Suppose they gave a housing crisis and nobody came?

The Atlantic just posted an article about our domestic housing market that was so full of holes that I just had to comment. First off, the author kind of presents our housing situation as some kind of blender-homogenized and thus uniform condition that is the same everywhere, from coast to coast. Whereas local conditions are paramount in discussing the market for real estate. Economic expansion creates more demand for nearby housing and economic contraction, obviously, does the opposite.

Last time I renewed my real estate license I took a class in current economic trends in California real estate. The book said that the demographic trend was for folks to be leaving the suburbs for the urban centers, young people for the more exciting life style and old folks for the logistical convenience. Then came the pandemic and the attendant serious rise in telecommuting.

Here I offer two important axioms: 1) There are only two kinds of people in this world, renters and owners. 2) All housing is affordable, or else it’s v-a-c-a-n-t.

The author of the Atlantic article based her conclusions on the high interest rate currently being charged for mortgages… ca. 7.5%. When I bought my house 37 years ago, rates were at 9%. Figuring that they were at or near their peak, I took out an Adjustable-Rate Mortgage (ARM)… and sure enough they trended down from there and my monthly payment went down as well.

Like most other commodities, real estate is thoroughly subject to market conditions… supply and demand. Supply is subject to both the construction of new buildings and the destruction, depreciation, and obsolescence of existing housing stock. In the United States we lose about a million housing units per year due to fire, termites, dry rot and, again, obsolescence. During the “great” recession of 2008, new unit construction fell way behind that process and shortages occurred.

Today’s market recently experienced a boom in selling prices due to unusually low interest rates that vastly increased buyers’ purchasing power. Then rates went up and purchasing power went down. Today’s sellers and even some agents are still captives of the boom market that is no more. In my local area, there are quite a few recently failed attempts at home-selling. I knew an old agent who was prone to say that there can never be something wrong with a house that lowering the price won’t fix.

Now we come to renting versus buying -- the crux of the Atlantic article. There are quite a few folks who, under “normal” market conditions, could easily afford to buy but choose instead to rent. Why? Because they prefer the fluidity of renting -- they’re averse to putting down roots and enjoy having nothing greater than a month-to-month commitment.

There are others who would like to own, but come up short financially. The down payment is the essence of their problem… even the Atlantic article includes this. Back to the “great” recession -- this was partially the result of very highly leveraged purchase loans, where the bank was the real owner and the technical vestee (borrower) was actually a tenant. Subsequent foreclosures abounded. I often encountered married couples who made good incomes, but were at a loss to come up with the 20% down payment to put themselves in a preferred position with both lenders and sellers. I would suggest that they buy a cookbook since they were spending hundreds of dollars a week on restaurant tabs.

The implied benefit of owning is that rent is money spent. It goes out the window every month. By owning, equity accumulates. Higher interest rates slow this process down. But as rates fall back to earth, equity formation will improve… and market appreciation will significantly add to this. It also helps to have an adult mindset and be fully familiar with the package of responsibilities that come with ownership: taxes, insurance, and maintenance in addition to debt service.

Political meddling also causes housing shortages. Local rent control laws protect existing tenants but scare away investors, who would otherwise construct more new units or at least purchase existing properties and renovate them up to modern standards. Existing landlords are also financially strapped and become disinclined to keep up with proper maintenance requirements. New renters are impacted since there’s much less turnover and fewer available units. The tax on capital gains suppresses ownership turnover and leads to unmitigated depreciation and eventually blight. Our most recent former president strongly suggested indexing the tax on capital gains to inflation -- since a lot of the increase in taxable basis is not true appreciation, but nothing more than the loss of the value of the money used to purchase the asset.

And, finally, an investment tip: The four-plex is the best bet. The attractive conditions of HUD mortgage loans apply to one to four units. Single-family houses are certainly the most common denominator of housing stock, but if you lose a tenant, you’re 100% vacant. With a four-plex, if you lose a tenant, you’re only 25% vacant.

Image: Wikideas 1

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