Explaining a low housing supply

Relatively few homes are available for purchase in the United States:

Sales of existing homes rose a steeper-than-expected 3.5% in December compared with January, according to the National Association of Realtors.

Demand is surging because mortgage rates are about a full percentage point lower than they were a year ago, and the largest generation, millennials, are aging into their homebuying years.

That demand has pushed the supply of homes for sale down 8.5% annually to the lowest level since the Realtors began tracking inventory in 1982…

Sales of homes priced below $100,000 were down 7.7% annually in December, while every other price category saw increased sales. That is because there is so few for sale at the entry level. Investors have been very active in this category, turning these homes into lucrative rentals.

The article cites multiple factors at work: low mortgage rates, older millennials looking to purchase properties, and a decreased supply of cheaper homes (in part because of investors looking for rental properties).

I am curious about two things the article does not mention:

1. Who are all the actors involved in these trends? Mortgage rates are down – because federal interest rates are low? How are lenders reacting to this? Millennial homebuying might be up – what do the trends look like for other groups (particularly since homeownership is not necessarily high)? How are policymakers reacting to this shortage, particularly when affordable housing is a major concern in many markets?

2. This seems like an opportunity for builders and developers: the supply is low, people want homes. How are builders responding? According to the Census, new housing construction is trending up in the last few years:

NewResidentialConstructionDec19

These converging actions and trends bear watching in a country devoted, at least in ideology, to homeownership.

 

Toll Brothers, smaller homes, and “affordable luxury”

Can a smaller home also be luxurious? Toll Brothers is looking to sell such an option:

In an effort to expand into new segments of the housing market that fit into its wheelhouse, Toll is putting a new focus on reaching out to the first-time homebuyer, particularly through its concept of “affordable luxury.”

Historically, luxury in the housing market has meant McMansions. However, Toll Brothers has broadened its offerings to include luxury apartment buildings, and its newest effort: affordable luxury. The affordable luxury niche (Toll won’t refer to it as a “segment”) is geared toward the millennial buyer, who is buying later in life and often has more financial resources than the typical first-time homebuyer. Currently, 37% of Toll’s offerings now have price points below $500,000, and in some areas hit $375,000. Note, however, that these are base prices, and when customization and additional amenities push the prices higher. Still, affordable luxury properties fall well below Toll’s average selling price in the fourth quarter of $857,800. The increased density (meaning smaller units/properties built close to each other) of these projects will help Toll maintain margins despite the lower price points.

During the earnings conference call on Dec. 9, Toll Brothers CEO Douglas Yearly explained the concept:

“While affordable luxury crosses all buyer segments including move-up and active-adult, this initiative is driven in large part by a growing number of millennials who are older, more affluent, and more discerning when they buy their first home. Think of it as a BMW 3 Series, a great example of affordable luxury.”

While there is a lot of concern in recent years about developers constructing few new starter homes and millennials not being able to buy into the housing market, could this plan suggest another factor at work: are younger adults expecting more out of their first home? Having a dwelling is one thing; people need a place to live and store their stuff. But, when committing to homeownership for the first time, do buyers expect the features they see all over TV and in the homes they knew growing up: open kitchens and living spaces, nice appliances, custom finishes, designer touches, plenty of bathrooms and bedrooms?

Toll Brothers says they are aiming at people who want their first home to not be just a dwelling: they want “affordable luxury.” One could argue that if people really needed first-time homes, perhaps the tiny home industry should be booming (and it is not mainstream yet). This builder believes there is a market for buyers who do not just want a home; they want a distinguished home that feels good to live in and shows well to others.

I have noted before that having smaller homes in the United States does not necessarily mean they will forgo nicer touches or be cheaper. I would guess there are a good number of buyers who are willing to trade some square footage (there is some bottom limit – many people do not want to truly live in a really small house) for luxury items in the home.

Mismatch between the slightly smaller homes millennials want and bigger homes builders want to construct?

Some data from recent years suggests builders and younger homebuyers may not see eye-to-eye on what kinds of homes they want:

A new survey from the National Association of Home Builders suggests that millennials — the demographic that should be the big driver of home buying over the next decade — is growing increasingly pragmatic about size. In 2018, one-third of millennials said they would trade smaller size for greater affordability; in 2007 just one in five millennials found that tradeoff palatable.

Indeed, in its most recent annual report, Harvard’s Joint Center for Housing Studies notes the builder vs. buyer mismatch. “With millions of millennials moving into their prime home-buying years, demand for smaller, more affordable homes seems poised for a surge,” the report stated.

Yet builders aren’t interested in ponying up the supply.

The JCHS says that in 2017 small homes represented just 22% of new homes, compared to an average of 32% between 1999 and 2011. And to be clear, the JCHS is not talking about tiny homes for millennials. It defines small as 1,800 square feet or less. That is still bigger than new homes’ median size a generation ago.

Just how much smaller are the homes that millennials desire? The median new home size decreased last year to around 2,300 square feet. What exactly is the range of home size millennials most desire (and how does this size interact with other important factors such as locations or features of the home)?

On the other side, builders are likely interested in constructing larger homes because they can make more money off each unit. Additionally, there is still some demand for larger homes though this could change in the coming years with more millennials in the housing market alongside older residents who are no longer buying homes or who are looking to sell their own large homes.

All of this is of interest to the housing industry (and other related observers): will millennials kill McMansions? Where are the newly constructed starter houses? On the whole, Americans still have large homes on a global scale and an intertwined set of social and cultural factors that keep that going. There is both money to be made here and new dwellings younger homebuyers would like to explore (if they can afford them).

Building a Sears mail-order home

The Chicago Tribune offers a summary of Sears mail-order homes from the first half of the twentieth century:

From the early 1900s until 1942, Sears, Roebuck and Co., more commonly known as Sears, sold thousands of mail-order kit homes, which buyers could pick from a catalog. The Barrington, for example, cost $2,606 and came with everything from trim, windows, millwork and flooring — some 30,000 pre-cut and numbered parts shipped by rail for assembly by owner or a local contractor. Housing styles were in the hundreds, floor plans customizable and prices from around $100

Ohio has the largest number of Sears kit homes, followed closely by Illinois, according to Solonickne, who started researching the topic seven years ago thanks to her daughter’s school project. Because many of the original sales records weren’t easily accessible, Solonickne decided to take on the task herself…

As of late summer, Solonickne counts 213 Sears homes in Elgin, 149 in Carlinville, 146 in Rockford and 69 in Downers Grove…

A number of companies — such as Aladdin Co. of Bay City, Mich., and Chicago-based firms Montgomery Ward and Harris Brothers — produced and sold mail-order homes. Each of these companies, including Sears, offered large luxury models (around 10 rooms) as well as two- and three-room vacation cottages, said Hunter.

Perhaps the most interesting part of this to me is the number of people who might live in such homes without knowing it. When you purchase a home, you actually do not find out much about the past of the home unless the seller goes out of their way to provide that information (and if they do, they are likely to doing so to justify a higher selling price).

It is also a bit strange to me that Sears itself would not have kept records (or those records did not survive) of to whom they sold home kits. Given the size of the order, wouldn’t Sears keep track of this information?

If Amazon is a direct descendant of Sears, we can expect Amazon to at some point sell homes or kits. Perhaps they would sell you all the materials and then offer an Amazon Expert to build it for you.

Production housing in the suburbs and what Americans want out of homes

An architect describes how production housing helps build the American suburbs:

Its scale is enormous. During the building boom before 2008, production housing—the name for builder-constructed residential developments—accounted for the vast majority of single-family homes. During that time, 1.8 million homes were started in a single month nationwide. Recent figures for January 2018, though down from prerecession highs, indicate 886,000 new starts. By some accounts, architects are responsible for designing no more than 2 percent of those homes. As the architect Duo Dickinson has observed, this means that the profession has largely ceded the best opportunity to be relevant and useful to ordinary people.

Not only does production housing dominate the market; consumers also like its products. The major appeal is affordability, with the housing industry producing a range of prices from modest to high-end. A family of four with a moderate middle-class income can put down $8,120, plus closing costs, to buy a home for $232,000 with three to four bedrooms, two bathrooms, a garage, and a piece of ground for a front and backyard. At the high end, buyers spending over $1 million—who could afford an architect if they wanted one—instead often choose big, builder-designed homes they see as bargains preferable to custom designs.

A second attraction is the quality of housing stock. People sometimes think of production homes as “builder-grade,” made carelessly and on the cheap. But American housing is better built now than ever before, a result of market competition, stricter building codes, and better materials. Basic construction is more solid, but the housing industry also is constantly upgrading the technology and sustainability of its products. As soon as the industry could see that producing energy-efficient homes had marketing advantages, green building started becoming increasingly widespread. These homes are not the ultimate in energy efficiency, but they are continuously improving. And because of the wide reach of production homes, those improvements impact many people.

A third appeal is that the housing industry answers consumers’ needs. Through its trade organizations, research institutes, and publications, it conducts constant research between buyer and seller. The feedback loop includes marketing, professional magazines, and trade shows. For instance, canvasing of consumers indicated that a living room adjacent to the front door, a holdover of the Victorian parlor, was far less important than having more space in a great room. Without reconfiguring the outline of the building—changing slab designs is costly—the front parlor was transformed into a smaller office or guest bedroom. This design makes sense, as the front door is typically not used for entry these days, but as a marker of domesticity. With marketing information at hand, builders can make immediate adjustments to their offerings. The expansion of walk-in closets, great spaces, and open kitchens correlate directly with consumers’ desires.

This list of positives sounds impressive: large-scale production of suburban housing means many homes can be built in many parts of the country at reasonable costs, at decent quality levels, and all while providing what buyers want. Relying on architects and others to design and build homes might push costs up, create more variability, and take more time. If efficiency and predictably for the homeowner is what Americans want, production building seems to be the way to go.

The rest of the article then goes on to discuss various critiques that could be leveled at suburban housing and development. Of course, efficiency and predictability have downsides both for individual homeowners and communities. And more broadly, we could ask about cultural values surrounding houses in the United States: what ends should they serve?

  1. Broadly accessible to the majority of Americans in settings that have broad appeal. This is what production building offers.
  2. Customized to the needs of individual owners and families rather than the limited number of models in #1.
  3. The design and size of homes should be subservient to community goals for land use and social life.
  4. Houses should provide significant return on investment.

Number three may just be the hardest sell as it places a house within a larger context and suggests it (and its owners) need to be part of what others are doing. Number two has the advantage of appealing to the individuality many Americans desire but this likely comes at some cost. Holding the goal of making suburban housing as available to as many people as possible (and you can make a good argument that this has been an American policy goal for roughly 100 years with ongoing socialized mortgages) leads to number one.

Number four is perhaps the most recent idea as it developed in recent decades with rising housing values amid financial uncertainties. This might fit best with number one: if Americans can get a good deal on a home, they can then expect more in return when they sell.

Home builders pull support of tax cuts over mortgage interest deduction

A group that may be viewed as generally in favor of fewer taxes – the National Association of Home Builders – is not happy that the mortgage interest deduction could disappear in the Trump tax cuts:

That’s because one day before, House Ways and Means Committee Chairman Kevin Brady (R-Tex.) informed NAHB that he would not be including a homeownership tax credit as part of the new tax legislation, which will be released on Wednesday.

NAHB’s chief executive, Jerry Howard, had spent months working on this new tax provision with Brady’s aides, but House leaders wouldn’t allow its inclusion, Howard was told. The next day, Howard and other NAHB officials gathered on a conference call and debated what to do. They agreed unanimously — kill the bill…

The home builders are seen as among the most influential Washington corporate forces, not only because they have members everywhere but are often big fundraisers for politicians and have a close connection to the economy, development, hiring and economic growth.

They are incensed about proposed changes to tax law that, they believe, would eliminate the need for almost all Americans to itemize their tax deductions, an adjustment they think would nullify the need for middle-class Americans to deduct their mortgage interest from their taxes. They are also incensed that the bill would strip away the ability of Americans to deduct their state and local property taxes from their federal taxable income. Both these changes, NAHB argues, would raise the cost of buying and owning a home.

This part of the tax code has been debated in recent years (ranging from fiscal cliff issues to 2010 post-housing bubble discussions). And, more broadly, the United States is the only developed country that subsidizes mortgages in the ways that we do.

It is not a surprise that certain interest groups would oppose changes to the tax code that they perceive could affect their business. At the same time, any perceived effect on housing – not only a major part of the economy but also symbolically important as a marker of the middle-class lifestyle – is going to draw a lot of attention. And this area also involves the interests of fairly wealthy Americans:

But this national wealth-creation policy has several negative side effects. Since tax benefits are most useful for people with taxable income, U.S. wealth-creation policy is predominantly for people who already have wealth. These high-income households don’t consider their tax benefits to be a form of government policy at all. For example, 60 percent of people who claim the MID say they have never used any government program, ever. As a result, rich households can be skeptical of public-housing policies while benefiting from a $71 billion annual tax benefit which is, functionally, a public-housing policy for the rich. As Desmond writes, “a 15-story public housing tower and a mortgaged suburban home are both government-subsidized, but only one looks (and feels) that way.” In short, an asset-building, wealth-creation, or welfare policy that’s run through the tax code can hurt the overall push for more direct forms of welfare—like simply giving money to the poor…

But more generally, people need money to buy houses. The United States still lags almost every advanced economy in the amount of money transferred from the rich to the poor. One major reason is that the tax code has become a vehicle for incentivizing wealth-creation among households who already have the most wealth, even as the government has soured on policies that spend money directly on the poor. It’s hard to find a better exemplar of this sorry fact than the juxtaposition of America’s affordable housing crisis and the untouchable sanctity of the mortgage-interest deduction.

In other words, the interests of the NAHB are not necessarily with the Americans who most need housing but with those who can purchase more expensive new homes. Thus, the mortgage interest deduction is just another piece of evidence regarding a bifurcated American housing market.

Could you build a hurricane, tornado, flooding, blizzard resistant McMansion?

With the number of single-family homes damaged by Hurricane Harvey in Texas, could you design a McMansion that could stand up to natural disasters? Here are a few factors that might affect whether this is possible:

  1. One of the advantages of McMansions for builders is that they are often constructed on a mass scale. Any changes to construction could slow down the process.
  2. Related to #1, an increase in the materials needed or a slow down in the process would likely lead to an increased price. Compared to true mansions, McMansions are aimed at a broader segment of the housing market.
  3. Different disasters likely require different approaches. If the problem is tornados, say in Tornado Alley, you are trying to protect against winds whereas if the home is constructed in a flood plain or on a coast, the home could be built on stilts or piers to allow floodwaters to pass underneath.
  4. Many McMansions are constructed in suburban areas. No matter what you do to each house, it could be very difficult to protect against everything. For example, flooding is less an issue of each home being poorly constructed but rather a problem connected to land development on a broader scale.

Many McMansion builders or owners would not have to worry too much about major disasters. But imagine that someone develops “the Resilient McMansion.” Could this be worth pursuing in certain areas?