Why the rental housing market is so deeply damaged
America’s housing market is broken, but the deep and structural problems cannot be fixed with technology.
Why it’s important: The United States is in desperate need of more high-quality rental housing. Home ownership works for many – and doesn’t work at all for many others, who may not be ready to settle down or may not have the financial means.
The big picture: Venture capitalist Marc Andreessen has invested $350 million, his biggest check ever, in Adam Neumann’s new company, Flow.
- Andreessen’s blog post lays out his investment thesis, that renting a home is “a soulless experience.”[ads1];
- 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 kind of financial upside.
What they say: “Someone who is bought in where he lives cares more about where he lives”, writes Andreessen. “Without this, apartments generate no bond between person and place and without community, no bond between person to person.”
- In New York, I’ve lived in both owned and rented apartments, and the community in my rental building was as vibrant and tight-knit as anywhere I’ve owned.
- Neighborhoods characterized by very low home ownership rates – think Harlem in New York or Hialeah in Miami – often have deep and enduring communities that span generations and decades.
Reality check: “Ownership by itself does not make you more invested in your community,” Sam Chandan, the director of the NYU Stern Center for Real Estate Finance Research, told Axios. “It makes you more invested in decisions in society that affect the value of your asset.”
- Andreessen, for example, opposed multi-family development in his hometown of Atherton, Calif., on the grounds that such development “would MASSIVELY decrease our home values.”
Between the lines: As a VC, Andreessen believes that technology and entrepreneurship can solve the problems in the rental market. (Of course, when this is Andreessen Horowitz, blockchain seems to be involved, somehow.)
- Where rental housing is most successful—Germany is Exhibit A—it’s not because renters “receive the benefits of owners,” in Andreessen’s formulation. Rather, it is because they have housing security and affordability.
- German tenants build strong community bonds as we all do – just by getting to know our neighbours. They – we – don’t need whiz-bang amenities like those offered by your local WeWork.
Where it says: Private sector solutions such as Flow cannot by their very nature solve the deepest obstacles to successful rental housing.
- It’s entirely possible that Neumann will succeed in marketing vibrant properties to upwardly mobile tenants in fast-growing cities like Nashville.
- But it will do nothing to address the structural obstacles that militate against America becoming more of a nation of rentiers.
Why it is so difficult to fix the rental market
Much of the cause of the lack of affordable housing in America can be found at the local or even individual level.
- Zoning is the biggest problem: NIMBYs like those in Atherton are the rule, not the exception. Getting permission to build new multi-family housing is ridiculously expensive and difficult.
- Education funding runs for a short second. As long as schools are funded by local property taxes, parents will prefer high property values to affordable housing, often increasing the number of children in local schools without correspondingly increasing 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 as a natural and expected development is deeply ingrained in the American psyche.”
Federal policy that favored home ownership is already much weaker than it used to be.
- Former President Trump’s tax reforms massively reduced the number of people claiming tax credits for mortgage interest, and government-subsidized 30-year mortgages are widely available on multifamily buildings.
- Once they get married and start a family, buying a house – and voting against further construction – is exactly what Americans do, whether it makes economic sense or not.
It’s time to build
The Great Recession after the financial crisis in 2008, the construction of new housing – both single- and multi-family houses – fell off a cliff and failed to keep pace with the US’s population growth. But now it has picked up again, and more homes are being built than households are being built.
There is still a housing deficit we have to build ourselves out of. But Andreessen is wrong when he claims that “our country creates households faster than we build houses”.
- The household formation rate is equal to the annual increase in US adults multiplied by the headship rate, which is always around 50%. Household formation plummeted when the pandemic hit, but even pre-pandemic, in 2019, there were only about 900,000 new households per year.
- New housing construction, on the other hand, is steadily increasing. Houses are being started at an annual rate of about 1.6 million units per year, well above the rate of household formation even after you account for older units being demolished.
Peter Boockvar, chief investment officer at Bleakley Financial Group, tells Axios that multifamily homebuilders are responding to ultra-low vacancy rates by building quickly.
- In a year or two, he says, if we continue to build at current levels, rents may even begin to drop.