Musings on the Supply Crisis


The real estate industry has been talking about low supply for a couple of years now, but it seems that some in the mainstream media have finally woken up to the issue. Chris Matthews writing in Fortune thinks that the housing crisis never ended – it just morphed into something else:

“America is experiencing a housing shortage. Not only are there fewer homes available to buyers of all income levels, those just starting out or making their first foray into home ownership are worse off than they’ve been in years,” writes Ralph McLaughlin, chief economist at online real estate firm Trulia. “There are fewer homes available, and even if they can find a home, it’s likely to be more expensive.”

All of these factors—supply constraints, tight credit, changing homebuying habits, and income inequality—have conspired to keep the American housing market weak and unable to lead the American economy to higher growth, as it has done in the wake of previous recessions. The height of the real estate credit binge was a decade ago, but it looks like we’ll be suffering from the hangover for many years to come.

And from within the industry, Selma Hepp, the Chief Economist of Pacific Union, wrote a long and rather interesting post about the housing market in which she notes:

The biggest obstacle to a more balanced market between buyers and sellers is a lack of homes for sale. Many areas across the country where job and population growth have been strong need more new construction.

By the way, just how cool is it that a brokerage has a chief economist? It’s awesome. I’ve been urging larger firms to do just this, and at least Pacific Union has stepped up in a pretty big way. (Hepp used to be Trulia’s Chief Economist.)

Anyhow, the mystery is why we have such an enduring lack of homes on the market. Prices have risen — skyrocketed even in some areas — and yet, no supply. It isn’t as if this lack of supply thing is a new phenomenon within the industry; it’s been going on for a couple of years now. Why aren’t builders building more of these homes that are supposedly in such high demand? Why are they building either apartment buildings for rental or high-end luxury housing instead?

So I looked into it a bit. Seems to me that the mystery is a bit overblown, but what that means for the economy and the housing market is… well… let’s talk about it.

The Logic of Capitalism

Let’s start with the obvious. Builders, from the smallest house-flipping crew to Lennar, are in it for the money. They’re not in business to supply affordable housing; they’re in business to earn as much profit as they can. So if there is this incredibly high demand for affordable homes, why aren’t they building them?

The answer must be that builders can’t make money building affordable housing. Indeed, from June of 2015, we find this in a CNBC column by Diana Olick:

Land prices have actually surpassed their peak values in many markets where builders are particularly active, especially in Texas. Finished lot values in Dallas are 40 percent higher than their peak, according to John Burns Real Estate Consulting. Other markets, like Charlotte and Raleigh in North Carolina, Denver and Phoenix are also seeing new highs.

“Land prices didn’t fall nearly as much as all of us thought they would,” noted John Burns in a recent interview. “Land is extremely expensive, the developer is selling it for a lot of money and the only way to make money for a builder is to build a big, huge expensive home.”

That’s part of the explanation, right? If land is more expensive, then the finished house with the land underneath it has to be more expensive. But that can’t be the whole story, since that cost can be passed on to the buyer if there is this ginormous demand.

The Illogic of Politics

Hepp points out one major factor in what’s holding new construction down: local politics. She writes:

  • California’s regulatory environment poses many obstacles to new construction, causing land prices, labor costs, and home prices to appreciate well above the national average. I will discuss this issue in more detail in a future column.

Okay, I’d love to read that future column. But that could explain California, the Land of Zealous Regulators. What about the rest of the country?

Well, it turns out, the political environment for building isn’t all that great anywhere else either. From the CNBC article cited above:

“You have to find the land, you’ve got to be able to buy it and you’ve got to persuade someone to let you develop it. The one you hear the most about is the last one,” said Paul Emrath, vice president of survey and housing policy research at NAHB.

Emrath points to stronger no-growth movements, new environmental development standards and the plain fact that so many local politicians run on platforms that include preserving neighborhoods. The problem is more acute for so-called Class A lots, which are in the most desirable locations, usually in or near to city centers. [Emphasis added]

So the (il)logic of politics is that people clamor for more affordable housing, as long as such housing isn’t built anywhere near them. See what’s going on in Boulder for an example:

As the City Council considers policy changes that would allow more housing and more density, it needs to balance both the desire for action to address a pressing need and community fears about rapid change, Jones said.

“As I go around town, I hear two contradictory things,” she said. “We need more affordable housing and you need to do something now, and we’re losing what makes Boulder special.”

Councilman Matt Appelbaum said changing existing zoning to allow multiple units where you currently can only have one will be controversial.

“We’d have to do what we’ve never done, which is densify existing neighborhoods,” he said.

Shoemaker suggested that current industrial land may present the best opportunity for more density because there aren’t neighbors to object.

I haven’t been in Boulder for… well… many years now, but here’s a picture of downtown:


Picturesque. Pretty. How excited are Boulderites about turning that into a more densely populated place, with affordable housing? Something more like this, perhaps:

And as Emrath points out, the no-growth, NIMBY, and environmental movements are far stronger today than they have ever been.

And Maybe, There Is No Spoon

Both land prices and politics are on the supply side of the equation. It helps explain why, if you’re a builder and you’ve managed to somehow thread the needle of all kinds of land regulations, zoning, environmental regulations, NIMBY’s, etc. etc. through huge wads of cash in brown envelopes effective persuasion, you might want to builder higher priced luxury homes to maximize your profits.

Thing is, if there really is this strong demand, particularly from the Millennials who are the “largest generation since the Boomers” and so on, then there is money to be made by catering to them. It’s not like the homebuilders aren’t following Millennial preferences with grrrreat interest. So what’s up?

Here’s a thought: what if there is no real Millennial demand, because they ain’t got no money?

This is something I’ve worried about for a few years now. This is a post from 2010, just a year or so after I started writing this blog:

When they do, we all assume that they’ll be flocking to the Interwebs, to Facebook, to Twitter, to social engagement, to their 4G wi-max third-generation iPads, to find that eco-friendly green condo in the cool “community” areas like the Upper West Side of Manhattan (as the AIA post above suggests), and so on.  And some will, no doubt.

But the gloomy economic picture suggests an alternative impact of Millenials on real estate.

Once the Millenial finds the condo of his dreams on his 4G iPad and contacts the realtor via Twitter, we may find that due to his lowered earning potential from the lingering effects of the Great Recession of 2009-2014, combined with the fact that he’s paying 65% in combined local, State and Federal taxes, not to mention the banks refusing to lend to anyone who can’t put down 30% and has a FICO above 750, he can’t actually qualify for the mortgage.

Lower your sights, young man.  That New Urbanism looks fantastic, and it’s the lifestyle you really want, but sadly, all you can afford is a $200,000 fixer-upper somewhere in the shadows of Giant Stadium with a 45 minute commute to your not-so-grand job in some corporation you used to rail against as a college student as evil, greedy corrupter of the environment.

In 2013 I revisited the issue in this post, in which I worried about intent vs. ability of Millennials:

We may as well begin with the 65% increase in Millennials who say their intention to buy has increased last year.

In similar news, a survey of my neighbors indicate a 90% increase in the number of people who say their intention to make more money has increased last year. Also, 100% of people with chronic illnesses say their intention is to get better.

There has never been any question about the desire of Milennials — or any generation of Americans — to own a home. If money were no object, everybody under the sun would want to own multiple homes in fantastic neighborhoods and hip cities and fly around in private jets, Al Gore style.

The issue isn’t desire, but ability and circumstance.

Turns out, the so-called economic recovery of the past 8 years or so is even more mysterious than why homebuilders aren’t building more homes. In fact, for Millennials, it’s downright uh… problematic. That’s not me, a diehard Milton Friedman capitalist pig, saying that, but Kevin Drum, with sterling progressive credentials writing in Mother Jones of all places:

Housing prices haven’t returned to their pre-crash highs, but they’ve recovered quite a bit. Roughly speaking, they’re about 80-100 percent higher than they were in 2000.

And how have millennials done since then? According to census data, the median 25-34 year old earned about $35,000 in 2000. The median 25-34 year old household earned $61,000.

In 2014, adjusted for inflation, median millennial income was down to $31,000. Median household income was down to $54,000.

In other words, millennial income is down about 10 percent while house prices are up 80-100 percent. Just in the past four years alone, housing prices are up by a third. This makes things a lot more comprehensible: millennials just can’t afford the housing market these days. Unlike boomers and some Xers, they don’t have an existing house that’s appreciated, which helps offset the cost of a new house. Nor do they have faith that housing prices will rise forever, which might tempt them into buying a house even if they had to borrow and scrimp. Millennials who earn more than average will still buy homes, but they have to be farther above the average than in the past, and that means there are fewer of them.

Maybe I’m missing something, but this doesn’t seem all that hard to understand. If I were a home builder, I probably wouldn’t build a lot of starter homes either. There just aren’t that many starters out there who can afford to buy them anymore. [Emphasis added]

What if there is no spoon? What if the much-anticipated, much-ballyhooed, much-catered-to Millennial generation just can’t afford to buy homes?

In that context, watch this video again, which I posted last November:

I’ll say this, though. In the old Soviet Union, there used to be a joke: “They pretend to pay us, and we pretend to work.” Well, maybe we can all pretend to have lots of affordable housing, and they’ll pretend to be able to buy them.

Maybe there is no spoon.

Plus, They’re Not Getting Married

One of the more amusing, yet deadly serious, things I’ve been thinking and writing about for years now is Millennial dating habits. Way, way back in 2011, I wrote this post about Millennials and family formation, in which I openly worried that they won’t get married:

Even were we to assume that 21st century American women, liberated from all the phallocentric patriarchy of the past, no longer seek to marry up… we probably should assume that they’d want to marry an equal. Hillary Clinton, after all, did not marry a blue collar construction worker with a GED; she married a Rhodes Scholar she met at Yale Law School.

Remember those 138,000 highly successful women with advanced degrees? They cannot meet a man who is their equal in education; it is mathematically impossible. But even those in the 339,000 women who can mathematically meet a man with an advanced degree are not in a great situation for the reason that Slate points out: men have far more options due to plain old supply and demand.

The terms of contemporary sexual relationships favor men and what they want in relationships, not just despite the fact that what they have to offer has diminished, but in part because of it. And it’s all thanks to supply and demand.

That is, because so many other men are unacceptable to highly successful women, the few successful men find it ever easier to get laid. And when you’re a young, healthy 30-year old investment banker in New York… why would you ever want to settle down and limit your options to just one girl? It has to be true love indeed. Especially since the minute this young man enters into a marriage, all of the advantage he enjoyed evaporates in our contemporary family law system.

The strange thing is not that the marriage rate is decreasing by 1% a year for the past decade; the strange thing is that some young men are getting married at all.

Various economists and prognosticators keep telling us that household formation is just about to happen. It’s just around the corner, as the Millennials enter their 30’s.

Which is why I found it so refreshingly shocking to see Selma Hepp talk about the issue in her article:

Green offered a compelling explanation of declining homeownership trends among young people tied to marriage rates. As he said, married people typically own homes while single people rent. Since single people do not appreciate the fixed costs of owning a home, they may want the flexibility of moving if they meet a prospective spouse. There has been a decline in marriage over generations, and across the world (see Figure 2). Only one in four of today’s millennials is likely to be married by the age of 32. Among the Silent Generation — those born between mid -1920s to the early 1940s — almost seven in 10 were likely to be married by the age of 32. That’s a remarkable difference.

graph samples

Figure 2. Source: Pew Research, re-created from Richard Green’s presentation

  • One important factor that has led to varying marriage rates is the difference in educational levels of women today and women of the Silent Generation. Today, young women are 8 percentage points more likely to have a college degree than males of the same age. Back then, males were 8 percentage points more likely to have a college degree. Also, according to recent research, well-educated men are more willing to marry less-educated women than well-educated women are to wed less-educated men. This creates a great marriage mismatch. [Emphasis mine]

Welcome to my world, Ms. Hepp! When a real economist with a real Ph.D. acknowledges the existence of female hypergamy, we can now say that maybe Rob wasn’t entirely crazy back in 2011.

In fact, NAR has some interesting stats related to this topic. Check them out. The most eyebrow twitching are:

  • Sixteen percent of recent home buyers were single females, and 8 percent were single males.
  • More women (15.5 million) than men (11.8 million) lived alone. Among these, women were more likely than men to own their homes (56% vs. 47%).
  • Over the time period of 1994-2002, the number of unmarried females owning homes climbed from 13.9 million to 17.5 million.

File that under “Things that make you go Hmmm….” Then read that again: 16% of recent home buyers were single females. That’s almost 1 in 5. Nearly 3.7 million more women live alone than do men. What?

Here’s an interesting factoid: 17% of buyers in February were all-cash investors, according to DS News, citing data from NAR. The single female buyer is almost as large a percentage of buyers as investors.

Think about that. Then think about it again. What does that mean?

I don’t know the full ramifications of that stat just yet, but I do know one thing. Single women do not buy 4BR/3BA single family homes in the suburbs as a general rule. They buy condos close to downtowns where they can more easily live their single lifestyle with their cats and dogs, hoping that they will somehow catch one of the few (and continuously vanishing) good, smart, college-educated, employed single men with not entirely embarrassing looks. The numbers are stacked against them.

Wrapping Up

I know from experience that we will revisit this issue again. Because demographics is destiny. And the demographics of the Millennials are… well… interesting, to say the least, for the real estate industry and the housing market overall.

But after all this, what, if anything, could we conclude? Likely not a whole lot. But here’s what I come away with:

  1. The supply crisis is caused primarily by government. Even higher land prices can be traced to government regulation, no-growth policies, strict zoning ordinances, and the like.
  2. However, I’m not convinced that the demand side isn’t just an illusion either. Maybe there is no spoon.
  3. People are hypocrites when it comes to housing: they say they want affordable housing, but just not where they live, and not in such a way as to disrupt the perfect utopia they have today. As someone I can’t remember now once said, “Environmentalists are just people who got there first.”
  4. Family formation amongst Millennials is social vaporware: it’s always around the corner, but never actually seen. Yet.
  5. If I were a working REALTOR, I might seriously think about launching a practice aimed at single college-educated women. One out of three recent graduates cannot mathematically marry a man with a college education. Unless #polygamy is legalized. Which is being worked on by our betters in the press.

Until next time!


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Rob Hahn

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.

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11 thoughts on “Musings on the Supply Crisis”

  1. Good Morning Notorious One … First, thanks for the well reasoned and highly-faceted analysis of this complex mega-issue. It’s no surprise that every Presidential candidate I’ve heard from avoids this topic like the plague. It’s more a “third rail” than Social Security in my view.

    My primary comment back has to do with your use of the term “government.” To my read, it’s inferring that “government” is a single entity when, as we all know, it has many, many layers, both seen and unseen. Thus, addressing a root cause of “government” as a one-stop obstacle makes it fully impossible to devise cures. It’s like the annual blaming of low February sales stats on the “weather” as a single entity…. huh? It would be useful to ask one of the many “Chief Economists” floating around these days correlate favorable weather with house showings, contracts and then sales.

    Maybe it’s just North American human nature that we don’t move caves unless we are really motivated. That’s anthropology and not economics, but they’re certainly linked to establishing buyer motivation … which goes well beyond even the exhaustive factors you’ve listed above. And the other elements of NIMBY, zoning, etc. are also anthropological in nature in my view at least.

    Back to “government” …. I’d have to say the Feds and other “government” orgs have done more than their part (largely due to NAR’s world-class Lobbying and RPAC $) to boost real estate markets. And yes, the process is a convoluted mess. I just bought another investment property last year and it was painful process. That kind of “government” friction, to your point, is not helpful.

    Nice work here Rob and I hope this essay provides motivation for those in power to reflect and act where and when we can. Rock on, Mate!

    p.s. It’s above my pay grade to comment on Polygamy, and it’s worthy of a “true” LOL tag

    • Hey John 🙂 Great to hear from you.

      I get your critique about “government” being too broad a brush. So revise it to “local government” then, since it does appear that the Feds are desperate to get the bubble reinflated as quickly and as large as possible.

      I’d also agree that NIMBY and zoning, etc. are anthropological, but they manifest as political acts. Human nature being what it is, we’ll always want to preserve what we have, while paying lip service to the needs of others.

      I tell you what though. Given that supply constraints are mostly the creation of local ordinances, I wonder if local REALTOR Associations need to think about engaging more heavily in that.

  2. Hi Rob – great post! But one part that bugged me was the comment that millennials are making 10% less than in 2000 while home prices are 80-100% higher. Aren’t you comparing inflation-adjusted income to nominal home prices? Seems a bit unfair.

    • Oh, that’s not me, but the original writer. Kevin Drum from Mother Jones. Good catch/question though; not sure if Drum adjusted for inflation on home values. However, even if those are unadjusted, 80-100% higher isn’t going to adjust down to 10% less than 2000, right?

      • Using data from it looks like inflation-adjusted housing over the same time period increased by about 15%. So wages declined 10% for millennials while housing costs increased by 15%.

  3. EDITED:

    In the community of Livermore Ca, in the eastern portion of the SF Bay Area (45 miles from SF), permits for tract housing are north of $150K. That gives you 3/4 bedrooms, 1,700 sft plus/minus on a 3,500 sft lot. Those homes recently sold from 650k to over 700K. Millennials are the largest group of buyers. Not sure what conclusions can be made except that there is/was a demand and the developer correctly priced the homes to meet that demand. Of course, this community has been “growth controlled” for many years and that contributes to artificial supply/demand factors in a desirable community.

    • One issue there is that maybe 650K is “affordable housing” in the Bay Area, but that’s simply insane by any objective measure. 😀 I mean, what sort of income does one need to afford the mortgage payments on a 650K house?

  4. Rob, best thing I have read regarding real estate in the last year. Excellent analysis catching the demographic challenges facing the industry.

    I would like to add that the early Baby Boomers and Greatest Generation are living longer and burning through their assets, not leaving inheritances for the Gen X’ers to use for move up/second homes like the Baby Boomers had access to creates another limiting factor.

    And last but not least, throw in that the banks have used up the borrowing power with ultra secure student loans instead of riskier mortgages, and the bow is tied on a real estate market that does not have the flexibility that it had in the past…

  5. For nearly 8 years the pathetic creature in the WH has been telling his adoring followers how wonderful the economy is, he has created so many great jobs (Wendy’s Walmart,McDonalds) the unemployment rate is very low etc. and the establishment lead by the Wall St Traders echo this nonsense,meanwhile many million’s of Americans are on some form of govt assistance,and another larger group are not working at all that’s where the blame for the present situation rest’s, it is bad leadership,the recent statements from the Fed regarding negative interest rates is scary,it is a strong signal that all is not well,so you wonder why the housing market is lousy,potential buyers are pausing in a wait and see attitude,we need political changes,both political parties are at fault.

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