There’s A Storm Coming, Mr. Wayne
Homes. People need them, but people can't afford them.
That rather unfortunate state of affairs, which is more or less pervasive across the developed world, will become completely untenable at some point.
As a general rule of thumb, the price of necessities can't outstrip the financial wherewithal of everyday people such that the middle-class becomes impecunious, the impecunious outright poor and the poor destitute.
If you, as a government or as a modern aristocracy, countenance (let alone e
I always hear about the problem with hedge funds buying up and owning a large portion of the single family homes as a reason for the unaffordability. Is there much truth to that?
A lot of institutional investors are targeting rental properties because they can buy at scale and there’s no rent controls in most parts of the country.
15-20% as I recall. They buy to rent them out.
Local NIMBY zoning restrictions also play a role.
The largest affordability remains high interest rates.
Not “hedge funds”, but institutional investors – can be publicly traded REITs, private REITs, private equity, etc.
Impact depends on region. Investors like metros where they can own large numbers of newer houses (10-15 years old) with no rent control. They don’t want to deal with old houses. In recent years, in some metros, investors have been as much as 25% of SFR purchases, buying with cash, crowding out ordinary home buyers. Increasing trend is “build to rent”, where homebuilder will build an entire subdivision pre-sold to an investor.
Institutional investors are good at maximizing rent increases. Since they own thousands or tens of thousands of houses and have leasing, maintenance, etc in-house, they can/do push rent increases to the max and don’t mind the resultant tenant turnover.
Read 10Ks from INVH or AMH for more info.
This whole housing investment thing is really nothing new my grandfather owned tenement housing along the Merrimack River in the 1930s onward. He rented the apartments to poor mill workers. My favorite doctoral prof owned a private REIT. He owned all the common stock and many of his colleagues owned some to the preferred stock. In the later 1960s there were more than a hundred properties in the fund worth over $150 mil. In fact, I got involved in one deal this fellow made and in a few weeks he became my landlord and made millions in five properties he bought from the developer of my place and four other large complexes. I have no idea why this sort of thing would be objectionable. After all one can’t rent unless someone owns the property one wants to occupy for rent.
BTW, sir, I really look forward to reading your regular contributions. They are always informative.
I have no objection to large investors owning multifamily housing. Who else should own them? Ordinary (middle class) families can’t easily own an apartment building.
My objection to large investors owning single family houses is because that is the last major asset class in the US that is still mostly owned by said ordinary people. Our system of fixed-rate long-term GSE-backstopped non-recourse tax-deductible highly-levered mortgages is designed to make home ownership accessible to ordinary people, as a investment that they can live in, with the security of title and fairly predictable housing cost, and use to build wealth for their old age.
As faulty as the system is, in a society with few safety nets for the elderly, it is very important. I would not like that last asset class to be taken over by the wealthy and their institutional investors. They already own everything else.
I also think, parochially,
that neighborhoods are generally better off with high percentages of owner-occupants.
I think that for rent affordability, right now is close to as good as it gets – even if it isn’t that good – because apartment completions are at new highs while permits and starts have fallen to pre-pandemic levels. Permits peaked Jun 2022, starts peaked Nov 2022, figure with pandemic delays it took, has taken, takes, is taking, will take, etc two-ish years from start to completion, completions should peak in late 2024/early 2025.
https://fred.stlouisfed.org/graph/?g=1lxt7
Apartment REITs are reporting 1Q. Blended rent growth about flat, -LSD decline in new lease pricing offset by +LSD increase in renewal pricing. Pricing may be improving (for the landlord) based on 2Q so far. Deal flow has been thin. Competing investor money looking to buy apartment buildings and willing to take 4.5% to 5.5% cap rates for now. The REITs can build at 6.5% cap rates so they are looking for better deal pricing. Jobs generally good especially in Sunbelt, buying is too expensive, so rental demand high. Even in the currently oversupplied Sunbelt, the wave of new supply is being absorbed well. So developers are not in as much default distress as hoped. Strong demand, strong absorption, high investor interest are supposedly leading banks to extend on their multi-family CRE loans. Expense inflation is high, from property taxes and insurance, so a damper on net operating income, but some of that might be one-time. The REIT part of this industry is looking forward to 2025 and beyond, when new supply is expected to slow down and they hope to resume driving rent inflation in more like the manner to which they are accustomed. In the meantime the big REITs are issuing debt at 5.5% effective yields.
This doesn’t sound longer term disinflationary.
The fourth largest metropolitan area is not on the list: Houston.
I noticed that too. Also #6, Philadelphia.
Sadly, in the USA, resentment against the unaffordability of housing will benefit right-wing populist parties. It’s clearly the fault of asylum seekers being given free apartments by Biden. (Do a websearch.)
And have you noticed the growing resentment against the homeless where you live? No doubt, Jesus is happy when he sees his followers trample on the already downtrodden!
There’s the homeless, and there’s the homeless-industrial complex. The latter has rapidly become one of the larger industries in my city, and among the least efficient and least effective.
That’s the same argument often made about private-pay addiction treatment services. Some sectors just don’t appear to be amenable to “private sector solutions.”
To wit, healthcare: https://finance.yahoo.com/news/walmart-shuttering-health-units-including-telehealth-and-51-clinics-202051397.html
I’m not making a comment about private market solutions to homelessness, but about the public entities that are addressing homelessness. In my city, they are a case study of disarray, infighting, dis-coordination, and ultimately very high spending for very little result. Last time I checked, it was costing taxpayers $7,000/mo per shelter cot. No wrap-around services, just a cot on a concrete floor and the homeless person can’t even spend the day there, only sleep there at night.
In many cases the issue is supply. Zoning and NIMBY has prevented more dense development of affordable and appropriate housing to be built near where there is demand for employees. The lack of this type of housing for younger and less wealthy folks drives the prices of all but the most high-end housing way up. When the public service people such as teachers, fireman and cops; the younger adults- plus the folks that actually fix and repair things disappear maybe more people will wake up.
This may be region-dependent.
In my city, the supply of appropriately zoned and located land is not a limitation. The main problem is the cost of construction, which last time I checked was running $300/sf for the typical 4+1 building (four wood-framed floors above a concrete ground). For a 1,000 sf (2-bdrm) unit, hard costs plus soft costs, financing cost, developer profit at a decent cap rate implies rent in new construction is around $2,500/mo. The permit process and associated fees are other problems.
Basically, it is uneconomic to provide lower-cost housing through new construction here. Affordable housing, outside of subsidized regulated-affordable housing, is in our older buildings.
Add in ever rising insurance costs or just availability to get insurance, this limits housing affordability and available housing. It’s not just Ca with wild fire risks, it’s cheaper areas like Fla with hurricane risks. Yes, there’s a “Storm” a brewing.