Making a house an investment is social poison

In the United States, homes have long been considered one of the safest, most responsible investments one can make. Paying down that 30-year mortgage to own the traditional detached suburban home free and clear, complete with yard and white picket fence, is what many consider to be the American Dream itself.

But the policies and practices necessary to make homes increase in value over time are social poison. They were a major factor behind the housing bubble and ensuing Great Recession, and as a big New York Times report shows, today they are once again inflating housing markets around the country. This risks another bubble, puts many homes out of reach of middle-class buyers, and directs investment away from more productive enterprises.

Let me start with a simple yet undeniable fact: There is no inherent reason why a house should appreciate in price. Unlike, say, a share of Apple stock, a house has no prospect of increasing in productivity to provide more shelter services. On the contrary, all it does is slowly fall apart, requiring progressively more maintenance and updating over time. And almost certainly it will eventually have to be torn down and rebuilt. In many countries, like Japan, homes are a declining asset — something like a car that many do purchase, but with no expectation they will be able to sold for a profit down the road.

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No, American housing markets are created to be profitable through a twofold policy process of subsidies and supply restrictions. There is the 30-year mortgage itself, which did not exist before government loan insurance. There is the secondary mortgage securities market, again created by the state-backed mortgage giants Fannie and Freddie, which frees up bank capital to make more home loans. And there are numerous other smaller federal and local programs that incentivize home buying.

Meanwhile, almost all residential neighborhoods have very restrictive zoning to prevent quick increases in home supply — some 75 percent of all residential U.S. land only allows detached, single-family homes. (Indeed, many cities have been so heavily down-zoned in recent decades that much of their existing housing stock would be illegal if you tried to build it today.) Now, these zoning codes often make property less valuable than it would be if you could build apartments on it, but they make the homes themselves more valuable.

All this means that home investment markets inevitably have something of a Ponzi scheme character. A house is a profitable investment only because government policy has arranged things to ensure the next person in line is willing to pay more than you did. And when lots of private capital floods into the market — as happened in the mid-2000s with new ultra-complicated mortgage securities (designed to obscure the fact that many loans were going to to people who could not possibly repay) — a financial bubble can easily get started.

That brings me back to the Times report. It shows that since the year 2000, the percentage of single-family homes bought by investors (as opposed to people looking to live in them) has nearly doubled, from 6 percent to 11 percent. In certain markets the increase is much more dramatic — in Atlanta from 8 to 18 percent; in Long Island from 6 to 19 percent; in Philadelphia from 6 to 23 percent; and in Detroit from 8 to 27 percent.

The fuel is once again financiers, who have dramatically streamlined the process by which private investors can buy and sell homes. A new platform called Entera "lets bidders choose among hundreds of thousands of single-family homes as if they’re buying stocks and bonds. Investors can build an online profile of homes they want ... then make an offer with a click." Many investors are simply individuals looking to flip homes for a quick profit, but others are big corporate investors who leave properties vacant while waiting for prices to rise. In Atlanta, city residents looking to buy a home for themselves are routinely outbid by investors paying in cash. One home was sold three times in one year starting in May 2018 — first for $85,000, then for $134,000 two months later, and finally for $324,000 ten months after that. (The intermediate buyers also spent another $53,500 on remodeling — big Wall Street players have even developed ominous securitization processes for these "fix-and-flip" loans.)

This is bad news for all kinds of reasons. It means people who just want a place to live spending vast amounts on mortgage payments. It means others being priced out of the market altogether. It might well mean another bubble and financial crisis at some future date. (Annual price increases of 380 percent surely can't keep going forever.) And it means vast amounts of capital being directed towards unproductive homes instead of something more sensible.

It would take tremendous reform to cudgel Wall Street away from Ponzi markets where they stand to make huge amounts of money from future price rises despite no inherent productivity. In particular, it would require radically shifting the distribution of income away from the very top, so as to give the broad population enough purchasing power to make additional investments in actual productive businesses and infrastructure worth it.

In general, treating homes as a commodity complete with a vast array of Wall Street machinery channeling capital in that direction is an extremely bad idea. That very practice blew up the world economy just over a decade ago, wreaking devastation which is still not fully fixed. Housing ought to be mostly removed from market processes, both to ensure affordable, stable neighborhoods, and to prevent future financial calamities.