Housing Supply Increasing?
There is a lot of attention being paid to real estate. It is obvious as to why this is the case. With it consuming so much of the economy, it is the sector that many watch very closely.
At present, many feel there is a major bubble. Since the Fed are keeping interest rates low, many attribute this to the high prices. While that could be part of it, we are now seeing a lot of cash buyers in the market. This is, in part, tied to the Fed's actions, since the hunt for yield is on. The fixed income market is basically shot, forcing money to find other alternatives.
It seems the equities and real estate markets are the beneficiaries.
There is another factor that many believe is playing into this.
Housing Shortage
We are seeing a situation where there are more buyers than sellers. The availability of homes for listing in many areas is simply not there. This is creating a seller's market which is feeding into the price activity.
It is not uncommon, in hot markets, to see multiple offers coming in above listing. This is giving sellers a major windfall. Sadly, from a market perspective, it also serves to keep pushing prices higher.
This brings up affordability issues. Perhaps that is why, for the last few months, mortgage applications are down. These are the "bread and butter" buyers. Cash buyers tend to be investors. Hence, we get a market that is disjointed.
One of the solutions is obviously more housing. If builders were able to put more supply on the market, that would alleviate the shortage.
Of course, the start/stop process for home construction is like maneuvering an oil tanker. This is something that takes many months before a direction can be changed. Since many of the larger builders tend to operate using the subdivision model, once things start, it is near impossible to stop. The project needs to keep going once the money is laid out for land cleaning and underground utilities.
Nevertheless, if builders start constructing at a much greater pace, we will see things turn in terms of the availability. This could be a problem with timing since the market can turn quickly, much quicker than builders can adjust.
Residential Construction Spending
We might be witnessing the situation heading towards a very painful conclusion. If the bubble does stumble, it could be very difficult consider what the builders are doing.
A lot can be determined by looking at what the builders are spending. When there is a shortfall in the market, you want things to ramp up. We are also seeing the residential real estate construction market as the primary areas of interest.
There are a couple things to take note of from this chart.
The first is that while residential construction is taking off, commercial and public projects saw a drop in spending. This makes sense since the remote work concept is really starting to take hold along with the renewed concerns about COVID.
What we are seeing is money flooding into construction of residential real estate.
From the chart, we can see we are at a level far above the last housing bubble, while peaked around $675 billion. At present, we are seeing the number closing in on $800 billion.
Another important variable is that, after the pullback due to the lockdowns, spending is up 30%, in a year. This is a rather large jump and amounts to another $200 billion put into this section of the real estate market.
Just using the eyeball test, it looks like the trajectory over the past year is at an even greater pace than the period that led up to the housing collapse 15 years ago.
Naturally, these are two different markets and this does not imply that we will see a similar implosion.
What it does tell us is that the housing supply could be increasing. This will help to offset some of the demand. Hence, we are brought to the point of how tightly wound is the market. Will the additional supply hit the pricing mechanisms that much?
It is a question that everyone is trying to figure out the answer to.
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