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Resi Wrap - Movin' On Up
August 2022

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A recent study by Harvard economist Raj Chetty has been making the rounds in the popular press this week (or at least in my heavily-curated Google news feed). Chetty’s latest work builds on his prior survey of economic mobility in America, by overlaying on top of it a map of the frequency of friendships between people of different socio-economic status (as determined by Facebook connections).

His conclusions are, on their face, powerful. The two maps look virtually identical. That is, the regions in which people hold friendships outside their immediate economic cohort are ALSO those in which a person born into poverty is most likely to climb out of it.

The NPR article linked above focuses on the microeconomic implications of this, describing a Boston gym that exclusively employs disadvantaged trainers to cater to a high-end clientele. As investors, however, our interest was piqued by the macro implications for the real estate market, especially against the current dynamic backdrop of remote work and exurban growth.

That is, economic and social mobility has historically been a large driver of why people moved to gateway city downtowns. After all, George and Weezy moved on up from Queens to Manhattan, not to New Canaan. Looking at the social mobility map, superstar cities like San Francisco, Austin, Seattle, and the northeast Megalopolis from DC to Boston are oases of blue mobility surrounded by deserts of red stagnation.

As investors, it is not lost on us that these oases systematically represent the most expensive real estate in the country. A simple formula for high priced real estate could then be: RP = f(+EM, +D) where RP = Real Estate Prices, EM = Economic Mobility, and D = Density. Perhaps small towns in Eastern Montana may have offered attractive economic mobility, but its lack of sufficient density meant those opportunities were not unique within the broader region. Memphis, TN may have had critical mass, but experienced little growth because opportunity was lacking.

But with central offices falling by the wayside, limiting the desirability of living downtown for workers across socioeconomic status, what then happens to this formula? If the CEO and the mailroom employee both commute full time, they are far more likely to both live close to one another in a city or transit-oriented suburb, albeit in different sorts of neighborhoods. This means that while they may not interract at work, much less at a block party, they still may interract at the gym, at church, or at the local watering hole. If they both subsequently move to separate, more distant exurbs, those opportunities for affiliation are less likely.

Chetty’s work also dug into how economic mobility can be engineered by mixing people of various socioeconomic classes within institutional settings that favor the formation of such friendships. Notably, friendships formed by geography tended to be much less socioeconomically mixed than friendships formed in the workplace, activity groups, or religious affiliation.

So with the current paradigm shift in living and working preferences from dense to distributed, it would seem a worthwhile area of study to find out what makes the Northern Mountain west different from the Southern Mountain West, makes Texas different from the rest of the South, and makes the Great Plains different from the Rust Belt across the dimensions of cross-cohort access, friending bias, and institutional affiliation, and apply those learnings to suburbs and exurbs that are either historically cheap or physically growth constrained.

Developers and suburban city planners are already starting to react these forces, whether or not they view their response to new demand for growth as being influenced by them.

Rest of Resi

  • Where are most people supposed to live in a housing shortage? Probably not rural America. Maybe with grandma, which would seem to exacerbate the challenge to economic mobility presented by urban flight.

  • San Francisco, perhaps the perfect storm of expensive office space and a highly mobile workforce, is lucky that its all-world housing shortage creates a potential outlet for all that empty downtown office space.

  • Perhaps a revival of the extended stay residency hotel model would be a perfect fit then?

  • “I want to spend 100% of my work and home life in a 75-mile long skyscraper surrounded by uninhabitable desert,” said no one ever, except Elon Musk’s would-be Martian immigrants.

  • Meanwhile in China, the world’s largest real estate market, visibly and obviously overbuilt since at least the middle of the last decade, appears to be tipping just as population peaks. This market represents not just the retirement savings of an entire generation, but the primary sink for approximately half the world’s production of steel, copper, and concrete.

  • Lest we take for granted our priviledged position to worry about the relative desirability of suburbs and exurbs, basic personal safety apparently matters more for the real estate market than a pretty view.