The Longest Housing Crash in History

A For Sale sign in front of a home in Arlington, Va., on Nov. 19, 2020. (Saul Loeb/AFP via Getty Images)

Commentary

What would you think if you walked into your favorite grocery store and saw that the shelves were 80 percent bare?

It echoes in there. The store is only one-fifth stocked. It’s eerie. Let’s call it “shelf awareness.” What kind of feelings does this evoke inside of you?

These store shelves represent the available supply of American housing today. Supply is only at one-third of its 2018 level. Further, it’s an astoundingly scarce one-fifth of the supply that it would take to bring the housing market into balance.

Are you looking for a housing crash? I found it. I’ve said for a long time that the real crash in U.S. real estate has already happened. It’s not a price crash. It was a supply crash that began in April of 2020.

This is a big reason why I don’t expect any housing price crash. When supply is low, this fuels bidding wars. In turn, this stokes prices.

Now that society has become more housebound, they’re willing to pay more for a home. In 2019, a home was where you resided and slept. Today, you might also work, exercise, homeschool, and garden there. A home is simply more useful today.

Bank of America predicts that home prices will finish 2022 up 10 percent and another 5 percent higher in 2023.

Empty grocery store shelves can induce panic in shoppers. They tend to buy all that they can—even hoard. This scene might make you load up on laundry detergent, vegetables, peanuts, pasta, almonds, and A.1. steak sauce. (When the store runs out of A.1. sauce, I declare it a dietary atrocity.)

Americans are hoarding houses. Some homeowners with low mortgage rates don’t want to let their properties go. Increasingly, when they move, they keep their former home as a rental. First-time homebuyers are being squeezed out of the market by investors.

What does a real estate investor “see” in this market? It’s important to understand that the rate of inflation is substantially higher than mortgage interest rates.

This means that when you take out a mortgage loan, you get to repay the bank with dollars that erode on them faster than their interest charges can accrue on you.

That’s also why people don’t want to sell their house and lose their mortgage. They'd rather keep it.

A savvy investor can own what historically appreciates in value (property) while borrowing what depreciates in value (dollars).

Whether it’s groceries or houses, when vital resources get scarce, people load up on them. We’re talking about food and shelter here. These are absolute life essentials.

There are three principal drivers to measure a real estate market’s vitality (click measure for recent level):

Months of Available Supply—5 to 6 months is balanced

Sale-to-List Price Ratio—95 to 99 percent is balanced

Days on Market (DOM)—30 to 60 days is balanced

All indicators point to a vivacious market in the next year, though probably with fewer bidding wars than last year.

Recall that in the real estate-fueled Global Financial Crisis of 2008, oversupply was one contributor to the rare national housing price downturn. Laughable mortgage underwriting standards were another.

Think about it this way. Today, it would take a 500 percent housing supply increase just to get the market to equilibrium, not an oversupplied condition. For the entry-level property segment (which often makes for the best rentals), the supply is even more scarce.

When will today’s housing supply crisis turn around? It'll be years. Some relief is on the way. Home and apartment construction recently reached a 45-year high.

But housing supply is inelastic. It only changes slowly.

It’s easier to produce laundry detergent, rice, and carrots to get the grocery store shelves full than to create new housing that’s undersupplied by 5x. Why?

Supplies—Many constrained supply chain items must converge in one place for housing construction.

Labor—There is an insufficient labor pool. Training new labor takes time. Teaching these skills doesn’t work well online.

Regulations—Recognizing the crisis, some jurisdictions are relaxing these, notably California.

Innovation Limits—I devoted GRE Podcast episodes about why 3-D printing and shipping containers aren’t answers.

Demand and utility are important market metrics. But due to its inelasticity and its ability to fuel bidding wars, I “keep my eye on the supply.” This pervasive dearth of housing inventory could feel like the longest crash in history.