America’s Housing Market is broken, but the deep and structural problems cannot be fixed with technology.
Why it matters: The USA urgently needs more high-quality rental housing. Homeownership works for many – and not at all for many others who may not be ready to settle or may not have the financial means.
The big picture: Venture capitalist Marc Andreessen has invested $350 million, his largest check to date, in Adam Neumann’s new company Flow.
- Andreessen’s blog post lays out his investing thesis that renting a home is “a soulless experience.”
- The details of how Flow will work are still vague, but they will likely include amenitization — bells and whistles for apartment tenants — as well as some sort of financial benefit.
What you say: “Someone who has shopped where they live cares more about where they live,” writes Andreessen. “Without that, homes don’t create a bond between people and places, and without community there’s no bond between people.”
- I’ve lived in both condos and rentals in New York, and the community in my rental home was just as vibrant and tight-knit as anywhere I’ve owned.
- Neighborhoods characterized by very low homeownership rates — think Harlem in New York or Hialeah in Miami — often boast deep and enduring communities that span generations and decades.
Reality check: “Ownership by itself doesn’t make you invest more in your community,” Sam Chandan, the director of the NYU Stern Center for Real Estate Finance Research, tells Axios. “By doing so, you invest more in community decisions that affect the value of your wealth.”
- Andreessen, for example, opposed multi-family development in his hometown of Atherton, California, on the grounds that such development “will MASSIVELY decrease our home value.”
Between the lines: As a VC, Andreessen believes that technology and entrepreneurship can solve the problems of the rental market. (Of course, since this is Andreessen Horowitz, blockchain seems to be involved somehow.)
- However, where rental housing is most successful – Germany is Exhibit A – it is not because renters “receive the benefits of the owners”, as Andreessen puts it. Rather, it is because they have housing security and affordability.
- German renters build strong community bonds, as we all do – simply by getting to know our neighbors. You—we—don’t need fancy amenities like the ones your local WeWork offers.
Where it says: Naturally, private-sector solutions like Flow cannot remove the biggest obstacles to successful rental apartments.
- It’s entirely possible that Neumann will market successful properties to up-and-coming tenants in fast-growing cities like Nashville.
- But that won’t change the structural barriers to America becoming more of a renters’ nation.
Why it’s so hard to fix the rental market
Many of the reasons for America’s lack of affordable housing can be found at the local or even individual level.
- zoning is the biggest problem: NIMBYs like the one at Atherton are the norm, not the exception. Obtaining permits to build new apartment buildings is ridiculously expensive and difficult.
- education funding running in second place. As long as schools are funded by local property taxes, parents prefer high real estate values to affordable housing, which often increases the number of children in local schools without a corresponding increase in tax revenues.
- The American dream also gets in the way. After looking at the behavior of older millennials, NYU’s Chandan says, “the data suggest that homeownership is deeply ingrained in the American psyche as a natural and expected development.”
federal policy that favored home ownership is already significantly weaker than it used to be.
- Former President Trump’s tax reforms have massively reduced the number of people claiming the mortgage interest tax deduction, and government-subsidized 30-year mortgages are common for multifamily homes.
- Once they marry and start a family, buying a home — and refusing further new construction — is exactly what Americans do, whether it makes financial sense or not.
It’s time to build
The Great Recession After the 2008 financial crisis, new home construction – both single-family and multi-family – fell off a cliff, unable to keep pace with population growth in the US. But now it has recovered and more houses are being built than households are being created.
There is still a housing deficit we have to work our way out. But Andreessen is wrong when he claims that “our country creates households faster than we build houses”.
- The household formation rate is the annual increase in US adults multiplied by the household head rate, which is always around 50%. Household creation plummeted when the pandemic struck, but even before the pandemic hit, only about 900,000 new households were created per year in 2019.
- New residential construction, on the other hand, is steadily increasing. Homes are being started at an annual rate of about 1.6 million units per year, well above the homemaking rate even after you account for the demolition of older units.
Peter Boockvar, Bleakley Financial Group’s chief investment officer, tells Axios that apartment building developers are responding to extremely low vacancy rates by building quickly.
- Rents could even drop within a year or two if we continue to build at the current level.