Potemkin Village

Americans bought 644,000 new homes last year, the government said Thursday.

That was the fewest since 2018. The 16.5% drop counted as the largest annual decline since 2009.

The monthly data showed new home sales rose a third month in December, a respite of sorts after a very challenging year for housing. The 616,000 annual pace was better than the 612,000 rate consensus expected.

The figures came a week after data showed single-family housing starts likewise fell the most last year since the housing bust. Homebuilder sentiment declined every single month in 2022, according to the NAHB’s widely-followed gauge, while existing home sales fell in 11 of 12 months.

Notwithstanding my having done so on countless occasions in these pages, it’s still too soon to declare this particular bubble burst. Although the swiftest rise in mortgage rates in a generation sapped demand and put the brakes on runaway price appreciation, the market is defined by a structural dearth of supply and favorable demographics. Those are sturdy pillars of support for prices.

As regular readers are apprised, my own search for new scenery last year was fortuitously timed in that my treasure hunt (which is ongoing) gave me a window into a market to which I’d admittedly become somewhat aloof over the years.

I was of course aware that everyday people had been priced out, and of the extent to which even many not-so-everyday people were priced out of the frothiest markets. What I wasn’t aware of, though, was just how far-reaching the pandemic effect really was. $1.2 million, I discovered, no longer guarantees an extravagant abode in very small cities. I’m always quick to remind readers that when I say “very small cities” I mean cities you’ve never heard of unless you were unlucky enough to run out of gas on the highway while passing one on the way to somewhere else.

More recently, I’ve noticed rampant dispersion. Last night, for example, while randomly perusing listings in second- and third-tier cities, I found a veritable penthouse in St. Louis for what, to me anyway, looked like a song. A few blocks over, a lesser condo was listed for 25% more. Similarly, I found a ridiculously extravagant loft in Cleveland for what seemed a pittance. No one need regale me with the potential pitfalls of buying real estate in St. Louis or Cleveland. The odds of my purchasing any of those listings are minuscule, not just because I hate heights, but also because I’ve never enjoyed “urban living,” even in smaller cities. The point is just that things do feel different now than they did just six months ago, when everything was still lofty (no pun intended). Versus 12 months ago, the market feels night and day.

Of course, that’s for high-end properties. Often, the dynamics can be a bit more idiosyncratic there than they are lower down the ladder. If you owned a penthouse in St. Louis, for instance, there was probably a reason, and there’s probably a reason why you’re trying to sell it now, which can impact what price you’re willing to accept. Back down the elevator, and back out in the suburbs, the median new home price rose nearly 8% from the prior year to $442,100 last month, according to Thursday’s data.

That was down considerably from November, and represented a near $50,000 discount versus the peak in October. But it likely still feels onerous for everyday Americans, particularly with the still-high cost of financing. The average price, which is less relevant given the statistical skew from high-end properties, was $528,400.

Note the subheading on the chart. I think it’s important, from a societal perspective, to acknowledge that prices aren’t going back anywhere near pre-pandemic levels. If they did, the implications for anyone who bought near the top would be catastrophic. I’ve seen (and documented) the math for those who bought at various intervals during the run-up, but crucially, almost all of those scenarios posit i) a relatively pedestrian price decline from the highs, ii) a respectable down payment and iii) some middle-ground in terms of when the purchase was made such that there’s a built-in assumption of an equity cushion on top of the down payment. Individually, those assumptions are probably safe. But taken together, they represent a pretty rosy conjuncture which I’m not sure is universally applicable. The point: The pandemic premium isn’t coming out. Not entirely, and that could impair affordability for years, if not decades, to come.

Consider that the median price of a newly-built residence has doubled in 10 years. Needless to say, real incomes for everyday people (“median” families, so to speak) haven’t doubled over that same period, if they’ve risen at all. Nominal wages are up sharply since the pandemic, but adjusted for inflation, wage growth is negative. Lower financing costs can bridge the divide for homebuyers, but only to a point. And that’s irrelevant now, because even after dropping sharply from the highs, mortgage rates are elevated if you’re a relatively young couple trying to make the math work.

None of that’s to say all homes are out of reach, or that income-sharing, cohabitating young adults in America with good jobs can’t find an affordable house. What it is to say, though, is that a lot of average, working people are priced out of the market. In an era when those with good-paying jobs are increasingly able to work remotely, people with money are probably becoming more mobile. At the same time, the huge run-up in prices during the pandemic afforded (figuratively and literally) untold numbers of middle-aged and older property owners in expensive markets the opportunity to sell their home, pocket a huge windfall and then deploy that windfall in less expensive locales. The effect of that is to price out the locals who, almost by definition (lower property values typically mean lower per capita income), don’t have much money in the first place.

The more I think about all of that, the more uncomfortable it makes me. I employ a lot of anecdotal evidence in these pages, and I’m always the first to say that my anecdotes probably aren’t representative. With that caveat, I wanted to quickly highlight what I view as an especially unnerving aspect of this entire conjuncture.

Over the past two years, two old friends of mine (one of whom was instrumental in my life at one point, and another I knew from business school) purchased homes in Florida and Tennessee, respectively. Both seemed to be quite proud of — wholly enamored with, even — those properties. But they weren’t nice properties. They weren’t run-down by any means. And they weren’t in bad neighborhoods. But objectively speaking (so, setting aside my own vanity), they simply didn’t fit any common sense definition of the word “nice.” Neither of those women make six figures, and neither are married. In America, the middle-class is being conditioned not just to accept less and less desirable outcomes, but to mistake them for desirable. Or so it seems to me.

Middle-income buyers unwilling to accept that dynamic in the housing market are herded into tract builds that increasingly resemble nightmarish Potemkin villages. This now goes well beyond the traditional “curb appeal” charade. Many new constructions in America are effectively two-story manufactured homes wearing masks of brick and stone. Walk down the street and you’re in Beverly Hills. Walk around the back and you’re staring at rows of mobile homes.

Now that I think about it, maybe that’s apt for America. Despite being the richest country in the history of the world, the US has pockets of almost Third World-style poverty and ranks embarrassingly low on myriad key metrics associated with stable, prosperous democracies. The whole country is a Potemkin village. The suburbs are just a reflection of that. Stately facades hiding a trailer park.