Home values are coming down

Daily Data: Wherein "shortage" is the myth that keeps on mything

In today’s dispatch (which got longer than I expected):

• shrinking inventory

• falling rents

• pressure to sell is rising

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Daily Data: Home values are coming down

Let’s say you went to a car dealership, and said “show me your luxury cars.”

The dealership says, “sorry, we really don’t have that many luxury cars . . . no one is buying them anymore because no one can afford them.”

You: “You don’t have any fancy cars, at all?”

Dealership: “Well, OK, we have like 2-3 of them, but we’re charging top-price for them, because y’know, we carry so few.”

You: “OK, I’ll take it.”

Now, everyone else who owns a luxury car might conclude, “great, the value of my luxury car went up because one person just bought one for a lot of money.”

Alternatively, they might say “oh wow. No one wants luxury cars anymore because no one can afford them. I sure hope I never have to sell my luxury car because if no one can afford it, then I’m going to have to discount the price a lot.”

OK, now trade “cars” for “houses.”

Homes are shrinking

Random Walk has been banging this drum for well over a year, but now even the Washington Post has noticed: the houses that are actually selling, are increasingly of the compact car variety.

The median size of new homes is dramatically smaller:

People are buying a lot less house than before.

If compact cars are the only thing moving, it tells you something about the demand (and value) of luxury cars.

It’s not the best.¹

Now, I wouldn’t recommend actually reading the WaPo article, because it will make you dumber in the main.

To paraphrase the world’s expert on democracy dying, “manufacturers and dealerships are making and selling compact cars because there was a shortage of luxury cars following a historic run of car-selling, which caused inflation, and compact cars are a critical step in alleviating the shortage of more expensive cars, because carmakers can make smaller cars, but presumably forgot how to make bigger cars in the interim, even though they sold them hand-over-fist only a few years ago.”

It makes no sense, of course, but if you throw “housing shortage” and “affordability” around enough times, then no one will care.²

What does make sense is that homebuilders are making smaller homes because when interest rates get high, buyers have less purchasing power, so you either sell the same thing for less money, or a lesser thing for less money, but in all events, you can expect to sell for less money.³

It helps that people are increasingly unmarried and childless, so regardless of purchasing power, their interest in large single family homes isn’t that high, but interest rates being higher—and therefore clearing prices being lower—is the big thing.

The price of shelter is coming down

Look, it’s undisputed that higher rates are driving down the value of multifamily assets.

New rents for three of the larger multifamily REITs are rolling over hard (via Calculated Risk):

New move-in rents are anywhere from 7%-2% lower YoY.

Pretty incredible for a “housing shortage.”

Median sales prices are coming down pretty steadily (because that’s what happens when compact cars are the only inventory that moves):

Median sales prices started flatlining the last time the Fed gradually started raising rates, back in 2018.

And then the “housing shortage” took off like a rocket ship when the pandemic came, until higher interest rates made the pandemic housing shortage go away.

Am I doing it right?

Single-family owner-occupied homes do not have interest-rate-resistant pixie dust

There is no housing shortage and home values are not appreciating.⁴

For the most part, builders build at prices that people are willing and able to pay. Right now, that means either “don’t build at all” because those prices are coming down, or it means “build smaller and cheaper” because those prices are coming down, but in all events, prices are coming down.⁵

That’s what higher interest rates do. They bring asset prices down.

Still don’t believe me? Try this one: