A Housing Market Crisis Can Not Be Fixed

Good afternoon everybody, Uneducated Economist here. In this video we are going to talk about how the housing market is not going to easily be fixed. And I think a lot of times people look to the new administration with the ideas of deregulation or opening up of federal lands is going to somehow provide a bunch of cheaper inventory for the first time home buyer or the low income home buyer in order to get into that property ownership. And when I hear this, although I think it's a great idea as far as how it sounds, the reality of the situation I believe is much different. So when we look at what is taking place with the new construction market, this is really what we have to look to in order to find the new inventory. Because inventory is really going to only come from two places. Existing homes, meaning that people who are living in those homes want to sell them. And considering that they probably have a cheap mortgage on it or they don't want to take out a higher mortgage, you know, considering where they are today, most of the people are finding themselves stuck in the home that they are living in now and that they are not going to flip that into another home, which doesn't bring inventory from the existing market. So where does the inventory come from? It has to come from new construction. So when we take a look at what's taking place in the new construction market, we're finding that permit issuance and starts are falling. They're not rising. When you see permit issuance and new starts falling, that's the gap in production. And a gap in production needs to be made up for. So anytime you have a slowdown in new construction, you have to ramp up construction beyond that of what it is that would normally be taking place in order to make up for the slowdown. And then you have to ramp it up even more to start filling in for what it is has been missing from inventory to begin with. So again, if you have a slowdown in starts and permits, then what you're going to have to do is ramp up the starts and permits to the level that they once were, and then really ramp it up beyond that to make up for the fact that you haven't been producing. This is part of the bullwhip effect. And once you see it within not only production of other items out there, but within the housing market itself, you have to then question how is it that this new construction is going to ramp up not only to make up for the fact that we have fallen in new starts and permits, but then also ramp it up beyond that to bring the new inventory that could actually bring housing prices down. And so when we think about how it is that this new construction market can ramp up in a very dramatic way, many times people do not put into the argument that there is also a material shortage that is happening out there. Lumber is in a very very tight position when it comes to the inventory level that is out there. Mill curtailments, mill shutdowns, inventory depletions, this has been taking place and very prominent within the lumber market over the last year. So if you all of a sudden have a bunch of permits that are issued, bunch of new starts, you have this ramping up of production, you're going to find that that is inelastic demand. So you have elastic demand and inelastic demand. And this is the reason why we faced so high prices of lumber a few years ago. It's because it came from inelastic demand. Now if you're going to build a woodshed, you're going to build a chicken coop, you're going to do a remodel to expand the house out a little ways, those projects can be postponed. They're not necessities. But if you take out a permit to build a home and you poured that foundation and you have started that process, you are going forward. You have no other choice. That is inelastic demand. So you have elastic demand and inelastic demand. Permit issuance and starts is inelastic demand. And if you have a ramping up of production due to deregulations or even an opening up of federal lands and the push coming from the government to say, hey, get out there and start building these new homes, what you're going to end up finding is even though they've made it cheaper for land costs or permitting issuance and stuff like that, you're going to find that the inventory levels within the building material industry is going to be depleted if you have any kind of dramatic rise in new construction, especially when it comes to the lumber. I mean, we faced this back just a few years ago. And as many people want to blame this on greed and manipulation and all the other stuff, I was calling it out literally years before it happened, warning people about the major depletion that was happening within the lumber industry all throughout 2019. I've been doing it again for the last year, trying to show how it is that the mills are not profitable at 500 per thousand and that they would much rather be up here around six or 650 per thousand. And although we are now finding that the lumber futures are up around six, 650 per thousand, the permit issuance and starts is depleting. This does not give the mills a lot of hope to go out there and produce a bunch of lumber to have in inventory so that they can provide to the housing market that is ramping up in production. They can see the permit issuance and starts just the same as everybody else. And if you do not see that ramping up, why would you provide a bunch of material for something that is not happening? See, this needs to be understood because even if you did all of a sudden have a ramping up of permits and issuance, it's not like the lumber mills can instantly supply that much lumber. It takes time. Lumber is heavy. It comes from the woods. You got to thaw the tree. You got to haul it to the mill. You got to mill it up. You got to haul it to distribution hubs, haul it to retailers, haul it to the job site. This takes time, effort, energy, and it's not cheap. If you're doing a lot of it and you have a lot of production out there, then you will have cheaper prices. But if you have a huge demand for it and not a lot of production taking place, and even if you're trying to ramp up production because it takes time, you're not going to find that that inventory level can just instantly rise. You will find inelastic demand forcing the supply down and the prices up. And this will not be able to provide cheaper homes, not into the new construction market. So even though you may have depleted the price over here, the cost of building a home, what will happen is on the other side, the prices will increase. So there is no bringing inventory to the market in a cheaper fashion if you are ramping up production in a dramatic way. This is something that we really have to consider. I mean, take a look at some of the articles I leave down in the description. Lowe's, for example, just recently talked about how the retail space is slowing down. I experienced this myself working at the retail side. I've talked about how retail is dying on the vine. There was a time where I would get daily phone calls from people. How much is this? How much is a window? How much is a door? How many people do you know who do construction? I need construction work done today. Those calls have almost evaporated. The idea of people coming in saying, hey man, I'm really excited about getting a new construction started is very low. Like new construction takes place all the time. You're never going to find a time in history in which that new construction stops completely. Like there is times like during COVID in which it came very close, but always since the beginning of time, since the beginning of the existence of human race, they have always tried to put a structure together of some sort, no matter how you look at it, no matter what the economic conditions are. So we are going to find that there is some demand, but if the demand is so low, like we are experiencing today, then the profit does not come to the people who are actually going to provide those products out there. Whether it's a house, whether it's lumber, it doesn't matter what it is. Like if you are not profitable at it, why would you do it? Like if you went to work and it cost you just as much to show up for work, to do the job and to go home and you realize that by the time you did that, you didn't make any money at it, would you still keep going to work? Would you still be providing efforts and skill and knowledge and everything into your job, knowing that at the end of it, it doesn't really provide you with any kind of profit? Like, no, of course not. So we can't expect corporations to do that either. And this is really where I think a lot of times people look at the mills and say, oh, those greedy bastards, they just ran it up to 1700 per thousand because they wanted to screw everybody out there, but yet did not take any kind of consideration that just a few years before that, there was such a bloodbath inside of the mills shutting down like forever that nobody really understood that the inventory levels were depleted to a major, major problem. And now when I looked at that and I said, hey, don't blame this on the money printer. When you see the price of lumber going up and you're pointing at the money printer, say, yeah, the Federal Reserve go off. And this is the reason why lumber prices have moved up as fast as they have and as high as they are. You have really missed it because here we have lumber prices back down to what would be considered somewhat normal prior to all the Federal Reserve's quantitative easing. And yet here we find that there is a depletion of inventory due to the fact that they are not profitable. So once they are profitable, they'll produce. And if you have demand that is increasing, I guarantee you that is going to create a situation in which that the prices will rise. And if the prices rise, you're not going to find home prices coming down. The replacement cost of a home is very important to understand why it is that the new or that the existing construction or the existing home market is going to be elevated comparatively to the new construction market. Again, like you might have an existing home, but the replacement cost of that home may be far more than what anybody else can afford out there considering what it is that we are facing today. You know, the idea that the administration can just come in and fix things is very unlikely. They have to participate within this free market just as much as everybody else. And when you think about what it is that you are going to ask out of the new construction market and you want to ramp up production, well, then now you have to go to the people who are actually doing that work. You have to say, hey man, you need to ramp up production. And now when you think about it, there's only so many people out there who actually do this kind of work. Now you might be able to increase the labor, but you need to also increase the amount of people who do contracting work, like those who are actual builders in the business, doing the logistics, doing all the work that requires there to be more inventory. These people have to be profitable at what they are doing. And now when you think a huge demand all of a sudden starts coming to the market and there's a limited amount of these people and everybody's asking them, build, build, build, build, build, you need to build, you need to build, and they'll be like, yeah man, I will build your house. Guess how much it's going to cost because everybody under the sun is asking me to build. All right, that's going to cause the prices to move up. Again, it's supply and demand. If all of a sudden you have a huge demand coming into building and you're looking at the builders saying, hey, build, build, build, and the builders are like, yeah, man, everybody's asking me to build. You want to build? You want me to build? You want me to build? You want me to build? Guess what? Which one of you is going to pay me the most price, right? Because that's really what it's going to come down to is money talks. And so all these people say, hey man, I got cheap land. I got the regulations down. I need a builder. And then it's like, you can't find a builder right now, can you? And if you can't find a builder, you're going to pay a higher price to get one to come to your job site. And this is the situation that we would face if we have any kind of dramatic rise in production. Again, we have to look at it beyond just that of like, hey, we can magically make it all happen by deregulations and opening up federal lands, but then not take any consideration that there is a supply demand issue when it comes to the most basic component for that house being lumber, that there is only a limited amount of builders out there. Yes, we could find people getting into that business, but they have to be in the business right now already in order to take advantage of the ramping up of production. Once the production ramps up and all these people start pouring into that business, they're going to find that's a malinvestment. Just like trucking, like we experienced very similar. I'm going to leave it right here at this. We experienced something very similar in trucking. When we had the shortages of truckers, it's not too long ago. Remember the government was wanting to hire the National Guard to come in and haul all this stuff away from the ports and get it out there to the distribution, get it out there into distribution. You remember when this was taking place, the building or the increase, the ramping up of the new trucking business really was quite evident during that time. And all of a sudden, all these trucking businesses who had expanded their operation with new trucks, new drivers, facilities, all this stuff, all of a sudden came into a situation in which the demand for truckers had just essentially evaporated and trucking companies went out of business. That's the bullwhip effect and how it takes place. Recognize it for what it is. This is a situation that's not going to easily be fixed. And even if you wanted to fix it, you have to consider how much logistical nightmares are going to exist down the line as all of a sudden you have a manipulation within this market with the opening up of federal lands and deregulations. What you also have to take into consideration is the labor costs, the material costs, the availability of all this stuff. Very few people take that into consideration. They just think that magically it will just happen, that if you throw the money out there, all of a sudden there's going to be an abundance of builders who are going to meet the demand and not increase their prices. Does that make sense? I mean, some people it might, but that doesn't make any sense to me as I look at this at a daily basis, saying that if you all of a sudden have an increase in demand and you have a limited amount of supply and you don't expect prices to go up, I mean, really? Uneducated economists.