Housing market- Long term
I often wonder where the housing market is going, particularly now that I have kids that will be looking to enter the housing market down the road.
The story of recent times is lack of supply which is leading to higher costs, to the point where young people are simply priced out.
I understand that the baby boomer generation is starting into retirement en masse, and most of them own homes. The boomer generation is the largest demographic we have, when they start giving up their houses will we see an increase in supply that will lead to a price correction?
Canada welcomed 1 million immigrants in 2022, but we have no houses for them.
Where are we headed?
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Here's what I see as the long-term trends:
First, there's a world-wide trend that more people are moving into cities, for the first time in history the majority of people now live in cities. Agriculture keeps getting more productive and efficient, which means it takes fewer and fewer people to feed the rest.
Second, America was created on the idea of idea of cheap land, but that era is ending for many people. Many of our cities are effectively built out. It was always true that you could just go out to where the houses stop and build more, but in many places you can't do that any more. Since the end of WWII it was the norm for developers to take multi-thousand acre parcels of farmland and build large numbers of single-family homes. In most places developable parcels of that size no longer exist. Instead what we see is in-fill development and redevelopment, which are more complicated and costly.
So we're seeing a lot of pressure on housing in the cities. How that pressure gets resolved will end up being a political question, the limits on development aren't technical limits, they're regulatory. But if we have increasing numbers of people wanting to live in cities, and a relative fixed amount of land, housing those people is going to require greater density. Which isn't necessarily a problem, there are many places in the world where people live at densities of 30,000, 40,000, 50,000 or more per square mile. Manilla is 111,000 per square mile. At 30,000 per square mile you could fit the entire US population into an area about twice the size of Los Angeles County.
Even at those densities you're not necessarily talking only high-rises or squalid slums. At 30,000 per square mile, that's 900 square feet per person. When my kids were young the five of us lived in a single family house in DC that was 2,000 square feet, on a lot that was 2,200 square feet*, so 440 square feet per person. We now live on a lot that's 50x100, 5000 square feet, so 1000 square feet per person. So it's possible to do high density and still have a mixture of apartments and single-family houses. What's probably not going to be sustainable is 2-acre minimum lots and fleets of lawnmowers to maintain them.
What's anyone's guess is how we get there.
*(I once met a man who had lived in that house in 1941. He said there were 11 people living in the house at that time).
My son tells me a similar story about how hard it is to buy houses for his friends. If I remember correctly, it was very difficult for us, the boomers, to afford to buy our first home as well.
Some moved to less expensive towns and states. Some rented long term. Some settled for cheap starter homes. Some got inventive and bought fixer uppers. None of us had the down payments, or hardly any money.
It may be MORE difficult for todays generation to purchase homes, but I doubt it. Just because you can't afford a house where you want to live doesn't mean housing is unaffordable. It simply means you can't afford to live where YOU WANT to live. There's a huge difference. Move, look elsewhere or get a job where you can afford to live.
You can't always get what you want, but if you try sometimes, you get what you need.
From about 1960 to 2000, the average home price to average income ratio was around 4.5. Now it's around 7.5. However, this doesn't take into account interest rates. Interest rates were higher back then, so I think it ends up evening out.
What I also think is a problem now is the number of larger houses that aren't necessary. We need to build more 1000 sqft homes I think. If you want a smaller home these days, you have to buy an older home. Everything newer is just larger. I think this will lead to problems down the road as the older, smaller homes need more and more maintenance or just become too worn out.
Are those averages medians or means? Because a big part of the reason housing is becoming unaffordable for so many people is that wealth and income are becoming increasingly unequally distributed -- which shows up in the median being far less than the mean.
Median income.
https://www.longtermtrends.net/home-price-median-annual-income-ratio/
Yes, very true.
I think that tax reform and efficient building will be factors if affordability is to improve.
Property taxes encourage large expensive houses on big lots, trying to attract people with resources to pay large amounts of tax to the local community. Until this changes, bigger and more expensive houses will be favored. There are many alternatives to local property taxes, some better than others, but changing the overall tax structures in most states will be a big effort.
I know that the real builders here will protest some, but I see very little efficiency in the process of building most homes. The basic techniques haven’t changed since platform framing took off after WWII (go ahead, fire back 😉 ) The overall building process is the very definition of waste. Can you spell COMMWIP? I think that some significant shifts are required, probably toward factory-built multi-unit dwellings.
Any major changes in how we design communities and build housing will be made more difficult because we have so many different levels of government and standards. When each city/county/state have different requirements from different organizations, it’s difficult to disseminate best practices. As a citizen of the USA, I often think that having 50 different states is a significant impediment to progress, especially regarding things that require long-term planning, e.g., infrastructure, that must survive many political cycles. Too many kittens to herd.
DC_Contrarian’s point wrt income distribution is clearly a factor in affordability that also needs a course correction.
I think I need to go for a bike ride.
From the Economist: "Efficiency Eludes the Construction Industry."
https://www.economist.com/business/2017/08/19/efficiency-eludes-the-construction-industry
Productivity of US construction workers has actually dropped over the past 50 years. In almost every other sector of the economy productivity has increased dramatically, largely due to automation and information technology.
One thing to keep in mind is that for the most part, new residential construction is a loser for the municipality.
Here's the scenario that has played out all over America over the past 70 years or so: a developer comes to town, buys an old farm and bulldozes it and proposes building a thousand or so houses. The town (or county, depending on how things are organized there) is excited about the prospect of thousands of jobs, millions of dollars in building permit fees, and millions more in annual tax payments. The heirs of the farmer get to retire and move to San Francisco after growing up poor, and the children of all the other farmers in town start daydreaming about the day Dad finally sells the farm.
Then those thousand houses get built, and about 4,000 or so people move in, and all of a sudden the town needs to widen the roads, and hire more firemen and police officers, and most crucially, build new schools. And while the town took in millions of dollars in fees, these new improvements cost hundreds of millions of dollars, and the taxes from the new houses aren't enough to pay for them and taxes have to go up on everybody in town. After this happens a few times there's an anti-development movement in town, someone hires a consultant to add up all the costs, and the consultant comes back and says the true cost of a building permit should be $100,000 or so.
So the developers move on to the next-further-out town, which hasn't learned this lesson yet. Back in the first town, the only housing that gets build is multi-million dollar luxury housing, because that's the only thing that can support the cost of a permit. And the taxes from that does tend to offset the cost of the new residents. But there's only so much demand for that kind of housing.
There is some efficiency in building homes (standardization of dimensions for framing and the like, as one example), but it's hard to gain much since every house (assuming custom builds here) is essentially a one-off prototype. That means nothing can be carried over from the last job, most lessons learned won't help on the next job that has different problems, things like that. It's a like a factory that builds a million different products, but only ONE of each. Production builders are different though, since they tend to build just a few basic designs, each with a few different trim packages. This allows them to standardize their construction process, reuse some otherwise wasted materials on the next job, and train workers to be efficient at the SPECIFIC way THAT developer builds THEIR homes. The downside is you usually don't get very good quality, because everything is cut to the bone. Some of that "cut to the bone" could probably be helped with better building codes, but you get the idea.
I don't think many would like factory built multiple occupancy residential structures. The Soviets tried that, and if you look at any of their old housing, you'll find they were very basic boxes. The architecture was very, very bland and boring. They did do some fairly nice "neighborhood" level layouts though, usually with central parks and a few other niceties, but the residence themselves were very bland. That type of construction maximizes efficiency, but it removes craft, art, and other things that tend to "make a house a home".
The idea behind different states is that things aren't the same everywhere. In the construction world, it would not make sense -- and would be wasteful -- to build every structure everywhere in the country to California's earthquake codes, as just one example. People in Montana probably don't need Florida's hurricane rated windows, either. You can take standards too far, although I do agree that some standardization is a good thing. I think we are probably about as far as we can easily go there though, in terms of standardizing materials. Wire, for example, is pretty much the same everywhere, as are the rest of the component level pieces of the electrical system. The same goes for plumbing stuff, and framing stuff. You don't have 2x4s in one state and 3x5s in another, for example, that stuff got standardized a long time ago so the "low hanging fruit" stuff has already been done.
Regarding costs, there are differences between areas. I'm pretty familiar with DC's area since I've worked out there a lot, and it's some of the most expensive realestate in the country. An advantage to that is that stuff tends to get redeveloped quickly so you don't have a lot of urban decay. You also have a lot of historic structures, which makes things more interesting. The downside is hefty price tags to buy things. I have friends who work for the federal gov't, which gives employees free metro (subway) passes, who can't afford to live in DC, so they commute from the suburbs to nearby metro stations with parking lots, then take the metro in to work in the city.
If populations decline as the baby boomer generation ages, then that should reduce demand on the housing market and lower prices. At that point, what starts to be an issue is will new buyers be satisfied with those older homes? Will they renovate them? Will they tear the old homes down and build new? I don't really know the answer to that, but my guess is it will be a mix of all three, probably with an emphasis on renovations (cheapest way to a "new" home), and less new builds and less "stay in it as it is".
Bill
It's pretty clear that the shortage of housing is driven by factors other than the cost of construction, but setting that aside there's plenty of room for efficiency improvements. I would say architects and engineers for the most part have moved into the 21st century, but there's just not a whole lot of integration with the suppliers and subcontractors.
There's a company in Baltimore called Blueprint Robotics (https://www.blueprint-robotics.com/passive-construction ) that has built a couple of homes near me. They build a house in sections in a CNC factory. They do high-end stuff, I don't think they save any money, but it does seem like what they produce is a higher-quality product.
They claim they build with a tolerance of 1/8", which means that what they build is what the architect drew. Which means that everyone else involved in the process can assume that the plans reflect reality. But the big win I can see is that if the whole process is computerized it becomes much easier to integrate the suppliers and subcontractors into the design process. Imagine if as you worked on the plans the bill of materials was constantly updated from the manufacturer's catalog, along with pricing.
Interestingly, if factory-built houses ever really took off, it would kill the renovation market.
My guess is those guys costs would come down if they could scale up to higher volume production.
There are software packages that do update materials lists as you work on the design, but they are for electronic design. I would think it would be possible to do something similar for the construction industry, since it's similar (lots of relatively standardized parts, so the "design" is mostly just assembling from the list of parts in various ways).
I think you'll always have renovations though. If you buy a factory-build home, the next guy will still want to change something, and then you have a "renovated" factory-built home :-)
Bill
I'm just thinking that as we have gotten better and better at making manufacturer goods and making them more cheaply, it becomes increasingly impractical to modify them or even repair them.
"I see very little efficiency in the process of building most homes."
True. It's normal to point to prefabrication as a solution. Makes sense. SIPS construction is a fine example of prefabrication that results in houses very similar to what homeowners expect to see. But for some reason they haven't caught on in a big way.
I think one reason why is that a lot of spec homes are built by small developers who are basically framers who became general contractors and then started building on spec. So they build the way they are accustomed to. I think most of the SIPS homes are initiated by the homeowners rather than being built on spec. There may be a handful of spec developers out there who build with SIPS but they are certainly a minority.
Buying ones first house has never been easy or cheap for any generation.
If you plan is to wait for the boomers to flood the market with homes when they retire and the prices to fall, I say don’t hold your breath. When I look at the charts, real estate almost always outpaces inflation and that seems unlikely to change.
I see thinks very differently than DC. The pandemic has changed the way we will work forever. Cities exist because people could make more money working fewer hours in city factories than on rural farms. Over time we outsourced the factories because we could make more money working fewer hours moving paper around in an office building. Today we move virtual papers around in computer mostly remotely. We are no longer chained to a desk in an office building in a city. Remote work has become the norm. Why live in a city and pay high city rents? Why live with city crime? Why live so close to a stinky neighbor? To me it looks more and more like the people with money are abandoning the cities to the poor.
It looks to me like there are billions of square feet of office space will be coming off lease will be repurposed into something that will pay rent and converting it to apartments/condos seems to be the only real option.
It depends on how far down the road you wonder what the future will be. Things will continue to get worse (the next few decades) before becoming more stabilized overall. Stabilized doesn't mean things are good, more that the current state of affairs will remain for a fairly long time. Environmental issues, disease, hunger, the leftovers of a war torn world will be the beginning of the great reset (30 to 50 years from now). The global elite will emerge from their mostly unharmed bunkers and seek to rebuild the continents as it suits them.
To worry about how one can better prepare for the future is not productive or necessary.
It will keep growing and growing... until the gov and city planners decide to make codes so difficult to comply with that no one can afford to build anymore.
Look to buy a house where you can afford it. No sense looking in markets that are out of your price range. Think creatively. Think for the future. Have vision. Be willing to invest sweat into your equity.
Not everybody has a right to afford a house. They have a right to own one. Figure out how and where and make it happen.
I think an interesting point regarding factory manufactured housing, if it ever catches on in a big way, is that it will greatly reduce the required labour force. Scale this up to all sectors of the economy and you have no work force to act as consumers, so no point in building things.
Things are likely to find a balance at some point. If manufactured housing reduces demand for labor, that might stabilize the labor market somewhat, since there is a HUGE shortage of workers in the trades coming in the next decade or so. Even now, there is a shortage of workers in the trades, and everyone knows it's going to get much worse in the near future, since people haven't been going into the trades in the numbers they used to.
Bill
That's happening across the economy, and it's been happening for a long time. Before the industrial revolution, 90% of the work force was in agriculture; today it's about 3%. Put another way, back then an agricultural worker could feed his own family and 0.1 other families, today a worker feeds his own family and 30 others. So that means 29 other people who have to find something else to do.
The point of the Economist article I linked to in post #7 is that for reasons unknown, construction is the one part of the economy where this hasn't happened -- output per worker is lower now than it was 50 years ago. Now much of the productivity gains in the broader economy have been due to information technology, and it's clear construction hasn't adopted information technology to the extent that say publishing or the legal business has, there hasn't been a complete lack of innovation. Just think of all the tools like air nailers and Bobcats and cordless tools that didn't really exist 50 years ago. Or just even how much easier a portable phone makes life. Construction still has a long way to go to be transformed the way other industries have been.
To the broader point, this is something that people who think about the future worry about a lot. If you squint and look into the future it's easy to see a future where robots and other automated tools do all the work necessary to keep humanity alive. What's not easy to see is how society is organized. In the utopian vision, humanity is free from drudgery, and everyone is free to work on projects they find personally fulfilling without having to worry about the practicalities of supporting themselves. In the dystopian vision, a small segment of societies control the robots, and through them, the rest of humanity.
My parents (boomers) bought a house in the late 80s for about $30k, with a 16% interest rate. Compared to today it is a nice price, but the interest is gross.
$30k in 1985 is about $85k today, which is almost exactly the 20% down payment on the median home in the US in 2022. I'll take the $85k house at 16% please.
Agreed.
As a note, the "house" was a small plywood shack in a bear infested swamp, not a 2000sf modern place, but still. The land value would now be $150k.