June 2023 Erdmann Housing Tracker Update

According to Zillow, home prices continue to be finding a new base. Unfortunately, they appear to be supported, fundamentally, by rising rents. As I have written about frequently, one problem with the thesis that rising mortgage rates will tank home prices is that low mortgage rates were never a necessary ingredient to explain why they were high to begin with.

The rent line will level off, if we’re lucky. There is little reason to expect prices to decline in the absence of more than that.

One thing to keep in mind is that rent inflation has been relatively high for nearly a decade at a de facto completions rate of about 1.2 - 1.5 million per year (solid black line in Figure 2). This has generally been a combination of about a million completions a year (dashed black line in Figure 2) plus 200,000 or 300,000 of harvested vacancies a year. So, just to keep at the rate that was associated with excess rent inflation (red line, right axis) of about 2% during that time, completions need to keep rising up toward the 1.5 million range.

Figure 2

If population growth remains low and immigration remains constrained, that could lower necessary completions by a few hundred thousand units annually. But, in the other direction, vacancies shouldn’t just stop declining. They need to recover. To get rent inflation back to neutral will likely require building at least another couple hundred thousand units associated with rising vacancy. That will need to happen for years.

The 2000s boom is an example of that sort of market. Completions were near 2 million, but some of that was associated with vacancies. New completions minus new vacancies was coming in at about 1.2 to 1.6 million annually - about the same net rate as the previous decade, but back then changes in vacancy were reducing the count of utilized new completions rather than raising it. That was the only period in decades where supply was actually moderating rents (red line from 2003 to 2006).

So, even though there have been some indications of supply related home price moderation, perhaps we should expect rent inflation to return until construction can rise some more.

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