Housing Hubris: Can Home Prices Spiral upward Forever?
For the Wall Street sequel, the subtitle was Money Never Sleeps. But the Oliver Stone reprisal of Gordon Gecko was the stuff of 2010. In America, a decade plus ago, money slept. Now, it truly doesn’t, with cryptocurrency prices gyrating 24/7/365. This frantic activity has spread to other asset markets.
Once real estate was stable and slow moving. Buyers would walk through a home, and walk it again with someone they trusted, before making an offer. But, as Francesca Mari titles his lengthy New York Times Magazine article, “In Austin and cities round the country, the crazy real estate market has forced regular people to act like speculators.” He wonders, “Will home buying ever be ‘normal’ again?”
Mari’s piece chronicles the trials and tribulations of millennials (who are now the largest generation) simply trying to buy a home. In some cases, the offers are made long distance on the basis of images from their computer screens. Nationwide home prices have soared nearly 25 percent. But, where the jobs are, in medium-size metropolitan areas such as Boise, Phoenix, Austin, and Salt Lake City, prices have soared 46 percent, 36 percent, 35 percent, and 33 percent, respectively.
Amena Sengal and her husband, Drew, did what 63 percent of North American home buyers in 2020 did, making offers on homes they had never visited. Covid has forced buyers to speed up. The flood of millennials demanding homes is facing a supply shortage of 3.8 million housing units according to Fannie Mae and Freddie Mac. Plus, there are investors, who are buying one of every six homes, to compete against.
Followers of the Austrian school are likely saying, “This is a repeat of 2008. Low interest rates lead to malinvestment, and this boom will lead to bust again.” However, there are no cheap, easy-to-qualify-for loans to fuel this boom. Mortgage rates are low, but the loans are hard to obtain. And builders are being stingy with supply and in some cases building neighborhoods that will be entirely rental homes.
Local government policy is steering the market in the opposite direction this time. Mari explains that there is “high demand, low supply and a dysfunctional economy in which wages are stagnant while restrictive zoning and poor public policy have turned housing into an artificially scarce commodity.”
And then there is the pandemic. “After a decade of too little development, the pandemic made the low inventory lower. Construction stopped,” Mari writes. “Sellers, afraid of inviting the virus into their homes or reluctant to move in uncertain times, didn’t list, and inventory declined by nearly a third from February 2020 to February 2021, falling to the lowest level relative to demand since the National Association of Realtors began record-keeping almost 40 years ago.”
Neighborhoods don’t want poor people living next to them. So, builders pitch higher-end product to city hall in order to gain approvals. The result: “An estimated 65,000 starter homes were completed nationwide in 2020, less than a fifth of the number built annually in the late 1970s and early 1980s.”
With technology and financialization, the result is “[w]e’re gamifying real estate investment to the point that it’s almost like throwing money at the stock market,” a thirty-five-year-old tech worker told Mari. The days of paper and ink are over. It’s FaceTime, DocuSign, and electronic fund transfers, making everything seamless. Real estate money can now move easily, meaning your parent’s real estate investing—stability and relative slowness—is no longer true.
What does ring a bell from 2008 is today’s Austin office market. Somewhere between 6.2 million to 9 million square feet of office space is being built downtown. “And it’s being built, like, it’s not occupied. So those jobs are coming. People are telling me, like, Oh, you know, we peaked…. As far as the metrics, the Texodus is not slowing down. We’re about to get a tidal wave,” Matt Holm, Austin’s “Tesla realtor” told Mari. He continued his bullish banter, citing the Elon [Musk] effect. I remember billions of dollars’ worth of casinos in Las Vegas were being built in 2008. They didn’t all get finished and one, the Fontainebleau, has just restarted construction, thirteen years later.
Another red flag is the number of investors in Mari’s piece who have or intend to turn their purchases into Airbnbs (short-term rentals). Holm the Tesla Realtor is quoted as saying about one investor, “He doesn’t take any Airbnb bookings that don’t gross rent $30,000 a month.” Really? A thousand dollars a day, every day? Neighborhoods hate short-term rentals, and in many municipalities vocal opponents will force governments to ban or restrict them.
And, of course, Mari’s story is full of people leaving perfectly good jobs to sell or invest in real estate or provide online courses on how to invest in property. For instance, Stephanie Douglass loved teaching fourth graders, but, “Remodeling this house was the first time I had been passionate about anything,” Douglass told Mari. With real estate, “I’d figured out how to take control of my life, and it was insanely exciting. I thought, This is cool, and everyone needs to know there’s another way.”
Another example of how booms lead to malinvestment. In this case labor.
In September Michael Kolomatsky wondered, “Is the Seller’s Market Over?”
Market dynamics are certainly different, but the hubris looks very familiar.