Friday, February 23, 2018

Housing: Part 285 - There was always a shortage of housing, Phoenix Edition

Phoenix.  The poster child for the boom and bust housing market.  Built so many homes in the developers' lust for profit that it took years to burn off the inventory.

Sources: IRS,
S&P/Case-Shiller and Census data via FRED at St. Louis Federal Reserve Bank
Here's the latest in a long line of graphs that I should have thought to make months ago.  If you are new to this blog, you may be surprised to hear that that is all wrong.  If you are not new, you probably aren't surprised any more by this stuff.

I have combined housing permit data with migration data to review the timeline.

First, a couple of notes:

(1) The migration data is based on IRS estimates of tax filers.  This only covers about 3/4 of Phoenix households, so the total number of migrating households is larger than the numbers shown here.

(2) There is some level of housing expansion that is required to cover natural local population growth and the replacement of old units.  For this exercise, we can assume that the level of building (the black line) from 1995 to 2001 roughly reflects the level needed to meet this need, which during that period appears to have been about 1.5 units per 100 existing households, annually.

From 2002 to 2004, there was a rise in housing units that roughly paralleled the rise in in-migration that was coming due to California's housing shortage.

In 2005, the gross inflow of households continued to rise, but Phoenix builders were already pulling back.  Permits in 2005 were lower than permits in 2004.  Now, notice what happened in 2005.  Net in-migration topped out along with housing permits.  So, how did net migration top out if in-migration was still rising?  The only way it could.  Out-migration had started to rise.  In 2005, in Phoenix, there was a shortage of housing.  And, as a result, home prices in Phoenix in 2005 sky-rocketed.

One explanation I hear in Phoenix for why builders didn't build more in 2005 is that new units were just being bought up by speculators, and they didn't want to feed that bubble.  Another explanation I hear, which is more plausible to me, is that local municipal permitting offices were working at capacity.  The only reason that may not be plausible is that I have not heard builders complain about it.  And, maybe the first explanation is the reason why they didn't complain.  Maybe they would have individually applied for more lots, but they were satisfied with having the entire market constrained for supply because they were convinced that it was a collective action problem and keeping the entire market from developing more lots was beneficial.

It looks to me like that constraint was a significant cause of the spike in prices and of the development of a speculator market, since speculators could put their name in a hat to buy a home one month, knowing that the 10 other buyers in that development who were turned away would be back next month willing to pay more.

In any event, what is clear is that supply started to moderate even when in-migration was strong.

In 2006, in-migration began to fall, because the Fed had engineered a decline in residential investment, employment growth was declining, and the mass migration event was subsiding.  But, note what happened in 2006 in Phoenix.  Permits for new housing units again dropped more sharply than in-migration was.  And, so, because the shortage remained, prices remained elevated and outmigration continued to climb.

These trends continued in 2007. In-migration declined and out-migration increased while new units declined.  The only change was that by the end of 2007, prices were collapsing.  By 2008, out-migration and in-migration had converged so that there was hardly any in-migration into a city that regularly sees net migration rates of above 1% per year.  Prices continued to collapse and building was at a standstill.

Finally, in 2009, out-migration declined.  In-migration also continued to decline, but the decline in out-migration suggests that finally locals weren't being pushed out.

Now, take a look at vacancies in Phoenix.  In 2006, vacancies among owned homes increased.  Homeowners were having a hard time selling houses.  Normally, this is chalked up as the first sign of a market dealing with overbuilding.  But, look at rental vacancies.  There weren't too many units in Phoenix.  Rental vacancies remained low until late 2007.  The reason owned vacancies increased was because we purposefully sucked money out of the economy in a concerted attempt to cool off housing markets.  Rental vacancies were low and households were still having to move out of town, but the market for homebuyers was weak.

By the way, in my 4 categories of cities, this pattern only shows up in the Contagion cities.  The Contagion cities are the cities that had a mass migration event.  In the Contagion cities, as a group, owner vacancy increased in 2006 and renter vacancy increased in 2007.  For years after the crisis, federal policies were based on the idea that there was an national overhang of housing inventory to work off.

None of the other types of cities showed any systematic shift in either rental or owned home vacancy rates.  There was a rise in the "other" category, which was largely due to Detroit.  I will concede that Detroit has an oversupply of homes.

1 comment:

  1. More great blogging.

    I wonder if the Fed knows, even if they will not concede. We can hope they do not tighten too much.