Housing inflation-higher interest rates: two problems of less importance for home buyers who buy and rehab a home

With so much public consternation today which is centered upon, A) "inflation", and, B) high housing costs, is it plausible to consider that the magnitude of each of the two aforementioned challenges really lies moreso in how we look at each of the two problems? Rather than in the two problems themselves?

For example, when one is considering the purchase of a home today, the purchase of a home at a sale price which is at-or-above the home's current market value, as interest rates rise (as they have been doing), then the ongoing affordability of that home being purchased can become a legitimate concern for the home buyer. A) Purchasing a home at or above the home's current market value in a market where home prices have steadily increased, coupled to, B) higher interest rates - these are two challenges for home buyers today.

The combination of "A" plus "B" has contributed to the housing affordability conundrum - and to reduced buyer demand - that we see today. Yet, this very same housing affordability issue is arguably in many ways predicated on only considering a traditional move-in ready home purchased at-or-above the current market value of the home as the #1 option for the buyer's home purchase. Contrast this home-purchase route, with an altogether different home buying route for the home buyer to potentially consider.

The affordability issue when purchasing a home could be much less of a challenge for the home buyer when the house being gauged for its affordability is a home that can be purchased and rehabbed, affordably. Since homes purchased that are in need of being rehabbed are often purchased by buyers at lower sale prices, as compared to the purchase of homes which are bought in move-in ready condition.

Released just this month - in November - a University of Michigan consumer sentiment survey pegs 4 out of 5 U.S. consumers as describing home buying conditions as "bad". Gauging today's home buyer sentiment, the University of Michigan survey results parlay the most negative perception of "housing" in the United States, going all the way back to the year of 1978. The year of 1978 being the year in which the University of Michigan survey was first conducted.

Arguably, based upon the lesser-known-yet-additional options home buyers do have available to them today, if (or when) home buyers choose to consider alternative home buying options by looking at potential homes to purchase (and rehab) through a different home buying "lens", then the "bad" connotation for "housing" in the University of Michigan survey should be nowhere near 80%. It should be, rather, much lower.

In fact, if one were to look at the subject of "housing" through the expansive "lens" which includes a home rehab as a purchase option for the home buyer, then "housing" could very well be deemed to be a positive today. Not a negative. Which would then lie in stark contrast to the 4/5 consumers in the University of Michigan survey who view housing conditions today as "bad".

In October, sales of existing homes - "existing homes" being the key point to think about in relation to housing inflation - fell by 28.4%. A steep decline. Yet, while home sales declined by 28.4% in October, what has been further creating added pressure on home buyers has been the steadily increasing prices of homes, coupled to the higher interest rates. In October, the average sale price of existing homes - i.e.: of home resales - actually increased. Increased by 6.6%. Home prices went up.

So, we have, A) home sales declined, B) home prices went up, coupled to, C) interest rates have been holding steady at their perceived-to-be-high levels (although interest rates are not "high", by any means, relatively speaking, looking at any measured history of interest rates). The combination of which, creates a tough environment for home buyers today (and for home sellers). A tough time for home buyers, that is, who predominantly only look to buy move-in ready homes.

With most home buying metrics speaking to assessments of predominantly what constitutes owner-occupying home buyers - the sentiments of these owner-occupying home buyers (i.e.: the University of Michigan study), correlated to housing affordability for owner-occupying homebuyers - the University of Michigan consumer sentiment survey also shed light upon a different buyer group in the market. As well as on this separate buyer group's confidence (or lack thereof) in "housing" today. The additional buyer group the University of Michigan survey evaluated was...institutional investors.

In the third quarter of 2021 - last year, when mortgage rates were notably lower than they are today - institutional investors purchased in excess of 94,000 total properties. Fast forward one year, to 2022.

In the third quarter of 2022, institutional investors purchased 66,000 total properties - nearly 30,000 fewer properties purchased than had been purchased by institutional investors in the third quarter of 2021. Institutional investors' purchase totals of properties in the third quarter of 2022 came in 30% lower than purchase totals for the third quarter of the prior year. A steep decline.

The Fed, inflation, mortgage rates, homebuyer sentiment, institutional investors, consumer surveys, and so on, and so on, and so on, and so on... Yet at the core of each of these aforementioned talking points, we can (arguably) find a property purchase platform based predominantly upon, move-in ready resales. Move-in ready home resales - the sales of (and the purchase of) existing homes that are purchased by buyers at, in most cases, higher prices...these are homes which in most cases do not need to be rehabbed, upon acquisition. These are homes which had been purchased at an earlier date by the now-sellers. Homes now being sold (i.e.: resold) to another home buyer today - homes being sold at higher sale prices. Correlation: A) Move-in ready home resales - higher home prices, B) Housing inflation - affordability (or a lack thereof).

If Americans continue to purchase (and purchase again, and again and again and again...) the very same move-in ready homes, from a limited stock of housing which is not adequately increasing every year in order to meet ever-increasing home buyer demand - more homes need to be added to the market each year, just to cover the higher number of buyers entering into the market every year - then we would have, housing inflation. And we have just that.

Then interest rates go up...and the housing affordability problem we face today becomes even more pronounced. But the problem is not really found in the higher interest rates. Not at all. The real problem is inflation - housing inflation, to be more specific. Housing inflation, linked to, too few homes which are available to too high a number of home buyers. Every year. Year after year. Which again traces back to, too few homes are being added to the market each year, in order to meet increasing buyer demand. And a good portion of the homes which could be added to the market every year - then existing on the market as suitable, affordable housing options for home buyers - could come through considering a home rehab as one good purchase option.

It can be argued that an industrywide overreliance on traditional move-in ready home resales, with a lessened focus on creating more housing stock - i.e.: an industry reliance built mostly upon selling move-in ready homes which are already built, which are already owned, and which are already lived in - is part of our housing inflation challenge today (as it is too, to reduced buyer demand).

An industry model, and an over-reliance, on selling predominantly move-in ready home resales, coupled to a potential lack of focus on, a lack or prioritizing for, and a lack of specialization by professionals in, creating more housing stock that can be added to the market (affordably) every year, then made available to a higher number of home buyers. Facilitating an ongoing national affordability-in-housing challenge. Creating inventory is the solution, whereas ignoring the creation of inventory further contributes to the housing inflation problem we face. 

Let's use but one, singular example for how an inadequate amount of housing inventory is being added to the market...while at the same time, across the country, homes are being sold, and resold, and resold yet again (at higher and higher sale prices). Thus creating - and compounding - a nation's housing inflation. The very same housing inflation that the Fed is looking to curtail by raising interest rates.

The singular example spoken to in the last paragraph that we could look at is New York City.

New York City issued fewer new housing permits in the 2010's than the City issued in the 1960's. Think about that for a moment. There were 400,000 fewer residents in New York City in 1960 than there were in New York City in 2010. And there were 1,000,000 fewer New Yorkers in the city in 1960 than there were in 2020 - one million. Yet, there were more new housing permits issued in New York City in the 1960's - when there was a much lower city population total - than there were in the 2010's. It goes without saying that that is, essentially, utterly unsustainable, in relation to limiting housing inflation.

If we would like to identify housing inflation in one city, the issuance of new housing permits issued in New York City - in the 1960's, then in the 2010's - would be one route cause for city-specific housing inflation. Free market economists often tend to argue that "the market" solves all problems. In relation to the subject of housing, reliance upon the free market as a good solution to nation's housing affordability challenges is not uniformly accurate, since looking at numerous factors today, once can argue that there is little evidence to support the premise that the "free market" has been working well in relation to housing affordability. And in relation to limiting housing inflation. Rather, "the market" has witnessed an over-expansive build-out in the real estate industry, based mostly upon selling move-in ready homes. While at the same time, "the market" has not, arguably, met market housing demand in relation to the creation of additional housing options for home buyers to consider.

But again, the challenge we have today - reduced buyer demand, lack of housing affordability, a decline in home sales - is found mostly when speaking to topics relegated only to move-in ready home resales, to higher interest rates, to the Fed, to mortgage rates, to inflation, and to "inventory" - the conventional real estate group think, that is. It's essentially a self-limiting - albeit a self-fulfilling - national challenge. A challenge, that is, when one limits one's home buying options predominantly to move-in ready home resales. But it's not an altogether unsolvable challenge for home buyers.

When we look at these same housing challenges, when we look at these challenges through a different housing "lens", then do we really need to accept the "reality" that 4/5 Americans cited in the University of Michigna study should view the housing market as "bad"? It's just not true. Not true at all, that is, when and if we look at the topic of "housing" (and housing affordability) through the different "lens".

One such "lens" could be found in looking at the subject of "housing", then adding in the possibility (as an option for home buyers) of buying and transitioning now non-performing, distressed, vacant (affordable) homes back into the marketplace. Doing so, with the end product then being, a quality, affordable home. To live in.

So, then, are there properties in the United States to buy (and to rehab) affordably, in scale? Or does the home rehab space need to be a one-at-a-time limited exercise?

In the City of Los Angeles, there are an estimated 70,000 vacant housing units. That is, 70,000 vacant housing units spread throughout the city. With city leaders in Los Angeles continually looking to identify good ways to address their substantive, ongoing challenge of too-few affordable housing options available to families, voters in Los Angeles this month approved - approved by a measure of 70%, supporting the measure, with 30% opposing the measure - Measure LH.

Measure LH in Los Angeles provides the city with the authority to use public funds to build 5,000 units of affordable housing within each of the city’s 15 council districts - 75,000 newly constructed affordable housing units which will be added to the existing housing stock in the city of Los Angeles.

While transitioning vacant, distressed, and now non-performing properties back into the market as performing, habitable, affordable properties, challenge-duplicity may arise when additional now-performing properties go unmaintained, enter into foreclosure, fall into disrepair, become non-performing, furthering compounding a city's vacant housing problem. 

To address this issue, in New York, a state law passed in 2016 requires mortgage lenders to check for the potential vacancy of homes when mortgagors go into default on their home loans. One reason for this state law being in effect in New York today is, while a mortgage lender has the objective of continuing to receive mortgage payments from the borrower, the city in which the property is located has a goal to prevent properties from becoming abandoned, falling into disrepair, and entering into foreclosure. 

In Kansas City, MO, a $50 million housing bond was recently approved by Kansas City voters - approved by a vote count of 71% supporting the measure, with 29% opposed to the measure. The $50 million in bond funds will be allocated towards the construction of, the renovation of, and the rehabilitation of what is intended to become 2,000 affordable housing units in Kansas City, Missouri. 

In Colorado, Proposition 123 was recently approved by Colorado voters. Proposition 123 in Colorado is projected to be a good vehicle which could enable the partitioning of $290 million per year to be used for the construction of affordable housing in Colorado. Whereas in Kansas City, the voter-approved $50 million in funds is coming through the issuance of a city bond, where bond funds to be injected into Kansas City's housing trust fund, in Colorado, the projected nearly $300 million per year in revenue will be funded through the partitioning of .1% of state income tax revenue. 

In relation to creating policies, procedures, and methodology on the national level which could stem housing inflation, one feature of President Biden's Housing Supply Action Plan calls for government-owned homes to be made available to owner-occupying home buyers, rather than to investors. Often times, homes buyers acquire from a municipality can be acquired at relatively low sale prices. These city-owned homes could be affordably rehabbed by home buyers. A good idea...and a counter-inflationary measure - in relation to housing - as well.

The overall vacancy rate of properties located within the United States is 11.6%. Out of 138,432,751 total housing units in the United States today - these are housing units both intended for owner occupancy, as well as rental units - 122,354,219 of the total housing units are now occupied. Which means, one out of every eight properties in the United States today is vacant. Throughout the United States, there are an estimated 16 million vacant housing units, in total.

Striking a balance - in most things - is typically considered to be a good attribute. Whereas going to extremes, often can lead to an imbalance, and to future challenges. So then, if striking a balance by considering the purchase of - and the rehab of - a vacant or a distressed home (and doing so affordably) is a novel, oft-overlooked idea when interest rates are low, when inflation is low, and when housing demand is high, then maybe considering the very same idea when inflation is high, when interest rates are perceived to be (relatively) "high", and when homebuyer sentiment is notably low - as 4 out of 5 consumers in the University of Michigan survey consider housing conditions to be "bad" - is one good option to think through, when buying a home today.