There is a new community in Florida that I have occasionally checked on that seems to be a good example of several stories swirling around housing now.
Kevin, Can you please explain what you mean by these 2 sentences?
"How can builders talk about an undersupplied market, if there are homes for sale? Because land rents have created regressively inflated rents and prices."
It's like when Covid supply chain problems cut off production of new cars and the prices of old cars inflated.
The price of durable assets is an odd dance. The price of used cars is mostly a consequence of the number of new cars produced. The price of new cars is a consequence of the cost of building them, and the quantity of new cars produced is a consequence of the marginal buyer comparing the cost of new cars (which is based on the cost of production) to the cost of used cars (which is based on the production of new cars). If the cost of producing new cars rises, then buyers choose to buy old cars instead and production of new cars declines while the prices of old cars inflate. During the Covid episode, when production of new cars became temporarily limited in a way that wasn't due to the cost of making them, we could see how important that odd dance is, because the prices of used cars increased until production could ramp up again.
In housing, the same thing happens, and in housing we can measure it because in housing, every unit is a combination of land and structure, and there are markets for land. Where housing is in short supply in a way that isn't related to the cost of building structures, the rents on that bundle of land and structure become inflated. And, the price of the land provides an estimate of how much production of new homes has been lacking.
We can also see this in the existing home market. Where the rents and prices of existing homes are increasing when the home itself has not been structurally improved, we can infer that the higher rents and prices are on the land.
Part of what I have found in my analysis, also, is that where there is a lack of adequate supply that is binding enough to create this unusual rent inflation, it is regressive. Basically, the limit on supply creates a monopoly premium on the right to own a home in that market, that is basically uniform across the metropolitan area. In a market where that premium is $100,000, it proportionately raises the prices of homes that were previously $200,000 a lot more than it raises the prices of homes that were previously $400,000. Temporary cyclical changes in home prices tend to raise prices across a city proportionately. So, this is another way to attribute higher rents and prices in a market to inadequate supply. And, the reason it plays out that way is because it's all tied together in that odd dance between the prices of new and old.
So, we can say that a market is undersupplied because rents and prices on the land are unusually high, and are regressively high. As more homes are produced, land prices will decline just like used car prices declined when production ramped up.
Florida reminds me of that Yogi Berra quote: "That place is too crowded; no one goes there anymore."
I'm also aggravated by those tweets from Conor Sen because they seem to point back to the fantastical thinking that prevailed in 2005 at the Fed, albeit with the strange inversion that now homebuilders are colluding to reduce supply to keep prices high.
Kevin, Can you please explain what you mean by these 2 sentences?
"How can builders talk about an undersupplied market, if there are homes for sale? Because land rents have created regressively inflated rents and prices."
It's like when Covid supply chain problems cut off production of new cars and the prices of old cars inflated.
The price of durable assets is an odd dance. The price of used cars is mostly a consequence of the number of new cars produced. The price of new cars is a consequence of the cost of building them, and the quantity of new cars produced is a consequence of the marginal buyer comparing the cost of new cars (which is based on the cost of production) to the cost of used cars (which is based on the production of new cars). If the cost of producing new cars rises, then buyers choose to buy old cars instead and production of new cars declines while the prices of old cars inflate. During the Covid episode, when production of new cars became temporarily limited in a way that wasn't due to the cost of making them, we could see how important that odd dance is, because the prices of used cars increased until production could ramp up again.
In housing, the same thing happens, and in housing we can measure it because in housing, every unit is a combination of land and structure, and there are markets for land. Where housing is in short supply in a way that isn't related to the cost of building structures, the rents on that bundle of land and structure become inflated. And, the price of the land provides an estimate of how much production of new homes has been lacking.
We can also see this in the existing home market. Where the rents and prices of existing homes are increasing when the home itself has not been structurally improved, we can infer that the higher rents and prices are on the land.
Part of what I have found in my analysis, also, is that where there is a lack of adequate supply that is binding enough to create this unusual rent inflation, it is regressive. Basically, the limit on supply creates a monopoly premium on the right to own a home in that market, that is basically uniform across the metropolitan area. In a market where that premium is $100,000, it proportionately raises the prices of homes that were previously $200,000 a lot more than it raises the prices of homes that were previously $400,000. Temporary cyclical changes in home prices tend to raise prices across a city proportionately. So, this is another way to attribute higher rents and prices in a market to inadequate supply. And, the reason it plays out that way is because it's all tied together in that odd dance between the prices of new and old.
So, we can say that a market is undersupplied because rents and prices on the land are unusually high, and are regressively high. As more homes are produced, land prices will decline just like used car prices declined when production ramped up.
Florida reminds me of that Yogi Berra quote: "That place is too crowded; no one goes there anymore."
I'm also aggravated by those tweets from Conor Sen because they seem to point back to the fantastical thinking that prevailed in 2005 at the Fed, albeit with the strange inversion that now homebuilders are colluding to reduce supply to keep prices high.