Need to think on that one - seems like it runs both ways - which is one of the reasons I enjoy reading your Substack. Your comments about Minneapolis are getting closer to "all real estate is local" which seems like something closer to micro than macro. You are basically pointing out local reality.
This does not apply to you, ever. This comment is admittedly driven by my profession, but I sometimes hear folks make statements or offer solutions in a macro sense that make no sense from a micro perspective. In the real microeconomic world they won't happen, ignore market demand, won't produce enough supply to move the needle, or cost too much to build.
We really might be saying the same thing?? Just in different ways.
I think you're saying builders have a hard time controlling the cost input of their inventory, some of which is due to the extended time it takes to build housing. I totally agree, especially since the mortgage meltdown. I do think the large builders have a better handle on those inputs than smaller builders.
In 2022 DR Horton closed on the sale of 3281 homes in Austin. Don't have 2023 numbers yet. That scale allows them to get better pricing from and provide a steadier workflow to subs and suppliers than small builders. Unlike some, I do believe the consumer benefits from that efficiency. I don't think there's oligopolistic pricing. It's a competitive, cutthroat industry.
I do think the big builders are also more efficient at controlling the quantity of inventory. Some of that is big data. Everyone in housing has more and faster information than 10-15 years ago. For example, every Tuesday morning I can pull the number of people that toured competitive apartment projects, how many apartments they leased, the rates they charge for each unit type, and vacancy rates. That information wasn't available a decade or so ago. Inventory control, quantity, is easier.
Part of it is scale. Unlike 100 small builders each building 32 houses with multiple decisions, when Horton makes a decision to slow starts in Austin it impacts a substantial part of the market. The 5 largest builders in Austin closed about 6500 houses in 2022. I don't think it's done as a cartel or to keep prices up. Standing unsold inventory reduces returns. The goal of any and every company large or small is to increase returns. It's not evil; it's smart.
When mortgage rates took off and builders momentarily froze, we entered discussions with a smallish local builder to buy their existing unsold houses and lots. The idea was to hire them as a GC to complete houses on the lots and convert all to rental units. It fell apart because we couldn't come to terms on a price for the existing unsold houses. During the negotiations we closely monitored the pricing of the large builders. They immediately dropped prices by as much as $30,000 on unsold inventory. Those values spooked us about the values of the houses we were about to buy.
The big builders control the quantity of starts and also are quick to move unsold inventory. And, unlike what some believe and in support of your thoughts, I do not believe builders act to keep prices high. In fact, sometimes, their actions reduce values. Some consumers made great buys!
I really enjoy your comments about builder publications. I'm pretty sure chapter 2 of the "International Builder's Handbook" is titled Whining.
I think mainly you’re comments are about microeconomic issues and my substack is mostly about macroeconomic issues and those are related, of course, but not in a simple “add up all these micro things and you get the macro picture” sort of way.
The housing crunch really is a mess, and I enjoy reading your columns. I tend to think it's been death by 1000 cuts since the 70's.
Here is one I just heard - housing has become a store of value - like gold or diamonds. It's now a place to park money. Kind of interesting to think about.
I wish census data could break out the big builders.
Seems like there're several pieces to inventory. A builder has absolute control over a start. Well, assuming they can get a building permit.
Input costs are way up, but the big builders have a good handle on those before they pull the trigger on a house. In the major markets many of them build 100's of houses a year and have subs in line with fixed prices. They also have a good handle on how long it'll take to build. For the majors it's a factory.
Prices have gone up, but not appreciably on a house that has been started - for the big builders.
The small builders get hammered on cost and time. Many don't have subs lined up or priced. The project sits idle for weeks while interest at today's high rate runs. Many get trapped as you say.
I just don't know how these differences impact the census data.
There're almost 2 worlds in homebuilding. We recently built a 300+ unit build to lease single family project in Dallas. It was overbudget and way over schedule. It cost us more to construct each unit than the big builders sell similar sized units on larger lots with nicer amenities. We can't compete. I'm pretty sure we'd skew any data. We lucked out and got a take-out purchase contract from a foreign buyer.
For the last 10 years we've focused on multifamily. We don't start without a fixed price contract from a general contractor. We have several projects with building permits and bids in hands that we will not start. With current interest rates, high construction prices, and falling rent rates there's no margin. And, as you say the last 5 projects we've built were completed behind schedule. Something has to give. To the extent that those other things impact our inventory you are right; we aren't in control.
But, we're making the decision to control the inventory based on the inputs. You're right; we don't control the inputs. I'm not sure we ever did. The decision to start was always impacted by inputs.
I think Roseanne Rosannadanna said - "It's always something".
Still believe the production of housing is very complicated, and it's hard to single out a cause of the housing crisis. Been in this dumb business for 40 years. Sometimes it's 70's inflation, sometimes it's the 80's changes in tax laws, sometimes it's the financialization of mortgages and the meltdown, sometimes it's the overreaction to the meltdown, sometimes it's high interest rates, sometimes it's labor and border issues, sometimes it's Covid and work from home, sometimes it's back to work, sometimes it's duties on imports, sometimes it's offshoring, sometimes it's the tech bust or oil bust. Yes, sometimes it's city regulations. My favorite is a requirement for sidewalks to have a passing lane for 2 wheelchairs if the run is over so many feet.
Seems like things piled up over the years.
While large single-family builders aren't an oligopoly, meaning they control or collude and drive up pricing, I do think they are more sophisticated at inventory control. At the margins it just seems that has some impact on pricing, especially in down markets. It's not THE cause of high prices, but it surely has some impact at the margins.
It's been a couple of years since I read it, and my memory may be off, but I believe Harvard produced a study showing that the 10 largest builders produce about 50% of new houses and 75% of houses in the 50 largest markets.
It would be interesting to see how fast single family building permits slowed in major markets during the latest downturn vs. some previous slowdowns. Maybe even look at publicly traded builders' SEC filings. I just don't have time.
Again, not saying big builders are THE problem, but I do believe inventory control is important to their bottom line. If they have a large market share of new housing it just seems like that has some impact on prices at the margins - again, at the margins - and especially in down markets and during price corrections.
All of that said - the large corporate builders deliver more and less expensive housing than mom and pop builders can. They are efficient in good times - and bad, which I guess is my point.
Since the spring of 2021, finished homes have sold more quickly than at any time in the last 50 years. That seems like oligopolistic inventory control. But over the same period, build times and input costs have been elevated because builders sold and started more homes than they had the capacity to finish. This is still the case. This has also never happened in the previous 50 years for which the Census Bureau has data.
Builders currently have less control over their inventory than they ever exhibited in either of our lifetimes.
Great post. I’m always annoyed when SFR is attacked for taking away housing when, in fact, it provides spacious rental housing for families that can’t qualify for mortgages. Those families’ only alternative is a small apartment. Urban Institute has done a great job showing this and I hope policy makers don’t accidentally harm the very population they aim to serve.
I’ve been going back and reading your assessment of the housing crisis. I agree with much of it (definitely not a supply glut), but having been at the GSEs through the midst of it, think some of your points on the role of mortgage eligibility isn’t right. In your previous piece you show that the average FICO at the GSEs was flat while home prices were growing. But, the GSEs share of the market was dropping precipitously and the average combined loan to value was rocketing upward (mostly with 80/20 sim seconds and low down payment programs). The fuller picture of total market risk in lending needs to include LTV, DTI and all originations. The picture is quite different.
I’ll end with a brief anecdote. At a conference in 2005, I remember very distinctly someone from Bear Stearns saying that supply constraints in CA made it impossible for home prices to go down there. In 2008 that sounded foolish in retrospect, but not so much in 2012. Despite that projection being true, what that forecast implied was that mortgage lending was effectively risk free. Sure, defaults would be non zero, but losses wouldn’t exist. That mentality, for investors/lenders/GSEs and consumers alike, was the core of the problem. While the underwriting response may seem draconian, I don’t think it is responsible for the shift to responsibility. And because capital standards require sustaining a crisis like 2008, all the capital in the world couldn’t support taking the kind of risk that became common between 1997 and 2007.
I appreciate your insider's perspective, and I'm having a hard time coming up with a reply to your comment, because my disagreements with it are subtle.
I guess, one thing I would say is that the Bear Stearns guy was basically right. If your oncologist says you have 3 weeks to live and gives you a cyanide pill to take in case you just want to end it, and 3 weeks later, you take the cyanide pill, that tells us nothing about the competence of your oncologist or the importance of cancer in your outcome.
I think you're right that LTV, DTI, and other terms before 2008 were more important than borrower qualifications. But, after 2007, the GSEs massively changed credit access based on borrower qualifications, well into prime territory. The cyanide had its effect, and it tells us nothing about what would have happened in its absence.
Again, thanks for putting up with me.
Need to think on that one - seems like it runs both ways - which is one of the reasons I enjoy reading your Substack. Your comments about Minneapolis are getting closer to "all real estate is local" which seems like something closer to micro than macro. You are basically pointing out local reality.
This does not apply to you, ever. This comment is admittedly driven by my profession, but I sometimes hear folks make statements or offer solutions in a macro sense that make no sense from a micro perspective. In the real microeconomic world they won't happen, ignore market demand, won't produce enough supply to move the needle, or cost too much to build.
The housing crisis is a complicated mess.
Sorry for the length of this.
We really might be saying the same thing?? Just in different ways.
I think you're saying builders have a hard time controlling the cost input of their inventory, some of which is due to the extended time it takes to build housing. I totally agree, especially since the mortgage meltdown. I do think the large builders have a better handle on those inputs than smaller builders.
In 2022 DR Horton closed on the sale of 3281 homes in Austin. Don't have 2023 numbers yet. That scale allows them to get better pricing from and provide a steadier workflow to subs and suppliers than small builders. Unlike some, I do believe the consumer benefits from that efficiency. I don't think there's oligopolistic pricing. It's a competitive, cutthroat industry.
I do think the big builders are also more efficient at controlling the quantity of inventory. Some of that is big data. Everyone in housing has more and faster information than 10-15 years ago. For example, every Tuesday morning I can pull the number of people that toured competitive apartment projects, how many apartments they leased, the rates they charge for each unit type, and vacancy rates. That information wasn't available a decade or so ago. Inventory control, quantity, is easier.
Part of it is scale. Unlike 100 small builders each building 32 houses with multiple decisions, when Horton makes a decision to slow starts in Austin it impacts a substantial part of the market. The 5 largest builders in Austin closed about 6500 houses in 2022. I don't think it's done as a cartel or to keep prices up. Standing unsold inventory reduces returns. The goal of any and every company large or small is to increase returns. It's not evil; it's smart.
When mortgage rates took off and builders momentarily froze, we entered discussions with a smallish local builder to buy their existing unsold houses and lots. The idea was to hire them as a GC to complete houses on the lots and convert all to rental units. It fell apart because we couldn't come to terms on a price for the existing unsold houses. During the negotiations we closely monitored the pricing of the large builders. They immediately dropped prices by as much as $30,000 on unsold inventory. Those values spooked us about the values of the houses we were about to buy.
The big builders control the quantity of starts and also are quick to move unsold inventory. And, unlike what some believe and in support of your thoughts, I do not believe builders act to keep prices high. In fact, sometimes, their actions reduce values. Some consumers made great buys!
I really enjoy your comments about builder publications. I'm pretty sure chapter 2 of the "International Builder's Handbook" is titled Whining.
I think mainly you’re comments are about microeconomic issues and my substack is mostly about macroeconomic issues and those are related, of course, but not in a simple “add up all these micro things and you get the macro picture” sort of way.
I wonder if the lead time the public builders report applies to lots rather than houses?
I don't think so. I think they talk about the time from when foundation work started to when the unit is approved for move-in.
The housing crunch really is a mess, and I enjoy reading your columns. I tend to think it's been death by 1000 cuts since the 70's.
Here is one I just heard - housing has become a store of value - like gold or diamonds. It's now a place to park money. Kind of interesting to think about.
I wish census data could break out the big builders.
Seems like there're several pieces to inventory. A builder has absolute control over a start. Well, assuming they can get a building permit.
Input costs are way up, but the big builders have a good handle on those before they pull the trigger on a house. In the major markets many of them build 100's of houses a year and have subs in line with fixed prices. They also have a good handle on how long it'll take to build. For the majors it's a factory.
Prices have gone up, but not appreciably on a house that has been started - for the big builders.
The small builders get hammered on cost and time. Many don't have subs lined up or priced. The project sits idle for weeks while interest at today's high rate runs. Many get trapped as you say.
I just don't know how these differences impact the census data.
There're almost 2 worlds in homebuilding. We recently built a 300+ unit build to lease single family project in Dallas. It was overbudget and way over schedule. It cost us more to construct each unit than the big builders sell similar sized units on larger lots with nicer amenities. We can't compete. I'm pretty sure we'd skew any data. We lucked out and got a take-out purchase contract from a foreign buyer.
For the last 10 years we've focused on multifamily. We don't start without a fixed price contract from a general contractor. We have several projects with building permits and bids in hands that we will not start. With current interest rates, high construction prices, and falling rent rates there's no margin. And, as you say the last 5 projects we've built were completed behind schedule. Something has to give. To the extent that those other things impact our inventory you are right; we aren't in control.
But, we're making the decision to control the inventory based on the inputs. You're right; we don't control the inputs. I'm not sure we ever did. The decision to start was always impacted by inputs.
I think Roseanne Rosannadanna said - "It's always something".
Thanks for putting up with me.
I appreciate the insider perspective.
The reports from public builders on lead times and costs seem to be similar to the trends in the Census numbers.
Still believe the production of housing is very complicated, and it's hard to single out a cause of the housing crisis. Been in this dumb business for 40 years. Sometimes it's 70's inflation, sometimes it's the 80's changes in tax laws, sometimes it's the financialization of mortgages and the meltdown, sometimes it's the overreaction to the meltdown, sometimes it's high interest rates, sometimes it's labor and border issues, sometimes it's Covid and work from home, sometimes it's back to work, sometimes it's duties on imports, sometimes it's offshoring, sometimes it's the tech bust or oil bust. Yes, sometimes it's city regulations. My favorite is a requirement for sidewalks to have a passing lane for 2 wheelchairs if the run is over so many feet.
Seems like things piled up over the years.
While large single-family builders aren't an oligopoly, meaning they control or collude and drive up pricing, I do think they are more sophisticated at inventory control. At the margins it just seems that has some impact on pricing, especially in down markets. It's not THE cause of high prices, but it surely has some impact at the margins.
It's been a couple of years since I read it, and my memory may be off, but I believe Harvard produced a study showing that the 10 largest builders produce about 50% of new houses and 75% of houses in the 50 largest markets.
It would be interesting to see how fast single family building permits slowed in major markets during the latest downturn vs. some previous slowdowns. Maybe even look at publicly traded builders' SEC filings. I just don't have time.
Again, not saying big builders are THE problem, but I do believe inventory control is important to their bottom line. If they have a large market share of new housing it just seems like that has some impact on prices at the margins - again, at the margins - and especially in down markets and during price corrections.
All of that said - the large corporate builders deliver more and less expensive housing than mom and pop builders can. They are efficient in good times - and bad, which I guess is my point.
Since the spring of 2021, finished homes have sold more quickly than at any time in the last 50 years. That seems like oligopolistic inventory control. But over the same period, build times and input costs have been elevated because builders sold and started more homes than they had the capacity to finish. This is still the case. This has also never happened in the previous 50 years for which the Census Bureau has data.
Builders currently have less control over their inventory than they ever exhibited in either of our lifetimes.
Great post. I’m always annoyed when SFR is attacked for taking away housing when, in fact, it provides spacious rental housing for families that can’t qualify for mortgages. Those families’ only alternative is a small apartment. Urban Institute has done a great job showing this and I hope policy makers don’t accidentally harm the very population they aim to serve.
I’ve been going back and reading your assessment of the housing crisis. I agree with much of it (definitely not a supply glut), but having been at the GSEs through the midst of it, think some of your points on the role of mortgage eligibility isn’t right. In your previous piece you show that the average FICO at the GSEs was flat while home prices were growing. But, the GSEs share of the market was dropping precipitously and the average combined loan to value was rocketing upward (mostly with 80/20 sim seconds and low down payment programs). The fuller picture of total market risk in lending needs to include LTV, DTI and all originations. The picture is quite different.
I’ll end with a brief anecdote. At a conference in 2005, I remember very distinctly someone from Bear Stearns saying that supply constraints in CA made it impossible for home prices to go down there. In 2008 that sounded foolish in retrospect, but not so much in 2012. Despite that projection being true, what that forecast implied was that mortgage lending was effectively risk free. Sure, defaults would be non zero, but losses wouldn’t exist. That mentality, for investors/lenders/GSEs and consumers alike, was the core of the problem. While the underwriting response may seem draconian, I don’t think it is responsible for the shift to responsibility. And because capital standards require sustaining a crisis like 2008, all the capital in the world couldn’t support taking the kind of risk that became common between 1997 and 2007.
I appreciate your insider's perspective, and I'm having a hard time coming up with a reply to your comment, because my disagreements with it are subtle.
I guess, one thing I would say is that the Bear Stearns guy was basically right. If your oncologist says you have 3 weeks to live and gives you a cyanide pill to take in case you just want to end it, and 3 weeks later, you take the cyanide pill, that tells us nothing about the competence of your oncologist or the importance of cancer in your outcome.
I think you're right that LTV, DTI, and other terms before 2008 were more important than borrower qualifications. But, after 2007, the GSEs massively changed credit access based on borrower qualifications, well into prime territory. The cyanide had its effect, and it tells us nothing about what would have happened in its absence.
Man, you nailed it. "When myth becomes canon."
I still think monetary policy is effected, in large part, by whipsawing real estate.
But...the nice thing about macroeconomic debates is no one is ever wrong.
Being "right" means your myths are canonized instead of the other guy's.