Is there really such a thing as unaffordable housing? Not for very long.
Back in the 2000s, as I have noted, time and time again, we bought two condominiums here in South Florida. We were alarmed as the prices kept ratcheting upward - sometimes 20% to 30% a year. As much as we enjoyed this phantom "equity", the rapid rise made us uneasy. We'd lived through real estate bubbles before, and this had all the makings of one. And we were right.
Every evening we would drive down route A1A and enjoy looking at all the fancy houses and also all that fancy new high-rises going up along the water. It seemed like hundreds and thousands of new condominiums were being built, just within a few square miles. And all of them would be topped out and finished off at about the same time, too. Who would buy all these condos?
(Fast-forward 10 years and we are back in Ft. Lauderdale, and this time it is all new luxury apartments under construction - all set to top out within the next few months to a year. Who will rent all this luxury apartment space?)
The inevitable happened around 2007. All those condos were finished, with not enough people to buy them - and the real estate market crashed. It is a cycle that Florida has been through many, many times, and is still going through today.
According to a recent article, a builder is warning the same thing may happen again soon, only this time with regard to luxury apartments. And actually, if you google this, you will see articles from as far back as 2015 warning of over-construction in the luxury apartment sector. Since the real estate crash of 2008, Builders have been adding more and more apartments as fewer and fewer people want to buy, and more and more older people are less interested in owning.
Many of these luxury apartments are second homes for very wealthy people, or even sometimes a third home - they're only seasonally occupied. Others are downsized homes for empty nesters whose children have left the house. They no longer want to deal with the joys of homeownership and just want to a turn-key place they can go, and pay a monthly fee.
At the other end of the spectrum, poor people are having a harder and harder time finding decently priced places to live, particularly in very hot real estate markets such as the San Francisco Bay Area, Washington DC, and the like.
Many are spending more than 50% of their income on the housing alone, which puts them in the category of being financially stressed. The question remains why are there not more lower income housing units for lower-income people? The answer is complex, and it has a lot to do with the inefficiencies of the free-market, which often becomes a race to the bottom. In this case, it is the builders racing to build a product that is the most profitable to them, but unafforable to most. It is like the carmakers building $70,000 pickup trucks and $100,000 SUVs - and not being able to keep them in stock. Meanwhile, no one wants to make a simple, inexpensive sedan anymore - no profit in that!
I mentioned before that there's really no such thing as unaffordable housing. A house or apartment is placed on the market either for sale or rent and then is rented or sold for the highest possible price the market will bear. Few, if any houses or apartments sit empty - for very long. If people stop paying higher prices, the market corrects itself and prices go down. This pattern has been established again, and again - and again - over the years. But it does take time for these corrections to occur - and in the interim, people can get hurt as a result.
This is not to say that housing prices are ever cheap or that affordability is tracked in real-time. Rather, there's often a delay or hysteresis in the system as prices get ahead of the market and then inevitably crash and prices go below the market - at which point nobody can afford to buy because they're broke.
I mentioned this before in a posting about depressed real estate prices in Cape Coral, Florida right after the crash. We drove down there after seeing houses selling for under $100,000 - houses that have been on the market for over $400,000 just months earlier. By the time we got there wily investors had snapped up most of the prime real estate stock. At that point in time, that's who could afford to buy these properties. The poor people who really could have used those houses were financially stressed from the recession, likely having lost their jobs or maybe their life savings in some real estate scheme during the bubble.
Of course there are other factors besides supply-and-demand in the real estate market - or at least some people believe. In many real estate markets, geography constrains expansion of the marketplace. Areas such as Vancouver or San Francisco are bounded by water and it's difficult to expand beyond those boundaries. Prices go up and poor people forced to pay an exorbitant amount of money for rent or have to commute enormous distances across bridges to get to their jobs.
Of course, there are other alternatives. As I noted before, many of my semiconductor clients moved their offices to lower-cost areas such as Boulder, Colorado or Austin, Texas - which quickly became higher-cost areas as more more companies moved there. Amazon is doing the same thing by locating a "second headquarters" in a lower-cost community, and it sounds like Apple may follow suit.
The high cost of living affects not only employees but employers as well. And as the cost of living rises, employees are more likely to seek other job opportunities where pay is higher in order to better support themselves. This is the reason I left the Patent Office to work for a law firm - so we could buy a house in the expensive Washington, DC area. My salary at the Patent Office was was not going to support our dreams of home ownership.
Although it may take some time, the same thing will happen in these hot real estate markets today. Employees will try to find higher-paying jobs or go on strike for more wages in order to pay for the higher cost of living. Companies will realize that the cost of living is too high and thus they have to pay their employees more. That, in turn will incentivize them to move some or all of their businesses to lower-cost areas in the country. Eventually, a new equilibrium will be reached - which has happened before in the Bay area, many times, when real estate boomed - and then went bust.
Before he moved to Washington DC, Mark lived here Boca Raton, Florida which was in the process of recovering from a real estate crash prior to the 1989 crash. Many developers overbuilt the area with luxury condominiums for which there were not enough buyers. He, and students like him, could rent these condominiums very inexpensively for use as dormitories while they were in college. And they could rent them inexpensively as the builder went bankrupt and a new owner took over - an owner with a much lower cost-basis who could rent for less and still make money.
A builder, developer, or landlord might argue that the high cost of these units would prevent them from renting at low prices, but then bankruptcy enters into the scene. We saw this same pattern in the Washington DC office real estate market in the 1990s, where too many new office buildings went up at once. Once these white elephants went up un-rented, they often ended up in bankruptcy court. Some new landlord takes over and rents them out for a few dollars less, and since he has a lower cost basis and overhead, he can do so at a profit.
Pretty soon, his building is full of new tenants whose more expensive leases expired in other buildings. Those buildings are now un-rented and they go bankrupt - and the process repeats, with these office buildings toppling like dominoes in bankruptcy court, one by one.
And I think that's what we'll see in this "luxury apartment" market. When you have a major luxury apartment developer warning that people are over-building, then trouble lies ahead. One or more of these apartment developments will end up in bankruptcy as the units end up un-rented. Since the landlord can't pay the notes on these places, they will have to reorganize in bankruptcy court. A bunch of the debt will be wiped out as a result, and the cost basis of the new owner will be lower, allowing them to lower rents to attract tenants. This doesn't mean that Section 8 tenants will be moving into the luxury high-rises, only that this will depress rents all across the market.
Again, as we saw in the Washington DC office real estate market, this has a domino effect. Thus, while housing seems unaffordable today, this could change dramatically in the coming months and years. Eventually they will reach a point where people will stop paying and this will, in turn, drive down prices. And the change could be sudden and dramatic, as we saw in 2008. And it could be very soon, too.
This is not to say that housing will become cheap or even free. People don't like to spend a lot of money on housing, and it usually takes up at least one-third of your budget, if not more, even in a "normal" market. What people complain about is they would like to have more and nicer housing than they can afford and have more money to spend on bling. And this is where I have a disagreement with the "affordable housing" people.
As I noted before, I pissed off a "housing advocate" in Key West once, as he argued that homeless people should be allowed to have homes on that resort island. I pointed out that since they weren't even working there, why would they need to have housing on a resort island? They could live further up the Keys or even on the mainland. But in his mind, beggars could indeed be choosers, and if you wanted to be homeless, you should have your choice of where to be homeless, including in a resort area.
Meanwhile the poor bartender or waitress, who's doing 60 hours a week trying to make ends meet, has to commute two hours from up the Keys in order to go to their job. They made the logical choice to go where housing was more affordable. The working class gets punished here.
And those really are the only choices you have, when the housing market goes bananas and gets crazy expensive. You can argue for political changes, but they're not likely to be forthcoming, particularly in the current political environment. Or you can find someplace cheaper to live - or find a job that pays better money. And in my life, I've been forced to do both of the latter, as there is no "middle-class housing advocate" with a 503(c) organization lobbying on my behalf.
A better approach, I think, is to realize that if you're living in an area with a high cost of living, to remember that you came there for a reason - most likely a job. Earn your money, and bank as much of it as possible - and spend as little as possible on housing even if that means getting a roommate or living in an apartment or a smaller place or a place less desirable than what you think your are "entitled" to.
Chances are, you may end up moving away in a few years, anyway. If the market is that overheated, it may correct itself soon, and you may end up "upside down" on a house for many years - and stuck. And I say this from experience, having bought at the height of the 1989 bubble - and then bought many more properties after it all went bust, in 1994. If the market is overheated, don't be in a rush to buy. It is like buying Bitcoin or gold after it has gone up in value - thinking that the boat is leaving the dock and you'd better get on board, only to later find out the boat was sinking.
When the time comes, you can move away to an area where housing costs are far less and live more comfortably. The big mistake, I think, is to try to buy up to your salary level and spend a huge amount of the money that you earn on something that could fluctuate in value greatly, particularly in these bubble areas.
Because when it comes right down to it, housing is a commodity like any other - and it is subject to the same laws of supply and demand. And when people try to tell you otherwise - that gold or bitcoin or houses, or tech stocks are "different" and don't conform to normal economic theories - that's a sure sign you are in the middle of a bubble that is about to burst, and burst bad.
And I think we are headed for yet another real estate meltdown, within the next couple of years. And a lot of housing that today is "unaffordable" will drop in prices dramatically. Don't take my word for it - ask the guy who is building these darn things!
UPDATE: Bubbles eventually burst and equilibrium returns. It cannot be denied forever. The key is to not give in and buy at the height of the bubble due to "fear of missing out". Same is true for most things, in fact.