bring prices down, across both the buy/sell market AND the rental market, for the good of society.

Yes, sale prices have gotten frothy/bubbly since 2020 relative to rents. But when that froth subsides, the equilibrium prices will still be high enough to continue causing social problems, and that high equilibrium price comes from a supply shortage that long predates the recent froth.

---

What @roomtempmayo describes above (posted as I was typing) can simply be folded into increased demand (people living in more house per person), therefore exacerbating supply/demand mismatch. Public policy can't reasonably force empty-nesters to downsize if they don't want to, so that's still a form of supply shortage relative to demand. Even if you can count excess bedrooms on paper, if they're not available they don't count.

AirBnB is an oft-evoked boogey-man that doesn't come close to explaining how large our supply shortfall has become. The number of units a city gets back onto the long term market from banning AirBnB is usually smaller than the amount that municipality is already building each year, so it might give the local housing market a short-term emergency shot in the arm, but failure to build remains the fundamental problem that needs to be solved.

Lots of housing prices in high-demand markets come down to extremely high underlying land values, and we have the technology that builds many more house on much less land - it's called skyscrapers. Where this technology is deployed (New York City, Chicago, Tokyo, etc.) it is extremely effective.

[roomtempmayo]

What @roomtempmayo describes above (posted as I was typing) can simply be folded into increased demand (people living in more house per person), therefore exacerbating supply/demand mismatch. Public policy can't reasonably force empty-nesters to downsize if they don't want to, so that's still a form of supply shortage relative to demand. Even if you can count excess bedrooms on paper, if they're not available they don't count.

But the problem here is that housing demand doesn't have a functional limit in many locations.

If the role of housing policy is to accommodate every person who wants their own door in the location they prefer at a price they can afford, then Santa Cruz, Hilton Head, Palm Beach, etcetera could grow 10x overnight and still fall short.

The number of households and their locations are largely dictated by what people can afford, and many, maybe even most people, are priced out of their ideal.

It seems like the question isn't whether everyone can live where they want in an independent household, but rather how much we're willing to tolerate deviation from people's ideal situations.

[Log]

What @roomtempmayo describes above (posted as I was typing) can simply be folded into increased demand (people living in more house per person), therefore exacerbating supply/demand mismatch. Public policy can't reasonably force empty-nesters to downsize if they don't want to, so that's still a form of supply shortage relative to demand. Even if you can count excess bedrooms on paper, if they're not available they don't count.

But the problem here is that housing demand doesn't have a functional limit.

If the role of housing policy is to accommodate every person who wants their own door in the location they prefer, then Santa Cruz, Hilton Head, Palm Beach, etcetera could grow 10x overnight and still fall short.

The number of households and their locations is largely dictated by what people can afford, and many, maybe even most people, are priced out of their ideal.

It seems like the question isn't whether everyone can live where they want in an independent household, but rather how much we're willing to tolerate deviation from people's ideal situations.

Absolutely - and when the deviation from ideal includes rates of homelessness and rates of young adults living with their parents unprecedented since the Great Depression, that’s a pretty big indicator we’ve gone too far.

Yes, places with nice weather, cultural amenities, etc., will always be more expensive than places with shitty weather and no culture. But that’s no excuse to do nothing. There are issues of housing costs rising faster than wages even in less desirable places. And if we narrowed the gap somewhat in those cost differences, that would enable more people to live better lives.

I’m just not okay with accepting a fatalistic approach towards these problems. No, we’re not gonna create a utopia where everyone gets exactly what they wants and is happy forever. But we can sure as shit do better than this.

[roomtempmayo]

and rates of young adults living with their parents unprecedented since the Great Depression, that’s a pretty big indicator we’ve gone too far.

I'm not really sure young adults living with their parents is a bad thing from a housing perspective since it's a much more efficient use of housing than having them move out on their own.

I could see the US going much more toward a European household model where kids stay at home through university and professional training, and often don't get their own place until they have a good financial start in their late 20s or 30s.

A major component of our student loan problem in the US comes from racking up room and board expenses, often to rent a crappy apartment off campus not all that far from mom and dad's house.  It seems better to just have them living at home.

[ChpBstrd]

I think you're equating two entirely different different media narratives. There are finance/real estate wonks saying the sale market is out of equilibrium with the rental market, and therefore sale prices have to fall. Then there's the housing economics/public policy wonks saying that there is a shortage, and we should pursue policies to address that shortage in order to bring prices down, across both the buy/sell market AND the rental market, for the good of society.
 
Yes, sale prices have gotten frothy/bubbly since 2020 relative to rents. But when that froth subsides, the equilibrium prices will still be high enough to continue causing social problems, and that high equilibrium price comes from a supply shortage that long predates the recent froth.

But if the assumed supply shortage predates the last 3 years of froth, then why didn't the froth occur in earlier years? Was supply more sufficient in 2018 than in 2023? For example, in years when mortgage rates weren't 3.25% and people weren't receiving direct stimulus payments?

What @roomtempmayo describes above (posted as I was typing) can simply be folded into increased demand (people living in more house per person), therefore exacerbating supply/demand mismatch. Public policy can't reasonably force empty-nesters to downsize if they don't want to, so that's still a form of supply shortage relative to demand. Even if you can count excess bedrooms on paper, if they're not available they don't count.

In a real estate economy run strictly by Supply and Fundamental Demand, supply shortages and high prices would prevent household formation. Young adults would stay with their parents for longer and more people would have roommates instead of empty bedrooms. That is to say, higher prices would be expected to reduce over-consumption behavior and reduce household formation. This would be lower Fundamental Demand. In a Supply / Fundamental Demand world, the issue corrects itself as Fundamental Demand is somewhat elastic to price. People take the option of not forming new households, and living with others instead. That reduction in Fundamental Demand drops the price until equilibrium is reached. That's how it's supposed to work when there's not so much Speculative Demand.

As for the retirees with 2 empty bedrooms in their homes? I cannot remember a time when lots of retirees didn't live this way. My grandparents and all their friends lived this way two decades ago, and as noted earlier the US's population pyramid is relatively smooth. Again, we have to explain what changed with Fundamental Demand in the past 3 years? Did a bunch of retirees who were formerly living as roommates, Golden Girls style, suddenly start buying individual homes? I don't see this narrative explaining what happened between 2020 and 2023, but I'm open to any evidence. People have always been hoarding housing resources.

Right now in 2023, regardless of whats going on with sale prices and speculation, the rent is too damn high. Real estate investors are not holding some massive supply of vacant units - they are renting those units out, and yet the supply remains low enough that rents continue outpacing inflation.

Rent is simply the cost of owning plus a profit for the owner. If the homes landlords buy go up in price, landlords must charge more in rent to offset their costs or opportunity costs and also generate an acceptable return on their investment. The LL's buying today have to charge rents commensurate with today's prices.

Existing landlords always have the option of selling their overpriced homes and reinvesting in stocks, bonds, etc. When a landlord sells a property to another landlord, the buyer will usually raise rents to justify the price they paid. Of course, it's much easier for the existing landlord to just raise rents.

Thus, for either new buyers or existing landlords, higher home prices and higher interest rates cause landlords to raise rents.

One sign of a bubble is when landlords start accepting low or negative returns, because they believe their properties will appreciate so much it makes sense to just hold on for as long as possible. This is a good thing for renters, and it is why the rent/buy decision has for years skewed toward rent in some of the most speculative markets. Now that trend is expanding.

[seattlecyclone]

If anything defies the laws of supply and demand, it's this talk about under-building houses over the course of decades. Millions of people across generations would have to choose to miss out on enormous profits for that to happen.

Yes and no. Housing development isn't that profitable of an industry most of the time. It's a competitive enterprise. If you see that houses are selling for $1 million and you could hire a contractor to build one for $500k, other potential developers see that too. What ends up happening is that the prior landowners capture most of this difference, as the developers bid against each other for building sites and that difference between building cost and home price gets reflected in the value of the land. The developer still makes a profit but it's usually not enormous, and the potential to lose quite a bit of money always exists if the market changes during the project timeline.

The ones standing to profit the most are therefore the incumbent landowners who may have bought in at a much lower rate. However when those landowners are predominantly individual homeowners who live on that land, they're reluctant to sell because realizing a profit would require them to either move into a much smaller home or leave all their existing community ties behind to move into a cheaper city. So yes, you could indeed point to millions of people in California and other expensive places who have been choosing to miss out on enormous profits, and they're doing it for very understandable reasons. The price of homes in such places basically elevates to what a "make me leave" price would be for some fraction of those homeowners.

As you can imagine, the number of people who want to move to a town and have the cash to pay someone to leave is much less than the number of people who might like to live in a given area who cannot afford that. Ordinarily the way around this is to build more densely. If a dozen families pool their money to pay one person to leave and they build a small apartment building where that prior resident's house was, the cost to each family is much less than if it's a 1:1 replacement. That sort of growth has been and remains literally illegal in so many places. Using your language, these zoning regulations have been to the benefit of those market participants whose demand is more speculative in nature, and to the detriment of those whose demand is more fundamental.

I'm sure in places like San Francisco, it may seem like there are not enough houses because of local factors. But this cannot explain national statistics because anyone with a small down payment for a place in SF could probably pay cash for a house in most other places - places with plenty of jobs and opportunities. So it's really that buyers are trying to get into a "hot" market where they expect to leverage future growth. I.e. if they are going to buy one house and have one job in either place, why put down 6% on a $200k home in Kansas City when they could put down 6% on a $2M home in SF? If you expect your home equity to double in either place over the next year (i.e. a 6% house price increase would do it), wouldn't you rather double $120k instead of $12K? Seen through this speculative light, choosing the KC house is leaving money on the table. That seems true even if living in KC makes more sense from a wage/COL perspective, which it does.

The problem with this analysis is that it assumes the person would receive the same wage in either place, so absent the real estate speculation angle they would rationally choose to live in the cheaper location. That has historically not been true, at least not in the tech industry that employs the majority of people who can afford San Francisco real estate anymore. These folks have moved to the West Coast because it offered the best economic opportunity in spite of the high real estate costs. They largely don't move there out of some motivation for real estate speculation. Instead they move there because it's the center of their industry, where the best opportunities exist for long-term economic success. If anything, the high local real estate prices are a deterrent that creates a measurable drag on the national economy.

While no data source is perfect, the site Levels.fyi is pretty well-trusted among the tech worker community. Their current data shows the median software engineer in the San Francisco Bay Area gets $240k total compensation, while the number is $103k in Kansas City. That $137k difference can pay a decent mortgage in San Francisco all by itself.

This does anecdotally match my experience searching for jobs after college. I was offered 50% higher base salary to move to Seattle than stay in the Midwest where I grew up, and the Seattle job also came with stock-based compensation. San Francisco would have paid more still, but I felt Seattle was a much better value at the time. Now the difference has narrowed quite a bit.

[Radagast]

Lets get back to square one. The median house price in the US approximately doubled in ten years. Not "Elite Costal San Francisco Top 1% Housing." Median housing nationwide. Median wages and inflation did not nearly keep up. Are you saying that this is a falsehood perpetrated by the media? It seems you are wrong.

Ok the media hyped it up. That's how they get paid. Is the issue deserving of the hype? We can debate that.

I have skin in the game because I am in the process of selling one house, buying a different house, and actively renting out a third (as well as the one we are selling). If you want to test your opinion in real life I suggest you do the same, rather than sitting comfortably in an owned house spectating.

In addition to high prices, interest rates are also much much higher than ten years ago. The cumulative effect is that for non-cash buyers (most of them) a house costs around 2.5 times more than it did ten years ago. This affects everyone who wants to buy. Maybe in some places more than others, but we're talking median. The reasons why don't matter, just the fact that houses are 2.5x more expensive matters for anyone who wants to buy a house. We can debate whether it's a "crisis," I would not use that word for my personal situation. Not being able to buy a big freestanding house is probably "first world problems" and not a crisis, though I think the word "crisis" could be applied to the abstract situation viewed in isolation.

At the bottom end of the market it is probably a crisis, as people are forced into difficult situations where it is increasingly difficult to prosper and even into homelessness by rising rents. You only say that it is not because it isn't you who is affected. The reasons behind it don't matter, only the result.

[Radagast]

Other thoughts.

Housing supply has not apparently kept up with population growth. You posted a graph showing housing construction has been steady with similar numbers of units constructed per year for decades. However, the population is 50% higher now than 50 years ago, is it appropriate to build the same number of houses per year and say that is enough?

I perceive that ~10% of all houses built in the past ten years went to short term vacation rentals, which could certainly have an impact, though probably it will dissipate within 10 years if it's a primary cause.

I think that COVID didn't just give people free cash, it also caused a lot of people to want to buy bigger houses. They want room for the kids to play. They want a larger or dedicated space to work from home (probably won't dissipate quickly). They want space. The effects of this will also probably dissipate pretty quickly.

The housing market takes a long time to react to a stimulus. It reflects conditions 1-10 years ago. In the very best case, it takes a long time for someone to decide they want a house, save up the money, find the right house, and close. Typically at least half a year before you see the price impact of their desire, maybe much more. For bigger scale housing it's a lot longer. First demand has to grow until enough someones recognize it and can make a sufficiently large and likely profit. Then they need to find a property, and hire civil engineers and architects. They take their plans to the City a year later. For anything big a city or others will need to install water, sewer, road, electrical, cable, gas, etc sufficient for the planned capacity. This is a 2-ish year process at best. Could be 5 years or even more if for example new water sources or treatment plants are needed and nobody planned ahead. It takes a long time for the plans to get permitted either way with city planners, building code officials, fire marshals, the public, et al weighing in with multiple rounds of comments. Finally everything is approved and construction starts. A year after that, people can start moving in! In summary, what you are seeing now does not represent the current situation, it represents the past 1-10 years. Unless there is a crisis and all construction stops. It's easy and costless to halt anything. Also I note that many parts of the process while maybe not actually halting lost a full year of expected progress between 2020 and 2022.

Did you just discover that free markets inherently have boom-bust cycles, rather than their prices moving rationally in a smooth line? It kind of seems like you did.

[MustacheAndaHalf]

Lots of financial media authors are writing dramatic headlines about a collapse in the housing market or a shortage of houses - which would seem to be contradictory.

That article's author doesn't mention a real estate background in their bio:
"Expertise: Stocks, Options, Precious metals, Bitcoin, Altcoins"
https://investorplace.com/author/davidmoadel/

Their article quotes another article, which then quotes source data.  I tracked down the source data, which puts things in context:

"Despite the rise, the delinquency rate is still 71BPS below the level of pre-pandemic September 2019"
"At the national level, serious delinquencies (90+ days past due) rose by 7K to 455K, but remain 6.7% below September 2019 levels"
"While overall delinquencies have risen, the number of loans in active foreclosure fell to 214K in September, its lowest point since March 2022 and some 25% below 2019 pre-pandemic levels"
https://seekingalpha.com/pr/19506038-ice-first-look-monthly-mortgage-performance-delinquencies-rose-in-september-while-foreclosure?hasComeFromMpArticle=false

Does "delinquency ... below 2019 levels" sound like cause for alarm?

The dramatic article quoted monthly changes, while the source data compared against several prior years.  That's one way to spot an alarming article - it does not put things in the larger context of several years.

[ender]

3) Housing Starts are at levels considered normal in the recent past. E.g. Annualized starts as of September 2023 were higher than they were from 2007 to 2018, than from 1989 to early 1993, and for periods of time in the booming 1960s. There was little to no talk about shortages during most of these timeframes.

I'm assuming you are aware you are comparing an absolute number (housing starts) against a population that is growing right?

The population of the USA today is over 2x what it was in 1960. So perhaps the reason no shortages existed in those times is because there were 2x as many homes being built per capita - and this doesn't take into account family size changes over the same timeframe. It looks like average family size went from 3.67 to 3.13 in that timeframe.

So not only are there 2x as many people in the USA now as the 1960s, households are also 15% smaller, meaning the demand is more than 2x.

If anything, this point is a pretty clear indication of some serious problems in the USA housing market when the rate of new supply vs demand drops so much.

[ender]

And more importantly, nothing your OP mentions, even if true, refutes the claim your post was titled with.

The housing market could be "fine" from a fundamentals perspective and we could still have a housing crisis.

Because the "crisis" is the fact that housing, whether owned/renting, is increasingly unaffordable for many people. The rationality or health of the underlying market is a separate discussion that is related, but not causal.

[GilesMM]

And more importantly, nothing your OP mentions, even if true, refutes the claim your post was titled with.

The housing market could be "fine" from a fundamentals perspective and we could still have a housing crisis.

Because the "crisis" is the fact that housing, whether owned/renting, is increasingly unaffordable for many people. The rationality or health of the underlying market is a separate discussion that is related, but not causal.

Good points.  Here are a bunch more: https://www.theguardian.com/us-news/series/america-s-housing-crunch

[Dicey]

Other related thoughts:
In my community, there is a proposed Continuing Care Community. It would provide various types of housing for older seniors. Those seniors would sell their homes to pay for a place in this community, freeing up homes for younger families. Those homes would be scattered across the region, so that schools would not be impacted. Also, these seniors would not be making multiple trips per day, as the community is all-inclusive. IMO, it's a win-win.

Except - the NIMBY's who live nearby don't want it. They utterly fail to grok the irony that nobody was in favor of their homes being built where they were forty years ago. It's worth noting that if this project falls through, they won't get what they want on property they don't own. CA's density laws have changed and the zoning of this property has updated to 7-17 (not a typo) homes per acre. Idiots.

[Telecaster]

Absolutely - and when the deviation from ideal includes rates of homelessness and rates of young adults living with their parents unprecedented since the Great Depression, that’s a pretty big indicator we’ve gone too far.

Yes, places with nice weather, cultural amenities, etc., will always be more expensive than places with shitty weather and no culture. But that’s no excuse to do nothing. There are issues of housing costs rising faster than wages even in less desirable places. And if we narrowed the gap somewhat in those cost differences, that would enable more people to live better lives.

I’m just not okay with accepting a fatalistic approach towards these problems. No, we’re not gonna create a utopia where everyone gets exactly what they wants and is happy forever. But we can sure as shit do better than this.

Great post. I haven't read all the posts in this thread, so forgive me if this has been discussed before but there is a widely quoted study on homelessness that came out a couple years ago that found out most homelessness can be explained by the ratio of income to rent.^[1]  The higher the ratio, the higher the homeless population.   More specifically, there is an inflection point at about 32% at which point homelessness starts to sky rocket.   Municipalities all across the country have different policies for how to deal with the homeless population, but the main problem is simply lack of affordable housing.   

The solution is simple, but not easy:  Build more units.   

Good article from Pew about the decrease in inventory and affordability of houses in the US that lays the changes in the affordability of the housing market pretty clearly:<sup>[2]

[1]</sup> https://wp-tid.zillowstatic.com/3/Homelessness_InflectionPoints-27eb88.pdf

^[2] https://www.pewresearch.org/short-reads/2022/03/23/key-facts-about-housing-affordability-in-the-u-s/

[roomtempmayo]

Ok the media hyped it up. That's how they get paid. Is the issue deserving of the hype? We can debate that.

I think it's a problem worthy of discussion, but not really from the angle we usually see covered in the news.

What's bad about really expensive housing on a national level is that it misallocates resources.  In aggregate it transfers wealth from the young to the old, and it locks many young families out of the large houses they could put to good use.  It makes it hard for people to move toward good jobs.  It drives up insurance rates.  Those are all real issues.

However, the people I encounter who want to talk about the housing "crisis" are mostly highly educated white people under the age of 35 who don't make a bundle of money and who are angsty that they personally can't really afford to live in the cool part of a superstar city.  The "crisis" framing is a superstructure that makes sense of their personal problem - look, see, my problem is really part of a big problem.  And then, one day, they decide they've had enough of that crisis and move to some uncool place where they can afford to live, and all of a sudden they stop talking about the crisis they previously gnashed their teeth over.

I suspect the media hype is largely due to the social overlap between reporters and the people who can't afford to live where they want.

[Log]

Absolutely - and when the deviation from ideal includes rates of homelessness and rates of young adults living with their parents unprecedented since the Great Depression, that’s a pretty big indicator we’ve gone too far.

Yes, places with nice weather, cultural amenities, etc., will always be more expensive than places with shitty weather and no culture. But that’s no excuse to do nothing. There are issues of housing costs rising faster than wages even in less desirable places. And if we narrowed the gap somewhat in those cost differences, that would enable more people to live better lives.

I’m just not okay with accepting a fatalistic approach towards these problems. No, we’re not gonna create a utopia where everyone gets exactly what they wants and is happy forever. But we can sure as shit do better than this.

Great post. I haven't read all the posts in this thread, so forgive me if this has been discussed before but there is a widely quoted study on homelessness that came out a couple years ago that found out most homelessness can be explained by the ratio of income to rent.^[1]  The higher the ratio, the higher the homeless population.   More specifically, there is an inflection point at about 32% at which point homelessness starts to sky rocket.   Municipalities all across the country have different policies for how to deal with the homeless population, but the main problem is simply lack of affordable housing.   

The solution is simple, but not easy:  Build more units.   

Good article from Pew about the decrease in inventory and affordability of houses in the US that lays the changes in the affordability of the housing market pretty clearly:<sup>[2]

[1]</sup> https://wp-tid.zillowstatic.com/3/Homelessness_InflectionPoints-27eb88.pdf

^[2] https://www.pewresearch.org/short-reads/2022/03/23/key-facts-about-housing-affordability-in-the-u-s/

The book that has been sitting on my reading list for a while about this particular body of research is "Homelessness is a Housing Problem." Hope to get to it soon. Has anyone here read this?

[Telecaster]

However, the people I encounter who want to talk about the housing "crisis" are mostly highly educated white people under the age of 35 who don't make a bundle of money and who are angsty that they personally can't really afford to live in the cool part of a superstar city.  The "crisis" framing is a superstructure that makes sense of their personal problem - look, see, my problem is really part of a big problem.  And then, one day, they decide they've had enough of that crisis and move to some uncool place where they can afford to live, and all of a sudden they stop talking about the crisis they previously gnashed their teeth over.

I suspect the media hype is largely due to the social overlap between reporters and the people who can't afford to live where they want.

Media hype may well play into it, but objectively housing is a good bit more expensive than it was 10, 20, and 30 years ago.   Since housing is something we all need, this seems to be an actual problem. 

[Telecaster]

Except - the NIMBY's who live nearby don't want it.

Can you blame them?  Old people tend to stay up late, drinking beer, and playing rap music from their car stereos.   Nothing kills a neighborhood faster than old people. 

[former player]

I'm going to suggest something very unpopular for an MMM crowd: the fundamental financial problems with housing (ie the non-land planning etc issues) are 1) an imbalance between capital and income and 2) a growing imbalance between rich and poor.  And the solution is tax: basic economic theory says that in order to achieve fair distribution of scare assets the best method is taxation policy.

Most developed economies overtax income (especially earned income) and undertax assets (capital and unearned income).  That leads to wealth and poverty becoming entrenched and makes it harder and harder to move from poverty to wealth.  Home ownership in particular is undertaxed, leading to capital which might go into more productive economic assets being wasted on property, leading to rising prices caused by an excess of available capital as against other investments.

The remedy is greatly increasing taxes on underoccupied properties (empty homes, second homes, short-term rentals, etc.  Essentially any home which is not someone's primary residence needs to be taxed very heavily.

More difficult but also necessary is to heavily tax underoccupied properties: those with a high ratio of square footage to occupants.

"Heavily taxed" will depend on the jurisdiction.  But 5 or 10 times what is paid for a main residence, with no exemptions, should start to make a difference.

The taxes raised should be spent on providing social housing in mixed occupation neighbourhoods.  In the UK every development over a certain size (5 or 10 homes) is required to provide a percentage of rented or sold affordable/social housing, usually on the same development, and this works reasonably well.

There also need to be more taxes on wealth in general.  Extreme wealth is bad for the planet (all those big houses empty most of the year, all those private planes, etc) and bad for social cohesion.  But start with houses.

[seattlecyclone]

"Heavily taxed" will depend on the jurisdiction.  But 5 or 10 times what is paid for a main residence, with no exemptions, should start to make a difference.

No. It won't. There's a persistent assertion going around that there's this large cache of vacant homes and vacation homes, and if we just nudged their owners hard enough to let those homes become primary residences we'd make a big dent in the problem. That assertion is dubious. In the US our Census Bureau collects all sorts of data about the nation's housing stock. Their 2021 estimate is that there were 142.1 housing units nationwide, of which 128.5 million (>90%) were occupied as someone's primary residence. Of the rest, about half were vacant for less than a year at the time: a home that was recently someone's primary residence but is between occupants for whatever reason. Some percentage of vacant homes is a good and necessary thing so that people who want to move actually have some available inventory to consider moving into, and so that older homes have some time to be renovated to prepare for a few more decades of occupancy.

Take all the homes, subtract the ones that are already someone's primary residence or vacant for less than a year, and we've already narrowed it down to less than 5% of the overall homes. Even if we assume that all of these homes are a) in perfectly habitable condition, b) located in places where people actually want to make their primary residence, and c) would actually be brought back to the market with your proposed tax, we're still talking about a <5% difference in the housing supply. Perhaps dumping all these homes on the market during one single year would temporarily depress prices, but what are we going to do next year? At some point we need to acknowledge that using our existing homes more efficiently is not a durable solution and we need to make structural changes to the marketplace that result in a construction rate high enough to keep pace with population and employment growth.

[reeshau]

The remedy is greatly increasing taxes on underoccupied properties (empty homes, second homes, short-term rentals, etc.  Essentially any home which is not someone's primary residence needs to be taxed very heavily.

All but 3 US states do this (arguably, not "greatly", at least by your definition) through homestead exemptions.  This is applicable tonyour primary residence, which is also tied with state taxation and voting rights.

More than just a straight line deduction, local taxing authorities in areas with high levels of nonresident property owners often supplement or fully exempt homesteads from particular tax bills.  Rather than your motive, though, I've often thought of it as pandering to the voting base.

[Log]

I'd agree that vacancy taxes would make a negligible difference, but I'm still in support of passing them simply so that the people who believe in some mythical excess of vacant units can realize that it doesn't solve the problem and we can move on to exploring other solutions.

The tax argument, more broadly speaking, I'm in full agreement with. The idea of taxing "underoccupied" properties sounds way to clumsy to me. And who cares if some old couple wants to live in a 10-bedroom mansion in the middle of a cornfield in Iowa anyway? The more straightforward and sensible policy is to replace property taxes (which tax the value of land+improvement) with just taxing the underlying land value, but at a higher rate. This would incentivize property owners to make better use of high value land. We want low efficiency uses (parking lots, single family homes) in high-value places replaced with high-efficiency uses. I already ranted about the benefits of land-value taxation here. Some of my thoughts are partially informed by an economic theory called "Georgism," though I haven't read enough into the details of Georgism to know if it's quite the same thing as what I'm in favor of.

I just read Triumph of the City by Ed Glaeser, and (in 2011 prices) he cited that the per-unit cost of construction for a residential skyscraper was something like $500,000. So in cities like NYC or SF where million dollar homes are the norm, residential skyscrapers make enormous economic sense, and with enough construction you could bring the cost of high quality new condos in prime locations down close to that $500k mark. 5-over-1s and other wood-framed buildings further away from prime locations can of course help bring costs down further. The idea that big cities are more expensive is inherently true to the extent that the construction methods for taller buildings are more expensive... but if your default posture is to allow taller construction rather than deny it, there's no reason the market price needs to be much higher than construction costs.

[ChpBstrd]

Other related thoughts:
In my community, there is a proposed Continuing Care Community. It would provide various types of housing for older seniors. Those seniors would sell their homes to pay for a place in this community, freeing up homes for younger families. Those homes would be scattered across the region, so that schools would not be impacted. Also, these seniors would not be making multiple trips per day, as the community is all-inclusive. IMO, it's a win-win.

Except - the NIMBY's who live nearby don't want it. They utterly fail to grok the irony that nobody was in favor of their homes being built where they were forty years ago. It's worth noting that if this project falls through, they won't get what they want on property they don't own. CA's density laws have changed and the zoning of this property has updated to 7-17 (not a typo) homes per acre. Idiots.

That's a particularly egregious example, demonstrating minimal concern for the good of the community or its residents. When the value of an existing homeowner's asset consists of hundreds of thousands of dollars in speculative value, such homeowners risk losing it all if their area starts being seen as stodgy, if it stops attracting speculators, or if its appreciation curve is lower than other places. These NIMBYs are motivated to defend the value of their own speculations. That's why you only ever see NIMBYs defending already-trendy and expensive areas. I don't think such cartel tactics would work in places that aren't already at the high end of the market, like Amarillo TX, or Wichita KS, Jackson MS, or Fort Wayne IN. People in such places aren't motivated to fight against supply because their property values have a lot more to do with construction costs than Speculative Demand. To the extent NIMBY tactics work in HCOL areas, it is because new speculators see it working and place new bets on the most effective NIMBYs. There could be millions of affordable houses available in Ohio or Kentucky, but the money and attention and perceptions are going to flow to where the NIMBYs are best organized. It's a game, and the music stops when we run low on new speculators.

Lots of financial media authors are writing dramatic headlines about a collapse in the housing market or a shortage of houses - which would seem to be contradictory.

That article's author doesn't mention a real estate background in their bio:
"Expertise: Stocks, Options, Precious metals, Bitcoin, Altcoins"
https://investorplace.com/author/davidmoadel/

Their article quotes another article, which then quotes source data.  I tracked down the source data, which puts things in context:

"Despite the rise, the delinquency rate is still 71BPS below the level of pre-pandemic September 2019"
"At the national level, serious delinquencies (90+ days past due) rose by 7K to 455K, but remain 6.7% below September 2019 levels"
"While overall delinquencies have risen, the number of loans in active foreclosure fell to 214K in September, its lowest point since March 2022 and some 25% below 2019 pre-pandemic levels"
https://seekingalpha.com/pr/19506038-ice-first-look-monthly-mortgage-performance-delinquencies-rose-in-september-while-foreclosure?hasComeFromMpArticle=false

Does "delinquency ... below 2019 levels" sound like cause for alarm?

The dramatic article quoted monthly changes, while the source data compared against several prior years.  That's one way to spot an alarming article - it does not put things in the larger context of several years.

Ok the media hyped it up. That's how they get paid. Is the issue deserving of the hype? We can debate that.

However, the people I encounter who want to talk about the housing "crisis" are mostly highly educated white people under the age of 35 who don't make a bundle of money and who are angsty that they personally can't really afford to live in the cool part of a superstar city.  The "crisis" framing is a superstructure that makes sense of their personal problem - look, see, my problem is really part of a big problem.  And then, one day, they decide they've had enough of that crisis and move to some uncool place where they can afford to live, and all of a sudden they stop talking about the crisis they previously gnashed their teeth over.

I suspect the media hype is largely due to the social overlap between reporters and the people who can't afford to live where they want.

Good critical thinking on both of your parts! These are two excellent summaries of the media hype: how crisis is an odd word to use when the home ownership percentage is up and delinquencies are down, and how a media story-telling narrative can win clicks by providing frustrated buyers with a "shortage" explanation for why they can't afford what they want - a big home in "the cool part of a superstar city" - as in, not next door to a senior living facility.

3) Housing Starts are at levels considered normal in the recent past. E.g. Annualized starts as of September 2023 were higher than they were from 2007 to 2018, than from 1989 to early 1993, and for periods of time in the booming 1960s. There was little to no talk about shortages during most of these timeframes.

So not only are there 2x as many people in the USA now as the 1960s, households are also 15% smaller, meaning the demand is more than 2x.

Again, what happened in the past 3 years that caused housing prices to skyrocket from where they were in early 2020? The purpose of the zoomed-out data series is to point out how housing starts have gone dramatically up and down over the decades, but the nationwide housing market has never seen house prices move like dot-com stocks in the late 90s, and now suddenly they are.

I think that COVID didn't just give people free cash, it also caused a lot of people to want to buy bigger houses. They want room for the kids to play. They want a larger or dedicated space to work from home (probably won't dissipate quickly). They want space. The effects of this will also probably dissipate pretty quickly.

The housing market takes a long time to react to a stimulus. It reflects conditions 1-10 years ago.

If a bubble bursts, I think we'll be revisiting these temporary factors as prescient explanations. We might also be astounded by the risks being taken by people buying in expensive places to be "near the jobs" in an era when they could see the WFH movement has proven staying power.

[vand]

Like I said elsewhere, there are 2 distinct classes of financial wellbeing these days - those who managed to lock in their mortgages before 2022 and those who didn't...

The housing market is now completely dysfunctional due to the opportunity that presented itself a couple of years ago to lock in ultra-cheap mortgages... the way that interest rates have ballooned now, we are now in a situation where anyone who was able to take advantage of that is never going to give it up - effectively removing themselves and their home from the market almost indefinitely.   

Nobody is going to sell and give up such a huge advantage, and yet nobody can afford to buy at the price that would tempt homeowners with these golden mortgages to sell up and give up that hedge now that mortgage rates are 8%.

Make no mistake this dysfunction is a direct result of the Fed's actions. It may be brilliant for those who were able to lock in those cheap mortgages, but overall it is not good for the economy long term as it has created a huge deadpool where no transactions will happen, and reduces workforce mobility. Personally I think they should have capped the maximum lock in duration to 10 or 15 years.  A sub 3% mortgage for 30 years is the sort of giveaway that only presents itself once in a generation. Those who didn't or couldn't benefit are the ones now saddled with the burden of paying for it.

[ChpBstrd]

The problem with this analysis is that it assumes the person would receive the same wage in either place, so absent the real estate speculation angle they would rationally choose to live in the cheaper location. That has historically not been true, at least not in the tech industry that employs the majority of people who can afford San Francisco real estate anymore. These folks have moved to the West Coast because it offered the best economic opportunity in spite of the high real estate costs. They largely don't move there out of some motivation for real estate speculation. Instead they move there because it's the center of their industry, where the best opportunities exist for long-term economic success. If anything, the high local real estate prices are a deterrent that creates a measurable drag on the national economy.

While no data source is perfect, the site Levels.fyi is pretty well-trusted among the tech worker community. Their current data shows the median software engineer in the San Francisco Bay Area gets $240k total compensation, while the number is $103k in Kansas City. That $137k difference can pay a decent mortgage in San Francisco all by itself.

This does anecdotally match my experience searching for jobs after college. I was offered 50% higher base salary to move to Seattle than stay in the Midwest where I grew up, and the Seattle job also came with stock-based compensation. San Francisco would have paid more still, but I felt Seattle was a much better value at the time. Now the difference has narrowed quite a bit.

I've always been interested in wages vs. cost of living comparisons, and levels.fyi is not a source I'd heard of before. Looks like it is focused mainly on the biggest employers in the biggest tech hubs.

For "software developer 1" Salary.com says the median wage in Kansas City, MO is $75,690. In San Francisco, it's $96,490.

If we plug $75,690 into Bestplaces.net, for someone moving from KC to SF, the output says:

Code: [Select]

A salary of $75,690 in Kansas City, Missouri should increase to $210,106 in San Francisco, California (assumptions include Homeowner, no Child Care, and Taxes are not considered.)
Maybe this is a fluke related to junior developers? If we bump the job up to software developer V, we obtain:
KC median salary: $164,290
SF median salary: $209,410
Plug that into the move calculator and obtain:

Code: [Select]

A salary of $164,290 in Kansas City, Missouri should increase to $456,050 in San Francisco, California (assumptions include Homeowner, no Child Care, and Taxes are not considered.)
So for either junior or senior software developers - THE jobs that supposedly attract all this demand to HCOL places - it appears folks in San Francisco are earning less than half as much as they'd need to be compensated for the higher cost of living. Kansas City developers will have their homes paid off faster and be well on their way to FIRE long before the SF folks. Keep plugging in different jobs and industries - the pattern keeps emerging.

So maybe there "are no jobs" in the cheaper place? Actually the reverse appears to be true:

Unemployment Rate:
SF metro: 4.0%
KC metro: 3.4%

Finally, maybe there is something wrong with Salary.com and we should use Levels.fyi salary numbers instead. For "software engineer" Levels curiously says you'll make exactly $103,000 in KC and $240,000 in SF. Plugging these numbers into the COL calculator obtains:

Code: [Select]

A salary of $103,000 in Kansas City, Missouri should increase to $285,916 in San Francisco, California (assumptions include Homeowner, no Child Care, and Taxes are not considered.)So that source reduces the level of underpayment to live in SF to $45,916 per year. No wonder people can't get by on six-figure incomes.

The SF workers are being compensated another way: via the opportunity to multiply their down payments in a highly speculative housing market. For the past several years, the SF workers who are homeowners have come out ahead, but it's despite being underpaid. It's all about buying into an area with heavy Speculative Demand. You ride that escalator for 5-10 years, sell out, and retire on the seven-figure tax-free capital gains. Of course, this plan involves a new speculator appearing at that time to buy your house for double what you paid.

[MustacheAndaHalf]

Adding up rent (near city center) and cost of living, I get $5k for San Francisco (SF) and half that for Kansas City (KC).  Annualized, that's $60k/year (SF) and $30k/year (KC).
https://www.numbeo.com/cost-of-living/in/San-Francisco
https://www.numbeo.com/cost-of-living/in/Kansas-City

I find a mere $20k/year gap between SF and KC very suspicious.  I looked on "indeed" at SF jobs using "entry level" as the criteria.  I took the first 5 entries that listed salaries, one of which may not be for junior software engineers :

$152,500 - $157,500 (requires 2 years experience)
$132,870 - $187,339 (master degree + 1 year experience)
$250,000 - $375,000 ("Have significant software engineering experience")
$98,400 - $135,300 (1 year experience)
$120,000 - $165,000 (2 years experience mentioned in three areas... 6 yr? 2yr?)

The median low is $133k and median high is $165k, or about $150k average.  That sounds more reasonable than the $96k/year quoted earlier.  The actual salary may be higher after considering stock options or equivalent.

Gathering "senior software engineer" jobs with salaries listed:
$190k - $204k (no years specified)
$160k - $240k (7+ years experience)
$214k - $252k (7+ years experience)
$143k - $214k (5+ years)
$230k - $256k (10+ years or advanced degree & 7+ years)

Same idea here, median low is $190k and median high is $240k, so salary might average about $215k/year.  Note that is before "equity", which could boost total compensation to the $240k/year mentioned earlier.  But as a salary, $215k/year is rather close to the $209k/year mentioned above.

Seems like senior software engineers in SF have numbers that are fairly close, regardless of approach used.  But I have trouble believing junior software engineers are paid under $100k in SF, and would trust sampling ($150k/year) more than the Salary website numbers.

[ChpBstrd]

I kinda regret going down the rabbit hole of software engineering salaries, because this approach promotes anecdotes over data. E.g. "Meta is paying $250k to interns!" or "Here's a real-looking job ad paying an astronomical salary." and one must compare the reliability of one website over another to assess which to believe.

The reality is every city has jobs paying astronomical salaries and every city has sanitation workers, restaurant employees, construction workers, car salesmen, teachers, customer service reps, retailers, truck drivers, and hundreds of other jobs. Without those workers, the city would quickly fall apart and there wouldn't be much demand for housing. Anecdotes become circular when we say "I guess there must be a bunch of high paying jobs available there or else supply/fundamental demand theory wouldn't hold". So let's look at larger samples from reliable sources. 

From the U.S. Bureau of Labor Statistics, May 2022 data, based on the Current Employment Statistics survey covering 122k employers and 666k work locations sampled from 10 million unemployment insurance accounts:
SF metro median hourly wage, all occupations: $31.50/h
KC metro median hourly wage, all occupations: $22.31/h
For a 40h week and 52 weeks per year, those median wages amount to $65,520 and $46,408 respectively.

SF metro mean annual wage, all occupations: $94,370
KC metro mean annual wage, all occupations: $58,250

That's a significant difference, with SF's large mean-median gap implying a more variable distribution than KC's (more income inequality and a few very high earners pulling up the mean in SF). Housing should cost more in SF if the wages are far higher than in KC, but the magnitude of the difference cannot be explained by wages! I.e. by financial metrics alone, no rational median wage earner would buy a house in SF instead of KC, unless they had a speculative interest in joining the hot real estate market.

Suppose you are the median wage earner trying to decide which city to live in. Plug the KC median wage into the calculator and it says:

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A salary of $46,408 in Kansas City, Missouri should increase to $128,823 in San Francisco, California (assumptions include Homeowner, no Child Care, and Taxes are not considered.
So right off the bat, the median SF wage underpays the median SF worker by (128823-65520=) $63,303 per year - an even worse number than the software devs faced in my earlier data-oriented example. Basically, a median one-earner household in KC can live at close to the same standard as a two-earner median household in SF. Unfortunately, the BLS does not seem to break down hours worked numbers by metro area. It would be interesting to see how many people are working long hours or multiple jobs to make ends meet so they can live in the HCOL area rather than the LCOL area.

Again, the homeowners struggling to maintain a toehold in SF are being compensated another way: through the expectation of rapid 5-33x leveraged real estate appreciation. They're working long hours, struggling to get by, sometimes becoming homeless, but playing a game where those who can hang on to home equity get very rich. Some prefer to play the game and others prefer to live in places where the finances are easier, but that preference for real estate gambling betting on leveraged real estate appreciation is hardly a crisis.

Many people in HCOL places with financial emergencies due to the cost of living could move to Indianapolis, Columbus, or Mobile and stabilize their financial picture tomorrow by closing the gap between income and COL, but most would never do so. That's the "housing crisis".