Why hasn't housing had relief?

U.S. housing strategist at Morgan Stanley, James Egan, appeared on Stocks in Translation to explore why the housing sector hasn't experienced the same relief as other sectors despite restrictive monetary policies benefiting other parts of the economy.

The other part of this is rent. “65% of the country are homeowners, 35% are renters. Rents are largely what go into the shelter inflation numbers that we're talking about here.”

Egan goes on to point out the challenges for first-time buyers. “You mentioned first-time homebuyers. Not a lot of inventory, that inventory is very unfordable… [so] you have a renter base that has to keep renting year-over-year and that, we think, that could be providing some upward pressure to that rent number.”

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This post was written by Neil Mulcahy.

Video Transcript

The latest inflation data shows that housing is still very expensive and sticky shelter costs, the biggest contributor to overall inflation rent prices.

Now coming back down, Jim, why have we not seen some of that relief?

Especially when restrictive monetary policy, it's working for other areas of the economy.

So I think there's two answers to that question.

One is how restrictive monetary policy makes itself felt in the housing market because if you look at home prices, it doesn't look like it's played a role at all.

Home prices haven't come down where at record highs.

But if you look at housing activity, so sales volumes starts the types of actual housing numbers that feed into GDP.

For instance, those have fallen significantly sales volumes especially we're at our lowest level of sales volumes.

2023 was the lowest level since 2011.

And that's the lock in effect we talked about right.

People aren't listing their homes for sale.

So transactions can't happen but because transactions aren't happening, we're not re marking the housing market.

People are just saying I don't need to sell into the lower prices that affordability would theoretically put on the market.

But then the other part of this is rents, right.

65% of the country are homeowners, 35% are renters.

Rents are largely what go into the shelter.

Inflation numbers that we're talking about here and there are two big components going on with rents.

No inventory in the single family market.

Multifamily starts have been at multi decade highs for years.

They've come down in 24 but they've been at multi decade highs for years, but they haven't been finishing the builds.

I can look at building permits and housing starts and then before they get completed their units under construction and the gap between starts and units under construction has ballooned to a level that we haven't seen.

That data goes back to the 19 sixties and it's just because those building timelines are elongating that can be because of labor shortage issues.

It can be from regulatory issues.

It can be supply chain issues that the pandemic brought on.

All of those are contributing to this.

But you, you have while that supply is coming online, that is helping rent growth slow down.

We've seen shelter inflation slow.

That supply shortage played a role initially.

But the final piece of this, if we think about how people typically exit renter ship, it's to go buy a home.

You mentioned first time home buyers not a lot of inventory that inventory is very unaffordable.

I don't want to say they're they're stuck renting but you have a, a renter base that, that does have to keep renting year over year and that we think could be providing some upward pressure to that rent number.