Posted originally on the conservative tree house on February 17, 2022 | sundance | 235 Comments
Let us speak clearly and concisely about what is happening in the macro housing market. Today, the Commerce Department announced an unexpected drop in U.S. housing starts. However, the rates of permit applications for future building remains strong. So, what’s going on?
First the report:
WASHINGTON (Reuters) – U.S. homebuilding fell more than expected in January as many parts of the country experienced freezing temperatures, but a surge in permits suggested a rebound in the coming months was likely amid a severe shortage of homes on the market.
Housing starts dropped 4.1% to a seasonally adjusted annual rate of 1.638 million units last month, the Commerce Department said on Thursday. […] Single-family building permits surged 6.8% to a rate of 1.205 million units. The supply of previously owned homes on the market is at record lows, which should keep builders busy. (more)
Inflation is crushing the middle class. The current housing market and real estate, overall, is being kept hot by institutional investors – Wall Street firms who shifted from paper assets to hard assets approximately 14 months ago. The macro housing market, and the financial mortage market that underpins home sales, is now a massive hedge system.
On a macro level, traditional real estate market dynamics are no longer the biggest factor. As overall inflation hits the middle class disproportionately, single family home sales are now back to being part of a betting system within the investment divisions of major banks and financial houses; only this time, they are not using the bond market or mortgage backed securities. They are using physical control over the hard asset itself.
It’s a big hedge game. The problem is their effort resulted in a market price system that has driven the ability of a working family to afford the purchase out of the equation. However, institutional investment groups cannot let housing prices drop, or quite literally they take a loss.
At the same time, construction prices have skyrocketed, and material prices (lumber, steel, concrete, etc) are through the roof (inflation issue). Additionally, labor costs in the building industry are directly attached to inflation. Job jumping for higher wages in the construction industry is extremely common; so much so, it is a long-accepted standard issue within the construction industry.
As a consequence, skilled and unskilled labor costs in construction rise much faster than labor costs for other sectors. Add fast rises in wages to extreme price increases in building materials, and you quickly have a scenario where new home prices increase in cost at an almost astronomical rate.
The speed of these price increases quickly knocks out layers and layers of potential home buyers who cannot afford those prices.
So, we have a scenario where: (1) institutional investors are holding assets in real estate. (2) Wage-limited buyers are priced out of the market. (3) Less buyers for the assets would normally mean a drop in price. However, investing groups (writ large) cannot and will not take the loss (actually, less profit). Therefore, builders are told not to build yet, because payments trigger for completed construction with no return.
New home single family building is now a hedge game.
Investment firms need banks to lend money to home buyers so they can take the profit. Home buyers cannot afford the prices, and banks are hesitant to repeat the situation that led to the housing crisis of 2004-2007. For the same reason, the same investment firms which hold the primary asset (the physical real estate) will not buy the underlying mortgages or securities.
The hedge is frozen until buyers can afford the finished product.
Meanwhile, other than the end transaction where the money is paid for the home purchase, the underlying activity continues…. and builders seek permits for homes they may build when the buyers can afford them.
With increasing inflation on all other sectors of the economy including home building, the question becomes: will there be buyers?
At the current price of new home construction, and considering the overall inflationary pressure on home buyers, and considering the Fed is likely to raise borrowing interest rates, the answer is a combination of Maybe, Yes and No.
The real question is, where does the
money lending come from that a new home buyer might use?
If the institutional investors want to get a return on their real estate inventory purchase, they might create a financial mechanism to loan the money to the buyer. However, they cannot loan their own money and simultaneously receive the proceeds from that loan as a return on the investment. So, the investing class achieve stasis by renting the home in order to receive a return and yet hold the property as an asset.
This system works out as long as the underlying value doesn’t drop.
How do you retain the underlying value? Control the supply.
That inventory control is what becomes evident when you look behind “New home construction unexpectedly drops, but future permits are strong.”
The problem underneath all the layers….
…. It’s Inflation!