Our Firm
Resi Wrap - Bottlenecks
February 2021

Friends of ResiShares -

We’re a bit delayed this week, given the variable demands of our day job. Apologies to those who employ Resi Wrap as your Friday evening sleep aid!

So this is about as comprehensive yet succinct a history of the Single Family Rental (SFR) industry as you’ll find in the world:

It is written by Ryan Dezember of the Wall Street Journal, who is quickly establishing himself as the go-to journalist of the emerging SFR era. What distinguishes this from the standard, 300-word, “Wall Street is buying houses and that is (good/bad)” column we see published every few months is his deep dive on the 2011 Morgan Stanley report that launched it all.

Most of us in this industry have a personal story about how this report influenced their decision to join it (ResiShares’ founders included), and I’m impressed that the author was able to make that connection. If any of you would like to read it, Google “Morgan Stanley Rentership Society.”

Dezember also highlights Blackstone’s epiphany that the bottleneck in the multi-trillion dollar housing industry was not a lack of physical demand, but a general inability to access capital. This is kind of like a barber waking up to discover that he is in possession of the world’s last pair of scissors.

Ten years hence, the bottleneck in the housing market is on the physical supply side, and certainly has nothing to do with capital.

Supply Chains

Last week, we included an article about the rapid rise of lumber prices. Is housing now so hot that it’s causing us to run short on trees? Not exactly.

We don’t have a shortage of timber, we have a shortage of lumber. Only about 20% of harvested timber goes into lumber, whereas over 50% goes into pulp, paper, and Amazon’s insatiable demand for boxboard (I think our family has been consuming a few trees per week of that stuff since the pandemic began). In other words, the timber owners are the other barbers in the analogy above. What you really want to be is the person that owns the scissor factory.

By the way, a typical house includes over 20,000 board feet of various cuts of lumber, including framing beams and plywood panels. What that means practically is that if lumber prices see a fivefold increase, as they recently have, lumber costs in a new home increase by maybe $10k - $20k. If the average new construction home retails for over $300,000, that increase in cost is a relatively small component of the overall price. In other words, lumber prices can go pretty darn high before the high prices begin to ration consumer demand.

As they sang in Hamilton, “It must be nice.”

Meanwhile in Berkeley:

The housing supply chain bottleneck in California has long been a combination of regulations and NIMBYism. This rollback of single-family zoning restrictions would seem to alleviate one of those. As with any large bottleneck, however, its release is likely to increase pressure on the next one downstream. Residents can expect many loud NIMBY fights over development, and for a few developers and landowners who successfully navigate the turmoil to do very well.

Rest of Resi

“Housing affordability” is a very useful concept to understand relative value across geographies, housing cycle stages, and the potential severity of a downturn. First American has some great data around this.

Like any useful economic concept, it has been tortured and twisted into a variety of ridiculous decision-making frameworks that ignore the leverage and financial exposure home ownership means to the average owner-occupant, so caveat-emptor. My favorite were the online calculators that compared the monthly cost of a mortgage, insurance, and taxes (PITI, to the cool kids) to monthly rent that were ubiquitous in about August, 2006.

So Zillow will now bid you their Zestimate on Zillow offers. This is one of those situations where the inefficiency of the real estate market may actually work to their advantage.

Many years ago, I worked on a trading desk that would automatically and blindly generate a firm, executable principal risk bid for client portfolio trades. After a tremendous research, product development, and marketing blitz, the product was shut down almost immediately, after the first few clients came in and ripped our faces off on every single transaction. The thing about these tools is that savvy humans will usually prefer to trade with algorithms when those algorithms are wrong.

Zillow, in theory, should be more exposed to this than most, given the known blind spots in automated home valuation. What helps them out, of course, is that bids in real estate are not firmly, blindly executable. There is plenty of time in inspection and closing for them to find a reason to back out of an individual deal if it is determined not to make sense. How they manage this risk while also maintaining a reputation with consumers for closing deals will be the tightrope to walk.

The ultimate Zoomtown trade: literally buy an entire ghost-town.

Have a great weekend,

Michael Greene

Co-Founder and CEO

ResiShares |