Residential property renewal
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Another summer was spent not far from home. I spent the past six weeks in rural Sullivan County, a beautiful place in the Catskill Mountains, about a two-hour drive from New York City. According to the latest census data, poverty levels are about 25% higher than in other parts of the state. Per capita income is slightly less than US$31,000, which is US$5,000 lower than the national average.
However, house prices in Sullivan County rose by 32.8% year-on-year in July. Ordinary wooden houses that might have sold for $200,000 or less before the pandemic were decorated and doubled (or rented out at boutique hotel prices). All-cash bids and invisible purchases have become commonplace. The borscht belt, known for its hotels catering to Jewish holidaymakers from about the 1920s to the 1970s, has not been that hot since Eddie Fisher and Liz Taylor wandered there.
Part of the reason is the madness of Covid, some of which will eventually abate. But the prosperity of borscht has been reflected in many parts of the United States, illustrating the fact that housing has remained at the center of the US economic divergence for more than a decade after the subprime mortgage crisis. This is because in the United States, houses are both a shelter and a tradable asset.
Just as investors promoted the real estate boom before the financial crisis, they also promoted the rise in housing prices after the pandemic, and housing prices have reached the level of the 2008 bubble. According to data from the real estate website Redfin, by the second quarter of 2021, investors have purchased one-sixth of the houses in the United States.
This is not all about large institutional investors, although many large private equity firms did buy real estate at low prices during the first phase of the pandemic, just as they did when they bought foreclosure houses on the steps of a court after the financial crisis. Invitation Homes, founded and operated by Blackstone, became the largest landlord in the country. Recently, private equity has been snapping up multi-family rental units and even mobile home parks, backed by federal loans that were originally designed to benefit the poor.
Some investors who are driving the new real estate bubble are just urban residents with ample cash. They bought a second home to rent or flip. But they and institutional investors have benefited a lot from low interest rates and quantitative easing, not only since the beginning of the pandemic, but also since the financial crisis. These central bank policies boosted the stock market and housing prices. But they have also had an incredibly distorting effect on many real estate markets, with locals competing with high-income urban residents for housing.
This in turn has exacerbated the post-Covid labor shortage problem, which has plagued American companies in areas such as travel, tourism, retail, and other areas of the service industry. Suddenly, Catskills became like Aspen-if you have to work there, you may not be able to afford to live there. I can’t tell you how many “closed: not helpful” signs I saw during my stay.
As federal benefits run out and children return to school, especially female workers who can free up time for work, this pressure will be partially reduced. It is unclear whether these emerging cities within two or three hours from major cities will retain their charm once the pandemic subsides and some form of office life resumes.
However, unless the paradigm changes, disagreements in the real estate market will accompany us indefinitely. Loose monetary policy raises asset prices, but cannot create income growth that allows people to invest and benefit from the measure. Housing supply is limited by various factors, from prices to limited land supply and zoning requirements for dense markets to Covid-related supply shortages. Therefore, even if the central bank changes its strategy, it may take some time for the bubble to burst.
After all, we need to make housing more affordable and usable. The White House just announced some good steps to increase the supply of low-cost housing by providing more financing to buyers of prefabricated houses. Previously, their loan lines were unfairly restricted because their houses were prefabricated and shipped to mobile home parks, which were regarded as “movable property”, such as boats or cars.
But research shows that these houses can maintain their value like any other house, especially when they exist as part of a cooperative structure for owner-occupied use, residents have the incentive to improve public land and property, and can share risks. I also support Biden’s proposal to restrict the sale of certain properties owned by the Federal Housing Administration and the Department of Housing and Urban Development to large investors. These projects started to help families, not to underwrite private equity.
We may also try some ideas, such as mortgage interest rates that change according to the performance of the economy itself. If the unemployment rate rises, growth declines, or housing costs change sharply, payments may change accordingly. This is an idea that economist Robert Schiller has been promoting for a long time, and it will allow financial institutions and borrowers to share risks more fairly.
No one wants to repeat it in 2008. We need a housing policy to make houses what they should be: shelters.