Why the rental housing market is so deeply broken
America's housing market is broken, but the deep and structural problems can't be fixed with technology.
Why it matters: The U.S. is in desperate need of more high-quality rental housing. Homeownership works for many — and doesn't work at all for many others, who might not be ready to settle down or might not have the financial means.
The big picture: Venture capitalist Marc Andreessen has invested $350 million, his largest check ever, into Adam Neumann's new company, Flow.
- Andreessen's blog post lays out his investment thesis, that renting a home is "a soulless experience."
- The details of how Flow will work are still vague, but they're likely to include amenitization — bells and whistles for apartment renters — as well as some kind of financial upside.
What they're saying: "Someone who is bought in to where he lives cares more about where he lives," writes Andreessen. "Without this, apartments don’t generate any bond between person and place and without community, no bond between person to person."
- In New York, I've lived in both owned and rented apartments, and the community in my rental building was just as vibrant and tight-knit as anywhere I've owned.
- Neighborhoods characterized by very low home-ownership rates — think Harlem, in New York, or Hialeah, in Miami — often boast deep and lasting communities stretching across generations and decades.
Reality check: "Ownership per se doesn’t make you more invested in your community," Sam Chandan, the director of the NYU Stern Center for Real Estate Finance Research, tells Axios. "It makes you more invested in decisions in the community that impact the value of your asset."
- Andreessen, for instance, opposed multifamily development in his home town of Atherton, California, on the grounds that such development "will MASSIVELY decrease our home values."
Between the lines: As a VC, Andreessen believes that technology and entrepreneurship can solve the problems of the rental market. (Naturally, this being Andreessen Horowitz, blockchain seems to be involved, somehow.)
- Where rental housing is most successful, however — Germany is Exhibit A — it's not because renters "receive the benefits of owners," in Andreessen's formulation. Rather, it's because they have housing security and affordability.
- German renters build strong community bonds the way we all do — just by getting to know our neighbors. They — we — don't need whiz-bang amenities like those offered by your local WeWork.
Where it stands: Private-sector solutions like Flow, by their nature, cannot address the deepest obstacles to successful rental housing.
- It's entirely possible that Neumann will be successful at marketing buzzy properties to upwardly-mobile renters in fast-growing cities like Nashville.
- But that's not going to make a dent in the structural obstacles militating against America becoming more of a nation of renters.
Why it's so hard to fix the rental market
A lot of the reason for the lack of affordable housing in America is to be found at the local or even individual level.
- Zoning is the biggest issue: NIMBYs like those found in Atherton are the rule, not the exception. Getting permission to build new multifamily housing is ludicrously expensive and difficult.
- Education finance runs a close second. So long as schools are funded by local property taxes, parents will prefer high property values to affordable housing, which often increases the number of children in local schools without raising tax revenues correspondingly.
- The American dream also gets in the way. After looking at the behavior of older millennials, says NYU's Chandan, "the data suggests that homeownership as a natural and expected evolution is deeply ingrained in the American psyche."
Federal policies that favored homeownership are already a lot weaker than they used to be.
- Former President Trump's tax reforms massively reduced the number of people claiming the mortgage interest tax deduction, and government-subsidized 30-year mortgages are widely available on multifamily buildings.
- Once they get married and start a family, buying a house — and voting against further new construction — is just what Americans do, whether it makes financial sense or not.
It's time to build
The Great Recession following the financial crisis of 2008 caused new-home construction — both single-family and multifamily — to fall off a cliff, and fail to keep up with U.S. population growth. But now it's rebounded, and more homes are being built than households are being created.
There's still a housing deficit we need to build our way out of. But Andreessen is wrong when he asserts that "our country is creating households faster than we’re building houses."
- The household formation rate is equal to the annual increase in U.S. adults, multiplied by the headship rate, which is always around 50%. Household formation plunged when the pandemic hit, but even pre-pandemic, in 2019, it was running at only about 900,000 new households per year.
- New residential construction, on the other hand, is steadily increasing. Houses are being started at an annual rate of about 1.6 million units per year, well above the rate of household formation even after you account for older units being demolished.
Peter Boockvar, the chief investment officer at Bleakley Financial Group, tells Axios that multifamily homebuilders are responding to ultra-low vacancy rates by building fast.
- Within a year or two, he says, if we continue to build at current levels, rents might even start to come down.