Erdmann Housing Tracker · Housing & Cities
TIER 4 Thu, 16 Oct 2025 23:01:18 +0000
This series of posts introduces a standardized product I will be making available at a temporarily reduced price. ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ ͏ | | ---|---|--- | | | Forwarded this email? Subscribe here for more --- --- # Metro Area Housing Analysis Packages: Part 2 | | Kevin Erdmann --- | Oct 16 --- | --- --- | | | --- | | --- | | --- | | --- | | READ IN APP --- This series of posts introduces a standardized product I will be making available at a temporarily reduced price. The central motivating feature of these packages will be the lot premium in each housing market that I attribute to inadequate new housing supply since 2008. Inadequate supply predictably and regressively raises rents, and I can quantify the effect as a premium that applies to every lot in the market. Upgrade to paid Most markets now have this premium and in most markets, the premium will be unsustainable as construction capacity rises. This creates an unusual context where significant growth in construction activity will be associated with moderating home prices and declining land prices, and my analysis can help to understand the balance of these trends so that investors and builders can take part in the building boom while understanding and minimizing their exposure to land price risks. Figure 1 shows the typical home price in a sample city, disaggregated between the home price (which includes the structure, locational amenities, development costs, etc.) and the lot premium (the price associated with buying the right to residing in a home in this market, which has historically been negligible in most cities). | | ---|---|--- Figure 1 As I mentioned in Part 1, nearly half of the price of the typical home in this city is now associated with that unsustainable lot premium. Recent changes in home prices reflect several components. Among them: * General inflation * Cyclical population flows * Local construction activity * Interest rates and mortgage access Adjusting home prices and the lot premium for inflation can help to highlight the other factors. About 1/3 of the one-time increase in home prices in this market in since 2020 has been associated with transitory inflation in 2021 and 2022. Figure 2 shows each measure, adjusted for inflation. | | ---|---|--- Figure 2 #### Population and Migration At the same time as the 2021-2022 inflation spike, there was also a temporary migration spike of families out of some coastal metropolises and into cities like this sample city. So, there was some cyclical increase in local home prices that has now reversed. You can see that in the red line in Figure 2. The real price associated with the size, quality, and amenities of the average home in this market increased by about 15% and then reverted to the pre-Covid price. This is based on the Zillow ZHVI estimate, which changes compositionally as new homes are constructed. Incomes rise over time, so the real price of homes without the lot premium should rise slowly over time. By this estimate, real home price trends in this market have been a bit low over the past 25 years, but that has been masked by the lot premium. That may be confusing. How could the lot premium be high if demand in this market seems to be otherwise low? Think of it as high tier and low tier. This market may not have been attracting its normal amount of high tier population inflows (except for briefly in 2021 and 2022), but the lack of adequate construction is still creating rent inflation in the low tier part of the market. As I mentioned in part 1, you can see a similar set of trends leading up to 2008. There was a cyclical rise (red line in Figure 2) in 2004 and 2005, which the Fed aimed to reverse. But, they reversed it too hard. What this city, and many cities, needed was _more homes_ in order to bring down the lot premium. Initially, in 2006, the lot premium increased because construction activity collapsed. Then, in 2008, the lot premium collapsed because of the mortgage crackdown. The appropriate, productive path would have been a recovery in housing starts in 2008 that would have been associated with an orderly decline in lot premiums back to neutral over the course of several years. Fortunately, today there is little public support for collapsing the construction market, so rising construction activity and an orderly decline in lot premiums are more likely. Though, less mortgage access has compressed the price/rent ratio, so neutral lot valuations will be associated with rents that will be higher than they had been before 2008. This is actually a difficult market to forecast right now because of the significant and changing rates of migration and population growth since 2020. The general trend in lot premiums is probably somewhere between the rising trend of 2021 and 2022 and the flat trend since then. This market will bear watching to see if the lot premium remains flat. If migration numbers move back up to the historical average, lot premiums are likely to rise again in the sample market. #### Construction Construction has remained relatively strong. All else equal, more construction will lower the lot premium. This will bend the lot premium curve down slowly over time. Changes in migration and population growth might be creating squiggles around the long-term trend, but reversing the trend in lot premiums will take years and tens of thousands of homes. #### Interest Rates and mortgage access As readers know, I don't attribute much price volatility to mortgage interest rates. That little bump in 2021-2022 in both Figure 1 & Figure 2 could be related to the significant shift from 3% to 7% rates on 30-year mortgages. I don't think mortgage rates will be an important long-term factor associated with the relative home prices and lot premiums in the sample market in 5 or 10 years. On the other hand, mortgage access seems to have tightened up a bit more since 2021, potentially compressing the price/rent ratio more in single-family housing markets. The rise in lot premiums since 2016 had been mainly driven by demand from new owner-occupiers. They were poaching homes from the investor/renter market from 2016 to 2022. Since 2022, renter household formation has finally started to develop again. This is likely because rents are now high enough to justify investor purchases of new homes. If that is the case, then lending standards may not be as important going forward as they had been after 2007. But, it is likely that some of the flattening of lot premiums since 2022 has been associated with recently declining mortgage access. On that topic, mortgage affordability, shown in Figure 3, is another element of local housing markets that these packages can help to illuminate. | | ---|---|--- Figure 3 The effect of the lot premium is regressive. So, in the high tier portion of the sample market, mortgage affordability is pretty normal, even with the lot premium - about the same as it was from 2000 to 2004. Mortgage affordability is very poor for mid- and low-tier homes in this market, but more than 100% of the affordability problem is due to the lot premium. This probably means that investor-funded construction growth will come first, and as the rising supply of homes lowers the lot premium, homeownership will rise later in this market. It is tempting to associate mortgage affordability challenges with rising interest rates, since, in real time, in 2022, rates increased and that was associated with much more difficult affordability conditions. But, without the lot premium, the rise in mortgage costs in 2022 wouldn't have been nearly as steep, and mortgage costs would not be high relative to historical norms. In Figure 3, I have divided the market into tiers, and I will go into that more in future posts. The lot premium can be estimated as a constant at the metro area level, and so it is systematically more important for cheaper homes than it is for more expensive homes. I think it is well understood that supply conditions affect low-tier rents more than high-tier rents. Conceiving of these market conditions with a metro area lot premium can help to quantify and conceptualize the effects of supply conditions in different cities. 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