We're in a "Bizarre Market"...Thoughts on a Recent Article

32 Replies

National Association of Realtors Chief Economist Lawrence Yun recently wrote an article stating that we're in a "Bizarre Market" in which he stated "With a strong economy and the lowest unemployment rate since 2000, more Americans are in the market to buy a home yet sales are stagnant. Existing home sales are down about 1 percent year over year." He went on to discuss how the average days on the market are only about 26 which is well under historical norms. I have personally seen SUB 1-week in both the Central VA and Omaha markets on some properties in the last several weeks.

His solution is new home construction in a variety of housing types to address the inventory shortage. While I think that certainly has merit, I was just wondering what everyone else was thinking of the current market, bizarre or otherwise, and what you feel is a good move to solve the problem. Is it a "problem" or is it a "new normal" for a while? What are your thoughts?

-Walt

You ask is it a problem?

A problem for who?  Investors?  New home owners?

It always comes back to the numbers and what you are wanting to accomplish

So what are your goals to solve the hosing ‘crises’ or make money?

@Michael Plante For you. And for whoever else decides to comment. Just sparking conversation. I couldn't agree more; it is always about the numbers. 

I can't say I have any specific goals to solve the housing crisis. I tend to think that new construction will help some of the supply issues but that'll take time. In the interim, an investor just needs to scrutinize what's available closely and a prospective home buyer needs to temper their expectations to what might be available in a limited market. 

I definitely have some goals for myself and my business. Those goals include selling a couple long term rentals over the next few months that are out of state and re-directing my focus into a new market. I'm a fan of flips and long term rentals, depending on the deal, the market, and the specific property and neighborhood. 

Off the top of my head, I think the housing market is (and will continue to) change with the latest generations of buyers and renters, a large part due to massive student loan debt and just general generational differences...  

Many 25-35 year olds today moved back in with their parents at some point to pay off student loans - are they eager to get into a mortgage for 100-200k now that they can afford a down payment?  (Even if it is a completely different sort of debt)  Maybe not... 

And millennials - it's my view that this generation values a lifestyle with more flexibility and freedom than settling into a 15 or 30 year mortgage.  A 12 month lease is much more attractive, as it allows them to move at will and not have to worry about maintenance.

I don't have any data to back up my view, this is just my 2 cents from what I've heard and read and seen.  But the staggering student loan debt levels in our country could be a game changer for real estate and I've heard figures about the # of 20 and 30 year olds who have moved back into their parents' homes being at an all-time high.  The result of all of this?  Higher demand for rentals  (and after living with their parents for a while, new renters may become accustomed to granite countertops and other high-end finishes, upping the demand for higher-end rentals)

That's a great observation Max. With almost $1.5 TRILLION in outstanding student loan debt and a generation that is ever more comfortable not leaving the nest until late 20's, I think you might be spot on with regards to the higher demand for rentals of purchases in the near future. 

Originally posted by @Walter Key :

National Association of Realtors Chief Economist Lawrence Yun recently wrote an article stating that we're in a "Bizarre Market" in which he stated "With a strong economy and the lowest unemployment rate since 2000, more Americans are in the market to buy a home yet sales are stagnant. Existing home sales are down about 1 percent year over year." He went on to discuss how the average days on the market are only about 26 which is well under historical norms. I have personally seen SUB 1-week in both the Central VA and Omaha markets on some properties in the last several weeks.

His solution is new home construction in a variety of housing types to address the inventory shortage. While I think that certainly has merit, I was just wondering what everyone else was thinking of the current market, bizarre or otherwise, and what you feel is a good move to solve the problem. Is it a "problem" or is it a "new normal" for a while? What are your thoughts?

-Walt

I agree with Mr. Yun. The Bay Area is in a full-blown housing crisis. We need more construction, of all types - let's not get bogged down in what color it is painted, or if it's SFR v condos v fourplexes, or affordable v market. Just build, baby, build.

Originally posted by @Chris Mason :

I agree with Mr. Yun. The Bay Area is in a full-blown housing crisis. We need more construction, of all types - let's not get bogged down in what color it is painted, or if it's SFR v condos v fourplexes, or affordable v market. Just build, baby, build.

Chris,

What kind of inventory are you seeing right now in the Bay area? Here in Charlottesville we're sitting at about 2.5 months. I can only imagine the craziness you've got going on out there.

Builders simply are not keeping up with demand. Add in that the average person stays in a home for 7 to 8 years, and those that bought at an artificial low 7 to 8 years ago are looking at normalized pricing and domt want to trade up, further exasperating the inventory problem.

I agree with Mr. Yun too.

This high price housing “problem” won’t be solved or the housing market won’t be burst until the supply exceeds the demands...

Lack of inventory is the root of the high price / main “problem”.

Although “people” want to build more and more properties, it cannot happen overnight, it will take minimum of a few years to build enough supply to flood the housing market, which means, yes, in the near future, the high price housing market “problem” will become much much more bizarre than today.

Speeding constructions on the numbers of new homes, building many more new units, let the supple exceeds the demands is the way to burst this housing market or solve this high price housing market "problem".

Before it happens, the trend of “tomorrow’s house price” is more expensive than “today”s house price” will keep on going without stop...

Originally posted by @Walter Key :
Originally posted by @Chris Mason:

I agree with Mr. Yun. The Bay Area is in a full-blown housing crisis. We need more construction, of all types - let's not get bogged down in what color it is painted, or if it's SFR v condos v fourplexes, or affordable v market. Just build, baby, build.

Chris,

What kind of inventory are you seeing right now in the Bay area? Here in Charlottesville we're sitting at about 2.5 months. I can only imagine the craziness you've got going on out there.

Within the last month I have heard Realtors quote 2 days and 7 days. 

Closed purchase/sale transactions are down, prices continue to climb. 

The super high end luxury market might be slowing a bit, but the "middle class" $300k/yr household income houses are not.

Build, baby, build.

Up until recently the American dream was to have that nice big 2 story home of your own the white picket fence the 2 car garage and kids running through the sprinklers watering that giant manicured front yard .. that is all gone now with millennials! They live at home till they are over 30
They have massive student loan debt virtually no savings and 3 out of 4 them can’t qualify for a home loan . They don’t care about their parents big dreams .they are happy to live at home or rent . Renting used to be shameful for those with no future in life .now these younger people today are perfectly happy to rent with no intentions of home ownership .crazy culture

Originally posted by @Max Fleissner :

Off the top of my head, I think the housing market is (and will continue to) change with the latest generations of buyers and renters, a large part due to massive student loan debt and just general generational differences...  

Many 25-35 year olds today moved back in with their parents at some point to pay off student loans - are they eager to get into a mortgage for 100-200k now that they can afford a down payment?  (Even if it is a completely different sort of debt)  Maybe not... 

And millennials - it's my view that this generation values a lifestyle with more flexibility and freedom than settling into a 15 or 30 year mortgage.  A 12 month lease is much more attractive, as it allows them to move at will and not have to worry about maintenance.

I don't have any data to back up my view, this is just my 2 cents from what I've heard and read and seen.  But the staggering student loan debt levels in our country could be a game changer for real estate and I've heard figures about the # of 20 and 30 year olds who have moved back into their parents' homes being at an all-time high.  The result of all of this?  Higher demand for rentals  (and after living with their parents for a while, new renters may become accustomed to granite countertops and other high-end finishes, upping the demand for higher-end rentals)

I don't buy this.. millennials are not clueless .. they understand that renting is throwing money down the drain.  just look at all of them on BP crushing it in the real estate space.. if anything i think more of them understand the value of ownership over the dead end of renting.

I know what you wrote is common thought process but i dont see it in the houses i build and sell.

Originally posted by @Jay Hinrichs :

I don't buy this.. millennials are not clueless .. they understand that renting is throwing money down the drain.  just look at all of them on BP crushing it in the real estate space.. if anything i think more of them understand the value of ownership over the dead end of renting.

I know what you wrote is common thought process but i dont see it in the houses i build and sell.

Jay, I tend to think that millennials (and technically I am one, but only by a hair) are split down the middle. You have half of them that are absolutely crushing life, paying off debt, succeeding in businesses, etc. Then you have the other half that's perfectly content to sit in momma's basement until they're 27 and they feel that life somehow owes them something. I guess the question becomes, how many does it take to change the market dynamics and how many are there really. 

Originally posted by @Chris Mason :

Within the last month I have heard Realtors quote 2 days and 7 days. 

Closed purchase/sale transactions are down, prices continue to climb. 

The super high end luxury market might be slowing a bit, but the "middle class" $300k/yr household income houses are not.

Build, baby, build.

If there is lack of inventory, it is because flippers are swooping in with "all-cash" offers and then putting the property up for an extra 50% of the price. Sure, quartz kitchens are nice, but people got to have enough money to eat. The "middle class of 300k a year income" is definitely what is the issue here because plenty of households make far less than that, even half of that and for them, it is game over.

Prices continue to climb and houses get sold in 2 to 7 days. Interest rates also continue to climb and soon enough, (perhaps 2 years), houses will start to take a little longer to sell and may even need, gasp, price reduction. (after all the middle class 300k have had their houses and we are now trying to sell to the below middle class of 150 to 200k income).

As for student loan, hopefully those loans paid off in the form of an education and the booming employment market is allowing the millennial to work and pay off those loans (even if they still have to live in a basement or dorm style apartment).,

Originally posted by @Walter Key :
Originally posted by @Jay Hinrichs:

I don't buy this.. millennials are not clueless .. they understand that renting is throwing money down the drain.  just look at all of them on BP crushing it in the real estate space.. if anything i think more of them understand the value of ownership over the dead end of renting.

I know what you wrote is common thought process but i dont see it in the houses i build and sell.

Jay, I tend to think that millennials (and technically I am one, but only by a hair) are split down the middle. You have half of them that are absolutely crushing life, paying off debt, succeeding in businesses, etc. Then you have the other half that's perfectly content to sit in momma's basement until they're 27 and they feel that life somehow owes them something. I guess the question becomes, how many does it take to change the market dynamics and how many are there really. 

 if you guys think Millenials are bad, Gen Z goes: "Hold my craft beer and watch this"

@Jay Hinrichs I was just arguing with someone the other day about the thought process behind renting versus buying here in Kokomo.

Last year, our city administration decided it would be a great idea for a company from Indy to develop 180+ high-end, luxury apartments near downtown Kokomo with retail space on the street level. They just opened a couple months ago and I can't say for sure how many are now leased.

Anyway, these are NICE apartments for our area. Granite counters, stainless steel appliances, wood floors, fitness center, pool, etc. - all the bells and whistles for a blue collar town highly dependent on the auto industry. Was looking at rents on their website when they opened...Studios (450 sq ft) start at $900/mo, 1bd (700 sq ft) start at $1,100/mo & 2bd (1100+ sq ft) range from $1,300 - $2,000/mo. Not many high enough paying jobs here in town to support those rent numbers either.

The supporters' thought process was that Kokomo is ranked one of the highest in the state in terms of # of people who work in the county but live outside of the county - so we need to build high-end apartments to attract them to live here. I partially understand that for individuals who might "job-hop" from state to state and would rather rent than buy. Or the millennials who hate the idea of home ownership and maintenance.

But for the same cost as the monthly rent of a studio apartment in that building, one could afford a mortgage in this city on a 4,000 sq ft all-brick home built in the 2000's on over half an acre in one of the top neighborhoods, building equity year after year rather than throwing rent money out the window.

But maybe I'm wrong and most people my age would rather waste money on rent, at least that's what our mayor thinks and is counting on! LOL

@Max Fleissner I have heard what you say about millennials liking freedom and avoiding settling down with a mortgage, but I think that is changing. Mainly just because millennials are aging and starting families. They want a stable lifestyle for their children. They are also looking to invest in their future and many view real estate as the smart decision. Student dept is not getting in the way of home purchases. Banks are giving them loans and they can easily get a mortgage on a house for less than renting.

@Walter Key low inventory is a problem most everywhere. Even in my city where we have abundant land, the cost to develop makes it difficult to build starter homes. Part of the problem is during the housing crash, many developers and builders went out of business. The ones who made it through are being conservative about growth. Even when a builder wants to move faster, labor shortages and higher material costs are presenting challenges. 

My personal opinion is that I see no problem. I am perfectly happy with the current market.

Originally posted by @Victor S. :
Originally posted by @Walter Key:
Originally posted by @Jay Hinrichs:

I don't buy this.. millennials are not clueless .. they understand that renting is throwing money down the drain.  just look at all of them on BP crushing it in the real estate space.. if anything i think more of them understand the value of ownership over the dead end of renting.

I know what you wrote is common thought process but i dont see it in the houses i build and sell.

Jay, I tend to think that millennials (and technically I am one, but only by a hair) are split down the middle. You have half of them that are absolutely crushing life, paying off debt, succeeding in businesses, etc. Then you have the other half that's perfectly content to sit in momma's basement until they're 27 and they feel that life somehow owes them something. I guess the question becomes, how many does it take to change the market dynamics and how many are there really. 

 if you guys think Millenials are bad, Gen Z goes: "Hold my craft beer and watch this"

I am a Gen Z and I remember when I got out of college, everyone was calling us the slacker generation. You younger people just watch the movie Reality Bites (starring Winona Ryder - long before Stranger Things). Young people are always clueless and wandering to find their way. Look at the hippies of the 60's or the flappers of the 20's. Nothing new here. The millenials will keep getting older and will settle down with kids and buy minivans. Then the millenials will start criticizing a younger generation. It is the cycle of life, now if you will excuse me I have a craft beer waiting.

What i've been reading regarding millennials is that they are starting to buy homes at pretty high rates. 'They are actually leading all other generations in regards to home buying according to NAR.

Link: https://www.housingwire.com/articles/42748-millenn...

The Great Recession set millennials back as it did many other age groups. I think it is true that younger millennials might not want to buy because they might want to try living in other cities and go where the opportunities are but once people get married and have kids they generally seem to want to settle in an area. 

I found the article he wrote on the Forbes site, link here

https://www.forbes.com/sites/lawrenceyun/2018/06/0...

This definately seems to be what is going on in the L.A area and the SF bay area but all real estate is local. I'm wondering which markets he studied. When I look at places on the market out of state it seems a lot is on the market for months. 

There was basically no building going on in L.A during the housing crash , now there has been quite a bit the past several years but still not enough to meet demand. Also much of this new building seems to be apartments rather than condos or townhomes. I don't know the percentage but it definately seem the marjority is apartments. I suppose it's less risky and easier to build apartments. Developments can take years here so having a condo project finish up during a downturn could be a big risk. 

In CA they are talking about removing red tape to build and getting rid of environmental regulations in order to build more but we will see. 

Both candidates for Governor of CA say they want to build a lot more housing than is currently being built..but we all know about political promises. In terms of affordable housing, I don't see there ever being enough of it to house every single person that can't pay market rate....it's going to be like a lotto just like it is now. Maybe 1 out of 100 applicants will win the affordable unit. Promising affordable housing for all I'm sure wins politicians votes though.

Gavin Newsom stance:

On housing: Build, build, build. Newsom touts a goal of building 3.5 million new homes in California by the year 2025 to address the affordability crisis. Newsom also supports the Gov. Brown-backed $4 billion bond for affordable housing projects on the November ballot. He’s also talked about the need to tackle the housing problem through regulatory reform and carrot-and-stick incentives for neighborhoods to produce more housing.

John Cox stance:

We need to get rid of burdensome regulations on home builders, Cox says. He wants to do away with the California Environmental Quality Act (CEQA), which requires developers to get projects assessed for their environmental impact. “It’s all a honeypot for trial lawyers to sue,” he said at a San Diego forum in March. He says he’d replace CEQA with reforms that will streamline the process of approving construction, and, if elected, he’d work to build 350,000 homes a year

Link: https://www.scpr.org/news/2018/06/06/83773/gavin-n...

I read this article the other day which was interesting but not surprising. 

Younger Americans aka Millennials are less likely to invest in stocks these days versus the past. 

"According to the poll, 52 percent of adults under 35 say they owned stocks in the seven years leading up to the crash. By 2017 and 2018, only 37 percent did. By contrast, an average of 66 percent of Americans over 35 invested before the crash, and though the share is lower now it's still at 61 percent."

Also they ranked real estate as their #1 long term investment option

"Real estate ranked highest, with 32 percent of respondents ranking it as their top choice."

Of course the article (it is CNBC after all..) then goes on to push the pro Wall street ..anti real estate agenda....

It's funny because there are many millennials that have done really well with real estate , yet I don't hear many that have been able to achieve financial independence investing in stocks. These articles never take leverage into account..how many people really buy investment real estate for cash and never refinance ? If you view real estate with the stock mindset of paying all cash it's not as attractive , but hardly anyone does that. 

"That's a common misconception: Returns on the residential housing market are "not making anybody rich," says certified financial planner Eric Roberge. "You're barely keeping up with inflation, not to mention all of the costs that go along with owning a home."

Astudy from London Business School and Credit Suisse finds that, after adjusting for inflation, housing offered returns around 1.3 percent per year from 1900 to 2011. The average annualized total return for the S&P 500 index over the past 90 years, meanwhile, is 9.8 percent."

https://www.cnbc.com/2018/05/16/gallup-why-younger-americans-arent-investing-in-the-stock-market.html

The market is a function of supply and demand. 

With a strong economy and still (even though they are rising) low interest rates, more people are able to purchase homes. So, demand has risen. 

Supply has not kept pace with demand. 

Why? There are a ton of factors. I suppose an economist could chime in with better detail. But, one factor that seems within the control of the government might be to reduce barriers to entry and regulation on housing construction to allow more new home construction to take place and satisfy demand. Tariffs on construction materials like timber probably aren't helping either, but construction costs were soaring prior to that. 

I think that part of the problem is that many companies and employees who were a part of the pre-recession market may have collapsed, leaving a black hole devoid of skilled labor and tenured companies. The few who survived have enjoyed a huge increase in demand and a competitive landscape that has not caught up yet.

To solve the problem outside of government intervention, private businesses need to spot the opportunities in the market. I have a buddy in the home construction business. He says that building costs have increased by 80% in the past few years (I could be citing this incorrectly, please call me out if that is way off!). If that's in the right ballpark, that's absurd and to me seems like an obvious opportunity for entrepreneurs to enter the market and compete effectively.

The demand for skilled labor is higher than ever, and costs for materials are increasing as well. With more demand for labor and materials, we have to hope that more workers enter the construction labor force, more companies hire and train to enable this, and more competition enters the space for construction materials.

Originally posted by @Scott Trench :

The market is a function of supply and demand. 

With a strong economy and still (even though they are rising) low interest rates, more people are able to purchase homes. So, demand has risen. 

Supply has not kept pace with demand. 

Why? There are a ton of factors. I suppose an economist could chime in with better detail. But, one factor that seems within the control of the government might be to reduce barriers to entry and regulation on housing construction to allow more new home construction to take place and satisfy demand. Tariffs on construction materials like timber probably aren't helping either, but construction costs were soaring prior to that. 

I think that part of the problem is that many companies and employees who were a part of the pre-recession market may have collapsed, leaving a black hole devoid of skilled labor and tenured companies. The few who survived have enjoyed a huge increase in demand and a competitive landscape that has not caught up yet.

To solve the problem outside of government intervention, private businesses need to spot the opportunities in the market. I have a buddy in the home construction business. He says that building costs have increased by 80% in the past few years (I could be citing this incorrectly, please call me out if that is way off!). If that's in the right ballpark, that's absurd and to me seems like an obvious opportunity for entrepreneurs to enter the market and compete effectively.

The demand for skilled labor is higher than ever, and costs for materials are increasing as well. With more demand for labor and materials, we have to hope that more workers enter the construction labor force, more companies hire and train to enable this, and more competition enters the space for construction materials.

 i don't know how it is in other areas, but I am hearing more and more about people sending their measurements/plans of their house digitally to china, and they get a container with a kitchen in it, with counters and sinks and cabinets for cheap

not sure if it is here since we are closer to china and have a ton of immigrants, but perhaps in the western coastal big cities too

aloha

steve

@Scott Trench  Addin on...

I'm an urban developer, and from a business perspective I would *love* fewer regulations.  It's a giant albatross that limits (affordable, especially) housing development.

As a citizen, however, it's not so clear.

In CA, we have a regulation called CEQA - it gets in the way of any development activity and basically says (my words): "If you're going to make the environment worse for anyone by building this, you better figure out how not to ... or pay to mitigate it some way."  Does this make building more difficult and expensive?  Yeah.  Do I hate it?  Yes.  Is it clear as a resident that I want to do away with it?  I'm not so sure.

I attended an urban planning workshop last year that touched on many of the challenges contributing to housing lots of people.  There's science and data and planning and coordination and alignment and political will and regulatory structure and financial viability ... and it needs to all come together.

My main observation at this point is that, while we can identify "regulation" changes in general terms as part of the solution, we need to be really careful to not minimize the challenge in identifying which regulations need to change and how.  It's hard work to do what's right for everyone in the long term. 

And yes to all the other items mentioned - increasing raw material costs (some homes I'm building now have an additional $15k in lumber costs compared to this time last year) and increasing skilled labor costs are obvious.