Residential property update
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Yet another summer was spent within driving distance of home. I’ve spent the past six weeks in rural Sullivan County, a beautiful place in the Catskill Mountains about two hours from New York City. According to the latest census data, poverty levels are about 25% higher than in the rest of the state. Per capita income is just under $31,000, $5,000 less than the national average.
However, real estate prices in Sullivan County were up 32.8% year over year in July. Modest wooden cabins that could have cost $200,000 or less before the pandemic are loaded and flipped over for twice as much (or rented out for boutique hotel rates). All-cash offers and invisible purchases have become commonplace. The Borscht Belt, as it was once known for its hotels catering to Jewish visitors from about the 1920s to the 1970s, hasn’t been this hot since Eddie Fisher and Liz Taylor hung out there.
Part of this is the madness of Covid, and some of it will eventually subside. But the boom of the Borscht Belt is reflected in many parts of the country, and speaks to the fact that, more than a decade on from the subprime crisis, housing remains at the heart of the segment of the American economy. . That’s because in the US, homes are a tradable asset just as much as they are a haven.
Just as investors fueled the housing boom before the financial crisis, they’ve also fueled the rise in post-pandemic home prices, which hit all-time highs in 2008. According to the real estate website Redfin property, investors bought one out of every six homes in the US in the second quarter of 2021.
This isn’t all about big institutional investors, though many large private equity firms bought real estate cheaply in the early stages of the pandemic, just as they bought foreclosed homes. collected in court steps after the financial crisis. Invitation Homes, founded and emerged by Blackstone, became the country’s largest landowner. More recently, private equity has attracted multi-family rentals and even mobile home parks, backed by initial federal loans designed to benefit for the poor.
Some of the investors driving the new housing bubble were simply cash-rich city dwellers who bought second homes to rent or transfer. But both they and institutional investors have benefited greatly from low interest rates and quantitative easing, not only since the pandemic began, but since the financial crisis. These central bank policies have supported both stocks and house prices. But they also have a surprisingly distorting effect on many property markets where locals are bidding against high-income city dwellers for housing.
That fuels the post-Covid labor shortages that are affecting US businesses in sectors such as travel, tourism, retail and other parts of the service industry. Suddenly, the Catskills became like Aspen – if you had to work there, you might not be able to afford to live there. I can’t tell you how many “closed: no help” signs I’ve seen during my stay.
That pressure will ease somewhat as federal benefits dry up and children return to school, especially unemployed female workers. And it remains unclear whether these new boom zones within two or three hours around major cities will retain their charm as the pandemic fades and some versions of office life resume. are not.
But the fragmentation in the housing market will stay with us indefinitely, unless the pattern changes. Monetary policy easily increases asset prices, but cannot produce the income growth that allows people to invest and benefit from this measure. Housing supply is constrained by everything from price to limited land and zoning requirements in crowded markets to Covid-related supply shortages. So even after central banks change their strategy, it may take some time for this bubble to burst.
Ultimately, we need to make housing more affordable and available. The White House just announced some good steps to increase the supply of lower-priced housing by providing more financing to manufacturer buyers. In the past, they were unfairly limited in how much they could borrow because their homes, prefabricated and delivered to mobile home parks, were considered “chattels,” like boats or umbrellas. Bowl.
But research shows that these homes can hold their value just like any other, especially when they exist as part of an owner-occupied cooperative structure. whereby people have an incentive to improve their land and common property, and can share risks. I also follow Biden’s recommendation to limit the sale of certain properties owned by the Federal Housing Administration and the Department of Housing and Urban Development to large investors. These programs are started to help families, not private equity guarantees.
We can also try ideas like mortgage rates that change based on how the economy is doing. If unemployment goes up, growth slows down, or housing costs change dramatically, payments could change accordingly. This is an idea that has long been promoted by economist Robert Shiller, and it would allow for a fairer sharing of risk between financial institutions and borrowers.
Nobody wants a 2008. We need a housing policy to make homes what they should be: shelter.