A Macro-Summary of the State of American Home Construction

The next post after this will be for subscribers. In it I will add detail and charts to develop this summary.

The American housing market has two ways forward:

1)      An extended building boom, which may slowly reverse the debilitating housing costs that have undermined our economy and our culture. It will take years or decades of building hundreds of thousands of units more than we are now, annually.

2)      Building at current levels, which is not high enough to lower rents and prices of residential land (and homes).

America is short by millions of units, but the lack of production is due to legal restrictions over the long term and supply chain capacities in the short term. The floor in American housing production can only be lowered from here by legally removing more buyers, builders, or owners from the marketplace.

Depending on population growth trends, something close to 1.5 million units a year are needed to keep up with household formation, and more than 10 million units are needed to get back to pre-Millennium supply norms.

Just to get back to a pre-Great Recession vacancy rate, which might reverse the unprecedented increase in rents, would require 4 or 5 million new empty units.

How universally underestimated is our housing shortage? Most institutional estimates of the scale of the housing shortage are lower than that.

Mortgage lending is unlikely to be further tightened. Under current standards, about a million families (with cash or pristine credit) buy new homes a year. About half a million more would under any pre-Great Recession standards. Multi-family building has topped out at about 400,000 units annually because of localized opposition. YIMBY political wins might slowly raise that number, but nothing is going to move it much above or below that, quickly.

The only remaining source of new housing is institutional purchases of new single-family rentals. That has historically been a trivial market, and its recent emergence is a good example of how deep our housing supply crisis is and how strong the floor is on current production. This is a market that shouldn’t exist. In the past, new single family housing markets were dominated by owner-occupiers. In our constrained environment, rising rents determine the market equilibrium. And, rents have risen enough to wake this formerly chimerical source of supply.

This market is on a tipping point. After some very recent growth, about 100,000 new homes are being built for rent. It is possible that this will be the latest victim of legal obstruction. Many bills are being proposed to block large institutions from buying homes to rent. If those proposals are enacted, it won’t lower the floor on housing production much, because this market isn’t very large yet, but it will remove our last chance at increasing production in the near-term enough to bend rents back down.

If that market is allowed to rise, we might follow path number 1. If it is blocked, we will follow path number 2.

In a functional market, marginal trends in things like interest rates or construction costs would be important factors, and they still surely are regarding individual projects. But, at the macro-level, about 1.5 million units can jump all the legal hurdles meant to stop housing production. About 1.5 million units will be economically built, and what will make them economical are the rising rents from all the Americans stuffing themselves into our 140 million existing homes while we legally suffocate additional sources of supply.

Think of it this way, rising costs in the existing stock of homes will justify building at existing production levels. Higher production levels will lower the cost to live in the existing stock of homes. The other 1,000 moving parts that make markets happen will move to where they need to in order to justify those new units. And that will be the case for years into the future. At the micro level, costs determine outcomes. At the macro level, when you are in a state of deprivation, the state determines the costs. Nature abhors a vacuum, and that includes a vacuum where 15 million homes should be. The richest nation in the world can only be housing-poor at the end of a gun. Anything less than that - high costs, high interest rates, etc. - will fail to keep it from being reasonably housed.

Water runs downhill, unless you build a dam.

Follow-up details for subscribers.