The American housing system is broken.
It’s bad for homebuyers and homebuilders; it’s even worse for renters.
To put it bluntly, the U.S. desperately needs more high-quality rental housing. A lot of it.
These are far different times than those of our grandparents who came home from WWII to go to college on the GI Bill and find affordable single-family homes to raise their new families in.
Today, homeownership still works for many – but doesn't work for many others, especially those who aren’t ready to settle down in one place or who don’t have an ample nest egg to tie up all their savings in.
Builders See a Housing Recession
And builder sentiment – for single-family homes anyway – has fallen into negative territory this month, as builders and buyers alike struggle with higher costs.
The National Association of Home Builders Housing Market Index dropped 6 points to 49 this month, its 8th straight monthly decline. Anything above 50 is considered positive; 49 is not.
Notably, NAHB chief economist Robert Dietz says, “Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession.”
The builders index hasn’t seen negative numbers since the start of the pandemic. Before that, it hadn’t seen negative territory since June 2014.
Of the index’s three components, current sales conditions dropped 7 points to 57, sales expectations in the next six months fell 2 points to 47 and buyer traffic fell 5 points to 32.
The biggest hurdle for buyers – like many renters – right now is affordability.
Home prices have been climbing since the start of the pandemic, and the average rate on the 30-year fixed mortgage, which had hit historic lows in early 2020, is almost double what it was at the start of this year.
Yes, home price growth has cooled somewhat in recent weeks, while mortgage rates have come down from their 6%ish highs.
But Deitz believes, “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011.
The eternal optimist adds, however, that peaking or falling inflation and stabilizing long-term interest rates “will provide some stability for the demand-side of the market in the coming months.”
By Dave Allen for Discount Gold & Silver
The American housing system is broken.
It’s bad for homebuyers and homebuilders; it’s even worse for renters.
To put it bluntly, the U.S. desperately needs more high-quality rental housing. A lot of it.
These are far different times than those of our grandparents who came home from WWII to go to college on the GI Bill and find affordable single-family homes to raise their new families in.
Today, homeownership still works for many – but doesn't work for many others, especially those who aren’t ready to settle down in one place or who don’t have an ample nest egg to tie up all their savings in.
Builders See a Housing Recession
And builder sentiment – for single-family homes anyway – has fallen into negative territory this month, as builders and buyers alike struggle with higher costs.
The National Association of Home Builders Housing Market Index dropped 6 points to 49 this month, its 8th straight monthly decline. Anything above 50 is considered positive; 49 is not.
Notably, NAHB chief economist Robert Dietz says, “Tighter monetary policy from the Federal Reserve and persistently elevated construction costs have brought on a housing recession.”
The builders index hasn’t seen negative numbers since the start of the pandemic. Before that, it hadn’t seen negative territory since June 2014.
Of the index’s three components, current sales conditions dropped 7 points to 57, sales expectations in the next six months fell 2 points to 47 and buyer traffic fell 5 points to 32.
The biggest hurdle for buyers – like many renters – right now is affordability.
Home prices have been climbing since the start of the pandemic, and the average rate on the 30-year fixed mortgage, which had hit historic lows in early 2020, is almost double what it was at the start of this year.
Yes, home price growth has cooled somewhat in recent weeks, while mortgage rates have come down from their 6%ish highs.
But Deitz believes, “The total volume of single-family starts will post a decline in 2022, the first such decrease since 2011.
The eternal optimist adds, however, that peaking or falling inflation and stabilizing long-term interest rates “will provide some stability for the demand-side of the market in the coming months.”
Renting – a Soulless Experience?
So, it looks like renting is the only option for millions of Americans seeking shelter for themselves and their families.
There are those like venture capitalist Marc Andreessen who calls renting a home is "a soulless experience." He says, "Someone who is bought in to where he lives cares more about where he lives.
"Without this, apartments don’t generate any bond between person and place and without community, no bond between person to person."
I beg to differ. Felix Salmon points to neighborhoods around the U.S. with modest home-ownership rates that “often boast deep and lasting communities stretching across generations and decades.”
He says excellent examples of this can be found in places like Harlem in New York and Hialeah in Miami.
Sam Chandan, who heads up NYU’s Stern Center for Real Estate Finance Research, believes this:
"Ownership per se doesn’t make you more invested in your community. It makes you more invested in decisions in the community that impact the value of your asset."
Andreessen opposed multifamily development in his home town of Atherton, California, because he felt that "will MASSIVELY decrease our home values."
He believes that technology and entrepreneurship can solve the problems of the rental market.
But Salmon counters that rental housing is most successful where they have broad housing security and affordability – for example, in Germany.
He says German renters build strong community bonds the way we all do – by getting to know their neighbors. They don't need all the amenities, which just tend to drive up rents.
Zoning Laws & Education Financing Are Culprits
Salmon claims that the lack of affordable housing in America can be traced to the local or individual level – in particular zoning, a major, possibly the biggest, issue in the U.S.
NIMBYs like those in Atherton are the rule, not the exception. Getting permission to build new multifamily housing is often absurdly expensive and difficult for builders.
In Pennsylvania, land development and subdivision plans are required to be reviewed by the municipal Planning Commission, the county Planning Commission, the county Soil Conservation District, the Department of Environmental Protection, as well as the state highway department, the municipal Historic Preservation Committee, and other advisory boards.
And that's BEFORE a plan goes before the elected governing body for final approval. Plus, if a developer is seeking one or more variances from the local zoning code, an extra trip (and expenses) will be required to the municipal zoning board.
Education finance is close behind. As long as schools are funded primarily by local property taxes, parents will prefer high property values to affordable housing.
According to the National Center for Education Statistics, in the 2018-19 school year, property taxes made up 80% of all locally-derived revenues nationwide.
In turn, that often increases the number of children in local schools without raising enough tax revenues to cover the cost of educating them.
The good ole American dream also gets in the way.
After looking at the behavior of older millennials, Chandan says, "the data suggest that homeownership as a natural and expected evolution is deeply ingrained in the American psyche."
Federal policies that favored homeownership are already a lot weaker than they used to be.
The 2017 tax reforms greatly reduced the number of people claiming the mortgage interest tax deduction, while government-subsidized 30-year mortgages are widely available on multifamily buildings.
After they get married and start a family, buying a house – and then voting against further new construction – is just what we Americans tend to do, whether it makes financial sense or not.
More Homes than Households
By now, we know the Great Recession following the financial crisis of 2008 caused new-home construction – single-family and multifamily – to fall off a cliff and not keep up with population growth.
But now it's rebounded, and more homes are being built than households are being created.
There's still a housing deficit we need to build our way out of. But those who suggest that our country is creating households faster than we’re building houses are wrong.
The Census Bureau defines the household formation rate as the annual increase in U.S. adults multiplied by the so-called headship rate, which is always around 50%.
Household formation plunged when the pandemic hit – we just stopped making babies – but even before then, in 2019, it was running at only about 900,000 new households a year.
New residential construction, on the other hand, has been steadily increasing. Houses are being started at an annual rate of about 1.6 million units per year.
That’s well above the rate of household formation even after you account for older units that are being demolished.
Some, like Bleakley Financial’s Peter Boockvar, says that multifamily homebuilders are responding to ultra-low vacancy rates by building faster.
Within a year or two, he adds, if we continue to build at current levels, rents might even start to come down.
In the meantime, more young adults will continue moving back in with their aging parents to reduce their living expenses and save more for that elusively affordable rent or down payment on a house to buy.