Marcia Fudge, current Secretary for Housing and Urban Development, during her acceptance speech when she was nominated for the position. The White House has announced some measures to increase the supply of affordable housing, but in the author’s opinion, there is still a long way to go to avoid a repeat of a crisis like the one in 2008. PHOTO: Washington Post by Joshua Lott.
I have enjoyed another summer just a short drive from home. I have spent the last six weeks in rural Sullivan County, a very beautiful place in the Catskill Mountains, about two hours from New York City. Poverty levels are 25 percent higher than in the rest of the state, according to the latest census figures. Per capita income is just under $ 31,000, about $ 5,000 less than the national average.
And yet real estate prices in Sullivan County were up 32.8 percent year-on-year through July. Modest log cabins that cost $ 200,000 before the pandemic have been repainted and sold for twice that (or rented at boutique hotel prices). Cash offers have become common without ever seeing the property. The so-called Borscht area, as it was known for its hotels for Jewish vacationers between 1920 and 1970, has not seen such high demand since Eddie Fisher and Liz Taylor used to spend time there.
A part of this is due to the insanity of the Covid and therefore it will be reduced at some point. But the bonanza in the Borscht area is reflected in many parts of the country and speaks to the fact that, during the decade since the mortgage market debacle in 2008, housing continues to be the nucleus of the economic bifurcation in the United States. This is because in the US, houses are seen as much or more as tradable assets than as shelters.
Just as investors drove the housing bonanza before the financial crisis, they have also driven the post-pandemic rise in home prices, which has reached levels similar to the so-called foam before the 2008 bubble. property monitor Redfin, one of every six homes in the US, sold in the second quarter of 2021, has been acquired by investors.
And these are not just large institutional investors, although the large private equity firms did buy cheap properties during the first part of the pandemic, just as they bought foreclosed homes on the steps of the courts at the end of the financial crisis. Invitational Homes, founded and funded by Blackstone, became the nation’s top tenant. More recently, private equity has been acquiring multi-family rental units and even mobile home parks, using federal loans that were originally intended to benefit the poor.
Some of the investors driving the new mortgage bubble are simply wealthy city dwellers who have bought a secondary home to rent or resell. But both they and institutional investors have benefited tremendously from low interest rates and quantitative easing, not only since the beginning of the pandemic, but since times of the financial crisis. These central bank policies have bolstered equity and home prices. But they have also had a very distorting effect on many real estate markets where locals compete against city millionaires for access to their shelter.
In addition, this increases the levels of post-Covid job shortages evident in sectors such as travel, tourism, retail and other parts of the service industry. Suddenly, the Catskills have become Aspen – if you have to work there you probably can’t afford to live there. I can’t tell you how many “closed: no staff” signs I came across during my stay.
The pressure will be reduced in part once federal benefits run out and kids go back to school, particularly freeing female workers to take those jobs. And it remains unclear whether these new bonanza towns a few hours from the cities will retain their charm once the pandemic evaporates and some version of office life begins again.
But the fork in the housing market will be around indefinitely unless there is a paradigm shift. Loose monetary policy raises asset prices, but cannot generate income growth that allows people to invest and benefit from the measure. The supply of housing is restricted by many factors, ranging from high prices to a limited amount of available land, and also zonal requirements in overpopulated markets or a shortage of supplies due to Covid. So even if central banks change direction, it could be some time before the bubble bursts.
Ultimately, we need housing to be more affordable and available. The White House just announced some positive steps to increase the supply of affordable housing by providing greater access to available financing for manufactured home buyers. They have previously been unfairly limited in their allowable amount of indebtedness because their homes, which are manufactured and transported to mobile home locations, were considered “belongings,” such as boats or cars.
But studies show that this type of housing maintains its value like any other, particularly when it comes to cooperatives of resident owners, since those who live in these communities have incentives to improve the shared land and their properties, and also they divide the risks. I also agree with Biden’s recommendation not to allow large investors to access auctions for certain properties from the Federal Housing Administration and the Department of Housing and Urban Development. These programs were established to help families, not to finance private equity.
We could also try ideas like mortgage rates that vary depending on economic performance. If unemployment rises, growth slows, or the cost of housing changes dramatically, payments could change. This is an idea that has long been proposed by economist Rober Shiller, and that would allow for a better distribution of risk between borrowers and financial institutions.
Nobody wants 2008 to be repeated. A housing policy is required that makes homes what they should be: shelter.
Copyright – The Financial Times Limited 2021
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