San Francisco: Modern Housing in The Golden City. Image © Blake Marvin
The housing crisis in America has been a persistent problem, but recent developments involving private hedge funds purchasing detached houses and townhouses are set to exacerbate the situation. These acquisitions by hedge funds are unlikely to re-enter the real estate market, further limiting the availability of housing.
Why do these purchases create such a problem? Hedge funds typically hold residential properties for 5-10 years, but when they decide to sell, they are unlikely to list them on local real estate platforms. Instead, these properties become assets to be traded among institutional investors. This transformation of residential properties into an asset class further restricts access for prospective homebuyers, perpetuating the shortage of homes for sale.
The establishment of a bundled home market allows funds to overpay for homes, as they anticipate appreciation of a scarce asset that generates tax-sheltered cash flow from rents and depreciation expenses. This gives hedge funds a significant advantage in a competitive housing market. They are cash buyers who can waive inspections and offer higher prices compared to individual homebuyers.
While some may compare this situation to the financial crises of the past, such as the bundling of subpar mortgages, it is unlikely to result in a similar collapse. Housing demand is an enduring force that persists year after year. People continue to form new households, creating an ongoing need for housing.
However, three critical problems contribute to the supply issue at the heart of the crisis:
Not Enough Affordable Pay
Many individuals struggle to afford rent or save for a down payment due to stagnant wages over the past two decades, coupled with a steady increase in housing costs.
Unequal Distribution of Affordability Challenges
As people flock to vibrant metropolitan areas for employment, education, and healthcare opportunities, the housing crisis is not evenly distributed across the nation. Some regions experience sharper cost increases than others.
Limited Productivity in the Construction Sector
The housing construction sector suffers from a shortage of skilled labor, hindering productivity. Without an increase in skilled workers, production will remain stagnant. This scarcity of resources demands innovation or potential failure from local small developers and builders.
Regrettably, these challenges are expected to persist for years, and the actions of hedge funds only worsen an already intense situation. In response, small developers and those interested in building and revitalizing neighborhoods should focus on constructing modest rental properties, often referred to as missing middle housing. These properties include rental apartment buildings and small mixed-use or live/work buildings.
To identify the ideal location for such projects, distressed existing neighborhoods should be prioritized, while avoiding overheated and costly areas of the market. Speculative values in for-sale housing have rendered many places expensive to build in, with local rents unable to support higher construction costs. By concentrating efforts on neighborhoods where modest rental projects are financially viable, opportunities arise to engage local construction trades and individuals interested in acquiring valuable skills. Ultimately, it is crucial to select a place that requires attention and care.
By acknowledging the hurdles posed by private equity in the housing market and adopting a strategic approach to building, we can begin to address the housing crisis and establish stronger communities that meet the needs of residents.
