Our Firm
Resi Wrap - The Day That Never Comes
May 2023

Friends of ResiShares:

Back in January, in our annual “Top Ten Surprises” note, we predicted that “the Fed will engineer a soft, landing, and we’ll hate it.” While the first part is reasonably self-explanatory (guide the economy back to a sustainable rate of inflation without causing a deep recession), the second part requires a bit more explanation now than we initially provided (who is this “we” anyway?).

In our predictions note, the “we” referred to professional investors - all licking our chops to dine on desirable assets at temporarily dislocated prices. Not vacant office buildings and terminally insolvent tech companies, but (especially in our case, given our day jobs) houses, scarce after 10 years of underbuilding into a demand boom from Millennials. There’s another “we,” however. In economics, as in sports, the number of spectators in the stands dwarf the number of players on the field, and their rooting interest is often even stronger than those whose careers are directly impacted by the game’s outcome. Unlike sports, the boos don’t only come from the cheap seats.

There is a vast political and media ecosystem (or several, if one prefers) with a financial or at least psychological interest in seeing institutions fail. Examples of this from today’s political right wing are too unsubtle to warrant a deep dive from a newsletter. For them, we will only point out that the same forces doing their best to manufacture a crisis from the debt ceiling have been advocating abolition of the Federal Reserve and a return to the Gold Standard longer than most of us have been alive. Sustainable growth amidst moderating inflation is a big problem for their dystopian narrative.

It’s the capitalism-skeptical side of the media spectrum, however, that seems especially frustrated right now by the real estate market’s failure to fail. This explosion of a schadenfreude deferred has manifested as multiple think pieces across multiple outlets, each strongly advocating that we completely rethink the way we allow market forces to govern housing.

The centerpiece is this hagiography of the housing policies of Vienna Austria, from the NY Times. According to its author, the US should emulate this “renter’s utopia” to solve its current housing crisis, as evidenced by the fact that the handful of families they interviewed paid a very small percentage of income on housing. Not to let facts get in the way of a good story, but the average American pays a lower percentage of their disposable income on housing than the average Austrian, according to the OECD.

Not only do Americans spend less of our DPI on housing than Austrians, we also have more house (yes, mathematicians, both of these are likely coincident with the fact that we have higher incomes, but that does not change the point).

And finally,

“I learned that the average waiting time to get a Gemeindebau is about two years”

Best of luck selling that allocation methodology to Americans.

Next up, here’s an article from Wired that attempts to make the case for a wonky (and atually quite interesting!) alteration to property taxation policy by comparing land ownership to slavery and trafficking in human body parts (unfortunately, I am not kidding. They really went there). One gets the sense that the author has a 1,800 words of a 2,000-word tragedy already written about the “downfall of the corporate landlord.” Thanks to the magic of word processing, they can easily store it until the next cycle.

Perhaps, when searching for schadenfreude, these writers simply did not know where to look. Even with resilient rents and a stubbornly strong economy, misaligned incentives and the overuse of leverage can still lead to disaster for investors, as this WSJ article explores. Unfortunately, the syndication business is replete with inexperienced investors who measure deals primarily by their pro forma return, which encourages this type of risk-taking.

The persistence of high housing costs has begun to impact policy as well. In Caliornia, pandemic-era eviction bans continue long after the end of the pandemic, with little apparent pushback. Pressure on policymakers to make eviction laws more tenant-friendly is indeed a dispersed phenomenon. We’re also seeing California export YIMBY-inspired land-use laws to counteract the NIMBYism California previously exported alongside the housing prices that California first exported, such as in Denver. Canada is getting in on the action with a vacant home tax. It stands to reason that these policies would have been harder to enact if we had seen a real estate crash.

The YIMBY’s are onto something. The biggest driver of higher housing costs is that the pandemic unleashed years of pent-up demand in new household formation, the demographic end of which is nowhere in sight. The solution is simple: build more houses (and, apparently, fewer parking spots).

The Rest Of Resi

  • ResiShares was at least partially founded on the thesis that California’s housing market was a 10-year preview on the other desirable metropolitan areas of the US. This month, we witnessed more evidence that we were on the right track, with trends accelerated not just mimetically, but by the physical movement of people and jobs.

  • Not to beat a very dead horse, but if you think that rents in the US can’t go much higher, take a look at Singapore.

  • Life science real estate got ahead of itself.

  • Distressed San Francisco office is finding its market clearing price….and it’s not pretty. Speaking of not pretty, here are the ugliest buildings in China.

  • Gentrification does not cause displacement at scale, according to this study.

  • Urban trees are good. Play deserts are bad.

  • Suburban malls are back, somehow.

  • Zillow GPT will find you a house. Oh hi, buyside agents!

  • New York is sinking.

While Nashville has experienced some of the highest price growth of any area in the past several years, T-RECS believes it still has room to run, ranking it 17 out of the top 200 metros on expected price growth over the next 3 years. Its median home price of just under $400k is not cheap, per se, but still cheaper than competing cultural centers like Austin and Dallas.

Based on its mix of size, demographics, and economic growth, it looks most similar to Atlanta, Raleigh, and Charleston back in 2019, three of the largest beneficiaries of the pandemic, as well as Dallas in 2015, as it began to accelerate.