Early yesterday, a friend sent me an article from The Atlantic, the left-leaning magazine for urban intellectuals, and it’s stayed on my mind. While I kind of agreed with the author’s main point, there was something that just stuck in my mental craw. I fear I won’t be able to sleep unless I get to the bottom of what bugs me so much about the article.
The article is “BlackRock Is Not Ruining the U.S. Housing Market” by Derek Thompson, a staff writer. I think it’s worth reading in full, so I invite you to do so (you get 3 free articles on The Atlantic before having to subscribe).
Thompson’s main point is that Wall Street institutional investors, whom the hedge fund BlackRock has come to represent, are not to blame for the “completely messed-up, unaffordable U.S. housing market.” The real culprits, he says, are you and me and our neighbors. The subtitle of the article, after all, is “The real villain isn’t a faceless Wall Street Goliath; it’s your neighbors and local governments stopping the construction of new units.”
He’s not wrong. I broadly agree. And yet… and yet…
So I was up late writing to figure out what I think about this. Why I can’t just let a magazine article go.
The Thompson Thesis
As I said, Thompson’s basic thesis is that BlackRock and institutional investors are not to blame for the horror show that is the U.S. housing market. Local governments and NIMBYism that prevent construction of housing are. Given that this is something that NAR has been saying for oh… a decade now? and something I’ve been involved in professionally from time to time, I know that he’s right. We haven’t built anywhere near enough housing, and the problem has usually been local government laws, rules, ordinances, and NIMBYs opposing just about any development of just about any kind, and certainly low/moderate income housing.
Thompson provides a real service by putting some evidence and data on his side of the argument. For example, he notes that institutional investors — no matter how scary a bogeyman they are — own a tiny fraction of the housing stock:
The U.S. has roughly 140 million housing units, a broad category that includes mansions, tiny townhouses, and apartments of all sizes. Of those 140 million units, about 80 million are stand-alone single-family homes. Of those 80 million, about 15 million are rental properties. Of those 15 million single-family rentals, institutional investors own about 300,000; most of the rest are owned by individual landlords. Of that 300,000, BlackRock—largely through its investment in the real-estate rental company Invitation Homes—owns about 80,000. (To clear up a common confusion: The investment firm Blackstone established Invitation Homes, in which BlackRock, a separate investment firm, is now an investor. Don’t yell at me; I didn’t name them.)
Megacorps such as BlackRock, then, are not removing a large share of the market from individual ownership. Rental-home companies own less than half of one percent of all housing, even in states such as Texas, where they were actively buying up foreclosed properties after the Great Recession. Their recent buying has been small compared with the overall market.
He further notes that institutional investors aren’t necessarily competing against normal family buyers, because many of the properties they buy are run-down fixer-uppers that they have to pour money into in order to make it habitable. So their real competition are individual and small investors and flippers, not Mr. and Mrs. Jones looking to buy their starter home to raise a family in.
No, the real villain in the story of America’s broken housing market, Thompson contends, is us:
Far worse than corporations taking a few thousand units off the market for owners are the governments and noisy NIMBYish residents taking millions of units off the market for owners and renters alike—by blocking construction projects in the past few decades. (California alone has an estimated shortage of 3 million housing units.) From New York to California, deep-blue cities and states have amassed a pitiful record of blocking housing construction and failing to meet rising demand with adequate supply. Many of the people tweeting about BlackRock are represented by city councils and state governments, or are surrounded by zoning laws and local ordinances that make home construction something between onerous and impossible.
In the arithmetic of online outrage—where big banks are evil, and landlords suck—nothing is more villainous than a big-bank landlord. But the larger villain in America’s housing crunch isn’t the faceless Wall Street Goliath overseeing your apartment building or house; it’s the forces stopping any new apartment buildings or houses from existing in the first place: your neighbors, local laws, and local governments. If we can’t see the culprit of America’s housing crisis, that’s because we’re eager to look everywhere except in the mirror.
Again, he’s not wrong. I have a lot of friends in California who have had to deal with the insanity that is trying to build a home just about anywhere in California, but particularly in the high-demand metro areas like San Francisco or Los Angeles. There’s so much corruption, so much bureaucratic red tape, and so much local opposition — fueled by local voters who say they want more low-income housing for cops, firefighters, teachers, and their servants… just not in their neighborhoods.
In fact, NIMBYism is so insane in some parts of the country that we have the sight of multimillionaires opposing mere millionaires from being able to buy in their communities. The Wall Street Journal recently ran a story about Pacaso, the fractional second-home ownership startup from Spencer Rascoff and Austin Allison. (Disclosure: I am on Pacaso’s Advisory Board.) The article starts with this:
Pattie Dullea stepped out one morning last month in Napa, Calif., to have a word with the young man who pulled up in an antique sports car to tour the home across the street.
“You might not want to buy there,” she said she told the man, who was there to consider investing in the home. “We don’t want our neighborhood to turn into a timeshare neighborhood. And we are going to do everything in our power to make that not happen.”
The buyer just stepped out of an antique sports car. Last I checked, those weren’t being sold at a discount. He was looking to buy a 1/4 or 1/8th ownership in a home that might be $4.5 million as this Pacaso listing is. This isn’t some Section-8 low income family trying to move in. This isn’t a flipper looking to turn the house into an AirBnB party mansion. This is a millionaire who wants to invest in a second-home without paying $4.5 million for it.
And yet, the multimillionaires of Napa Valley are gathering together to “stop Pacaso.”
What are the chances that this group pictured above would be okay with a multifamily condo complex? What about a 300-unit rental apartment complex? What about high-density SFR developments on 1/10th of an acre?
So not only should we not be blaming BlackRock, we should be blaming ourselves. If we didn’t march around and bring pressure on local governments and state governments to stop development, we’d have a lot more houses. Then we wouldn’t be in the crisis we are in now.
All of this is true. I agree with Thompson wholeheartedly.
And yet… and yet….
Blaming People for Being Human
After much thought, I think what bugs me about Thompson’s overall argument — and perhaps it’s more of a tone of his argument, rather than the cold hard substance — is that he’s blaming people for being human beings. It makes me wonder if Derek Thompson, a member of the media elite who lived in Manhattan and lives in Washington DC, is a homeowner.
I think Sunny and I are about as enlightened about real estate and housing market as anybody in America. For a lot of reasons, I’d like to see all local anti-growth ordinances and environmental regulations and local school districts and so on removed, not the least of which is the extent to which those laws have and continue to contribute to systemic racism. I believe strongly in property rights, and if a property owner wants to sell his land to someone who wants to build a methadone clinic on it, I believe he should have every right to do so and not have either us, his neighbors, or the local government step in to stop him.
Even so… if a developer were to propose to put up a 300-unit low-income housing development on the empty lot around the corner… I don’t know how we’d feel about that.
Is that greed? Just the desire not to have the value of our home decline? Perhaps it is. Is it mere selfish desire not to be inconvenienced by the years of construction, followed by the surge in traffic in our little corner of Las Vegas? Perhaps it is. But there is a sense of familiarity and comfort in our home in this cul-de-sac. We like the streets just the way they are. We like our neighbors. We like the relative quiet, the trees, the neat well-kept lawns. We feel at peace here. We feel… at home. And we haven’t even been here that long.
Does Thompson find it so easy to condemn people who have lived in their homes, in their familiar neighborhoods, for decades, having raised children in a home, buried pets in the backyard, planted trees to see them grow tall, mowed countless blades of grass, having gotten used to everything just so, knowing every family for a couple of blocks around them… does he find it so easy to blame them for not wanting that to change? Is it just greed, just money, just not wanting property values to go down?
Perhaps it is. But maybe, just maybe, it’s something a bit more than just dollars and cents. Maybe it’s that deep human need for familiarity and comfort, for a piece of one’s own. For a home. It seems perfectly natural for people not to want to see that disrupted.
I know, I know. Life is change. We all should be prepared for change at all times. Our little piece of paradise might turn into a parking lot if the economics makes sense. I get it.
And yet, to so blithely tell us to look in the mirror to find the real culprit… well, that sticks in my craw.
The Real Culprit: Government, At All Levels
And while I do agree with Thompson 1,000% that local governments who put up every conceivable barrier to building are to blame, I do not think he goes far enough. Yes, city councils and state governments pass zoning laws and environmental regulations and local ordinances that make building a home prohibitively expensive and nearly impossible. According to this news report from 2020, permits and development fees in California often total more than $130,000 before the builder can even break ground. Meanwhile, Lennar has homes for sale in San Antonio starting at $130,000.
According to the National Association of Home Builders, as of May of 2021, regulations from all levels of government account for $93,870 or 23.8% of the average sales price of a new home in the United States. That includes the federal government, not just the local and state governments that Thompson rightly calls out.
But in 2021, I think the biggest blind spot that Thompson has is the role of the federal government in creating the craziest housing market we have ever seen.
He thinks the insanity of the housing market is simply supply and demand. I learned this from another article he wrote for The Atlantic, titled “Why You Should Wait Out the Wild Housing Market.” In it, he writes:
So what exactly is happening? The short answer is: supply and demand. The longer answer is also supply and demand.
On the demand side, demographics are the big, invisible engine driving the machine. Millennials are the largest generation in American history. Having been too financially constrained to buy houses at a normal rate in the previous decade, many of them are now storming into the housing market. Some might feel a desperate need to escape their current apartment, basement, or home after the coronavirus pandemic closed much of the world for more than a year and led to an outbreak of mind-numbing cabin fever. To make things even wilder, homebuyers are flush with cash after a year in which the national savings rate soared to its highest level in decades. On top of all that, interest rates, having basically declined for most of the past 40 years, recently touched new lows, luring more buyers into the market and encouraging higher bids.
He further points out that COVID and work-from-home policies led to extraordinary interstate migration, away from blue states like California and New York to red states like Idaho, Texas and Florida. And of course, lack of supply from years of not building enough houses is to blame.
What he leaves out, however, is the immense role that the federal government played and continues to play in the insane housing market.
For example, the coronavirus pandemic did not close much of the world for more than a year; state and local governments did that. He’s not even going to address the migration away from high-restriction states like California and New York to lower-restriction states like Texas and Florida? That’s a blindness.
But more importantly, and less… ah… political… he entirely glosses over one of the biggest blunders of the federal government. Thompson writes:
The 2021 housing craze feels as sudden and shocking as the pandemic, but it was decades in the making. The emergence of the huge Millennial generation in the 1980s made strong housing demand in the early 2020s entirely predictable. The Great Recession’s clobbering of the construction industry made today’s housing shortage equally foreseeable.
How is he leaving out the fact that the federal government chose to bail out the big banks and Wall Street, not the construction industry? We spent $700 billion on TARP to prop up the banks; what did we spend on the construction industry? Given the number of companies I knew personally that went bankrupt, simply stopped working, couldn’t finish projects, etc. because construction loans were nowhere to be found, I’m going to guess not $700 billion.
The Great Recession clobbered the construction industry. Why did it not clobber BlackRock and institutional investors? Is it not more accurate to say that the federal government allowed the Great Recession to clobber the construction industry while sheltering the financial industry from the clobbering?
And that’s without even looking deeper at what caused the Great Recession in the first place: government regulation. From the linked article from American Enterprise Institute:
Continually increasing leverage—driven largely by Fannie Mae and Freddie Mac credit policies and the political obsession with taking credit for increased homeownership—into the U.S. mortgage system. Reduced down payments and loosened underwriting standards were a matter of government policy throughout the housing boom.
In 2021, while it is correct to blame local and state governments for onerous regulatory barriers to building, that alone does not explain the frenzy that is the housing market today. Because I simply do not believe you can explain the insanity of the housing market in 2021 without at least thinking about this graph:
The Fed is printing money like crazy, because the federal government spent over $2 trillion in 2020. And we’re set to spend more trillions in 2021 and beyond.
But possibly even more important for our purposes is this graph:
The Fed Funds Rate — the interest rate that big commercial banks pay each other — is near zero; at its June meeting, the Fed set the target between 0% and 0.25%. That rate in turn drives all other interest rates, which partially explains the wild demand for housing.
Except that… a large financial institution like BlackRock is by definition the most prime of prime borrowers. Is there really much question about the difference between a $40 billion hedge fund borrowing a few billion dollars at rock bottom rates versus Mr. and Mrs. Jones trying to qualify for a mortgage? Cheap money is going to flow to family buyers, yes, through low mortgage rates… but it’s also going to flow like crazy to institutions who are a far better credit risk.
I still can’t blame the hedge funds and private equity funds and institutional investors; they’re just doing what they’re supposed to be doing for their investors. They owe a fiduciary duty to their investors to maximize returns, and if that means leveraging up to buy up residential real estate — which is going up at 15% year over year, easily outpacing inflation — then that’s what they should be doing. And there is a lot of evidence to suggest that that is precisely what they’re doing.
I can, however, blame the government for making the money printer go brrrrr. And I do. Maybe that’s stupid, and maybe there are good reasons for devaluing the US Dollar that I’m not aware of. But I can’t help but feel more disdain for the big spending and money printing by our so-called leaders than I do for even misguided NIMBYs in Napa, never mind my neighbors who really don’t love the idea of a huge apartment complex down the street from our tree-lined streets. At least my neighbors are acting human.
No One Ever is to Blame
So where does all of this leave me?
I don’t really blame the homeowners out doing NIMBY things. I think they’re misguided, but they’re behaving entirely as one would expect normal human beings to behave. I wish they’d be more rational, sure, but again, they’re acting human.
I don’t blame BlackRock or the big scary hedge funds or institutional investors. They’re acting entirely rationally to maximize returns for their investors, and making a fortune along the way. Is that greedy? Maybe. But greed is an entire human motivation without which none of us would have a fraction of the things we enjoy today. This laptop I’m typing on, this internet I’m using to publish these words, the electricity that powers all of it… none of these things would exist without human greed. So I don’t blame them.
I really want to blame local governments and state governments, and I think they ought to be blamed for a lot of the problems. But those elected officials are just doing what their constituents (at least the loudest and most motivated ones) want. Isn’t that… democracy? Yes, they should exercise more leadership but… the youthful days of my counting on politicians for leadership are lost in misty chords of memory.
That leaves just one obvious culprit: the federal government. Yes, while the federal government is made up of very smart and educated people probably trying to do the right thing… its track record in housing is dismal at best. And its actions and failures to act in the last couple of decades have led us directly to the insanity that is Housing Market 2021. Unlike the local city council or zoning board, it’s really difficult to say that the federal government — particularly the unelected regulators — are responding to what their constituents want. The national government feels more and more like our rulers, rather than our representatives. So yeah, I blame them most of all.
Yet, there’s plenty of blame to go around. For example, the fact that home prices are going up 15% YOY while wages are doing nothing of the sort is something to consider. Who is to blame for that? The fact that our education system fails to do even the most basic teaching of basic economics and financial planning is contributing to the problem. Who is to blame for that?
And the fact that I, even after writing this and knowing what I know about real estate and how it works and some of the details of the housing market, don’t really want a huge apartment complex going up across the street and want my home and my neighborhood to remain more or less the same as it is today… because I love living here, and owning my own little piece of Earth… Who is to blame for that?
So here we are. Aspirations in the clouds, but your hopes go down the drain. This can’t last. It can’t last even if no one is to blame.