Those who read my posts are certainly aware of my view that as a result of the future-selling and institution-milking decisions of the past 30 years, across the whole range of our institutions from families to businesses to governments, and in every area of policy from debt to pensions to infrastructure to the environment, future generations are going to be worse off than those who came before. Many who I have corresponded with over the years are coming to agree, now that the bills are coming due. There is, however, one possible piece of good news that is being presented as bad news — housing is becoming much more affordable. Not only is the bubble deflating, but housing could become cheaper (relative to income) than it has been in forty years.
The combination of massive government subsidies, up front in the form of the mortgage interest tax deductions and after the fact in the form of massive federal debt to bail out mortgage lenders, and a cultural craze, has led to a massive misallocation of resources, with housing getting the excess. As a result there are 19 million empty homes in the United States according to the latest Census Bureau data, and due to the large size of homes built in recent years, tens of millions more empty rooms. Supply and demand are coming into play, and not only is the bubble deflating to bring housing prices back in line with income, but an overshoot is likely — with housing actually becoming cheap relative to income. Will America’s excess housing be reallocated and reused to cut the cost of living? Yes, unless the government tries to stop it and actually succeeds.
Few people alive today can remember a time when housing affordability and homelessness was not a concern, but there was such a time. Housing became dirt cheap to the point of abandonment in older cities and small towns in the 1960s and 1970s because an entirely new housing stock was built in massive supply in the suburbs. Older housing in older places was thought of as obsolete, and those willing to live there could do so for very little. For a New York example consider the SRO hotels, the former hotels in the vicinity of Penn Station that became obsolete for travelers as the U.S. shifted from rail to air and the buildings aged and became less pristine. They were passed down for less and less money until they were purchased for little enough to be profitably rented to poor people as their permanent homes.
In neighborhoods such as Park Slope, at the same time, buildings that had been constructed as homes for the affluent were divided up and converted to rooming houses. Once again small housing units could be rented to poorer people, older people, disabled people for a profit, because the purchase price was low enough. While this cheap housing existed, no one worried about affordable housing in New York City. The worry was that housing would get cheaper still, to the point where the rents didn’t even cover the cost of operating and keeping up the buildings, and they would decay and be abandoned — as happened in cities all over the country.
For small cities and small towns, also declining as people moved to booming metropolitan suburbs, consider a couple of popular song from the time.
“Trailers, for sale or rent, rooms to let 50 cents, no phone no pool no pets.”
“Two hours of pushing broom buys an eight by ten four bit room.”
In short, people had less income, but housing was cheap.
Fast forward to the present and those 19 million empty homes. The vacancy rate for both homeowners and renters is near historic highs, and rents and prices have been falling — in some cases collapsing — for some time elsewhere in the country. But most of the vacant units are available neither for sale or rent. Of the total, 4.9 million are “seasonal” second homes, but many people purchase second homes with the goal of renting them out some of the time, or as investments. That market is collapsing. And 7.9 million are vacant “other.” Among these are millions of houses that have been foreclosed and are just sitting empty while people figure out what to do with them. How long will it take to absorb all that vacant housing? Consider that the number of occupied housing units went up by just 544,000 over the past year.
It may stop going up altogether, and for the reason why remember those Park Slope rooming houses. An unmarried young person with a high and steady income, or willing and able to go deeper and deeper into debt, might rent their own apartment. Even at low rents, however, a young person struggling to get by on seasonal, part time, episodic or off-the-books work would probably choose to live with their parents or with roommates. An older person with lots of money from a lucrative pension might be willing and able to rattle around in an empty home, despite high property taxes and heat bills. An older person getting by on Social Security and (perhaps) a diminished 401K, however, might see the benefit of taking in a younger person as a border, having their kids live at home, or moving in with their kids when their health requires it.
Until I was ten years old, my family lived in part of my grandparents’ house. My other grandparents also had relatives living there. When we moved out, others moved in, and so it went until the houses were sold and the widow and widower moved to senior apartments. That was a little tight by today’s standards. But consider the monster houses that have been built since 1980, with five or six bedrooms, three or four bathrooms, multiple entrances, etc. And lots of owners who will be looking for someone to help share the bills, due to rising taxes and falling incomes.
There are already indications around the country that this is happening. So what if there are 19 million empty homes and, because people are compressing into the existing inventory, no increase in the number of households to fill them? Prices and rents are going to keep falling, and will become so cheap elsewhere that people in New York will have to cut their prices and rents too, or massive out-migration will result. Even if New York City remains an attractive place to live, something the New York State legislature will do what it can to prevent, the price difference between here and elsewhere can only be so large.
In New York City, there is plenty of excess demand for housing, kept latent by high prices. Many people here, for example, are already living with roommates in shared apartments, or even doubled up in individual rooms, and housing unit sizes are smaller in any event. If rents were to fall significantly, all those now priced out would be able to afford their own housing, offsetting whatever loss of potential housing occupants the declining economy would cause. It would require tremendous stupidity — on the part of landlords, financial institutions that take properties in foreclosure, and the city for the city’s housing stock to return to the abandonment and decay of the 1960s and 1970s. Investors will take losses, sellers will have to sell for much less than housing bubble prices, and real estate bondholders will take a hit, but if all act rationally — and the city acts to force housing to be maintained — New York City’s housing units will remain occupied by people paying more than the cost to operate them.
Clearly, however, some of America’s housing is going to be abandoned. Some of it is obsolete, like smaller, run-down houses in ever-declining cities such as Detroit and Cleveland, because better suburban housing (in the places the middle class fled to in the 1950s and 1960s) is going to be available for “sale or let” dirt cheap to the less well off. Some of it is in the wrong place, as the housing bubble produced lots of subdivisions far from jobs and services. Even if oil were to remain cheap (unlikely) and the U.S. continued to do nothing to face up to our environmental challenges (likely), people will only commute for two hours if they have no other choice. And there will be choice.
It could be possible, within a decade, for younger people, poorer people, older people to be able to rent modest-sized but high quality housing, within a bicycle ride of all they need and need to do, for very little. And if suburban areas are re-purposed for bicycle access, carpooling and mixed use, it could be possible to live reasonably well at a cost people will be able to afford. Fewer Americans might be able to afford SUVs, entire McMansions for one person or two, and two cruises a year, etc. But with housing consuming a smaller and smaller share of household income, it could be possible to live pretty well on less for those without other choices — and those willing to make choices. Just imagine a cul-de-sac with twelve 6,000-square-foot McMansions. With a little investment (which is all the U.S. will be able to afford) that could be sixty 1,200-square-foot family housing units. Or 120 smaller 500-square-foot senior housing units, with additional housing for staff.
The federal, state and local governments are not going to make this happen. The federal, state and local governments are not going to help this happen. The question is, are the federal, state and local governments going to try to stop this from happening?
In the financial press you hear pundits say over and over that the federal government has to stop housing prices from falling. These pundits are calling for the federal government to take sides in a generational war, and try to force younger and poorer people to pay more to subsidize high-priced real estate and the bonds based on it. If they won’t do it personally, perhaps the federal government will forced them to do it collectively, it seems. My view, despite owning a house, is let the prices fall. In the end we’ll be better off. My children certainly will be.
And what about the excess housing itself? In the 1950s and 1960s, in older cities that built without zoning and then regulated by liberal rules, there was nothing to stop brownstones from being renovated into rooming houses (and back again) and nothing to stop people from working in their homes (whether legal or not due to non-enforcement). In an effort to keep the poor and their burdens out of town, in contrast, many suburban municipalities limit housing exclusively or nearly so to one-family homes. Some also imposed rules to require either lots to be very large, or houses themselves to be very large, to ensure that only the better off could afford them.
But these rules are running into economic imperatives, which will pit homeowners worried about taxes and “property values” against those worried about paying for property taxes, heat and power. In New York’s suburbs the conflict has been handled the typical way — illegal occupancy, reported only if the “wrong” sort of people move in, and tax fraud — with the rental income unreported to income tax authorities and the second unit (if not a boarder) not reported to property tax authorities. As more and more tax revenues are shifted to public employee pensions, retiree health care and past debts, leaving less and less for public services at higher and higher tax rates (even as property values fall), this is going to be the number one political issue in many parts of the country for years to come. Personally, I’ve glad to be a spectator.
Americans have lived beyond their means, running up huge debts not for investment but for empty homes (and a really good deal for today’ senior citizens). They will not be as well off in the future. That is certain. The good news is that when those wealthier and older people turn around and try to sell assets to younger, poorer Americans, those younger poorer Americans will be in a position to insist on a lower price. Higher subway fares and the re-collapse of the school system driving you out of New York? How about if one could rent a one-bedroom within a bicycle ride of their job for $750 per month? How about if one could buy an outer-borough house or Manhattan or nearby two-bedroom for $400,000 or less, using the savings to pay for some new kind private school?
Then again, in other paces, how about if one could rent a room and have the landlord cook you breakfast somewhere else for $350 per month or less, or buy a house in a convenient location for $120,000 somewhere else? It’s coming.
In the next few years we aren’t going to be building the communities of the future. We’re looking at a decade of adaptive reuse. Expect local pols to fight that adaptation every step of the way.