Lessons From The Toilet Paper Surplus

On today’s show we are talking about how market cycles form and the effect it can have on the economy and a business. How do you know when you are in a bubble and how do you protect against catastrophe when you are surrounded by insane market conditions?

Market cycles are often driven by an irrational fear. We saw it last year during the early weeks of the pandemic. Grocery store shelves were emptied of paper products, of hand sanitizer, of cleaning supplies.

Last night I went to the grocery store and the shelves were full of toilet paper. Not only that, toilet paper had taken over the seasonal shelf that last week had been full of Easter candy.

Like many, we had a three month supply of toilet paper. Are we using more toilet paper than last year? Clearly the answer is no.

So it stands to reason that if toilet paper sales in 2020 were $2B above 2019, then at some point toilet paper sales will fall to $2B below the average. That represents a fall of $4B from the peak sales in 2020.

You’re probably thinking ok that’s toilet paper. What does that have to do with my business? What does that have to do with real estate?

The market conditions a decade ago are a distant memory. Back then you could go to auctions on the court house steps and pick up half a dozen distressed properties over your lunch hour. You could buy properties for 60% less than construction cost. The population had not changed. People still needed a place to live. How did the demand evaporate and create these strange market conditions?

The question is, with new supply coming into the market at the rate of about 1.2-1.5 million homes a year in the United States, and roughly 1/4 million housing starts in Canada, will there be enough demand to absorb the new supply in the locations where that supply is being added?

This is the classic question of assessing the headwinds and tailwinds in a market segment.

Unlike toilet paper, which can easily be shipped to meet the demand, houses are firmly planted in the ground. You could have a housing boom in Fort Lauderdale at the same time that you experience a housing recession in Detroit. That has more to do with migration trends than it does population growth.

The lack of supply could be real, or perhaps artificial. Was there really a lack of toilet paper last year? Not really. People were hoarding toilet paper. They were buying toilet paper to hold. They were not selling it, and they were not using it any faster than normal.

The question is, are people buying more real estate than they need and just holding it. How many people from the NE USA are buying second homes in Florida or the Carolinas? Those condos near the beach sit empty for most of the year. Perhaps they compete with hotels in the short term rental market. That does not constitute new household formation, but it does absorb inventory.

How many young adults under age 30 are still living at home with their parents? This is a shocking statistic. In February of 2020, 47% of young adults between 18-29 were living with at least one parent. By July of 2020, that number had grown to 52% of young adults between 18-29 were living with their parents.

Those are numbers that have not been seen since the Great Depression in the 1930’s .

So what household formation trends can we expect? We know that the median age of first marriage has grown by two years in the past decade. The median age for men is 30 and 28 for women.

So when we go from a shortage of toilet paper to a surplus, could you have predicted those market conditions? When real estate markets will go from low inventory to a surplus, what forces will drive that shift? Could you have seen those forces in hindsight?