The top of the K
The housing boom and the past, present, and future of our K-shaped economy.
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And now, housing.
As September draws to a close we have reached a consensus on how to describe the “shape” of the U.S. economic recovery — K-shape.
Last month at The Margins, Ranjan Roy wrote about the K-recovery and all the shapes I imagine many readers are familiar with — U, V, W, Nike swoosh, reverse square root, etc.
The simplest outline of a K-shape recovery is that some industries and companies and individuals will thrive and others will flounder and fail.
The stock market, the labor market, and the housing market are all areas we see this dynamic at work. Nathan Tankus detailed last week why the stock market’s rally makes sense and some of the K-shaped outcomes we see in the market today. This chart from Nathan’s post is the easiest way to understand what has happened over the last six months: big companies got bigger and small companies got smaller.
As readers of last week’s letter can probably guess, I’m not all that sure describing this recovery as K-shaped is anything other than a re-statement of the economy we were already living with before the pandemic.
Haves and have nots and the way policy shapes the divergence between these two classes in America has been a consistent theme for the last few decades and it seems to be the world we’re barreling towards living in after this crisis ends, too. We choose to support some areas, leave others for dead, and call it the market system when the dust settles.
But the title of this post refers to just one area in this recovery: housing.
The future of employment and business success in certain key areas of the economy — hospitality, travel, restaurants, bars — is precarious at best. There were 11.5 million fewer people employed in America in mid-August than there were in mid-February. Millions more are hanging by a thread.
And yet this period has spurred a boom in large purchases that often serve as the biggest investment most people will ever make. The depths of this economic crisis are unprecedented in their scope and scale while this same jolt supercharged a home buying cycle that will only further stratify the economy.
Last week, new home sales hit their highest level since 2006 and there is currently just 3.3 months of supply on the market. Existing home sales are soaring. Home prices are at record levels. Homebuilder sentiment is at a record level.
Stephen Kim at Evercore ISI outlined the state of the market at length in a note published a few weeks ago.
In our view, the roots of this demand strength run deep, nourished by a reservoir of millennial households now springing forth, nesting and upsizing trends, accommodative housing policy, and record-low mortgage rates. Meanwhile, an intractable shortage of homes in the resale market and limited construction labor provide fertile soil for an explosive rise in home prices and homeowner equity, which will in turn plant the seeds for robust remodeling demand in the years ahead.
Some will point nervously at dark clouds all around, in the form of a contentious election season, looming job losses for white collar workers, and the potential for pandemic trends to take a turn for the worse. However, amidst rising fear and insecurity, the instinct to retreat to the sanctuary of one's home is implacable. So as we stand at the threshold of a new cycle, surveying years of pent-up demographic trends, unprecedented buying power, generous government support, and scant supply, the industry’s forecast is uncommonly bright...
Welcome to Housing’s Golden Age.
This is all very good if you are buying shares in companies that build homes.
It is less good if you’re hoping to see the housing market serve as a sign this recovery is accomplishing anything beyond merely exaggerating the divides that already defined our economic moment.
Conor Sen wrote at Bloomberg earlier this month that this positive backdrop for homebuilders and their shareholders isn’t a positive for actual homebuyers. Housing’s crisis boom does not broaden economic prosperity. A shortage of housing at all levels of the market — but most notably in the entry-level single-family market — will keep upward pressure on prices and downward pressure on prospective buyers.
“Resale inventory, as measured by months of supply, was already at record lows, and has fallen even further this summer,” Kim writes. “A contributing factor to this inventory shortage was a decade-long period when owned homes were converted to rental units. Using census data, we calculate that between 2005 and 2016, 6.4mm units, or 7% of the housing stock, were converted into rentals. Most of this was concentrated among the affordable price-points.”
Stories about (young, upwardly mobile, white collar professional class) people moving out of cities and into the suburbs have been the buzziest anecdotal reports of this cycle. And one could note that this anecdata is backed up by what we’re seeing in the hard data — starts, sales, permits, prices, mortgage applications all going aggressively up and to the right. Yet the housing market imbalances Conor flags suggest this is a managed outcome: if there are too few homes for sale, every metric is flattered if the gears of demand are tightened even a little.
This data makes any conversation about the housing market sound like what so many Fed haters would say about the stock market — it’s artificially inflated. In the 1990s, policymakers tried to make everyone a homeowner, a directive large financial institutions took literally instead of seriously and when it all went wrong lawmakers blamed the poor and bailed out the banks. And so then these banks financed outfits that took millions of owned homes off the market at accessible price points and converted them to rental units. Magically, housing is now thriving.
And so like almost everything else with this crisis, the “housing boom” is but a mere exaggeration of what had already been in play during the Before Times: single-family homeownership serving as an increasingly unattainable goal. The bull case for homebuilding stocks and the housing market at large is a bear case on affordable availability.
And if we want to run the local “everyone is leaving the city” conversation through a slightly different lens, I think we’re still a bit light on hearing from those who never planned to leave now re-imaging their lives as square suburbanites. A young family living in a two- or three-bedroom apartment in Windsor Terrace or the Upper West Side deciding during this crisis that South Orange or Ardsley is actually great doesn’t do more than outline demand pulled forward. And if we’re talking about those looking to buy an hour or more outside of the city upstate or in western NJ or rural Western Connecticut, don’t believe the smoke about some city slickers re-imagining their lives as outdoorsmen. These are second home purchases masquerading as primary residence relocations amid a year of remote schooling and work. All of these buyers will be back sooner than they think.
And if this overnight lifestyle change made in a crisis does indeed stick, it is a dynamic that stands to reshape the politics of cities and suburbs alike. Will a COVID housing boom result in a rightward shift among millennials as the paranoia bred by suburban America changes this generation of 30-somethings as it did their parents? Do pushes to make cities more accessible to bikers and walkers — an echo boom of neighborhood gentrification — fall flat as the residents these plans are designed to court flee to the safety of 4bds/4bths? These questions and those related to them seem to be just outside the frame when we take stock of what the data say is happening in housing right now. Because housing today almost seems like the trend-we-should-not-name lest we jinx the economy’s biggest bull argument.
In 2007, Ed Leamer famously argued that housing is the business cycle. Or, said differently, the housing cycle is the economic cycle.
Leamer’s outline for how this would or could change monetary policy decisions reads a bit anachronistically today, but that housing makes and breaks the fortunes of the economy because of the role it plays in building individual wealth, mobility, labor market dynamism, and so on is not in question.
On the one hand, what we see in housing today is an economic snapback exceeding all expectations. To put a letter on it, a V-shaped recovery has broken out in housing. Perhaps the rest of the economy will follow.
On the other hand, what we see in housing today is a luxury good made more scarce. We see a K-shaped cycle pushing the gap between who can and who cannot attain the most enduringly American of all financial assets ever wider.
Housing is the economy, indeed.