Rising real estate values in affordable markets make it harder to enter that market

Whether reading about rising real estate values in Elkhart, Indiana or Chicago area locations, this has an effect on who can enter the market as homeowners:

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But after prices soared during the COVID-19 pandemic, even the lower-priced homes became out of reach for many low-income households, according to a recent report from the Joint Center for Housing Studies of Harvard University…

In June 2020, a home slightly below the median price was comfortably in that range, selling for $196,450, Hanifa found.

But one year later, a home that was 80% of the median price would sell for $220,562, meaning even lower-priced homes were no longer affordable for low-income buyers.

The loss of affordability was not limited to Chicago. Hanifa found low-income families could afford a home in just 20 of the country’s 100 largest metro areas in 2021, down from 39 the year before…

The hot housing market has had a trickle-down effect on neighborhoods such as Garfield Park, Humboldt Park and Belmont Cragin, he said. As buyers have been priced out of more expensive neighborhoods, they begin looking at a lower or middle-income neighborhoods where they can make offers over asking. Then residents of those neighborhoods can’t afford the homes for sale.

Rising home values are often viewed very positively. Those who own homes can benefit from the increase in prices without much work of their own. Over time, homeowners hope prices go up and they can get a strong return of investment at a sale.

But, this data is a reminder of the flip side of those same rising prices. If prices go up faster than other factors including accessing mortgages and rising incomes, those who want to enter the housing market – and reap the benefits of increasing real estate values – have a harder time doing so.

This dynamic is recognized in particularly expensive real estate markets. When people discuss Manhattan, San Francisco, Seattle, Los Angeles, and a few other locations, people know there is a limited or nonexistent cheaper market for homeownership. This does not come up as often in cheaper markets, often in the Midwest or South, where prices are not as high and there are more options. If prices increase there as well to beyond what lower-income residents could afford, then what happens?

My quick takeaway: the need for affordable housing is great all over the place. If Americans continue to think that homeownership is a laudable goal, there is a lot to do to help make that possible for all.

Who is affordable housing for? Biden Build Back Better edition

The Biden administration includes affordable housing as an important part of the Build Back Better initiative. Under the heading “The most significant effort to bring down costs and strengthen the middle class in generations,” here is how whitehouse.gov describes the affordable housing plans:

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Makes the single largest and most comprehensive investment in affordable housing in history.

The framework will enable the construction, rehabilitation, and improvement of more than 1 million affordable homes, boosting housing supply and reducing price pressures for renters and homeowners. It will address the capital needs of the public housing stock in big cities and rural communities all across America and ensure it is not only safe and habitable but healthier and more energy efficient as well. It will make a historic investment in rental assistance, expanding vouchers to hundreds of thousands of additional families. And, it includes one of the largest investments in down payment assistance in history, enabling hundreds of thousands of first-generation homebuyers to purchase their first home and build wealth. This legislation will create more equitable communities, through investing in community-led redevelopments projects in historically under-resourced neighborhoods and removing lead paint from hundreds of thousands of homes, as well as by incentivizing state and local zoning reforms that enable more families to reside in higher opportunity neighborhoods.

There is certainly a need for affordable housing throughout the United States as well as in specific places. What interests me at the moment here is the references to how this investment in affordable housing will benefit the middle class. The whole package is aimed at the middle class. The introduction states, “President Biden promised to rebuild the backbone of the country – the middle class – so that this time everyone comes along.”

On one hand, affordable housing is important to the middle class. For decades, homeownership has been a marker of being in the middle-class. The postwar suburban housing boom was driven in part by attainable mortgages. This middle-class homeownership is then often related to a number of middle-class goals. Since housing is such a big expense in many household budgets, having cheaper housing enables spending in other areas.

On the other hand, many people need housing assistance, not just the middle class. Middle class is a broad category and some in that group have plenty of resources (this is a little different in high housing cost areas). Housing is foundational need as good stable shelter is connected to a number of other positive outcomes. If this money is aimed at the middle class, will it go to educated young professionals or older downsizers (as it sometimes discussed in suburban communities)? Or, would it be more needed for those who work lower-wage wages or have fewer family and community resources to draw on?

Perhaps the devil is in the details and where exactly this money goes. Or, middle-class here is intentionally broad as many Americans like to think of themselves even if their circumstances suggest they are not and some Americans are averse to resources directed to narrower groups. Regardless, if the plan comes to fruition, it will be worth seeing whether these efforts can make a significant dent in the affordable housing needs in the United States.

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 growing number of US suburbs contain a majority of renters

A new analysis suggests the number of suburbs with a majority of renters is increasing:

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Renters now make up the majority of residents in more than 100 suburbs around the U.S., according to a new analysis of Census Bureau data from Rent Cafe. Another 57 suburbs are on their way to becoming predominately renter territory over the next five years, the apartment search website also found…

Overall, roughly a quarter of the more than 1,100 suburbs near the nation’s 50 largest metro areas are renter-dominated, according to Rent Cafe. Some 21 million people rented their homes in the suburbs as of 2019, up from 17 million a decade ago.

Millennials and members of Generation Z account for most suburban renters, Census data show. Rent Cafe notes that 55% of suburban renters are younger than 45, with median household earnings of around $50,000.

Meanwhile, the pandemic is expected to further fuel the shift away from suburban homeownership in favor of renting. Remote work opportunities have generated more interest in suburban areas within striking distance of cities.

If this is indeed the case, it would be interesting to know if these suburbs share characteristics. Do they tend to be close to the city or further out? Do they have particular hosing stocks compared to other suburbs? Are middle-class and up suburbs still devoted to residents owning single-family homes as a status marker?

My guess is that a majority of suburban residents would still say that they desire to home at some point. But, if more suburbanites are now renters, is the pathway to homeownership in their own community or other suburbs much more restrictive? This is part of the larger affordable housing conversation; people need any decent housing to live in but because many Americans aspire to own a home, having affordable ownership options is important as well.

An interesting middle path in some communities could be having significant numbers of single-family homes with long-term renters. The appearance and status of homes is maintained while renting adjusting for current conditions. On the other hand, many have argued that renters do not care for their properties or communities in the same way and communities may not like this trend.

Chicago as “the nation’s capital of deconversions” from condos to apartments

Henry Grabar suggests Chicago is ground zero for efforts to convert condos to apartments:

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Stories like this make Chicago the perfect place to understand how condos usually meet their end—not in a pile of rubble, but in a buyout that leaves some owners feeling lucky and others feeling betrayed. Lauren Kerchill, the owner of a Gold Coast unit overlooking Lake Michigan, was a holdout when investors came to buy out her building. After fighting to toss her condo board, she told Crain’s Chicago Business she was called “petty,” “greedy,” and “uneducated.” She just didn’t think she could find another home like hers nearby. In the end, she didn’t have a choice. Her neighbors voted to sell her building, at 1400 Lake Shore Drive, for $107 million in 2019—another record, this time the most expensive deconversion in the country…

But there’s another side to the story, in which deconversion is the only way out for condo owners stuck in deteriorating properties. In June, the collapse of Champlain Towers South in Surfside, Florida, drew attention to the challenges that confront condo boards as they assess structural damage and raise money for repairs. Maintenance bills for the Great American Condo Boom of the ’70s and ’80s are starting to come due in areas like South Florida…

While states like Florida, California, and Hawaii saw tons of new condo construction in the decades after the concept was established in the 1960s, Chicago saw a different kind of boom: older buildings becoming condos. Fearing rent control, facing declining profits, or saddled with obsolete prewar commercial space, landlords in Chicago raced to sell off their units in the 1970s. Yuppies and middle-class workers gobbled up these starter apartments, which provided an easy and cheap entry point to homeownership.

Fifty years later, those buildings are among the oldest condominiums in the country. Owners who have not kept on top of maintenance, and even some who have, sometimes find themselves facing massive repair bills.

It would be interesting to read more about the specific aspects of Chicago’s history, real estate market, and local regulations that play into the the number of condo deconversions in Chicago.

More broadly, this gets at two larger housing issues:

  1. How do deconversions fit with a larger American promotion of homeownership? Condos offer opportunities to offer homeownership opportunities in settings where the single-family home is less possible. But, given market conditions right now, is there now increased interest in having more rental units?
  2. While aging and the associated expenses is an issue for condo buildings, it is also an issue for many more housing units in the United States. What happens to older homes and residences when there is limited interest in repairing them or redeveloping the property? In wealthier communities and desirable locations, there are often developers and individuals interested in rehabbing or rebuilding structures. Hence, teardowns or new residences in suburban downtowns. Elsewhere, replacing or changing housing is a more arduous task.

Housing for tenants, housing for landlords?

Who is housing for? The expiration of the national rent moratorium highlights competing interests in American housing:

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The eviction wave is expected to hit population centers across the country. Housing advocates point to renters in Ohio, Texas and parts of the Southeast — where tenant protections are generally low, housing costs are high and economic problems from the pandemic linger — as particularly at risk. Even though it has its own ban in place through August, New York is also a concern, because it has been especially slow at distributing rental assistance funds to the hundreds of thousands of tenants in the state who are behind on their rent.

The last-minute gridlock between President Joe Biden and Democrats in Congress that resulted in the demise of the eviction ban this week threatens to impose new economic burdens on state and local governments. The officials will have to respond to mass evictions triggered by landlords — including many struggling financially themselves because of lost revenue — who are poised to kick out tenants who fell behind on their bills during the pandemic. The renter safety net is severely weakened, with fewer than a dozen state eviction bans in place and state and local governments having disbursed only a fraction of the $46.5 billion in rental assistance that Congress authorized over the past year.

About 7.4 million adult tenants reported they were behind on rent in the latest U.S. Census Bureau survey, which was taken during the last week of June and the first week of July. About 3.6 million tenant households said they were “somewhat likely” or “very likely” to face eviction over the next two months.

The lapse of the eviction ban, which was first imposed by the Centers for Disease Control and Prevention in September as a Covid-19 safety measure, comes after landlords warned that it cost them billions of dollars each month. Industry groups including the National Association of Realtors lobbied against extending the moratorium this week and made the case to lawmakers that it “unfairly shifts economic hardships to the backs of housing providers who have jeopardized their own financial futures to provide essential housing to renters across the country.”

In addition to tenants and landlords, there are more actors involved including builders, developers, real estate agents, mortgage providers, local officials, and more. But, ultimately, whose interests should win out in times of trouble?

The era of COVID-19 is a very unusual time. But, the US has faced severe housing issues before. The housing bubble of the late 2000s. The Great Depression. A housing shortage after World War Two. In the United States, the logic regarding housing tends to default to free markets – people can access what they have resources for and there is much money to be made in housing – plus homeownership. With both, interventions from actors, like the federal government, may be necessary in times of crisis or for people with very limited means. In non-crisis times, interventions can favor developers and homeowners.

In contrast, there is less support for public housing or seeing housing as a right. Housing is needed for a variety of reasons – health, stability, accessing jobs and services, personal space, etc. – but not guaranteed.

If any city or local government truly wanted to distinguish itself as a people-oriented location rather than a market-oriented community, guaranteed housing would be one way to stand out.

Big drop in construction of starter homes of under 1,400 square feet

For younger adults looking for smaller homes to purchase as their first home, there at least one reason they are not easy to find: few have been built in recent years.

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The supply of entry-level housing, which Freddie Mac defines as homes up to 1,400 square feet, is near a five-decade low, and data on new construction from the National Association of Home Builders shows that single-family homes are significantly bigger than they were years ago.

Homeowners from previous generations had access to smaller homes at the start of their financial lives. In the late 1970s, an average of 418,000 new units of entry-level housing were built each year, according to data from Freddie Mac. By the 2010s, that number had fallen to 55,000 new units a year. For 2020, an estimated 65,000 new entry-level homes were completed…

“What was really striking to me was the consistency in the decline in the share of entry-level homes, irrespective of geography,” Mr. Khater said. “The thing that struck me the most was that really, it’s all endemic. It’s all over the U.S. It doesn’t matter where.”…

Homeownership leads to greater wealth for those who buy earlier. An analysis from the Urban Institute estimates that those who became homeowners between the ages of 25 and 34 accumulated $150,000 in median housing wealth by their early 60s. Meanwhile, those who waited until between the ages of 35 and 44 to buy netted $72,000 less in median housing wealth.

Three things stand out to me from this article:

  1. The decline in the construction of these smaller homes is real. The numbers cited above suggest roughly 15% of these smaller homes are constructed now compared to the late 1970s.
  2. At the same time, the definition of an entry-level homes is contingent on square footage. These days, 1,400 square feet is not that large for a home. These standards have changed over the decades; new homes in the 1950s in Levittown were more around 1,000 square feet while many new homes today are over 2,500 square feet. As builders construct larger homes (presumably making more money) and some buyers want larger homes, what is now an entry-level home may have changed.
  3. The final paragraph above considers the wealth implications about being able to buy a home earlier on. This is important: homes are one of the biggest generators of wealth for Americans. Yet, this also marks a shift in viewing homes as investments as opposed to good spaces for people to live.

More Americans looking for vacation homes in Europe

Those with means and resources can purchase real estate around the globe. This is essential for development in many locations, including major cities as well as vacation destinations in Europe:

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From Lisbon to the Greek islands, the Americans are back, ready to take advantage of the buyer’s market in many of Europe’s leading resort areas. There are bargains to be had at the entry and mid-levels, with prices buoyant at the top end…

Knight Frank last week released its Global Residential Cities Index for the first quarter of 2021, giving a view of price changes from the year-earlier period, when lockdowns began to take hold world-wide. It shows double-digit increases clustered in the Nordic countries and Eastern Europe, while prime European second-home destinations that had been inching toward the top in previous years—including Lisbon and Malaga on Spain’s Costa del Sol—are seeing declines…

Americans typically play a niche role in Southern Europe’s luxury second-home markets, which tend to be dominated by sun-hungry Northern Europeans. But they have traditionally made themselves more conspicuous at the very top of those markets.

This is different than Americans looking for relatively inexpensive places to retire; this is about finding real estate to invest in and profit from in the long term in desirable locations. This is an opportunity to make money in locations where prices have decreased, in contrast to numerous markets in and around big cities where prices have increased for years. Homes are places to enjoy and to invest in, as sociologist Brian McCabe argues. Being wealthy and staying wealthy can depend, in part, on buying real estate when it is available and then profiting later.

All of this is an opportunity that most Americans do not have or could not even dream about. A second home in a foreign country? The ability to travel there regularly? Being able to sell this property later and/or pass down profits to heirs? Just as those featured on HGTV’s International House Hunters are a select group, those who can take advantage of a European buyer’s market are limited.

People using localized social media for an edge in searching for homes

Scroll through local Facebook or Nextdoor groups and there is a more common request these days: does anyone know of an upcoming listing for a 4 bedroom home in a desirable neighborhood? Or, perhaps a three bedroom townhome or house for rent at a reasonable price?

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It is hard to know how many good leads are generated by such posts. They often ask for DMs. Generating more competition for such housing is probably not the goal – though landlords or sellers might be interested in drumming up more interest (also evidenced by pictures of homes soon to be on the market). The more direct interaction cuts out some of the middle actors.

Judging by the posts I have seen, the housing needs seem to be present. Even with economic instability during COVID-19, homes in desirable neighborhoods and communities have held their value or increased in value. The housing supply is limited. At least a few people have looked to move out of cities to quiet suburbs. Stories of bidding wars abound. Finding places at reasonable rents is hard.

I could imagine some broader partnerships between the socials and real estate websites. Imagine a special Zillow add-in to your Twitter feed or a Realtor.com bonus for Instagram. All of the real estate websites are competing and so are the social media platforms; which one can truly integrate real estate into their daily feeds beyond the posts of individual users? Say you are looking for a home with particulars and the social media plug-in can alert you to matches and you can get an exclusive bidding window; potential buyers could feel they get an in and realtors might like the added competition among buyers ready to spend.

All of this might matter less if there is more housing supply in the future. Yet, if real estate is truly so lucrative because there is only so much land in the first place, why wouldn’t it permeate even social media.