ResiDay 2025
I was honored to be included as a speaker at Lance Lambert’s ResiDay 2025. Lance runs the ResiClub newsletter and now the ResiClub Terminal with a cache of useful real estate data.
Lance is a source of level-headed information. He is able to maintain a mastery of the conventional approach to and language of real estate coverage while also introducing his readers to less conventional interpretations and approaches.
This was the second year for ResiDay, which Lance is building into an annual one-day event, and the day was filled with interesting presentations. I will discuss some of the other presentations in another post. Here, I am sharing my interview.
Because of some scheduling surprises, the event was running a bit long, so we didn’t get to my closing hot take on stage. Regular readers probably can guess what that is. In the video, we cover several points.
Notes on the Discussion
The century-long flat Case-Shiller home price index was no accident. That is what home prices will naturally do in just about any context except for under deep supply crisis conditions. A supply crisis caused it to leave the long-term range.
Bubble markets and supply constrained markets look distinctively different. They are easy to tell apart. In supply constrained markets, prices and rents appreciate the most in the poorest neighborhoods because families are all making compromises within the city to make their budgets work. That systematically pushes demand down-market. Markets that are deeply supply constrained have perennial outmigration. Families resist both local and regional displacement, and are willing to pay higher rents to avoid it. The rents and prices of homes in those markets are set by the leavers. The rent it takes to get enough people to leave Los Angeles or New York City to make room for the remaining families is the anchor point that determines market rents across Los Angeles or New York City.
In bubble markets, prices rise because buyers are impatient. In Phoenix and Orlando, in the 2000s, prices increased across all neighborhoods, and then declined across all neighborhoods. Thousands of families were moving in to Phoenix and Orlando. And many of them were coming from Los Angeles and New York City.
Aspirational movers might push price/income ratios up from 3 to 5 across a city. That’s a big cyclical push. In supply constrained cities, some families live in homes that would sell for 15 times their incomes. Few would pay that much aspirationally. Families live in homes that are that inflated because they are under duress. It’s inertia. They are resisting unwanted change.
This is how the housing deprived cities create a sense of gentrification and unusual demand among their residents. In simple terms, an existing neighborhood with average incomes of $60,000 and price/income ratio of 10 would have homes worth $600,000. A family with a $120,000 income in another city would expect to spend 3 times their income - $360,000 for a home. If they want to move into the supply constrained city, they can spend 5 times their income - $600,000 - if they can find a unit in the neighborhood that has previously housed families with $60,000 incomes. The existing residents are left with the impression that they are being displaced because their city is especially popular among richer households. The household moving in isn’t overspending any more than the families that were moving into Phoenix in 2005. But, the compromises they have to make within the Los Angeles market in order for that math to be similar create demographic stresses and create rent inflation for the existing families that already live in homes worth 10 times their incomes. With the arrival of the new family, the additional upward pressure on rents will motivate a local family to finally leave.
There aren’t an unusual number of newcomers in those markets, and the newcomers aren’t spending more than families are willing to spend aspirationally. But, the existing families are spending more than families are willing to spend aspirationally, until they finally leave. And it sure looks to them like the problem is too many rich newcomers.
This creates a market that requires abstractly describing the forest. But many will oppose that description because it will differ from their personal and poignant observations of the trees.
The elevated Case-Shiller index was a reflection of both the shortage pushing thousands of families out of the housing-short cities and the bubble that it created in the cities they arrived in. There was also a lending boom at the time. The lending boom took all the blame for what was largely motivated by the shortage, and so austerity and a lending clampdown were enforced until a depression in lending roughly countered the inflation related to the supply crisis.
By 2012, the normal-looking national price index was a combination of cities like Los Angeles and New York City, which were inflated by a supply shortage, and most other cities, where prices were now pushed well below the historical norm by the mortgage crackdown.
The damage that did to the new home construction ended up putting the entire country into a shortage condition, and now almost every city looks like a market with a supply crisis - rents are inflating in the poorest neighborhoods.
The Hot Take
Now, there are cities with locally enforced shortages - the closed access cities (New York, Los Angeles, San Francisco, San Diego, and Boston). And, there are many cities with shortages that are the result of a series of massively important accidents - the mortgage crackdown, a decade of rent inflation with very low construction, a few years where construction activity was clawing back toward an equilibrium that would flatten rents, and new additional Covid-related supply chain disruptions that interrupted that recovery.
Now, regressive rent inflation has accumulated in cities across the country that aren’t capable of putting a permanently tight lid on the construction of all types of homes. In most cities, the pendulum has swung past neutral while events conspired to slow the recovery in construction. Rents are unsustainably high. There is a premium on the land under low-tier homes that is unsustainable.
We are used to a housing market, under that old flat Case-Shiller regime, that was driven by cyclical changes in demand that pushed prices and construction activity up and down together as the economy ebbed and flowed. Those changes generally were small compared to the volatile trends of the past couple of decades, but they happened quickly.
There will still be cyclical trends, but now, the downside of those cycles will be buffered by the pent up demand of millions of renter households who have delayed forming households under these shortage conditions. Construction will be stable and rising for years, if not decades, with no deep drops in activity. As that construction plays out, it will eventually level out rents and prices in cities where land values have become unsustainably inflated. Eventually, land values in most markets will start to decline. But, it will decline slowly.
In many ways, this will be a builder’s dream time. A perpetual building boom. But, it will be different than building booms in the past. Prices will be moderating as construction activity increases. That will put continual, moderate downward pressure on margins, but without the volatile margins that used to swing back and forth over the course of a cycle.
There will be risks, and within all these moving parts, traditional risks regarding location, execution, and regional economic shifts will still be just as important as they always have been. But, over the top of that, there will now be an equally important macro-level set of factors that has never really existed before. In some ways it will be bullish because pent up demand will limit cyclical downside - and some of that will come in the form of opportunistic purchases from investors for the rental market where the owner-occupier market is soft. In some ways, it will be bearish because there will be a constant downward pressure on urban land values where construction is active. But, it will be a slow-moving pressure, not the cyclical bottom falling out of markets.
Understanding this temporary condition will be important for optimizing investments in the space.
The only way to kill this coming building boom will be to ban large scale investments in rental housing, which is, unfortunately, a possibility. But, even that has mitigating factors for some investors, since that would cause land and rent inflation to return.