Tag Archives: supply and demand

How might a prediction of a crash in housing prices in specific cities affect behavior?

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Goldman Sachs is predicting a big drop in housing values in four American cities:

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In a note to clients earlier this month, Goldman Sachs forecasted that four American cities in particular should gear up for a seismic decline compared to that of the 2008 housing crash.

San Jose, California; Austin, Texas; Phoenix, Arizona; and San Diego, California will likely see boom and bust declines of more than 25%.

Such declines would rival those seen around 15 years ago during the Great Recession. Home prices across the United States fell around 27%, according to the S&P CoreLogic Case-Shiller index…

In 2023, the investment bank expects home prices to barely fall in cities like New York (-0.3%) and Chicago (-1.8%) while predicting higher prices in Baltimore (+0.5%) and Miami (+0.8%).

It make sense that a company interested in investments and finance would want to make such a prediction. Will it change people’s behavior? A few ways this might matter:

-Local homeowners try to sell now before the big decline or prepare to stay put longer so they can see an increase in values. Either way, the supply of homes for sale is affected.

-Builders and developers reduce their construction and plans. They wait to see how long such a decline lasts. They hope to weather this and have higher profit margins later.

-Local governments steel for the impacts to tax revenues and population growth.

-People who might consider moving to or investing in the area reconsider. Would lower housing values make the area more attractive? (This might conflict with fewer homes for sale.)

Does such a prediction become a self-fulfilling prophecy to some degree as people wait for the drop in home prices?

I just want housing for Christmas, New Year’s, and the years to come

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How about more housing for the holidays?

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“We have a supply problem with housing,” Marc Norman, associate dean at the NYU Schack Institute of Real Estate, told Yahoo Finance Live (video above). “We’ll see the price declines, but I think the income gains that we are seeing lately are still not keeping up with the prices that we are seeing in the market — in most markets.”…

“We, for the last 20 years, have underbuilt the housing,” Norman said. “In 2008, we saw the sort of demand go down, but it never came back in terms of supply.”

After the 2008 real estate crash, residential construction activities in the private sector never recovered to the level of 2006. Although home building slowly increased year over year during the last decade, projects remained well below early 2000 levels, according to figures from the Census Bureau and. Department of Housing and Urban Development.

Several thoughts in response:

  1. The United States has never fully recovered from the housing bubble in the late 2000s. The rise in housing values, homeownership, and lending activity led to a lot of trouble.
  2. How much money has the real estate and development sector made since the late 2000s? How much money has been left on the table by not building (or not being able to build, as discussed in the article, due to zoning and other restrictions)?
  3. How many older homes are retrofitted or renovated to meet current standards and tastes each year compared to how many new housing units are needed? Both routes could help provide housing.

All of this could set up nicely for giving housing as a Christmas present in the future.

The implications of unevenness in rapid housing value appreciation

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A new analysis suggests housing prices did not increase as much in recent years in some wealthier areas:

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House prices were up less than 1% last quarter from a year earlier in Westchester, New York, for example — and not much more than that in Montgomery County, Maryland, a favorite of wealthy commuters to the capital.

The trend isn’t limited to the east coast, with Chicago’s Cook County posting an increase of 2%. By comparison, almost two-thirds of the counties surveyed saw prices rise more than 10%…

“Demand today tends to be stronger at the entry and mid-priced tiers of the market than at the higher end,” said Rick Sharga, Attom’s executive vice president of market intelligence. “Price appreciation tends to rise more quickly in counties with a higher percentage of lower-priced homes available.”…

In more than three-quarters of the 586 counties analyzed by Attom, housing was less affordable than in the past relative to incomes.

Interpreting this report about the data and trends, it sounds like housing prices increased faster than incomes in many places but not all places. Additionally, housing did not appreciate at the same rate; places with more cheaper housing appreciated more.

Two quick thoughts in response:

  1. There is a need to both see housing as a national issue and a need to understand local variation in housing. While so much about housing can be local, there is also a tendency to make sweeping claims about housing across the country as a whole. Better addressing both levels of analysis requires better reporting of data and different kinds of analysis. (And this is why national housing policy is so difficult.)
  2. There is an idea that people who need cheaper housing can move to places or markets with cheaper housing. What if enough people move to those cheaper housing areas so that there is no longer cheaper housing? I’m thinking of the rapid housing value increases in Austin. In the first place, not everyone can simply move to take advantage of that cheaper housing, but, even if they did, this would defeat the purposes of moving as housing prices would increase.

View housing – and America? – as “a country of 384 metro areas”

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Housing is all about location so why not view it as a metro by metro issue?

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When it comes to housing, it might be better to think about the U.S. as a country of 384 metro areas (plus 50 million Americans who don’t live in places big enough to qualify as a metro area) rather than one continuous country. In 2021, the U.S. population grew just 0.1% – the lowest annual expansion rate since our nation’s founding. But housing dynamics are best viewed through the different metro areas that are growing and shrinking. Of the 384 metro areas, 72 had declining populations in the decade leading to 2020, according to the Census.

The general argument makes some sense: supply and demand for housing depends on the metropolitan region. I have lived in one of these regions that has very limited demand for housing and experienced numerous foreclosures in the late 2000s. In places such as these, housing is cheap and plentiful – but there are relatively few people who want to move there and, if they do, there is limited desire to rehab older homes. On the other hand, the activity in particular housing markets – such as the coverage of housing and population in Manhattan and San Francisco during COVID-19 – draws all sorts of attention because of the prices and demand. All of this contributes to why housing is difficult to address at a national level.

More broadly, seeing the United States as a collection of metropolitan regions (or expanded city states?) may make some sense. For example, the 9+ million people in the Chicago region may see themselves as more of a collective than describing people from Illinois or people from the Midwest. These people share a particular housing and jobs market, common sources of information, entertainment options, a transportation network, and regional forces.

Of course, some regions may be more like other regions. Scholars have examined some of these broader collections, such as Rust Belt or Sunbelt regions or immigrant gateways, or used particular cities as models – particularly Chicago, New York, and Los Angeles – by which we can better understand all cities and regions. Yet, even these regions that share common characteristics have particular histories and current realities that would help set them apart from other.

All of this gets at an ongoing issue in sociology and other disciplines: at what point is it worthwhile to group phenomena together because of common traits or is it better to leave them as distinct entities because of their differences? There are both common traits in and a lot of variation among the 384 metro areas (plus all the other people living outside metro areas). At least for housing, it is tempting to treat each market as unique even as there are common patterns.

The factors affecting housing in the Chicago region in 2022

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Several experts suggest housing prices will continue to rise in the Chicago area in 2022 but not at the same rate as they did in 2021:

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Rather, changes in home price growth, the supply of homes for sale and upticks in rock-bottom interest rates are more likely to stabilize the market after an unpredictable 2021, they said. That likely won’t mean an end to competition or high prices — and it doesn’t bode well for first-time homebuyers — but the market could ease up compared with 2021…

In the nine-county Chicago metro area, the median home sale price from January to November was $300,000, up nearly 12% over the same months in 2020, according to the Illinois Association of Realtors…

Prices are likely to rise next year, but won’t continue the exponential growth of 2021, said Daniel McMillen, head of the Stuart Handler Department of Real Estate at the University of Illinois at Chicago. Without an influx of new residents to the area or big increases in incomes, that growth will become unsustainable, he said…

Homebuyers are continuing to look for amenities like home offices and workout areas, Melbourne said. Kitchens are a priority. Condo-buyers are looking for bigger units, rather than one-bedrooms.

The pressure from COVID-19 moves will hopefully subside. Then, the more regular patterns in Chicago area real estate might take over again. There are at least several interrelated factors:

  1. Limited population increases in the Chicago region. This reduces demand.
  2. Uneven development within the region where some neighborhoods and suburbs will be popular and others not. Prices will go up in desirable places.
  3. Construction of new residences has been down. What kind of units will be built? If recent trends hold, it will be housing aimed more at wealthier residents. Additionally, these units will be constructed in some locations and not others.
  4. If there is a long-term shift in what homebuyers and renters want from units, does this significantly shift demand? Continued or more working from home has the potential to affect the individual and collective experience of places.
  5. The particulars of certain communities. Communities understand themselves as having certain characters and prioritize particular goals. Local regulations could incentivize or discourage certain kinds of development.

There are numerous factors affecting housing to pay attention to amid changing conditions.

Investors buying about 20% of homes in the United States

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A story about rising home prices in small town America highlights the role of investors buying property:

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Local buyers bid against one another as well as against investors who now comprise about a fifth of annual home sales nationally. Online platforms such as BiggerPockets and Fundrise make it easier for out-of-town investors to buy real estate in smaller cities across the U.S., said John Burns of California-based John Burns Real Estate Consulting.

Often, Mr. Burns said, “the cash flows are better in the Tulsas and Allentowns of the world” for those seeking to rent out properties. In the fourth quarter of 2020, nearly a fifth of homes sold in the Allentown area were bought by investors, according to Mr. Burns’s data.

While much attention is directed to hot real estate markets in major metro areas – with a lot of attention for the most expensive like Manhattan, San Francisco, Los Angeles, and others – this hints at a different dynamic. In smaller town, there is not a big supply of new housing. Thus, investors can purchase homes and turn them into rental properties. Without large influxes of new residences, these rental units can bring in good money as buyers look to move up within an unchanging local supply.

If there is such demand and limited supplies of new homes in places like Bethlehem, Pennsylvania, the focus of this article, one possible future is a business opportunity for local or national builders who could come in and provide new apartments or single-family homes. While the community may not be growing much in terms of population, housing stocks do need replenishing and what people desire over time changes. Could building in Bethlehem generate the kinds of profits builders are looking or are more of them chasing even better profit opportunities in hotter markets with faster-growing populations?

If investors are making a significant number of these purchases, could communities respond in ways that help retain opportunities for local residents as opposed to far-off companies? Could they form local investment funds or cooperatives that then only sell or rent the homes at reasonable rates to local residents? This could be an affordable housing issue in many communities and even if local actors generated little profit in the transactions, they could help insure a supply of human capital.

A strange housing market: limited supply, less construction, rent prices diverging from home prices…

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According to experts, the housing market right now is a strange one with COVID-19 and other factors coming together in odd ways:

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Today, if you’re looking for one, you’re likely to see only about half as many homes for sale as were available last winter, according to data from Altos Research, a firm that tracks the market nationwide. That’s a record-shattering decline in inventory, following years of steady erosion…

There are lots of steps along the “property ladder,” as Professor Keys put it, that are hard to imagine people taking mid-pandemic: Who would move into an assisted living facility or nursing home right now (freeing up a longtime family home)? Who would commit to a “forever home” (freeing up their starter house) when it’s unclear what remote work will look like in six months?…

For more than a decade, less housing has been built relative to historical averages. The housing crash decimated the home building industry and pushed many construction workers into other jobs. Local building restrictions and neighbor objections have slowed new construction. President Trump’s strict immigration policies further restricted the labor supply in the industry, and his tariffs pushed up the price of building materials…

Right now, in a number of metro areas, home prices and rents aren’t just drifting apart; they’re moving in opposite directions. Prices are rising while rents are falling.

The article ends on a note of uncertainty: where might the housing market go from here? But, I wonder if it is worth digging more into the past to think about how we got here. Several things come to mind:

  1. COVID-19 is a very unique situation. As the article notes, this seems to have affected rental and home prices in different ways as suddenly people were interested in homes in particular areas and not so interested in rental properties in other areas. Figuring out the long-term effects of this will take time; will people return back to work in big offices, whether in the city or suburban office parks? Is this a significant change or will markets return back to earlier patterns with more time removed from COVID-19?
  2. Are we really removed from the housing bubble and crash of the late 2000s? This affected the market in profound ways – are we still feeling the consequences? For example, are builders and developers more committed than ever toward building more profitable homes rather than affordable or starting-level properties?
  3. How #1 and #2 fit with longer-term patterns in American life – such as a preference for single-family suburban homes and government support for homeownership – is interesting to consider. How do recent market shifts fit with long-term cultural and social preferences and practices? Does a shift to homes as investments fundamentally shake up this dynamic and alter future patterns?

In other words, keep watching the broader housing markets through the next few years.

Competing claims: America has a shortage of housing versus it has plenty of housing (albeit overpriced or inaccessible)

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Does the United States have lots of housing units or a shortage? The two sides of the argument:

  1. A few years ago, I had a conversation with a sociologist who studies housing. When I brought up the issue of not enough housing units in connection with a need for more affordable housing, they said the problem was not a lack of units. Rather, more of those units needed to be made available to the people who for a variety of reasons could not easily access them now.
  2. A recent opinion piece states the other side of the argument:

“Stephen, you’ve been proven right on housing, and I think you’re about to be proven even more right. The most important driver of home prices is supply and demand. And right now, there is a chronic undersupply of homes in America.“

As I said, the 2008 bust turned a lot of folks off from investing in housing. It shattered the confidence of homebuilders, too. Census Bureau data shows an average of 1.5 million homes were built each year since 1959. Yet since 2009, just 900,000 homes have been built per year. In fact, fewer homes were built in the past decade than in any decade since the ‘50s!

We have a serious housing shortage in America today. It would take less than six months to sell every existing home on the market, as you can see here…

…In the past year or two, the first wave of young homebuyers came into the market. But every year for the next decade, tens of millions of Millennials will hit home-buying age.”

I could see a possibility where both prognosticators could be true: there are many dilapidated or older units that need to be updated and priced in ways that more people can access them and there is a relatively shortage of new homes that meet the demands and tastes of younger buyers.

But, this gets at some bigger questions about housing in the United States:

  1. How many older housing units can be renovated to today’s codes and standards? And who should pay for this?
  2. Should anyone be put in charge of or help set housing prices so that more housing units are within economic reach of more residents?
  3. Should developers and builders primarily focus on profit or do they also have a responsibility to communities (beyond paying a fee for affordable  housing or sprinkling in a few cheaper units)?
  4. Can housing be revitalized in areas without significantly changing the population composition or housing values or other ways that might significantly disrupt what current residents like about the location?

Argument: mass transit service comes before demand

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A history of the decline of mass transit in the United States concludes with this claim: there must be transit service in order to generate demand.

The story of American transit didn’t have to turn out this way. Look again at Toronto. It’s much like American cities, with sprawling suburbs and a newer postwar subway system. But instead of relying on park-and-ride, Toronto chose to also provide frequent bus service to all of its new suburbs. (It also is nearly alone in North America in maintaining a well-used legacy streetcar network.) Even Toronto’s suburbanites are heavy transit users, thanks to the good service they enjoy.

Likewise, in Europe, even as urban areas expanded dramatically with the construction of suburbs and new towns, planners designed these communities in ways that made transit use still feasible, building many of them around train stations. When cities like Paris, London, and Berlin eliminated their streetcar networks, they replaced them with comparable bus service.

Service drives demand. When riders started to switch to the car in the early postwar years, American transit systems almost universally cut service to restore their financial viability. But this drove more people away, producing a vicious cycle until just about everybody who could drive, drove. In the fastest-growing areas, little or no transit was provided at all, because it was deemed to be not economically viable. Therefore, new suburbs had to be entirely auto-oriented. As poverty suburbanizes, and as more jobs are located in suburban areas, the inaccessibility of transit on a regional scale is becoming a crisis.

The only way to reverse the vicious cycle in the U.S. is by providing better service up front. The riders might not come on day one, but numerous examples, from cities like Phoenix and Seattle, have shown that better service will attract more riders. This can, in turn, produce a virtuous cycle where more riders justify further improved service—as well as providing a stronger political base of support.

I wonder how much infrastructure – largely paid for by taxpayers and serving the public – differs from other kinds of innovation. Sometimes, new products meet a clear demand. At other times, a new product generates new demand that people did not even know existed.

Furthermore, let’s say for the sake of argument that this claim is true: building more mass transit lines and options would eventually increase demand. Municipalities and governments would still be left with a tricky issue: is there enough will or enough resources to pay what can be massive costs up front with a promised payoff in the future? Long-term thinking is not necessary something Americans have done well in recent decades. (And this does not even include the possibility that the big investment might not pay off.)

Finally, another way to approach this is to start with smaller-scale projects, show people that they work, and then build up to a larger structure. In many American communities, this would mean starting with bus service since plenty of roads already exist. But, many Americans do not like buses. They may be more likely to take trains but these require a lot more work and money.

Can we have both protected open spaces and affordable housing?

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Conservatives argue that the affordable housing issue is simple: stop protecting open space and let developers build more housing units.

But, beginning in the 1970s, housing prices in these communities skyrocketed to three or four times the national average.

Why? Because local government laws and policies severely restricted, or banned outright, the building of anything on vast areas of land. This is called preserving “open space,” and “open space” has become almost a cult obsession among self-righteous environmental activists, many of whom are sufficiently affluent that they don’t have to worry about housing prices.

Some others have bought the argument that there is just very little land left in coastal California, on which to build homes. But anyone who drives down Highway 280 for thirty miles or so from San Francisco to Palo Alto, will see mile after mile of vast areas of land with not a building or a house in sight…

Was it just a big coincidence that housing prices in coastal California began skyrocketing in the 1970s, when building bans spread like wildfire under the banner of “open space,” “saving farmland,” or whatever other slogans would impress the gullible?

When more than half the land in San Mateo County is legally off-limits to building, how surprised should we be that housing prices in the city of San Mateo are now so high that politically appointed task forces have to be formed to solve the “complex” question of how things got to be the way they are and what to do about it?

The argument goes that this is an example of supply and demand: open more space for development and housing prices will have to drive as supply increases. Is it really this simple? Here are at least a few other factors that matter in this equation:

  1. The actions of developers. Even if more housing units could be built, there is no guarantee they could build cheap or affordable housing. They want to make money and they argue the money is not in affordable housing.
  2. Is cheap suburban housing (what is typically promoted by conservatives in these scenarios – keep building further out) desirable in the long run? Opponents of sprawl might argue that having a cheap single-family home 30-50 miles out from the big city is worse in the long run than a smaller, more expensive unit close to city amenities and infrastructure.
  3. What exactly is the value of open space? Conservatives sometimes argue this is another sign of the religion of environmentalism but there are realistic limits to how much housing and development land can hold before you end up with major issues. (For example, see the regular flooding issues in the Chicago area.) If green or open space is simply about property values – keep my home values high by not building nearby housing – this is a different issue.
  4. There is a larger issue of social class. I’m guessing there are few Americans of any political persuasion that would choose to live near affordable housing. There is a stigma associated with it even if the housing is badly needed. Lots of people might argue affordable housing is needed but few communities want it in their boundaries and middle and upper class residents don’t want to be near it.
  5. Another option for affordable housing is to have denser urban areas. Think cities like Hong Kong where a lack of land and high demand have led to one of the highest population densities in the world. If a region wants to protect its open and green space, why not build up? Many city residents don’t want this – the single-family home urban neighborhood is a fixture in many American cities – and conservatives fear a government agenda pushing everyone into dense cities.

Opening more land to development might help lead to cheaper housing but it would take a lot more to get to affordable housing that is within a reasonable distance from job and population centers.