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We Mortgaged Our Future With Overvalued Housing

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Like it or not, the “Yes In My Back Yard” movement for more affordable housing is gaining steam. Last year San Francisco Mayor London Breed won a special election in part of support from organized Bay Area YIMBYs. Minneapolis abolished single-family zoning. The Sightline Institute reports that similar bills are in the works at the state level in Oregon and Washington. Not everything is going the YIMBY way, as California State Senator Scott Weiner can attest after a recent defeat there, but the movement is making progress. 

But as Joe Cortright and Daniel Kay Hertz have pointed out, both providing widespread affordable housing and building wealth for future retirees are contradictory goals. As Hertz wrote in City Lab, “Possibly the only thing worse than a world in which housing doesn’t work as a wealth-building tool is one in which it does work as a wealth-building tool.”

Around 62 percent of a median homeowner’s total assets are tied up in their house, according to Arun Muralidhar. So while a successful YIMBY movement will necessarily reduce home values, it will also need to mitigate the effects on people whose retirements were planned around their home equity.

Moreover, another path to middle-class stability will need to be found for immigrants and minorities historically shut out of the housing market—since credit is cheap when homes are at their most expensive and scarce when homes are cheapest, according to Cortright. A new approach should not rely on a massive forced transfer of wealth from young people to old.

The use of housing as a wealth-building tool and eventual retirement is dependent upon the next generation being populous enough—and wealthy enough—to buy the homes older people have been sitting on. In Boston and San Francisco, this has worked too well, with the result that few young people can afford to buy homes and median prices are vastly out of whack with the median income.   

Yet in many other parts of the country, home values have not recovered from the 2008 financial crisis in either nominal or real terms. According to Cortright, for the country as a whole, “Between 2006 and 2018, housing values haven’t kept pace with inflation, meaning the real value of housing has declined.” 

Writing in Forbes, Zillow’s Svenja Gudell points out that in these areas—such as Las Vegas, Nevada; Hartford, Connecticut; Orlando, Florida;  Riverside, California; Baltimore, Maryland; and Miami, Florida—less than 10 percent of homes had recovered their pre-Recession peak values by the end of July last year. In Baltimore, around 14 percent of all mortgages were in negative equity.

In a future YIMBY revolution, where a given city where large-scale upzoning has vastly increased the housing supply, it won’t look quite like Baltimore. If building lots of apartments wreck some home values, it will still increase land value near those apartments. Still, for areas unaffected by the building boom, like autocentric suburbs, we can anticipate home and land values declining. Some distant sprawl may be abandoned because it will be easier and cheaper for some to live closer to the city. Unlike contracting Rust Belt cities where declining home values result in falling tax receipts, building more homes in cities like San Francisco will grow the tax base. 

But many people once dependent on home equity to fund their golden years will be stuck in a hole—and subsequent generations will no longer have rising home prices to fall back on. As we look to a bygone era of low-interest rates, fiat currency, and quantitative easing, thrift is less about saving money and more about putting money to work the right way. Prices rise more than interest pays and so one’s savings get inflated away. Risk and return are directly correlated, so finding an investment that is both low risk and has a higher rate of return than inflation is a real coup. So much so that in retrospect it’s surprising little was suspected about the risks of a housing bubble.  

Things will be simplest for those people not really on the property ladder yet. They will be able to take the money they don’t spend on housing and invest it in the stock market or diversified financial instruments, or even ploughing more into their IRAs. For people who bought homes at $150,000, have seen them rise to $700,000 and financed them accordingly, building more affordable housing is going to be more complicated. Earlier this year, the housing wealth of homeowners aged 62 and up topped $7 trillion for the first time, according to Reverse Mortgage Daily. For comparison, this is roughly one-third of the United States’ entire economic output, and bigger than the GDPs of every country other than the United States and China, according to the World Bank.

Other new possibilities could include a government-run pension fund or perpetual bond, like the consol bonds the British government used to issue. 

There is simply no way that getting rid of that wealth and compensating for it. Maybe some needy homeowners can be bailed out for pennies on the dollar, but other people will have to transition out of home equity before they lose it. 

Then again, it might be too late to cash out anyway. There’s some evidence that a lot of housing wealth is overvalued already. According to The Wall Street Journal baby boomers and retirees who built million-dollar dream homes already can’t sell them for more than what they paid for them. If trends favoring smaller homes in walkable areas continue, a large part of that housing wealth will be wiped out without anyone building anything.

Squirreling away money in housing, where it doesn’t earn much, and moving it into equities and consumer spending, would likely be a good thing for the economy as a whole. Lower income people won’t have to choose between rent and food, while middle-class people might be able to afford quality goods made in America. Banks will have more money to lend at lower interest rates, families will need less debt for education, and wages will go further. State and local governments will subsist on lower tax rates to maintain the same levels of service. That $7 trillion will be in the economy and not buried in a hole in the ground.   

It’s sad that the housing market has become what The Atlantic calls “intergenerational warfare.” But presumably some wiser, older folks should have been more prudent—before mortgaging future generations by making an easy buck and enjoying a sprawling backyard at their expense. The YIMBYs aim to sober up Americans and restore economic sanity before the middle class shrinks forever.

Matthew Robare is a journalist based in Boston.