In this post, I want to continue the discussion of the effect of new housing supply on residential property values at a more macro level. In the previous post, I wrote that the effect of new supply is powerful over the long-term, but acts slowly and gradually. I pointed out that none of the sharp downturns in home rents or prices in the recent past have been the result of increased supply. And, further, I asserted that supply has never and will never cause a collapse of prices and rents. Under a 2% inflation target, comprehensive supply reforms might create flat, or at most, slightly negative nominal price and rent trends while nominal incomes grow and catch up.
Kevin, your analysis is always impressive but the one variable that you don’t discuss is the impact of demographics on the mix of housing types in demand. Baby Boomers like me are just now reaching the age where “aging in place” is no longer practical, but downsizing to single level living puts us in direct competition with our millennial children who are looking for starter homes for their new families.
Actually, I have thought of some things to say tangentially related to the topic. One is that starter homes have been underpriced for most of the time since 2008, and in cities without supply restrictions, new construction should now return in the starter home market since their prices have finally risen high enough to trigger new construction. The prices of the homes should mostly reflect the cost to building, and new construction will cause prices to moderate at that level going forward. I would say that the main consequence of having underpriced homes for the last 15 years is that rents for non-owners are much higher on those homes. But, the prices should be moderated by new supply.
Of course, there are a lot of complications around the value of urban land, etc., which do inflate the prices, and that's a whole can of worms.
One barely connected tangent here you've reminded me of is a topic I probably won't get a chance to write up anywhere, but in Phoenix, we have a lot of retirement neighborhoods, which creates the opportunity to look at the effect of credit. For instance, a neighborhood with $250,000 homes in a regular neighborhood probably is affected by working class access to mortgages. $250,000 homes in a retirement neighborhood might have similar residents, but they mostly paid cash because they are older.
What I found was that before 2008, prices of retirement homes rose sharply in Phoenix just like regular neighborhoods did, at all price points. After 2008, prices of low-tier regular neighborhoods declined very sharply - more than 50% typically. Prices of rich neighborhoods with million dollar homes didn't fall as much. Maybe 20% typically. All the retirement neighborhoods had trends like rich neighborhoods. Maybe falling 20%, whether they were $200,000 homes or million dollar homes.
My takeaway is that this is more tentative evidence that credit access didn't have much to do with rising prices in Phoenix before 2008, but it had a lot to do with how far prices fell after 2008.
Yeah. Those issues can certainly be important at the microeconomic level. And I'm sure it affects the details on new buildings. But, one thing that I have come to appreciate is that there is a lot of exchange and substitution within the existing housing stock. For every 1% of new homes built, there are 3-4% of families trading around, moving, renovating, etc. So, those issues don't usually make a lot of difference on the macro-level analysis I am doing. And there are always those sorts of mixes and trades happening.
Maybe nutrition is a good analogy. If you eat a steak vs. ice cream vs. a sandwich, etc., there are countless processes that will have to react very differently within your body to react to those various meals. But, if all those people are running a 5k race later in the day, they're basically all going to be fine, and what they ate will help give their body energy.
On housing, I'm like a doctor that sees a patient who has become weak and can't run. All of those details about the various ways their cells convert food to energy are still real and important, but there is probably just one reason that they are weak, and it doesn't necessarily require nailing down all those details to understand the thing that is wrong.
That's a self-serving way to say that I probably won't have much to say on a topic like that.
Kevin, your analysis is always impressive but the one variable that you don’t discuss is the impact of demographics on the mix of housing types in demand. Baby Boomers like me are just now reaching the age where “aging in place” is no longer practical, but downsizing to single level living puts us in direct competition with our millennial children who are looking for starter homes for their new families.
Actually, I have thought of some things to say tangentially related to the topic. One is that starter homes have been underpriced for most of the time since 2008, and in cities without supply restrictions, new construction should now return in the starter home market since their prices have finally risen high enough to trigger new construction. The prices of the homes should mostly reflect the cost to building, and new construction will cause prices to moderate at that level going forward. I would say that the main consequence of having underpriced homes for the last 15 years is that rents for non-owners are much higher on those homes. But, the prices should be moderated by new supply.
Of course, there are a lot of complications around the value of urban land, etc., which do inflate the prices, and that's a whole can of worms.
One barely connected tangent here you've reminded me of is a topic I probably won't get a chance to write up anywhere, but in Phoenix, we have a lot of retirement neighborhoods, which creates the opportunity to look at the effect of credit. For instance, a neighborhood with $250,000 homes in a regular neighborhood probably is affected by working class access to mortgages. $250,000 homes in a retirement neighborhood might have similar residents, but they mostly paid cash because they are older.
What I found was that before 2008, prices of retirement homes rose sharply in Phoenix just like regular neighborhoods did, at all price points. After 2008, prices of low-tier regular neighborhoods declined very sharply - more than 50% typically. Prices of rich neighborhoods with million dollar homes didn't fall as much. Maybe 20% typically. All the retirement neighborhoods had trends like rich neighborhoods. Maybe falling 20%, whether they were $200,000 homes or million dollar homes.
My takeaway is that this is more tentative evidence that credit access didn't have much to do with rising prices in Phoenix before 2008, but it had a lot to do with how far prices fell after 2008.
Yeah. Those issues can certainly be important at the microeconomic level. And I'm sure it affects the details on new buildings. But, one thing that I have come to appreciate is that there is a lot of exchange and substitution within the existing housing stock. For every 1% of new homes built, there are 3-4% of families trading around, moving, renovating, etc. So, those issues don't usually make a lot of difference on the macro-level analysis I am doing. And there are always those sorts of mixes and trades happening.
Maybe nutrition is a good analogy. If you eat a steak vs. ice cream vs. a sandwich, etc., there are countless processes that will have to react very differently within your body to react to those various meals. But, if all those people are running a 5k race later in the day, they're basically all going to be fine, and what they ate will help give their body energy.
On housing, I'm like a doctor that sees a patient who has become weak and can't run. All of those details about the various ways their cells convert food to energy are still real and important, but there is probably just one reason that they are weak, and it doesn't necessarily require nailing down all those details to understand the thing that is wrong.
That's a self-serving way to say that I probably won't have much to say on a topic like that.