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.

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.

Building the ability to disperse billions in rental aid assistance in the US

Congress has allocated billions for rental aid assistance amid COVID-19 but it takes time and infrastructure to distribute it to American renters:

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With millions of Americans out of work due to the pandemic, the eviction moratorium helped keep people in their homes — but it also put a squeeze on landlords. To help, between the December and March COVID relief packages, Congress approved more than $46 billion in rental assistance. Exact amounts renters and landlords can receive depend on their income and where they live, but renters could get enough to cover rent from as far back as March 13, 2020, unpaid utilities and even, in some cases, future rent.

But by the end of May, only $1.5 billion had gone out. And officials are racing against the clock: The federal eviction moratorium ends July 31…

“While we have substantial funds through the American Rescue Plan, we as a nation have never had a national infrastructure to prevent unnecessary evictions,” White House American Rescue Plan Coordinator Gene Sperling said recently during an eviction prevention summit.

While there had been some state and local rental assistance programs, the scale of this program was beyond what they’d handled, a Treasury official said. State and local entities had to build IT systems and hire staff. Some programs did not even open until May or June — but since opening, a Treasury spokesperson said, there has been an exponential increase in renters getting money. Landlords and renters can apply directly for funds through their states, counties and in some cases tribal authorities depending on where they live.

Unprecedented times lead to unprecedented processes? Putting the money into the right hands in a timely manner is no easy task. The steps include:

-approving the monies and making it available

-letting people know that the money is available

-encouraging applications

-processing applications

-disbursing funds

-applying the funds to rent

-overseeing the program during the process and afterward

If it comes together, millions of Americans will be able to stay in their housing and landlords will rent they were waiting for.

Now, to tackle the broader issues of affordable housing in helpful locations…

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.

Asking in San Francisco why a McMansion is allowed but a fourplex is not

McMansions may not just be undesirable on their own. If a McMansion is built, another kind of dwelling is not. One proposal in San Francisco aims to address this:

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He will introduce an ordinance making it much harder to build giant homes — the ones increasingly dotting the hillsides above Glen Park that many San Franciscans deride as monster homes or McMansions, but which are perfectly legal to build.

He will also ask the city attorney to draft legislation making it legal for any corner lot in the city that’s currently slated for one home to allow up to four units. And, most significantly, the legislation will allow any parcel within a half mile of a major transit stop like the Glen Park BART Station to be converted into a fourplex — corner property or not. The extra units could be rented or sold.

Yes, in large swaths of San Francisco — this supposedly progressive bastion — it’s currently legal to build an enormous, over-the-top house for one family, but illegal to build a small apartment building of the same size for four families.

This question plagues many desirable neighborhoods in big cities and suburbs: should anything that disturbs the existing character and/or property values be allowed? If this is the driving question, a McMansion might be a threat because it is a different kind of home – derided by critics as too big, architecturally incoherent – compared to what is already there. At the same time, the McMansion is still a single-family home. If that single-family home was replaced by a multi-family unit, residents then express concerns about increasing densities. They might also have concerns about renters moving into what was a neighborhood of homeowners as many Americans assume renters are less committed to their community.

And, as the article notes, making changes like this often means neighborhood by neighborhood conversations to consider the implications. Will a change have different impacts in different communities? What might be some of the unintended consequences? What will neighborhoods look like in a few decades with changes?

San Francisco may have a particular need for solutions but so do many other locations. The answers might come slowly on a case-by-case basis.

17% of millennial homebuyers regret the purchase (but perhaps 83% do not??)

A recent headline: “17% of young homebuyers regret their purchase, Zillow survey shows.” And two opening paragraphs:

Seventeen percent of millennial and Generation Z homebuyers from ages 18-34  regret purchasing a home instead of renting, according to a Zillow survey.

Speculating as to why, Josh Lehr, industry development at Zillow-owned Mortech, said getting the wrong mortgage may have driven that disappointment. For example, the Zillow survey showed 22% of young buyers had regrets about their type of mortgage and 27-30% said their rates and payments are too high.

The rest of the short article then goes on to talk about the difficulties millennials might face in going through the mortgage process. Indeed, it seems consumer generally dislike obtaining a mortgage.

But, the headline is an odd one. Why focus on the 17% that have some regret about their purchase? Is that number high or low compared to regret after other major purchases (such as taking on a car loan)?

If the number is accurate, why not discuss the 83% of millennials who did not regret their purchase? Are there different reasons for choosing which number to highlight (even when both numbers are true)?

And is the number what the headline makes it out to be? The paragraph cited above suggests the question from Zillow might be less about regret in purchasing a home versus regret about owning rather than renting. Then, perhaps this is less about the specific home or mortgage and more about having the flexibility of renting or other amenities renting provides.

In sum, this headline could be better. Interpreting the original Zillow data could be better. Just another reminder that statistics do not interpret themselves…

More upper middle class Americans are renting rather than owning

Homeownership is down in recent years in the United States (with a recent uptick) and this has affected even among relatively high-income earners:

Families such as the Bauerles who want to live in solid middle-class neighborhoods with good schools and reasonable commutes are increasingly renting single-family homes. Taking advantage of this trend, the private-equity firm Blackstone Group Inc., with other investors, launched a business that is now the nation’s largest renter of single-family houses.

The number of households that have inflation-adjusted annual incomes of $100,000 or greater but are renters nearly doubled from 2006 to 2016, according to the Joint Center for Housing Studies of Harvard University.

Domonic Purviance, a senior financial specialist at the Federal Reserve Bank of Atlanta, said people earning the median income can no longer afford the median-priced new home, costing $323,000 last year, and barely have the means to buy the median existing home, which now about $278,000.

The overall focus of the article in on the major sources of debt facing middle-class families today: housing, student loans, and cars. Out of this trio, the suggestion is that mortgage debt may come last out of these three. Many believe they need a college education (at least) for decent jobs and to maximize their earnings. A car loan is often a top priority as driving is necessary in many locations. Even if the majority of Americans desire to own a home, they can put that off until later.

Hence, renting is on the rise. This raises two big questions in my mind:

1. It could be interesting to see in the next few decades how upper middle class residents react to not having as easy access to homeownership. Will it turn them off to owning? Will they feel resentment and, if so, who do they think is to blame? Will this change spread to other groups since the upper middle class is one hat others would aspire to?

2. For the middle class and above, renting is often viewed negatively, particularly in wealthier communities. The perception is that renters are less invested in their community and property. If more people of means rent single-family homes instead of own them, could perceptions change?

New apartments in the US also getting smaller

As the median size of new homes in the United States drops, so does the size of new apartment units:

According to a recent analysis of apartment sizes by RentCafe, newly built apartments, in general, are 5 percent smaller than those built 10 years ago. The average U.S. unit built in 2018 boasts 941 square feet, down roughly 52 square feet. According to the study, Chicago ranks third in the nation for the smallest average apartment sizes (a tie with Manhattan at 733 square feet).

Census Bureau data from 2017 on the median square footage of multifamily units suggests something similar with a drop from a peak in 2007.

Three quick responses:

  1. While the square footage is dropping, I assume the rental price has not dropped at the same rate. Fewer square feet for the same or a higher price?
  2. According to the same Census data, more multifamily units were constructed in 2017 than in any year in the table (going back to 1999). Do smaller units mean builders and developers can now squeeze in more units?
  3. This data from RentCafe is connected to a rise in microapartments. The Census data suggests the percent of multifamily units under 1,000 square feet has not increased over 10 years between 2007 and 2017.

So is there a significant trend toward smaller rental units? Maybe a small one that could be worth watching but it could take quite a bit of change for microunits to really be built in large numbers.

When the landlord for a single-family home is an institutional investor…

Alana Semuels explores what happens when you rent a house from an institutional investor:

I talked with tenants from 24 households who lived or still live in homes owned by single-family rental companies. I also reviewed 21 lawsuits against three such companies in Gwinnett County, a suburb of Atlanta devastated by the housing crash. The tenants claim that, far from bringing efficiency and ease to the rental market, their corporate landlords are focusing on short-term profits in order to please shareholders, at the expense of tenant happiness and even safety. Many of the families I spoke with feel stuck in homes they don’t own, while pleading with faraway companies to complete much-needed repairs—and wondering how they once again ended up on the losing end of a Wall Street real estate gamble…

As the industry started to grow, the major players all described their desire to standardize and improve the business of being a landlord. But even to the companies’ employees, the effort to become more efficient started to look more like craven attempts to squeeze tenants. “It shouldn’t be just about making money, but that’s what it turned into,” Shanell Hanson, who was a property administrator for Colony American Homes in an Atlanta suburb from 2014 to 2016, told me. Hanson said the company had six maintenance workers for 2,100 homes in the area she managed. Residents would frequently call with substantial problems: Sewage was overflowing, or the house was full of mold. But with such a small staff, Hanson could rarely deal with the problems quickly. And the law was on the corporations’ side: If tenants want to seek financial remedy for a landlord not keeping the property in adequate condition, under Georgia law, they have to take the landlord to court, a costly and lengthy process. “It’s almost impossible to do without an attorney,” Lindsey Siegel, an attorney at Atlanta Legal Aid who works on housing issues, told me…

Many other single-family landlord companies were cutting corners on maintenance and repairs. “As the corporation got bigger, it just got worse, in terms of what we had to work with and how we had to deal with problems,” a former Los Angeles leasing agent who worked for Waypoint between 2015 and 2017 told me. (She spoke on the condition of anonymity because she still works in real estate.) Regional teams received bonuses for keeping costs low, she said, which incentivized them to skimp on spending. Instead of responding to tenants personally, supervisors would send calls for maintenance to out-of-town call centers—which would in turn assign maintenance workers dozens of repairs in a day, not realizing that Los Angeles traffic could mean that relatively short distances could take hours to traverse…

Tenants also say that rather than taking advantage of economies of scale, the rental companies are taking advantage of their clients, pumping them for fines and fees at every turn. This impression is backed up by the financial reports of the companies themselves. American Homes 4 Rent increased the amount of money it collected from “tenant charge-backs” (essentially billing tenants for repairs after they move out) by more than 1000 percent between 2014 and 2018, according to company earnings reports, though it only grew the number of homes it owned by 70 percent over that period. In some states, Invitation Homes keeps the utilities in its name, and charges tenants a monthly $10.99 “utility service fee,” which is in addition to the cost of water, gas, and electricity. The company increased its “other property income”—the amount it collected from resident reimbursement for utilities, service charges, and other fees—by 114 percent between the first nine months of 2017 and the first nine months of 2018, despite only growing the number of homes it owned by 71 percent. On an earnings call in 2017, Invitation Homes’ then-CEO John Bartling said that “automated charges to residents” drove profits in the quarter, leading to a 22 percent increase in “other income.”

I wonder how much of these issues are due to overwhelming emphasis in the United States on homeownership rather than renting. Do large companies think they can do this to renters because the long-term goal is to sell the property for a large sum to a homeowner (or another investor)? Similarly, do renters put up with this for a longer period of time because they expect to leave the rental market? Or, perhaps in markets where renting is more common and more rental units are available, renters would leave these situations sooner and institutional investors would have to do more to keep renters?

I would also be interested in more information on the profitability of such companies. How lucrative is it to purchase thousands of homes? While Americans historically are opposed to government involvement in housing (unless it is subsidizing suburban single-family homes), stories like these seem like they could be used to justify more government intervention in regulating housing. But, what if regulations cut into profits? The housing industry is a large and profitable one.

Another angle to take here would be to examine how these institutional investors do or do not contribute to local communities. One justification of homeownership in the United States was that it gave owners a stake in their local community and government. Yet, much capital in the world today is global and real estate decisions made thousands of miles away could heavily influence smaller communities that look like – they are full of single-family homes – they are constructed to emphasize local control.

If “Ninety percent or so of renters still want to become homeowners,” what could this lead to?

Financial pressures might have pushed more Americans toward renting and lower rates of homeownership but that does not mean attitudes have shifted away from homeownership. From an overview of housing ten years after the burst housing bubble:

“There’s a remarkably high preference for homeownership that shows up in every survey of renters,” says Chris Herbert, managing director of the Joint Center for Housing Studies of Harvard University. “Ninety percent or so of renters still want to become homeowners. Certainly, young people are moving into homeownership more slowly, but that’s because of a host of reasons such as marrying and having children later, a reduced ability to save since the recession and that it’s harder to get a loan. It’s not because of a fundamental change in attitude.”

Let’s assume this desire for owning a home continues for at least a few years – and this is a consistent desire across multiple decades already. What might this lead to? Two different paths:

  1. The economy improves to the point where those who want to buy a home are able to. This may be difficult to imagine given the availability of high-paying jobs plus the return of housing prices to 2000s levels. Yet, homeownership has been higher in the past and might be again in the future as this is what Americans want. Historically, the federal government has helped Americans reach this goal.
  2. A changing economy plus high housing prices mean relatively few of those who want to own a home will be able to. Younger adults become frustrated by their inability to purchase a home, particularly compared to previous generations. They take out that frustration in various ways, perhaps including higher levels of stress or taking it to the polls (though I argue it will be difficult to have a national conversation about housing and proposals to address housing are often unpopular).

The homeownership rate will be very interesting to watch in the next ten to twenty years. While Americans promoted homeownership for over a century now, there is no guarantee it has to continue into the future if conditions make it very difficult for average residents to buy a house.