US housing market is broken, but the deep and structural problems cannot be solved with technology.
Why it matters: The US desperately needs 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 largest check ever, in Adam Neumann’s new company, Flow.
- Andreessen’s blog post explains his investment thesis that renting a house is “a soulless experience.”
- The details of how Flow will operate are still vague, but they will likely include amenities — bells and whistles for apartment renters — as well as some sort of financial benefit.
What they say: “Someone who is bought from where he lives cares more about where he lives,” Andreessen writes. “Without it, apartments don’t generate person-to-place bond, and without community, there’s no person-to-person bond.”
- In New York, I’ve lived in both owner-occupied and rental apartments, and the community in my rental building was just as vibrant and close-knit as anywhere else.
- Neighborhoods characterized by very low home ownership — think Harlem, in New York, or Hialeah, in Miami — often have deep and sustainable communities that span generations and decades.
Reality check: “Ownership by itself doesn’t make you invest more in your community,” Sam Chandan, director of the NYU Stern Center for Real Estate Finance Research, told Axios. “It makes you invest more in community decisions that affect the value of your property.”
- For example, Andreessen opposed multi-family development in his hometown of Atherton, California, on the grounds that such development “will HUGE drop in 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 in some way.)
- However, where rental housing is most successful – Germany is Exhibit A – it is not because tenants “receive owners’ benefits,” in Andreessen’s formulation. Rather, it is because they have housing security and affordability.
- German tenants build strong community ties the way we all do – just by getting to know our neighbors. They – we – don’t need super-fast amenities like those offered by your local WeWork.
Where it says: Private sector solutions such as Flow cannot by their very nature remove the deepest obstacles to successful rental housing.
- It’s very possible that Neumann will be successful in selling hip homes to upward mobile renters in fast-growing cities like Nashville.
- But that won’t detract from the structural obstacles that advocate America becoming more of a tenant nation.
Why is it so difficult to solve the rental market?
Much of the reason for the lack of affordable housing in America can be found at the local or even individual level.
- zoning is the biggest problem: NIMBYs like the one in Atherton are the rule, not the exception. Getting permission to build new multi-family homes is ridiculously expensive and difficult.
- Education financing runs a close second. As long as schools are funded by local property taxes, parents will favor high property values over affordable housing, often increasing the number of children attending local schools without increasing tax revenues accordingly.
- The American Dream also gets in the way. After looking at the behavior of older millennials, NYU’s Chandan says, “the data suggests that homeownership as a natural and anticipated evolution is deeply rooted in the American psyche.”
federal policy that privileged home ownership is already a lot weaker than it used to be.
- Former President Trump’s tax reforms have dramatically reduced the number of people claiming mortgage interest deductions, and government-subsidized 30-year mortgages are widely available on multifamily homes.
- Once they get married and start a family, buying a house — and voting against 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, construction of new homes – both single-family and multi-family homes – caused them to fall off a cliff and fail to keep up with U.S. population growth. But now it has been restored and more houses are being built than households are being created.
There is still a housing shortage we have to build our way out. But Andreessen is wrong when he states that ‘our country creates households faster than we build houses’.
- The percentage of household formation is equal to the annual growth rate of adults in the US multiplied by the percentage of headship, which is always around 50%. Household formation collapsed when the pandemic hit, but even pre-pandemic, in 2019, it only amounted to about 900,000 new households per year.
- On the other hand, new housing construction is steadily increasing. Homes are being built at an annual rate of about 1.6 million units per year, well above the rate at which households are formed, even if you factor in older units being demolished.
Peter Boockvar, Chief Investment Officer at Bleakley Financial Group, tells Axios that multi-family homes are capitalizing on ultra-low vacancy rates by building quickly.
- If we continue to build at current levels within a year or two, rents may even fall.