Author: Ted Ihde

Ted is a real estate broker, a real estate developer as well as co-CEO of Team With Heart.

Home loans: using the 2 – 1 buydown

The 2-1 buydown is a real estate financing technique…an attractive home loan provision whereby funds are set aside in an escrow account at the closing, for the benefit of the buyer. These escrowed buy down funds permit the home buyer to “buy down” the interest rate on their home loan…as the buyer’s interest rate is “bought down” for the two-year period.

Inadequate Supply: Assessing Annual New Home Build Levels

One factor which has greatly contributed to – a factor which, on an annual basis, continues to contribute to – challenges Americans face today in regard to choosing from a limited housing inventory…a housing inventory which, by any metric used, would be considered inadequate, would be the 2007-2008 Financial Crisis.

America is simply not building enough new homes to satisfy demand. This leads to inadequate supply levels. This contributes to affordability challenges. This contributes to escalating home prices. This contributes to the naggingly-stubborn inflation that the Federal Reserve is combating with higher interest rates.

When the Financial Crisis took hold in 2007-2008, home builders stopped building homes. Home builders closed their doors. Home builders shut down. Home builders went out of business. As home builders exited the marketplace, the tradespeople that home builders relied upon to get their new homes built – and positioned, for sale, in the market – simply found other careers. Tradespeople found new ways to make a living. Tradespeople exited the housing industry. They left the construction business. This left a void in the market, which has contributed to an inability on the part of home builders to build enough homes each year, to satisfy demand.

Post-Crisis, as the real estate market began to stabilize, and as home purchase numbers began to climb once again – albeit very, very slowly – the new home construction industry was simply ill-equipped, not rightly-sized, and understaffed. Thus, the new home construction industry was unable to keep up with the increasing (albeit, a slowly increasing) demand for new homes. That inability of home builders to keep up with increasing demand levels for new homes continued. Each year. Year by year. Every year. Last year. This year. All leading to the housing inventory shortage we have today. And to inflation. And to an inadequately-functioning housing market. And to the imbalance we have in the housing market today between supply and demand. And to the challenges Americans face everyday, in regard to housing affordability (or lack thereof).

Let’s look at some data, to see how we arrived at this inadequately low number of new homes which are available to buyers in the marketplace.

We simply have an inadequately low number of new homes being built and added to the market each year. The number of new houses built and added to the market each year is continually contributing to the challenges we see in housing affordability (or lack thereof). This low supply level of new homes in the marketplace is continually contributing to inflation.

In the year 2000, the number of new housing permits for privately owned homes totaled just about 1.6 million for the full year. This, as the number of new housing starts for privately owned homes also approached 1.6 million for the full year in 2000. While in 2000, the United States population was a tad over 282 million.

Fast forward from the year 2000, to 4 years later…

Taking place in back-to-back years – in 2004 and once again in 2005 – housing permits obtained for privately owned homes topped 2 million each year – in 2004, and again in 2005. The year 2004 had been the first year that permits obtained for privately owned homes exceeded 2 million in a year. That 2 million level of housing permits issued for privately owned homes had been reached in back-to-back years in 2004 and 2005. The trajectory of new home builds in the United States had been on an upward swing, in the mid-2000’s.

Housing starts for privately owned homes surpassed the 2-million threshold in 2005. Housing starts for privately-owned homes fell just short of 2 million during the prior year, in 2004. At that point in time, the market had been absorbing just about 2 million new homes a year.

Permits for privately owned homes – as well as actual housing starts for privately owned homes – in 2004 and in 2005 as well – had reached a level which was just about 400,000 higher each year – higher in both 2004 and 2005 – than the level of permits and housing starts reached in 2000. While at the same time, the population of the United States was approaching 297 million by 2005.

Between the years 2000 and 2005, there had been an increase in population in the United States which totaled just about 14 million. That would be, fourteen million people added to the population of the United States over those five years (2000 to 2005). While at the same time, the number of housing permits for privately owned homes – and the number of housing starts for privately owned homes – had been just about 400,000 higher each of these two years – 2004 and in 2005 – as compared to the number of housing permits and housing starts for privately owned homes in 2000.

Let’s look at the effect the Financial Crisis had on the number of new homes that were being built in the United States…

Between the years 2008 and 2013, in each of these six years, the number of new housing permits for privately owned homes – in 2008, 2009, 2010, 2011, 2012, and once again in 2013 – failed to reach 1 million in any given year. Too few new homes were being built…

In 2009, new home starts for privately owned homes fell to just about 550,000 for the full year. This level of 550,000 new housing starts for privately owned homes in 2009 encompassed nearly 1.5 million fewer new home starts for privately owned homes than the marketplace had absorbed four years earlier, in 2005. While there had been just about 1.5 million fewer new homes built in 2009 than had been built in 2005, the population of the United States increased by 12 million over that same four-year period, between 2005 and 2009.

The United States has an increasing population, which is coupled to a highly inadequate number of new homes which are built each year, and added to the marketplace.

There is so much discussion today about the topic of inflation. No matter which news channel you prefer, we see that inflation is a problem that we all face. If we de-politicize the topic of inflation, and just focus on the topic of housing in relation to inflation, we see a significant imbalance that exists between supply and demand for new homes being added to the market. We also see how this imbalance in housing contributes to inflation. The imbalance we have – an imbalance which compounds annually – is compounded by the inadequate supply levels. This leads to escalating home prices, further complicating the task the Fed has in combating inflation.

The Fed is correct in ratcheting up interest rates to squelch overall demand in the economy. The Fed’s approach of higher interest rates is correct in combating inflation. The inflation challenge we have, and the demand level in the marketplace which contributes to inflation – each of which is being addressed by the Fed – are unfortunate ancillary consequences of an imbalanced housing market. A market imbalance which traces its origin to the limited supply of new housing which is being added to the market each year. A problem, which is coupled to higher demand levels for homes, each and every year.

The housing supply and demand challenges we face today lead to a situation where, each year, starting in 2006, we have continued to see too few homes being built and added to the market. To simplify our housing and inflation challenge, too few homes are being built each year. This leads to our housing problems. A housing problem which is present, which is current, and which is ongoing. Ongong, a full sixteen years after the number of new homes built each year drastically fell, on an annual basis, as a result of the Financial Crisis.

One point to consider when assessing the condition of today’s housing market would be the aggregated, annual, compounding, ongoing, every-year challenge one would find in any supply-and-demand equation, when supply – every year – is inadequate, in relation to demand. The topic of housing just happens to be the largest, most relevant, most highly-visible example of supply-and-demand that we have – that we can see – each and every day. So let’s look further at our inadequate housing supply levels…

New housing starts fell from a level whereby 2 million privately owned homes were built in 2005, to the much lower level of 1.3 million privately owned homes built two years later, in 2007. Seven hundred thousand fewer new homes were built in 2007 than had been built two years earlier, in 2005. While at the same time, the population of the United States increased by 6 million people during that same two year period – 2005 to 2007. This is an inadequate supply of new housing created, which was not satisfying demand.

One year later – in 2008 – new housing starts for privately owned homes fell further…dropping by another 400,000 for the year, to just over 900,000 new housing starts. In 2008, there were 1.1 million fewer new privately owned homes built than had been built three years earlier, in 2005. While at the same time, the population of the United States increased by 3 million people. A supply of new housing created, which is inadequate, in relation to home buyer demand.

As has been previously cited, new housing starts for privately owned homes fell to the very low level of 550,000 in 2009. New housing starts remained at a sub-600 million level, each year, through 2010.

In 2011, new housing starts for privately owned homes finally crept back up to over 600,000 for the year. Six hundred thousand new homes built in 2011…the 600,000 new homes built, still being an inadequate number of new privately owned homes added to the marketplace for the year, in relation to buyer demand levels.

Three years later –  in 2014 – the market would finally once again absorb one million new home builds for the year. One million privately owned homes were built in 2014…a new home build total which still had been one million fewer than 2005 levels.

In 2021, the market absorbed 1.7 million new permits for privately owned homes, while the market also took on 1.6 million new privately owned homes which had been built. The 1.7 million new permits, and the 1.6 million new housing starts…each total representing annual figures which were three-hundred thousand fewer (permits) and four-hundred thousand fewer (housing starts) than the market absorbed 16 years earlier.

According to U.S. census data, the total number of new homes built between 2012 and 2019 would be a new home build total representative of 3.9 million homes less than the total number of new households created in the United States during that same seven year time frame. The country is just about 4 million new homes short over the past seven years…and that is 3.9 million homes short, only taking into account housing demand coming through the creation of new households. This 3.9 million new home construction shortfall does not even take into account home buyers who have older homes, who would like to trade up, to a new construction home.

Multiple Listing Services

In the year 1908, the National Real Estate Exchanges was first established. During the first decade of the 20th Century, one of the early goals for the National Real Estate Exchanges was to facilitate an effective cooperation system which could be used by different real estate brokerages to sell real estate. In summary, these were the earliest days of what we today refer to as cooperation among REALTORS.

The National Real Estate Exchanges set out to find good ways to communicate the benefits of – and the saleable features for – individual properties which were available to be purchased through members of the National Real Estate Exchanges. This would have been real estate which was only able to be made available to the buying public through the earliest centralized efforts of cooperation undertaken by National Real Estate Exchanges members.

The National Real Estate Exchanges established innovative methods for member-brokers to effectively communicate – i.e.: sell – the features of the real estate they were marketing, to other member-brokers. These were other real estate brokers, that is, who were working at different real estate offices. The idea being, these could be real estate brokers who may very well have had the right buyers for the properties their colleagues were promoting.

The National Real Estate Exchanges, in the early days of the 20th Century, was committed to facilitating processes that could be used by member-brokers to sell real estate. While simultaneously developing processes through which those real estate sales could take place. Helping National Real Estate Exchanges member-brokers to sell their properties. Helping National Real Estate Exchanges member-brokers to locate properties for their buyers. To simplify: cooperation among members to sell real estate.

In the very, very beginning of the business of property-information-sharing, taking place a couple of times each month, what was then the dissemination of MLS property information would have looked like the physical delivery of property information – delivery by real estate brokers – to the actual doorsteps of other real estate brokers, at their brick-and-mortar real estate offices. The earliest stages of REALTOR cooperation, and the very earliest forms of the sharing of information about properties in the real estate industry. It looked very much like property information drop-offs: 1) head over to the local real estate office, 2) drop off information about properties which were available for sale.

Preceding this physical dropping off of property information at the front doors of real estate offices, in the late-19th Century, real estate brokers liked to meet in the offices of their local real estate trade associations. To discuss the properties the brokers were selling. The meetings which took place at offices of these local real estate trade associations were scheduled with an intent for the brokers to share information about their properties. And to sell their real estate. Real estate brokers who participated in these early-on MLS member meetings agreed to compensate one another…a collaborative effort undertaken to assist one another in the sale of member-brokers’ properties. Functioning something like this: Help me to sell my property, and I’ll help you to sell yours…

At these early-20th Century association meetings, brokers would have conversations with other member-brokers about the properties they had available. Discussing specific criteria applicable to the properties the brokers were hoping to sell. Sell, that is, by presenting their properties to their trade association colleagues; colleagues who would meet – regularly – at their local real estate trade association office. To find properties for their buyers. To sell their properties through their colleagues. Broker cooperation.

Today, there are just about sixty-thousand licensed REALTORS in New Jersey. Florida has over two-hundred twenty-thousand licensed REALTORS. This makes Florida – by far – the most highly-concentrated state, in terms of licensed REALTORS. There are in the range of two-hundred two-thousand licensed REALTORS in California. In Texas, there are over one-hundred fifty-thousand licensed REALTORS.

Using Texas as our example, those 150,000-plus Texas REALTORS access Texas MLS property information through a consortium of Texas multiple listing services. Each of which are managed and controlled by the Texas Real Estate Commission.

One of the oldest MLS’s in the state of Texas is the Austin Board of REALTORS Multiple Listing Service. The origin of the Austin Board of REALTORS goes all the way back to the year 1918…its establishment in Austin taking place a mere ten years after the earliest formation of what would go on to become the National Association of REALTORS. Today, the Austin Board of REALTORS Multiple Listing Service serves over 18,000 real estate professionals practicing their craft in eighteen Texas counties.

In the United States today, MLS’s are organized locally. And they are managed locally too. The importance of local MLS management – and local MLS control – can be found to be quite evident when one thinks about real estate listings in the state of Texas.

In Texas, MLS property descriptions may include pertinent information about – among other features such as kitchens, bedrooms, and property taxes – oil leases, mineral rights, as well as additional considerations which could be applicable to oil and gas interests. These would be Texas property details – about oil and gas, that is – which may be included (with relevance) in many Texas MLS property listings. As these property details about oil and gas in Texas would not be so relevant, for example, in Florida MLS property listings or in New Jersey MLS property listings. Because the energy industry would be more of a factor for real estate valuation in Houston, Texas, than it would be for property valuation in Holmdel, New Jersey. Or in Miami. Or in Los Angeles. Accordingly, the argument for localized MLS control and management.

The largest MLS in the state of Texas is the Houston Association of REALTORS Multiple Listing Service. Houston’s MLS was established in 1918. Serving over 164,000 real estate agents and brokers, the Houston Association of REALTORS Multiple Listing Service is the 10th largest MLS in the country.

The California Regional Multiple Listing Service is the largest multiple listing service in the United States. The California Regional Multiple Listing Service serves over 100,000 REALTORS, as well as 40-plus local associations, boards, and MLS’s.

Two other notably large – large, as measured against other MLS’s in the United States – are also domiciled in California: 1) the LA/Westside MLS, and 2) the California Regional MLS. The LA/Westside MLS serves over 16,000 agents and brokers in California.

The largest MLS in the state of New Jersey – and the 39th largest MLS in the country – is the Monmouth-Ocean Regional REALTORS Multiple Listing Service. Established in 1936, Monmouth-Ocean Regional REALTORS has over 11,000 members, serving home buyers and home sellers in two New Jersey counties: 1) Monmouth County, and 2) Ocean County.

The second largest MLS in New Jersey is the Garden State MLS. The Garden State MLS – established in 2010 – is the 89th largest MLS in the United States. Based in Parsippany, New Jersey, serving ten New Jersey counties, the Garden State MLS typically has nearly 19,000 real estate listings to choose from.

Founded in 1908, the National Association of Real Estate Exchanges became the National Association of Real Estate Boards eight years later, in 1916. By 1972, the National Association of Real Estate Boards officially became the National Association of REALTORS, the NAR.

Of note, the National Association of REALTORS is entirely distinct from, and independent of, the National Association of Real Estate Brokers – NAREB.

Founded in 1947 in Tampa, Florida, members of the NAREB would be REALTIST members, not REALTORS.

The NAREB is the oldest minority business association in the United States. The NAREB functions as an equal opportunity and civil rights advocacy organization…focusing their efforts on advancing the interests of African-American real estate professionals, consumers, and neighborhoods.

Headquartered in Maryland, the establishment of the NAREB goes all the way back to early-day efforts which were then undertaken by Black real estate professionals who had a goal to form their own real estate trade group. Incentivized to do so due to Black real estate professionals’ then-exclusion from NAR membership, due to race.

The first NAREB convention was held in New Jersey. In Atlantic City. In 1948.

Today, the National Association of REALTORS governs – and establishes policies for – most of the multiple listing services in the United States. NAR members belong to local real estate boards and associations which are strewn throughout the United States; of which there are about 1,600.

NAR members are REALTORS. With over 1.5 million members, the NAR is the largest trade association in the United States.