Wednesday Briefs – 21 October 2020

A weekly commentary on current events. Follow populyst to receive notification.

This week: Coronavirus Third Wave; Housing’s Boom and Bust; Are the Polls Wrong?; Where the Media Would Miss Trump; Reading List.

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How Refinancings Fueled the Housing Bubble

The wave of mortgage refinancing by millions of households has distorted the housing market and contributed to the 2000s bubble.

It makes sense for a household to refinance their mortgage when interest rates decline. In addition to lowering monthly payments, refinancing can be highly advantageous if home prices have risen from the time of the initial mortgage.

But are the millions of refinancings also distorting housing’s supply and demand and de facto feeding the real estate bubble? In my view, YES. I make the case below.


In essence, market prices are set at the margin when a small percentage of properties changes hands. When conditions are favorable, prices will trend upward because the supply is small and the demand is higher. But when large numbers of homeowners refinance, they are able to monetize the higher value of their homes without – and this is the key point – adding their homes to the overall supply. When a household refinances their mortgage and takes cash out in the process, they are liquidating part of their property through a private transaction without adding to the official supply.

As an example, say a household has a $400,000 mortgage on a $500,000 home. Five years later, the home is valued at $750,000 and interest rates have dropped from 6% to 4%. The household decides to refinance and to maintain its monthly payment at the same level. Because interest rates are lower, it is able to increase the loan from $400,000 to about $500,000 without increasing its monthly payment. By now, the principal on the old mortgage has dropped to $375,000 and the owner can extract $125,000 in cash during the refinancing process. This amount is the difference between the new mortgage $500,000 minus the principal outstanding on the old mortgage $375,000. So far so good.

But what happened to the homeowner’s equity in his home? On the eve of refinancing, the owner’s equity in his home was $750,000 – $375,000 = $375,000, equivalent to 50% of the new market value.

After refinancing, the owner owes $500,000 and his equity has dropped from $375,000 to $250,000 ($750,000 market value – $500,000 new mortgage), equivalent to 33% of the new market value.

Because the owner now has $125,000 of extra cash, you could say that he “sold” 17% (50%-33%) of his home equity for $125,000. The owner was able to sell one sixth of his house without subjecting his transaction to the pricing scrutiny of the market and without adding to the official supply. This is not a big issue if only a few people refinance their mortgage, but it could, and probably did, distort the normal mechanism of supply and demand when millions of people refinance.

Through refinancing, a large number of households have monetized their home values (or fractions thereof) through private transactions. Had there been an open liquid supply and demand market where existing homeowners actually sold 17% of their homes, the values of all properties would have been reset at lower levels, owing to the existing homes fractional sales.

Further exacerbating the distortion, the household may have taken that $125,000 cash and made a down payment on a second home, giving a further boost to home prices. So, a transaction figure, $125,000, which would have depressed prices under normal supply and demand conditions ended up pushing prices higher.

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Putting this in the right context, we see in the chart above that the volume of existing home sales in the US now has an annual run rate of approximately 4.8 million units. According to the US Census bureau, there are nearly 133 million housing units in the country, which means that 3.6% change hands every year. So the market value of all residential property in America is determined by the marginal 3.6% that transact annually. Yet, using the model above, if we said that 10% of homeowners “sell” say 10% of their homes by refinancing, that would amount to an additional 1.33 million homes sold or a 28% increase which should have been added to the supply, had the fractional sale occurred in the open market rather than through a private transaction between owner and lender.

The general issue is that 20% or more of transactions took place in private deals between owners and lenders without any competitive bidding or the disciplining effect of supply and demand. It is a fair bet that without these refinancings and private deals, the real estate market could have avoided the bubble of the 2000s decade and could skirt the new bubble now threatening in some cities.

Other populyst posts on housing and real estate:

Manhattan Real Estate: A Conversation with Lisa Larson

New Home Sales: Better but Still Historically Weak

US Demographics and Housing

New Home Sales: Better but Still Historically Weak

New home sales for February were stronger than expected, at an annualized pace of 539,000 units vs. 465,000 expected. This is good news because it is the highest number since early 2008. However, the chart below shows that we are still dealing with a depressed single-family housing market.

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First, it is clear that we are very far below the peak recorded near 1.4 million in the mid-2000s. Second, if we dismiss that period as an irrational bubble, it is still a fact that a 539,000 reading is in the bottom half of the historic range of 400K-800K. In fact, if we ignore recessionary periods (shaded areas), new home construction has not been this low since the 1960s when the US population totaled under 200 million vs. about 320 million now and when household size was larger than it is today.

It is true that multi-family construction is now more prominent than in the past and that it mitigates the sluggishness in single-family construction. As seen below, multi-family housing volumes now exceed the high preceding the 2008 crisis.

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But if we use a back of the envelope approach and use a figure in the low 300,000 multi-family annual units as an historic average, we could say that the last multi-family reading is about 150,000 units above average. We could then argue that these 150,000 were ‘shifted’ from single-family homes. (That may be a generous assumption, considering that a large share of these multi-family buildings are destined to be rentals. Nonetheless the higher demand for rentals can also be considered a secular ‘shift’ that should be counted.)

Without this shift in living preferences, we could then argue that single-family sales would have been about 150,000 higher and closer to a 700,000 annual pace. That is a much better figure than 539,000 but still not very robust compared to the past, given low interest rates, the growth in population and the decrease in household size. In my view, keeping these factors in mind, an adjusted figure north of 800,000 single-family units would be closer to the historic norm. We should therefore be looking for a monthly report of at least 650,000 single family homes before we can talk about a return to normal.

In US Housing and Demographics, I made an argument three years ago that the housing market would be weak until at least 2020 because of adverse demographics. So far, it looks like the recent data supports my thesis. Homebuilder stocks have risen since then. This is based in part on optimistic anticipation of greater home sales, and in part on the fact that homebuilders have been quite adept at identifying and directing their efforts at higher growth areas of the country.


What’s Holding Back Affordable Housing in India?

The demand is huge but poor infrastructure, antiquated business models, government bureaucracy and lack of financing are all impediments.


When real estate developer Xrbia recently launched a 170-acre housing project in Hinjwadi, a suburb on the outskirts of Pune in Maharashtra, all the 3,400 apartment units were sold within a week. The biggest unit in this apartment complex was 550 square feet and the smallest was close to 250 square feet. The units were priced at Rs. 22 lakh (around US$40,000) and Rs. 9 lakh (US$ 16,000) respectively.

Pointing to the quick sale of these homes, Rajesh Krishnan, managing director and CEO of Brick Eagle, a Mumbai-based land banking firm that acquires land and promotes affordable housing in partnership with developers, says: “In a way, this shows the demand-supply gap [in the affordable housing segment in India]. People physically queue up under the sun to apply for allotment of these houses.” He considers affordable housing in India to be homes that cost less than US$40,000. READ MORE.

USA: Will Property Prices Need a Crutch as the Population Ages?


There has been much speculation that single-family housing prices could take a hit as increasing numbers of baby boomers downsize and leave larger homes behind as they move into retirement age. That assumption is too general to be entirely accurate, according a pair of major economic papers on the topic of aging and property prices.

What is clear is that this ongoing population shift holds important ramifications for the multifamily property sector, including senior and assisted living facilities. And it is also becoming an issue of increasing importance for commercial real estate investment researchers.

“As Baby Boomers enter retirement age, many ’empty nesters’ may downsize, leaving their current homes in favor of smaller condos or age-restricted communities. Therefore, prices for large single-family homes located in high property tax areas could be under pressure over the next decade,” Tim Wang, senior vice president and head of investment research for Clarion Partners in New York, told CoStar News. “However, seniors today are often healthier and live longer; because of this we believe it is still premature to invest in assisted living or nursing homes.” READ MORE.

Video: ‘Detropia’ Official Trailer

From DETROPIA’s website, by Caroline Libresco:

Detroit’s story has encapsulated the iconic narrative of America over the last century— the Great Migration of African Americans escaping Jim Crow; the rise of manufacturing and the middle class; the love affair with automobiles; the flowering of the American dream; and now . . . the collapse of the economy and the fading American mythos. With its vivid, painterly palette and haunting score, DETROPIA sculpts a dreamlike collage of a grand city teetering on the brink of dissolution. These soulful pragmatists and stalwart philosophers strive to make ends meet and make sense of it all, refusing to abandon hope or resistance. Their grit and pluck embody the spirit of the Motor City as it struggles to survive postindustrial America and begins to envision a radically different future.

DETROPIA Trailer from Loki Films on Vimeo.

Nine Out of 10 Latin Americans Will Live in Cities by 2050

Region is already the world’s most urbanized, with 80 percent of the population living in cities. 


RIO DE JANEIRO –  Almost nine out of every 10 people in Latin America will live in a city by the year 2050, and the region should use this moment of economic stability and slower population growth to make those cities more equitable, said a UN report issued Tuesday.

The report by the United Nations Human Settlements Programme said the region is already the world’s most urbanized, with 80 percent of the population living in cities. This growth came at a cost: it was “traumatic and at times violent because of its speed, marked by the deterioration of the environment and above all, by a deep social inequality,” the report said.

“The main challenge is how to develop in a way that curbs the enormous inequalities that exist within cities,” said Erik Vittrup, the head of human settlements of UN-Habitat’s regional office for Latin America and the Caribbean. “There are other cities that have been through these urban transformations and don’t have this level of inequality. It goes against the economic model in Latin America. Cities didn’t grow more inclusive; the prosperity wasn’t for everyone.” READ MORE.

China Entering Demographic Danger Zone, BOJ Official Says


China is entering a “danger zone”where a financial crisis may become more likely because of increases in loans and property prices coinciding with an aging of the population, a Bank of Japan (8301) official said.

“If a demographic change, a property-price bubble, and a steep increase in loans coincide, then a financial crisis seems more likely,” BOJ Deputy Governor Kiyohiko Nishimura said in a speech for a conference in Sydney, posted on the central bank’s website today. “And China is now entering the danger zone.”

China is at risk of emulating crises in Japan in the 1990s and the U.S. in the 2000s, according to Nishimura, who cited a Chinese working-age population that is “close” to peaking as a proportion of the total. Demographic changes can provide fertile ground for “malign property bubbles” because of the effect on demand for real estate, he said. READ MORE.

US Demographics and Housing

Expectations of a robust housing recovery are not well supported by US demographics.

From Bloomberg News (February 8, 2012): Chief Executive Officer Jamie Dimon told investors and analysts in a January conference call that housing is “getting closer” to a bottom. “We’re going to add 3 million Americans every year for the next 10 years. That’s 30 million Americans who need 13 million dwellings,” he said.

Mr. Dimon’s estimate looks too optimistic on two accounts.  First, the US population will more likely grow by 23 to 26 million in the next 10 years.  And second, the demographic bracket which includes over 80% of home buyers will grow at a much lower rate.

The US population grew by 2.8 million people in the sixteen months from April 2010 to July 2011, but over 700,000 of these 2.8 million were new immigrants.  In the remainder of this decade, the population will grow by an average of 2.6 million people a year, assuming a more typical 1 million new immigrants per year.  My estimates are derived from data compiled by the Center for Disease Control (which tracks life expectancy among other things) and by the US Census. In the next decade 2020-29, the population will grow by an average 2.3 million per year and in the following decade by 0.9 million per year, again assuming 1 million new immigrants per year.  Note that without immigration, the population would shrink in 2030-39 and in 2040-49, as I argued in America Heading Towards Zero Population Growth?.

It is not enough to tabulate the number of new Americans (newborns or immigrants) to estimate the likely impact on housing.  We have to also look at the likelihood that they are in an age segment and in an economic bracket that will lead them to spend a fair amount of money on a home, regardless of whether they are renting or buying.  An ideal scenario would be a large increase in the population segment of young and middle-aged Americans who can be characterized as middle-class or richer.  But this scenario is unlikely in the next decade.

Of the 2.6 million annual addition to the population in the present decade, 4.2 million will be from new births and 1 million from new immigrants.  And because there will be 2.6 million deaths, the sum total of these three figures comes to a 2.6 million (4.2 + 1 – 2.6 = 2.6) addition.

The US Census recently disclosed that foreign-born households are made up on average of 3.4 people, more than the 2.5 people average for native-born households. Assuming new immigrants are in similarly-sized households, one million immigrants would absorb about 294,000 dwellings per year. Incidentally, there were only 700,000 immigrants in 2011, equivalent to a demand for 206,000 units.

Outside of immigration, the annual growth in population in the present decade will be 1.6 million.  Babies don’t buy homes but growing families with new babies may do so because they need more space.  In this case however, they are vacating one home and moving into another, resulting in a net demand of zero in terms of units (say trading a 3 bedroom for a 4 bedroom home) and a subdued net positive demand in dollar terms (say trading a $250,000 home for a $300,000 home).  At the other end of the age spectrum, older people who pass away often leave a home vacant, adding to the supply of existing homes for sale.  The demand for upgrades is debatable but the supply from deaths is certain, resulting in a murky overall supply-demand situation.

A better way to look at the demand is to estimate the size of the population of people who are likely home buyers.  75% to 80% of home buyers are in the 30 to 60 age bracket (see footnote). The remaining 20% to 25% of home buyers are aged less than 30 or more than 60 and are generally buyers of smaller homes. In terms of dollar value, the 30-60 bracket could therefore represent as much as 90%+ of the residential real estate market. This bracket now has about 125 million people but it has stopped growing (excluding new immigration) in 2005 and will not resume its growth until after 2020.  If the overall pool of likely home buyers is not growing, then people are just trading homes amongst themselves without any significant net gain in overall demand for new homes. Upsizing by growing families could be largely matched by downsizing from older couples whose children have left home.

Therefore if you assume no demand from existing residents and demand of 294,000 homes from new immigrants, the total net demand in the next ten years would be around 3 million units, far fewer than the 13 million estimated by Mr. Dimon. Total home construction will probably exceed this 3 million figure because of some demolition of older homes and because supply and demand are often not in the same location.  Florida or Texas may see net demand while some other regions see net supply.

Some attention has been given to other measures of demand such as housing affordability and the rate of household formation. The National Association of Realtors said in March that the housing affordability index rose above 200 for the first time since recordkeeping began in 1970. An elevated index is an indication of high affordability.  But in any transaction, there is the ability to buy and the need or desire to buy. The affordability index shows that the ability to buy is strong but it is not indicative of the need to buy. If people are already in homes and there are few incremental buyers, housing affordability is not an indication that demand will soon return. If the index is high because demand is muted and interest rates are low, it does not follow that greater demand will inevitably return. That would only be true in the context of favorable demographics such as we have had in previous recoveries.

As to household formation, it is still low but seems to have bounced in the first quarter.  It declined after 2007 because of a fall in the divorce rate and because more young people stayed under their parents’ roofs.  The youth unemployment rate has recently been improving, raising expectations that household formation will also recover. But even during the good times, the young demographic contributes a relatively small demand in terms of units and an even smaller demand in terms of value (since they tend to live in smaller and less expensive housing). Furthermore, counting the young people who enter the house-buying age bracket and neglecting to count the older people who simultaneously leave this bracket only presents half of a full picture.

Outside new immigration, there will be little demand for housing from demographics until the end of this decade.  When the 30-60 age bracket starts growing again in the 2020s, housing demand will grow again but it will be weaker than in 1985-2005 and will have to contend with the new supply of homes vacated by rising numbers of dying or downsizing baby boomers.

As to the exchange-listed home builders, two factors may work in their favor despite the poor demographic backdrop. One is that real estate is famously local, which means that, with sufficient research, they may be able to focus on areas of the country which are growing even in a time when the overall market is not.  For example, some parts of Florida or Texas may see more demand than supply while some regions in the Midwest or Northeast see more supply than demand. The second factor is the trend towards urbanization with more people choosing to live in cities instead of suburbs. In this vein, several home builders are shifting some of their focus to multi-family developments.

The main risk to these forecasts arises from the difficulty in assessing the impact of illegal immigration. It clearly contributes to some incremental demand, perhaps not in the early years after a person’s arrival, but certainly after a few years. But here again, the data is mixed because, as noted by the Pew Research Center, the inflow from Mexico has recently reversed for the first time.

Footnote: The National Association of Realtors publishes every year a Profile of Home Buyers and Sellers. The Profile is compiled from responses to a survey which the NAR mails to tens of thousands of consumers who purchased a home during the period under study, usually July to June.  For 2010, the NAR mailed 111,004 surveys and received 8,449 responses, or 7.9%, and for 2011, it mailed 80,099 surveys and received 5,708 responses, or 7.3%. It is not clear whether these samples are large and diverse enough to be representative of all home buyers. It is possible, or perhaps even probable, that the profile of survey respondents differs markedly from that of home buyers in general. Notwithstanding the methodology, the 2011 Profile shows a marked jump in the average age of home buyers from 39 in 2010 to 45 in 2011.  This jump is directly related to the expiration of the first-time home buyer tax credit which was still on offer in 2010 (and 2008-09) but not in 2011.  Although the age distribution of buyers in 2010 showed a large percentage in their twenties, we view this as a discrepancy caused by the tax credit. In addition, it is very likely that the current historically very low mortgage rates have skewed the age distribution towards younger age groups.  We are comfortable with our estimate that, under normalized circumstances, 75 to 80% of home buyers are in the 30 to 60 age bracket.