The Capital Note

The Housing Crunch

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Welcome to the Capital Note, a newsletter about business, finance, and economics. On the menu today: housing, stonks, nukes, doing business in China, and the memefication of markets. To sign up for the Capital Note, follow this link.

News and Views

House Prices: Wall Street Not to Blame
Two stories in the Financial Times.

The first:

House prices have set new records in the US and parts of Europe as vast fiscal and monetary stimulus help residential property markets to continue shrugging off the impact of the coronavirus pandemic.

The median price for US existing houses rose a record 23.6 per cent year-on-year to a new high of $350,300 last month with every region of the country recording increases, the National Association of Realtors said on Tuesday . . .

The second:

Blackstone has agreed to acquire Home Partners of America, a buyer and operator of single-family rental properties, for $6bn, a signal of confidence from the world’s largest real estate manager that the US housing market boom is here to stay.

And, dare I say it, a lack of confidence in the ability to find a decent yield anywhere else.

The Financial Times:

The private equity firm’s real estate arm, which has $378bn worth of property assets, will add a portfolio of more than 17,000 homes across the US. HPA will become part of Blackstone Real Estate Income Trust, a perpetual capital vehicle Blackstone manages for income-focused investors.*

“This partnership with Blackstone Real Estate and its consistent support of our business will ensure we are well-positioned to expand the reach of our program to provide access to more homes,” said Bill Young, co-founder and chief executive of HPA.

US housing demand has boomed during the pandemic as millions of Americans seeking larger homes farther from city centres took advantage of record-low interest rates and government stimulus to buy new properties. That led to a sharp increase in prices as demand has often outstripped supply.

An additional 17,000 homes is not a huge number in itself (on the contrary), but, as someone with a strong belief in the contribution that property ownership can make to our democracy, I’ll confess to feeling some unease. Building new properties for rent is one thing, but for large institutional investors to crowd out existing buyers (at a time of a supply shortage) would be another. On the other hand, watch out for the way that anecdote might be crowding out reality.

Derek Thompson at The Atlantic:

The BlackRock saga [note: BlackRock is not Blackstone] sounds grotesque. At a time of maximal desperation in the U.S. housing market, giant investment banks, such as BlackRock, are buying up some of the few houses left on the market, boxing families out of the American dream. They’re turning these homes into rental units that they will, in some cases, leave to decay. Such faceless institutional investors are reportedly more likely than ordinary “mom and pop” landlords to aggressively raise rent—and evict people who can’t afford it.

Americans don’t agree about much, but they seem united in believing that this is a despicable state of affairs. In the past few days, institutional housing investors have drawn criticism from Fox News and Republican politicos as well as left-wing commentators.

But this outrage is misdirected. If we have any chance of fixing the completely messed-up, unaffordable U.S. housing market, we should direct our ire toward real culprits rather than boogeymen.

The U.S. has roughly 140 million housing units, a broad category that includes mansions, tiny townhouses, and apartments of all sizes. Of those 140 million units, about 80 million are stand-alone single-family homes. Of those 80 million, about 15 million are rental properties. Of those 15 million single-family rentals, institutional investors own about 300,000; most of the rest are owned by individual landlords. Of that 300,000, BlackRock—largely through its investment in the real-estate rental company Invitation Homes—owns about 80,000 . . .

Megacorps such as BlackRock, then, are not removing a large share of the market from individual ownership. Rental-home companies own less than half of one percent of all housing, even in states such as Texas, where they were actively buying up foreclosed properties after the Great Recession. Their recent buying has been small compared with the overall market.

Besides, BlackRock and investors like it aren’t necessarily taking homes away from ordinary families. As the Vox reporter Jerusalem Demsas explains, institutional investors tend to buy homes that need significant repairs. That means they’re often competing with other investors—individuals who buy houses to rent them out, as a side gig or a main gig—not with typical young couples who are looking to turn a key and walk into a finished house . . .

That may understate the impact that institutional investors may be having as marginal buyers in a tight market but, even so, it’s difficult not to think that the real culprit is elsewhere.


Nothing in the BlackRock saga is central to America’s larger housing problem, which is, simply stated: Where the hell are all the houses? A ton of people want to own new homes right now—including the largest crop of 30-somethings in American history. But single-family-home construction is in a rut, having fallen in the 2010s to its lowest levels in 60 years. The pandemic threw a few extra wrenches into home construction that will hopefully resolve themselves in the near future.

Far worse than corporations taking a few thousand units off the market for owners are the governments and noisy NIMBYish residents taking millions of units off the market for owners and renters alike—by blocking construction projects in the past few decades. (California alone has an estimated shortage of 3 million housing units.) From New York to California, deep-blue cities and states have amassed a pitiful record of blocking housing construction and failing to meet rising demand with adequate supply. Many of the people tweeting about BlackRock are represented by city councils and state governments, or are surrounded by zoning laws and local ordinances that make home construction something between onerous and impossible.

Through law and custom, the U.S. has encouraged people to buy and cherish their houses. But by asking Americans to see their homes as precious investment vehicles, these laws activate a scarcity mindset and sow the seeds of NIMBYism: Don’t dilute my equity with new construction!

How can we encourage Americans to support more housing construction near where they live? Maybe the answer is … more single-family rentals. As the Bloomberg columnist Conor Sen points out, homeowners tend to look down on nearby construction, because more ample housing could drive down the cost of their property. But renters might celebrate nearby construction for the same general principle: Ample housing might hold down their rent . . .

Perhaps, but most people appear to still want a home of their own, by which I mean a home (a single-occupancy home) that they own — and one in the suburbs at that. And yet, to return to that rut referred to by Thompson, in an article published on January 2020, the NAHB’s (the National Association of Homebuilders) chief economist, Robert Dietz noted that (my emphasis added):

After a downshift following the Baby Boomer induced single-family home construction wave of the 1970s, the population-adjusted pace of single-family construction was remarkably constant, despite year-to-year ebbs and flows. In fact, over the period of 1980 through the end of the 2000s, single-family construction averaged just higher than 41,000 starts per million of population. The 2010s stand out as the exception to this general benchmark, with single-family construction operating near 50% of this pace following the demand-side and supply-side impacts of the Great Recession . . .

The paradox of declining inventory, rising home prices, and underperforming single-family construction has been the most important home building research focus of the last decade. Traditional demand-side housing analyses are insufficient to explain these market conditions. The lack of building is rooted in a set of supply-side headwinds that limit home construction in expanding markets.

Since 2015, NAHB’s explanation and forecasts have referred to this complex set of limiting factors as the five Ls: lack of labor, lots/land, lumber/materials, lending for builders, and laws/regulatory burdens. No single factor alone can sufficiently explain the housing supply equation of the last decade. And to a certain degree, the challenges offered by this set of issues are rooted in consequences of the Great Recession on the structure, organization, and enforced policies on the housing industry in the 2010s.

Labor — Some details on each is useful for understanding the challenges of the 2010s. Residential construction faces a persistent labor shortage, which has resulted in higher costs and longer construction times. The effort to replace the 1.5 million workers lost during the Great Recession has been difficult. In fact, the skilled labor shortage has been cited as either the No. 1 or No. 2 business-related challenge for builders for the last five years of NAHB surveys.

As hiring has progressed and many organizations in the housing sector have enacted programs to recruit, train and sustain workers in the home building and remodeling sectors, the pace of those efforts has not kept up with demand . . .

Land — Access to land and lots for building has also limited aggregate building volume since 2012. As of 2019, almost six out of ten home builders indicated that lot supplies were low or very low. Low lot supplies are due to a reduced number of land development companies, as well as tighter rules regarding zoning for housing and land development.

Lumber and materials — Lumber price volatility and access and cost of other building materials have also acted as a headwind for home construction. For example, in 2018 lumber prices expanded by 63% at their peak, adding thousands of dollars to the cost of a typical newly built home. While lumber prices were lower in 2019, other building material prices have increased.

Lending — Access to builder and developer financing is also a key ingredient for housing supply. Discussions of housing and lending are often exclusively focused on mortgage financing, but a buyer cannot buy a home before financing is ready for construction. Typically, small and regional builders rely on debt financing from banks. Such acquisition, development and construction (AD&C) lending has been tight in the 2010s. And loan data reveal the stock of such lending is off 61% since the start of 2008. 

Laws and regulations — Finally, regulatory burdens have increased during the 2010s. NAHB analysis finds that 24% of the price of a typical newly-built single-family home is due to the broad set of regulatory burdens imposed by state, local and federal governments. Moreover, between 2011 and 2016, such costs increased by 29%, faster than inflation and economic growth. Such burdens are high for apartment construction as well, as a joint study by NAHB and National Multifamily Housing Council found that 32% of apartment costs are due to regulatory costs.

The volatility in the price of materials has, of course, not gone away (although the price of lumber is on its way down again after the recent surge). The labor shortage may be a problem for a while, although a recent rise in wages paid in the sector may suggest that that problem will, in time, fix itself. So far as builder and developer financing are concerned, I’m not surprised that memories of the financial crisis — obviously the key problem — continue to weigh. Today’s stronger market, lower interest rates (for now) and the shortfall in construction over the last ten years ought (again in time) to start putting that right.

That leaves regulation. I don’t see a drive toward increased rental construction as either the solution politically or, indeed, as something that is desirable. Call me old-fashioned, but I still see the notion of a property-owning democracy as something intrinsically healthier than a renter nation. As so often, the answer appears to be that government needs to get out of the way, partly by allowing smaller lot sizes, something that will (effectively) require voter consent, but also by taking a fresh look at the massive increase in regulatory burdens. How many of those regulatory costs were worth it in the first place, and how many can be justified at a time when we have a housing shortage?

Or are those questions that we are not allowed to ask?

We can talk about what “climate” regulations might mean for housing costs on another occasion.

Around the Web
Stomped by a stonk:

The Financial Times:

A London-based hedge fund that suffered losses betting against US retailer GameStop during the first meme stock rally in January is shutting its doors.

White Square Capital, run by former Paulson & Co trader Florian Kronawitter, told investors that it would shut its main fund and return capital this month after a review of its business model, according to people familiar with the fund and a letter to investors.

White Square, which at its peak managed about $440m in assets, had bet against GameStop, say people familiar with its positioning, and suffered double-digit per cent losses in January.

The move marks one of the first closures of a hedge fund hit by the huge surges in so-called meme stocks. Retail investors, often co-ordinating their actions on online forums such as Reddit’s r/WallStreetBets and in some cases deliberately targeting hedge fund short sellers, drove up the price of stocks such as GameStop and cinema chain AMC Entertainment in January and again in recent weeks. GameStop, for instance, soared from less than $20 at the start of the year to more than $480 at its January peak . . .

Strange nuke respect:

Michael Shellenberger:

Bhaskar Sunkara is the founding editor of Jacobin, a socialist magazine, and author of The Socialist Manifesto: The Case for Radical Politics in an Era of Extreme Inequality. He is also an unlikely advocate for nuclear energy.

In a new article for The Guardian, Sunkara draws on Environmental Progress research which found that, in its first full month without Indian Point nuclear power plant, New York’s carbon emissions from in-state electricity generation rose 35 percent over the state’s pre-covid shutdown levels.

The same analysis found that the carbon intensity of New York’s electricity, the amount of carbon dioxide emissions per unit of electricity, rose 46 percent. And the share of electricity from renewables, including hydroelectric dams, actually declined between 2019 and 2021.

Sunkara’s article comes at a time when a growing number of progressives, socialists, and Democrats are speaking out for nuclear power. A few weeks ago, Emmet Penney, a founding member of Santa Fe’s Democratic Socialists of America (DSA) chapter, noted that “Nuclear plants bring wealth and meaning to their host communities” and, in a turn of phrase that elicited strongly positive responses from readers, Penney added, “They are American industrial cathedrals.”

Part of the reason for growing progressive support for nuclear is because of the research and advocacy of pro-nuclear organizations including Environmental Progress, which has forced renewable energy advocates, and now the industry itself, to admit that solar panels and wind turbines do not substitute for fossil fuels . . .

Doing business in China:

The New York Times:

Doug Guthrie spent 1994 riding a single-speed bicycle between factories in Shanghai for a dissertation on Chinese industry. Within years, he was one of America’s leading experts on China’s turn toward capitalism and was helping companies venture East.

Two decades later, in 2014, Apple hired him to help navigate perhaps its most important market. By then, he was worried about China’s new direction.

China’s new leader, Xi Jinping, was leaning on Western companies to strengthen his grip on the country. Mr. Guthrie realized that few companies were bigger targets, or more vulnerable, than Apple. It assembled nearly every Apple device in China and had made the region its No. 2 sales market.

So Mr. Guthrie began touring the company with a slide show and lecture to ring the alarm. Apple, he said, had no Plan B.

“I was going around to business leaders, and I’m like: ‘Do you guys understand who Xi Jinping is? Are you listening to what’s going on here?’” Mr. Guthrie said in an interview. “That was my big calling card.”

His warnings were prescient. China has taken a nationalist, authoritarian turn under Mr. Xi, and American companies like AppleNike and the National Basketball Association are facing a dilemma. While doing business in China often remains lucrative, it also increasingly requires uncomfortable compromises.

“Uncomfortable compromises”:

That trend raises the question of whether, instead of empowering the Chinese people, American investment in the country has empowered the Chinese Communist Party.


Random Walk
Robin Wrigglesworth, writing in the Financial Times on the “memefication” of markets:

Narratives matter and have always mattered enormously to markets. Nobel laureate Robert Shiller has even written a book on how the stories we tell ourselves can shape economic ebbs and flows. But over the past year, a condensed, modern form of narrative — the internet meme — has grown deep roots in markets and evolved from attempting to capture reality to actually helping distort it.

Memes are easily-digestible and shareable images or videos, often in the form of a snapshot from popular culture, tweaked with custom captions to send myriad messages, from amusing self-deprecation to arch political commentary.

It may seem ludicrous, but financial memes can arguably shape perceptions just like verbose investment bank reports or newspaper opinion pieces. Arguably more so among younger generations with less patience for long-winded, staid traditional news and analysis. If a meme spreads, it can have a sizeable impact at a time when retail trading is a rising force in markets.

“Individually, a meme from one small account probably won’t do much, but if it’s a concerted effort and it goes viral, then there is the possibility to drive the share price,” says a prominent finance “meme lord” known as Litquidity on Instagram where he has over half a million followers. He has declined to give his real name.

Memes have long been central to the rise of various cryptocurrencies, but their impact is starting to be felt in mainstream markets as well. This is most vividly highlighted by the mayhem surrounding a bunch of meme-friendly stocks adopted by a horde of online retail traders this year . . .

For now, this is primarily a factor in niche corners of markets. But it is a broader phenomenon than just the classic “meme stonks”. Memes have also fuelled the boom in so-called special purpose acquisition companies, arguably in a modest way, even affected the wider stock market, exemplified by Tesla’s market-rattling run. Almost half of 1,500 individual investors polled by advisory group Betterment said they invest in stocks based on social media buzz.

Kyla Scanlon, a young former industry insider who now creates TikTok videos explaining finance to younger generations, is among those both fascinated and alarmed by the “memefication” of markets. She observes the sense of community it engenders but also how it displaces reality from valuations. “We have this short-form content to help us process larger narratives,” she says. “And I think that is going to keep showing up in the stock market.”

Scanlon is right, in my view, about the way that memefication draws investor attention away from any (conventional) notion of valuation but lurking within that thinking is the notion that a stock has a “right” price.

I looked at this issue back in February while discussing possible regulation in the wake of the first great GameStop adventure:

Somewhere beneath rules intended to constrain the ability of people to invest in honestly sold (an essential precondition) securities lurks the conceit that for any given security there is a right price, or, at least, an appropriate price range. Eventually that might (in a way) be true, but in the short term the right price for a security (or almost any asset), however seemingly absurd, is located within the spread for which it can be bought or sold at that instant. A few minutes, or even seconds, later that price might change, and when it does that new price is then the right one — until it is not. Were stocks mispriced on October 16, 1987, or were they mispriced at the close the next Monday (my first crash)?

Manipulating a stock price is (as it should be) illegal in most cases, but the faintly premodern notion that there is a “correct” price for a stock haunts rather too much of the discussion around GameStop . . .

Returning to the Financial Times’s Wrigglesworth:

Another pseudonymous finance memer known as Dr Parik Patel — who has garnered over 300,000 followers on Twitter in less than a year — sees them mostly as fleeting entertainment at a tough time for many people. That said, he has noticed how they have spread far beyond the confines of his world. “I have friends working in completely unrelated fields to finance who had no interest in the industry pre-pandemic now trading their own portfolios and following the hottest finance meme pages,” he says.

I wouldn’t overlook that entertainment factor. The lack of alternative entertainment in COVID-constrained times as well, in some cases, high savings, provided a good enough reason, for many, to roll the dice on a stock. That’s both understandable, and by no means necessarily irrational. Entertainment often comes at a cost which is not recoverable. What’s more, buying into a bubble can make economic good sense, so long — there’s always a catch — as you know when to get out.


How durable is this phenomenon? It seems unequivocally linked to how maniacal markets have been in the post-Covid era. Scanlon and Patel reckon that it will therefore likely fade once the ebullience eventually evaporates.

I suspect that for the most part that’s right. Even more so as some fingers will be severely burnt.


Litquidity, however, worries that the growing appreciation for how social media can be harnessed to make money means that market memefication might prove more resilient than many expect. “I don’t think it’s a good thing, but I don’t think it’s going anywhere unless some sort of regulations are put in place,” he says.

If I had to guess, this phenomenon will indeed prove more resilient than expected, albeit on a much smaller scale, and, what’s more, that is likely to have a long-term effect on institutional investor behavior. However richly deserved a short position may be in a particular stock, I suspect that many short sellers will be haunted by the thought that, if they pile in too obviously, Redditors may scent rich pickings. And, as a result, the professionals will stay clear.

Should new regulations be put in place?

As I wrote in January:

Meme stocks will eventually crash back to earth, however close to the moon they get. And when they do, there will be tears, and calls for much tighter regulation. If the relatively recent past is any precedent, that regulation will be heavy-handed, and will result in a market that is far less “democratic” than the Reddit bros would like to see. In the absence of any actionable malpractice, those who have lost out — adults all — will be left to pay the price of their gambling. That experience will be a teaching moment far more compatible with the preservation of free, relatively open markets than anything that our current crop of legislators could dream up. Somehow, I suspect that the opportunity for that teaching moment will be lost, as the rule-setters move in. More clear-eyed investors (large and small) are right to be concerned about what the consequences of that might be.

There are, rightly, plenty of regulations against fraud and market manipulation. We don’t need any more.

— A.S.

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