America’s housing market deteriorates, but deep and structural problems cannot be solved by technology.
Why is it important: The US is in desperate need of higher quality rental housing. Owning a home works for a lot of people and doesn’t work at all for many who aren’t ready to settle down or don’t have the financial means.
Big picture: Venture capitalist Marc Andreessen invested $350 million in his biggest check ever. Adam Neumann’s new company Flow.
- Andreessen’s blog post lays out the investment thesis that renting a home is a “soulless experience.”
- Details on how Flow will work are still unclear, but they’ll likely include some sort of financial improvement as well as bells and whistles for apartment tenants.
What they say: “One who is bought from where he lives is more concerned with where he lives,” writes Andreessen. “Without this, apartments form no person-to-person bonds between person and place, and without community.”
- I’ve lived in both owned and rented apartments in New York City, and the community in my rental building was as vibrant and close-knit as anywhere else I’ve ever owned.
- Neighborhoods characterized by very low homeownership rates, such as Harlem in New York or Hialeah in Miami, often have deep and enduring communities that span generations and decades.
Reality check: “Property by itself doesn’t make you more invested in your community,” Sam Chandan, director of the NYU Stern Center for Real Estate Finance Research, tells Axios. “It allows you to be more invested in decisions in the community that affect the value of your asset.”
- Andreessen, for example, against Multifamily development in his hometown of Atherton, California, on the grounds that such development “will SIGNIFICANTLY reduce our home values”.
Between the lines: As a VC, Andreessen believes that technology and entrepreneurship can solve the problems of the rental market. (Naturally, this is Andreessen Horowitz, blockchain seems to be somehow included.)
- But where rental housing is most successful — Germany It is Annex A – this is not because, in Andreessen’s formulation, tenants “receive owner benefits”. Rather, because it is housing security and affordability.
- German tenants form strong community bonds simply by getting to know our neighbors, as we all do. They – we – don’t need great amenities like those offered by your local WeWork.
Where does it stand: Private sector solutions like Flow inherently cannot address the deepest barriers to successful rental housing.
- It’s entirely possible that Neumann was successful in marketing moving properties in fast-growing cities like Nashville to upwardly mobile tenants.
- But it won’t slash the structural barriers to America becoming more of a tenant nation.
Why is it so hard to fix the rental market?
Many reasons for the lack of affordable housing in America can be found at the local and even individual level.
- reconstruction The biggest problem is this: NIMBYs like the ones found at Atherton are the rule, not the exception. Getting permission to build new multi-family housing is ridiculously expensive and difficult.
- Education funding works for a close second. As long as schools are funded by local property taxes, parents will favor higher property values over affordable housing, often increasing the number of children in local schools without increasing tax revenues accordingly.
- american dream it goes too. After looking at the behavior of older millennials, NYU’s Chandan says, “the data show that home ownership is deeply rooted in the American psyche as a natural and expected evolution.”
federal policies This preferred host is much weaker than before.
- The old president Trump’s tax reforms It has greatly reduced the number of people claiming the mortgage interest tax deduction, and government-subsidized 30-year mortgages are widely available on multi-family buildings.
- When they get married and start a family, buying a house and voting against new construction is what Americans do., whether it makes financial sense.
time to build
Great Recession The aftermath of the 2008 financial crisis caused new home construction, both single-family and multi-family, to fall off the cliff and fail to keep up with U.S. population growth. But now it has recovered and more houses are being built than houses are created.
There is still a housing shortage We must build our way out. But Andreessen is wrong when he says that “our country creates households faster than we build houses”.
- Household formation rate equals annual rate to increase In US adults, multiplied headship ratio, which is always around 50%. Household formation dropped when the pandemic hit, but even before the pandemic, it was working in just about 900,000 new households a year in 2019.
- New residential construction is stable growing. Even after taking into account the old units destroyed, houses are being started at a rate of about 1.6 million units per year, well above the household formation rate.
Peter Boockvar, chief investment officer at Bleakley Financial Group, told Axios that multi-family home builders are responding to ultra-low vacancy rates by building fast.
- In a year or two, he says, rents may even start to fall if we continue to build at current levels.
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