The US real estate market is broken, but the deep, structural problems cannot be solved with technology.
Why is this important: The United States desperately needs more high-quality rental housing. Home ownership works for many – and doesn’t work at all for many others, who may not be ready to settle or don’t have the financial means.
The big picture: Venture capitalist Marc Andreessen has invested $350 million, his biggest check ever, in Adam Neumann’s new company, Flow.
- Andreessen’s blog post lays out his investment thesis that renting a house is “a soulless experience.”
- Details of how Flow will work are still vague, but are likely to include amenitization – bells and whistles for apartment tenants – as well as some sort of financial benefit.
What they say : “Someone who is bought into where they live cares more about where they live,” writes Andreessen. “Without it, apartments generate no connection between person and place and without community, no connection between person to person.”
- In New York, I lived in both owned and rented apartments, and the community in my rental property was just as vibrant and tight-knit as anywhere I’ve owned.
- Neighborhoods characterized by very low homeownership rates—think Harlem, New York, or Hialeah, Miami—often boast deep, enduring communities that span generations and decades.
Reality check: “Property by itself doesn’t make you more invested in your community,” Sam Chandan, director of the NYU Stern Center for Real Estate Finance Research, told Axios. “It makes you more invested in community decisions that impact the value of your asset.”
- Andreessen, for example, has opposed multifamily development in his hometown of Atherton, Calif., on the grounds that such development “will MASSIVELY diminish our home values.”
Between the lines: As a VC, Andreessen believes technology and entrepreneurship can solve problems in the rental market. (Naturally, this being Andreessen Horowitz, the blockchain seems to be involved, one way or another.)
- Where rental housing is most successful, however – Germany is Exhibit A – is not because tenants “receive landlord benefits”, as Andreessen put it. Rather, it is because they have safe and affordable housing.
- German tenants build strong community bonds like we all do, just by getting to know our neighbors. They – we – don’t need super-fast gear like your local WeWork offers.
Where is it : Private sector solutions like Flow, by their nature, cannot address the deepest barriers to successful rental housing.
- It’s entirely possible that Neumann could successfully market bustling properties to mobile bottom-up tenants in fast-growing cities like Nashville.
- But that won’t dent the structural barriers that stand in the way of America becoming more of a nation of tenants.
Why it’s so hard to fix the rental market
Much of the reason for the lack of affordable housing in America lies at the local or even individual level.
- Zoning is the biggest problem: NIMBYs like those found at Atherton are the rule, not the exception. Getting permission to build new multi-family housing is ridiculously expensive and difficult.
- Education funding runs up close. As long as schools are funded by local property taxes, parents will prefer high property values over affordable housing, which often increases the number of children in local schools without increasing tax revenue as a result.
- The American dream also annoying. After examining the behavior of older millennials, says NYU’s Chandan, “the data suggests that homeownership as a natural and expected evolution is deeply embedded in the American psyche.”
Federal policies favorable to home ownership are already much weaker than before.
- Former President Trump’s tax reforms have dramatically reduced the number of people claiming the mortgage interest tax deduction, and government-subsidized 30-year mortgages are widely available on multi-family properties.
- Once they’ve married and started a family, buying a house — and voting against new construction — is exactly what Americans do, whether it makes financial sense or not.
It’s time to build
The Great Recession in the wake of the 2008 financial crisis, construction of new homes – single and multi-family – fell off a cliff and failed to keep up with population growth in the United States. But now it has rebounded and more houses are being built than households are being created.
There is still a housing shortage we need to construct our output. But Andreessen is wrong when he says that “our country is creating households faster than we are building houses”.
- The rate of household formation is equal to the annual increase in the number of American adults, multiplied by the rate of heads of household, which is always around 50%. Household formation plunged when the pandemic hit, but even before the pandemic, in 2019, there were only around 900,000 new households per year.
- New residential construction, meanwhile, is constantly increasing. Homes are being started at an annual rate of about 1.6 million units per year, well above the household formation rate, even after older units are demolished.
Peter Boockvar, chief investment officer at Bleakley Financial Group, told Axios that builders of multi-family homes are responding to ultra-low vacancy rates by building quickly.
- Within a year or two, he says, if we continue to build at current levels, rents might even start to come down.