Wednesday, June 15, 2016

Housing: Part 162 - The two stories of the housing market in a single graph

Here are housing starts of single unit structures and housing starts of all types minus single unit structures.
The multi-unit structures (blue line) are the story of the Closed Access cities.  There is a hard cap on housing in high density cities.  The cap is at a much lower level than it was prior to the last 20 or 30 years.  People in places like Boston, New York City, and San Francisco think they are experiencing building booms right now because it has been a couple of generations since any of those cities was able to actually allow a building boom.  The blue line is the answer to the question, why has there been secular stagnation for 20 years and why are high income workers doing especially well?

Single unit structures (red line) are the story of the moral panic of the 2000s.  We have closed down mortgage markets, removing the main source of housing expansion in the country as a whole.  This remains at levels similar to the darkest brief recessionary periods of the past.  The red line is the answer to the question, why has the recovery from the recession been so weak?

A while back, I was ready for a treasuries/housing trade as the inevitable recovery of housing would coincide with rising interest rates as capital was redeployed into real estate.  But, I have lost faith in that trade.  I see few signs that either of these problems will be solved before the Fed errs in the direction of contraction.  I would love to be proven wrong.

I suspect that the trade will come eventually, in a slightly different flavor.  There will be a recession where housing performs relatively well.  Maybe instead of taking a long housing/short bonds position during a surprise recovery, the initial position will be long housing/short stocks/long bonds during a contraction.  It depends on how it plays out.  In the meantime, a highly leveraged position as a direct owner in low end rental units is probably the most lucrative place to invest in any context.


  1. Great post. The Fed is playing on its own two-yard. It seems to like it there.

  2. "We have closed down mortgage markets . . . ." I suppose you mean, through bank regulation. But might not mortgage lending be carried out by financial institutions other than banks? Why have not more such institutions arisen?

    1. That's the mystery I can't solve. There has been an inflow of private equity into properties. Why isn't there a similar inflow of funds into mortgages that issues high yield mortgages at the low end of the market and keeps them in an owned portfolio? It's a mystery I would love to solve.