The Chairman's Quarterly - Q1 2025

First Quarter, 2025

Published 6/19/25

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Benjamin Graham introduced the concept of Mr. Market in his 1949 book "The Intelligent Investor" as an allegory to describe the irrational and contradictory traits of the stock market. Mr. Market is portrayed as a manic-depressive business partner who offers to buy or sell shares every day at varying prices, reflecting his mood swings from optimism to pessimism. The real estate industry shares many of the same traits as the stock market, however the swings from mania to depression tend to take a much longer time. I believe we are witnessing one of these swings in real time. This is evident by the articles that keep popping up in my news feed:

• “CMBS delinquencies for apartments reach highest point since 2015”
• “New homes inventory hits highest level since 2009”
• “Home listings hit record high as people struggle to sell”
• “Realtors panic as buyers pull out of deals at near record levels”
  

If you have been reading the news, you can’t miss these types of headlines. The psychology in the real estate market is rapidly shifting from post-covid exuberance to a general marketplace funk. And the problem with the negative mindset that is now taking hold is that when it happens it is hard to shake off, at least in the short and medium term. The bigger problem is that this mindset is based to a degree on real short and medium-term challenges facing the housing market. To the prudent investor, this may not necessarily be a bad thing. And if a correction occurs, it is likely necessary to correct imbalances that exist in the housing marketplace. Let’s look at some of the reasons why a correction may be happening now.

The Residential Rental Market

Rental housing supply growth has recently been on a tear. Apartment deliveries reached a historic high in 2024, with over 500,000 apartment units released into the market. And this is not an anomaly. More than 350,000 apartment units were delivered each year since 2017, with over 400,000 deliveries in 2021 and 2023.

US Population Growth

So, who is renting all these apartments? Where is the demand coming from that is spurring so much development? These are important questions with so many units being built.

Natural Growth

According to the CDC, births over deaths in the United States, what we call “Natural Growth”, amounted to about 500,000 new Americans in 2023. The combination of shrinking fertility rates, and increasing death rates, means that the Natural Growth rate will decline in the coming years. But with an average US household size of roughly 2.5 people, that means approximately 200,000 additional dwelling units per year (including rentals and new houses) are needed annually.

Legal Immigrant Growth

The United States has an annual cap of 675,000 for permanent immigrant visas across various visa categories. However, about 500,000 people actually enter the U.S. legally under these visa programs on an annual basis. Further, the United States additionally allocates up to 480,000 family-based immigrant visas annually, in principle. But the actual number can exceed this limit because the number of unused employment-based visas from the previous year is added to the total. In all, about 1,100,000 immigrants enter the U.S. per year as legal immigrants. Because newly arrived immigrants generally have larger households of 4.30 people, I have averaged the two household group sizes (existing citizens or permanent residents and newly arrived immigrants) and come up with an average household size of 3.4 people. This means, approximately 325,000 additional dwelling units per year have been needed to accommodate legal immigrants.

Illegal Immigrant Growth

Starting in 2021, illegal immigration to the U.S. ramped up considerably. The average annual number of southwest land border estimates by the U.S. Customs and Border Patrol was approximately 2,300,000 per year for the three-year period starting in 2022. At an average household size of 4.3 for new immigrants, this means approximately 530,000 new dwelling units have been needed to accommodate these newly arrived immigrants.

Rental Dwelling Unit Growth versus Population Growth

With an estimated annual demand for new housing units of 1,055,000, and approximately 425,000 rental units built annually in recent years, it would appear as though there has been a severe undersupply of units built to meet the demand, roughly at the magnitude of 630,000 units per year. The problem, however, is that in recent years, many new “for sale” homes were built in addition to rental units.

The New Home Market and Total Dwelling Demand

Approximately 1,400,000 “for-sale” homes have been built annually since 2020, and for the five-year preceding 2020 approximately 1,200,000 homes were built annually. When added to the new rental supply, approximately 1,825,000 new dwelling units have been added to the housing stock since 2020, or roughly 770,000 more dwelling units per year than there were people to fill them. This can be seen in the rapidly rising supply of new homes in the US, which now stands at a roughly ten months of supply based on recent sales. However, if the sales fall, which is likely to happen, the supply of new homes could increase dramatically.

And of the people that were in the US and needed a place to live, almost 60% did not enter the US legally, Since President Trump has taken office, southwest land border crossings have fallen to an annualized average of 144,000. If both these recent trends continue, lots of newly built housing with a complete shutdown at the border, were to continue in 2025, over 1,250,000 dwelling units will be added in the US in 2025 that won’t be needed. And this doesn’t include dwelling units that won’t be needed if the president succeeds in his continued efforts to deport illegal immigrants.

Conclusion

When the high costs of homeownership, including high interest rates and rising insurance and property tax costs, are considered, it is no wonder that home buyers are heading to the sidelines. Apartment rental vacancies are rising, and rental rates are dropping. While the entire country will not likely be impacted equally, prudent buyers in overbuilt areas will likely sit tight, keep renting or stay in their current home for a little longer and see if the local home prices drop. This, in turn, could become a self-fulfilling prophecy, and in many areas around the country it already is.

I don’t believe inflation will prohibit the FED from lowering interest rates at some point, especially since housing costs make up roughly one third of the Consumer Price Index and housing and apartment rental costs are likely to fall, but the question will be at what point does the FED start lowering rates. Recent indications are that it will happen sooner than later, because the longer they wait, the more challenging the problem will become.

Reading the tea leaves is never easy, but the data suggests storms are gathering on the horizon. But that is usually when the best opportunities arise. Warren Buffet, Benjamin Graham’s most famous student, lives by his famous quote “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful."

Fear is overtaking Mr. Market; it is time to sharpen our pencils and see what opportunities arise!