Large actors in the US housing market and building more homes

Derek Thompson argues those interested in more housing in the United States should be more concerned with local NIMBY activity than private investment firms buying up homes to rent:

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Far worse than corporations taking a few thousand units off the market for owners are the governments and noisy NIMBYish residents taking millions of units off the market for owners and renters alike—by blocking construction projects in the past few decades. (California alone has an estimated shortage of 3 million housing units.) From New York to California, deep-blue cities and states have amassed a pitiful record of blocking housing construction and failing to meet rising demand with adequate supply. Many of the people tweeting about BlackRock are represented by city councils and state governments, or are surrounded by zoning laws and local ordinances that make home construction something between onerous and impossible.

One of the issues at play here is a numbers one: who exactly is acting within the US housing market and how much sway do they have. Concerns about corporations and housing can be placed in the larger context of how many housing units there are and how many are being built. Here are the numbers Thompson provides:

The U.S. has roughly 140 million housing units, a broad category that includes mansions, tiny townhouses, and apartments of all sizes. Of those 140 million units, about 80 million are stand-alone single-family homes. Of those 80 million, about 15 million are rental properties. Of those 15 million single-family rentals, institutional investors own about 300,000; most of the rest are owned by individual landlords. Of that 300,000, BlackRock—largely through its investment in the real-estate rental company Invitation Homes—owns about 80,000. (To clear up a common confusion: The investment firm Blackstone established Invitation Homes, in which BlackRock, a separate investment firm, is now an investor. Don’t yell at me; I didn’t name them.)

If I am calculating correctly, institutional investors currently own 2% of the single-family rentals. Of course, this number could grow if these firms find this to be a good investment.

Also of interest is the number of new homes being constructed. Thompson links to figures from the National Association of Home Builders that shows 6.8 million new single-family units were created in the 2010s. So, concerns about big investors buying homes could be considered alongside housing construction: if the investors are buying more quickly than new homes are being built, this could be an issue.

Thompson settles on local actors – governments and residents – as holding back housing construction. In this numbers game, restrictions on a local level collectively are holding back the construction of single-family housing. If these restrictions were lifted or lessened, concerns about institutional investors would presumably diminish because there is a larger supply of houses to choose from.

One problem I see with this among the larger numbers: while local actors might in the aggregate have oversight over millions of units, they individually have control over relatively few units. Let’s say a particular suburb in the Bay Area (and this NIMBY argument often comes back to California) is against building new single-family homes. Depending on the size of the community and the availability of land, this might affect just a few homes to several thousand. This is not many. Zoom out to the whole region and many suburbs doing this adds up to tens of thousands of potential homes. Do this across all of California’s metro areas and the numbers add up. Similarly, you could do this across all the metro areas in the United States.

However, convincing all these municipalities to act in the interests of the region, state, or country as a whole regarding housing is a difficult task. Housing is local and this makes legislation at the state or federal level very difficult. California’s recent efforts with SB 50 did not go through. Illinois just recently gave some teeth – but not all the teeth – to affordable housing guidelines for communities set almost two decades ago. Federal guidelines are met with the suggestions that the suburbs are going to be abolished. One reason Americans like suburbs in the first place is that local government, presumably more responsive to the needs of residents, has the power to exclude (particularly on race and social class) and protect the existing single-family homes.

All of this does not necessarily mean Thompson is wrong. Yet, to get to the numbers of new homes constructed that would make a significant difference – whether in reducing the need many metro areas have for more affordable housing or outweighing the actions of investment firms – would require a lot of change across many communities. State or federal legislation may or may not be successful and would be unpopular in many places without a significant public groundswell of support that this is an issue that all or even most communities need to address.

Together, municipal changes regarding zoning and NIMBY could add up. But, changes would need to come across communities to make a big difference.

Investors buying about 20% of homes in the United States

A story about rising home prices in small town America highlights the role of investors buying property:

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Local buyers bid against one another as well as against investors who now comprise about a fifth of annual home sales nationally. Online platforms such as BiggerPockets and Fundrise make it easier for out-of-town investors to buy real estate in smaller cities across the U.S., said John Burns of California-based John Burns Real Estate Consulting.

Often, Mr. Burns said, “the cash flows are better in the Tulsas and Allentowns of the world” for those seeking to rent out properties. In the fourth quarter of 2020, nearly a fifth of homes sold in the Allentown area were bought by investors, according to Mr. Burns’s data.

While much attention is directed to hot real estate markets in major metro areas – with a lot of attention for the most expensive like Manhattan, San Francisco, Los Angeles, and others – this hints at a different dynamic. In smaller town, there is not a big supply of new housing. Thus, investors can purchase homes and turn them into rental properties. Without large influxes of new residences, these rental units can bring in good money as buyers look to move up within an unchanging local supply.

If there is such demand and limited supplies of new homes in places like Bethlehem, Pennsylvania, the focus of this article, one possible future is a business opportunity for local or national builders who could come in and provide new apartments or single-family homes. While the community may not be growing much in terms of population, housing stocks do need replenishing and what people desire over time changes. Could building in Bethlehem generate the kinds of profits builders are looking or are more of them chasing even better profit opportunities in hotter markets with faster-growing populations?

If investors are making a significant number of these purchases, could communities respond in ways that help retain opportunities for local residents as opposed to far-off companies? Could they form local investment funds or cooperatives that then only sell or rent the homes at reasonable rates to local residents? This could be an affordable housing issue in many communities and even if local actors generated little profit in the transactions, they could help insure a supply of human capital.

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.

“NYC isn’t dead”…for the wealthiest

A look at the ten most expensive properties sold in the United States in 2020 highlights the presence of New York City properties on the list:

Google Street View image of 220 Central Park South (September 2020)

By the end of September, the volume of Manhattan co-op and condo sales was down 43% year over year, according to a report by Douglas Elliman, as sellers held back from listing their apartments and buyers increasingly gravitated toward the suburbs

Of the top 10 national sales compiled by Jonathan Miller, president and chief executive officer of Miller Samuel appraisers, five were in 220 Central Park South, a new luxury tower on Central Park designed by architects at Robert A.M. Stern

Another trend from this year, namely rich people “fleeing” New York for Florida, didn’t manage to trickle up to the highest tier. Only two of this year’s top 10 sales were in Palm Beach; last year there were three…

Even the three Los Angeles entries diverge slightly from conventional 2020 narratives. Yes, the L.A. market is one of the few urban bright lights this year, with sales soaring and inventory hard to come by. But numbers at the very top are down from last year, when it notched four entries in the top 10, totaling $463 million. This year there were three, totaling $293 million.

The actions of the wealthiest homeowners matters not only because people often have an interest in what those who have lots of money do with all that money; it matters because these are people with clout and influence. If they are continuing to purchase in New York City – it is less clear how much time the owners would necessarily spend in the city – it is a sign of the importance of the city and the prospects for future development.

The optics of 2020 might not be favorable to the list above but the project and the trends were underway far ahead of COVID-19. In a very expensive land and housing market, purchasing a residence in one of the newest buildings and in such a location within Manhattan is an object of desire for some who have the resources to purchase such places. While a figure later in the article notes that the total price for the properties on this list is lower than the price for the properties the year before, this may only allow the wealthiest to get into hot markets even more.

It may (or may not) be worth noting that five of the ten properties are in a tower in New York City while the other five properties are large homes on some land. On the whole, Americans as a whole tend to prefer or idealize single-family homes but the wealthiest in the United States and elsewhere may be more inclined to purchase large units in multi-unit buildings.

So you want to live in an affordable big city – that is a suburb

Looking to live a big suburb that is affordable? Zillow and Yelp have you covered:

https://www.zillow.com/research/zillow-yelp-suburbs-cities-2020-28058/

Increased opportunities to work remotely are pushing more Americans to rethink how and where they want to live. But even if there’s less of a need to live as close to urban job centers, traditional urban amenities — think restaurants, nightlife, museums and sports venues — remain a big draw and demand for city living remains high. As a result, many buyers may seek places that balance the space and affordability of the suburbs, while still maintaining that big-city feel.

A new “Cityness Index” created by Zillow and Yelp Inc. helps identify the U.S. suburbs that best strike that balance. Key metrics include housing affordability compared to the nearest big cities and to the country at large, housing availability, the mix and diversity of businesses — including restaurants, nightlife and the arts — and consumer reviews and check-ins…

There were four individual Yelp indicators evaluated for each suburb to determine its cityness.

1. A mix of businesses similar to major cities

2. A diversity of restaurant and nightlife businesses

3. A diversity of arts businesses

4. A high level of consumer activity

This is an interesting suburban niche to highlight: communities for those who do not want to live in a big city but want more affordable housing and want to have some urban amenities. Of course, people could find this in less affordable suburbs or suburbs near the big city or other suburbs that have these more urban amenities. Is there something inherently more appealing in being in one of these big suburbs?

The reason I ask is that many Americans equate suburbs with small town life. The appeal of suburbs for Americans involves features often associated with smaller communities including lots of single-family homes (as opposed to denser concentrations of residences) and local control. Big suburbs often have a lot of jobs and can be significant jobs centers within a region. Furthermore, they could offer a mix of more dense housing as well as single-family homes. But, these big suburbs are also close in size to legitimate small big cities including Providence, Rhode Island, Chattanooga, Tennessee, or Akron, Ohio.

Perhaps if you live in a large metropolitan area, it matters less if you live in a particular suburb and more if you live near your work and desirable amenities within a certain budget. If this is the case, perhaps living in a suburb of over 150,000 people does not matter much. It is still more suburban than the big city but you are not at the edges of sprawl and the price is right.

Trying to define the “average American home”

One writer/realtor describes the features of today’s typical American home:

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Homebuyers now realize that although space is important, it’s not necessarily the most important feature to have. To have enough space to be comfortable, today’s average American home measures about 2,400 square feet. This is definitely up from the 1973 average of about 1,500 square feet for a single-family home, but it’s down quite a bit from the 4,000-plus-square-foot McMansion…

People like finished basements, a home office, a large master bedroom, a big (we’re talking the size of a child’s bedroom), customized walk-in closet with organizer features, and a tricked-out ensuite master bathroom — think of one with spa-like amenities, such as a linen closet, a separate shower stall and tub, a double vanity, and a private toilet room…

Even when you adjust for inflation, you’ll find today’s median home price has increased 900% from 1973, but incomes have increased only 600%. Americans have become used to spending more of their paychecks to get the American dream of homeownership…

“Live, work, play” became the motto of the day as people grew weary of being car-dependent. Being able to walk to shops, restaurants, bars, and entertainment has become just as important as the home itself to many homebuyers.

This description appears to draw off two sources of data: Census data that regularly provides numbers on square footage, numbers of bedrooms and bathrooms, and prices (among other things) as well as real estate knowledge of recent trends.

Whether this gets us to what “the average American home of 2020 looks like” is a tricky question. At first glance, several things seem to be missing from the description. What does this typical home look like? It is somewhere between more traditional pre-World War II styles, postwar styles like ranches and split-levels, and more recent options like McMansions? How old is this typical home? While newer homes and features receive a lot of attention, many homes are at least a few decades old. And while the factor of the neighborhood is mentioned, where are people buying homes and then what is happening to these homes in terms of renovations and alterations?

Much of this also depends on local context. Given regional architecture plus the variation in housing markets as well as communities, finding the modal American house might just be near impossible. Perhaps there could be a set of typical American homes that could encompass some of the common variation.

More on the wealthy leaving cities, San Francisco edition

The flight of some out of New York City amid COVID-19 has attracted attention. This may also be happening in San Francisco:

city skyline during golden hour

Photo by Kehn Hermano on Pexels.com

Amid the depths of a global pandemic and financial downturn, the demand for real estate is unexpectedly rocketing in wealthy regions outside San Francisco, reports Bloomberg. Agents say that demand is soaring in affluent areas around the Bay Area such as Napa, Marin and further afield in Carmel, as people who have the means look to get away from the city. Meanwhile, the market in San Francisco and Alameda County is still well below where it was last year.

Elsewhere, Lake Tahoe has also seen a surge in real estate interest. The prospect of living out of the city on an alpine lake while maintaining a career is appealing for a new generation of young buyers, as many tech companies have signaled that remote work may be the new norm for a long time…

Meanwhile, the rental market in San Francisco has dropped significantly, with rates for one-bedroom apartments in the city dropping by 9.2% since June 2019, and hitting a three-year low.

However, buying a new home in an isolated haven in a nearby bucolic county is not an option for lower-income San Francisco residents, and some believe the trend is only exacerbating the wealth divide.

And, as noted in the final paragraph of the story, it is hard to know whether this is a long-term trend. But, this is one of the advantage of wealth and resources: residential options during times when many others are limited in where they can live. And this is not just limited to where they can live; it includes being able to travel back and forth easily, owning or renting multiple properties at the same time, and having all the resources for working from home.

More broadly, the evidence cited above is interesting in that people moving out of the city are not said to be moving very far. They are still within a drive of San Francisco/the Bay Area/Silicon Valley. Are people in the Bay Area more willing to stay close by or do they have to due to work (a need for at least some in the tech industry to be at meetings, see people and products, etc.)? Does this differ from New York City where many of those moving ended up in the suburbs while others left the metro region all together? Staying in driving distance changes the moving experience.

I am also imagining the possibility of a more significant migration than some wealthy people heading for the suburbs or other cool metro areas. What if Facebook said they want to get out of the petri dish of Silicon Valley, be a different kind of tech company that really wants to connect people, and picks up for Omaha or St. Louis or another smaller big city in the middle of the country? Clusters of organizations have particular synergies and efficiencies but if more workers are going to be at home, is there still the same need to locate near everyone else?

Related earlier post: the evidence for this happening in Washington D.C. may not be as strong.

Housing as the ultimate marker of poorly functioning (free) markets

Alexis Madrigal considers generational access to housing and the high real estate prices in some markets:

There are obviously many reasons that coastal housing markets have gone so bonkers. But it is an ironic twist that residential property, which once served as the bedrock for American capitalism, has become the most obvious sign for young people that something is deeply wrong with the markets.

What exactly has gone “deeply wrong” with these housing markets? Madrigal lays out a number of factors. But, I wonder if we could extend the analysis a bit further from “housing markets” to “economic markets” more broadly. Here is what two opposing sides might say:

One side: these housing markets with high prices have never truly been free. For decades, federal policy has privileged single-family homes. Local policies have made particular choices, often toward protecting property values and limiting density. Open up these markets to true competition. If affordable housing is needed, limit regulations and let all the money of potential buyers drive new development.

The other side: housing markets have not been regulated enough. The federal and local policies have tended to privilege certain actors – like the white middle-class and connected developers – over the needs of many working-class and poor residents as well as non-white residents. Policies aimed at providing more housing for all need more teeth and the ability to compel protected wealthier residents to accept development near their own homes.

As a sociologist who has studied this for over a decade, I tend to side with the latter argument: (1) markets are rarely ever completely and free and (2) the scales have been tipped toward whiter and wealthier residents for a long time. Perhaps the true lesson of these high-priced housing markets is that calls for regulation and oversight only go so far when property values and who neighbors are is truly at stake.

When your friends laugh at your new McMansion

A Reddit thread starts with the experience of a user who bought a new home for his family:

Hi! Long time lurker.

My wife and I are buying our first home for our small but growing family. We are moving to Laredo, Texas so our price range gets us quite a house.

we found one we really liked, and decided to put an offer on it. We think it’s beautiful, although I will admit a bit ostentatious.

I showed a friend, and they laughed and called it a “McMansion” and I googled what that meant and have to say I’m a bit embarrassed and find it kind of insulting.

I previously lived in SF, where I paid the same price for a 700sq ft studio, so I am struggling to see what was so much better about that, and my friend still lives in a studio there.

I guess my point is: are large newer homes all considered “McMansions?” Should I care what others think of it? I’m just concerned as perhaps this is just a bad investment as well.

Example: http://imgur.com/a/0zDiF

Three quick thoughts:

  1. The difference between the San Francisco and Laredo, Texas housing markets are substantial. What is common in one – and at what price point – is unlikely to match the other.
  2. The Internet is probably not going to provide much positive validation for buying such a home. Most comment boards I have seen regarding McMansions have ridiculed them, usually picking on their architecture as well as the type of people who buy them. There are a few defenders of McMansions in this thread. But, they are hard to find overall on the Internet.
  3. The pictures of the home provided through the link would probably put this into the McMansion category for many people. It appears to be a large house, the front facade is out of whack in terms of proportions, and the features are meant to impress (front columns, big entryway, shiny surfaces).

Can McMansions count as affordable housing in some markets?

A New Jersey fair housing group highlights a recent report that argued thousands of homes $300,000 and up counted as affordable housing.

On the face of it, this seems absurd: expensive large suburban homes might count as being within the reach of many Americans? Yet, there is the matter of the particular housing market that may affect such calculations. The priciest markets tend to be on the coast and whether one is examining the median sales price or the average list price (and this does matter – the median suggests half the homes sell for above and below that price and all 15 on this list are around $300k or higher), a $300,000 home might be difficult to find.

Now, whether such a home is within the reach of many in the region is another matter and it is likely not. Even with higher incomes in these metropolitan regions, there are still plenty of workers and residents who don’t see as much of a relative bump in their salaries. McMansions might be some of the cheaper homes available in pricier markets but that does not mean they are attainable.

Do any of these more expensive regions have interest in suggested plans to alter McMansions (see here and here) to make more cheaper housing? This would likely face opposition from nearby owners who would fight tooth and nail against any efforts to introduce multi-family housing.