In our last episode, we explored Zach’s piece recommending a blanket ban on foreign ownership of American farmland. But Zach’s piece also dealt with housing, and it recommended that Congress pass either a total ban on Wall Street/private equity ownership of housing, or a right-of-first-refusal policy via a “grace period” for individuals to bid on homes before financial entities are allowed to. I’m going to disagree pretty strongly with Zach’s recommendation here, so let’s dig in.
Zach correctly notes that the cheap money policies pursued by the Fed in the aftermath of the 2008 financial crisis had as one of its byproducts the supercharging of private equity. But I would gently remind him that we *were* in the middle of the worst financial crisis since the Great Depression, and so all the tools to try and heal the economy needed to be on the table, including expansionary monetary policy. Not employing that tool could easily have led to an even longer recovery, and therefore even more suffering for everyday people. Private equity getting more money to play with was an unintended consequence, but one worth putting up with to avoid another Great Depression.
A couple paragraphs later though, Zach laments that “It certainly does not help that current federal policy, geared toward lowering inflation, is raising interest rates and causing mortgage payments to rise.” Here we get to my first real beef with Zach’s piece, which is: it’s not particularly reasonable to convict the Fed in one paragraph for making money cheaper, and then convict them 3 paragraphs later for making money more expensive. What’s a poor devoted Fed governor to do?
Still, that’s more of an editorial tsk-tsk than an actual policy disagreement, so let’s get to the policy disagreement. Zach’s argument is one that is echoed in many places- here is one short example. The argument is that private equity is the *cause* of our housing problems. Yet, whenever you read one of these articles, eventually the article is forced to admit that private equity (PE) owns only a tiny portion of the nation’s housing stock. Usually these articles try to get around that (as the one I linked to does), by saying that even though PE owns only a small portion nationally, it owns a large portion in specific local markets.
For example, in the article I linked to, buried in between such quotes as “For instance, in Sacramento, the private equity firm The Blackstone Group’s single family rental arm, Invitation Homes is the largest private landlord in the county” and “Homebuyers’ biggest enemy during 2021’s breakneck price gains was the institutional investor, flush with cash, snatching up SFRs from under their noses” are the following statistics:
Sacramento and San Francisco combined have an estimated 5,000 SFR rentals owned by institutional investors
Sacramento and San Francisco have 724,000 renters
Thus, the institutional investor presence is .07% in Sacramento and San Francisco.
Hopefully it’s not too controversial to say that If the largest player in a market only has 0.07% of that market, they will have at best only a modest impact on the market price. The best example that the article could come up with was Atlanta, where institutional investors have 12% of the market. Even at 12%, the amount of influence institutional investors could possibly have on price is small.
The alternative argument, which I think is extremely compelling, is that PE’s movement into the housing market isn’t the *cause* of the housing problem, it’s a *symptom* of the housing problem. Two articles making the case for that are in the Atlantic here and in Forbes here. What I would say is this: PE serves a very important function in our economy. Its function is to identify where we’ve allowed inefficiencies to appear. PE’s reward for sussing out those inefficiencies is to monetize the bejeezus out of them for as long as the inefficiencies continue to exist.
As policymakers, once PE identifies the inefficiencies, we should immediately shape policy to remove them. At that point we have to stop listening to the PE folks, because they’re just going to kick and scream about how we’re killing their golden goose, but it’s fine- PE folks are both extremely smart and extremely resilient, in my experience, and they’ll just endure a couple down years until they find the next inefficiency to monetize. They’ll be fine.
So what is the inefficiency that PE has identified in housing? It’s that the supply of housing in California particularly, and in certain other cities around the country, has not come close to keeping up with demand. And who made it so hard to build more supply? Here in California, very little of that can be hung on my party; we’ve been completely locked out of power for almost a generation now. Here’s a summary of the top 10 metro areas with housing shortages, and you’ll notice that the diagnosis for California is a combination of running out of space for new development, and rules and regulations that increase the cost of development to the point where no one is willing to do it.
Thus, Zach’s policy recommendation to exclude or limit PE from the housing market, which is a demand-side solution, will do little, if anything, to address what is really a supply-side problem. So while I share Zach’s underlying concern about the state of our housing market, both broadly and with particular regard to affordability, we’ll have to look at other solutions.
So stay tuned- when it’s time to get back in the ring as a candidate, I’ll do one of these episodes to lay out some ideas for those other solutions. That may be sooner than you think!
Housing supply is the biggest issue. This includes everything from building up neighborhoods to building new cities. For a good view of this see Darrell Owens substack. https://darrellowens.substack.com/
Once you get past the housing shortage though, it really is all about regulations and CA is trying to introduce new regulations to try to fix housing. Lets see if that works.