The wimpiest downturn ever

Between the National Association of Realtors’ (NAR) $418 million spanking and Home Depot’s purchase of SRS Distribution at a whopping 16.6 times adjusted EBITDA, nobody in the channel seems to be paying much attention to the housing market right now.

That’s too bad because we’re actually doing better than a lot of people expected. Annualized single-family starts were 1.13 million in February, up 11.6% from January and up 35.2% YoY. At 392,000, multifamily is still in the tank on a YoY basis—down 37.8%—but up 8.3% from January.

February new home sales were 662,000 (annualized). That’s a slight dip from January’s 664,000, but still up 5.8% YoY. Existing home sales rose for the third month, to 4,380,000 annualized. Still down 3.3% YoY, but after five consecutive months of losses last year, we’ll take it.

“February’s inventory of unsold listings as of the end of the month were up 5.9% from last month, standing at 1,070,000 homes for sale, says NAR. “Compared with February of 2023, inventory levels were up 10.3%.”

We’re still a long way from the finish line, though. In February we had just 2.9 months’ supply of existing for-sale homes (at the current sales rate). Anything less than six months’ supply is a shortage, and while new home inventory is at 8.4 months, new homes account for less than 15% of the total market. Plus, we’re losing ground. “Demand is currently outpacing inventory,” says NAR.

So it’s no surprise that existing home prices are still rising. Redfin’s February Home Price Index was up 6.7% YoY. That’s just slightly ahead of the 6.5% increase in Feb 2023, but well below Feb 2022, when the index was up 22.2% YoY.

This is not just an American phenomenon. The 2020-21 surge in home prices was as strong in Canada as it was here. Since then, Canadian home prices have fallen by 14% while the median existing single-family home in the U.S. is down 7%.

But as of Feb 2024, the Canadian composite price (SFD plus multiples) was still 33% above its level in Feb 2020, just before COVID hit. In the U.S., existing homes were 42% above their Feb 2020 price.

In both the U.S. and Canada, prices slipped a little bit during the second half of 2023. But if you’re hoping for a correction like the correction that occurred in the wake of the Great Recession, you’re probably going to be disappointed.

When the 2004-07 housing bubble popped, home values fell 33% over the next five years (NAR data). But that bubble was the result of excess household debt, sketchy mortgages, and deceptive investment practices. None of them is a factor today (except maybe deceptive investments, but we won’t know about that until they bite us on the butt again).

This time around, home price inflation is a simple expression of the law of supply and demand: We’ve been underbuilding for a decade and we don’t have enough housing units to accommodate the population. Scarcity always jacks up the price.

It’s not as if anyone should be surprised that we’re in this situation. As far back as the 1990s, we knew the Millennial generation was the largest cohort in U.S. history, and that they’d reach their prime home-buying years sometime around 2010. It doesn’t take advanced calculus to know that averaging fewer than 1.3 million starts per year throughout the 2010s wouldn’t yield enough housing units for everyone.

It’s not as if we’ve never been in this situation before, either. Same thing happened in the 1960s, when Baby Boomers—who at the time were the largest cohort in U.S. history—were entering their prime home-buying years.

Analysts predicted a severe housing shortage by the early 1970s, which convinced Congress to enact a number of programs to encourage construction of low-income and entry-level housing.

The centerpiece was a HUD program called Operation Breakthrough. Its purpose was to jumpstart construction by subsidizing innovative industrialized methods, primarily modular and panelization. Some worked and others didn’t. Operation Breakthrough helped push roof trusses and prehung doors into the mainstream, but the program petered out in the early 1970s.

Other government incentives sparked a gold rush among conventional on-site home builders and real estate investors, though. Housing starts jumped from 1.43 million in 1970 to over 2.0 million in 1971, continued at that pace until it was cut short by the OPEC energy crisis in 1974, then jumped back over 2.0 million when the crisis ended.

In other words, we know how to jumpstart construction. In 1972, starts peaked at an all-time record 2.36 million. Adjusted for population growth, the equivalent in 2023 would be 3.75 million housing starts.

The Biden Administration has proposed tax credits, down payment assistance, and new rules on title insurance that would help first-time buyers get into the market. Some are hoping the NAR settlement will improve affordability by taking money out of realtors’ pockets. But that’s all just nibbling around the edges.

Aside from the fact that the chances of Congress implementing a Biden proposal are slim and none, anything we do that includes the existing home market wastes resources. When an existing home is sold, it is nearly always offset by another one that was purchased. You can goose existing home sales all you want and the effect on the total supply of housing units is still zero or close to it.

But there is a lesson here: You can jumpstart pretty much anything if you throw money at it. Just ask Intel Corp.—or, for that matter, builders who are having an easier time finding framers because the average wage is up nearly 30% vs. five years ago.

Economists say that at this point, housing is the only reason inflation is hanging on above 3%. Government incentives that boost housing production might also get the economy back on track faster than it would have otherwise. Doesn’t mean it’s going to happen, though—plenty of people think that’s the wrong way to go about it.

But the fact remains that the only way out of our affordability dilemma is to build our way out. The big question is how long that will take.

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