Erdmann Housing Tracker · Housing & Cities
TIER 5 Fri, 17 Oct 2025 21:30:24 +0000
In this series, I am describing an analytical package that I will be making available for dozens of housing markets that is an essential addition to standard local underwriting models for builders, lenders, developers, and investors under our unprecedented current market conditions. ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ | | ---|---|--- | | | Forwarded this email? Subscribe here for more --- --- # Metro Area Housing Analysis Packages: Part 3 | | Kevin Erdmann --- | Oct 17 --- | --- --- | | | --- | | --- | | --- | | --- | | READ IN APP --- In this series, I am describing an analytical package that I will be making available for dozens of housing markets that is an essential addition to standard local underwriting models for builders, lenders, developers, and investors under our unprecedented current market conditions. Upgrade to paid These market estimates are a unique feature of our time. For decades, there was nothing to track here. Decades from now, there will again be nothing to track. The magnitude of the shock to new home construction in 2008 was so great that a predictable process of market disruption was set in place that will take decades to play out. Today, these measures are the dominant factors creating home price trends. Because this is so novel, your competitors and counterparties will let you have this competitive advantage, if you choose to take it. A review of what these packages provide: Part 1: * An estimate of the **lot premium** embedded in home prices in most markets today, which will correct in most markets as more homes are constructed and rents moderate. * An estimate of the **neutral rate of construction** required to counter excess rent inflation in each housing market. Part 2: * Using the estimate of the lot premium in each market, we can estimate the portion of home prices that are temporary aberrations vs. permanent. * Permanent factors: Population growth, income growth, past general inflation * Temporary factors: Cyclical fluctuations (fast), lot premiums (slow) #### Market Tiers Since the lot premium is a constant that applies to every lot attached to a home in a given market at a point in time, it has a proportionately stronger effect on low-tier home prices than on high-tier prices. A $100,000 lot premium doubles the price of a $100,000 home but only adds 10% to a $1 million home. The following figures and their supporting data are part of the package that I will provide for each housing market. As a reminder, Figure 1 shows the typical nominal home price in the sample city (the ZHVI from Zillow), the lot premium over time, and the value of the typical home if the sample city didn't have lot premiums. It will take years - likely decades - for the lot premium to correct, but $150,000 is a large correction, and important to note, even if it will play out slowly. | | ---|---|--- Figure 1 Figure 2 shows the same measures, adjusted for inflation. | | ---|---|--- Figure 2 Figure 3 shows the average nominal home value in 3 tiers of the market in the sample city, in the left panel. The right panel shows the average nominal home value after subtracting the lot premium. Every tier tells a similar story. The lot premium in this market is responsible for high home prices. After netting out the lot premium, home prices in both the top and the bottom of the market have roughly risen with general price inflation. | | ---|---|--- Figure 3 In Figure 4, I index these measures to January 2000, to compare the cumulative change in home prices in each tier of this market. In the left panel, you can see some of the themes that are common in this newsletter. This was considered a bubble city before 2008. It was a bubble city. But, note that there wasn't an unusual rise in the value of low-tier homes at that time. That is common throughout the nation at that time. The "bubble" cities saw rising home prices across the board. The markets where low-tier home prices increased more were the Closed Access markets (New York, Los Angeles, etc.) where prices were high because the housing shortage - which is endemic and locally enforced in those markets - had already created a sizeable lot premium, and millions of poorer families were moving out of those cities as they were priced out. The cities where those families were moving to - like this sample city - had building booms and price bubbles. But it wasn't a low-tier price bubble. Prices increased across the board. | | ---|---|--- Figure 4 The academics generally didn't differentiate between the cities that were emptying out and the cities where families were being displaced to. They just threw all that data at their models and "controlled for regional fixed effects", and, on average, they found that homes in poorer neighborhoods increased the most. That really only happened in the cities that were displacing hundreds of thousands of families, but the academics didn't know that, and they didn't even know that it was an important distinction to make. So, their models naively found this statistic that only applied to the Closed Access cities and they presumed that it described the cities that were building a lot of homes, even though it didn't, at all. And, voila, they invented a GIGO conventional wisdom and filled the libraries with tales about it. The boom was reversed with recessionary monetary policy and then devastating overregulation of mortgage access. What you can see in the left panel is that the main effect of the entire boom and bust, then, was to collapse the value of low-tier homes, relative to high-tier homes. In this market, but 2012, there was a 30% differential between the high tier and the low tier. That, by the way, is when the large institutional investors bought most of their inventory of rental homes. One way to look at this is that rental housing investors are in the business of managing _properties_. They aren't in the business of land speculation. Land values are a risk to them, not an opportunity. The years 2010 to 2015 were a golden time for them. Existing homes were selling at a discount, since their traditional buyers were now locked out of mortgage funding. And, the lots the homes were sitting on had negligible - even negative value. This was an opportunity for housing investors to focus on exactly what they prefer to own - buildings with families living in them - without the risks of land valuation. But, since 2015, lot premiums have been increasing, pushing the value of low-tier homes higher. Now, the relative value of low-tier and high-tier homes in this market have increased by similar total amounts since 2000 - about 130% (continuously compounded). But, the problem is that, now, in order to invest in rental housing, you have to also be a land speculator. By the way, you can see how this plays out in the right panel. That is the cumulative change in the values of high-tier and low-tier homes after subtracting the lot premium. Low tier _homes_ still sell for a discount in this market. They sell for a discount in almost every market, because the mortgage crackdown permanently raised the rent yield on homes in neighborhoods where the residents can't get mortgage funding. But, since the lot premium is a constant across a market, the more discounted the home is you might want to invest in, the more its value is now tied to land speculation - land speculation, by the way, that over the long haul is almost certain to produce a loss. That is where these markets will equilibrate - where higher rental yield makes up for the land risk. Those who don't understand this will be the proverbial naked swimmers when the tide goes out. Figure 5 shows the portion of the average low-, mid-, and high-tier home values in this market, over time, that are attributable to the lot premium. | | ---|---|--- Figure 5 This particular market is tricky. It has been going through a decline from a cyclical boom after Covid. The decline in home prices will stabilize. Cyclical changes are temporary and mean reverting. It is possible that the lot premiums in this market will return to an upward slope for a while if population inflows increase to typical levels again. This market requires a lot of cyclical intuition of the type that has always been a part of underwriting work: What is the trend in the number of homes that will be demanded in this market in the next few years. Figure 6 shows these valuation estimates for another market that (1) has continued to see strong cyclical demand for housing after Covid, and (2) has recovered to a rate of new construction that is closer to a sustainable supply. In this city, there has been a slight reversal in the lot premium, but it has coincided with strong price appreciation of homes in all tiers, after accounting for the lot premium. | | ---|---|--- Figure 6 I think this will be a common theme across markets for the foreseeable future. The correction in the lot premium will be associated with building booms. Building booms are usually associated with cyclically strong price and construction trends. In a way, this all will add up to more stable markets. Cyclical price appreciation will be tempered by declining lot premiums. Standard underwriting processes will still be important. But, understanding the details of what is happening with lot premiums within each market will be an important factor helping to consider where in the market your investments should be targeted, when to plan to get in and when to get out, where to be careful about land exposure, where lot premiums might still be ascending, and where gains can be pocketed on new construction because prices in land markets do not reflect the lot premiums embedded in home prices. There are countless margins on which the novel analysis this data allows you to make can be applied. For instance, you can think of the value of any given property as a combination of 3 factors - (1) cost of construction, (2) amenity value of location, and (3) the lot premium. In a market like that in Figure 6, builders may see declining margins because they are bidding up the cost of inputs. That might be a fundamental issue underlying the rise in home values in the right panel. Targeting a new project where more of the value comes from amenities of location rather than the size and quality of the homes - say an upscale apartment building or townhomes located near central city amenities or transportation access - might help avoid the risks posed by that market. In that case, the high-tier project will be less sensitive to the declining lot premium and less sensitive to rising costs of construction inputs. It might also be important to target a product that can be constructed quickly, to minimize land value risk. All the standard competitive advantages still apply - the builder that knows where locations have value, what sorts of homes will sell well in those locations, and how to build them efficiently, will still apply all of those organizational tools. But, now, with lot premiums that frequently run in the 6 digits per home, this additional level of analysis will be important. In Part 4, I will discuss forecasts. 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