review the basic economics of housing supply and the functioning of U.S. housing markets to better understand the impacts on home prices, household wealth and the spatial distribution of people across markets. Section II documents the state of housing affordability in the U.S., and begins with three core facts about housing supply. First, when building is unrestricted by regulation or geography, housing supply curves seem relatively flat, meaning that we can approximate reality by referring to a single production cost. Second, both geography and regulation severely restrict the ease of building in some parts of the country. These constraints raise building costs both directly, by increasing time delays and reducing the amount of available land, and indirectly, by ensuring the homes are produced more on a one-by-one basis rather than in bulk. Third, the supply of housing is kinked and vertical downwards because housing is durable. (2, citation omitted)
These are themes that Glaeser and Gyourko have touched on before, but this essay does a service by updating them ten years after the financial crisis.
Glaeser and Gyourko have consistently hit on some important points that can garner attention at the national level , but there has been no real action on them as of yet:
where supply is regulated, housing costs more;
heavy land use regulation in places like NYC and SF reduces the nation’s overall economic output; and
existing homeowners tend to oppose new projects, which is consistent with their financial self-interest.
Glaeser and Gyourko do not give up hope that policymakers can craft solutions that deal with the political economy of housing construction. One first step would be to develop a toolkit of carrots and sticks that can be employed at the national and state level to incentivize local governments to take actions that are in the interest of their broader communities and the nation as a whole.
We know we need more housing in highly productive regions. We just need to figure out how to build it.
On a chilly December afternoon in Atlanta, a judge told Reiton Allen that he had seven days to leave his house or the marshals would kick his belongings to the curb. In the packed courtroom, the truck driver, his beard flecked with gray, stood up, cast his eyes downward and clutched his black baseball cap.
The 44-year-old father of two had rented a single-family house from a company called HavenBrook Homes, which is controlled by one of the world’s biggest money managers, Pacific Investment Management Co. Here in Fulton County, Georgia, such large institutional investors are up to twice as likely to file eviction notices as smaller owners, according to a new Atlanta Federal Reserve study.
“I’ve never been displaced like this,” said Allen, who said he fell behind because of unexpected childcare expenses as his rent rose above $900 a month. “I need to go home and regroup.”
Hedge funds, large investment firms and private equity companies helped the U.S. housing market recover after the crash in 2008 by turning empty foreclosures from Atlanta to Las Vegas into occupied rentals.
Now among America’s biggest landlords, some of these companies are leaving tenants like Allen in the cold. In a business long dominated by mom-and-pop landlords, large-scale investors are shifting collections conversations from front stoops to call centers and courtrooms as they try to maximize profits.
“My hope was that these private equity firms would provide a new kind of rental housing for people who couldn’t — or didn’t want to — buy during the housing recovery,” said Elora Raymond, the report’s lead author. “Instead, it seems like they’re contributing to housing instability in Atlanta, and possibly other places.”
American Homes 4 Rent, one of the nation’s largest operators, and HavenBrook filed eviction notices at a quarter of its houses, compared with an average 15 percent for all single-family home landlords, according to Ben Miller, a Georgia State University professor and co-author of the report. HavenBrook — owned by Allianz SE’s Newport Beach, California-based Pimco — and American Homes 4 Rent, based in Agoura Hills, California, declined to comment.
Colony Starwood Homes initiated proceedings on a third of its properties, the most of any large real estate firm. Tom Barrack, chairman of U.S. President-elect Donald Trump’s inauguration committee, and the company he founded, Colony Capital, are the largest shareholders of Colony Starwood, which declined to comment.
Diane Tomb, executive director of the National Rental Home Council, which represents institutional landlords, said her members offer flexible payment plans to residents who fall behind. The cost of eviction makes it “the last option,” Tomb said. The Fed examined notices, rather than completed evictions, which are rarer, she said.
“We’re in the business to house families — and no one wants to see people displaced,” Tomb said.
According to a report last year from the Harvard Joint Center for Housing Studies, a record 21.3 million renters spent more than a third of their income on housing costs in 2014, while 11.4 million spent more than half. With credit tightening, the homeownership rate has fallen close to a 51-year low.
In January 2012, then-Federal Reserve Chairman Ben Bernanke encouraged investors to use their cash to stabilize the housing market and rehabilitate the vacant single-family houses that damage neighborhoods and property values.
Now, the Atlanta Fed’s own research suggests that the eviction practices of big landlords may also be destabilizing. An eviction notice can ruin a family’s credit and make it more difficult to rent elsewhere or qualify for public assistance.
Collection Strategy?
In Atlanta, evictions are much easier on landlords. They are cheap: about $85 in court fees and another $20 to have the tenant ejected, according to Michael Lucas, a co-author of the report and deputy director of the Atlanta Volunteer Lawyers Foundation. With few of the tenant protections of places like New York, a family can find itself homeless in less than a month.
In interviews and court filings, renters and housing advocates said that some investment firms are impersonal and unresponsive, slow to make necessary repairs and quick to evict tenants who withhold rent because of complaints about maintenance. The researchers said some landlords use an eviction notice as a “routine rent-collection strategy.”
Aaron Kuney, HavenBrook’s former executive director of acquisitions, said the companies would rather keep their existing tenants as long as possible to avoid turnover costs.
But “they want to get them out quickly if they can’t pay,” said Kuney, now chief executive officer of Piedmont Asset Management, a private equity landlord in Atlanta. “Finding people these days to rent your homes is not a problem.”
Poor Neighborhoods
The Atlanta Fed research, based on 2015 court records, marks an early look at Wall Street’s role in evictions since investment firms snapped up hundreds of thousands of homes in hard-hit markets across the U.S.
Researchers found that evictions for all kinds of landlords are concentrated in poor, mostly black neighborhoods southwest of the city. But the study found that the big investors evicted at higher rates even after accounting for the demographics of the community where homes were situated.
Tomb, of the National Rental Home Council, said institutional investors at times buy large blocks of homes from other landlords and inherit tenants who can’t afford to pay rent. They also buy foreclosed homes whose occupants may refuse to sign leases or leave.
Those cases make the eviction rates appear higher than for smaller landlords, according to Tomb, whose group represents Colony Starwood, American Homes 4 Rent and Invitation Homes. The largest firms send notices at rates similar to apartment buildings, which house the majority of Atlanta renters.
Staying Home
Not all investment firms file evictions at higher rates. Invitation Homes, a unit of private equity giant Blackstone Group LP that is planning an initial public offering this year, sent notices on 14 percent of homes, about the same as smaller landlords, records show. In Fulton County, Invitation Homes works with residents to resolve 85 percent of cases, and less than 4 percent result in forced departures, according to spokeswoman Claire Parker.
The Fed research doesn’t say why many institutional investors evict at higher rates. It could be because their size enables them to negotiate less expensive legal rates and replace renters more quickly than mom-and-pop operators.
“Lots of small landlords, when they have good tenants who don’t cause trouble, they’ll work with someone who has lost a job or can’t pay for the short term,” said David Reiss, a Brooklyn Law School professor who specializes in residential real estate.
If you were burned in 2008, the last time the housing bubble burst, you’re probably (and understandably!) gun-shy about jumping into the housing market again — especially if you think your local area could be experiencing another bubble. If you buy during a bubble, overpaying for your home, you might be forced to sell for less than the property is worth — either that or stay put longer than you’d like until you build up enough equity to sell. So if you’re thinking of buying, it’s important to have a sense of the signs that point to a real estate bubble. Here are five of them.
1. Shaky loans are common
As we learned from the 2008 recession, subprime lending (lending to anyone with a pulse) is not sound practice. And we have made changes. “Credit remains relatively tight,” says Jonathan Miller, CRE, CRP, and president of Miller Samuel Inc., a New York, NY, real estate appraisal company.
Yet the U.S. government still backs loans that some might consider risky, particularly ones that require only a 3.5% down payment, which the Federal Housing Administration (FHA) offers. Before you get too alarmed, keep in mind that the FHA has been helping people become homeowners since 1934. The underwriting standards are higher with FHA loans than with some of the subprime low-down-payment products offered in the early 2000s, explains David Reiss, professor of law at Brooklyn Law School in Brooklyn, NY.
2. There’s lots of leverage
When you take out a mortgage, you’re leveraging your money — the smaller the down payment you make, the more you have leveraged the deal by using the lender’s money to make the purchase. “A bubble means lots of leverage,” says Miller. “And this [current] cycle has been remarkably devoid of leverage.” Miller cites New York City as an example. “About 45% of the transactions are cash. And for the price points below half a million dollars, the average person puts about 35% down.”
3. Home prices are rising faster than salaries
When housing prices are rising and your salary isn’t, you’re left with two options: continue to rent, or buy a house you can barely afford. If you think your market is in a bubble, you might want to wait to buy, especially if you’re really stretching to make ends meet.
“I would review the mean income levels and employment levels compared to real estate prices for signs of discord,” says Michael Kelczewski, a Pennsylvania and Delaware real estate agent. “Indicators of a local real estate bubble are asset values exceeding the local market’s capacity to absorb prices.” Reiss says that when home prices rise faster than salaries, “It could be the sign of froth in the market.”
Miller agrees that a “rapid run-up in prices that don’t match wage growth leads to discussions about bubbles.” But he says that as long as credit conditions from bank lenders are tight, you won’t have runaway price inflation. In New York, prices aren’t rising like they were, but they aren’t falling either. Miller says they’ve leveled off and are “stuck on a high plateau.”
So what do you do when affordability isn’t improving in pricey markets like New York, NY, San Francisco, CA, Los Angeles, CA, or any other high-cost urban market? Buy in the burbs. Miller notes that for New York, the market is booming in the outlying suburbs.
* * *
When there are no signs
Of course, you might think your market is (or isn’t) in a bubble, but you could be wrong. “The problem with bubbles is that we don’t know them when we see them,” says Reiss. He explains that San Francisco, CA, for example, a hugely unaffordable city for most people, isn’t in a bubble just because prices are high. “Bubbles do not refer to rapid price appreciation. They refer to unsustainable rapid price appreciation. [The market] is unsustainable because fundamentals do not support the appreciation.”
The bottom line is, it’s difficult to know whether it’s really a bubble. “If homeowners buy a house that works for their family and that they can afford over the long haul, they will have made a decision that benefits them every day, even if real estate prices drop significantly,” says Reiss. But heed his warning: “If homeowners instead buy a house that is a financial stretch in the belief that it will appreciate down the road and fund their retirement, there is a good chance that they have set down a road to ruin.”
Fannie Mae’s September Multifamily Market Commentary repeats a common misunderstanding about small multifamily properties that is worth addressing. By way of background, it opens,
Multifamily rental units can be found in high-rise structures or in garden-style buildings, but there are a number of properties that house between just five and 50 housing units. These properties are usually identified as small multifamily and can be found in many different metros across the country. In many places, they can also be a key source of affordable rental units. (1)
While the data is not definitive, there appears to be somewhere between “296,000 and 360,000 small multifamily properties” with between 2.3 million and 4.4 million units of housing among them. (1) These units appear to be concentrated in about ten states that contain three quarters of the stock. California and NY have the most small multifamilies by a wide margin and the cities with the most come as no surprise: LA, NYC, SF-Oakland, Chicago and San Diego.
Here’s where I have issues with the analysis:
Fewer Small Multifamily Properties in the Pipeline
According to data from the Dodge Data & Analytics Construction Pipeline, the number of new multifamily projects being started has been declining since peaking in the second quarter of 2015, falling to 678 projects during the first quarter of 2016 . . . . The average number of units rose, however, to about 117 units per project.
Given the high land acquisition and construction costs in most metros, this trend of maximizing square footage in multifamily development, rehabilitation, and renovation should not be surprising. Unfortunately, it does have implications for the small multifamily segment, which in many places tends to offer more affordable rents when compared to newer properties.
An Uncertain Future for Small Multifamily
Over the next decade, the nation’s multifamily stock will likely see an influx of higher unit count properties. As older small multifamily rental properties age and/or fall into disrepair, they will likely be replaced with properties with more density per square foot. Developers will likely create more, but much smaller, units on the same size lot. As a result, these small multifamily properties may end up moving out of the 5-50 unit category and push up into the 50+ unit category, making preservation of the existing stock of small multifamily rental properties offering more affordable rents even more critical.(6)
The logic of this last sentence is faulty, but it is also oft-repeated by sophisticated housing market commentators. Small multifamilies are not cheap because they are small, they are cheap because they are old. Old housing is generally cheaper than new housing. So this notion that we should preserve old housing for its own sake is faulty. Generally, we would want to see an expansion in the supply of housing, so replacing an aging small building with a bigger new one would generally be a positive development. We also would like to see investments in upgrades to the housing stock, either through rehabilitation or replacement. Effectively, this Fannie Mae Commentary is saying that we should preserve very old small multifamilies instead of upgrading those properties. That is short-sighted because while it may keep particular units affordable, it will also tend to raise rents more generally (by restricting supply) and lowering the overall quality of the housing stock (by disincentivizing investment).
The Commentary acknowledges that “it seems that there are a variety of financing sources available in the financing of small multifamily rental properties, indicating there is sufficient and ongoing liquidity for this property type. ” (5) Perhaps it is best to treat small multifamilies just like the bigger ones and let the market determine the highest and best use of each parcel zoned for multifamily construction.
Charles Williams loves working on cars, a hobby he’s continued even after losing his legs in 1993 in a freak construction accident. So in 2007, he poured $65,000 into building a nearly 2,000-square-foot four-car garage next to his house in Harbeson, DE. The place—which has vintage license plates covering the walls and lifts so he and his buddies can tinker to their heart’s content without lying on the concrete floor—is a car nut’s fantasy. At least, it was, until some of Williams’ neighbors—apparently offended by the sight, smell, and sounds of guys doing guy stuff—decided to sue Williams for repairing cars in his own garage.
In 2014, three of Williams’s neighbors—Margaret Foulke next door and John and Carol Kane, who live 800 feet down the road—filed a lawsuit against Williams saying that the garage was a noisy, stinky nuisance and must be torn down, according to The Cape Gazette. In June, a judge ruled in favor of Williams, explaining simply, “Mr. Williams has a not-uncommon hobby—working on cars—that he pursues with an uncommon vigor.”
Nonetheless, the neighbors plan to take their case up the chain to the Delaware Supreme Court.
Williams says he’s spent $30,000 defending himself from his accusers, who also claim he built the garage without permits and runs it as an illegal business. But Williams denies these allegations as well, saying he received the proper permission to build and has never accepted money in exchange for repairs. In fact, he has even fixed vehicles owned by the very people are demanding that he tear down his garage!
“I’ve fixed their lawnmowers, I’ve fixed their tractor, I’ve fixed their golf carts… I did everything for them, anything they asked, since that’s what neighbors do,” says Williams.
At first glance, the plaintiffs seem like candidates for a “worst neighbors” award. But we had to wonder: Is there anything to this case? Is it ever illegal for to tinker with cars in your own garage?
While local laws vary by area, as a general rule, David Reiss, a professor of Law at Brooklyn University and editor of REFinBlog.com, thinks the neighbors are spinning their wheels.
“The facts sure don’t seem to be on their side, at least as this article portrays them,” says Reiss. Here’s a rundown of the neighbor’s complaints about the garage, and why Williams appears to be in the clear.
Noise complaints
“There are a lot of loud things in and near homes,” points out Reis. Compare a vacuum cleaner at 10 feet (70 decibels) to a lawnmower (as high as 90 decibels) to a train (100 decibels).
“Many localities have restrictions on the decibel level of noise that can come from a property, but those levels can be pretty darn high,” Reiss explains. “New York City, for instance, limits garbage trucks to 80 decibels from a distance of 35 feet when they’re not compacting. It limits music from commercial establishments to 42 decibels when measured from inside a neighbor’s home.”
In other words, the sound of a few motors running or rock music probably aren’t loud enough to write home about—or to sue over.
Noxious fumes and other nuisances
Sure, these neighbors could claim that the eau de motor oil emanating from William’s garage is a “nuisance.” It’s just that they would have to be deemed “unreasonable in the context of their residential neighborhood,” says Reiss.
“The neighbors could also argue that the increased traffic that resulted from this use was a nuisance too, but that also seems like a major stretch,” says Reiss.
Illegal activity
“The neighbors could claim that Williams is running a commercial establishment in a residential neighborhood, but it sounds from the article like the facts don’t support this claim,” says Reiss. So unless the neighbors catch a huge wad of cash passing hands, Williams is just a regular dude who digs cars.
Historic preservation regulations are costly, contentious, and – as best we can tell – tend to promote residential segregation. Preservation as practiced in the United States also tells historical tales in a way that is inevitably selective, often more attuned to contemporary needs than historical objectivity, and likely to signal current residents and visitors about whose stories aren’t worth commemorating. Yet historical preservation, even to its critics, can further desirable goals. This essay examines traditional historic preservation strategies while also considering two potential alternatives, neither of which has received much attention.
The first alternative to traditional historic preservation – fake history – is employed on a large scale in the fastest growing residential community in the United States. The essay provides a case study of the use of fake history and theming in The Villages, Florida, revealing both the strategy’s potential for generating low-cost cultural resonance and its pitfalls. The possible connections between The Villages’ omnipresent theming and its disturbingly homogenous demographics are explored. The essay suggests that The Villages’ alternative to historic preservation might be replicated elsewhere and speculates about the demographic results of efforts to create more inclusive fake historical narratives.
A second, and novel, alternative to traditional historic preservation would select sites for historic preservation restrictions at random within a given community. Many of the problems associated with the way historic preservation regulations are implemented in the United States stem from the arbitrary and occasionally ugly battles over what to preserve and what to erase. Historic preservation becomes a battlefield for cultural warfare. Compared with this alternative, the case for randomly preserving in each city a few blocks that date from each particular era, while letting market forces dictate what gets preserved or destroyed elsewhere, may be surprisingly strong.
While I do not like either of these novel alternatives, we would certainly benefit from fresh thinking about what we are trying to achieve with historic preservation. Historic preservation remains too much of a niche area of regulation dominated by the few who feel most strongly about it. It has slowly but surely increased its reach in cities like New York. But it has not been accompanied by much serious thinking by broader constituencies about the costs and benefits of each incremental step.
There are obvious trade-offs with landmarking that don’t just affect landowners and developers. By restricting new construction, landmarking tends to restrict the supply of new housing units. This might be okay, but we should certainly think through those costs before just letting preservation districts cover more and more of a city. I am not particularly interested in communities based on fake history, but others are welcome to them. For me though, I am concerned that our most important cities might end up like Paris — stunning historic playgrounds for the wealthy, encircled by high-rise ghettos for the poor.
New York City has long been at the forefront of ensuring that its housing stock is safe for residents. We have instituted laws such as the Multiple Dwelling Law, the Housing Maintenance Code, and the Fire Code to ensure that buildings are constructed to the right standards for their intended uses, and have passed laws to prohibit activities that endanger people’s lives. One such action is turning residential properties into illegal hotels hosting over a dozen guests.
Residential properties are not meant to host dozens of transient guests. The IDC’s investigation found over 100 ads featuring residential spaces for groups of more than a dozen people, some claiming to house over 30 people. This kind of behavior not only creates an inconvenience for neighbors, but creates real dangers to both residents of this city and those guests that may choose housing not knowing that it is an illegal posting, since they saw the ad on Airbnb. We should not wait for a tragedy to strike before taking actions to curb illegal rentals that create dangerous conditions.
It is important that the State government take steps to protect our residents and tourists visiting New York from this kind of irresponsible behavior. As such, the Executive should act and sign into law the recent bill passed by the Legislature that will impose fines on individuals advertising illegal short term rentals and the Legislature should examine additional steps necessary to make sure that illegal short term rentals are handled not only in multi-family buildings but in private homes as well and that hosting websites be made responsible for the content they profit from. (11)
While the sharing economy is here to stay, it is hard to imagine that it will not face some form of increased regulation after reports like these come out. One Airbnb rental highlighted in the report advertises space for 16 people in a two-family house and another claims that it can house 32 people. The pictures in the report tell a thousand words each — bunk beds, beds in the kitchen, air mattresses lined up one next to the other.
This report shows some extreme examples of what can happen when the free market for residential space goes unfettered in a high-cost city. But, as the report notes, the government has a legitimate interest in protecting the health and safety of its residents and visitors. New York first regulated tenements over a hundred years ago. No doubt, they will soon act on this 21st century version of them, hopefully before a Triangle Factory Fire-type event strikes.
