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!
So.. why not get the county government to… say.. levy a %50,000 property tax on corporate owned single family homes.. Even the time it takes to unload them it would teach a hard lesson to the hedge fund class.
Around these parts, the counties’ legislation like that is dictated by the Board of Realtors, Chamber of Commerce. and the investment bankers who sell them bonds.
Not sure of any of the dynamics behind this locally, but my city government just put a moratorium on building for 90 days.
Because they might just be in bed together. No way this will happen.
Because:
(1) the rents will go skyhigh
(2) the sales price will go skyhigh
You can’t control this via taxes.
However, my HOA solved this issue a while back. Home ownership in my 500+ home Association requires live in owners OR an approval to rent by the Board.
Nothing about race, culture, religion, sexual preversion (or perversion ).
Everybody supports it… it’s in our bylaws and, get this, it’s legal.
Whaa…? And interfere with the “free” market on property? Stand down serf! This is why “We” have to gain control over government and expel ordinary people (once called citizens, now economic units) from any influence over their civic lives.
The solution will be to subsidize rents through the government, but only for those who show proper obeisance. The rest can look for their tent on the sidewalk. They will enjoy subsidized drug purchases.
Seems to me we are heading into a downsizing spiral that will mean too many mouths to feed. Depopulation is the answer they will come to.
America in decline.
Brought to you by the build back better initiative.
A demonic plan that is quite popular with most of the west.
Don’t want to miss any future events that are sure to thrill and excite?
Pick up a copy of the Bible, it’s almost as easy as getting another covid vaccine.
Simple instruction for life by the King of all nations.
This offer won’t last much longer, so rush to get yours today!
What exactly did you think the pandemic was for? Elders first 😡
Not one person on this thread understands the system. I have been a RE. Broker for 46 years. I think i figured out how the last crash made billions for the banks. let me describe, a home goes into the foreclosure hole. I walk into bank and offer to buy the mortgage and bring payments up to date! No can do, that asset has been sold to who knows who. then it sits for maybe 5 years with some nameless faceless list of holders until they decide to sell it. then the price is set with a selling broker. I will use a real life example, list price $130,000. 25 days offer comes at $114,000. it is rejected and countered at $127000. two months later an offer at $92,000 comes in. It is accepted!!
Now we figure out the fun part. the current seller sends the government a bill for the original loan amount, plus interest. and all the fees, taxes, repairs, maintenance. and selling commissions, plus interest and get their pay check.
If you can read the leaves this is the scam, foreclosures pay way more than loans. so now we have bank type investors buying homes with the end game of letting them go into foreclosure. they write off the loss and then buy up the notes from the banks and reap the rewards at the time of sale.
What does Sundance mean when he says, [The hedge funds and big banks] “cannot loan their own money and simultaneously receive the proceeds from that loan as a return on the investment”? Can someone please explain to me why granting mortgages on properties they own wouldn’t work? I’m sure Sundance is right – I just don’t get it.
Explain like I’m a golden retriever, please. 😉
So maybe it is like my banker lending me $100,000 at 0.1% interest over 30 years, no points or fees, just so long as I agree to drop off an envelope to him with $10k in it after I cash the $100,000 check.
I read that paragraph 4 times and I am still pretty confused myself. I have no idea what he means.
I’m betting it has something to do with how they write off the loan, payment or interest. They can’t loan themselves money and then deduct the interest on their taxes, if the company is the one lender and property owner. You can’t be both.
Hah! Well then I’m glad I asked – never sure if I’m the only one who doesn’t understand. Lots of great answers here, including from the man himself.
You can’t be the lender or borrower. You can’t borrow money from yourself and then go do your taxes and then take advantage of all the tax deductions, etc.
You can’t be the lender AND borrower.
The investment funds are holding the property as an asset.
The appreciation on the property is a paper investment increase.
In order to turn the appreciation into an actual profit they need a sale.
The investment fund cannot lend the buyer the money to make the sale and get an actual profit.
I believe they could if they had a buyer for the note who took possession of the note at closing of the real estate transaction. I’m not a title attorney so don’t take that a gospel. Have been a commercial mortgage broker, no residential knowledge to speak of. But who has the capacity to buy all that paper? Just Fannie, Freddie, and Jerome!
Besides, BlackRock does what BlackRock wants.
Investor spends $500,000.to buy a $500,000. house. During the current heated increase in home prices he wants to sell it for $700,000. If he were to loan a buyer the $700,000. at 3% – 4% he would have laid out $500,000 to get the $200,000. home value appreciation plus the 3% – 4% on the $700,000. and wait 15 – 30 years for it. He can’t cash out because he’s still tied to the same house with less cash in his pocket now to reinvest.
If he’s an investor he wants the $700,000. now before interest rates rise, not just the 20% down (maybe) of $140,000. and wait 2 decades for the $560,000. balance and 3% – 4%. By end of 2022 he could make a loan and get ? 5% – 7% or perhaps 7% – 10%.
this makes my head hurt
The money is chasing the same asset class. It’s musical chairs. Not all the money wins. Someone will lose. And, then comes the unwinding. No one will want to be holding assets that are going to correct in price to the downside. So, the exit becomes dicey.
It’s really too much concentrated money, and probably virtual money at that.
If you give someone the money to buy something from you and they pay you back with that same money, how are they ahead except on paper? You are now down one house from your inventory.
well when the shtf the gov will bail em out again just like in 08,they are too big to fail don’t ya know!.
“well when the shtf the taxpayers will bail em out again just like in 08,they are too big to fail don’t ya know!”
FIFY
Gee, why is it that the experts are always surprised by reality?
Because experts make reality and when reality disagrees, well then obviously reality is wrong. They’re experts. They know what they’re doing.
I know it was a sarc comment but the staggering arrogance of these people cannot be understated.
Unexpected inflation! Unexpected job losses!
It’s a drinking game at this point.
Unexpected lower viewership for the Olympics! I recommend light beer or you may go blind.
My blind dog with dementia who randomly howls at the moon (or the voices in his head)can predict the future better.
Sundance, SB 9 and SB 10 in CA are the loophole for supply to prop up the real-estate market and home affordability in one of the largest economies in the country. Other blue states will follow. The value will maintain because you can subdivide and turn your primary property into two homes. No more single family homes. CA is telling the counties tuff luck and too bad, you cant control it. Watch Boxable to work out federal contracts for affordable housing. It’s the elephant in the room here and no one can get a straight answer on it.
The commies in San Franciskovich and Sacramentograd have not yet faced the HOAs.
No way will the HOAs and the suburban planning commissions allow subdivisions of SFH. There is a TON more money in the suburban HOAs and homeowners… a real TON TON. In my little part of town, we have several HOAs… about 4000 homes. Imagine if each one of us put in 500 bucks ( a drop in the bucket as such things go ), that would be 2M. Now, multiply that for the city, not a large one.. you’d likely get 50M. Easy. Just in one city. The county could likely raise billions. Just one county.
Do you think the commies in LA county want the fascists in Sacramentograd dumping their property values? I got news for you… LA county’s SFH HOAs would easily raise $500B to defeat this stuff.
Or, level 1 and make it a 3 story with 6 units. Welcome to the transportation corridor mandate.
Where in SoCal were you? Ventura? Santa Barbara?
I could refer to my brother but my understanding is there is a sunset date on permits….so if they are permitting for future construction the permits may expire increasing the costs even further and permits in most municipal locales are not cheap
I believe you’re right. The game was fixed for the large investor groups. Once they are satisfied the states will shut the door. Volatile either way.
And with the price of materials and the costs of labor going up, they can’t build right now and have it affordable.
Builders are not signing contracts. Why? Because a sheet of plywood, the price of which was trending down, is not skyrocketing.
Have a contract for a build at say, $250k, sure. The price of plywood just went up 30% and sheetrock went up 40%.
The build price just went up to $280k. But, we signed a contract.
Sure did. And down there in paragraph Z, subsection 49, the one you didn’t read, it says that it material costs go up, I have the right to raise the cost or withdraw from the contract. Peace out.
yes.
here you have 1 year from the date of issuance of the permit to complete construction.
you can reapply after that.
however, there is also an “empty house” time limit,
so most builders will demo and clear the lot if construction is delayed for whatever reason.
there may be penalties on a vacant lot as well, not exactly sure.
interesting, as this situation applies right now to a house on my street.
will watch and see what happens….
I am told that they are about $10,000 here in Florida.
It’s different for the big dogs. They get approval from the planning commission for the entire development, with a rough schedule for the build out. The project gets approved in its entirety, then by staying within the approvals, they get expedited permits issued on the individual homes as needed through the various stages of the development. The small builder has no way to compete near the median prices.
If we let DC re-enact the previous problems with home mortgages because BLM & Antifa DEMAND social justice for the poor, particularly people of color, who don’t work because “THESE” PEOPLE deserve to live in homes like middle class Americans, but with no mortgage, free utilities, free water, free trash pick-up, free medical treatment, free education, free college, no property taxes, free groceries & free delveries, free medicine & free drugs & paraphenalia, etc.
Inevitably, the U.S. Supreme Court will rule all illegals, criminals, gang members, cartel members & terrorists, are entitled to the same.
The Supreme Court already made much of this possible when it ruled that illegals have constitutional rights.
Founders of BLM & officers have plenty of donated money to buy homes in gated communities & mingle with the elites. They’ll demand the same for their followers at taxpayer expense & not their elites & donors expense.
Or maybe they’ll just show up on our doorstep & take our homes away from us, freeze our bank accounts & herd us into re-education camps like Sparkle Socks wants to do in Canada.
If I recall these companies are also in with the government on affordable housing and creating apartments in the suburbs.
Agenda 21 and Seotero’s housing scam…..Obama’s Affirmatively Furthering Fair Housing (AFFH) rules, which would put the federal government in the driver’s seat in planning and approving construction of housing in every sector of the country.
But our previous President wanted to do away with all of this, as it would destroy the suburbs. But he’s gone. And we can thank a handful of Governors and other state level corrupt POSs for it.
I really question this analysis that institutional investors have so much control that they can cause home builders to stop the number one revenue stream of their business and bank lending revenue stream…those are two giant drivers in the economy. Everything else makes sense.
As an aside, I know a custom home builder/remodeler who has projects anywhere from $50k-$1M+ and as of the new year dropped from 15-20 concurrent projects to 2-3. He says he did this for two reasons:
A. Needed a break between the ice storm in TX sending the demand into overdrive coupled with supply chain constraints leading to angry customers. (eg windows for a project just came in…7 months from placing the order).
B. He can’t justify charging the prices necessary to maintain a profit margin to people who can’t afford to pay it so he is taking only cash customers.
On the other hand, I would suggest that you understand the situation completely.
Sorry if this comment has already been made, but I started seeing Berkshire Hathaway real estate signs in northeast Florida a couple years after the great 2008 crash. I asked people around me at the time “what the hell is Warren Buffett doing in the residential real estate market.” Sundance seems to have finally provided the answer. God these rich Ba$tards are so cynical and ruthless with the lives of normals it’s mind-boggling. Conscience free living for them it seems.
Where I’m driving around in Georgia, NE Metro Atlanta, I’m seeing more and more townhouse developments and single family home subdivisions popping up, offering a brand new ‘Rental Opportunity’.
And, of course, the crooks in the Ga State Legislature, the puppets of the many developers and builders do and say nothing. The check cleared so all is good.
My husband and I were planning on buying a house in New Hampshire next spring, our house here in New York is just about paid off. Looks like we are screwed with our retirement plans. We have watched prices surge for the last two years, and God only knows where it will end, so here’s a hearty FJB.
Sorry to hear that moe. So many expectations have been gutted the past 13 months. There are some bright sides here and there though. For many years I detested what I thought was the paranoia of my miserly mother, though I always loved her dearly. As is so often the case she has been proven correct in her worldview, and I am at last convinced that though more educated, I was never smarter than she was as I’d convinced myself.
This is still a completely-speculative industry, built on constructing homes for around $40,000 parts-and-labor (at the economies of scale they can enjoy) and selling them for $200K and up. I really can’t get excited about their statistics. But, I’m glad that I live in a house in the country that’s completely paid-for.
Berkshire H. also owns the countries largest modular home builder. Also went big on the railroads 10 years ago.
Also in fl. , to be homesteaded ( which means property taxes are capped @ 3% increase in any year) it must be your primary residence. May not seem like a big deal at first but own a home for 20 years and your house can have an appraised value of 1,000,000 but pay property taxes on only 300,000
A friend attended home auctions regularly to buy for his kids. He suddenly stopped and said that he never has the chance to bid because all the corporate folks bid everything way up. Sundance is correct, this is their new gig and it’s hurting so many.
What a bitch of a time we’re having with all this craziness. FJB
What will happen to the market if there’s a lot of people dying from the jab? I’ve heard some estimates of 75% of those who took the jab will die in the next 3-5 years. Inventory will increase and prices will drop, right?
Our neighbor next door had a co-worker who sold his house to Zillow and apparently got a really really outrageous price for it. Our neighbor told us he came home that night, entered his info into Zillow and had a Text/Email within 2hrs along with a REALLY ridiculous offer (at least $100K more than it should have been). He spoke with the rep who called and they asked to set up a meeting with their local Agent the next morning to do a walkthru & look at the property. He met the Agent and within 24hrs had his final offer (same offer as original). It was 225K+ what he paid for it 6 yrs ago so he sold immediately.
Zillow then announced they were getting out of the house buying business and were selling their inventory. Instead of putting it on the hot Nashville area Market, they sold to one of the national companies that rent the homes they buy (becoming a real problem here!).
They have done some cosmetic work to it and put it up for rent at $2K per month. That means someone has to be able to buy/pay for everything else they need to live AND pay $24K a year RENT. We are NOT happy about a rental in our little neighborhood. That should have been a house on the market to SELL instead of a rental property.
We understand their is a family (that is good at least we hope) moving in 3/1. This house has been empty since last Summer in a Real Estate Mkt where the average Home is selling in less than 28 days of listing and MOST now have multiple offers.
There is also another national company that just almost bought up every house in a small community in another very desirable area. When they first bought a couple of houses and rented, they then began to contact all the other Home Owners with very overpriced offers. As the HO didnt want to live in an area that was going all rental, they sold. It created a snowball effect and finally this company owns the whole neighborhood and rents every house.
There is another company (just like the article above is explaining) who bought a very large area of land and is building a 300 home Rental ONLY community. These rentals are taking much needed Inventory off the Market that should be sold at a good but affordable price to ppl who want to Buy. Instead these Rentals are popping up everywhere and because the Nashville Mkt is red hot, we understand several more of these companies are eyeing the area to do the same. It is driving out families and young singles/couples who want to live in Metro but cant afford it. That is not a good thing.
No offense to Renters but they do not treat the Home or Neighborhood like a Buyer would.
I am curious to meet the new neighbors ( we will be as welcoming and friendly as we would anyone). We are hoping for the best.
In Tampa, Blackstone bought a billion dollars’ worth of low and mid-priced homes after the last crash using practically free money. They would swoop in and make all cash offers leaving normal home buyers with empty hands. They didn’t try to flip the homes; they have held them and rented them out.
Ever since the government destroyed the savings bank industry, they have done nothing but monkey with the housing market. Even their attempts at making housing more affordable have been counter-productive. I am as free market as anybody, but hedge funds should not be allowed to interfere in the single family housing market, where they have an unfair advantage and cause market distortions that are not in the country’s best interest. How will it help America if the nation’s housing stock is owned by hedge funds, and the vast majority of citizens are renters?
Those permits are for 2024…
Great article, Sundance!
An interesting read here on the topic at hand. Bottom line, when those at the controls of Air Ameristan decide it’s time to stop flying the plane, it will be a crash and not a landing. —
https://thefederalist.com/2022/02/16/key-indicator-hints-america-is-headed-for-its-worst-real-estate-crash-in-history/?utm_source=wnd&utm_medium=wnd&utm_campaign=syndicated
Well, we need to figure out how to bet against the investment firms like Blackrock who are making this play. Just like the folks who got rich during the big short in the last housing bubble. As they say: “If something cannot go on forever, it won’t.” This will be the next financial crisis and the taxpayers will be asked again to bail out firms “too big to fail.”
We’re looking to move south and have found that builders are doing spec houses instead of dealing with buyers and their choices of colors, etc. It’s to protect themselves in this uncertain time. Crazy
I was talking to a friend of mine just yesterday about all of this. She is young, in her 30’s. They are building a small house across the street from us — price online before it has even been built is over $400,000. That is unheard of in our neighborhood. So, yeah, the middle class is being priced out. This is in NC.
In Ca, there is a lot of foreign cash buying homes. With no state laws to mandate residency at all, it has become a free for all.
For example, a coastal 1500 sq ft undetached home price has more than doubled from the low / mid $300s to a ludicrous low to mid $700s.
Domestic investors are a problem as well. Including Zillow.
Queue the liberal screaming and implementation for “affordable housing” less than 5 miles from the beach.
Think about that. Affordable housing within 5 miles of the beach in southern California.
The drop in housing starts will be just as transient as inflation. The government told us so!