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.

 

Asking again: who buys McMansions?

Given the negative connotations of the term McMansion, who exactly purchases such homes? The A.V. Club takes a quick shot:

It doesn’t seem likely that McMansion Hell will make these kinds of houses disappear from the landscape. Not as long as there are orthodontists and hedge-fund managers with money to burn.

This is a standard claim: the people who move into McMansions are the nouveau riche and they want the home to impress others. They are not concerned with architectural purity; they just want neighbors and people to drive by and be wowed by the grandiosity and features. But, is this actually true? We don’t know some fairly basic information, such as who lives in McMansions or what they actually think about domestic architecture.

For me, the basic question is this: if McMansions are so unquestionably bad, whether due to architecture or excessive consumption or contributing to suburban sprawl, why do people continue to move into them or live in them? There is something in the McMansion that appeals to a good number of Americans with the means to afford them (and before the housing bubble burst, more of those who maybe couldn’t afford them). And if you oppose McMansions, I’m guessing the architecture criticism simply doesn’t register with many Americans. The postwar era is littered with bad housing (I know ranch homes get some love today but they aren’t special) and aesthetics may not matter much compared to other factors (like the quest for more space or being in certain desirable locations) when purchasing a home.

Trading the large yard and dining room for interior play spaces

Home buyers with young kids are looking for houses with certain kinds of spaces:

The biggest requirements for families with children, according to the National Association of Realtors, is what you’d expect: 62% of those with kids 18 and under say the quality of the neighborhood is important, while 50% are looking for a good school district and 49% want the home to be convenient to their jobs. Fewer said that lot size or proximity to parks and recreational facilities were a factor in choosing a home. The statistics come from the group’s 2015 Profile of Home Buyers and Sellers report.

Yet once those top-level needs are met, families start to make more detail-level compromises. And being able to visualize a place for the kids to corral their stuff and play has become a priority, according to Blackwelder and others…

But in the Kansas City area, too, an indoor play area is a priority, Hines said, since parents want a separate space to keep toys from flooding the kitchen and family areas. “The volume of toys we have is much higher [than in generations past],” she observed…

Retailers are also suggesting the dual-use room as a trend. On the website for Land of Nod, a Chicago-based retailer of children’s furniture and products, there are tips on how to create a formal dining room and playroom in one.

How Americans choose and use their homes is often influenced by larger social forces. Based on this article, here are some of the larger forces at work:

  1. A move away from formality. Americans have often been said to be casual and informal people and this removes one of the more formal rooms of the house (along with the living room).
  2. An ongoing interest in private space. Play for children here is confined more to settings that are easier to control and within quick sight and sound of parents.
  3. The need for increased safety for children also contributes as kids are not only in private spaces but are also still within the home where others cannot reach them.
  4. A greater emphasis on the needs of children as opposed to other members of the family. Perhaps every child should now have a dedicated play room and parents should have no spaces off-limits to kids. (Think of the formal parlor of past decades where children were banned or very infrequent guests.)

Will the dining room completely disappear in the trend toward great rooms and open living spaces? Probably not, particularly if there are some easy solutions to split the use of the space between more formal dining and play areas. Yet, if fewer people have formal gatherings, perhaps the dining room will become a luxury item in homes with the extra space or for those who desire such segmentation.

American problem and solution: too much stuff? Just buy a bigger house

Episode 11 of Season 88 of House Hunters opens with this claim from a Jacksonville, Florida couple:

We have a very American problem. We have too much stuff. And we’re going to do the very American solution. Instead of getting rid of some of our stuff, we’re going to just get a bigger house.

This is indeed a very American problem. I’m not sure whether this couple should be applauded for recognizing the issue at hand (how many Americans really recognize they have lots of stuff?) or we should sadly shake our heads at their decision of how to move on. We have a consumer driven economy where Americans own enough stuff to fill lots of self-storage facilities. And the size of new homes have risen over 50% in the last four decades, even as household sizes have decreased. Perhaps the interest in McMansions isn’t about having private space or impressing the neighbors or showing off the owner’s status; perhaps they are about having so many square feet of space that the owner can keep consuming.

As an aside, it might be fascinating to see how many McMansion owners rent self-storage units…

Public homebuilders increase their Chicago area market share in the last 15 years

What kinds of firms have built homes in the Chicago region has changed quite a bit in the last 15 or so years:

Public companies accounted for nearly 60 percent of the contracts for new homes in the Chicago market last year, up from 54 percent last year and well above the 11 percent market share they held in 1999, according to Tracy Cross & Associates, a Schaumburg-based consulting firm.

The top five builders in the Chicago area all were public companies, led by D.R. Horton of Fort Worth, Texas, with 517 local contracts signed last year.

The growth of public companies partly at the expense of private builders—a trend playing out in many markets across the country—will likely continue for the next few years until conventional banks grow more willing to finance land purchases and development, said Tony Avila, chief executive of Builder Advisor Group, a San Francisco firm that advises and raises capital for homebuilders.

Many private builders rely more on banks, which have clamped down on financing home construction since the financial crisis, while public companies have other options, such as issuing bonds or shares, Avila said.

Quite an increase since 1999. This reminds me of the shift from really small builders – often just a few homes a year – before World War II to the larger-scale construction afterward (often said to be illustrated by Levitt and Sons). Then (big housing need, new innovations) and now (economic crisis leading to new lending guidelines), broader economic and social conditions contributed to these changes.

With that said, how does this affect the average homebuyer and resident? Large-scale firms may offer economy of scale and therefore lower prices but they also might have fewer options in their housing designs and interiors and be able to construct larger developments, contributing to sprawl. Does the quality increase? Do homebuyers have a better experience in one versus the other?

How life stages affect decisions about housing

Life stages, including cohabitation or kids leaving the house, can trigger different housing choices:

Unmarried. Singles are more likely to rent and live in locations that are closer to entertainment and employment, which is why these areas are more in demand today than usual.

Togetherness. Cohabitation has been on the rise in recent decades, but homeownership rates for these couples are much lower than rates for their married counterparts.

Marriage. Marriage often increases the desire to own a home; many location and housing choices depend on income and nearby family.

Children. The addition of little ones makes owning a home feel like a necessity for many, given the desire for yards, good schools and social circles for the kids.

Children moving out. An empty nest often results in lifestyle changes, including different home-size preferences, social circles and floor-plan needs. Locational preferences also begin to shift.

The first two stages suggest a decrease in homeownership, the next two based around marriage and kids involve the more traditional American Dream, and the last seems to revert to the first two when more options are available. Are we headed toward a housing market where owning a home is primarily about kids? This has always been a key factor in moving to and living in the suburbs, which is closely linked to homeownership.

The flip side of this is to ask how real estate agents and builders will respond to these life stages. Can they afford to target each stage with specialized housing? Are there ways to have more flexible housing that can transition as the lifecourse changes?

Watch for more personal appeals from home sellers

Personal appeals from home sellers may be the next big thing in real estate:

Watch for this to take off in home listings: Sometimes, in a bidding war, you hear about homebuyers writing love letters about themselves — words that explain what wonderful families they have, how they’re crazy about the house, etc., in order to persuade sellers to choose them over other bidders.

Now comes a vaguely comparable feature for sellers: Coldwell Banker Real Estate recently revised its listings to allow home sellers to post personal stories, photos and videos about their homes, with the aim of making their listings stand out. Among the first to take up the offer were actors William Macy and Felicity Huffman, who explained their affection for the house they’re aiming to sell in Colorado: “Felicity and I love to hike up toward Sopris Mountain, right out the back door. … We put a secret door between the kids’ bedrooms, which has been a huge hit.” The brokerage says that all of its seller-clients can add their own content to their listing pages, although it must be approved by their agents.

Positive emotions seem to be the key to such appeals. If the opposite party is touched, the home can be sold for more or bought for less. It all may seem cheesy but selling and buying a home can be a very emotional process. As economic sociologists and others have found in recent decades, such decisions are not just about dollars and cents but often include complex emotional reactions. Buying and selling certainly counts as an emotionally fraught process from the amount of money involved to the transitions involved (changing communities, jobs, etc.) to the commonly-invoked American ideals of “making it.”

I would love to see some data on this: how much does an effective letter change the price? And, on the flip side, how might a poorly worded letter damage the party who wrote it?