💼 Big Short 2: Supply Crunch

briefcase | invest smarter | issue #36

Coming soon to a life near you, The Big Short 2: Supply Crunch.

Tagline: When trying to buy a house feels like...

🎬 If you know someone who'd watch this sequel, please forward this email to them.

We aren't good with movie titles

🥣 Supply crunch, probably a better cereal brand than a movie title. We estimate that 100% of movie producers will not call us for any consulting on the sequel to the movie The Big Short.

Spoiler Alert: The original film tells the story of the mid-2000s credit bubble in the U.S. In short, loose lending requirements enabled millions of toxic mortgages to enter the market, creating a cascading effect that led to a recession of historical proportions, felt most acutely in the banking and housing sector.

Many banks lied about these bad loans, meaning the homes that secured those loans were almost all underwater.

Only the best quote from this film sums up the entire scenario that led to the financial collapse...

Truth is like poetry, and most people fucking hate poetry.

🤷‍♂️🤷‍♀️ So what does this have to do with today? We have another big short on our hands that isn't nearly as titillating, but could be equally damaging.

The Big Supply Short

Homeowners and buyers are much more financially sound than during the mid-2000s, as shown in this chart. Mortgage debt service as a percentage of disposable income is at record lows, especially compared to the mid-2000s. Yikes 😲

We wrote about this a few months back, but the biggest existential threat is the supply crunch, exacerbated by the pandemic and high material costs.

More recently, several data points stuck out to us as alarming that we are going to share.

📉 According to Census Data, housing starts fell 7% in July month-over-month, as construction supply lines continue to strain the industry. Starts dropped to 1.534 million units last month, compared to June’s 1.65 million units.

🤔 In 2018, Freddie Mac estimated the housing shortage target to be about 2.5 million homes per year. Who here is good at math?

🚧 Prices for building materials have jumped 19.4% year-over-year. Despite a drop in lumber, steel mill product prices increased 87% in 2021. And, gypsum (drywall) products are up nearly 16% in 2021.

🏡 Entry-level home construction is at record lows, even before the pandemic.

According to a recent NAR report on the acute shortage,

Comparing the last two decades of annual housing production with the prior historical period (1968-2000), every major region of the country heavily underbuilt housing. In order to fill an underbuilding gap of at least 5.5 million housing units during the next 10 years, while accounting for historical growth, building would need to accelerate to a pace that is well above the current trend, to more than 2 million housing units per year.

So, who are the villains in Big Short 2: Supply Crunch?

From your left, the Labor Shortage Shocker, Land Use NIMBY Doom, and the Zoning Goblin.

🥊🥊 To win this fight, governments all over need to embrace sensible densification, reduce draconian land-use restrictions, and explore upzoning to promote missing middle housing.

So what? Go watch The Big Short if you haven't already, and think about how you're prepared for Big Short 2: Supply Crunch.

🙋‍♂️ Ask a Question

TLDR: Top Stories

📈 U.S. rent grew 9.2% year-over-year in July, the fastest in Zillow records, to $1,843/month — Zillow

😬...And they're going to stay there due to the housing shortage — CNBC

👷‍♀️👷‍♂️So then why aren't builders creating more inventory? They don't want a repeat of 2002-2005 — Housing Wire

📉 Demand for second homes drops 20% in July, but still above pre-pandemic levels — The Real Deal

📉 Builder sentiment for newly-built single-family homes fell five points to 75 in August — NAHB

📉 60% of offers written by Redfin agents faced competition in July, down from 67% in June — Redfin

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Up next, on briefcase...

...Hulk Hogan plays the role of Peter the Intern in the Big Short 2.

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Written By Brad Cartier