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Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

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  • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

    Also useful maybe to think of it this way: Roughly the same number of 4+ bedroom units were built in 2018 as 1998. That hasn't changed in 20 years. But only half the number of 2-bed and 3-bed units are being made. In 1998, about half of all newly built homes homes had 2 bathrooms or less. By 2018, 65% of new construction had 2.5 baths or more. So they're adding rooms for sure. But I can't think of many families who really need 2.5 or more baths and 4 or more bedrooms. So giant luxury units cost a lot to build and sell for whopping prices.

    The question remains, why can't we seem to get anyone to build a 3 bed, 2 bath house with formica counters anymore when we could 15 years ago?

    Comment


    • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

      how many middle income people bought houses in 2005-2007, at the peak, and were foreclosed or had to sell at a significant loss when someone was laid off? all those folks have become renters.

      also new household formation is down, and young adults are burdened by student debt, making it hard to scrape together a down payment and scary to take on still more debt. further, multigeneration housing is up- maybe more families do need all those baths and bedrooms. they can piggyback on the boomer home equity and pool incomes to make the mortgage each month. [i don't know how real that is, but i wonder.]

      with low new household formation there's a smaller buyer population for starter homes, and so fewer people can trade up too. so maybe just fewer middle income purchasers?

      us months of housing supply currently on the market is about 6mos, trending up since its low in early 2013.

      https://fred.stlouisfed.org/series/MSACSR

      if i have to sit on a unit for 6mos before it's sold, i'd rather it have a higher profit margin.

      Comment


      • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

        Data point:
        The tide of foreign real estate purchases is going out
        https://wolfstreet.com/2019/07/18/us...on-from-juwei/

        Comment


        • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

          Can't reply to all 3 now, but the college cost is not just a question of shifting it to taxpayers.
          It is question of the over all cost, regardless of who pays. It is analogous to health care in that Obama care shifted cost to taxpayers
          but seems to have raised over all costs.

          You can attend any number of colleges in Canada for about 1/4 of what the tuition is in the USA.
          Last edited by Polish_Silver; 07-22-19, 08:55 PM.

          Comment


          • it's the zoning

            It is definitely a zoning problem. It's quite obvious around here. (wilton CT) There are very few builldable lots, and they all get 2-3 million dollar houses.
            Houses <$800k are at least 20 years old, mostly 50 years old . There is enough demand for $2 million houses to use up all buildable sites.

            There is plenty of physical space. But the town is divided into 1-2 acre parcels, and many of the neighboring towns are likewise.

            It was the opposite in the California of the 1950s-1960s. Dolger and Challenge were building houses by the thousands, and middle class, even working class people could afford them.

            Then cities decided they wanted to "preserve hill sides" etc.

            As for multi-family, there is no where near enough in this area, and a shortage nationwide. Read an Eastham capital report if you don't believe me.
            Population keeps growing, but multi family construction is significantly down in absolute numbers.
            I am paying $3200/month for a 1200 sq foot apartment, and that is not high for this area. The complex is filled with people who could
            afford houses at the national median price.

            Consider my home town of Pacifica, California. The population has barely budged in the last 40 years, but the prices have increased many fold.
            There is lots of physical space to build, but most of it has been turned into "national recreation area". That would be fine, except that the people who could live on those hilltops face commutes of 90 minutes each way to get their house price "down" to $800k or so.

            The San Diego problem is that there are far too few building permits issued, so most of them go to the highest price housing. If the number of permits were 3X what it is, you would see far more low cost housing. (The situation of 1960)

            If you want open space, stop all the legal and illegal immigration, offer financial incentives to one-child families, etc.

            Comment


            • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

              Originally posted by jk View Post
              how many middle income people bought houses in 2005-2007, at the peak, and were foreclosed or had to sell at a significant loss when someone was laid off? all those folks have become renters.

              also new household formation is down, and young adults are burdened by student debt, making it hard to scrape together a down payment and scary to take on still more debt. further, multigeneration housing is up- maybe more families do need all those baths and bedrooms. they can piggyback on the boomer home equity and pool incomes to make the mortgage each month. [i don't know how real that is, but i wonder.]

              with low new household formation there's a smaller buyer population for starter homes, and so fewer people can trade up too. so maybe just fewer middle income purchasers?

              us months of housing supply currently on the market is about 6mos, trending up since its low in early 2013.

              https://fred.stlouisfed.org/series/MSACSR

              if i have to sit on a unit for 6mos before it's sold, i'd rather it have a higher profit margin.
              This may be the logic. But like the back to the city movement that ebbed 3 years ago, I doubt it will hold for long. The back to suburbs and rural places out of the city movement has been the story the data of the last 3 years tell me. And developers may simply be slow to pick up on the trend.

              The millennials will not let the American dream die without a mighty fight to save it. Funny though that sentence may seem, I believe it to be true. They're 35 now. They buy into 30yr mortgages now or die renters. A few may inherit. But most have a hard choice. They fight now, or the dream dies. Watch them get more radical as the clock runs down.

              Last edited by dcarrigg; 07-22-19, 11:12 PM.

              Comment


              • Re: it's the zoning

                I mean no offense, truly, but I never thought myself worthy of living in Wilton any more than Weston or Mountain View. There are places on this earth custom made for my socioeconomic superiors. Similar requirements don't seem to be screwing anything up on the other side of the nutmeg in Sterling. And that's a town more my speed. I mean, how far's Wilton from Bridgeport? 15 minutes or so? That's got lots of density & it's right on the sound & you can still rent for under a grand a month. But, you know, it's Bridgeport. Similar dynamic all over New England. Westport and New Bedford; Andover and Lowell; Barrington and Providence; Bedford and Manchester.

                But that's what I mean about zoning. It's a great variable because you can hold it constant (similar rural connecticut towns) or let it vary, and either way, there are problems that remain constant. Maybe I'm reading too much into the numbers. Just seems to me that if zoning's by and large a wild variable and yet similar problems are pervasive regardless, focusing all the effort on zoning ain't gonna solve the puzzle.

                Then again, what do I know? I'm totally speculating. If you don't follow my reasoning, and I ain't making my case, maybe I belong in Sterling farming dirt. Or it could be a plutonomy problem. Zoning may be the primary variable screwing the upper 10%, and at the same time it may not matter almost at all for the other 90%. You dig?

                I have a friend I grew up with who's up in some exalted town up Rt. 2 just west of Boston where median income's somewhere around a married couple of anesthesiologists and everyone rides around on bikes worth more than my car. He also seems to think zoning is the number one issue, even though his town's actually denser than mine and a whole lot more expensive. Smart guy I respect. As tikes we were the two nerds in the fancy math classes. And I think that's the rub with the places zoning probably does the most damage: they're places in striking distance of a major city, but not IN a major city. They have excellent school systems. And their zip codes are exclusive.

                So Andover's for the Lenos and Bushes and Cupps; Lowell's for the Wards and Eklunds and Santiagos. Been that way since as long as I can remember. Nerds like Grover Norquist grew up in Weston and went to Harvard because of course a nerd named Grover grew up in Weston and went to Harvard. You don't see many Grovers pushing carriages at Market Basket. I agree there's probably way more demand to live in those places than zoning allows. I just think that's kinda the point and it kinda always has been. If you're middle class, keep heading west down Rt. 20 to Marlborough, you know? Hell, by comparison they're basically giving houses away in Fitchburg.

                I never spent too much time in Fairfield County. But I did have a friend in Danbury who I haven't seen in years, and back in the day sometimes I'd stay there to get an early start into the city, and we'd go to that Dennys that used to be over in Fishkill off I-84 at 2am from time to time. Nothing seemed too fancy about it. In fact, if I remember Fishkill, had a prison and a bunch of "don't pick up hitchikers" signs and was right across the Hudson from Newburgh, which is rough and poor as hell. Danbury seemed not too bad but not too great and dense enough. Guess I'll I'm saying is the point of the towns between Danbury and Bridgeport are to be more exclusive. Point of Darien and Greenwich is to be very exclusive.
                Last edited by dcarrigg; 07-23-19, 07:54 AM.

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                • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

                  Originally posted by dcarrigg View Post

                  The question remains, why can't we seem to get anyone to build a 3 bed, 2 bath house with formica counters anymore when we could 15 years ago?
                  My belief: it's too expensive. I think people who want a formica counter just buy an existing house because it's cheaper than building a new one.

                  If filtering doesn't happen, then what's the explanation? Are middle income people living in luxury homes or low income housing? Are huge numbers of luxury homes vacant? Is the upper class growing and the middle class disappearing? Is the middle class homeless or clustering into fewer households?

                  There just aren't that many explanations that make sense. Somehow the math has to be explained. My guess is that it's a combination of factors but I think filtering has to be one of them. I also think that there are large differences city to city. The local effects of zoning, taxes, rent control, economic/population growth, etc lead to very different housing costs and I assume they also dramatically change the patterns of filtering down and renovating older homes into more expensive ones.

                  Comment


                  • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

                    In markets for consumer products the suppliers will seek the sweet spot on the demand curve. You see it in autos, where Ford has completely abandoned cars and will only build SUVs and trucks. The combination of profit per unit and sales volume is too attractive, they are focusing on that sweet spot.

                    In home construction I see around me exactly what you all describe; a lot of big apartment complexes being built for renters, and a good number of new high end houses with granite counter tops and 2,500 square feet or more. No new starter homes like the one I bought in 1987, with Formica counter tops, cheap carpets and cabinets and windows, and just 1,600 sq feet. Clearly the builders are happy with this or they would build something else.

                    I see it the same way at the level of communities. There are enough people with enough money to lock up entire small towns so a person who works with their hands and punches a time clock just cannot live there. No young single mothers can afford to raise their children in those towns.

                    So the market has spoken. It may be a response to high and increasing income inequality, or monopolized supply chains, or regulatory capture of zoning boards, but we have distinct social classes in the U.S being more clearly separated every day.

                    Comment


                    • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

                      I emailed Eric Silverman at Eastham Capital to ask him about this question we are discussing. He was happy to have me share his view with the iTulip board and asked me to let everyone know he is raising a new fund in 2020.

                      Here's Eric's take:

                      "The answer is actually rather simple. There is really nowhere in the US today (or frankly since about 2013) that you can “build a B” apartment community. Land is costly, and the restrictions around building, are high everywhere. Material costs are going up (and have been going up) far more than the rate inflation for many, many years now. And, labor, especially specialized construction labor, is tight and expensive. Add those 3 things together (Land, Materials, and Labor), and you can only target Class A, high rent, properties.

                      Turn the clock back to 2012 or earlier, and there was too much risk/uncertainty to build a lot of apartment units. So, now you’re back to 2007 or earlier since there might have been a viable equation to build a ‘B.’ That’s 12 years ago!

                      Hope that helps."

                      Comment


                      • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

                        the apartment complexes are for the people in the middle. too well off to get subsidized, not earning enough to save a downpayment or pay a mortgage plus taxes plus maintenance plus insurance. if someone loses a job or has to take a lower paying one, they can move to a cheaper apartment in a worse neighborhood. it's a system for living paycheck to paycheck with housing a sticky but variable cost. we've gone from crazy home ownership by people who were completely out of their depth [2005-07] to a system in which, more and more, home ownership is a privilege of the well off.

                        Comment


                        • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

                          There seems to be a lot of new construction in Cities that is more about wealth storage than homes.
                          For example this story about Boston https://www.wbur.org/news/2018/09/11...-luxury-towers

                          Or 2017 story about New York https://www.theweek.com/articles/736...rk-real-estate

                          Comment


                          • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

                            If anyone follows @AlderLaneeggs
                            here is what he says his happening in Vancouver https://globalnews.ca/news/4306119/m...ing-vancouver/

                            Comment


                            • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

                              Originally posted by DSpencer View Post
                              My belief: it's too expensive. I think people who want a formica counter just buy an existing house because it's cheaper than building a new one.

                              If filtering doesn't happen, then what's the explanation? Are middle income people living in luxury homes or low income housing? Are huge numbers of luxury homes vacant? Is the upper class growing and the middle class disappearing? Is the middle class homeless or clustering into fewer households?

                              There just aren't that many explanations that make sense. Somehow the math has to be explained. My guess is that it's a combination of factors but I think filtering has to be one of them. I also think that there are large differences city to city. The local effects of zoning, taxes, rent control, economic/population growth, etc lead to very different housing costs and I assume they also dramatically change the patterns of filtering down and renovating older homes into more expensive ones.
                              A huge number of luxury homes are vacant, or otherwise unoccupied for 10 months of the year (census definition). Home ownership rates have been declining over the past decade, but the number of people who own three or more homes has been rising.

                              I don't believe in filtering because I've never really seen it happen. Fancy homes don't just suddenly become cheap. Sometimes something that was fancy 100 years ago falls into disrepair and is poorly maintained and therefore may be cheap. But unless it's in a neighborhood that went to hell, usually it get renovated and flipped and becomes luxury again. You just can't take a place with luxury fixtures in good shape in a decent neighborhood with 4+ bedrooms and 2.5+ bathrooms and make it affordable to middle class people.

                              Comment


                              • Re: Economic Crisis Avoidance Deus ex Machina - Part I: Active Asset Price Inflation - Eric Janszen

                                Cool. The timeline definitely fits. Maybe it's the common thread along with higher ed and healthcare. Anything that can't easily outsourced gets more expensive every year.
                                Last edited by dcarrigg; 07-23-19, 07:46 PM.

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