Housing Market

Late Capitalism is coming for the last pillar of the American Dream

Bullseye (nationalrealestateinvestor)

Bullseye (nationalrealestateinvestor)

Today the Wall Street Journal and its dizzying “everything is fine” tone explored the booming sector of home-buying. We’ve built our entire economy and political cultural around homeownership in the US, so you can see why this could be a good thing. But it is not. It is a terrible thing.

That’s because the people buying these homes aren’t people at all. They are “sovereign-wealth funds, insurance companies, hedge funds, pensions, [and] asset managers” and they are buying bundles of single-family homes with the clear intention of renting them for the long-term. In fact, many of these groups are raising billions of dollars to expand their portfolios. 

I’ve written about how Wall Street is becoming a lot of peoples’ landlord, and how it exposes how fraudulent US housing policy is, but the trend is only getting bigger and scarier. The biggest players in this new market own thousands of single-family homes, mostly in markets like Atlanta, Phoenix, or Nashville where populations are growing. They are squeezing out many potential homeowners in the process.

The economics are clear and deeply cynical. Mega-financial institutions are taking advantage of the average American’s inability to buy a home because of high debts and low wages on the household-side and higher mortgage rates/prices and leaner inventories on the market-side. 

If that wasn’t bad enough, these institutions still reap all the government-subsidized benefits of homeownership that were designed to be passed along to families. I’ve written about the $134 billion the US government spends a year on subsidizing homeownership, most of which goes to wealthy home-owners already. It’s insanely wasteful and deeply unfair. But does anyone want a hedge fund to get tax breaks for owning a home and renting it out to a cash-strapped family?

Homeownership policy is broken. Housing policy is broken. Our economy is broken. Nothing screams this more than late capitalism’s calculated lunge towards single-family homes, the final pillar of the American Dream. Wall Street and the investor class get how broken our economy is and respond by exploiting it. And they aren’t even pretending to care about optics:

‘“The American dream no longer includes homeownership,” said Jordan Kavana, chief executive of Transcendent Investment Management LLC, a south Florida firm that has been a big acquirer of rental homes. “You will earn your equity in other ways, not your home.”’

I’m not sure where Mr. Kavana assumes this new source of equity will come from, but given that few Americans own stock and most draw their wealth from their homes, the options appear to be limited. But that’s your problem.

The new, frightening (and baffling) development is that many of these cash-rich entities are building new housing expressly for foreign owners — expressly as rental/investment properties. Mr. Kavana goes on to say that these investors “Get that this [homeownership] is the lynchpin of the American economy.”

The paradox of identifying (correctly) that homeownership is the lynchpin of the economy while actively subverting it goes unaddressed in this article, but it gets to the core of this market play. 

These institutions know that the game is up for most Americans. They know that many young Americans can’t (and won’t) afford to buy homes and many baby boomers will eventually be forced to sell. They know that special interests have frozen any ability to politically address the structural deficiencies in housing policy or for that matter the American economy. They know that at best politicians from both parties are going to pound their chests about homeownership, perhaps offer some empty new incentives around the margins, declare victory, and move on. They know that they can continue to reap the rewards of homeownership subsides while sitting on ever-increasing housing prices as the housing crisis grinds on.

They know that this is a cash cow for their shareholders and will be for a long time.

We should all be sounding the alarm at this outrage. It’s outrageous on the face of it as this new normal goes against everything that 80 years of bi-partisan domestic policy was created to foster (as flawed and racist as it was), but its even more outrageous given that we are only 10 years removed from the damage caused from the Great Recession — damage caused by many of these same actors under these same structural realities in housing. For many Americans, my generation included, we will never recover from it.

The Great Recession may have ultimately been triggered by the exotic and fraudulent nature of mortgage-backed securities, but it really happened because people couldn’t afford their homes.

That is even more true today: household debt is $13.2 trillion, which is half a trillion dollars higher than the previous record set in 2008. Real wages for the majority of Americans have barely moved in forty years. Wealth inequality has skyrocketed over that same period. Generational wealth passed though home equity is the only path for most first-time homebuyers, furthering racial and demographic wealth gaps.

What happens when the next downturn comes? Sure, it may actually benefit some families who don’t own their homes — these institutions can in theory weather it better than individual homeowners (or get bailed out before a homeowner would). They could lower rents to keep some cash coming in. In turn that could give families more flexibility and mobility. But somehow I don’t think the average American family will be that much better prepared than last time.

Housing policy rarely gets the attention it deserves, which is maddening and disheartening. There are certainly many fires and leaks spreading across the land, but it all starts with home. If our entire economy and political structure is built on the fundamental concept that you will own a home, then we are entering unchartered water if that stops being the case. There could be benefits for our economy moving away from homeownership, but simply turning it over to hedge funds and foreign investors could further destabilize our fragmented country while only benefiting a tiny sliver of the super-wealthy.

The investor class has taken nearly all of the wealth created over the last 30 years and gotten away with it. Now it’s coming for our homes and appears to be getting away with that too. If we lived in a healthier political climate with a clear moral north star, this would be met with bi-partisan condemnation. But if we’ve learned anything about late capitalism, it’s that no one is coming to save us. We must do it on our own.

The New York Times Doesn't Get the Housing Market

Wait, seriously? (newyorktimes)

Wait, seriously? (newyorktimes)

This week the New York Times published an article about how the national housing market “finally looks healthy” that was at best misleading and at worst irresponsible (it was also lazily edited).  The writer bases his argument on a joint release from the US Census and HUD that shows an increase in housing sales of 12% over last month and 31% over the same month last year.  On the surface, this could be a positive sign that the housing market is returning to ‘health’, but once you dig into the numbers, the picture is more complicated.  In fact, if this writer stepped back and examined the broader context of the economy, it would be hard to argue that we have a healthy market at all. This reveals a larger problem about how the media talks about the housing market and what it hasn’t learned from the 2008 crash.

Let’s start with the data from the joint report.  Though the article does point out that this data has a wide margin of error and is volatile, it still proceeds to use it as the core of the argument.  The problem is, this data does have a wide margin of error and is incredibly volatile because it’s based on a quick sample turnaround. You only need to look at the previous month’s release (June 2016) to see the difference in the July report’s revised totals.  They lowered the June numbers by 10,000 homes.   The report itself is clear about expectations and explains its methods and possible errors.  It also makes it clear that it takes a quarter to get an accurate sense of the trends within the market.  You can quibble with how different the data ends up being from what is currently reported, but the point is, this is a thin piece of evidence to base an entire argument on. 

Now, let’s just assume that the data is more or less accurate. We are still left with a more complicated picture than the article suggests, particularly when trying to compare the differences among regions.  Though the numbers are broken down into 4 regions, the raw numbers don’t show how wildly different the housing market is, even in certain parts of the same region.  For example, prices and availability for housing in and near NYC remain a competitive death-match while parts of Connecticut less than an hour from New York are struggling.   Does that mean the housing market is healthy?

The reality is that economic growth is happening in an increasingly smaller number of cities (and it’s almost exclusively cities) in certain pockets of the country that also have extremely expensive housing markets.  This is because of a limit in the supply of housing in these markets relative to the demand, whether as a result of geographical or political limitations. In either case, this situation is making it harder for middle class workers, let alone poorer workers, to be able to locate in these hot job markets. Hot job markets should create a housing boom, but that’s not what’s happening and it’s hurting our productivity as a nation.  That’s not the sign of a healthy housing market.  

This article also somehow neglects to mention (which is surprising given that the Times has covered this issue in another section recently) who is buying up a lot of these houses in certain market segments.  The entry of private equity firms into the housing market has been a quiet, powerful force building over the last 10 years.  Though the number of houses under control by private equity on a national level is relatively minor, the concentration of their portfolios in certain markets has had a huge impact on the perception of the housing market as a whole.  In many cases, they are buying up homes for straight cash.  They then rent them until the market reaches a certain point to flip them.  This speculation is perfectly legal, but it distorts the actual activity of house sales.

Also unaccountably left unsaid is the question over the financial health of the housing market.  No, another crash is not just around the corner, but the continuing receivership of Freddie Mac and Fannie Mae (who collectively back over 60% of US mortgages) has left the previous crash in an unresolved, frozen state.  Though many of the excesses that led to the crisis have been removed, the flawed assumptions underlying the housing market – that homeownership is a good political policy, that the government should support it as an economic policy - remain in place.  The fact that this policy costs taxpayers $150 billion a year while still failing to provide adequate housing for millions of Americans should challenge the assertion that this is a healthy market.  It’s not even a true market.

It is a mystery how the same paper that has addressed all of these issues at various times could allow an article to be published that breezes passed them all.  Maybe it’s just laziness or someone having an off-day, but it could also be someone pushing a narrative in search of story.   The media primarily talks about the housing market as an economic trend.  In doing so, it internalizes the assumptions of people who profit from the housing market regardless of how that process impacts the larger society and economy.  The housing market looked healthy, even robust, in the lead up to the 2008 crash, but underneath the sales numbers were real problems with earnings, financial instruments, and exploitation that went underreported until it was too late.  It is stunning and ultimately disappointing to see the Times revert back to this laziness and water-carrying.

It’s easy to cherry pick data from a report or to draw phantom conclusions from it, but it’s more important to report the full context of an issue to readers.  The housing market is not healthy.  Arguably it has never been healthy.  Trying to present it that way does a terrible disservice to the people that are suffering from it and to the people that are trying to solve it.