The Commodification of Housing

Part 1: Price spikes (and price collapses?)

Many folks will describe housing as a commodity, or the commodification of housing. Usually, this revolves around being upset that folks make money in housing. But I think it’s useful framing if taken literally - there are important lessons to learn from commodity markets!

First, commodities often have price spikes.

Currently, a big shortage has emerged in cocoa. Two key producing markets, the Ivory Coast and Ghana, have had poor harvests in recent years, which has caused the price to skyrocket, rising 5x since 2022:

I’m no chocolatier - but I will speculate about how it’s possible for the price to rise so much.

1. Many commodity buyers have contracts in place. This helps both the producer and the buyer have predictability in the near-term¹ . But for the market overall, that means relatively small amounts may but actually available to buy or sell (market prices don’t equal average price paid).

2. Cocoa isn’t a very substitutable product, despite the amazing story of nutella being invented to extend scarce post-war supply. If you want chocolate, you need cocoa.

3. Many buyers only need a little cocoa per item. Chocolate bars often show a percentage (dark chocolate often being 70-85%). But if you buy a Mars bar, the milk chocolate will be low cocoa, and there’s the fudge and caramel. And all the distribution, marketing, etc. So a cocoa price spike is obviously not good for Mars Inc., but it translates to a modest increase in overall costs - much better than not making Mars bars because of not having cocoa.

4. Financial speculators may jump in - seeking to profit off the shortage

Shortages -and price spikes - are inevitable when your are dealing with agricultural products, because of drought, disease, trade disruptions, etc. Shit happens. But what’s more important is what happens after the spike.

Take a more important commodity, wheat. Wheat also has wild price spikes, but every time, the price has come back down, sometimes quickly.

There are some simple reasons why this spike and crash pattern might be so clear in wheat:

1. Lots of farmland can be used to grow wheat, all over the world²

2. Droughts / diseases don’t last forever (hopefully)

3. Farmers can switch between crops

4. Yields trend up

5. Wheat demand can be substitutable for other crops

I think #3 is key. Given a high price and a planting-harvest cycle to switch, farmers can switch from corn or soybeans to wheat to capture that high price. They may even get contracts to lock in high prices.

What that creates is a rather flexible market - not one that never has price increases, but where supply and demand can readjust in a reasonable amount of time.

If you look back at the wheat chart, the nominal price of wheat today is lower than in 1996. Commodities famously have huge price spikes, but over the long-run, their (inflation adjusted) price goes down.

Why can’t commodified housing do the same?

1. Airlines also often hedge their jet fuel prices, an oil price spike can easily ruin their slim profit margins

2. Russia and Ukraine are often the top exporters, but many countries produce wheat