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Resi Wrap - Putting The Gini Back In The Bottle
December 2022

Friends of ResiShares:

Happy Boxing Day, to those who celebrate.

For the uninitiated, Boxing Day was founded by Mike Tyson, who, after knocking out the previously undefeated Michael Spinks before half the audience had made their way back from the concession stand, remarked, “I deserve my own holiday for this performance!” When informed that there was already a holiday called “Boxing Day” celebrated the day after Christmas since at least the 17th century, Tyson replied, “ok that’ll do,” and thus, the holiday’s modern interpretation was born. (Note: the author may have taken some artistic license with the above).

In Europe, Boxing Day was traditionally celebrated as a day for the rich to provide gifts to those less fortunate. What more perfect day, then, to start with a story about wealth inequality, and its effect on the price of financial assets. Researchers from Oliver Wyman have shown a positive correlation between stock market performance and inequality, which they explain as resulting from the tendency for those with more money than they can spend to exhibit greater willingness to speculate on financial assets than those living paycheck-to-paycheck. This drives greater demand for these financial assets, driving up p/e ratios (and, for our purposes, driving down cap rates).

Intuitively, it makes sense that a less equal world is one with higher financial multiples overall. What about housing, though? Liquid financial assets like stocks are nearly 100% geographically fluid within national borders (the herd of millionnaire farmers, grocers, and plumbers in Omaha who figured it was a good idea to give that smart kid Warren a few bucks to invest back in the ‘70’s notwithstanding). By contrast, directly owned real estate tends to be local. Rich folks tend to spend more on their primary residence than that which meets their basic shelter needs, and then typically make their first direct real estate investments within driving distance. If this relationship applies to stock multiples through time, could it apply to housing costs through space?

A simple internet search turns up a list of the top 25 MSAs by income inequality:

And the bottom 25:

While recreating the Oliver Wyman report and applying it to real estate is beyond the scope of this humble newsletter, a simple glance at the tables above suggest a rich vein of insight can be mined from these data. In an extremely unscientific example, the egalitarian nuclear scientists of Los Alamos, NM, who come in at number 916 on this list, live in homes whose median cost was $440,000, according to Zillow. By contrast, the more libertarian discretionary hedge fund managers of Bridgeport-Stamford-Norwalk, CT live in homes whose median cost was $562,498. This, despite the fact that both MSAs share an average income amongst the bottom 99% of earners of around $80,000.

It’s been said that Fannie Mae and Freddie Mac, by providing subsidized loans for homeownership, inadvertently exacerbate inequality. If indeed inequality drives home prices higher across space, the FHFA’s most recent home price adjustment will do little to quiet that argument.

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