The Housepocalypse is Nigh
On February 25th of this year, I posted an article, The Coming Housepocalypse, that foretold massive disruption in the U.S. housing market when an order from the Centers for Disease Control (CDC) prohibiting evictions for non-payment of rent or mortgage expired. In it, I estimated total unpaid rent owed at as much as $35B, and a potential expansion of homeless numbers by as much as nine million. It seems I may have been overly optimistic.
The Guardian ran a piece yesterday about the coming crisis. The people who were most affected by the eviction moratorium fell into three categories. First were the Mom and Pop owners of rental properties. They had no relief from their obligations to pay mortgages, insurance, utilities and upkeep of the properties they rented out, but there was no enforcement measure – eviction - allowed to collect rent. Fortunately, about two-thirds of renters paid their rent throughout the pandemic. Unfortunately, the ones who weren’t paying were thankful for the federal government deferring their rent payments; the federal government simply shifted the burden from renters to landlords. I’m not sure that was ever made clear to the majority of renters.
It appears that as many as four million additional individual homes may be added to the inventory of available houses for rent or purchase. At the 2019 sales rate of existing homes, 683,000, it could take six years to burn through the new additions. Meanwhile, the value of all residential real estate plummets. Apartment buildings are particularly vulnerable, because there is no massive market for apartments unless jobs recover. There are already seventeen million vacant housing units in the US. In central cities’ high-crime areas, these tend to be in poorly-maintained apartment buildings. As non-paying renters move out, non-paying squatters typically move in. That does not add to the property’s value.
As we saw during the S&L crisis, an entire class of real estate can collapse in price in short order. An investor realizes it will be years before he can be above water, and walks away from his mortgage. Nearby similar buildings are now worth less money, and with little to negative equity, refinancing is no longer an option. More investors walk away, and the cycle continues. The last time it was office buildings and manufacturing plants; this time it’s dwellings. The people evicted are immediately homeless. If that is everyone who has not been paying rent, it’s 7.49 million households, or about fifteen million people. There are nearly a million in the Dallas-Fort Worth area, and more than a million in the New York City area. In January 2020 there were a bit over 91,000 homeless in the New York area, for whom spending was $2.1B. Increase that by more than an order of magnitude and NYC might never recover.
All of this can cause a significant economic contraction, usually called a recession. The Federal Reserve Bank and other Central Banks have tools to fight recessions, including fiscal stimulus, interest rate management and simply printing money. The U.S. Federal Reserve is already buying up about $120B in US government debt and troubled real-estate backed assets each month. We have spent trillions of dollars trying to prevent the economy being wrecked by panicked lock downs as reaction to the pandemic. Alone among the world’s major economies, our central bank did not hold a major sell-off of assets when the economy recovered from the 2008 debacle. We now have about $9B in purchased assets on the books, and the Fed’s ability to sustain the economy is not infinite.
The economy itself can handle the problem, if we can fill vacant jobs and avoid inflation. That’s no longer an option, at least according to the New York Times in an editorial titled The Fed Cannot Control Its Easy-Money Monster. The Times fears a recession. The weekly claims for unemployment rose last week to 412,000, and new job creations last month were weaker than expected for the second consecutive month. Thus far, the CPI (Consumer Price Index) has risen by five percent year over year, the highest number in 13 years. The PPI (Producer Price Index) is both more predictive of the future and in worse shape. It has risen by 6.1% year over year. The PPI should be causing government officials to sound an inflation alarm. They aren’t.
Demand for new homes has gone up as the pandemic ends. This has raised the price of building materials and insurance. We may see a sudden drop in the cost of building materials and home insurance if the housing market craters. I’m not sure there’s a lot more silver lining in that cloud. As many purchase contracts on new homes (or existing homes) include a sale-of-current-residence contingency, the dominoes could begin falling quickly.
Many small employers are having difficulty filling empty positions and there are nine million-plus job openings in the U.S. Labor force participation rate is low, and previous studies indicate that it is unlikely to increase so long as extended Federal Unemployment Benefits mean workers do better financially sitting at home. As many as nine million new workers becoming homeless matches the number of empty jobs, but there is unlikely to be a one-to-one skills and geographic match.
"As we saw during the S&L crisis, an entire class of real estate can collapse in price in short order"
I have seen very little analysis of the S&L crisis on the internet. It may be due to the fact that the S&L crisis was tapering off while the internet was ramping up. I like Charles Bowden's take on Charles Keating in DESIERTO, but it's the take of an artist, not an insider.
I don't pretend to know what is going on, but I bought my house outright -- no mortgage -- in 2012. I get a minimum of 3 cold calls every day from agencies trying to buy it. It's a major annoyance.
Have you been following the Blackrock purchasing of homes? How does that fit in to above? Also this from yesterday could benefit from your observations: https://freddiedeboer.substack.com/p/yes-mass-home-ownership-is-a-dumb