[00:00:12] Everyone. I wanted to I’ve been working on this for a while. You know, we talk about supply and we talk about demand in the housing market. And a while back there was this, there was this debate about shadow inventory. And one of the better economists in housing was certain that there was no such thing as this shadow inventory. And it kind of devolved into finding out about the data of what that would be. And I wanted to go over it with you.

[00:00:44] My belief is that building more houses right now or bringing on more supply of single family homes is dicey. And I just wanted to go over the reasons and just follow along with me. And if you think differently, put it down in the comments section and maybe you’ll convert me. But let’s get to the first little part right now. So this is a tweet from Lance Lambert. And this is as of today, it’s 9:27. As I’m recording this and he says, taking into account the mortgage rates, incomes and house prices, september of 2023 stands out as the least affordable month for US. Housing this century. The previous holder was August of 2023. And he follows that tweet up with this century meaning since 2000. In the early 80s, according to most housing affordability metrics, worse than this. So in the early 80s, we’re talking about high interest rate environments again. And so I just wanted to go through, I put together some notes and I just wanted to go through them. And we’ll just kind of do that. So the hidden supply in the housing market, the thought about that is simply, look, for years and years and years we’ve defined single family homes as just that. They’re not rentals, they’re not units that are being short term rentals or even regular rentals, just not being done. Every single family home is a home that a family or people can buy and live in free of renting it from someone. And as we’ve gone on, we’ve seen large or, you know, large companies purchase single family homes specifically with the intent of renting them. We’ve also seen large investors purchase tracts of land to build single family for rent homes.

[00:02:42] And so when you get the institutions involved, it’s kind of scary. Also, we don’t exactly have laws across the United States for these single family, these short term rentals. They’re cracking down on them. But the idea is that there’s so much lending being done just based on the income of these properties that if that income goes away due to any number of reasons, one of which not being able to make the payments on the rent from the rents, you’re going to have a severe issue. And so I have just this one more thing from Bankrate and it’s key homeowner data from 2023. It’s the homeownership rate in the United States as the first quarter of 2023 was 66%. So let’s just make a broad assumption that 35-36% of all housing is not 34% is being rented single family homes.

[00:03:51] I could be totally wrong, right? But let’s just use that as an example. That means you’ve got 30% of the housing market, single family housing market that’s currently owned by investors that could be owned by owner occupants.

[00:04:07] That to me seems like a problem.

[00:04:12] The problem is in that of a supply issue.

[00:04:17] And I mean that by if you build more houses, more units, you’re not fixing that dynamic of only having 66% of homeownership. And I’m going to go through it in the way I think about it. And you’re free to disagree with me, but let’s just look an example from a place like St. Louis. So in St. Louis, you can find places in St. Louis for less than $200,000. Okay? The question is, do people want to live there? Okay? And then the next question is, if you built homes in that area, would people go to them?

[00:04:56] So to me it’s more of an issue of there’s a lack of supply of homes in areas where people want to live. And I don’t think anybody’s brought that up. And I think that that’s something that we should pay attention to whenever you hear there’s an affordability problem, okay?

[00:05:19] I don’t think anyone can argue that.

[00:05:22] But adding more supply isn’t going to bring the affordability down in neighborhoods where people want to live. Okay? So let’s just take for an example a place like Kirkwood in St. Louis, okay? The house price. Well, let’s do Clayton. That’s even more. A single family home in Clayton is going to be $800,000 or more. If you build more units in Clayton single family homes, no one’s selling those for less than that price, and they’re probably selling them for more than that because of new construction. So just blindly building homes isn’t adding to the supply.

[00:06:02] There’s other constraints within the marketplace.

[00:06:06] So I just wanted to point that out as far as affordability. And so we know that the affordability right now isn’t great. Okay? But I did want to talk about some ideas about what is the word affordable? What does that even mean? Because people throw it around all the time and I’m not quite sure there’s a good definition for it.

[00:06:29] So here’s a couple of ways we look at affordability. One, there’s the 30% rule. Traditionally, housing is considered affordable, but costs 30% or less of a household’s gross income. This includes rent, mortgage payments, utilities, taxes, insurance, and any associated fees. When households spend more than this, they may be considered housing burdened or cost burdened, which means they might struggle to afford other basic needs such as food, transportation, health care, and savings. Then you have the mortgage considerations. The concept of affordability becomes more nuanced when considering mortgages. While taking a mortgage is common and often necessary for the majority of Americans, the terms of the mortgage can influence affordability for instance, a home with a lower price tag may not be affordable if the only mortgage terms come with a high interest rate, while a more expensive home might be affordable with favorable mortgage terms. Now, this is kind of dicey, but did you know that there’s different mortgage packages for different people? Yeah, it’s odd. So doctors can usually get different mortgage packages than the rest of us. Also, engineers professional degrees, they call it. They can often get terms that are better than others. I’m not interested in the fight between whether that’s fair or not. It doesn’t really matter. The point is that with those special considerations, their level of affordability is different than others.

[00:07:56] They do talk about affordability in different indices. I’ve never really trusted those, so I don’t look at it that way. And then there is this issue of location. So something is affordable in one place, like, for instance, in California, I suspect people out there are probably got to be at, like seven or 800,000 for, like, a shack, I’m guessing. Now, I’ve never been even out to California, but, I mean, that’s the situation there. So here in the United States, here in Missouri, 700 $800,000 buys you pretty nice home still in certain parts of St. Louis. So that’s something to look at regionally. And then, as conservative as I am in finance, it’s like, look, how is something even affordable if you have to use a mortgage for it anyway?

[00:08:52] Why do we need to finance everything with debt?

[00:08:55] To me, that doesn’t make something affordable. I mean, my picture of an affordable home is actually one that somebody could save up and actually buy outright and not have to make payments. And this is like, heresy as a real estate agent, and I apologize, but that’s just the way I look at it.

[00:09:13] So what’s going on with this supply issue? As far as we’ve talked about how the housing market might be broken in previous episodes, people say, well, we can create affordability a different way. We can lower interest rates.

[00:09:33] Well, if that’s the case, what happened? In the last two years, we had historically low interest rates and housing prices exploded, and that was due to demand. People say that was due to demand. It was definitely demand for low cost, low interest money, free money, quote unquote.

[00:09:55] But as I was sitting in that market, okay, the $300,000 house all of a sudden became a $450,000 house that isn’t exactly affordable at $450,000.

[00:10:11] It’s really caused an issue where people have basically the rate lock in.

[00:10:18] So I did want to point that out.

[00:10:24] I did also want to mention that I’m not anti investor. I don’t think there’s anything wrong. I mean, people that flip houses, some of them are terrible people, but others actually do a service to the community. They fix something that somebody else wouldn’t.

[00:10:40] And part of me wonders in some parts of town, if you didn’t have investors. Would you have anything there at all?

[00:10:49] That’s how bad some of the places are.

[00:10:52] I don’t mind the investor in the housing market. I just think that something is up when 40% of the housing stock is owned by investors. I mean, that’s a tremendous amount of power that that group has. Now, you could argue that only two or 3% of that is institutional investors, the Wall Street Group. But even mom and pop shops are not like these small own one house, own two houses. I mean, they can own thousands. It’s pretty impressive.

[00:11:31] So I just wanted to point out that supply, just building more houses isn’t going to fix this.

[00:11:42] And now the supply, where is it going to come from? There will be supply from investors selling properties as they lose money on rentals. I mean, that’s going to happen.

[00:11:55] But I just wanted to point this out. I might be running long, and I just want you to understand that when people say build more houses, it’s going to increase supply and lower cost or be more affordable, I don’t think that’s true based on what I see in my market. I mean, we could build a thousand units in Kirkwood or Clayton, and you’re not lowering the price in those areas.

[00:12:21] The issue is who’s going to build affordable housing when the markup is so great in those areas? You say, well, the government or the county or the city should put forth different rules for development that will stimulate affordable housing, but it just doesn’t seem to be the way it works in practice. If you build a nice small single family home in Clayton, it’s not going to be affordable.

[00:12:53] By your definition, it’s not going to be affordable. So I just wanted to put that out there. I do believe that there’s a tremendous amount of inventory being taken up by investors of single family homes. And I do think that that does affect the supply. And I’ll just point out if someone that has a job fresh out of college can only afford $150,000 house, okay, how many investors can afford that $150,000 house first?

[00:13:28] It’s just the way it is now. I don’t have any solutions.

[00:13:33] I think it’s a very complex issue, and I don’t think we’re going to really get the answers that we’re looking for. But I will say I don’t think that this particular case is a supply issue. Building thousands of homes isn’t fixing this. Thousands or millions of homes isn’t. Fixing of single family homes isn’t fixing this issue or bringing relief to the marketplace anytime soon.

[00:13:58] So hopefully that wasn’t too controversial. And hopefully I presented in a way that you can at least say, I hate that guy, or I like what he said.

[00:14:09] If did agree with me, you put it in the comments. Or if you don’t agree me with me, tell me why. Remember, I’m speaking off the cuff here.

[00:14:17] I’m sure that don’t hang on my every word. Basically, that’s all I have for today. Thank you for watching, thank you for listening, and I’ll catch you on the next one.