That first chart, with CPI core less shelter...wow.
The short story: America has inflation due in large part to housing scarcity.
There must be add-on effects of scarce housing that are not measurable. Expensive housing means more-expensive labor. Expensive housing means demands for public transit from distant suburbs, or lower living standards as people commute for hours.
Well, the election is over and the new administration, like the old administration, is not really in gear to do anything.
I like the idea of essentially bribing local governments to unzone. Maybe homeowners in targeted upzoned neighborhoods could be tempted with bonus payments. Would you take $200k to allow high-rise condos here? Schedule a vote of the district.
I prefer a national abolition on property zoning, but that is not in the cards.
Kevin, if rent inflation is returning to normal (or below), home price appreciation is returning to normal (or below), how do we justify the need for more housing?
There is more than 20% of excess accumulated rent inflation. That's on average. Rents on older, formerly cheaper homes are up as much as 40% or more. It's not enough to stop the rise. We need to reverse it.
And, I'd say, it's not so much about "justifying the need" as it is that the market will demand it if we let it. We don't need to force it. It will happen where it is legally allowed.
One way I would put it is that the market abhors land rents like nature abhors a vacuum. Where it is legal to, the market will replace land rents with structure rents.
Think of it this way: Would you rather spend $2,000 a month on an empty plot of land or $2,000 a month on a home with 3 bedrooms, etc.? Obviously the home. Right? That preference works its way through the communal expression of supply and demand. The structures will be built, where legal. All of the excess rent is land rent. More construction will substitute structures for inflated land.
I'm not 100% sure. We're in uncharted territory under current mortgage conditions, where, in 20 years, there will be a sizeable institutional single-family rental market that has never really existed before. But, I think those scatterplots I post of price/income levels across each metropolitan area do represent a firm long-term equilibrium pattern that markets will revert to. I think that anywhere where there is some version of housing that can be built legally to meet demand, price/income ratios in the poorer ZIP codes will settle in within 1 point of the richer ZIP codes. In most cities that's 3-4x. IOW, if the richest 10% of neighborhoods in the city have a price/income ratio of around 3x, then the poorest neighborhoods should settle at less than 4x. And I think there will be a natural demand for new homes in a given city as long as the difference is greater than that.
That makes sense Kevin. I'm not sure the Wall Street investors will want a plan that brings down home prices, but affordability needs to be addressed/attacked.
I keep reading your work in the hopes that I'll understand better and better the information you give and how it relates to home prices, but I confess i'm mystified by this one. But if you're happy, I'm happy.
I just am not sure what a 2% trend path is, but I’m having the chance to read it again and I’m getting it a bit more. Mostly I lack more than rudimentary literacy in statistics and economics, so sometimes I find myself adrift and have to triangulate to understand some details and/or statements.
2% trend path is the level prices would be at if they rise by 2% each year, according to the Fed’s goal. The first chart is price indexes after subtracting 2% each year, so that the lines are flat if inflation hits the Fed’s 2% target over the long term.
https://www.bisnow.com/national/news/capital-markets/office-loans-are-the-feds-top-concern-in-stress-test-report-126841?rt=100280&utm_source=outbound_pub_6&utm_campaign=outbound_issue_81722&utm_content=outbound_link_2&utm_medium=email
This is OT a little, but office loans are looking uglier than the Yankees World Series play, and getting worse.
But..no recriminations, no howling that banks were too easy on borrowers, that in the future credit quality and down-payments have to be raised, etc.
Some of those correctives may be taken, and fine and dandy...but there is no moralizing, and beating up in general of commercial property borrowers.
Commercial property was also whacked hard back in 2008. But only the residential side got the headlines.
That first chart, with CPI core less shelter...wow.
The short story: America has inflation due in large part to housing scarcity.
There must be add-on effects of scarce housing that are not measurable. Expensive housing means more-expensive labor. Expensive housing means demands for public transit from distant suburbs, or lower living standards as people commute for hours.
Well, the election is over and the new administration, like the old administration, is not really in gear to do anything.
I like the idea of essentially bribing local governments to unzone. Maybe homeowners in targeted upzoned neighborhoods could be tempted with bonus payments. Would you take $200k to allow high-rise condos here? Schedule a vote of the district.
I prefer a national abolition on property zoning, but that is not in the cards.
Kevin, if rent inflation is returning to normal (or below), home price appreciation is returning to normal (or below), how do we justify the need for more housing?
There is more than 20% of excess accumulated rent inflation. That's on average. Rents on older, formerly cheaper homes are up as much as 40% or more. It's not enough to stop the rise. We need to reverse it.
And, I'd say, it's not so much about "justifying the need" as it is that the market will demand it if we let it. We don't need to force it. It will happen where it is legally allowed.
One way I would put it is that the market abhors land rents like nature abhors a vacuum. Where it is legal to, the market will replace land rents with structure rents.
Think of it this way: Would you rather spend $2,000 a month on an empty plot of land or $2,000 a month on a home with 3 bedrooms, etc.? Obviously the home. Right? That preference works its way through the communal expression of supply and demand. The structures will be built, where legal. All of the excess rent is land rent. More construction will substitute structures for inflated land.
Does that make sense?
Yes, I get it, so deflate rents/land prices. So where do we find "the dotted line" where we need our deflation level to target?
I'm not 100% sure. We're in uncharted territory under current mortgage conditions, where, in 20 years, there will be a sizeable institutional single-family rental market that has never really existed before. But, I think those scatterplots I post of price/income levels across each metropolitan area do represent a firm long-term equilibrium pattern that markets will revert to. I think that anywhere where there is some version of housing that can be built legally to meet demand, price/income ratios in the poorer ZIP codes will settle in within 1 point of the richer ZIP codes. In most cities that's 3-4x. IOW, if the richest 10% of neighborhoods in the city have a price/income ratio of around 3x, then the poorest neighborhoods should settle at less than 4x. And I think there will be a natural demand for new homes in a given city as long as the difference is greater than that.
That makes sense Kevin. I'm not sure the Wall Street investors will want a plan that brings down home prices, but affordability needs to be addressed/attacked.
I keep reading your work in the hopes that I'll understand better and better the information you give and how it relates to home prices, but I confess i'm mystified by this one. But if you're happy, I'm happy.
Is there something I need to clarify? (The post is a bit terse.) Or, are you just unsure of the conclusions?
I just am not sure what a 2% trend path is, but I’m having the chance to read it again and I’m getting it a bit more. Mostly I lack more than rudimentary literacy in statistics and economics, so sometimes I find myself adrift and have to triangulate to understand some details and/or statements.
2% trend path is the level prices would be at if they rise by 2% each year, according to the Fed’s goal. The first chart is price indexes after subtracting 2% each year, so that the lines are flat if inflation hits the Fed’s 2% target over the long term.
I was *barely* on track hahahaha, thanks much!!
Some, however, remain worried!
https://marcusnunes.substack.com/p/brief-notes-on-todays-cpi-release
Yep. Great post, as usual.