The State of Housing & Builders First Source

Our thoughts on the current housing crisis and resulting investment themes

Introduction

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”- Adam Smith

The American dream is rooted in the ability of the average man to purchase and own his own slice of this country via home ownership. In this way, homeownership is not just a financial milestone but is culturally and psychologically important. As it turns out, people who own homes and feel they are “in” the system, tend to act differently than those who are forced to be lifelong renters. It should be surprising to no one that we are seeing the social consequences of the home affordability crisis show up in the election of people like Zohran Mamdani in New York as well as a general interest in things like Socialism.

After all, this upcoming generation of 20-something’s have grown up in a system where Capitalism and greedy billionaires have used their wealth and influence to “keep them down” and therefore if that system blocks you from obtaining the material goods you have been told are required for a stable, successful life does it not stand to reason it should be torn to the ground the rebuilt a-new?

This is the attitude of many in my peer group and as it turns out financial turmoil has major social implications. While I do understand the frustration of my peers and their feelings of being priced out of home ownership, I disagree with their conclusions. At the same time, the home affordability crisis is just that, a major crisis that needs to be dealt with. The average first time home buyer in 1980-1990 was 28-29 years old, ticking up slightly to 30 in 2000 and today, is closer to 40 years old according to National Association of Relator Data.

There are a myriad of systematic issues that have driven home affordability to near all time lows that include the kind of homes we build, how we build them and the mystique of the Federal Reserve. The combination of these factors has left the US in what is estimated to be a 4-5M home deficit accumulated since the 2008 Financial Crisis. From 2009-2019 we built roughly 1M homes a year but normalized levels representing the true needs of the country would have been more like 1.5-1.7M homes per year. As the years went on, this gap compounded.

The deficit we find ourselves in today is one of supply, not demand issues. Demand for housing is massive and if affordable homes existed they would be purchased. The problem is bringing on new supply is bottle necked in a handful of meaningful ways that we will discuss in detail in the piece to follow.

It is our view that home building in this country is on the precipice of a massive resurgence that will likely come in the form of more offsite construction especially in the early stages of the home building cycle say, the first 6-8 weeks of construction. This is not a popular opinion and the consensus is that there is no near term catalyst for home starts to increase meaningfully and public equities adjacent to this trend are communicating this. The only companies worth owning in the minds of the market are large cap builders that own mortgage companies and can buy down rate for their customer base. We would disagree with that sentiment. It is often we get involved with businesses when no identifiable catalyst is discussed because that is often the time stocks trade at their most disconnected levels.

The truth is that popular sentiment is interest rates need to be cut in a meaningful way for home building demand to increase and that Trump’s appointee after Powell exits will be the one to deliver such cuts. Perhaps this is the case, but the truth of the matter is a cutting of interest rates does not bring a single new home to market and many of the structural forces depressing new home building have nothing to do with what the rate of interest is.

We hope that this piece is an honest, multifaceted take on the current state of housing that is differentiated from what you hear from Wall Street talking heads or X accounts that live and die by forecasting the new stimulative event of the Trump Administration or the Fed. We do not take the other side of this argument for the sake of being contrarian, but because valuation and sentiment have become so poor in this space that it warranted a deeper discussion – our aim is to enlighten you with the piece that follows and hopefully provide a narrative that is both intellectually stimulating and useful to our readers.

The State of Housing

“If you do not change direction, you may end up where you are heading.” – Lao Tzu

Today’s new home construction is a major political and social issue and is between the proverbial rock and hard place. From 1959 to 2025 the average new home start figure was 1.03M SFH per year. From 2000 to 2025 the average was 1.01M and from 2009 to 2025 the average is 781K. If we assume 1M home starts is the right number (some sources argue 1.5-1.7M is more normalized) that is an average of 210K~ in short fall per year compounded for 17 years. I have seen no one that argues less than 1M homes a year is the normalized number in the US and I see some sources as high as 1.7M so assuming that number is somewhere in the middle lets assume 1.35M is the right normalized home start number. Under that scenario the underbuilt figure is more like 9.6M homes vs the 3.7M we reach when assuming 1M is the proper figure.

The problem has compounded in our minds due to two intimately related factors. The first is the artificial suppression of the rate of interest coupled with the death of the starter home. These problems are compounded by dynamics like real wages growing significantly slower than the average rent and home prices in America. Not only have wages stagnated but we would argue this, and the fall off in the affordable “starter” housing stock are a direct consequence of the Fed’s decision to keep interest rates artificially low for too long. While no one can fault the Fed for the rapid rated cutting post the 2008 housing crash, the decision to continue this same policy can not be forgiven.

To ensure we are speaking the same language, when I say starter home I am speaking of houses that are 1,800sqft and below. In 1970 we built roughly 418K starter homes per year by 1980 it was 314K and today it is only 65K which is only a slight recovery from the 55K trough during the GFC. There are structural and economic reasons for the refusal or disinterest in building start SFH’s with the first being, if I am going to build a house and the rate of interest is nothing why would I not build “more” house? On top of this, we have all but made the building of small SFH’s illegal in this country. Standards for construction are regional with the city of Seattle alone possessing 38 different home zoning areas vs the entire country of Japan (125M pop) having just 12. Regulatory standards require things like minimum lot sizes, parking space minimums, SFH only zoning laws, impact fees and development fees, and an ever-changing building code requirement that add costs. All told, in many cases it is uneconomic to the home builder to even consider a home that is say, 1400sqft.

The National Home Building Association estimates that government regulation adds roughly $93K in cost for the average SFH built in this country. The interesting part of this is that the consumer is interested in these kinds of homes. A survey in 2023 found that 22% of home buyers wanted a 1600sqft home with only 16% of homes built in that same year being 1600sqft while 22% of new homes are 3,000sqft or larger where only 14% of new home buyers were interested I a home of this size.

Comparing this to other times in US history, 1980 saw average SFH square footage of 1,595, in 1999 37% of new homes built were under 1800sqft and by 2014 only 17% of new homes built were 1,800sqft or less with 33% being larger than 3,000sqft. In the US today the average SFH built is 2,150sqft, roughly 20% larger than what the average first time buyer actually desires or could afford. As a final quantifying data point, 1970 saw 40% of new homes built classified as entry level falling to roughly 7% in 2026.

On top of this, capital has been misallocated for nearly 2 decades on the back of artificially low interest rates from the fed. The mystique of the Federal Reserve is amusing to me. It is our contention that the fed is basically ineffective and has made a massive mistake, achieving none of its economic goals since the GFC. While the goal of the federal reserve was the stimulate the economy post the GFC the only thing that happened was massive financial inflation in assets like stocks, real estate etc. The actual economic results were abysmal. From 1960-1970 average GDP grew 4.4%, 1970-1980 3.2%, 1980-1990 3.1%, 1990-2000 3.4%, 2000-2010 1.8%, 2010-2020 2.3%. The result from a GDP perspective was an epic failure and in the meantime, all the market cares about as it relates to investment of any kind and housing in particular is the feds next move. Apparently, we have no learned our lesson on putting our fate into the hands of the fed.

We will discuss the investment themes in the section below but I want to preface this section by saying the narrative from Wall Street and the populous at large is Trump will appoint a fed chair, likely Kevin Hassett and interest rates will fall. On the other side of falling interest rates housing demand will pick up and the housing related stocks will all perform well and as a side note, PE & PC will also be bailed out. Perhaps this is true, but perhaps not. In the following section I will discuss the differentiated view we have of investing in the housing market in 2026 and beyond.

Investment Themes