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Anthony Downs (1930–2021)

Autor/a de An Economic Theory of Democracy

18+ obres 336 Membres 7 Ressenyes

Sobre l'autor

Anthony Downs is a senior fellow in the Economic Studies Program at the Brookings Institution.

Obres de Anthony Downs

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Revisiting Rental Housing: Policies, Programs, and Priorities (2008) — Col·laborador — 8 exemplars

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Nom oficial
Downs, James Anthony
Data de naixement
1930-11-21
Data de defunció
2021-10-02
Gènere
male
Nacionalitat
USA
Lloc de naixement
Evanston, Illinois, USA
Lloc de defunció
Bethesda, Maryland, USA
Causa de la mort
sepsis
Educació
Carleton College (Bx)
Stanford University (Mx & PhD|Economics)
Professions
economist
Organitzacions
Brookings Institution
Real Estate Research Corp.

Membres

Ressenyes

This book sheds light on the forces behind gentrification by answering two questions. One, where did this excess of money come from? Two, why is it investing in real estate and not elsewhere?

Until the 90s, investors typically avoided real estate, preferring instead to put their money in stocks, bonds, gold, or other assets. Real estate had the reputation of being unreliable, not producing steady increases in earnings, taking too long to make a profit, and being burdened by complex taxation and accounting rules. But by the mid-2000s, so much money was pouring into financing real estate investments that banks started both shelling mortgages out to anyone regardless of their ability to pay and buying properties with just as little discretion, bringing on the Great Recession of 2008. What happened?

The story begins with the real estate crash of 1990. Overbuilding in commercial real estate during the eighties led to property values declining. Rent plummeted and vacancy rose. Federal regulators responded by discouraging mortgage lenders from funding loans for commercial real estate. But due to new financial deregulations, banks worked around this by selling chunks of loans to investors in the stock market.

In the past, commercial banks issued a single loan and then serviced the whole thing through its entire duration. These new financial tools allowed banks to spread the debt to multiple types of investors who buy parts of a loan for a few years, possibly renovate the property, and then sell it at a higher price.

This led to the rise of Real Estate Investment Trusts (REITs). REITs are companies that own and operate income-producing real estate. They are funded through publicly selling stocks on the stock market. Rather than get loans through banks, property owners began securing funding by putting their property into REITs and issuing stocks. Stock trading evokes an image of greedy yuppies on the trading floor, but many investors in REITs are companies who manage pension funds.

The economy recovered throughout the Nineties and property values slowly rose. REIT investors were making money, inviting more interest and investment in them. When the dot-com bubble burst in 2000, central banks cut interest rates, increasing the amount of money available in the economy. Corporate stocks and bonds plummeted, leaving real estate one of the few profitable investment opportunities. Property values increased even though commercial spaces deteriorated due to the weak economy.

Since there was so much available capital, central banks kept interest rates low to encourage banks to issue loans. Buying shares in real estate debt became cheaper than investing in stocks.

Demand for housing in the US rose in the Aughts, as did the value of housing. Notably, wages didn’t rise in tandem, but lenders had so much money flowing in that they began issuing loans to people with lower income and worse credit scores. This led to so many renters buying homes that there was a brief dip in rental prices. Eventually the rent increased alongside the cost of land and as apartment owners converted rentals into condos.

But where did this “Niagara” of capital which fueled the housing boom come from? As China and India continue industrializing, the low-wage labor force in the world expands. More workers in the world mean more competition between them and therefore lower wages. The lower cost of labor means that products will be priced lower. This glut of workers kept inflation in-check while, to keep the U.S. economy afloat during a recession in the early 90s, the federal reserve decreased interesting rates, causing an increase in liquidity, and a boom in housing prices.

Capital also came from Chinese bank investments. Chinese workers do not have social safety nets in the form of Medicare or social security, so they tend to save much more of their income than workers in the United States. The Chinese government controls all the banks in the county and, since they didn’t have profitable places to invest it domestically, they used this excess savings to buy U.S. Treasury bonds, which promise a higher yield. But China bought 10% of the landlord company Blackstone in the aughts, showing that this excess savings also can go other places, like Real Estate.

What followed was a boom in housing prices. Homeowner Americans borrowed against the new equity, increasing money lent to banks.

Political and economic instability worldwide has led to investment worries. Terrorism, war, soaring oil prices, and EU controversies make investors hesitant to invest anywhere but real estate, especially in the US where it’s seen as more stable.

Additionally, as Ex-Soviet Bloc and other emerging markets now have wealthy people, they look to invest somewhere outside of their unstable economies. Real estate has better economic performance than its major alternatives. Property went undervalued starting in real estate crash in 1990, so investments in them have been yielding returns as the values rise.

5 of the 13 major causes of real estate capital flooding will likely continue:
• The effects of low-wage Asian labor
• Paradigm shift of investors towards real estate
• Desire of foreign firms to invest in U.S due to its stability
• Aging population in developed nations
• Savings from oil sales by oil-producers

After the mid-90’s, five factors drove up housing prices:
• Low interest rates after dot-com recession
• Financial securities deregulated
• Niagara of Capital
• Competition among lenders to get all the liquid capital facilitated subprime lending
• Normal population growth
These factors caused:
• Incentives for renters to buy homes due to low credit barriers
• Incentives for renters to buy home due to prospect of profiting from rising home values
• Speculators flipping houses
All of which caused drove up housing prices even more.

Downs argues that, in theory, capital inflows should have increased the housing stock and thus brought down home prices. Home manufacturers should have seen an opportunity for profit and ramped up production, which would have increased supply and thus brought prices and profit down. However, this never happened.

Homeowners usually resist new housing developments that threaten to bring down the value of their homes, since it’s their primary asset. So, they lobby local governments to do what they can to prevent affordable single-family homes or rental units from being built in their areas. Additionally, the desirable places for living are near places of work, so they are already congested with housing. Also, the homebuilding industry makes more money on luxury units, so they’re more likely to build them.

Rising home prices have contributed to a disparate housing stock, where some states and regions have significantly higher cost housing than others. San Francisco and other wealthy cities have trouble getting workers to relocate there, since they usually cannot afford to do so.

Usually, filtering brings down the price of housing. Filtering is the process when homes originally built for the rich at high prices depreciate overtime, allowing affordability for lower-income people. The author says this is ideal in how it requires no government subsidies. This process is somewhat unique in the United States where builders are held to a high standard for what houses they build. They can’t just build shacks.

But the Niagara of Capital has recently subverted this process. The author claims there are six factors enabling the filtering process to function:
1. A housing surplus must exist.
2. There must be more housing construction than forming of new households.
3. No discriminatory processes that hinder minorities from moving into certain neighborhoods can exist.
4. Cost of building materials and the process of building should be somewhat low.
5. There should be less very poor households.
6. If housing prices are increasing, the ability for low-income households to pay for housing must increase also.
The sixth factor is especially relevant now. Since housing prices are going up in general, it causes the rise in prices of depreciated, older housing units as well.

Since incomes for the poor and working class are probably not increasing, the filtering process seems to be failing. Meanwhile, housing prices skyrocket. Since 1970, but especially since 1995, household income increases have not kept pace with housing costs. To be clear, this is not due to a housing shortage, but instead to the Niagara of Capital.

The HUD claims there is a housing affordability problem if two conditions are met: you make 80% or less of the median income and you spend 30% or more of your income on housing.

This is abetted by a decline in building lower-cost housing. As the quality of hew housing increases, the price does also. Old apartments are being transformed into condos. Downs argues that it’s difficult to raise wages for the working poor since there is a surplus of workers in the same fields around the world willing to work for less.

He instead argues for increasing their earning power through education and training. This argument gave me pause. It is a typically naïve middle-class assumption that more education will better the lot of poor people. At its core is a belief that the problems aren’t systemic, but instead related to the intelligence and capabilities of the poor. More concisely, it implies that there are many job openings that the poor could potentially fill if only they were properly trained. I don’t think that’s the situation. There are a fixed number of job openings. If the poor did become trained in certain fields, that would only mean more competition for those skilled positions, and thus a decrease in wages followed by some pushed out into the situation the poor are in now.

He argues that subsidizing the poor’s rent, lowering existing housing prices, and public housing are all unrealistic. Subsidizing rent would cost too much, homeowners would not allow the value of their homes to go down without a fight, and public housing is expensive and has a bad reputation.

He thinks that tax credits, “workforce housing,” inclusionary zoning, and laxing of homebuilding regulations in suburbia are the only policy solutions to unaffordable housing. I don’t know enough about tax credits to comment, but “workforce housing” means renting to those who make below or slightly above the median income. Basically, it’s for those who work full-time for mid-range incomes. The income ceiling goes up with “household size,” but I imagine a “household” is a regulated/policed category, excluding platonic friends and unconventional living situations. It also excludes those who make money in the informal economy.

“Inclusionary zoning” is an inept policy as well. As Samuel Stein puts it in his 2019 book “Capital City”, throwing a few affordable units in a market-rate or luxury development doesn’t prevent it from gentrifying the area. The more market and luxury-rate housing units in an area, the more the area gentrifies. Unless you built more affordable units than market/luxury, it will drive up housing prices generally.

Laxing regulations for homebuilding standards in the suburbs makes sense but seems difficult for all the NIMBY reasons he spells out earlier. Anything that will decrease home prices will face the wrath of homeowners and the real estate industry, both of whom have significant sway over local governments, who would be the ones laxing the zoning laws. I just don’t see it happening unless a suburban area somehow consists of mostly rentals.

After the recession and 9/11, non-vacant commercial property rates continued to rise even though many other buildings were vacant. This was due to the Niagara of Capital. This was due to capital not having better investments and financial deregulations making it easier for investors to make short-term investments in real estate.
… (més)
 
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100sheets | Jun 7, 2021 |

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