“HORRIBLE Time To Be A Realtor” - 10M Home Shortage FUELS U.S. Housing Crisis

The White House estimates that America is currently short 10 million single-family homes, a figure that significantly dwarfs prior estimates. Previously, estimates ranged from 2.6 million to 5.5 million homes. This new 10 million shortage is based on the premise that if home building had continued at its historical pace of 6,000 new homes per million people per year—a rate steady for decades before 2008—the US would have 10 million more homes today. The 2008 financial crisis effectively halved the home building rate, and it has not fully recovered. The median home price currently stands at $534,000, a 52% increase from the first quarter of 2020. Data from the Federal Reserve Bank of St. Louis indicates that 40% of Americans do not own a home and believe buying one in the future will be impossible. According to CNBC, only eight of the 50 largest US metro areas are currently buyer markets, with half of those located in Florida. Other buyer markets include Atlanta, Austin, Nashville, and Riverside. A bill addressing this issue recently passed the US Senate with an 89-10 vote, but its fate in the House remains uncertain. A 10 million unit shortage, assuming an average price of $450,000 per unit, represents $4.5 trillion in potential housing wealth that could enter the market, create jobs, and benefit many people. Tom highlights a fundamental supply and demand issue in housing, citing Austin as a case study. During the price surge in 2022, fueled by post-COVID inflation and money printing, Austin experienced a construction boom starting in 2018. Major tech companies were relocating their headquarters to Austin, attracted by its high-tech environment and low state income tax. This led to a significant increase in housing supply. Consequently, rents in Austin are now moderating, with an excess supply of rental housing making it more affordable for people to find rentals in near-town areas, reducing the need for long commutes. This contrasts with the national picture, where many areas did not build at the same pace, leading to widespread rental shortages and contributing to the 10 million home deficit. The challenge now is how to build the necessary supply when material costs are inflated. Austin’s construction boom largely occurred before the sharp rise in material costs in 2022. Building new homes today involves inflated prices for copper, concrete, plywood, and labor, making construction more expensive. Adding to the problem, current interest rates are around 6.4-6.5%. There's a significant gap between buyers and sellers, with an estimated 1.359 million buyers and 1.9 million sellers, creating a deficit of 600,000. This means many people cannot afford to buy existing homes, exacerbating the market's issues. If other areas had followed Austin’s lead in building supply, housing might be more affordable nationally. Lynn identifies two main factors contributing to the housing crisis: "NIMBYism" (Not In My Backyard) and a structural shift in interest rates. Many existing homeowners resist new supply due to concerns about price disruption to their properties. Austin, by contrast, is seen as a model for allowing new supply when incentives are aligned. The second factor is the end of a 40-year period (1980-2020) characterized by structurally rising home prices, both nominally and as a percentage of average incomes. This increase was largely offset by declining interest rates, which kept monthly payments relatively stable compared to incomes. However, with interest rates now at zero and inflation rising, this "tailwind" is gone and unlikely to return. The best-case scenario is for interest rates to fluctuate sideways. The high multiples of housing value to income persist because decades of money supply growth gravitate towards scarce assets. While the supply of goods like grain, manufactured goods, and electronics can be easily increased, limiting price increases, assets like top-tier housing, and even median housing, possess inherent scarcity. This leads people to buy second homes as a "piggy bank" in lieu of holding cash. The current phase severely impacts consumers because of the absence of falling interest rates. Even if the Fed cuts rates, it may not impact long-term mortgage rates significantly. Tools like yield curve control are unpopular during high inflation. The solution, Lynn suggests, involves removing obstacles for builders to allow construction when incentives are right. However, even with this, it remains a structurally difficult problem due to stable interest rates. Sellers are often "locked in" with low mortgage rates (e.g., 3.5%) and are reluctant to sell. Over time, some may become forced sellers, having to reduce prices to attract buyers, eventually allowing the market to clear, but this could take considerable time. The current market shows an unprecedented gap between sellers and buyers, making it a challenging time for realtors and loan officers. Many professionals in the mortgage and real estate industries have left the field due to the difficult conditions. Brandon connects the current real estate market to the Federal Reserve's 2020 decision to eliminate reserve requirements for banks. Previously, banks had a 10% reserve requirement. The removal of this requirement allows for "infinite money" creation through commercial bank lending, which he believes is a major factor pushing up real estate prices and other assets. While acknowledging the multi-trillion-dollar debt created by the Treasury during COVID, he posits that the lack of a reserve requirement is a more significant, ongoing driver of inflation in asset prices. He also emphasizes the need to reduce commodity prices and combat restrictive zoning practices that limit home building to maintain high prices. He argues that prioritizing the younger generation's ability to afford housing is more important than the older generation maintaining their home as their primary asset. Lynn offers a caveat regarding reserve requirements, stating that while they have been eliminated, banks in aggregate still hold high reserves relative to their total assets and deposits. Reserve ratios did not materially decrease. In the post-global financial crisis era, reserves are actually quite high, unlike the period before the 2008 subprime mortgage crisis when regulations were low and reserves tiny. Banks now have risk-adjusted capital ratios, requiring them to hold significant amounts of low-risk or no-risk capital. Therefore, Lynn doesn't view aggressive bank lending as the primary issue, but rather the other factors discussed, particularly the inability of homes to be affordable at higher interest rates. The market will likely need sellers to experience "exhaustion" and materially reduce prices to attract buyers. The discussion also touches on attempts to remove Jerome Powell from his position, with some suggesting a new Fed chair might change interest rates. However, Tom stresses that focusing solely on interest rates, the Fed, or "boomers" overlooks other significant costs. Homeowners insurance has increased by 46% since 2021, and HOA fees by 28%. These costs also burden consumers. Insurance companies attribute rising premiums to the increased cost of materials like copper, lumber, and concrete, as these impact replacement costs after events like fires or natural disasters. All these factors combine to create a "perfect storm" in the housing market.