Residential real estate is the single largest physical asset class. In the U.S. alone, the aggregate value of houses exceeds $45 trillion. As such, this sector attracts investors and entrepreneurs alike and spurs a huge ecosystem.
Yearly transactions are measured in the trillions, and with such staggering amounts at play, one is reminded of the apocryphal story of bank robber Willie Sutton. Upon being asked why he robbed banks, he said, “Because that’s where the money is.” The money is in real estate — for sure.
This statement is certainly a truism but it’s worth examining the matter with more nuance. Questions worth posing include:
- Who is investing in real estate?
- What is the position of the ordinary family in this sector?
- Are houses affordable for most Americans?
- Who benefits the most from the rise in real estate prices?
Answering the questions
The National Association of Realtors (NAR) predicts that approximately 4.8 million homes will be bought in 2023. Of that share, institutional investors are likely to purchase about 20%. This number is brought into bold relief when we consider that the U.S. is “short” circa 5 million housing units — both single and multi-family units.
Add this to another double-whammy, housing prices are near historic highs in the U.S. and mortgage interest rates have doubled over the last 18 months. This situation creates an impossible burden for tens of millions of American families.
When considering all of these facts, there are three straightforward conclusions to be drawn:
1. There are vested interests in creating the crisis of permanent renting. Today, 45 million American families rent their homes.
2. Capital talks. The “activation” capital that people need to become homeowners eludes tens of millions of American families while flush institutions can buy entire neighborhoods and convert them into rentals.
3. A large portion of these renters could become homeowners with just a little nudge. This is borne out by the fact that 45% of renters spend 30%+ of their gross household income on rent. With the right methodologies, that money could be spent on a mortgage.
What all of this comes down to is, you guessed it, capital. The crisis is so deep that it affects even families that would be considered well-off by otherwise sensible standards. In some markets like San Francisco, San Jose, Seattle, Boston and New York, even families with incomes upward of $200,000 per year have a hard time achieving homeownership. Mind you, these lofty numbers apply to only 7% of all households.
The crisis is not only about affordable housing but about housing affordability
Real estate has two mantras: “location, location, location” and “money, money, money.” Capital, however, does not live in isolation from other factors. It’s a major disservice not to discuss other valences that have brought us to where we are today with regard to housing. The most decisive parameter is race, which cannot be seen as discrete from class. Rather, they are intertwined in powerful ways.
In the U.S. today, approximately 65% of people live in houses they own. The Non-Hispanic, white homeownership rate is 73.3% while the rate for Black households is 42%. The average household income for the former group is $75,000 while for the latter it is $51,000.
Given the low rates of homeownership and income disparities coupled with the fact that home equity is the main source of generational wealth transfer for most families, historical trends weigh heavily on the present. This is not simply a product of individual bias. Redlining and “housing racism” has been enshrined in the law for the entire history of this country.
Wealth disparities are hard enough to overcome, but disparity combined with an abetting ideology creates a boundary that appears to be insuperable.
Houston, we have a problem
To extend the NASA analogy, societies are known to make moon shots and are often taken, even kicking and screaming, into a new reality. That reality requires a new paradigm of capital.
Let’s call this new paradigm “Community Capital” while the traditional/ incumbent I’ll label as “Wall Street Capital.” The latter category should be understood as a partnership between institutional money and government agencies. So what is the difference between the two? Community Capital can be seen as a form of altruism or as a form of long-term, sustainable business with positive externalities.
These externalities include both those realized at the personal or family level and also those realized on a societal level. Strong communities with economic and social “happiness” tend to be healthier, safer, more democratic and better at problem solving. These factors benefit everyone, including those who ordinarily are on top of the hierarchy. In this way, housing inequality is like air pollution — it is toxic for everyone.
Community Capital can be the wave of the present and the harbinger of a positive future. Housing is one sector that can benefit from this paradigm. No doubt, others can as well, like healthcare.
This is a clarion call for a new paradigm whose time has come. Some companies have answered the call, but voices in the wilderness need amplification.
This piece was originally published in the June/July issue of HousingWire Magazine. To read the full issue, click here.
Romi Mahajan is the president of KKM group and adviser to Rook Capital.