The One About Housing

Episode Summary

Executive Summary: The episode focuses on the U.S. housing market’s severe affordability and supply crunch. NAHB chief economist Rob Dietz argues that low sales are being driven mainly by mortgage-rate lock-in and a long-running housing undersupply, while new-home builders use incentives to offset high rates. The group discusses mortgage-rate outlooks, underbuilding, zoning, labor, financing, and policy tools like LIHTC and workforce development.

Main Topics: Housing market slump and sales collapse (Priority: 5/5): The panel opens with weak existing-home sales, noting that transaction volume is near multi-decade lows even as prices remain elevated, signaling a supply-constrained market rather than collapsing demand. Mortgage-rate lock-in and affordability (Priority: 5/5): Rob Dietz explains that homeowners with 2.5%-3% mortgages are reluctant to sell into a 6%+ rate environment, limiting inventory and freezing the resale market. Lower rates would help, but not enough to fully restore affordability. New construction as partial relief (Priority: 4/5): New-home sales are holding up better than existing-home sales because builders are using incentives and rate buydowns to bridge affordability gaps. However, higher financing costs and lot constraints limit how much builders can scale. Structural housing shortage (Priority: 5/5): The guests argue the U.S. has underbuilt for years, producing a sizable shortage that persists beyond cyclical rate effects. Estimates discussed range from roughly 1.5 million to 1.7 million homes. Drivers of underbuilding: the five Ls (Priority: 5/5): Dietz lays out the major supply constraints: labor, lots, lending, lumber/materials, and laws/regulation (especially zoning). These factors raise costs and slow new supply across for-rent and for-sale housing. Demographics, immigration, and household formation (Priority: 4/5): The group connects housing demand to rising immigration, delayed household formation, and more young adults living with parents. They expect these forces to sustain demand in the near term and reshape construction over decades. Policy responses and housing finance ideas (Priority: 4/5): They discuss LIHTC expansion, workforce development, potential secondary markets for builder/developer loans, and possible support for modular, manufactured, and chattel financing. Federal action is seen as helpful but not sufficient alone.

Key Arguments: The housing market is weak primarily because supply is constrained, not because demand has disappeared; prices staying high while sales fall is evidence of shortage. Mortgage-rate lock-in is a major short-run constraint: owners with sub-4% mortgages are unwilling to trade up or move when current rates are around 6%+. Lower mortgage rates will help, but the panel agrees rates are unlikely to return to the 3%-4% era; a more normal 30-year fixed rate is around 5.5%-6%. Builder incentives, especially mortgage-rate buydowns, are supporting new-home sales and effectively reduce prices without outright list-price cuts. The U.S. has a large but manageable housing deficit, likely around 1.5-1.7 million units, depending on methodology and whether suppressed household formation is counted. Long-standing supply constraints are summarized as the 'five Ls': labor, lots, lending, lumber/materials, and laws/regulation, each raising costs or slowing production. Regulatory costs and zoning restrictions materially increase home prices and discourage entry-level construction; the problem is especially acute for affordable and starter homes. Immigration and delayed household formation are boosting long-run housing demand, while older adults aging in place and demographic changes will reshape where and what gets built. Policy should prioritize LIHTC, workforce development, and possibly financial-market support for builder/developer loans; modular housing may help, but it is not a stand-alone fix. Construction productivity has lagged the broader economy, in part because building remains highly on-site and heavily regulated, making rapid cost reductions difficult.

Data Points: Existing-home sales, full-year level: Just over 4 million - Described as the lowest annual sales level in roughly 25-30 years Existing-home sales, December 2023: 3.78 million annualized - Latest NAR existing-home sales report discussed on the episode Home price change: Up 4% year over year - Existing-home prices rose despite falling sales, supporting the supply-shortage narrative Mortgage rate peak: Around 8% - 30-year fixed mortgage rates peaked a few months before the episode Recent mortgage rate: 6.6% - Current Freddie Mac-style 30-year mortgage rate referenced in the discussion NAHB mortgage rate forecast, Q4 2024: 6.2% to 6.3% - Rob Dietz’s near-term base-case forecast NAHB longer-run mortgage rate forecast: Close to 6% next year; normalized 5.5%-5.75% - Forecast for mortgage rates over the next year and longer run Spread between 30-year mortgage and 10-year Treasury: ~300 bps recently vs. 160-180 bps historically - Explains why mortgage rates remain elevated relative to Treasury yields New home inventory share: About one-third of total inventory - Recent months compared with a typical share of about 12% New home sales: Roughly 600,000 annualized - Compared with a typical 750,000 level Existing home sales typical level: About 6 million - Used as a rough benchmark for normal market turnover Multifamily starts, month change: Up 8% - Marissa’s stat-game clue based on the latest housing report Multifamily starts, annualized level: 433,000 - Discussed as a still-elevated but evolving segment Household formation / parents living at home: 19% of 25-34-year-olds live with parents - Rob’s stat-game clue tied to delayed household formation Immigration, CBO estimate for 2023: 3.3 million net immigrants - Chris’s stat-game clue, highlighting much higher-than-usual inflows Real median weekly earnings: $371 per week - Mark’s stat-game clue; described as rising 2.2% over the year Real median weekly earnings, annualized level: $82,840 - Inflation-adjusted benchmark implied by the weekly figure Residential construction productivity growth since 1993: Up about 13% - Compared with nearly 50% for the overall U.S. economy Building industry labor need: ~700,000 workers gross - Estimated gross hiring needed just to tread water with workforce needs Effective interest rate on development/construction loans: 13% - A major financing constraint for private builders Top builder concentration: Top 100 builders do about 40%-50% of market - Used to show how much of the market larger firms control Share of homes built on-site: 97% - Only about 3% are modular/manufactured according to the discussion Modular/manufactured share: ~3% currently; previously ~8% - Shows the decline in off-site construction share over 20 years Teardown share of single-family building: ~10% now, rising toward 15% - Expected shift toward rebuilding on existing lots

Pivotal Quotes: "The market is really, at least in terms of home sales, taking it on the chin." — Mark Sandy: Framing the discussion after the weak existing-home sales report "We lack labor, we lack lots to build on, lending... lumber and building material availability... and laws and regulatory issues." — Rob Dietz: Summarizing the five Ls that constrain housing supply "If we could see market rates get to about 5.9 percent, the feeling is there's a lot of demand that will be priced back." — Rob Dietz: Explaining why a five-handle mortgage rate could re-energize demand

Implications: Housing sales may stay subdued until rates ease and supply grows. Builders, policymakers, and lenders will need coordinated fixes—especially more affordable supply—to restore affordability and normalize turnover.