Why the Rental Housing Market Is So Deeply Broken

America’s housing market Broken, but not deep and structural problems cannot be fixed with technology.

why it matters: America is in dire need of more high quality rental housing. Homeownership works for many people—and doesn’t work at all for many others who may not be ready or have the financial means to settle down.

big picture: Venture capitalist Mark Andreessen has invested $350 million in Adam Neumann’s new company Flow, his biggest check ever.

  • Andreessen’s blog post states his investment thesis, that renting a home is “an amicable experience”.
  • The details of how Flow will work are still unclear, but they are likely to include amenityization — the bells and whistles for apartment renters — as well as some sort of financial upside.

What are they saying: Andreessen writes, “Someone who is bought where he lives cares more about where he lives.” “Without it, apartments create no bond between person and place, between person and place, and without community, between person to person.”

  • In New York, I’ve lived in both owned and rented apartments, and the community in my rental building was as lively and tidy as the one I’ve owned.
  • Neighborhoods characterized by very low home-ownership rates – think Harlem in New York, or Hialeh in Miami – often boast deep and enduring communities spanning generations and decades.

reality check: “Ownership per se doesn’t make you more invested in your community,” Sam Chandon, director of the NYU Stern Center for Real Estate Finance Research, told Axios. “It makes you more invested in decisions in the community that affect the value of your assets.”

  • For example, Andreessen opposed multifamily development in his hometown of Atherton, Calif., on the grounds that such development would “significantly reduce our home values.”

Between the lines: As a VC, Andreessen believes that technology and entrepreneurship can solve the problems of the rental market. (Naturally, this being Andreessen Horowitz, the blockchain is somehow involved.)

  • Where rental housing is most successful, however – Germany is Exhibit A – is not because renters “get the owners’ benefits” in Andreessen’s formulation. Rather, it is because they have housing security and affordability.
  • German renters form strong community bonds the way we all do – simply by getting to know our neighbors. They — we — don’t need the fast-paced features your local WeWork offers.

Where does it stand: Private sector solutions like Flow, by their very nature, cannot remove the deepest barriers to successful rental housing.

  • It’s entirely possible that Newman was successful in marketing buzzy properties to upwardly mobile renters in fast-growing cities like Nashville.
  • But it is not going to break into the military infrastructure barriers against America becoming a tenant country.
Why the rental market is so hard to fix

Much of the lack of affordable housing in America has to be found on a local or individual level.

  • zoning The biggest issue is: The NIMBYs found at Atherton are the rule, not the exception. Getting permission to build new multi-family housing is ridiculously expensive and difficult.
  • education finance Runs a close second. As long as schools are funded by local property taxes, parents will prefer higher property values ​​to affordable housing, which often increases the number of children in local schools without increasing tax revenue.
  • American Dream gets in the way too. After observing the behavior of older millennials, says NYU’s Chandon, “the data suggest that homeownership as a natural and expected development is deeply rooted in the American psyche.”

federal policies That favorite homeowner is already much weaker than before.

  • Former President Trump’s tax reforms massively reduced the number of people claiming the mortgage interest tax deduction, and government-subsidized 30-year mortgages are widely available on multifamily buildings.
  • Once they get married and start a family, buy a house – and vote against further new construction – that’s just what Americans do., Whether it makes financial sense or not.
it’s time to build

great recession New-home construction – both single-family and multi-family – fell off a cliff after the 2008 financial crisis, and failed to keep up with US population growth. But now it has started again, and more houses are being built than houses.

There is still a housing shortage We need to make our way. But Andreessen is wrong when he insists that “our country is building houses faster than it is building houses.”

  • The household formation rate is equal to the annual increase in American adults multiplied by the headship rate, which is always around 50%. Home construction fell when the pandemic hit, but even pre-pandemic, in 2019, it was only running around 900,000 new homes per year.
  • On the other hand, new residential construction continues to grow. The houses are being commissioned at an annual rate of about 16 lakh units per annum, which is much higher than the rate of domestic construction even after the old units are demolished.

Peter Boucher, chief investment officer at Blakely Financial Group, told Axios that multifamily homebuilders are responding to ultra-low vacancy rates by building faster.

  • Within a year or two, he says, if we continue to build at current levels, rents could come down as well.

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