The United States isn't building enough homes. The amount of inventory that we've seen increase has
taken the level of existing home inventory to 3.8 months. Normal is six. Builders completed over 1.5 million new housing units
in the 12 month period that ended in July 2024. That still wasn't enough to end a housing
shortage that's a decade in the making. Not only were we under-building for a decade, but then
you get to the pandemic and there's this massive rush on housing. That's making home prices rise fast in many parts of
the country. So if you are waiting for that market to really dip,
it's not going to happen. The reason for that is that we are so under built. Both 2024 presidential candidates have ideas to fix the
housing market, but neither stance seems to prioritize a key underlying issue. A lack of competition is also contributing to the low
supply of housing. Can politicians do anything about the housing shortage? and if so, why haven't they yet? For years, builders in the United States have made
fewer homes than the US needs.
There are various estimates for the scale of the
shortage. Which is estimated anywhere from 2 to 8 million. Some people put it at even 20 million. Housing units that we are short. The shortfall in new construction sent home prices
trending higher over the past decade. The typical newly built home in the United States cost
about $417,000 in June 2024, a slight decline from 2022 when home prices
averaged around $430,000. But the typical household only brought in
around $75,000 a year in 2022, the most recent year with data available. Purchasing a home in many major US cities would
require over $130,000 in household income. Meanwhile, many people have depleted their savings
following the pandemic. We're absolutely seeing a trend of consumers, home
buyers moving from California to the southwest and Texas; moving from the Northeast to Florida and
Georgia because of a lower cost of living, less state tax, better weather. About half of the new home sales in the country are in
ten cities, and that includes four cities in Texas. It's much faster to get zoning and entitlement
improvement.
And so as that happens, then you can move it through
the cycle faster. Decisions from the Federal Reserve can affect the real
estate cycle too. About 18 million households were priced out of home
ownership between early 2022 and October 2022 as mortgage rates rose, according to the National
Association of Home Builders. That economic tightening is slowing down the
development of new housing too. In the housing sector, investment stalled in the second
quarter after a strong rise in the first. There were fewer residential building permits issued
and fewer housing projects started in 2024 than there were in 2023. The expectation, of course, is that the fed will lower
their rates in September. And while mortgage rates don't exactly follow the fed,
they are influenced by what the fed does. So a lot of summer potential buyers were waiting till
fall to see if rates would come down even more. Some big builders have offered deals on mortgage rates
to help homebuyers bridge the gap. For example, the homebuilder D.R. Horton offered some buyers in the Reno, Nevada area a
temporary one year, 3.5% interest rate in 2023 before it rises to market rates over time.
Most of the big builders have their own mortgage
company. It's called a captive mortgage business. They can buy down the mortgage rate. That is an advantage big builders have that private,
smaller builders do not have. There were over 400,000 businesses building homes in
the United States in 2023. The industry remains fragmented, but the biggest firms
have advantages that are helping them increase their control of numerous local housing markets.
Just ten builders are behind more than half of the new
homes in 49 of 50 metro regions in the United States. We're seeing cities like Tampa as an example where
today the top ten builders have more than 80% market share. That just makes it very hard for any new
builder to get a foothold. If you look at relevant markets well-defined for
housing, then you see that in many places it took the two firms that were merging from having 30%
each to having 70 or 80 or 90% of the housing market.
What's really critical here is the definition of a
housing market. No matter how many developers you have building in San
Francisco, if you live in the suburbs of D.C. in Virginia, those developers in San Francisco do not
constitute a competitive threat to your market. The largest 100 home builders in the United States were
behind about half of new single family home sales in 2023, according to researchers at Johns Hopkins. The top ten builders combined had 10% market share. Today, only three decades later, the top ten have 50%
market share and Horton, the biggest has 15% market share, so the
concentration has been accelerating. My team estimates that about two thirds,
70% of the unit growth that the big builders are delivering is from
acquisitions.
The two biggest home builders in the United States are
D.R. Horton and Lennar. Both have outperformed the S&P 500 between August 2014
and August 2024. Their business is really going gangbusters, and if you
look at the stocks, they're way up because they were able to grab such market share. A lot of the small to midsize builders just simply
couldn't make the math work. Their borrowing costs were so high that a lot of them
either went out of business or agreed to be purchased by the larger builders. At the end of its 2023 fiscal year, D.R. Horton closed about 83,000 homes at an average price
of about $382,000. D.R. Horton did not respond to CNBC's request for a
comment. Lennar ended its 2023 fiscal year with about 73,000
homes, delivered at an average price of $446,000. Lennar didn't provide CNBC with a comment on
this story in time for publication. Both have acquired competing firms in the
years after the Great Recession. For example, Lennar's 2017 takeover of WCI
communities.
Lennar paid $643 million for the company,
approximately a 37% share price premium. The transaction combined two of the largest
homebuilders in Florida. This whole structural change in competition came from a
very difficult situation that started in the Great Recession. If you have a great crisis. Who are the players that can withstand the crisis and
actually survive? Are those that are bigger, that have more access to
capital? But not only that, a lot of them were receiving a
massive liquidity boost from stimulus packages in the early 2010s. The 13 largest home builders received around $2.4
billion. They could use these resources in any way they wanted. In the intervening years, D.R. Horton, Pulte Group and other big builders struck
mega-deals too. Experts believe that the industry became less
productive as its lead companies consolidated. The average builder, when I started in the early 90s,
would tell the consumer that they would deliver the house in 40 or 50 days.
Over the course of my career, in the last 30 years,
that went from weeks to months. So it's incredibly unusual that you have an industry
where you have negative productivity, essentially where it's getting longer versus shorter. To be honest, it's not like the house is super more
efficient or more tech friendly than it would have been before. They're also able to bring down their own costs because
they've simplified the models of the home. There are far fewer actual floor plans and models that
you can choose from. There would be 10% more housing built if we had the
levels of competition of 2006.
Are they getting large because they want to, you know,
maximize profits? Well, all firms want to maximize profits. It's something that we expect and that's why we have
antitrust regulation and regulators. And that is where maybe the regulators
should have been a little more strict. President Biden made competition a focal point during
his time in office. His lead regulators, Lina Khan at the Federal Trade
Commission and Jonathan Kanter at the Department of Justice, have taken a sharper stance on business
mergers. Observers on Wall Street believe that a Harris
administration could take a different approach to antitrust policy. They feel confident at some level that she's going to
maybe have a lighter touch on regulation.
The policies from the federal government, especially
that are aimed at increasing housing supply, should also look at competition. On the campaign trail, Vice President Kamala Harris has
called for subsidies to help builders construct 3 million new homes. If approved, the tax credit would go to builders who
sell starter homes to first time home buyers. Harris has also called for $25,000 in down payment
assistance for some first time home buyers and rent caps on corporate landlords. We will take on corporate landlords and cap unfair rent
increases. The Biden-Harris administration has also awarded
transportation grants to communities that allow more dense housing construction, and they've asked Congress
to provide a one year, $10,000 tax credit for homeowners who sell starter homes to other owner
occupants.
That could increase the number of preexisting homes on
the market, but also risks increasing demand for housing. The Republican Party wants to address housing
affordability too. Its 2024 platform, says the party will reduce mortgage
rates by slashing inflation, open some federal land for home construction, and also provide tax
incentives for first time home buyers. In his campaign, former President Trump has criticized
both Biden and Harris for the inflation that occurred during their administration. Republicans have a plan to bring down prices and bring
them down very, very rapidly. His agenda 47 platform claims that a Democratic
administration would abolish zoning for single family homes, allowing the building of apartments and suburbs
and destroying property values in the process. The alternative to all of this is, well, if you don't
allow this to happen, the neighborhoods are going to change regardless, and the neighborhoods are going to
be changing because now a developer comes in, purchased an old single family detached home, and they put in
place a McMansion.
That really changes the character of the neighborhood
as well. No matter who controls the White House, the president
will need to rely on the other wings of government to address the housing shortage. There's no reason to think that housing supply is going
to change that much. Ultimately, it's a function of the number of permits
that are made available to the builders. The demand is going to keep increasing. It's going to take time to really resolve that shortage
that we have built up for decades.
If the laws are complex and the land is not made
available, they don't come out and build..