What is the issue with the housing market? How can we fix it?

Source: Unsplash

Median home prices as well as rental rates have skyrocketed across the U.S. and for those who own homes, their total home equity has increased. However, to the millions of people who don’t own homes and are looking to rent or buy a home, it has not been easy. [1] In this essay, I will analyze the impact that housing speculation by private equity firms as well as quantitative easing and tapering was able to have in the housing market during the Great Recession, and relate them to the issues aspiring homeowners currently face in the market.

It is common knowledge that the housing collapse during the Great Recession was caused by the rise in subprime mortgages and poorly structured loans given out by reckless lenders to borrowers who couldn’t afford them. [2] However, according to a study conducted by three professors of finance in the Economic Consequences of Housing Speculation in 2017, another important factor for the Great Recession is found. Through the study, researchers found that houses present in areas with a lot of housing speculation “had not only a more pronounced housing cycle during the boom and bust, but also experienced greater swings in employment, payroll, per capital income and the number of establishments.” [3] Why was this? In accordance with the law of supply and demand, as more speculators descended on a certain area, this resulted in less houses being available, thus increasing home prices. However, because these homes were absent of any residents, if the market went down, houses would decrease in prices due to the abundance of inventory. Although real estate speculation was not a direct cause for the Great Recession, it exacerbated the event. Furthermore, it is also what is causing the instability that we see in the housing market today as I will address next.

With large corporations being able to buy so many homes, the option of buying a home is removed. As a result, people are forced to rent from these corporations and “for regular people, the structural advantage enjoyed by corporate landlords amplifies the inequalities endemic to capitalist housing systems.” [4] In regards to the relationship between a landlord and a tenant, it’s evident that there is already an imbalance of power between the two. However, when having such powerful corporations as their landlords, tenants are unable to have any voice or authority in the decisions that these corporations make regarding the property as they would with a traditional landlord. As said by venture capitalist JD Vance,“When you don’t have any ownership stake, you lose your voice.” [5] In an interview of tenants whose building was taken over by a private equity-backed firm Greystar, many of them reported complaints about the soaring rent, the absence of security guards, and the decrease in quality and management of the building. [6] By raising rents, private equity firms are able to evict existing tenants and simply bring in ones that can afford the rent, thus creating the cycle of gathering more and more profit for themselves, while tenants struggle to find an affordable home.

With aspiring homeowners being forced to rent homes, instead of buy homes, what investment firms are doing is what is known as equity mining. For many years, the best way for ordinary Americans to build up generational wealth was by owning a home. This is called equity. However, with all these firms buying up houses, they are stripping neighborhoods of the pool of investment potential that used to be accessible to the general population and making it only accessible to them. They are monopolizing the housing market and preventing average citizens from having the chance to build equity. Counters to this argument can be that there are other ways to build equity such as investing in the stock market; however, the stock market is only an investment, but a house becomes an investment as well as a shelter to live in. While the government can try to discourage this trend of private equity firms buying all these houses through taxation, rent isn’t considered capital gains. Also, the government can’t just tell someone who they can or can’t sell their house to.

Source: Unsplash

Another consequence of the Great Recession that we see is affecting the housing market today is quantitative easing (QE) and tapering. Quantitative easing is a non-standard monetary policy where the Federal Reserve begins buying billions of dollars worth of bonds, mortgage-backed securities, and other assets from the open market. [7] When Feds buy securities on the open market, it takes them out of circulation, thus leaving fewer for everyone else to compete for. With less supply, investors bid up the prices. As prices go up, yields decrease. Lower yields on long-term treasury bonds can mean lower interest rates and cheaper corporate bonds, which can lead to more home buying and hiring throughout the economy, thus helping the economy get back on track. [7] The first time the Federal Reserve was able to implement QE was after the Great Recession. Prior to this, the traditional way the government would help the economy recover from a recession was by lowering interest rates; however, they realized that even lowering interest rates down to zero wasn’t enough. [8] Although QE does decrease interest rates, the problem with QE is that it increases the money supply, which can then create inflation. Because of this, once the Feds believe that the economy has successfully rebounded from the recession, it begins a process of reversal known as tapering, which is when the Federal Reserve begins to wind down on their bond-buying stimulus program and slow down the rate at which the Feds adds to its balance sheet; the Fed’s balance sheet will keep growing, but just at a slower rate. [9] Of course, tapering also has its own consequences. While it does slow down inflation, it also increases interest rates.

Source: The New York Times

Back in March of 2020, due to the economic crisis caused by the pandemic, the Federal Reserve restarted the program of Quantitative Easing as they announced in their FOMC Statement a series of measures that they would take to maintain financial stability, one of which included purchasing bonds. [10] From the month of June until November 2021, the Feds purchased about $80 billion in U.S. Treasuries and $40 billion in mortgage-backed securities every month. [11] [12] Their balance sheet rocketed from $4.3 trillion in March 2020 to over $8.9 trillion by May 2022. [13] Due to a year and a half of stimulus, household income was able to rise and this led to a sharp increase in home values and other assets due to the increase in demand. [14] With inflation, the chances of buying a house for those who want to become more difficult and a significant issue for them. With this issue in mind, on August 21, 2021, Fed Chair Jerome Powell said “it could be appropriate to start reducing the pace of asset purchases this year.” [15] Powell stated that​​ “[his] view is that the “substantial further progress test has been met for inflation” [15], which is why it is appropriate for Feds to begin tapering. However, as mentioned previously, tapering increases interest rates and this introduces the current issue that is at hand. Even though inflation is beginning to decrease as a result of tapering, interest rates are rising, making it more difficult for homebuyers to take out a loan and buy the house that they desire. Whether it is QE or tapering, there are negative consequences for aspiring homebuyers and this highlights the underlying overall problem of our economy, which is that the government is only looking at the overall health of the economy, but not the effect that their decisions are having on individual citizens. When beginning these programs such as QE, the purpose of it isn’t to give people the chance to build generational wealth by buying a home, but it is for the economy to reach a certain level of stability and as soon as a certain goal is reached,the Federal Reserve takes that chance to own a house back from people by raising interest rates and making it harder for Americans to take out a loan. This creates a never-ending up and down roller coaster for the people where they are forced to comply with the decisions of the government.

The mortgage program was begun in the 1930s by the government in order to offer ordinary people the chance to build equity. Before this, homebuyers were required to pay a large down payment of almost 50% and only had a 5–6 year repayment period. [16] Because of this, only wealthy people could afford to buy a home. When the mortgage program was introduced, it was able to shorten the gap between the wealthy and the poor and is also widely credited with building the middle class. With the current issues that I was able to present above, it’s evident that the purpose of the mortgage program and, in general, what this nation stands for of being a nation of opportunity, has been forgotten. With private equity firms being able to buy so many houses, there needs to be more strict federal regulations issued against these corporations in order to give the common people an opportunity to buy a home. Although defenders of these corporate landlords argue that they offer single family residence living to many people, who would otherwise be unable to achieve it, they ignore the significant difference between renting and owning as I clearly stated in my previous argument. Moreover, they claim that they only own a few percentage of houses; however, in the coming years as private equity firms slowly begin buying more houses, before we even know it, nobody will be able to own their own homes. Although the Los Angeles City Council in California, U.S. has begun thinking about a motion that would seek ways to prevent tech companies and private equity firms from real estate speculation [17], it is not clear if there has been any federal involvement regarding this issue. Therefore, it is imperative to create more laws that give people back that opportunity to move up the social ladder and shorten that gap between the wealthy and the poor. In regards to QE and tapering, citizens need to have a bigger voice in the decisions and actions of the Federal Reserve. The Federal Reserve is run by the Board of Governors, whose seven members are nominated by the President of the United States and whose positions are confirmed by the U.S. Senate. [18] Despite the President being the one to appoint these members, the people do not have a direct voice in regards to who the Chair or the Board of Governors are and I believe that in order to have changes in our economy, the people should have the opportunity to elect members of the Federal Reserve. With this, they will be able to elect candidates who value their opinions and take into consideration the effect that the Federal Reserve’s decisions have not just on the overall economy, but on the individual lives of every citizen.

As a democratic nation, however, the people have also forgotten the power of their voice and, instead, they have left it to authorities and powerful corporations to make the decisions of how our economy should run. In order to solve this problem, people need to seek information about the economic decisions that their governments and those in power are making. A democracy is a nation governed by the people; however, by not doing our job of learning and expressing our opinions about what is going on in the housing market, the opportunity of being able to own a home and live in an economy that we can all benefit from becomes difficult to achieve. There needs to be a change in our government as well as the people. It is only with everybody’s cooperation and willingness to make changes that we will be able to solve the housing problem.

Footnotes

1. Cunningham, E. “Great recession, great recovery? Trends from the current population survey.” Monthly Labor Review. April, 2018. U.S. Bureau of Labor Statistics. Retrieved June 20, 2022, from https://www.bls.gov/opub/mlr/2018/article/great-recession-great-recovery.htm
2. The Investopedia Team. “The Great Recession.” May 26, 2022. Investopedia. Retrieved June 10, 2022, from https://www.investopedia.com/terms/g/great-recession.asp
3. Zhenyu Gao, Michael Sockin, Wei Xiong, Economic Consequences of Housing Speculation, The Review of Financial Studies, Volume 33, Issue 11, November 2020, Pages 5248–5287, https://doi.org/10.1093/rfs/hhaa030
4. Fields, Desiree. “Tech and finance firms buying up homes doesn’t bode well for everyone else.” The Washington Post, The Washington Post, 4 January, 2022. Retrieved June 15, 2022 from https://www.washingtonpost.com/outlook/2022/01/04/corporate-landlords-silicon-valley/
5. Niquette, Mark. “Wall Street emerges as GOP’s villain amid house price pinch.” Bloomberg, Bloomberg, 30 July, 2021. Retrieved June 20, 2022 from https://www.bloomberg.com/news/articles/2021-07-30/kkr-blackstone-are-gop-s-new-villains-amid-housing-price-pinch
6. Vogell, Heather. “When private equity becomes your landlord.” ProPublica, ProPublica, 7 February, 2022. Retrieved June 15, 2022 from https://www.propublica.org/article/when-private-equity-becomes-your-landlord
7. The Investopedia Team. “Quantitative Easing (QE).” Investopedia, Investopedia, 15 October, 2021. Retrieved June 20, 2022 from https://www.investopedia.com/terms/q/quantitative-easing.asp
8. Probasco, Jim. “Fed tapering: How the US central bank gradually dials back its bond-buying stimulus.” Personal Finance, Business Insider, 27 December, 2021. Retrieved June 23, 2022 from https://www.businessinsider.com/personal-finance/fed-tapering
9. Goldberg, Shelly R. “Tapering Definition.” U.S. & World Report News, U.S. & World Report News, 18 May, 2022. Retrieved June 20, 2022 from https://money.usnews.com/investing/term/tapering
10. “Federal Reserve issues FOMC statement.” Board of Governors of the Federal Reserve System, Federal Reserve, 23 March, 2020. Retrieved June 21, 2022 from https://www.federalreserve.gov/newsevents/pressreleases/monetary20200323a.htm
11. “Minutes of the Federal Reserve Open Market Committee.” Federal Reserve, Federal Reserve, 2–3 November, 2021. Retrieved June 19, 2022 from https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20211103.pdf
12. “Federal Reserve issues FOMC statement.” Federal Reserve, Federal Reserve, 16 December, 2020. Retrieved June 20, 2022 from https://www.federalreserve.gov/newsevents/pressreleases/monetary20201216a.htm
13. “Credit and Liquidity Programs and the Balance Sheet.” Federal Reserve, Federal Reserve, 24 June 2022. Retrieved June 25, 2022 from https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
14. John V. Duca, Anthony Murphy, “Why house prices surged as the COVID-19 Pandemic took hold.” Federal Reserve Bank of Dallas, Federal Reserve Bank of Dallas, 28 December, 2021. Retrieved June 27, 2022 from https://www.dallasfed.org/research/economics/2021/1228.aspx
15. Powell, Jerome H. “Monetary Policy in the Time of COVID. Federal Reserve, Federal Reserve, 27 August, 2021. Retrieved June 19, 2022 from https://www.feeralreserve.gov/newsevents/speech/powell20210827a.htm
16. Ziraldo, Katie. “The History of Mortgages In the Housing Market.” Quicken Loans, Quicken Loans, 2 May, 2022. Retrieved June 25, 2022 from https://www.quickenloans.com/learn/history-of-mortgages
17. “LA City Council to consider motion to stop tech companies from buying up family homes.” CBS News, CBS News, 10 November, 2021. Retrieved June 27, 2022 from https://www.cbsnews.com/losangeles/news/la-city-council-to-consider-motion-to-stop-tech-companies-from-buying-up-family-homes/
18. “The Fed Explained.” The Federal Reserve, The Federal Reserve. Retrieved June 20, 2022 from https://www.federalreserve.gov/aboutthefed/the-fed-explained.htm

Bibliography

Boykin, Ryan. “The Great Recession’s Impact on the Housing Market.” Investopedia, Investopedia, 31 March, 2022. Retrieved June 15, 2022 from https://www.investopedia.com/investing/great-recessions-impact-housing-market/

Erin Coghlan, Lisa McCorkell, Sara, Hinkley. “What really caused the Great Recession.” IRLE Institute for Research on Labor and Employment, September, 2018. Retrieved June 16, 2022 from https://escholarship.org/uc/item/74x0786t

Foster, Sarah. “What is Quantitative Easing?” Bankrate, Bankrate, 7 March, 2022. Retrieved June 20, 2022 from https://www.bankrate.com/banking/federal-reserve/what-is-quantitative-easing/

“How will tapering of the QE program impact rates and the economy?” The American Deposit Management Co., The American Deposit Management Co. Retrieved June 26, 2022 from https://americandeposits.com/how-will-fed-tapering-impact-rates-economy/

Kevin Schaul, Jonathan O’Connell. “Investors bought a record share of homes in 2021. See where. The Washington Post, The Washington Post, 16 February, 2022. Retrieved June 25, 2022 from https://www.washingtonpost.com/business/interactive/2022/housing-market-investors/

Matthews, Steve. “What’s a Taper, and Why Has the Fed Started Tapering?” The Washington Post, The Washington Post, 16 December, 2021. Retrieved June 25, 2022 from https://www.washingtonpost.com/business/whats-a-taper-and-why-has-the-fed-started-tapering/2021/12/16/9ec2fd9c-5ead-11ec-b1ef-cb78be717f0e_story.html

Patton, Mike. “The Effect of Fed Tapering on the Economy, the Housing Market, and Stocks.” Forbes, Forbes, 19 September, 2013. Retrieved June 20, 2022 from https://www.forbes.com/sites/mikepatton/2013/09/19/the-effect-of-fed-tapering-on-the-economy-the-housing-market-and-stocks/?sh=77b164417006

TRD Staff. “Former Goldman exec behind “The Big Short” looking to raise $1B to buy up foreclosed homes.” The Real Deal, The Real Deal, 5 October, 2016. Retrieved June 12, 2022 from https://therealdeal.com/2016/10/05/former-goldman-exec-behind-the-big-short-looking-to-raise-1b-to-buy-up-foreclosed-homes/

Weinberg, John. “The Great Recession and its Aftermath.” Federal Reserve History, Federal Reserve History, 22 November, 2013. Retrieved June 13, 2022 from https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath

Wemy, Edouard. “What is the Fed taper? An economist explains how the Federal Reserve withdraws stimulus from the economy.” The Conversation, The Conversation, 15 December, 2021. Retrieved June 23, 2022 from https://theconversation.com/what-is-the-fed-taper-an-economist-explains-how-the-federal-reserve-withdraws-stimulus-from-the-economy-173792

Wigness, Sam. “What is the ‘Fed Taper’ and How Will it Affect Home Buying?” Home, Home, 17 August, 2021. Retrieved June 24, 2022 from https://home.com/fed-taper-and-home-buying/

Thank you so much for reading!

Contact me: LinkedIn and Twitter