The US needs to make homes more affordable — and available


Residential property updates

Yet another summer has been spent within driving distance of home. I passed the last six weeks in rural Sullivan County, a beautiful place in the Catskill Mountains about two hours from New York City. Poverty levels are about 25 per cent higher than in the rest of the state, according to the latest census figures. Per capita income is just under $31,000, $5,000 below the national average.

And yet property prices in Sullivan County were up 32.8 per cent year on year in July. Modest wood cabins that might have gone for $200,000 or less prior to the pandemic were being dolled up and flipped for double that (or rented out at boutique hotel prices). All-cash offers and sight unseen buys have become common. The Borscht Belt, as it was once known thanks to hotels catering to Jewish vacationers from roughly the 1920s to the 1970s, hasn’t been this hot since Eddie Fisher and Liz Taylor hung out there.

Part of this is Covid madness, and some of that will eventually abate. But the Borscht Belt boom is mirrored in many parts of the country, and speaks to the fact that, over a decade on from the subprime meltdown, housing is still at the centre of America’s economic bifurcation. That’s because in the US, homes are as much a tradable asset as they are shelter.

Just as investors drove the pre-financial crisis housing boom, they have also driven the post-pandemic increase in home prices, which has reached 2008 levels of froth. Investors purchased one out of every six homes in the US in the second quarter of 2021, according to the property site Redfin.

This isn’t all about big institutional investors, though many big private equity firms did pick up real estate on the cheap during the first part of the pandemic, just as they bought up foreclosed houses on courthouse steps in the wake of the financial crisis. Invitation Homes, which Blackstone founded and floated, became the country’s largest landlord. More recently, private equity has been snapping up multifamily rental units and even mobile home parks, backstopped by federal loans that were originally designed to benefit the poor.

Some of the investors driving the new housing bubble are simply cash rich city dwellers who’ve bought second homes to rent or flip. But both they and institutional investors have benefited hugely from low interest rates and quantitative easing, not just since the pandemic began, but since the financial crisis. These central bank policies have bolstered both stocks and home prices. But they have also had an incredibly distorting effect on many real estate markets where locals are bidding against high-earning city dwellers to get access to shelter.

That in turn adds fuel to the post-Covid labour shortages plaguing US businesses in areas such as travel, tourism, retail and other parts of the service sector. Suddenly, the Catskills has become like Aspen — if you have to work there, you probably can’t afford to live there. I can’t tell you how many “closed: no help” signs I saw during my stay.

That pressure will abate in part as federal benefits run out and children go back to school, freeing up female workers in particular to take up jobs. And it remains unclear whether these new boomtowns within two or three hours of major cities will retain their charm once the pandemic fades and some version of office life resumes.

But the bifurcation in the housing market will be with us indefinitely, unless the paradigm changes. Easy monetary policy raises asset prices, but can’t create the income growth that allows people to invest and benefit from the measure. Housing supply is constrained by everything from prices to limited land availability and zoning requirements in dense markets to Covid-related supply shortages. So even after central banks change tack, it may take a while for this bubble to burst.

Ultimately, we need to make housing more affordable and available. The White House has just announced some good steps to increase the supply of lower priced housing by making more financing available for buyers of manufactured homes. Previously they have been unfairly limited in how much they can borrow because their homes, which are prefabricated and shipped to mobile home parks, are considered “chattel”, like boats or cars.

But research shows that these homes can hold their value just like any others, particularly when they exist as part of an owner-occupied co-operative structure, in which residents have an incentive to improve communal land and property, and can share risk. I’m also for Biden’s recommendation to limit the sale of certain Federal Housing Administration and Department of Housing and Urban Development-owned property to large investors. These programmes were started to help families, not underwrite private equity.

We might also trial ideas like mortgage rates that shift based on how the economy itself is doing. If unemployment goes up, growth goes down or the cost of housing shifts dramatically, payments might change accordingly. This is an idea that has long been pushed by economist Robert Shiller, and it would allow a more equitable risk-sharing between financial institutions and borrowers.

Nobody wants a repeat of 2008. We need a housing policy that makes homes what they should be: shelter.

rana.foroohar@ft.com

 



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