Harvard housing study fails to address the real causes of escalating prices; government intervention and Fed policy

Note to reader: The purpose of this post is to show the reader that the current discussions by policymakers regarding the housing market problems will only help to ensure future gains for landlords and investors.  I am not here to discuss my thoughts on normative economic policy per se. However, all government intervention either stimulates demand and/or restricts supply. Whether or not this is acceptable social policy is up to the reader. One thing here is for sure; current policy initiatives will only assist in the consolidation of wealth in the housing sector over time. Long-term investors and savvy landlords should also take notice regarding what this housing study omits rather than what it says. All these proposed policy initiatives will eventually be arbitraged into the supply/demand equation, which will just result in higher prices for everybody.

  • JCHS seems somewhat surprised at how the housing market powered forward despite the pandemic.
  • The survey fails to account for the Federal Reserve’s policies in the role of stimulating demand and raising price inflation. Moreover, there is no mention of monetary policy in its analysis as to why wealth disparities are growing.
  • The JCHS seems wilfully ignorant to the unintended consequences of government and Fed covid policies
  • The JCHS charges the government to enact a number of programs to target homeownership and increase rental unit construction via indirect or direct subsidy. In the long run, this only consolidates government control over the sector.
  • Although JCHS contemplates the easing of zoning and local regulations as part of their policy plan, the ever higher price points required for new unit construction will ensure that affordable housing is rarely ever built.
  • The JCHS fails to recognize how the rental market changed because of government covid policies.
  • Implementation of JCHS suggested policies will only result in the continuation of current trends that will benefit investors and landlords
Harvard_JCHS_State_Nations_Housing_2022

 

The market equilibrium in home prices and rents are the result of a number of factors. Let’s consider the government’s role in the housing market. On one hand, direct/indirect government subsidies as well as tax benefits, credits, and exemptions stimulate demand. On the other, government regulations and restrictions at all levels suppresses supply. Thus, I do not consider home prices and rent rates to be exceptionally elevated. This is especially true when we consider the post-covid world.

If markets conditions become less stable (e.g. mortgage rates rise profoundly), this trend may actually be underestimated.

Recently, I discussed covid’s everlasting impact on housing and rental markets: The covid lockdowns, rent moratoriums, and heavy-handed restrictions are still impacting the market in a number of ways.

The eviction moratoriums with its reliance on government covid-related  landlord aid, while no longer in effect for the most part, has caused many small landlords, which traditionally charge less than full market, to begin disappearing from the long-term rental market. The “unintended” consequences of the ad hoc covid housing policies have only helped to centralize the rental market into the hands of the large institutions.

These “mom and pop” investors effectively provided a subsidized form of rental housing, which was largely free of government intervention and regulation, and this housing was a much more cost effective housing subsidy than any taxpayer subsidized unilateral government transfer. I insist the governing authorities and policymakers are not ignorant of this outcome; thus government agencies and its socialist policymakers like JCHS must have different objectives than their stated goals. They gain power and influence by directing policy rather than leaving the sector available to the free market.

Social policy based on racism and income inequality only ensures ever higher home prices and rents

Rather than blaming racial and income inequality, I submit that policymakers should blames their ongoing misguided policy enactments; of which the negative externalities are rarely ever contemplated. Perhaps the true goals of policymakers differ from their publicly announced objectives. Perhaps the unintended consequences of policy enactment are intentional, so as to implement more and to exert more control over the entire market and to centralize its wealth.

To remedy these inequalities [in homeownership], policymakers should be mindful of how much assistance is necessary to make homeownership affordable for each income group and which households are most likely to benefit from this aid. Although households earning 50–80 percent of the area median income would seem to be a prime focus for downpayment programs, even fairly generous levels of assistance—such as the $25,000 included in the Build Back Better budget proposal—would not be enough to make even modest homes in most markets affordable for these households. At the same time, capping eligibility for assistance at 120 percent or more of area median income may be short-sighted.

THE STATE OF THE NATION’S HOUSING 2022, Page 27
JOINT CENTER FOR HOUSING STUDIES OF HARVARD UNIVERSITY, June 22, 2022

 

One proposed approach is to target downpayment assistance to first-generation homebuyers—households whose families have been excluded from previous efforts to promote homeownership. The CFPB and HUD have also taken steps to support programs providing credit on favorable terms to borrowers of a protected class that has suffered economic disadvantages.

Coupling these type(s) of financial assistance with homebuyer education and counseling, plus funding to increase the supply of homes in communities of color, would go a long way to providing more equitable access to homeownership.

THE STATE OF THE NATION’S HOUSING 2022, Page 29

Forget looking to the JCHS to identify and remedy the problems in the rental market

Its remedies will only raise rents with subsidies and government intervention

Other government interventions protected millions of renters behind on their rents from eviction

THE STATE OF THE NATION’S HOUSING 2022, Page 29

Eviction and rent moratoriums may sound like a magnanimous gesture to many disenfranchised renters affected by covid, but the long-term results have permanently restricted the supply of affordable housing, while also raising renter eligibility standards and lowering approval rates for leasing. Since the small landlords were the most profoundly impacted by government covid policy, and as their share of rental units falli at the expense of the large investors, rents will have no place to go, but higher.

Is it really all about systemic discrimination as the JCHS claims? What about the open borders policies that continue to pressure the rental markets? While population growth rates may diminish, the absolute number of renters will rise year in and year out on a consistent basis.

The longer-term picture is quite different from today’s overheated conditions. Over the next decade, the millennials will be replaced in the prime household formation years by a smaller generation, reducing the demand for housing among young adults. At the same time, the baby boomers will age into their late 70s, the time of life when mortality rates begin to rise more quickly. And with overall population growth already at historic lows, household growth will ultimately slow as well, dragging down the demand for rental housing.

THE STATE OF THE NATION’S HOUSING 2022, Page 36

Talk about willful ignorance….

Conclusion

It is a sad state of affairs for the prospective homeowner or renter; government intervention always raises prices under the guise of helping the intended beneficiary. Over the longer run, social largesse and government intervention only work to consolidate the wealth and power of the population into the hands of the few. Recent monetary and fiscal policies implemented in the wake of covid have only helped the income-generating asset owners, and this includes the 6-7% of the population that are direct owners of rental real estate. At what point will the people finally realize that it’s the government that is causing the problems? Are the people even capable anymore?  Regardless, please understand that the proposed solutions to the current problems will only consolidate the housing wealth. Be on the right side of the trend.

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7 thoughts on “Harvard housing study fails to address the real causes of escalating prices; government intervention and Fed policy

  1. I was asked about what I would suggest regarding the housing market and how to rein in price growth.

    First thing I would do is eliminate or reduce the $250,000 / $500,000 cap gain exclusion for owner-occupied real estate. I would treat owner-occupied housing cap gains as any other asset. That is just an unwinding of the 1997 taxpayer relief act regarding owner-occupied housing.

    The next step I would do would begin repealing many of the tax benefits that are afforded to real estate investors. I would begin to roll back certain depreciation schedules and other like-kind exchanges. In essence, I would de-emphasize the tax benefits of owning residential properties.

    I am certain just based on that alone you would see an unwinding of at least 20 to 25% in the prices of single family housing within a couple years.

    We wouldn’t have to do anything regarding rents, but I would assume that rents would begin to fall lower in price as its competition, mortgage payments for housing, would diminish in the wake of recrafting the tax laws.

    If I truly wanted to see rent rates come down, I would encourage small entrepreneurs to get involved in rental management and would promise them that the government would only lightly regulate the sector. I would apologize to the mom and pop landlord regarding all of the damage I inflicted on the small investor psychology because of covid

    In essence, the less government intervention we have the better off the market will become. It doesn’t matter whether it’s medical and healthcare, education, or housing, demand is stimulated and supply is restricted when the government gets involved.

    I say get rid of the government’s magnanimous gestures.

  2. Canada isn’t prepared to deal with large investors’ growing interest in single-family homes

    https://www.theglobeandmail.com/opinion/article-canada-housing-real-estate-market/

    Institutional investors, which have squeezed residential markets in many parts of the world, can be expected to pick up a purchasing pace that has turned them into the world’s biggest private landlords and transformed rental housing into a go-to global asset class.

    “Institutional ownership threatens to accelerate the trends unleashed by the financialization of housing,” says a report commissioned by the Greens group in the European Parliament to buttress their case for a regional response to the crisis. “Deeper financial markets have not substantively increased either aggregate home ownership or housing supply, but instead have inflated house prices and pulled down rental yields.”

  3. So, let me get this straight; the overseer of the central banks is encouraging the nation’s central banks to raise rates to stem the inflation problem that they alone created. If you wonder how the large institutions will buy up all the rental properties, we are seeing the plan rollout now.
    ———-

    BIS urges decisive wave of global rate hikes to stem inflation

    https://www.reuters.com/markets/europe/global-markets-bis-report-pix-2022-06-26/

    LONDON, June 26 (Reuters) – The world’s central bank umbrella body, the Bank for International Settlements (BIS), has called for interest rates to be raised “quickly and decisively” to prevent the surge in inflation turning into something even more problematic.

    The Swiss-based BIS has held its annual meeting in recent days, where top central bankers met to discuss their current difficulties and one of the most turbulent starts to a year ever for global financial markets.

  4. Have been reading your posts for a while, you are very knowledgeable and have unique point of views, about Jesus, about immigrates. I am myself a immigrate, hard working, forever be grateful for the opportunity given to me in this country. My family own one small condo as rental property, and we moved into our current house about 3 years ago, rented out the previous SF house, now the tenant moved out, we are debating to sale the house or keep it as another rental property. The case flow is very low ($150). The housing market is definitely slowing down in the area. Do you think is it worth keeping it? Thank you for all your informative blog posting.

    1. Ask yourseof these questions…

      Can you raise the rent?
      Are you currently charging below market rent?
      How much cash reserves do you have?
      Do you like managing properties?
      Do you need the $150 in cash flow to keep the property?
      What is the capitalization rate and how much equity do you have in the property?
      What’s your current financing terms on the property?

      If it is a low interest rate, I would view that favorably. I would also try to prepay the loan as well. I do and it has a way of building up equity fast.

      Personally, I would keep it, but that is just what I would do. If you’re really nervous about the market and hope to cash out and do something else with the proceeds, I would do that if it helps you rest better. There is no right or wrong answer here.

      I don’t know enough of your personal circumstances. Is the condo is San Francisco?

      The tax benefits of owning a property are tremendous, while on paper, owing properties look like a money losing venture. I show little profit every year for tax purposes, but I live off the cash flow.

      Ask yourself this, what would you do with the proceeds? Selling properties is expensive.

      If you are seriously looking into making an informed transaction decision, please email me with the specifics and I can help you better. There are a few items regarding the property tax issues in CA in which I am not up to speed, but let me know. Just send an email to chris@knowyouradversary.com.

      I am glad to hear you appreciate what America has to offer.

      1. Thank you so much for your time providing such detail information!! Really appreciate it. Those are great questions, we will take time to think over it, right now, we are more incline to rent it out. We are in east coast, Virginia area, so the housing market is far not as crazy as CA.

        Oh, America is a great nation, we were welcomed and helped by many when we came 25 year ago. we escaped the socialism, truly hope America is not heading to that direction.

        1. Oh. Virginia. For some reason I thought SF as San Francisco and not single family.

          So, you would own two rentals? That’s a good place to start. I have been thinking of buying another one again.it’s out of necessity to create more write offs.

          I think holding it in VA makes better sense than out in CA. VA property taxes are fairly low. Property values in VA hold up better than elsewhere, since they haven’t gone bonkers like elsewhere. There’s still value in DC area, MD and VA.

          I also like using RE to write off other income.

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