Great summary, thank you for posting. You've explored so many ideas in your stack, it's helpful to occasionally get a condensed recap and timeline like this.
Question for you:
You're describing the housing situation in the US generally, but in practice there isn't a single national market. New apartments built in the middle of Kansas are not fungible with new apartments built in LA.
I don't have data for this, but my intuition is that cities and towns in the south are already building houses and apartments at roughly the same rate that refugees from the closed access cities are giving up and moving south. If southern cities could ramp up housing production even more and drive costs down perhaps the rate of migration would accelerate, but by definition we can't solve the problem of *displacement* by building houses in other places.
So how do you think about the geographic distribution of the housing shortage and geographic elasticity of supply?
A functioning macro picture does depend on and take for granted countless micro-level decisions about capital allocation. But, I do think because micro-level decisions are idiosyncratic, taking them for granted isn't as dangerous. For instance, in 2008 there was a deep demand shock that basically everybody mistook as a million incorrect micro-level decisions about building homes where there wasn't demand. I'm not sure there is a comparable mistake in the other direction. I don't think there will be a million poor location decisions that I will mistake as a lack of demand.
I'll use Phoenix as an example on the building and flows issue. There are three sources of households. Cost-reducing flows from California. Aspirational inflows from places like the Midwest. And local household formation. In the 2005-2010 boom and bust, first, there was a large amount of pre-existing inflows from the Midwest, etc. Then, there was a spike in inflows from LA. Then there was a reduction in inflows from the Midwest and a rise in outflows from Phoenix because now Phoenix was expensive. Then the LA inflows collapsed, and what really killed Phoenix in 2008 was that when that happened, the other traditional flows had all been killed to. For decades Phoenix had taken in inflows from the Midwest, but the LA inflows knocked the local market out of whack, and when it disappeared suddenly, those traditional net flows were gone, and it took a while for them to come back.
Today, demand has been pushing up rents in Phoenix for a decade rather than creating new units, so there is pent up demand from California, from the Midwest, and from local household formation. More homes will attract more households from all of those sources. Of course, an extra household of demand in Phoenix means one less household in Milwaukee, and so all of those flows are inter-related. But, nationwide, there are probably at least 15 million units worth of household formation and vacancy normalization, so Phoenix could attract a lot of new households without actually creating a net negative demand elsewhere.
It's hard to say how new home completions will net out in terms of where the growth will be because, as I discussed in the Kalamazoo posts and the "When we lost our minds part 1" post about the Midwest, the mortgage crackdown actually hurt housing production in low growth places at least as much as in other places. So, even places that we tend to think of as "low demand" have a lot of pent up demand.
In the end, the market will bid away land rents where it is allowed to, and to me that's the easy measure to benchmark to. Builders will build and households will demand new units until rents normalize. (This is tricky, though, because rents will normalize to a higher level than they were at before 2008 because the mortgage crackdown raised the equilibrium rent it takes to induce new homebuilding. So, I think the best indicator is the asymmetry of excess rents, which is most thoroughly proxied by the slope of the price/income lines I use for each metro area. Those will always tend toward a flat slope where they are legally allowed to.)
All the change coming will be difficult for some landlords. That's why I prefer builders as a speculator. The effects of a building boom are much more straightforward for them than they are for developers exposed to changes in rents that result from the boom.
Great summary, thank you for posting. You've explored so many ideas in your stack, it's helpful to occasionally get a condensed recap and timeline like this.
Question for you:
You're describing the housing situation in the US generally, but in practice there isn't a single national market. New apartments built in the middle of Kansas are not fungible with new apartments built in LA.
I don't have data for this, but my intuition is that cities and towns in the south are already building houses and apartments at roughly the same rate that refugees from the closed access cities are giving up and moving south. If southern cities could ramp up housing production even more and drive costs down perhaps the rate of migration would accelerate, but by definition we can't solve the problem of *displacement* by building houses in other places.
So how do you think about the geographic distribution of the housing shortage and geographic elasticity of supply?
Thanks Andrew, and good points and good question.
A functioning macro picture does depend on and take for granted countless micro-level decisions about capital allocation. But, I do think because micro-level decisions are idiosyncratic, taking them for granted isn't as dangerous. For instance, in 2008 there was a deep demand shock that basically everybody mistook as a million incorrect micro-level decisions about building homes where there wasn't demand. I'm not sure there is a comparable mistake in the other direction. I don't think there will be a million poor location decisions that I will mistake as a lack of demand.
I'll use Phoenix as an example on the building and flows issue. There are three sources of households. Cost-reducing flows from California. Aspirational inflows from places like the Midwest. And local household formation. In the 2005-2010 boom and bust, first, there was a large amount of pre-existing inflows from the Midwest, etc. Then, there was a spike in inflows from LA. Then there was a reduction in inflows from the Midwest and a rise in outflows from Phoenix because now Phoenix was expensive. Then the LA inflows collapsed, and what really killed Phoenix in 2008 was that when that happened, the other traditional flows had all been killed to. For decades Phoenix had taken in inflows from the Midwest, but the LA inflows knocked the local market out of whack, and when it disappeared suddenly, those traditional net flows were gone, and it took a while for them to come back.
Today, demand has been pushing up rents in Phoenix for a decade rather than creating new units, so there is pent up demand from California, from the Midwest, and from local household formation. More homes will attract more households from all of those sources. Of course, an extra household of demand in Phoenix means one less household in Milwaukee, and so all of those flows are inter-related. But, nationwide, there are probably at least 15 million units worth of household formation and vacancy normalization, so Phoenix could attract a lot of new households without actually creating a net negative demand elsewhere.
It's hard to say how new home completions will net out in terms of where the growth will be because, as I discussed in the Kalamazoo posts and the "When we lost our minds part 1" post about the Midwest, the mortgage crackdown actually hurt housing production in low growth places at least as much as in other places. So, even places that we tend to think of as "low demand" have a lot of pent up demand.
In the end, the market will bid away land rents where it is allowed to, and to me that's the easy measure to benchmark to. Builders will build and households will demand new units until rents normalize. (This is tricky, though, because rents will normalize to a higher level than they were at before 2008 because the mortgage crackdown raised the equilibrium rent it takes to induce new homebuilding. So, I think the best indicator is the asymmetry of excess rents, which is most thoroughly proxied by the slope of the price/income lines I use for each metro area. Those will always tend toward a flat slope where they are legally allowed to.)
All the change coming will be difficult for some landlords. That's why I prefer builders as a speculator. The effects of a building boom are much more straightforward for them than they are for developers exposed to changes in rents that result from the boom.