Thursday, June 16, 2022

The Ugly, the Bad, the Good'ish

A constant and well publicized "fact" is that there is a "housing shortage" resulting in low inventories of available homes for sale and rental vacancies. The solution to this shortage as per the NAR, the POTUS, etc. is to build something like 4 to 7 million more housing units to bring prices down, push inventory up, and balance in the rental market. Only problem with this housing shortage "fact" is that it isn't very factual.

To detail the issue, I'll show that in twenty-eight states, as of year-end 2021, the per capita ratio of housing to population had surpassed the previous peak, seen in 2008. We'll call these states the "ugly". In fact, with the large (near record) quantity of new construction in the pipeline against continued low levels of population growth, the number of states surpassing the previous '08 peak housing-unit-to-population-ratio will rise in excess of 40 states...an additional 15 states set to see record high housing units far in excess of historical norms (we'll call these "the Bad"). Only seven states show the inverse, population growth moving faster than housing growth (or thereabouts)...resulting in declining &/or flattish housing to population ratios (yup, the guessed it, "the Good").

I'll suggest that the housing bubble isn't due to inadequate new housing...but a significant part of that new supply being misallocated as short-term rentals, 2nd/3rd homes, etc. amid the Federal Reserve sponsored, asset inflating, wealth bubble.

To begin, another well-known "fact" is that the US has positive demographics that has boosted the demand for new housing. Again, only trouble with this fact is that it isn't very factual. Many will focus on the 25 to 44 year-old population segment to suggest that this myopic view should supersede the overall demographic trends. Below, I show the year over year change in 16 to 54 year-old US population (orange, millions) versus year over year change in housing units (blue...which unfortunately is only available back to 2000) and also best proxy for viewing changing housing units, housing under construction (black line). FYI- the population spikes are not sudden growth but Census decennial backward looking adjustments...focus on the trend, not the spikes.

Below, adding in the total year-over-year population growth (green area) overlaid over the 16 to 54 year-old, annual change, plus annual housing changes. The delta between the 16 to 54 year-old population vs. total population since 2008 has been the growth of the 55+ year-old population.
The best proxy for impact of 25 to 44 year-olds on housing is following their employment (red line) versus total housing under construction (dark blue) and single family housing under construction (light blue). The current impact of Millennials, who are aged 26 to 41 years-old in 2022, is clearly nothing like the soaring Boomer population driven demand growth of the '70's and '80's.
Below, looking at the same data as above, but on a year over year change basis (I removed the Covid net-zero employment layoff/rehire spike). Plus, consider this age segment is at the level of employment (about 80%) that typically implies full employment. In fact, if I netted out the large post 2000 and 2008 declines...and removed the subsequent rehiring of the same population, it is clear over the past two decades, 25 to 44 year-old employment has net grown less than two million. So, given we are at peak Millennials at peak employment amid an inflation induced rate hike cycle...this is likely as good as it gets against soaring quantity of housing coming on-line in '22.
Lastly, viewing this same 25 to 44 year-old employed population versus annual births (all births are counted regardless parents legal status). Also included are the '08 and '17 erroneous Census projections for births. The yawning gap in peak employed Millennials versus declining births does not support a view that "normal" growth for housing demand is in the offing.

State by State
Below, I show state populations, state housing units, the ratio between the two, plus total employees (per state) versus housing indexes (per state). Consider that the majority of states have not recouped the previous total jobs that were seen in late '19 to early '20...and will likely not recover them as the US is heading into a rate hiking recession. Many of these states will "never" regain these previous peak employment totals due to secularly declining labor forces already at peak employment percentages. But housing units and housing to population ratios continue rising...think China, Japan.

So, without further ado...the Ugly. States at peak (heading to peak'er) housing to population ratios...again, most without have recovered labor declines (aka, declining pool of mortgage worthy potential home-buyers) amid soaring housing prices and rising total housing stocks. The majority of these states are also in varying stages of outright secular depopulation, again amid rising quantities of housing units. Said otherwise, there is ever less demand for ever more housing in a scenario more typically associated with a price collapse (think I heard Powell suggesting a "housing reset"...hmmm). (BTW - many states had large backward looking Census decennial population and housing unit adjustments causing large 2020 "skips" in population-to-housing ratios...again, focus on trend, not spikes).
The UGLY
Alaska
Residential real estate price index vs Total Employees.
Alabama
Residential real estate price index vs Total Employees.
Arkansas
Residential real estate price index vs Total Employees.
Connecticut
Residential real estate price index vs Total Employees.
Delaware
Residential real estate price index vs Total Employees.
Hawaii
Residential real estate price index vs Total Employees.
Illinois
Residential real estate price index vs Total Employees.
Iowa
Residential real estate price index vs Total Employees.
Indiana
Residential real estate price index vs Total Employees.
Kansas
Residential real estate price index vs Total Employees.
Louisiana
Residential real estate price index vs Total Employees.
Maine
Residential real estate price index vs Total Employees.
Michigan
Residential real estate price index vs Total Employees.
Mississippi
Residential real estate price index vs Total Employees.
Missouri
Residential real estate price index vs Total Employees.
New Hampshire
Residential real estate price index vs Total Employees.
New Jersey
Residential real estate price index vs Total Employees.
New Mexico
Residential real estate price index vs Total Employees.
New York
Residential real estate price index vs Total Employees.
North Dakota
Residential real estate price index vs Total Employees.
Ohio
Residential real estate price index vs Total Employees.
Pennsylvania
Residential real estate price index vs Total Employees.
Rhode Island
Residential real estate price index vs Total Employees.
South Dakota
Residential real estate price index vs Total Employees.
Vermont
Residential real estate price index vs Total Employees.
West Virginia
Residential real estate price index vs Total Employees.
Wisconsin
Residential real estate price index vs Total Employees.
Wyoming
Residential real estate price index vs Total Employees.
The Bad
(*Colorado/Georgia/Oregon exist somewhere btwn the bad and the good!?!?)
In 2022, these states will likely surpass '08 population to housing unit peaks (meaning building is surpassing traditional ratios of population growth to purchase/occupy/rent homes). At significantly lower prices, demand growth should ultimately create a market for the present and soon to be coming housing under construction.
California
Residential real estate price index vs Total Employees.
Colorado
Residential real estate price index vs Total Employees.
Georgia
Residential real estate price index vs Total Employees.
Kentucky
Residential real estate price index vs Total Employees.
Maryland
Residential real estate price index vs Total Employees.
Massachusetts
Residential real estate price index vs Total Employees.
Minnesota
Residential real estate price index vs Total Employees.
Nebraska
Residential real estate price index vs Total Employees.
North Carolina
Residential real estate price index vs Total Employees.
Oregon
Residential real estate price index vs Total Employees.
South Carolina
Residential real estate price index vs Total Employees.
Tennessee
Residential real estate price index vs Total Employees.
Texas
Residential real estate price index vs Total Employees.
Utah
Residential real estate price index vs Total Employees.
Virginia
Residential real estate price index vs Total Employees.
The Good
These states that likely underbuilt against current population/employment trends (Idaho/Arizona/Nevada) or have built more in-line with historical norms of new housing to population growth trends. Although prices in nearly all are in bubble territory, demand for housing in these states is likely to soak up the supply once prices are more rational. However, an equally important question is if the "political / tax policy" refugees will continue to stream out of blue states creating ongoing population/demand growth in all these states (except Washington)?
Arizona
Residential real estate price index vs Total Employees.
Idaho
Residential real estate price index vs Total Employees.
Florida
Residential real estate price index vs Total Employees.
Montana
Residential real estate price index vs Total Employees.
Nevada
Residential real estate price index vs Total Employees.
Oklahoma
Residential real estate price index vs Total Employees.
Washington
Residential real estate price index vs Total Employees.
*Housing unit and population data is via Census Bureau, Housing price indexes via US Federal Housing Finance Agency, total employees via Bureau of Labor Statistics.

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