1. There isn’t enough:
- Using a range of forecasts, the market requires ~3-4 million additional homes.
- Millennials are living with their parents much longer than prior generations due to affordability.
2. People are not moving:
- There are 80 million single family homes in the US, with only ~450k for sale.
- Mortgage applications are at the lowest levels in two decades. Mortgage brokers are closing and reducing staff.
- Worst January for mortgage purchase approvals since 1995.
3. Investors are stuck:
- Second and third homeowners are sitting on their hands/stuck with interest rates at current levels.
- Short term rentals are becoming less attractive for landlords (STR supply in NYC fell 80% in 2H 2023 due to regulations).
4. Yet, stress is minor compared to history:
- The dynamics are vastly different from 08/09 and builders have been disciplined.
- Housing foreclosures and defaults are rising q-q, yet are only 10% of financial crisis peak levels
- Inventories are approaching more normalised levels (ex-financial crisis), at 3.5 months of supply (vs 11 months in 2007)
5. What about home improvement and DIY?
- Retail sales for building materials and garden supplies are weak y-y (elevated pandemic comparables are a factor)
- Consumers are spending less on DIY projects with higher interest rates (“flipping” homes has become more expensive)
6. Fortunately, most borrowers have mortgage rates well below 5% AND have homes that have appreciated materially.
- Home equity withdrawals provide $1-2trn of further spending power for consumers, on our math.
- This provides psychological and financial support for most homeowners to spend more on products they like, or in time, their home.
The pent-up demand for new homes and DIY, if history is any indication, will return, at the right price. Idiosyncratic opportunities will emerge for patient investors with a medium-term outlook.
