In 2008-2009 the nation was struck by a crisis in the mortgage credit markets that had repercussions for the next 15 years. The Great Financial Crisis (GFC) caused many people to lose their house or their job, or both. Many have yet to fully recover.
Fast forward to 2020-2022 and the housing situation in the United States is very different… Housing prices are rapidly rising and mortgage rates are headed higher as the Fed begins to raise rates and tighten financial conditions in an effort to fight inflation. Since WW2 housing has been a bastion of wealth building for the middle and working class. As an asset people were able to benefit from its appreciation and stability over time. Contrast this to the fact that many in the middle or working class have very little saved in their 401ks compared to the wealthier 10% of society; The wealthiest 10% own 89% of stocks, nearly $36 trillion. (1)
As housing prices and mortgage rates rise, younger buyers who are starting out in life are increasingly being priced out of the market. The University of Michigan Consumer Sentiment Survey takes a monthly snapshot of buying conditions for housing. The February 2022 figure came in at 36, a 42 year low. By way of comparison, the survey printed 70 in January 2020 and 56 in 2008 during the GFC.
So, the question is why are housing prices, as well as rents, continuing to rise with consumers largely sidelined?
One part of the problem facing housing is structural and regulatory. A recent Brookings Institution study titled, “Dysfunctional Policies Hace Broken America’s Housing Supply Chain”, found that local regulation is preventing many builders from creating more houses, especially in areas with increasing demand and economic growth.
“The US has failed to build enough homes to meet the demand created by population and job growth since the Great Recession—and even earlier in some parts of the country. The shortfall is particularly apparent in metro areas with an abundance of well-paying jobs and amenities; the places where many people want to live consistently build too little housing. For instance, the San Francisco Bay Area added only one home for every seven new jobs created between 2010 and 2015, while rents increased more than 40% during the same period. Similar patterns are observable within cities: Affluent, high-amenity neighborhoods such as Georgetown in Washington, D.C., Greenwich Village in New York City, and Hancock Park in Los Angeles have added minimal amounts of housing over the past 30 years.”
“The policies that regulate land use and housing production make it extremely difficult to add more homes in desirable locations. In every state across the country, it is illegal for a landowner or developer to build new homes (or alter or tear down existing homes) without explicit approval from the local government. And the people who already live in those places wield a variety of legal and political tools—zoning laws, historic preservation, environmental regulations, and direct lobbying of elected officials—to block attempts to build more homes.”
“It is understandable that current residents want an opportunity to share concerns over changes to their neighborhood; adding homes and people can increase the demands on local schools, roads, and parks. But giving existing residents—especially long-term homeowners—veto power over new development creates economic, social, and environmental costs that are borne by the rest of society.”
Roadblocks to creating more affordable housing start with government… local, state, and federal. “Local governments should reform the rules governing housing production, to allow diverse types of housing at a wider range of prices in every community. State governments play a vital role in overseeing localities, and could create financial carrots and sticks that nudge localities toward pro-housing reforms. The federal government should expand direct financial support for low-income households; enabling every person to live in decent-quality, stable, affordable housing should be a core tenet of a strong social safety net.”
The challenge is “wicked hard politics…”
While this explains part of the supply issues driving housing prices higher, there is a second factor that is driving demand.
Since the GFC financial institutions have struggled to find income and yield in a world of near zero interest rates. One area that corporations have moved into enmasse is residential real estate. Corporations have been buying up properties over the past few years, especially in the most competitive markets and in the most affordable segments. (4) Many of these corporations will bid up the price of a house, pricing out other buyers and often times paying cash. Sellers seeking to maximize their chance to sell benefit from a higher price and from a quick close with a cash buyer; buyers who rely on getting financing approval face additional hurdles in the purchase process and are sometimes less reliable.
Homebuyers who have geographical demands based on their employment, limited liquidity and savings, and need for financing find themselves fighting 800 lb gorillas for the house of their dreams.
By contrast, corporation enjoy historic access to low or no cost liquidity and a veritable blank check to purchase a property. Companies then rent out the housing to generate income. Over the past few years, rents have been increasing pushing many people over the financial cliff.
“They’re really buying up the stock of relatively inexpensive single-family homes built since the 1970s in growing metro areas. They mostly ignore bigger and more expensive houses, especially ones that are move-in ready: Wealthy boomers and the nation’s finance and tech bros nab those properties. And they’re also ignoring cities with stable or shrinking populations, like Providence and Pittsburgh.
But investors are depleting the inventory of the precise houses that might otherwise be obtainable for younger, working- and middle-class households, in the cities where those workers can easily find good-paying jobs…”
An example of the actors at work here can be seen with Invitation Homes, a $21 billion publicly traded company that was spun off from Blackstone, the world’s largest private equity company, in 2017.
“While normal people typically pay a mortgage interest rate between 2% and 4% these day, Invitation Homes can borrow money for far less: It’s getting billion-dollar loans at interest rates around 1.4%. In practice, this means that Invitation Homes can afford to tack on an extra $5,000 to $20,000 to the purchase price of every home, while getting the house at the same actual cost as a typical homeowner. While Invitation Homes uses a mixture of debt and cash from renters to buy houses, its offers are almost always all cash, which is a big leg up in a competitive market.” (4)
Invitation collects rents of $1.9 billion on a $16 billion portfolio of housing.
As inflation rises due to rising food and fuel prices, the pain is magnified by rising rents; as house prices continue to rise and corporations continue to buy up housing units, fewer options exist for people to protect themselves from long term from inflation by owning a house. In such a dynamic, wealth inequality worsens hurting the fabric of society that connects us to each other. It also hurts the economy’s long term growth prospects as capital is tied up in residential housing instead of investing in research and development.
This is an issue that could be addressed by regulation from the Federal Reserve and Treasury, if there were the political will. At present, there is none.
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