Behind the Housing Crisis: Speculation
By Nancy Spannaus
Sept. 16, 2019—A recent article by Kathryn Milani on the blog of the Roosevelt Institute, along with the uproar over the homeless crisis in the Los Angeles area, has led me to once again address the housing crisis. This is a crisis that I also experience close to home here in affluent Loudoun County, Virginia, where the median home price is over $500,000, and large numbers of civil servants are compelled to live outside the county (often in West Virginia) because housing is unaffordable here.
What’s clear in all these manifestations of crisis—exorbitant prices, shortages, and the related increase in homelessness–is that at the core of the problem is rampant speculation, unchecked by government regulation. As American System founder Alexander Hamilton pointed out more than 200 years ago, speculation is the mortal enemy of a sound financial system, which itself must provide the credit for the general welfare and prosperity of a nation. Without recognizing that fact, and taking appropriate action to uproot the speculative practices we see today, there is not only no hope we will solve the housing crisis, but the current trends could well result in a new, larger crash than that of 2008.
The Rental Squeeze
There were two major points of emphasis in Milani’s article. The first is the trend from home ownership to rentals. The demand for rentals has risen by an estimated 30% since the crash of 2008-9, and is notably high among Americans over 65. This trend is attributed in part to the effect of the “recovery” of the housing market which has led to exorbitant housing costs, which are now combined with more stringent requirements for down payments. These factors, despite continued bargain-basement interest rates, create major obstacles to purchasing a home—if one is available–and encourage people to look for rentals.
However, rentals in many areas (especially major cities) are also in relatively short supply, and priced in many markets at a level that demands that 30% or more of a household budget be spent on keeping a roof over the family’s head. And rents continue to rise at a much higher rate than incomes.
Milani’s second major point dealt with one of the culprits in this process—the private equity firms which have moved into the housing market. At the center of this process is the Blackstone Group, which is now the largest landlord for single-family rentals in the nation. In the wake of the 2008-2009 foreclosure crisis, Blackstone moved to buy up large swaths of abandoned property cheap, and then turned a substantial number of those dwellings into rental units, run by its rental division called Invitation Homes. In line with its philosophy of maximizing profits no matter what the human or broader economic costs, Blackstone has notoriously implemented outrageous rent increases, which have served to evict long-term residents and make the shortage of affordable housing even greater.
Blackstone is only one of many private equity firms involved in this process. According to a 2017 report by City Rising, one fourth of single family rentals today are owned by institutional investors, who are oblivious to the effect of their rapacious practices on local communities. Numerous studies have documented this sordid process, including the Americans for Financial Reform.
A Risk to the Nation
The danger to the nation from this process goes beyond the fact that it is immiserating and dislocating families, adding to the homelessness crisis, and ruining people’s lives. Private equity takeovers of real estate have also turned the rental housing market into a new financial bubble, through a new round of mortgage securitization. As the City Rising report points out:
This process is very similar to the mortgage-backed securitization made famous by the 2008 financial crisis. Invitation Homes issued the first single-family rental-backed security for $500 million in 2013. Since then, ten more companies have entered the market, amounting to 37 securitizations and totaling $44 billion with $16.4 billion still outstanding.
This dangerous process of financialization was elaborated at some length in the 2016 book by Rana Foroohar called Makers and Takers. (A review was printed in this blog in July of 2017.) In her chapter called “When Wall Street Owns Main Street,” Foroohar discusses how the post-crash housing market has become the playing field for private equity firms, which, she says, “operate very much like the most leveraged parts of the banking industry, but on steroids.” They operate as part of the shadow banking system, and thus evade what government regulation has continued to exist. And now these firms (like Blackstone) are securitizing rental properties—using the same kinds of real estate-backed securities that exploded in the 2008 crisis.
The laws that have been put in place, she writes, favor investors, not homeowners. In the name of financial responsibility, the banks now demand much larger down payments (20-30 percent is the norm), and are putting home ownership increasingly out of reach. The only population for which getting a mortgage is easier today, is the group of people contracting for what Foroohar calls “jumbo mortgages,” loans of $417,000 or more for single-family homes.
Foroohar emphasizes how dangerous this situation is, not just for the financial system, but also for average Americans, who increasingly find their dwellings, and their major financial asset, at risk from economic actors notorious for stripping their companies of assets, and bilking the public. If 10 million Americans lost their homes in the crisis of 2007-14, how many more might be out on the streets if a crisis hits again.
Note: These firms are not building new homes or apartments—despite the crying need for new decent housing stock. They are buying up and flipping already existing houses, and step-by-step making them unaffordable for middle- and lower-income Americans. This process qualifies as speculation, and there is no way that it will end well.
No Simple Solution
There is clearly no solution to this crisis without a reversal of the financialization of the economy as a whole, toward the American System. Reinstituting that system would provide inexpensive credit for productive investment (including housing), and would feature a tax system that would bleed the speculative bloating out of the housing market. Regulation—including Glass-Steagall strictures for the commercial banks–would be brought back, and protections put in place to protect the population from predators. (Proposals for clamping down on the destructive practices of the private equity funds have already been introduced into Congress.) It is insane that so many heads of households with full-time jobs cannot afford a simple two-bedroom apartment, much less a house.
Under such a system, wages would finally begin to rise and employment become more secure, while directed toward fulfilling the physical needs of society for modernized infrastructure. Indeed, without reindustrialization on the level of new, more advanced technologies, the productivity of the U.S. economy will continue to stagnate.
As far as housing per se, the goal must be that laid out explicitly by FDR – a decent home for every citizen – and the obstacles to that must be swept away. Those obstacles begin with astronomical land prices, which have been bid up by speculation, and which push home builders to produce for the high-end market. But they also include a myriad of tax rules and regulations which favor speculation on the current housing stock, and make it more difficult for companies who might want to build modest homes for those with moderate incomes to survive financially. Such rules must be changed.
It is a fraud to say that there is no demand for moderately-priced housing; the problem is that it hardly exists. In the Washington, D.C. area alone, there is an estimated need for 300,000 such units to be built over the next 10 years. Instead, older housing stock, which could be rehabilitated for people with modest incomes, is being razed to erect glitzy condos for IT executives and other high rollers. And where will the people go who lived in those older houses or apartments? Our current public planners don’t seem to care.
What FDR said in his Inaugural Address remains true today: “Economic laws are not made by nature. They are made by human beings.” Those laws must be crafted to meet the major objectives of society as a whole. In his Report on Manufactures, Alexander Hamilton expressed it this way:
Not only the wealth; but the independence and security of a Country, appear to be materially connected with the prosperity of manufactures. Every nation, with a view to those great objects, ought to endeavour to possess within itself all the essentials of national supply. These comprise the means of Subsistence habitation clothing and defence.
Hamilton set out the principles and instrumentalities by which these essentials could be provided, through the creation of an agro-industrial republic committed to technological progress. I am confident that their application in public policy today could put us on the path to solving our economic crises, housing included.