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 put it this way, 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 practices 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 tables below will look very different from 2020 onward. Eviction Lab’s website (here) may become one of the best places to keep an eye on America’s housing policy crisis. Ordinary citizens can help flatten their legislators’ learning curve by examining the Lab’s scoreboard of state policy changes in response to the pandemic. The continuing legacy of the 2008 crisis is directly reflected in the lab’s state-by-state and county checklist (here) and NYC’s Columbia Law School’s help. For example, new York landlords can’t file eviction orders against tenants right now – but they can after June 20, 2020.
The best source for monitoring policy changes in NYC is through the New York University Furman Center.
The market recognizes home value fluctuations with an increased number of 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 in rental households, of which 5 million are in NYC. The share of renter households whose gross rent made up more than 30 percent of their monthly pre-tax income is approaching 50% of households.
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 good 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
Wall Street’s $60 billion real estate purchases have altered housing markets all over 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 in FY 2017. As in the 2008 recession, the malfunction is not paying attention to the possibility that former housing policies 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 in which to invest. This wrinkle in a hot market is smooth with 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 that recognize the rights of residents 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 in the form of a five-room apartment in which the average cost of its development came to $20,000.
It is important to point out that this was considered reasonable and $20,000 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) represented in the development was composed of 1) construction, 2) taxes, 3) land, 4) money, and 5) operating costs and then pointed out of the five which had the greatest impact on rent. Answer: the cost of money is the major factor. Today a change of one percent in the average interest rate from development through permanent financing could alter rents by $120 per month. Manipulate all of the other costs, and it will yield minimal impact on rent.
The affordability of housing is built entirely on Wall Street’s finance and banking industries’ desire to sustain both low (for them) and high-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).