Thursday, August 18, 2016

House, House, House

Continuing low interest rates and inventory short-falls in some major U.S. cities continue to fuel sustained demand by home-buyers. Historically low interest rates have been the driver of rising home prices as the above chart illustrates. But take the above chart farther into 2016 and you will see the beginnings of the housing bubble beginning to burst – not remotely as bad as what happened in the recent Great Recession – but a downturn nonetheless.
The really interesting part of the above trendline analysis is the gray marker: the home ownership affordability index. With a contraction in the middle class, too many young people unable to contemplate home ownership under the burden of student loans, and 70% of American workers earning less in buying power, year-after-year for decades, something obviously has to give. Strangely, younger workers still want a home someday, and while few can afford even a starter home, most actually figure that their first purchase “someday” will be more than that minimalist stripped down vision of a “first home.”
Other variables are at work as well. Brexit took down real estate prices in England, particularly in mega-pricey high-end London neighborhoods. This rippled through the global high-end market, particularly where foreign buyers are over-represented. The Panama Papers effect – where money laundering fomented anonymous companies that sucked up high-end real estate – has generated global governmental scrutiny. In the United States, for example, the feds are looking at all cash transactions in high-end real estate in New York City and the Miami area. In Miami, at least, the high-end market just tanked.
Even if interest rates stay the same, experts are telling us that overheated markets, particularly in California (Silicon Valley, San Francisco and Los Angeles), will “feel the burn” starting now. For some, there is a suggestion of increased affordability. For others, gathering that down payment is still a non-starter. They still have to rent… or live with relatives.
We’ve also created an incentive for excessive borrowing, and the government has even stepped in to guarantee a sizeable portion of the bond market (not the banks! Loans from banks are bundled and sold into the bond market) that fuels these lending practices. The August 18th Economist explains: “Because housing is seen as one of the few ways in which less-well-off Americans can accumulate wealth, there is an inbuilt political pressure to loosen lending standards. As a result, housing crises are a recurring feature of American life. Before the subprime debacle in 2008-10, there was the savings-and-loans fiasco in the 1980s. Since the crisis the share of households that own their property has fallen from 69% to 63%. Rather than welcoming this as a sensible shift towards renting, Donald Trump and others have portrayed it as a disgrace. Because global investors are hungry for safe assets, any bonds with an American guarantee are snapped up, adding to the incentive to borrow.” Oh, my aching taxpayer!!!
Further, as home ownership still eludes an increasing number of people in this country (per the above numbers), even with the inevitability of a growing downturn in real estate prices, the rental market continues to fly upwards. So it comes down to an increasing population, many moving out of the suburbs back to the core cities for commuting and employment reasons, with not enough housing to satisfy demand. It is a rather huge issue that few are talking about.
California is particularly complex. Addressing this housing shortfall, the state legislature passed a statute enabling people to build rental add-ons to their homes… while most local communities simply refused to grant the necessary building permits for fear of increasing traffic and changing basic character of their regulated neighborhoods. “It’s my land and I can do what I want” is met with “It’s my neighborhood and no you can’t.” The state legislature is debating a solution, but no matter the result, a large constituency will be disappointed.
Even when there may be tracts of land where significant housing can be constructed, the going is anything but smooth. Take for example Brisbane, a small community south of San Francisco. “The town is home to a 684-acre plot of former industrial land. A developer wants to clean it up and build a mixed-use project, with public parkland, that could include more than 4,000 new units of housing. And the site surrounds a stop on the regional rail line that connects workers to jobs in San Francisco and Silicon Valley.
“It's exactly the kind of flat, spacious, hard-to-find place where you'd want to drop new housing in the Bay Area without displacing current residents or exacerbating traffic. But many Brisbane officials and residents prefer a plan for the land that would include no new housing at all.” Emily Badger writing for the Washington Post, August 10th. People who own homes aren’t generally concerned about the macro-issues of housing availability for those who don’t. It’s an old story: Not in my backyard. 
“As the San Jose Mercury News recently reported: A 2015 community survey found that 43 percent of Brisbane residents opposed any housing on the site, while just 2 percent favored 4,000 units or more. The survey found residents were far more concerned about preserving open space and their quality of life than adding ‘housing that working families can afford.’
“This is unconscionable to people trying to solve a housing and transportation crunch that has turned the Bay Area into a gridlocked and gated community where local teachers can't afford to live. And the Brisbane episode is a more extreme version of a plot line that keeps popping up, as individual towns stymie efforts to address what is a regional quandary.
“The story reminded me of an insight I borrow from Luke Tate, a special assistant to the president for economic mobility. Part of the challenge throughout California and plenty of other communities, he once pointed out to me, is that we tend to make local policy — and housing policy in particular — as if the only people who matter in a community are the ones who go to bed there at night.
“We don't think of people who work but don't ‘live’ there, or who'd like to live there but can't afford to, or who once lived there but had to leave, or who could access better jobs if only they could move there, or who commute through there as part of their daily lives.” Badger in the Post.
Think about it. If a major construction of new housing might result in a decline in your own property values, how would you feel? Think about the resistance all over the United States to low income projects (people of color) descending into middle class (white) neighbors back in the 1960s and beyond.
Still, take a long hard look at the populist anger in this country. And if you think that finding a reasonable and affordable place to live is a minor issue, think again. How would you feel if you could not afford a home anywhere near where you work or where the jobs are? Multiply that by a couple of million people.
I’m Peter Dekom, and governments are increasingly faced with a Hobson’s choice, but sooner later, we are going to have to bite that “affordable housing” bullet.

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