The causes of the housing problem can give you a facial tick. Here goes one recent example; the housing market has added single-family-rental securitization. This specimen is made of our old friend mortgage-backed securities backed by inflated home value and a rising market for rental housing. Combined with the collapse of employment, a friend from Michigan said this could turn into a nasty brew of outraged and hungry people, all of whom have guns.
In 2016, 95 percent of the distressed mortgages on Fannie Mae and Freddie Mac’s books were auctioned off to Wall Street investors without preconditions and few provisions. As a result, the market recovered but without homeowners. Instead, private-equity firms acquired over 200,000 homes. While cities like New York are attractive but expensive investments, a substantial percentage of these new acquisitions occur in middle-class and low- and moderate-income suburban neighborhoods. Single-family buildings have been in the rental market for a long time, but only recently has this practice added volatility to the market with the public humiliation of eviction.
Matthew Desmond’s book focused on eviction as a cause and consequence of distress in low to high-density communities. Once considered a big-city problem where evictions occurred formally through the courts. Less known and understood are management practices using subtle displacement, such as “rent to buy schemes,” where low rent is the “hook,” and high down payments provide the profit. Overall, the increased rate of housing displacement is driven by weak government policies attracted to quick fixes, leading to the rise of institutionally managed and owned rental housing and a court system that does not recognize the rights of tenants as comparable to landlords or developed the capacity for mediation before calling a U.S. Marshal.
“The moment these moratoriums are lifted, we’ll see massive evictions.”
Professor Emily Benfer, Columbia Law School to CNBC reporter Annie Nova
The best source for monitoring policy changes in NYC is the New York University Furman Center. For the final tally on pandemic impact evictions. The market recognizes home value fluctuations with increased tenants available to cover mortgages. However, the market could not recognize the collapse of renter capacity to prioritize shelter over all else. Another fly in the soup (aka malfunction) is the invisibility of increased corporate ownership in low-density areas whose legal systems heavily favor owner over renter. The table below shows how NYS is attempting to protect its 8.2 million people [? population of Lima, the capital city of Peru]
A 2018 study of New York eviction cases (Collinson & Reed, here) established a connection between eviction and homelessness in New York City. The malfunctions of the housing market go both ways. A similar graph showing the percentage of household income for rent would also move steadily up from a baseline of affordability at 30%, rising to over 50% in 2019.
America’s complicated housing market story includes a blaze of web articles (example here) that claim property management and rental housing acquisitions are suitable investments based on the volatility of sales (figure 3 below), offering the fun of bargain hunting coupled with the steady upward trend in asking rents (figure 2 above).
Wall Street as Landlord
The Malfunction
Wall Street’s $60 billion [? net worth of Bill Gates, 2011] real estate purchases have altered housing markets throughout the United States. (NYT Story) The total funding for the Housing Choice Voucher program (Section 8) was a third of that at $20.292 billion [? cost of 2005 Hurricane Wilma] in FY 2017. As in the 2008 recession, the malfunction is not paying attention to the possibility that former housing policies that put equity in ordinary families’ lives through homeownership have disappeared just as the public might have been ready to recognize the inequity built into the system since 1950 could be corrected for the damage to families of color.
New York City’s real estate market includes some of the most high-profile properties in the world. Unfortunately, it is also one of the most expensive investments. This wrinkle is the invention of publicly traded real estate investment trusts (REITs).
These outfits are companies that invest directly in real estate through properties or mortgages. The Internal Revenue Service requires REITs to pay taxable profits in dividends to shareholders. Companies with REIT status do not pay corporate income tax. It has developed adjudicative services with support systems recognizing residents’ rights as renters. Investopedia’s description of Investing In New York City REITs is recommended reading.
In 1968 the Citizen‘s Housing and Planning Council of New York (CHPC) produced a little sixteen-page booklet on the housing problem with the above graphic on the cover. As a housing affordability advocacy group, they wanted people to understand what it took to build and operate affordable housing. So they put it in the form of a five-room apartment in which the average cost of its development came to $20,000 $20,000 [? Per capita income – Taiwan, 2005] in 1967, based only on the consumer price index changes that would be $155,000 in 2020 to yield a total inflation rate of 675% or 12.73% /year. The genius of the CHPC presentation is how the five rooms (image above) represent the five main factors for development composed of 1) construction, 2) taxes, 3) land, 4) money, and 5) operating costs. Of the five, what has the determining impact on rent? Answer: the cost of money. Today a change of one percent in the average interest rate from development through permanent financing could alter rents by $120 [? Smartphone cost per month] per month. Manipulate all the other costs, which will yield minimal impact on rent.
Housing affordability is built entirely on Wall Street’s finance and banking industries’ desire to sustain low (for them) and higher interest rates (for everyone else). Since 1967, or just over fifty years, the rate is based on the CPI alone, the trend toward high and almost 675%.
The lack of affordable rents and housing (a human right) sits squarely on government steps in handling the cost of money for the American people’s safety and health. A researcher on this question will find reasonably up-to-date data in another post (here).