The Need for a National Housing Plan

Welcome to A Skeptical Dude’s Take on Real Estate: a frank, hopefully insightful, dive into real estate and financial markets. From one real estate investor to another.

Coming at you live from Nashville, TN.

Fuel for the day: Closed on a cute little duplex property today (will update y’all on that in a future article, I promise), so I treated myself to some in-person coffee this am. Wow I know, adventurous :) But I did just pick up one of these bad boys: a Mueller stainless steel french press (my favorite brand obviously).

Can’t wait to blacken it.

Today We’re Talkin:

• - The Weekly 3 - News, Data and Education.
• - Economic numbers = Interest Rates 👇.
• - Getting Bullish!
• - The Need for a National Housing Plan.
• - A Skeptic’s Take.

The Weekly 3: News, Data and Education to Keep You Informed

1. - A lot more people will need homes over the next few decades. Even accounting for falling birth rates and the aging population, the Census expects the 18+ population will grow by TENS OF MILLIONS by 2050 (EricFinnigan).
2. 
   
3. - Job openings nudged down in November, down to lowest in more than two years.The Job Openings and Labor Turnover Survey (JOLTS) showed employment listings nudged lower to 8.79 million, about in line with estimates for 8.8 million and the lowest level since March 2021 (CNBC).
4. 
   
5. - Book Recommendation: The Book on Rental Property Investing. An oldie but goodie. Real estate rookie? Pro? This book is the bedrock.

Today’s Interest Rate: 6.62%

(👇.25%, from this time last week, 30-yr mortgage)

Interest Rates, are starting to 👇!

Last week, and the week before, I drew a big fat red line in the sand:

Inflation has likely already reached the Fed’s target! And I see no signal of that changing

When will the Fed cut? And what will this look like?IMO: in the next 6 months the 30-yr mortgage will likely drop by a full 1%. Bold call: Rates may even hit 6.25% by year’s end.

Economic indicators are signaling the start of a new real estate bull market, until further notice.

Rent Control - Just Say No: Update

A brief follow-up on last week’s article re: the White House’s 5% rent cap proposal. A new survey of 46 economists in academia by Univ of Chicago makes it clear, the plan won’t do anything to help the low / middle-class, but would reduce the supply of properties available to rent.

Right on the money.

Back to the drawing board people.

Wall Street Getting Bullish On Commercial Real Estate

Blackstone President Jon Gray put out a video last week with a bullish view on commercial/multifamily real estate (sans office), pointing toward more acquisitions in the coming months. Some highlights:

"At the beginning of the year, we said real estate values were bottoming. And I would say now, six months later, after it’s pretty clear from the data that that’s occurred, we’d say real estate values are recovering – really with the exception of office buildings." "We continue to see the cost of capital come down, and we’ve seen greater availability of debt." "We’re seeing a sharp decline in new supply, and that of course creates a foundation for the recovery as well. We really think this is a good time to be investing capital. We’ve been doing it for the last six months in real estate, and I expect you’ll see a lot in the back half of the year as well."

Although certain markets may be struggling more than others.

Case in point, Wood Partners, one of the country's largest real estate developers, is pulling out of California, Oregon and Washington. Sources close said that:

"The entire state of California with 40 million people will produce less rental housing than Dallas/Ft Worth with 8 million people in 2024. This is solely because of the financial burdens imposed on apartment development in CA that simply don't exist in DFW and other places."

Wow.

To keep it honest, I would argue that many of the larger cities in California, Oregon, and Washington have made positive progress on reforming zoning and streamlining permits (such as passing medium density and ADU laws), but still have much much more work to do on that front, and on reducing regulatory pressures facing operators after an apartment property is built.

The Need for a Housing Construction Fund(ing)

Housing economist Jay Parsons posted a thread this week reviewing multifamily housing and the need for more steady construction funding to ensure long-term supply. In it, he runs through a new report by Paul Williams arguing for new tools to incentivize and provide construction funding in the multifamily space.

This is a fantastic piece, we desperately need a plan for boosting the supply of new housing units past 2025 for the long term.

The Key Highlights:

• Create a national housing construction fund to avoid the wild up-and-down housing supply market, similar to what we are about to experience. High interest rates have killed new start construction for the last year creating an impending supply trough. Low supply in turn creates rent spikes, which are sticky. Because of this, housing supply tends to be a lagged response to demand. For ex: it took 2 years for supply to respond to the demand of 2021-22.

• Importantly, this is NOT just a massive stimulus, which would be inflationary. From the report:

I highly recommend a read of the full report and analysis by Jay to all investors. I couldn't say it any better so I am simply linking the thread here.

Home Builders Agree, and Unveiled their Own Plan

Coincidently, the National Association of Home Builders also recently unveiled a planto address the nation’s housing supply challenges. It has some exciting ideas to keep the housing sector stable and supply more in line with demand for homes. In summary the NAHB plan recommends we:

• -Eliminate excessive regulations,
• -Promote careers in the skilled trades,
• -Fix building material supply chains and ease costs,
• -Pass federal tax legislation to expand the production of affordable and attainable housing,
• -Overturn inefficient local zoning rules,
• -Alleviate permitting roadblocks,
• -Adopt reasonable and cost-effective building codes,
• -Reduce local impact fees and other upfront taxes associated with housing construction,
• -Make it easier for developers to finance new housing,
• -Update employment policies to promote flexibility and opportunity.

Speaking during a House Small Business Committee hearing, Steve Martinez, a NAHB homebuilder emphasized the urgency of the housing crisis, saying,

“Shelter inflation—rent and homeownership costs—is still rising well above a 5% rate driven largely by a nationwide shortage of 1.5 million housing units….In today’s market, tighter lending conditions, a limited supply of land, permitting roadblocks and delays, and rising fees are all contributing to increased construction costs that make it increasingly difficult to boost the supply of housing.”

They also opposed the White House’s rent caps, during their testimony.

Housing Affordability is in the Pits

Housing be too damn high!

And it shouln’t be shocking to anyone that home sales numbers are at multi-decade lows, as we saw last week. A new chart out by JBREC says it all:

And this generation is getting short shrift. Earlier generations were earlier to homeownership; in fact, 33% of Baby Boomers owned a home at just 26 years of age. Coincidently this was the year I bought a home too, in 2009. But, I got lucky on timing, for sure.

TBD on whether Gen Z can get to homeownership at 26. But I am very optimistic. As I have said in the past, I believe we are entering a 10-yr real estate bull market.

Case in point: From economist Mark Zandi:

“I don’t want to jinx anything, but what a fantastic week for the economy - strong real GDP growth and inflation that is arguably already consistent with the Fed’s target. Most encouraging, it appears the economy’s growth potential is much higher than is commonly thought. Labor force growth is surging, with all the immigrants coming into the country, and productivity got has picked up, perhaps because of all the business that have formed in recent years. Potential growth isn’t 2%, it feels like it is north of 3%. If so, the Fed shouldn’t fear the strong growth, instead it should be fearful that’s its restrictive monetary policy is a counter-productive impediment to that growth. Consider the half percentage point increase in the unemployment rate over the past year. The Fed should begin cutting rates.”

Hear hear.

LFG Gen Z!

A Skeptics Take:

As the old Hank Williams song goes: “The interest is up and the stock market’s down and you only get mugged when you go downtown.”

All too apropos to today.

Real estate is and has been in a home sales recession for a long time. The current pace is 3.89 million home sales vs 5.3 million in 2019.

But there is fantastic news for real estate investors on the horizon!

Rates are coming down soon as key economic indicators normalize: inflation, shelter and labor markets, all. The environment to purchase and invest in real estate is much improving, as is the supply of available homes.

There is too much pent-up demand in real estate. For a home. Not an apartment, not a flat. This isn’t Europe or Japan. Folks here want a home, they want soil. I don’t know why, I just know it’s true. And demand for homes is like a coiled cobra, ready to spring once rates tick down.

Demand will be volatile, with lags in between hitting 6.5%, 5.9%, 5.5% and 5% interest rates, where we may bottom.

Sharpen your pencils and get ready.

Until next time. Stay curious. Stay skeptical.

Herzliche Grüße,

-Andreas

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* I write this myself and get it out for you all in the same day. Apologize in advance for any typos / syntax errors. Don’t have a team of editors, yet :).

** The preceding has been my opinion only, the views are my own, and are intended for educational and entertainment purposes only and does not constitute financial advice.