New: 🧠 Market Minds Issue #054

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The Housing Shortage Dilemma: Inventory Rises but Affordability Remains Distant

The U.S. housing market remains locked in a delicate dance of supply and demand, with affordability still a dominant challenge. Median home prices rose again in Q3, marking over a year of continuous increases, driven largely by stubbornly low inventory across high-demand regions. As agents and investors, this climate offers both obstacles and opportunities, and it’s essential to track where supply might improve—without being fooled into thinking the shortage is over.

Housing Shortage: A Demand-Driven Dilemma

Despite an increase in construction jobs, local limitations on building permits and workforce shortages continue to choke housing supply, particularly in major metros with high employment rates. While certain markets are seeing slight inventory improvements, they're barely scratching the surface of buyer demand, leaving homeownership a distant dream for many potential buyers. Areas like New York and Honolulu exemplify these supply gaps, with only one housing permit issued for every 23 new jobs, underscoring the need for continued development even as prices rise.

Market Resilience in Smaller Metros

A select few markets, like Ocala, FL, and Myrtle Beach, SC, have reached or are near the ideal ratio of one single-family permit for every two new jobs, indicating balanced supply and demand. In these markets, property acquisition may present less price volatility, with a healthier balance of housing availability and job growth—a rare advantage in today’s constrained market. However, markets near this balanced state are few, leaving the overall landscape skewed toward under-supply.

A Cautionary Tale of Inventory ‘Improvement’

Yes, 87% of tracked metropolitan areas showed a reduction in their housing shortage index this past year, hinting at a gradual increase in available inventory. But this improvement doesn’t imply a buyer’s market on the horizon. With nearly 80% of markets still falling short of balanced housing conditions, we’re not yet seeing a significant shift in favor of affordability or supply. Investors should view this as a marathon, not a sprint—focused on incremental gains rather than any quick surge in inventory.

Strategic Focus: Keep Your Eye on High-Deficit Metros

For those poised to invest or advise buyers in the upcoming year, consider areas with acute supply shortages as both high-risk and high-reward. New Haven, Hartford, and Bridgeport in Connecticut, along with New York, are key metro areas where demand far outstrips supply. While challenging, these locations also have high potential upside if new construction can meet even a fraction of the demand—making them markets to watch closely.

Renter Surge: Why the U.S. is Rapidly Becoming a Nation of Renters

Renter Households Outpacing Homeowners

The third quarter saw renter households surge by 2.7%—a rate three times faster than that of homeowners, whose numbers increased by a modest 0.9%. This trend, driven by the high cost of homeownership, marks four consecutive quarters where renting outpaced buying. For agents and investors, this isn’t just a trend—it’s a structural shift in the housing market that reflects the growing challenge of homeownership in an environment of rising prices.

Homeownership: A Harder Sell as Prices Outpace Wages

Housing affordability remains a central barrier. While rents have barely risen (up just 0.6% year-over-year), home prices have jumped by 6% in the same period, far outstripping wage growth. The median asking rent has stayed relatively flat over the past two years, as multifamily construction provided more rental options, particularly in the Sun Belt. However, with permits for new multifamily construction down 16% year-over-year, the pipeline for future rental inventory could soon narrow, keeping investors attuned to potential rent pressures down the line.

Key Markets: Where Rentership Dominates

In metro areas with steep home prices, renting isn’t just an option—it’s the norm. More than half of all households in places like San Jose, Los Angeles, and New York City are renters, with rentership rates reaching up to 52%. In contrast, metros with traditionally lower housing costs, like Cape Coral, Charleston, and Columbia, SC, have the lowest renter shares, with Cape Coral’s at just 21.8%. This disparity underscores where affordability most influences renting vs. buying.

New Supply: Multifamily Development Hits Record, But Slows

The multifamily building boom has been a key factor in stabilizing rents. The U.S. added multifamily units at a record pace of 647,000 units annually as of Q3. Yet the brakes are now on: multifamily permits have plunged by nearly half since February 2023, signaling a potential supply slowdown that could put upward pressure on rents in future years.

The Bigger Picture: Rentership as a Long-Term Shift?

For investors and agents, this is more than just a cyclical shift. With mortgage rates high and home prices remaining elevated, renting is becoming a permanent fixture for many households, especially among younger generations who no longer see homeownership as a prerequisite to success.

Opendoor’s Tightening Moves: Cost Cuts and Layoffs Amid Persistent Losses

Strategic Cuts to Navigate Market Pressures

Opendoor’s recent decision to lay off 300 employees—roughly 17% of its workforce—signals the company’s push to streamline operations amidst ongoing market challenges. While the company reported a $78 million Q3 loss, it’s worth noting this is a 26% improvement year-over-year. This reduction reflects a cost-cutting drive intended to bolster financial resilience and prepare for an eventual market rebound.

Scaling Home Sales and Revenue, But Losses Linger

Despite the headwinds, Opendoor managed to sell 35% more homes than in Q3 2023, driving revenues up 41% to $1.37 billion. CEO Carrie Wheeler noted that, while sales volume and revenue are increasing, high mortgage rates and delisting rates are stifling broader market activity. With inventory valued at $2.1 billion, Opendoor is taking on a risk-aware stance, avoiding over-expansion and focusing on incremental revenue growth.

Trimming Excess: Spinoffs and Operational Refinement

Beyond layoffs, Opendoor spun off its single-family rental platform, Mainstay, in August, a move aimed at refining its core business model and freeing up resources. These structural adjustments, including the spinoff and reduced operating expenses, are anticipated to generate $85 million in annualized savings starting in 2025, strengthening Opendoor’s position to scale back up when conditions are more favorable.

Market Reality Check: A Long Path to Profitability

As it stands, Opendoor has accumulated $3.61 billion in losses since its inception, with recent stock prices fluctuating between $1.58 and $4.89, reflecting investor caution. Yet, the company has shown it’s willing to cut losses and restructure as necessary to align with market realities. Opendoor’s adjustments suggest a strategic pivot to sustainable growth rather than rapid expansion—a critical lesson for agents and investors watching the iBuyer space closely.

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TL;DR (Too Long; Didn’t Read)

The U.S. housing market faces a persistent affordability crisis despite a rise in inventory, as median home prices continue climbing due to limited supply. Local barriers, like restricted building permits and labor shortages, keep inventory low, especially in high-demand metros. This shortage has pushed more households towards renting, with renter growth outpacing homeownership, reflecting a longer-term shift driven by high home prices and limited wage growth. Meanwhile, companies like Opendoor are making strategic cuts to navigate market challenges, indicating a shift toward sustainable growth over rapid expansion amid persistent losses and high operating costs.

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Cheers 🍻

-Market Minds Team