Erdmann Housing Tracker · Housing & Cities
TIER 4 Mon, 20 Oct 2025 17:31:17 +0000
No CPI numbers this month because of the government shutdown, so the rent and price chart here is the basic chart that just matches 2015-2019 nominal rent and price trends (using the Zillow US price index <ZHVI> and rent index <ZORI>). ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ | | ---|---|--- | | | Forwarded this email? Subscribe here for more --- --- # September 2025 Erdmann Housing Tracker Update | | Kevin Erdmann --- | Oct 20| | | ∙| | Preview ---|---|--- | --- --- | | | --- | | --- | | --- | | --- | | READ IN APP --- No CPI numbers this month because of the government shutdown, so the rent and price chart here is the basic chart that just matches 2015-2019 nominal rent and price trends (using the Zillow US price index <ZHVI> and rent index <ZORI>). One of the main takeaways from this chart is that rents explain the vast majority of home price trends. As I have been discussing in the series of posts on my new housing market analytics packages, excess rent is essentially land rent, and the price/rent ratio on land is higher than it is on structures. So, as rents become elevated, price/rent ratios become elevated. Price/rent ratios are being driven higher by a rising denominator. That's counterintuitive enough to give you trading and development alpha until the cows come home. Lining rents and prices up from 2015-2019, in Figure 1, basically accounts for this issue, and we can see in Figure 1 that through all the chaos of the Covid shock, prices never deviated more than a few percentage points from the price that is completely explained by rent trends. | | ---|---|--- The shift in the price index since 2023 from a couple percentage points above to a couple percentage points below the rent index trend is possibly due to recent marginal additional tightening in credit access at the federal agencies, which may have further compressed price/rent ratios. After 2008, the compression in price/rent led to a collapse in construction activity and subsequent rising rents, but most markets today have rents high enough to trigger new construction, so I think the marginal effect of recent credit tightening has been to slightly lower prices with little effect on construction activity and rent trends. Supply conditions are driving rent trends and rents are driving prices. But, we need to be careful about this. I see a lot of discussion of construction and rent trends that equates rising construction with lower rents. Some claim recent trends among cities proves that supply brings down rents. Others claim that it proves that builders will pull back on construction themselves in order to stop rents from falling. Others, of course, create interest rate stories. Of course, conceptually, the supply story is the right story. The other stories are largely wrong. But, the supply story is not so clear cut. Supply and demand is an equilibrium story. There is a supply curve and a demand curve, and where they cross is an equilibrium at a market price and quantity. But, we haven't been in an equilibrium since 2008. The economics academy appears to be completely unaware of this, because papers are continually published in the journals that appear to be completely unaware of the 2008 mortgage crackdown and of the subsequent shock of prices on existing homes, which required years of rent inflation to get new home markets and existing home markets back in balance. The authors, their informal mentors and peers, the reviewers, and the journal editors have to all be universally and completely ignorant of those important issues, because if they weren't, one of them would suggest that those issues should be mentioned and accounted for. Apparently none of them do. That means there will continue to be poor policy decisions. At least it means trading profits for those of us that can pick out an elephant when it is standing in the room. But, we still need to be careful. A reasonable baseline estimate is that, under conditions of a shortage, a 1% increase in housing supply will lower rents by about 2%. The red line in Figure 2 is the regression line that shows the recent correlation between new home construction and rents. In Figure 2, production is "annual units per 1,000 residents" and the change in rents is over a 3 year period. The arithmetic, using a 1:2 units to rent ratio is that 1 unit/1,000 residents should lower rents by about 1.5% over 3 years. By the way, these are nominal rent increases, so the vertical position of each plot is mostly a reflection of general inflation while the differences between cities reflect supply and demand dynamics. Since 2022, 1 additional unit per 1,000 residents has been associated with a decline of 1% in typical rents in a given city. A supply win! Right!? Not really. Supply is important, but this isn't good evidence. | | ---|---|--- First, the only way for that to be true is if demand for new homes was uniform across these cities. That's obviously not the case. In fact, if markets are functioning and 1% supply growth does lower rents by 2%, this would be a flat line. Some cities would be approving 15 units and other would be approving 2, and supply would be constructed in both cities that met that demand while rents remained relatively stable. If you see a regression line with a steep slope in Figure 2, your reaction shouldn't be "Hey supply works!". It should be, "How screwed up are we?" The second problem here is that from 2015-2019 and from 2019-2022 the slope went up. Does that mean that sometimes more supply causes rents to increase? Obviously not. (If your city has the right vibes, the economists will say agglomeration economies can do that, but that has, oddly, only been a popular explanation for rising rents in cities that permit less than 6 units per 1,000 residents.) So, what's going on? These are demand fluctuations. The mortgage crackdown pushed prices down relatively uniformly after 2008 because the imposition on the marketplace was uniformly applied through federal mortgage regulation. After 2008, rents had to rise uniformly everywhere to pull home prices back up to a level that would induce new construction. On the margin, out on the edge of a normal city, the cost of a home is mostly the cost of construction, and since the mortgage crackdown lowered the price associated with any given rent, the primary systematic effect of the mortgage crackdown was to raise rents to the new higher level that would be associated with the price equal to that cost of construction. Rents had to rise in every city, but the rate of that rent inflation, in practice, was driven by demand. In a city that was growing 3% annually, rents would rise by 6%. In a city that was growing 1% annually, rents would only rise by about 2%. On the x-axis, I use the construction rate from 2019-2024 for all three plots. Construction in 2015 was lower. If I had used that, the slope of the regression line for the 2015-2019 period would be more positive because construction was unsustainably low in the fastest growing cities. The 2015-2019 regression is showing a return to equilibrium when home prices in every city were still too low because of the mortgage crackdown and needed to rise to trigger more construction. As we moved through that period, prices in many cities started to cross the tipping point where new construction was feasible. Cities were slowing catching up to a rate of new construction that was sustainable. But, there were growing pains in getting construction capacity back up to a sustainable level. So, from 2015-2019, supply responses were uniformly lagging and higher rents were largely a result of higher demand putting more pressure on the local housing stock. Then, from 2019-2022, there was a bump in housing demand related to Covid, work-from-home trends, etc. And, at the same time, Covid supply-chain constraints kept supply from meeting demand, even in cities where local prices could justify new construction. This created one last lunge of demand that continued to create a positive correlation between construction and rents. Builders across cities were universally unable to meet rising demand with adequate new construction. Higher demand was associated with more construction, but not enough to keep rents stable. The regression line continued to slope upward. Then, that all reversed. From 2022-2025, rents dropped the most in the cities that permit the most housing. A good chunk of that is a reversal of the Covid migration boom. That will be temporary. That creates an odd spurious correlation. The fastest growing cities are the cities experiencing the largest reversal of demand. In the 20th century, a large drop in local demand would have been associated with a large drop in local construction, because most cities had enough homes to accommodate natural demand for household formation. Today, almost all cities have inadequate supply, so families bid up rents until some portion of potential new households relents. So, today, when there is a drop in local demand, rents decline, and construction activity is supported by the pent up demand for household formation. That is still painful for builders who invested in new projects when land values, rents, and prices were higher. But, the market for new construction can continue apace as builders pick up new lots at lower relative prices. Some of the recent trend in rents is a reversal of post-2008 rent inflation. Rents in some of the fastest growing cities have overshot. Land values and rents will decline in those cities as more homes can be constructed. This is one thing that my housing market packages addresses, which I have been writing about in recent posts. 1, 2, 3. But, again, that's not an equilibrium condition. That's a correction from a disequilibrium. The supply chain for new housing demand after 2019 wasn't responsive enough. So, I expect this negative correlation to continue for a bit. Slow growing cities might still have some rent inflation remaining in order to get home prices high enough to trigger a recovery in new construction while fast growing cities have seen too much rent inflation, which is bound to correct as new supply can be constructed. But, that's a weird temporary situation. When we are back to normal, supply will lower rents. But, if that 2022-2025 trend was what normally happened in functional housing markets, the fastest growing and largest cities would have much lower rents than slowly growing cities do. That obviously makes no sense. More construction will be associated with lower rents for the foreseeable future. That is because supply _hasn 't_ been able to meet demand to keep rents low since 2008. This is a correction from that condition. This month's tracker data below the fold. Upgrade to paid ## Continue reading this post for free in the Substack app Claim my free post Or upgrade your subscription. **Upgrade to paid** --- | | | Like --- | | Comment --- | | Restack --- (C) 2025 Kevin Erdmann 548 Market Street PMB 72296, San Francisco, CA 94104 Unsubscribe