In a note to clients earlier this month, Goldman Sachs forecasted that four American cities in particular should gear up for a seismic decline compared to that of the 2008 housing crash.
San Jose, California; Austin, Texas; Phoenix, Arizona; and San Diego, California will likely see boom and bust declines of more than 25%.
Such declines would rival those seen around 15 years ago during the Great Recession. Home prices across the United States fell around 27%, according to the S&P CoreLogic Case-Shiller index…
In 2023, the investment bank expects home prices to barely fall in cities like New York (-0.3%) and Chicago (-1.8%) while predicting higher prices in Baltimore (+0.5%) and Miami (+0.8%).
It make sense that a company interested in investments and finance would want to make such a prediction. Will it change people’s behavior? A few ways this might matter:
-Local homeowners try to sell now before the big decline or prepare to stay put longer so they can see an increase in values. Either way, the supply of homes for sale is affected.
-Builders and developers reduce their construction and plans. They wait to see how long such a decline lasts. They hope to weather this and have higher profit margins later.
-Local governments steel for the impacts to tax revenues and population growth.
-People who might consider moving to or investing in the area reconsider. Would lower housing values make the area more attractive? (This might conflict with fewer homes for sale.)
Does such a prediction become a self-fulfilling prophecy to some degree as people wait for the drop in home prices?
Thinking more about yesterday’s post on cooling home values in certain housing markets, how many people benefit from the lower prices? The typical emphasis in such economic times is to note the difficulty of buying a home when interest rates are higher and there is economic uncertainty.
But, lower prices means some might be able to buy when they could not otherwise. The hottest markets in good economic times have high prices and lots of competition. Even as borrowing money is harder in a recession, prices can be lower and the competition might not be as stiff.
Some people are still buying and selling homes during economic downturns. This leads to a long-term question: are those who buy during a recession more or less likely to hold tightly to the idea of a home as an investment? Is buying at the height of the market – famously, such as right before the housing bubble burst in the late 2000s – tied to a deeper focus on property values and a strong return on investment? Or, because a home purchased during a recession might emphasize scarcity and economic uncertainty, might this lead to more concerns about property values?
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.
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.
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.
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.
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:
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?
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.
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?
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.
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.
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.
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?
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.
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