Erdmann Housing Tracker · Housing & Cities
TIER 5 Mon, 8 Dec 2025 16:16:21 +0000
Here's one way to think about residential investment and the cost of housing. ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ | | ---|---|--- | | | Forwarded this email? Subscribe here for more --- --- # The current high value of residential investment | | Kevin Erdmann --- | Dec 8 --- | --- --- | | | --- | | --- | | --- | | --- | | READ IN APP --- Here's one way to think about residential investment and the cost of housing. Since the mid-1990s, all excess value in residential real estate has been associated with regressive rent inflation in cities where growth has slowed. First, that occurred in the coastal metropolitan areas where both multi-family and single-family construction are tightly regulated and domestic migration must be perpetually outflowing. Upgrade to paid Then, in 2008, the mortgage crackdown cratered the single-family home construction market, and since every city limits multi-family construction, every city took on the same condition. Of course, home prices collapsed, but rents didn't. In fact, rents had to rise because prices of existing homes were too low to trigger new construction. And, when rents increased, they increased in the same regressive way that they had already been rising in the coastal metropolitan areas. Rents on the land under existing homes increase until migration or household formation reduce the quantity of housing demanded until it fits within the existing stock of homes and the small number of new apartments and single-family homes that were being constructed. | | ---|---|--- Figure 1 Rent inflation under shortage conditions is basically land rents, so dividing expenditures on housing between the real part, labeled as structure rents, and the inflated part, labeled as land rents in Figure 1, gives an indication of how much the shortage of homes has led to land rents. You could say that every dollar in obstructed structures has led to more than $1 in new land rents. Inflated land rents aren't production, so when the rent on a home increases, it doesn't affect real GDP. It raises nominal GDP and nominal GDI (gross domestic income) and it raises inflation by the same amount, leaving real GDP the same. So, getting rid of land rents doesn't increase real GDP directly. That would require building more homes to replace land rents with structure rents. But it does get rid of rent-seeking. In a complicated way, I think this is one way to get at the issue of families feeling squeezed even though real incomes are growing. This is like a tax equal, currently, to about 2.7% of the economy. I think that's about triple the scale of Trump's tariffs. It's a generally regressive transfer from renters and new buyers to current owners. Based on past trends, I would estimate that net residential investment (investment in new homes and home improvements minus depreciation of existing homes) needs to run at about 2% of GDP to maintain a supply of residential structures that grows enough to end the land rent inflation that occurs when dampened household formation and population growth are required to equilibrate local housing markets. Net residential investment is currently running at about 0.6% of GDP. Since 2006, the cumulative shortfall in residential investment below a sustainable pace is about 25% of GDP, or about $7 trillion dollars. At the current $500,000 average price for new homes, that would amount to about 15 million homes, which is about how many homes it would take to get vacant units and adults per household back to the trends they had followed for the previous 50 years. A quick reminder: I attribute the entire 15 million shortage to the post-2008 mortgage crackdown, but there were land rents before 2008. Before 2008, the land rents were limited to a few metro areas - New York City, San Francisco, Los Angeles, and Boston, mostly. Homes were built elsewhere, but families in those cities paid land rents to avoid being one of the movers. That was 17 years ago. Most economists haven't updated their focus, so, unfortunately, public discourse is generally blind to the chief cause of the land rents. Tireless, smart, hardworking advocates for housing still explicitly claim that it's a New York and California problem; not a national problem. Anyway, that $7 trillion dollars - 25% of a year's GDP - would provide a return of about 8%, which is the typical aggregate return on residential investment. That would get spending on real housing - actual walls and roofs - back up to 10% of GDP. It would also provide an even higher return by reversing land rents - especially if the building is universal - including New York City, etc. Again - that's a transfer - the rentiers would be worse off and those who earn income by being productive would be better off by the same amount. I don't think we need to argue about why that would be good, even though it wouldn't have a first-order effect of increasing real GDP. Of course, there would also be some moderate increases in incomes as families and workers move to places where they can be more productive. This is one reason I am bullish on homebuilders. The new homes per capita trend looks similar to the net residential investment trend. The idea that builders are being held back by affordability issues has it backwards. New home construction has been increasing along with rising rents and prices. Initially, that had to happen because existing homes were too cheap. | | ---|---|--- Figure 2 But, now, land rents are elevated in every major city. One way to think about the new home market today is that it is an arbitrage on land rents. Where land can be leveraged, new homes will be constructed because that is one way they can compete with existing homes on land with inflated rents. In the 20th century, rising purchase demand, which was very cyclical, tended to lead to rising construction activity. Coming out of the scars of 2008, rising construction will lower land rents. That won't be cyclical. That will be a very slow-moving beast. At 0.6% of GDP, net residential investment isn't even there yet. It will get there. And, when the blue line is back to where it was in the 2000s, the red and orange lines will slowly correct back to 20th century norms. Most of the growth will have to come from investors (in either apartments, missing middle units, or single-family homes). The social value of those new homes that investors buy will be huge, because the effect of each new rental home will be to lower the land rents under existing homes at a scale that aggregates to more than the rental value on the new structures. This isn't a rising tide lifting all boats. It's not new value trickling down. It's a see-saw, and the investors will be pulling down the other end with landowners and existing landlords on it so that the end with renters and new homeowners rise. The rich getting less rich and the poor getting richer. That part of it is actually a zero sum game. Ironically, it's a playing-field leveling zero sum game that will often be opposed by the very people who complain the most about unfair zero sum games. Upgrade to paid You're currently a free subscriber to Erdmann Housing Tracker. For the full experience, upgrade your subscription. Upgrade to paid --- | | | Like --- | | Comment --- | | Restack --- (C) 2025 Kevin Erdmann 548 Market Street PMB 72296, San Francisco, CA 94104 Unsubscribe