Redfin – and America – selling an unattainable American Dream of homeownership?

The CEO of Redfin recounts how he has viewed who can and should be able to purchase homes:

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Rampant speculation and skyrocketing property values have left Kelman feeling almost nostalgic for those years leading up to 2008, which, in retrospect, were the last time the working poor could reasonably aspire to home ownership in America. “I used to read stories about strawberry pickers buying McMansions in central California, and everybody viewed that as just the absolute apex of insanity,” Kelman told me. “But reading Piketty five years later, is it so bad that the strawberry picker had a nice house?”

Conceding that the picker probably could not afford his McMansion, and that the loans that put him in it were untenable, Kelman nevertheless liked this gaudy permutation of the American Dream. More than that, he disliked the level of “elitist judgment” surrounding these types of homes, which he views as nothing more sinister than the market’s attempt to grapple with problems politicians are content to ignore. In Kelman’s view, the left is eager to help the poor rent homes but not own them, while the right tends to ignore their plight altogether. Meanwhile, rampant NIMBYism prevents the kind of building that might help bring home prices back down to earth.

It had put him in a mood to reflect somewhat darkly on the future of housing in America. “The original premise of my stint at Redfin was that we’re selling the American Dream and the idea that everyone can afford a house sooner or later if they work hard and play by the rules,” he said. “Recently, I’ve had this feeling that there are so many people who are never going to become Redfin customers — that maybe the product we’ve been selling just isn’t a middle-class product anymore but an affluent product.” In February, anticipating a future in which homeownership is out of reach for more and more people, Redfin spent $608 million to acquire RentPath and its portfolio of apartment-leasing sites.

The story as written suggests that Kelman originally subscribed to the idea that Americans who work hard and follow the rules would be able to purchase a home. This has been at least an implicit idea for decades, particularly in the postwar era. He did not like commentary that suggested some were less deserving to own homes or political positions that limited homeownership. But, after the housing bubble burst in the late 2000s, he realized homeownership was not available to all.

If this is correct, the Redfin pivot to apartment-leasing is an interesting choice. This could be a good business decision as rental housing is needed in many communities. At the same time, this does not necessarily line what up with what Kelman expressed. Apartments can provide housing but they do not provide the same kinds of opportunities as housing – such as building wealth – nor are apartment dwellers viewed the same way as homeowners. Americans continue to say that they would prefer to own a home.

Redfin and similar sites could play important roles in what homeownership looks like in the future. Exactly what influence they will have is less clear.

More young adults pooling resources to purchase homes

Limited in pursuing the American Dream of homeownership by college debt, economic conditions, and high housing prices? More young adults are buying homes with other people:

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For millennials, many of whom are getting married later in life, swimming in student-loan debt and facing soaring home prices, homeownership can feel more like a fantasy than an achievable goal. So, some first-time home buyers are taking a more creative route to make it happen—by pooling their finances with partners, friends or roommates.

Since 2014, when millennials became the largest share of home buyers in the U.S., the number of home and condo sales across the country by co-buyers has soared. The number of co-buyers with different last names increased by 771% between 2014 and 2021, according to data from real-estate analytics firm Attom Data Solution.

The pandemic added fuel to that trend, according to data from the National Association of Realtors. Among all age groups during the early pandemic months—April to June 2020—11% of buyers purchased as an unmarried couple and 3% as “other” (essentially, roommates). Those numbers were up from 9% and 2%, respectively, in the previous year.

This is an interesting situation: Americans continue to want to purchase homes. However, this is not within the reach of many unless they have ways to draw on additional resources.

I do wonder how this is connected to broader changes in households and the formation of families. How does this all work with more Americans living alone, changes in marriage rates, and extended emerging adulthood?

I have heard many warnings over the years about co-signing loans, even among family. Some of these arrangements could present complications in the long run:

Legal experts advise buyers to consult a real-estate attorney to help write a co-ownership agreement that covers every possible scenario, from job loss to marriage to personal fallouts. For example, who will hire the handyman if there is a plumbing issue? Who is in charge of collecting and making the mortgage payments? If one co-owner moves away, will the other co-owners have an option to buy them out or will there be a forced sale of the home?

While this is still a small minority of homeowners, it is worth paying attention to with high housing prices and economic anxiety.

A strange housing market: limited supply, less construction, rent prices diverging from home prices…

According to experts, the housing market right now is a strange one with COVID-19 and other factors coming together in odd ways:

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Today, if you’re looking for one, you’re likely to see only about half as many homes for sale as were available last winter, according to data from Altos Research, a firm that tracks the market nationwide. That’s a record-shattering decline in inventory, following years of steady erosion…

There are lots of steps along the “property ladder,” as Professor Keys put it, that are hard to imagine people taking mid-pandemic: Who would move into an assisted living facility or nursing home right now (freeing up a longtime family home)? Who would commit to a “forever home” (freeing up their starter house) when it’s unclear what remote work will look like in six months?…

For more than a decade, less housing has been built relative to historical averages. The housing crash decimated the home building industry and pushed many construction workers into other jobs. Local building restrictions and neighbor objections have slowed new construction. President Trump’s strict immigration policies further restricted the labor supply in the industry, and his tariffs pushed up the price of building materials…

Right now, in a number of metro areas, home prices and rents aren’t just drifting apart; they’re moving in opposite directions. Prices are rising while rents are falling.

The article ends on a note of uncertainty: where might the housing market go from here? But, I wonder if it is worth digging more into the past to think about how we got here. Several things come to mind:

  1. COVID-19 is a very unique situation. As the article notes, this seems to have affected rental and home prices in different ways as suddenly people were interested in homes in particular areas and not so interested in rental properties in other areas. Figuring out the long-term effects of this will take time; will people return back to work in big offices, whether in the city or suburban office parks? Is this a significant change or will markets return back to earlier patterns with more time removed from COVID-19?
  2. Are we really removed from the housing bubble and crash of the late 2000s? This affected the market in profound ways – are we still feeling the consequences? For example, are builders and developers more committed than ever toward building more profitable homes rather than affordable or starting-level properties?
  3. How #1 and #2 fit with longer-term patterns in American life – such as a preference for single-family suburban homes and government support for homeownership – is interesting to consider. How do recent market shifts fit with long-term cultural and social preferences and practices? Does a shift to homes as investments fundamentally shake up this dynamic and alter future patterns?

In other words, keep watching the broader housing markets through the next few years.

Homeownership up roughly 3% in 2020

After the housing crisis of the late 2000s, the homeownership rate in the United States declined to 62.9% in 2016 and then slowly inched up. But, it jumped quite a bit from 2019 to 2020:

During 2020, the homeownership rate jumped to roughly 67%, up nearly 3% from a year earlier after remaining largely flat for a decade, according to the Census Bureau.

The article attributes this jump to COVID-19 and the shift of people from cities to suburbs.

This may be true. I have chronicled this here on this blog. However, there is limited overall data compared to reports from various cities (like New York and San Francisco) or population figures for states and communities.

If indeed homeownership jumped nearly three percentage points in one year, this is a big shift. In the historical data table from the Census (Table 14), it is rare to find huge jumps year to year. The fallout from the late 2000s happened in relatively small decreases.

A big jump in 2020 has implications for multiple actors: communities with new residents and others losing residents; those involved in the housing industry from develoeprs to realtors to investors to landlords; residents as those with resources took advantage of purchasing opportunities while others struggled to hold on and payments are looming.

How will these dueling pressures – buying homes amid COVID-19 and low mortgage rates at the same time as economic uncertainty – play out?

Atlanta McMansions in the early 2000s

Atlanta highlights their work in the 2000s and includes an excerpt about McMansions:

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“When suburbanites come intown, they want to bring the suburbs with them. The day of the urban pioneer is gone,” says attorney Lee Meadows. The heart-pine floors, plaster walls, and black-and-white tile bathrooms of compact 1920s Craftsman bungalows can’t compete with the wired-for-plasma-TV mantel and Carrera marble–accented master bath of that “Neo-Craftsman” on Oakdale. (August 2007)

This is a short description but this seems to capture the McMansion era well:

-Bringing particular expectations about homes to cities and suburbs, whether they fit or not.

-Preferring new larger homes with features over historic homes.

-Particular features of these new homes included flat screens mounted over the mantel, marble in the bathrooms, and aping established architectural styles.

All that might be missing is the spread of McMansions in Sunbelt regions and the size of these homes, especially on certain smaller lots.

Of course, this comes before the housing bubble burst and more hardened opposition to McMansions. These homes are still constructed today in cities and suburbs but the thrill of McMansions has diminished. In other words, the “irrational exuberance” of McMansions is gone except perhaps in particular locations and for certain builders and buyers. For this reason, and perhaps many others, 2007 seems very far away.

Where shopping mall debt ends up

A story of several traders who shorted shopping mall debt provides insights into financial workings of shopping malls:

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Then, in October 2018, Sears declared bankruptcy, and they decided it was time. Here was the scheme: MP built a position against two slices—called “tranches” in Wall-Street speak—of mall debt with, they thought, a relatively low likelihood of being repaid: CMBX.6 BB and BBB-, which were filled with roughly $2 billion worth of debt, an outsized chunk of which was issued to 39 struggling shopping malls. They bought credit default swaps on the block of debt, which amount to insurance policies on the bonds. If the bonds went completely bust—similar to, say, your house burning down—they would be owed their entire value in cash. But even if the tranches decreased in value, MP’s insurance would be worth more and they could sell the swaps for a profit. In any case, it was an asymmetric bet: the downside risk was confined to what they’d have to pay to hold the insurance, but the potential payout was many multiples of that amount—theoretically in the billions…

Meanwhile, McKee was becoming known on Wall Street as “The Queen of Malls,” and other bearish hedge funds began asking her for advice on shorting CMBX.6. “All I did was talk about malls all day,” she said. This included portfolio managers working for the infamous billionaire activist investor Carl Icahn, who, by the end of 2019, had put on a $5 billion short position, arguably the largest by anyone on Wall Street. This went against conventional wisdom at the time, considering that the value of the mall debt was going up, but once word got out that Icahn had entered the ring, the trade was taken more seriously on Wall Street. “That made a lot of people stand up and say, ‘Hold on, we should look at this,’” McNamara said…

Between March and July, as businesses struggled to pay their rent, CMBS delinquencies, according to Trepp, increased by a staggering 492 percent, the value of the hotly contested CMBX.6 tranches were slashed in half, and the brick-and-mortar retail sector was on the verge of going belly-up. Large retailers like Gap stopped paying rent; Neiman Marcus, J.Crew, Brooks Brothers, Ann Taylor, Loft, Pier 1 Imports, GNC, and JCPenney (among many others) filed for bankruptcy; Victoria’s Secret was closing hundreds of stores and Lord & Taylor announced it was closing its doors for good and liquidating inventory; TJX and Macy’s recorded losses of $5 billion and $2.5 billion, respectively; foot traffic for shopping malls plummeted to basically zero; and, in April, clothing sales fell 79 percent, the largest drop on record. “The economy has declared war on your aunt’s wardrobe,” Scott Galloway, marketing professor at New York University, mused on his podcast Pivot. As for Crystal Mall, Simon Property Group, its landlord, defaulted on the mortgage and is planning on handing over the keys to their special servicer…

COVID-19 also revealed a dirty secret hidden in the crawlspace upon which many commercial mortgage-backed securities were built. A University of Texas at Austin study published in August claimed that banks knowingly inflated underwriting income for $650 billion worth of commercial real estate mortgages issued between 2013 and 2019, including by 5 percent or more for nearly a third of the roughly 40,000 loans. “A well-documented historical pattern is that fraud thrives in boom periods and is revealed in busts,” the university researchers wrote, adding that end investors were unaware of this hidden risk, a deception akin to buying a Ferrari secretly outfitted with a rusted-out Kia engine. It could be argued that CMBS had been a magic trick all along, with big banks one step ahead, luring investors to pick a card from a rigged deck. It took a global pandemic—an act of God—to reveal this financial sleight of hand.

Americans and financial institutions were bullish about single-family homes into the 2000s, until they were not and the housing market imploded. Americans liked shopping malls…and is this a repeat?

Since the story suggests those shorting shopping malls are in the minority, does this mean other investors truly believe shopping malls will successfully reinvent themselves and or redevelop enough to successfully pay their mortgages? Or, are a lot of people hoping that shopping malls make it through?

The default of shopping malls could have a broad effect, particularly on communities that will struggle to fill that space and recapture some of the tax revenue that shopping malls could bring in. More broadly, the difficulties retailers face could impact a lot of people in multiple ways.

Percentage of delinquent FHA loans keeps rising

The economic and social consequences of COVID-19 might be just beginning. A new report suggests a number of FHA mortgage holders are behind in payments:

More than 17% of the Federal Housing Administration’s almost 8 million home loans nationwide were delinquent in August, according to a new study from the American Enterprise Institute.

“Rising FHA delinquency rates threaten homeowners and neighborhoods in numerous other metro areas across the country,” American Enterprise Institute researchers said in the just released report. “It would be expected that these delinquency percentages will increase over time…

The increase in late FHA loan payments is even greater than the rise in the number of overall mortgage delinquencies since the start of the pandemic…

A new study by the Federal Reserve Bank of Dallas warns that highly indebted FHA borrowers are at risk of losing their homes when payment forbearance programs end.

More people falling significantly behind on their mortgages – plus other issues related to housing – could have ripple effects on a number of actors:

  1. Americans who need housing. If you cannot afford your mortgage or rent, what viable options do you have?
  2. Mortgage providers. If a lot of mortgages go into default or foreclosure, what does this mean for these large financial actors?
  3. Local governments and communities. With larger numbers of people without housing and limited housing, what happens? What happens to local tax revenues?
  4. Housing investors and people with resources. Does this mean they can take advantage of opportunities?

The memory of the burst housing bubble just over ten years ago lingers. While few predicted a worldwide pandemic and the resulting impact on housing, we could know within a few months whether this will lead to another housing crisis.

Reminder: “Americans have no comparable safety net for housing”

Americans generally have limited options in obtaining with housing from the government:

With food and health care, we recognize that some number of people will have trouble paying for the basics, so our government provides a minimum standard of access through the Supplemental Nutrition Assistance Program (for food) and Medicaid (for health care). These programs are designed to expand and contract based on need (setting aside current politics).

Americans have no comparable safety net for housing. While the federal Section 8 program does provide rental assistance to low-income families, inadequate public funding means that fewer than half of eligible households actually receive a voucher. The inadequacy of our response has led to a variety of injustices: growing homelessness, overcrowding in small or substandard apartments, and housing costs that squeeze families’ ability to pay for child care, transportation, and other essential needs. Policymakers and housing advocates, especially some of the great ones we have in Massachusetts, have worked hard to cobble together different low-income housing programs and subsidies that help many of these needy families. But it’s a patchwork approach that leaves far too many behind.

And then those who compete in the “free market” may also have few options:

There’s also a second crisis, which affects middle-income families headed by people such as teachers, salespeople, nurses, and retirees living on fixed incomes. This crisis is more directly tied to housing cost. If our private market was functioning properly and producing diverse, family-friendly housing, these families would be able to afford decent housing options without needing public subsidy. But they increasingly struggle to do so. This problem is especially pronounced in Boston’s suburbs, many of which have a long history of banning the construction of townhomes, duplexes, triple-deckers, and modest apartment buildings that would serve these middle-class families. Thanks to these extreme prohibitions, many of our region’s suburbs have instead seen a trend towards larger, and pricier, McMansion-style homes.

Addressing housing may the toughest issue to address in the United States. Still, ousing is a basic human need and not having adequate or consistent housing has detrimental effects on residents. Providing food, health care, and other necessities can help but may not mean as much without a good home.

As an earlier post noted, Americans have supported/subsidized mortgages for single-family homes but this has not benefited all. The system is not really a free market; it helps some people make money, some residents to benefit from long-term property value increases (and then pass on this wealth to future generations), and others to struggle to get into the system. The federal government – and the American people in general – have had little appetite for big government housing programs. Not even a burst housing bubble in the late 2000s truly altered the rules of the American housing game.

Given the number of people affected, perhaps this will eventually grow into an issue that cannot be ignored. But, given the lack of attention this gets during this election season, I am not hopeful with will be adequately addressed soon.

Black homeownership down to nearly 41% – and housing values down

The two largest minority groups in the United States are headed in different directions regarding homeownership:

While Hispanic homeownership rate is on the rise, the black homeownership rate has fallen 8.6 percentage points since its peak in 2004, hitting its lowest level on record in the first quarter of this year, according to census data.

This divergence marks the first time in more than two decades that Hispanics and blacks, the two largest racial or ethnic minorities in the U.S., are no longer following the same path when it comes to owning homes.

Analysts say black communities have struggled to recover financially since the housing crisis, which has kept homeownership out of reach. A decades long legacy of housing segregation has also made many would-be black buyers wary of returning to the market after losing their homes…

Homes in neighborhoods with a high concentration of white borrowers on average have seen their homes appreciate 3% from 2006 through 2017, according to the study. However, homes in neighborhoods with a concentration of black borrowers on average are worth 6% less than they were in 2006. High-income black borrowers have concentrated in neighborhoods where homes have lost 2% of their value, compared with white borrowers, who have concentrated in neighborhoods where homes have appreciated 5%.

According to the first quarter homeownership rates reported by the Census Bureau: whites have a rate of 73.2%, Hispanics are at 47.4%, and blacks are at 41.1%. These are off from peaks of 76.0% for whites in 2006, 50.1% for Hispanics, and 48.6% for blacks in 2006.

This is a contributor to inequality that gets relatively little attention. If homeownership rates are low for a particular group, not only does that mean a different present experience (renting versus owning), it has significant long-term consequences for building wealth. When whole neighborhoods have relatively low homeownership rates plus the properties there do not appreciate much, the effects can last decades.

Where are the 2020 presidential candidates in discussing homeownership as an issue Americans care about?

Consequences of suburbs growing, back to city movement declining

Willing Frey at The Brookings Institution sums up recent trends in growth rates among cities and suburbs:

As we approach the end of the 2010s, the biggest cities in the United States are experiencing slower growth or population losses, according to new census estimates. The combination of city growth declines and higher suburban growth suggests that the “back to the city” trend seen at the beginning of the decade has reversed.

These trends are consistent with previous census releases for counties and metropolitan areas that point to a greater dispersion of the U.S. population as the economy and housing market pick back up, perhaps propelled by young adult millennials who may be finally departing dense urban cores as they make a delayed entrance into marriage and the housing market…

Primary cities vs. suburbs growth rates

In both regions, city growth exceeded suburban growth in the early years of this decade, where Sun Belt growth in both cities and suburbs exceeded Snow Belt growth. As the decade wore on, city growth declined in both mega-regions while suburban growth remained higher. This is evident when looking at the individual metro areas in each region (download Table C). In 2011-2012, city growth exceeded suburb growth in 19 of the 34 Sun Belt metros, and in eight of the 19 Snow Belt metros. However, in 2017-18 the city growth advantage appeared in just nine Sun Belt metros and two Snow Belt metros. Among these 11 areas that still registered city growth advantages are: Los Angeles, Washington, D.C., San Francisco, Denver, and Boston.

It is helpful to see the longer trends in the data, particularly when lots of media outlets want to jump on one-year estimates (such as Chicago’s recent population loss).

While it is helpful to compare cities and suburbs (and these changes do matter for a lot of reasons, including perceptions), I wonder how much this covers up larger changes across metropolitan regions or feeds narratives that cities and suburbs are locked in mortal competition. All of the above data could be true while Sun Belt regions continue to grow at a strong rates. Regions could think about policies as a whole that would enhance conditions for many more people than just those in cities or suburbs.

Finally, I’ve written before about how it would likely take decades to unseat the primacy of suburban life in the United States. Was the back to city movement or great inversion just a blip on the radar screen? Or, will it cycle back at closer and closer frequencies? The global economic system may have something to do with this – what happens with the next major downturn? – yet overcoming decades of expressed preference for suburbs will not be easy.