An Article of the Modern Survival Guide
You’re reading the Modern Survival Guide, a long-running blog that I’ve been writing to cover things that we all need to know to survive and thrive in the modern world. In the US, where I live, survival is an increasingly important topic. We have a large number of national crises that, regardless of your politics, exist and affect us all. We desperately need to solve, or at the very least address, these issues and so far… nope. No real progress.
In Part 1 of this mini-series, I talked about the first of these big challenges, the current political instability that is endemic in the US. In Part 2 I tackled the problems with our national narrative, and in Part 3 I discussed inflation. Part 4 was on the national debt. Today, we’re covering the housing crisis, which is a remarkably insidious, resilient, and far-reaching problem. It’s created a financial crisis once in my lifetime, and it looks like it’s on point to do so again.
The Problem: Everyone Needs a House and There Aren’t Enough
There are a few key components we have to get through in order to understand the housing crisis, and so we’re going to list those out, explain each one, and then present some extraordinarily uninformed opinions on solving this problem. Let’s be honest, folks — I’m not an expert in housing policy, so I’m doing as much of my job as I can by pointing out the problem to you and then prompting dialogue.
That being said, the core issues surrounding the housing crisis are pretty well understood at this point, and they are:
- You have to have a place of residence, by law.
- Housing construction slowed after 2008, and never caught up.
- Boomers aren’t dying and making homes available.
- Companies are buying up homes.
- Home loans were too cheap for too long.
- Rental prices are insane.
When you add all of these things up, you get a system in which people must have a place of residence in order to survive, but can’t afford a house, and can’t afford to rent, which consequently is producing an enormous drag on the average American’s ability to have a family and finance literally any other purchase. Let’s get into it.
You Have to Have a Home
This is a core premise of the whole discussion, and it’s actually kind of interesting as one of those things that we all just take for granted — you have to have a home. You must have a place of residence, by law, in most places, in order to qualify for just about any service you’d care to name, to apply for a job, or even to become part of the systems of licensing and registration that dominate modern life (note: I’m not saying those systems are inherently bad, but they exist).
This is why homelessness is just absolutely devastating, by the way. Without a place of residence, you are a bum. Society treats you like a piece of garbage. You can be legally run out of just about everywhere because, and this is a key point, property is king in America. If you don’t own a space, there are very, very few public spaces where you can legally be. Everyplace else is private property, and the moment someone doesn’t want you there, you’re a trespasser.¹
You have to have a home. That means that to live in our society, you must rent or own property. Period, full stop. The incentive structure is set.
So why is it so hard to get a house? The simple answer is “you can’t afford one,” but that used to be an exception rather than the current rule. That all changed fifteen years ago.
The Great Housing Construction Crash
Let’s think back to 2008. America was getting into the crunch of the most severe recession in decades, an event that rivaled the Great Depression in terms of sheer impact to the economy, and one which would set the stage for our current economic reality.
The Great Recession had a huge impact on the housing market. It was the housing market that triggered that crisis in the first place, and the housing market took a long time to recover afterwards — nearly a decade by most estimates. That decade represented underbuilding; it wasn’t economical to build new homes in a market that couldn’t sell them.²
That underbuilt decade, in turn, resulted in a mismatch between housing availability and housing demand. That helped the market conditions rise to the tumult we saw in 2021/22, as a huge volume of potential homebuyers took advantage of low interest rates, competed for increasingly rare real estate, and consequently massively inflated the price of housing nationwide.
The economic rationale for these events is painfully simple. Supply did not increase as rapidly as demand. Capitalism only has one thing to say about the consequences of such a situation — prices go up. The more prices go up, the fewer people are able to afford homes.
In 2023 and for a few years in the future, we should expect to see another housing slowdown, for similar reasons. Interest rates are high again, and the price of homes hasn’t been dropping fast enough to rekindle buying. At the same times, wages and material costs have increased markedly over the past two years. I’ve said it before and I’ll say it again — it hurts to be part of a market correction, which is what we see happening here, and it will contribute to an increasing pinch on home availability.
Please keep in mind: it is to the home construction industry’s benefit to keep prices as high as the market will sustain. It is also to their benefit to sell homes to whoever can afford to buy them. This will become relevant later on in the article.
There are other contributing factors as well, such as…
Boomers Aren’t Dying Fast Enough
Ok, I recognize the “Boomers aren’t dying” thing is a meme for a lot of reasons, and no offense is intended to the Boomers, but here’s the deal: in the past, generations died and their homes opened up for resale. In the past, coupled with new home construction, this happened fast enough that new generations could find homes. That was the past.
These days, the life expectancy is considerably higher than it was in, say, 1980.³ Not by much, mind you — a few years — but that’s enough to throw a delicate system out of balance, which is exactly what has happened. If grandma doesn’t die, and you don’t want to move in with grandma, you don’t get grandma’s house. It’s as simple as that.
Now, one could be forgiven for thinking that the market would eventually find a happy equilibrium, except…
Companies Are Buying Up Homes
These days, depending on who you ask, between 20% and 25% of homes are bought by investment firms of one stripe or another, either as asset investments, as flip properties, as attempts to consolidate a local market, or for the rental market, again depending on who you ask. Remember, folks, if there’s a market for it, there’s a company that has been formed to exploit that market! That’s just how things go.⁴
This is toxic if you are an individual attempting to buy a home, because every single one of these companies can outbid you if they want to. This was, in part, what prompted the buying frenzy of 2021/22; people were desperate to get a house, and costs were rapidly and in many cases transparently manipulated by real estate speculation.
This is also a toxic trend long-term; again, part of our ongoing problem is that there simply are not enough houses on the market, and most of the houses that have been bought by corporate interests are going on the rental market, not the sale market. Corporate groups buying up homes can, will, and have increased the price of every other home for sale (because capitalism has only one thing to say about restricted supply and high demand).
Home Loans Were Too Cheap for Too Long
From late 2008 through the end of 2021, the Federal Reserve prime interest rate was historically low. That means that loans were very cheap for lending institutions to make during that time. There were a few years of recovery following 2008, another few years while lending companies competed their way to the bottom, and then it all came to a head between 2020 and 2022 as interest rates plummeted on loans across the board.
This had major implications. The first was that it created a buying frenzy that artificially inflated the home market. This was, in fact, part of the point. The Fed wanted to stimulate the home market after 2008 to try to prevent some of the other negative side effects we’ve already discussed. But in this case it was too much of a good thing, and the end result was that home prices skyrocketed starting in 2020, and kept going until the Fed slammed the brakes in 2022. Two years isn’t a long time, but it was long enough for home prices to increase something like 40% over that time period, depending on the location.⁵
Folks, 40% is a lot when you start talking about hundreds of thousands of dollars. As the old saying goes, a thousand here, a thousand there, and pretty soon you’re talking about real money. This type of a jump in home prices was only briefly sustainable, as it rapidly priced every rational homebuyer out of most markets, and was only attractive at all because home loan interest rates were between 2% and 4%. As of this writing, home sales are bottoming out compared to the boom time.⁶
The problem is, home prices aren’t. It’ll take another year, or maybe longer, for the market prices to reset to a level that balances out the price with demand. That’s another year with another tranche of people who can’t or won’t buy a house, and another year when housing construction won’t be as rapid as it “ought” to be. And that leads us to our final issue.
Rental Prices are INSANE
Rental prices have been increasing more or less linearly since the 80s, always at a rate faster than inflation, but over the last couple of years it’s started to look like a j-curve, and that’s a BIG problem.⁷ This means that not only are people priced out of homes, they’re also priced out of renting. And that means that if you’re in a low-income situation, can’t live with your parents, and can’t find roommates, you’re screwed.
Folks, I can’t tell you exactly what effect this will have on our economy, because it’s impossible to predict something this complex. But it won’t be good. We could start seeing things like flight from urban areas, particularly among the people who make things work but don’t get paid a lot (teachers, sanitation workers, service industry people, etc.). We could start seeing an increase in homelessness. Or it might (arguably, already has) have more insidious impacts, like skyrocketing credit card debt due to people loading up their credit cards because they can no longer afford groceries.⁸
None of this is made any better, at all, by any of the factors previously mentioned.
What Can be Done?
Ok, so what do we have here? We have a crisis both in situ and in the making in which not enough people can buy homes to keep pace with the demand, because they’re too expensive, while people are also being priced out of the rental market, which creates an overall financial drag on millions of American households. This is a big problem.
There are very, very few solutions to this problem that don’t confer a degree of pain. Again, I’m not an expert, but that’s pretty obvious and we should accept it as given.
For example, the Federal Reserve has been raising interest rates all through 2023 in order to clamp down on inflation, which theoretically will eventually lower the sticker price of homes — but at the cost of increasing mortgage rates, which just sets the stage for a slower market that is still priced out of the range of normal people. This just further exacerbates a couple of the points listed above, if it happens in a vacuum.
Similarly, this is time when people start talking about price caps, and that doesn’t work either. Capitalism and price caps do not work well together; that’s basic economics, and it’s proven reasonably true over the years. You end up causing more harm than good; given current post-COVID material market conditions, a price cap on home sales would simply result in fewer homes being built which, again, exacerbates a long-term problem.
Someone might also say that boosting wages would help get people into housing, or possibly boosting the availability of cheap loans. Unfortunately, as we have already seen happen in other areas (I’m looking at you, student loans), increasing the availability of money doesn’t solve a supply-side problem. It makes it worse.
There are a couple of solutions that might work, though: one is legislatively based, the other is market-based with the potential for governmental prodding. Again: NOT AN EXPERT, TAKE WITH GRAIN OF SALT.
The legislatively-based solution is to bar corporate entities from owning homes for the purpose of renting. That would cause a fair degree of screaming in the rental market, and likely wouldn’t be a perfect solution (someone would try to game the system) but would likely force a large number of houses back into the sale market, with an expected effect of lower housing prices due to increased supply. This is not a new idea; it’s currently being worked at local levels across the country, but frankly this needs to be a national implementation to make it work properly.
The market-based solution has to do with telework. As we all know, teleworking is in, and it’s very likely the proverbial djinn that won’t go back in the bottle. That has already created several problems in cities around the country, because most of those cities relied on office workers coming into the city limits and spending money when they went to work. The service industry in particular is getting nuked in many American cities.⁹
Telework is not going away, and pretty soon the leases are going to run out on expensive office complexes across the country, many of which are in desirable urban areas with a dearth of housing. Those office leases probably won’t be renewed any time soon. I’m sure you can see where I’m going with this: renovate those buildings into apartments and condos. That solves three problems with the same stroke. The building owners make money, the cities attract residents and money, and the housing market gets a much-needed bump in supply.
And… that might be pretty much it. Over a sufficiently long timespan, market forces should eventually reach a new equilibrium, and we will likely see another great housing boom in my lifetime. That seems to be the way things go. Unfortunately that doesn’t help anyone right now, and the economic future of a generation or two is being written by the housing market.
Make no mistake, this is a crisis and it does affect you, if you are looking to buy, sell, or rent a home, as millions of Americans are. It’s the product of years of mismanagement, and absent some degree of intervention this is a problem that won’t go away without a decade or so of economic pain, and the financial apocalypse of Millennials and Gen Z.
¹Something of an oversimplification, as there are such things as squatter’s rights, but it’s still a mostly valid point as squatting is illegal in the US. There are plenty of discussions on homelessness online, and here’s one of them for reference: https://nlihc.org/sites/default/files/AG-2021/06-08_Criminalization-of-Homelessness.pdf
²Let’s recall that the population continued to increase while homes were no longer being built in sufficient quantities to house that burgeoning population. https://www.businessinsider.com/us-underbuilding-housing-over-the-past-decade-2020-9
³Yes, even with COVID thrown into the mix. https://www.macrotrends.net/countries/USA/united-states/life-expectancy
⁴For more reading, here’s a decent summary of a local situation: https://www.stltoday.com/business/local/how-out-of-state-companies-are-buying-up-homes-and-changing-the-st-louis-area/article_279a03be-7944-5bd9-8d22-2a4eb436bbe3.html
⁵Again, depending on who you ask, and what region of the country you happened to be in. https://www.cnn.com/2023/01/20/homes/existing-home-sales-december/index.html#:~:text=The%20median%20home%20sale%20price,17.8%25%20from%20the%20year%20before.
Home prices skyrocketed last year. Two regions saw the biggest increases | CNN Business
Home prices rose 18.8% in 2021, according to the S&P CoreLogic Case-Shiller US National Home Price Index, the biggest…
⁶Again, depending on your region and who you ask, but the point is that home sales are now at a 10-year low. https://tradingeconomics.com/united-states/existing-home-sales
⁷A linear increase just means that a chart would show a more or less straight line. A j-curve is a sudden upward (or downward, but in this case upward) shift in a trend line where it shows a sudden rapid increase. https://www.nerdwallet.com/article/finance/rental-market-trends
⁸This is already happening, and it’s terrifying. This is the type of slow-burning fuse that triggers major recessions. https://www.cnbc.com/2023/02/03/us-credit-card-debt-jumps-18point5percent-and-hits-a-record-930point6-billion-.html