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Is the real estate bubble growing in the US?

Home prices in the US increased 18 percent last year and with the presence of institutional investors in the market growing, many wonder if a bubble is forming.

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A real estate bubble refers to an increase in the overall value of the housing market that is not associated with material changes to support such an increase. For that reason, prices can be extremely volatile, and in the case where the bubble pops, as it did during the 2009 Financial Crisis, the effects can be devastating.

Between 2007 and 2009, it is estimated that around 3.8 million households were foreclosed which impacted a staggering ten milllion people.

Homelessness increased dramatically as people were laid off and kicked out of their homes for failing to make mortgage payments that had been locked in in at criminally high-interest rate. In 2019, there were still around 100,000 people exercising homelessness as a result of the Great Recession, according to the Economic Roundtable.

The S&P CoreLogic Case-Shiller US National Home Price Index reported that in 2021, home prices increase by eighteen percent, partially driven by historically high inflation. Representing the largest increase in thirty-four years, market growth at the same level in 2022 should not be expected. In the coming months, the US Federal Reserve plans to increase interest rates to prevent further inflation, which could stabilize the market that has become impenetrable to many first time home buyers.

None the less, these figures have many worried that a real estate bubble may be forming. One of the main features of a real estate bubble is that they are difficult to identify until they pop. This does not mean, however, that there are no warnings.

In the years leading up to the financial collapse, a few leaders in Washington like Vermont Senator Bernie Sanders raised questions about the financial and monetary tools and strategies used by the Federal Reserve. Sen. Sanders called out Wall Streets predatory behavior and critized the ways in which monetary policy had led to a weakening in the economic wellbeing of many American households.

The loss of manufacturing jobs, stagnant wages, and tax breaks for major corporations and associated cuts in social spending led to the crisis having a disproportionate impact on the most economically vulnerable people in the country.

However, in the years following little has really changed in relation to US monetary policy.

In a recent interview with Jon Stewart, Treasury Secretary Janet Yellen agreed with Stewart’s assertation that the Federal Reserve has come served corpoarte interest at the expense of workers “in recent decades [...] many of the interventions have enhanced the power or corporations” and that the federal government has “ignored the needs of individuals.” Yellen added that precense of “structural forces in the US economy” combined with a “failure of policy” has led government to act in way that does not represent “the job that Americans should want government policy to do.

These structural forces impact all aspects of the economy, but housing is undoubtedly one of the most important.

What is leading to price increases in the housing market?

Wall Street is not entirely to blame for the surging value of the housing prices and rent, policy failures at the federal, state, and municipal levels also play a contributing factor. Many cities have allowed real estate developers to move forward with projects that make them profits but do not necessarily represent the housing needs of the community.

Additionally, historically low-interest rates, increased demand as people settle into new areas and routines after the pandemic, housing vacancy, and more have all contributed to unprecendented growth in the value of the market.

How do institutional investors impact the housing market?

In 2021, one in seven houses purchased in the United States was bought by an investment firm. This is a 2.8 percnet increase over 2020.

Accessing data on the exact percent of houses purchased by large firms, like those on Wall Street, is next to impossible. Some estimates put the percent of homes purchased by these firms at around two percent, but it could be higher. The remaining are owned by so-calledmom and pop landlords” or smaller investment companies. This has led many economists to say that the targeting of Wall Street for predatory behavior in the housing market is overblown. Without proper data and information evaluating this claim is challenging. But is clear is that the failure of policy makers to address the structural forces in the market that have led to this point, should not be allowed to escape criticism.

What do instituational investors do with the houses they purchase?

Investors do not live in the homes they purchase, which is how they can be distinguished from your typical home buyer.

Investors can either renovate it and resell, rent it out, or keep it vacant.

All three of these options can lead to an increase in property values in the area.

In cases where a firm chooses to renovate and resell a property, more commonly known as flipping, can create ripple effects felt across the market. In cases where several properties are renovated and the area becomes more desirable, the values for other houses can increase as well. Even houses that have not been remodeled or “fixed up” can see an increase in their value as other investors may be interested in breaking into the market.

Leaving the property vacant can protect against the property decreasing in value. Also, depending on how many houses are vacant, investors can create artificial scarcity in the market, leading to an increase in prices overall.

Lastly, rentals can increase property values because most landlords do not charge their tenets rent based on their monthly mortgage payment. Instead, they determine the rental price based on the housing market in the area. If a neighborhood sees an increase in property values, some residents may look to sell their homes which can be purchased by an investor. This is often what happens in areas that endures gentrification. The land becomes more desirable and expensive, rents then increase, rental tenants are either forced to move or pay up. Those who owned their homes often sell because of the increase in property taxes.

These housing issues are exacerbated when affordable alternatives do not exist and displaced households are pushed further away from their communities and business centers.

What could be done?

All of these issues have a policy solution.

Leaders at various levels of government could limit the number of properties in a certain area that can be sold to institutional investors. Caps or limits on the number of vacant homes an investor is able to hold could also be implemented.

Finally, to give families and first time home buyers greater leverage in the market, the government could impose higher property taxes on single-family homes owned by investors. Or in cases where various non-investors are placing offers on a property, the seller must choose from those individuals to give them more power in negociations.

These suggestions would and have been subjected to critismsm as some see them as infringing on private property rights of homeowners. But what we are seeing now is the alternative.

Owning a home is one of the most effective ways to build wealth in the United States and if the prices continue to grow at the rates they are this simply will not be an option for many families. Additionally, the effects compound, meaning that the greater number of homes investors are able to purchase the more capital they will have to expand their inventory.

Even, a “small landlord” who is in the housing market to earn a passive income should understand what they are perceiving as passive, because it does not result from their own labor, is the result of anothers. The morality and fairness of a market where the the presence of institutional investors limits the ability of families to purchase a home, effectively robbing them of the ability to build equity and wealth, should be questioned.


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