So tired of reading the endless copium on housing. I get it. Many of you can’t afford homes, that doesn’t mean prices are coming down anytime soon.
Despite everything you’ve heard to the contrary, most houses are owned by people. I know I know: CoRPoraTiOnS ARe buYIng aLL tHe HoMEs!! But it’s just not true. For single family rented homes only 300,000 are owned by corporations while 16.2 million are owned by “mom and pop” landlords.
To understand how significant this is we need to look at what has recently occurred with mortgage rates. First lets just overview the 30y fixed that’s offered to US consumers. This is an incredible deal that doesn’t really exist anywhere else in the world. The reason is fairly obvious, it’s just a bad deal for the lender. It’s a deeply asymmetric trade; if rates go up you get a better deal than before in relative terms, if rates go down you get to refinance at the lower rate.
And that’s exactly what happened! Covid struck and all of a sudden people had the chance to refinance bellow 3%, and not just for owner occupied units but rentals too. Every property owner with half a brain took advantage of this.
Fast forward to today and rates are at 4.8%. It might not seem like a big deal, after all rates fluctuate. 1.8% give or take isn’t really that big of a deal right? WRONG!
It’s a huge deal. We’ve never pushed rates so low and guaranteed them for so long. Rates need to be viewed on a relative basis. That means paying 4.8% interest is 60% more than 3% with regards to debt maintenance. No one with half a brain is ever going to sell a home they refinanced under 3%. Let that sink in.
Government covid policy has effectively removed a very large percentage of homes from the available market permanently. There will likely never be a time in the future in which selling one of these refinanced single family rentals is a good play. Moreover, the 60 million or so single family owner occupied homes are highly incentivized to never move or if they do turn they’re existing home into a rental.
The logical way this plays out does not look good for inventories. People who’s financial situation has stayed about the same are extremely unlikely to move. People who’s finances have deteriorated are incentivized to hold on for dear life or face significantly worse living conditions, and people who’s financial situation has drastically improved are much more likely to rent their old place out and can afford to do so.
Inventories are fukt. And not just right now, but for decades.
All of this has already happened. You can literally watch its effects playing out in the market right now. Looking at market conditions it seems like things are going to get much worse before they get better.
Obviously inflation is the elephant in the room, and the US govt is not well positioned to deal with it. If inflation is permitted to run wild housing will get a huge boost. Most houses are fractionally owned with most money coming from the govt as they are ultimately the primary lender this relationship will mean homeowners are making several times the inflation rate just from holding real property.
Conversely, govt tackles inflation head on (LOL) by raising rates. This will make the those 3% loans too good to give up. Mortgage rates at even 6% will mean you are paying twice as much servicing your debt at those who bought at 3%. 6% is still bellow the current inflation rate, how likely is it for them to ever get inflation bellow 3% without cheating on their CPI.
So, we have an extremely constrained supply that is structurally unable to improve. The only available option is new housing. New housing starts data has been bad for years, and while the numbers have improved lately they 1. Aren’t enough, 2. Coming on the back of a major materials/commodities re-pricing and 3. Struggling with labor costs and supply so widespread many laborers are able to choose safer/easier work. Best case (for non-homeowners) is we continue to build at an elevated pace and stop the trend, but this will take years not months.
So before you even get started, no this is nothing like 2008. In 08 people were signing up for horrible variable rate mortgages designed to fuck them, now they’ve signed up for a bunch of 30y fixed at under 3% designed to stimulate the economy at the expense of the future. So here we are in the future, paying for all those 3% 30y the govt bought up like hotcakes. Even if, as many of you housing bears insist, housing prices come down it will almost certainly be on the back of meaningfully higher lending rates. This will NOT create housing supply since most mortgages are around 3%, unlike 2008 when they were twice that! If interest rates hit 6% and prices drop 40% (they won’t) it still wouldn’t create the waves of defaults we saw in 2009.
TLDR: Housing operates like all markets, based on supply and demand. There will always be demand but supply will never really come back thanks to ultra loose monetary policy during covid and the govts willingness to buy up all the 30Y mortgage paper. The only way supply constraints can lessen is if asset price inflation is tamed AND rates are close to 3%, so basically never.
Positions: Short 1.2M in mortgage bonds at 2.99% secured by apartments and houses.
Edit: Purpose of this post isn’t that housing is cheap and should be bought at these prices, it’s that supply has been structurally constrained and this effect is likely permanent.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.