The early 2000s built upon the 1990s momentum for extending home loans to as many people as possible. The drive culminated in the “ownership society” which incentivized the financial system to over-extend credit and fuel a housing bubble. That bubble collapsed spectacularly from 2008 to 2009. In the wake, builders became very wary about building new homes and banks greatly tightened credit standards. Housing starts and new home sales remain well below pre-crisis levels. Markets are now reluctant to play catch-up.
Now, housing inventories are chronically tight. The massive liquidity poured into the financial system along with a pandemic-induced acceleration of changes in housing preferences are pressing on the supply side. Pleas are growing for the industry to play catch-up with housing demand. Even the National Association of Realtors (NAR) keeps asking home builders to do more.
How to Play Catch-Up
A Marketplace segment on July 2, 2021 called “How many more housing units do we really need to build?” brought my attention to one such plea for the housing market to play catch-up.
Habitat for Humanity hosted a seminar with the provocative title “What will it take to build 10 million units of housing?“. The organization brought together Raphael Bostic (President and CEO of the Atlanta Federal Reserve Bank), David Dworkin (President and CEO National Housing Conference), and Edward Seiller (Executive Director, Research Institute for Housing America, Mortgage Bankers Association) to discuss the challenges and potential solutions. Along with host and moderator Johnathan Reckford (CEO for Habitat for Humanity, Internation) , they agreed on ways for dramatically increasing housing supply while achieving affordability and expanded housing options for more households. The themes are quite familiar. They reveal the sluggishness of the system, particularly governments at all levels, to respond to the needs and demands of the market.
Given the theme of the webinar, the bulk of the conversation naturally concentrated on the supply side of the housing market. I organized my notes into the main themes. Since the participants largely agreed with each other, I did not include attribution to these notes.
Supply Side Problems
- Financial crisis created a loss of builders of starter homes
- Construction costs too high
- Lack of skilled labor
- Infrastructure bill remove construction workers from the housing market; housing not part of infrastructure bill
- Land costs driven by exclusionary zoning (a “last bastion of bipartisanship”)
- Development fees too high: California costs can be $100K a unit; need a carve out for affordable housing
- Housing technology has not changed much and still requires long construction times
- Some cities don’t know what land they have (Atlanta is starting to build an availability database)
- Appraisal gaps that make homes appear cheaper than they really are (reduced incentive to sell and/or build in a neighborhood)
Supply Side Solutions
- Build more
- Rethink attitude: change in zoning to create more density and mixed use
- Need to show people the data as part of a message for denser housing
- Accessory units that are addendums to single-family homes
- Rethink geography of housing to fit changing geography of work
- Rehabilitation housing
- Audits of zoning laws and restrictions
Demand Side Problems
- Credit tightened back to mid-90s levels
Demand Side Solutions
- Down payment assistance
- Non-inflationary incentives (FHA is guilty with first-time home buyer incentives)
Demand and Supply Policy
- Incentives for regions to come together on housing issues
- Neighborhood Homes Investment Act (has bi-partisan support)
Housing Market Narratives Need to Play Catch-Up
At least two narratives emerged from the rubble of the financial crisis. One claimed that American suburbs were dead and people would abandon them for the cities. This narrative was exemplified by “The End of the Suburbs: Where the American Dream Is Moving” by Leigh Gallagher. An overlapping narrative emerged about the coming “Senior Sell-Off” popularized by demographer Arthur C. Nelson. As soon as 2020, aging Baby Boomers, unable to manage their over-sized suburban homes, would evacuate and leave behind a wasteland of firesale prices and emptied neighborhoods. In both narratives, today’s young people were portrayed as uninterested in suburban life.
Fast-forward to a tragic COVID-19 pandemic that accelerated trends already underway. Millennials are buying up homes and the suburbs are thriving. The housing market has a new pandemic-induced narrative about the evacuation from cities in favor of spacious suburban living. Moreover, it turns out that seniors prefer to age in place. Combined these forces exacerbate the crunch on an under-supplied housing market struggling to play catch-up.
The Trade
This Habitat for Humanity webinar was a great reinforcement of the longer term bullish thesis on the U.S. housing market. Dips, sell-offs, and even crises are all times to buy into the secular trend on the cheap. I developed the seasonal trade on home builders as a strategic approach to lower the risk and increase the reward of investing in home builders.
Be careful out there!
Full disclosure: no positions