Waiting for the Crash

I walked around the 1300-square-foot apartment in Manhattan's Gramercy neighborhood as Daniel Blatman — an associate real estate broker at The Agency — explained why the space had just sold for $2 million.

He pointed to the six-foot-wide balcony. "That gives you plenty of room to entertain." He touted the massive main bathroom, home to two sinks, a spacious shower, a tub, and a porcelain throne. The large bathroom would reduce marital rifts, he assured me. "When you have to shuffle past your partner in the bathroom, that's when an argument is going to start."

Blatman was right. The place was beautiful. But was it worth $2 million? "Pricing is never really about value," he said. "It's about positioning in a market."

Blatman's comment struck a chord with me. He had decided to show me this apartment from his many listings because he said it was more attainable than the luxury homes he typically hawked. It made no difference to me. As a millennial with little chance of affording a place anytime soon, a $2 million Gramercy apartment felt just as unattainable as a so-called "average" home.

American homes are less affordable today than ever. The average price has been surging since the early days of Covid, jumping from $329,000 in early 2020 to over $450,000 today. On top of that, the average mortgage rate has hovered around 7% since October after hitting an all-time low of 2.65% in January 2021. Estimates of the average monthly mortgage payment, perhaps the purest example of month-to-month affordability, show the average family is paying at least $400 more per month on housing.

CNBC wrote in October, "There are only 4 U.S. cities where the average American can afford a starter home," urging us to relocate to Detroit, Memphis, or one of Oklahoma's major cities. "Home Buying Is Becoming 'Unaffordable For Most Americans,'" said one Forbes article. In early December, the Real Deal wrote, "Housing affordability is worst on record, data shows." Like many of the 75 million millennials approaching prime home-buying age, I'm worried I'll never be able to afford a place of my own.

"The market is completely out of whack," said Mark Zandi, chief economist for Moody's Analytics. "It's making it more difficult to become a homeowner."

Today, the housing market is slowing after two years of unsustainable growth. That sounded good to me — a cooling market was a healthier, more stable market. But in the housing industry, one person's "cooldown" is another's "potential crash," and forecasts of the impending housing apocalypse fill the news today.

"U.S. housing is in a massive bubble," read one Business Insider article. "Buckle in for a brutal free-fall in home prices." Fortune claimed the "U.S. housing market [will] see the second-biggest home price decline since the Great Depression." The folks at InvestorPlace were less optimistic, publishing the headline, "Why a 2022 Housing Market Crash Could Be WORSE Than 2008."

While the media warns of an impending crash, realtors across the country have told me I shouldn't worry about it. "I am not sensing a market crash at all," said Andrea Crouch, a high-powered realtor in Phoenix. She laid out a handful of confusing statistics and assured me they proved there was no danger of a crash. "The typical indicators of a 'crash' are nowhere to be found."

So, houses are too expensive for most Americans to buy their first home. Meanwhile, housing prices are coming down, and a crash could destroy our economy. And many experts say there's no danger of a collapse. I'm officially confused.

More importantly, I'm worried this is the end for the American dream, the one so many of our parents and grandparents lived, where a college education didn't require tens of thousands of dollars of debt, and a degree guaranteed a job with a livable wage, and with that wage, the family could afford a home within which they could raise a family. Three-quarters of Americans say owning a home is key to the American dream. But that dream is increasingly out of reach for the 75 million debt-saddled millennials approaching the prime home-buying age. They can't afford it.

The disarray in the housing market isn't limited to potential buyers. As of August 2022, the average rent in the U.S. was $2,090, according to Zillow. That's an increase of more than $400, or 25%, from February 2020. More adults are living with roommates, including their parents. In July 2020, more than half of all Americans between the ages of 18 and 29 were living with their parents. The last time such a share of the population had to shack up with mom and dad was during the Great Depression. Then, there's the problem of half a million homeless Americans who truly can't afford a place to live.

When did it all go wrong? I searched for an explanation or some semblance of logic in the housing market. More than anything, I looked for evidence that I could afford a home one day. I found that evidence, but some homeowners might not like it.

Now, I return to Zillow, celebrating each time a family of three looking to upgrade to a home in the suburbs has to ask for $20,000 less for their cramped Morningside Heights apartment. I text my new realtor, measuring his client's desperation to unload that little co-op on the Upper West Side. They're not desperate enough yet, but the time will come. And when it does, I'll be ready.

Finding the cause of disarray in the housing market is like finding the start of a circle. As long as humans have existed, we've needed a place to live. Issues of affordability, gentrification, homelessness, and others have always persisted. So, I did my best to boil down the matter to the most basic rule of economics: supply and demand.

Demand for housing is inelastic; that means people need a place to stay even if rents and home prices are unaffordably high. But, demand can still increase when homes are cheap. In the early days of the Covid-19 pandemic, the U.S. Federal Reserve lowered interest rates to near zero in an attempt to stimulate the economy. That forced mortgage rates to historic lows, cutting tens of thousands of dollars off the long-term cost of buying a home. With that kind of discount, demand surged.

Plus, the rise of remote work had freed Americans from the geographic chains of working in an urban office. They responded by fleeing the cities they had flocked to for the last decade. They purchased homes in relatively cheaper suburbs where they plopped down Pelotons and set up at-home workspaces with three monitors on their desktops. The rise of remote work has been responsible for a 15% increase in housing prices since 2019, according to an analysis by the San Francisco Fed Bank. "The persistence of remote work is likely to affect the future path of real estate prices and inflation," the paper's authors wrote. "The fundamentals of housing demand have changed."

But, for that geographic shift in demand to matter, we needed an imbalance on the supply side of the equation. That supply imbalance is the main reason for the housing chaos.

"The biggest culprit is this historic housing shortage. Strong demand and low supply mean higher prices," NPR wrote. Housing is expensive because supply and demand are out of whack. That's simple enough. But the reasons for the lack of supply are more complicated.

"The undersupply problem has been brewing since the housing crash a decade ago," said Zandi, the Moody's economist. Decimated by the collapse in housing prices from 2007-2009, the home building industry took its foot off the gas. And why wouldn't they? Millions of American homes sat empty with foreclosure signs on the front lawn.

In the decade leading up to the housing crash, the U.S. construction industry started work on an average of 1.7 million new housing units each year. Since 2009, that number has fallen to barely over 1 million housing units per year.

Much of that falloff came in the early days following the crash. As home builders attempted to get back to work, they ran into issues. In a piece called "Why Your House Was So Expensive" in The Atlantic, Derek Thompson laid out a handful of those issues. "Material-cost inflation, anti-building rules, NIMBY attitudes, and barriers to innovation have created a housing-affordability crisis."

Anti-building rules and NIMBY (Not In My BackYard) attitudes are both reflected in strict zoning laws. Sometimes that means there are zoning restrictions on building housing in commercial areas, like by converting unused office space into housing. More often, it means that residential areas — think sprawling suburban neighborhoods — have restrictions on building multifamily housing. Multifamily housing is a powerful tool for fighting housing supply issues, but it's a tool that suburban Americans have long fought against.

"Single family zoning is such a huge barrier to building more housing," said Daryl Fairweather, chief economist at Redfin, a real estate brokerage. Fairweather named Los Angeles as an example of a city with ample housing demand but where zoning restrictions have made new construction a longer, more expensive process. With zoning so hard to come by, some builders have sought to maximize earnings from each parcel of land by building high-margin, multi-million dollar homes instead of modestly priced starter homes.

As homebuilding activity picked up in late 2019 and early 2020, Covid derailed the industry's progress via lockdowns, labor shortages, and supply snags.

Clogged supply chains also caused price increases for critical supplies, like lumber, which often went to the highest bidder. The price of lumber quadrupled in a matter of months, adding an average of $36,000 to the cost of every finished home, according to the National Association of Home Builders. And it wasn't just lumber. "They can't get the kitchen counter or the garage door or the lumber they need to finalize the deck," Zandi said. "We have a record number of homes that are under construction and headed towards completion, but they can't get across the finish line."

Even when those supplies arrived, many construction sites were run by skeleton crews as contractors struggled to hire enough workers. "There's a historic and widening labor shortfall in the U.S. construction sector," wrote a group of consultants for McKinsey. The shortfall is more than half-a-million workers. "The severity of the labor shortage means you're paying workers more and your construction schedules are longer, both of which are big drivers in overall cost," Brian Turmail, a vice president at the Associated General Contractors of America, told the Wall Street Journal.

All of these factors combined to create the hottest housing market in U.S. history. Home prices had risen because of supply shortages and surging demand. But some questions remained. Would I ever be able to afford a home? And what about the possibility of a crash? These two questions became impossible to separate.

In the fall of 2007, Dana Sprong was driving through Madisonville, a sycamore-lined neighborhood on the outskirts of Cincinnati, where the midwestern city begins its slow transition to suburbs. Sprong was looking for apartment complexes to invest in when he saw a for sale sign in front of a recently foreclosed house. Sprong said the aging mid-century home "had good bones," real estate jargon for a place that could look nice with some TLC. He knew turning a solid profit on investments in single-family homes was difficult, but this opportunity piqued his interest. The dirt cheap asking price forced Sprong's hand. He bought the house, spent $20,000 fixing it up, and rented it out.

When Sprong purchased a second foreclosed home the following January, he realized he could be on to something big. Sprong had a front-row seat to the earliest days of the foreclosure crisis, where 10 million Americans would find themselves forced out of their homes. But as the U.S. witnessed the worst economic collapse in generations, Sprong saw a once-in-a-lifetime opportunity. Today, he's the managing partner of VineBrook Homes, the proud owner of 25,000 single-family rentals in 24 cities throughout the country.

I'll never own 25,000 homes, but that doesn't mean I can't learn from the VineBrooks of the world. Just as Sprong's business rose from the ashes of the last housing crash, I'm hoping that I — and my generation — can do the same.

I'm not alone in rooting for the market to collapse. Almost two-thirds of Americans — led by Gen Zs and millennials — say they want a crash, according to a Consumer Affairs survey. Those homeowners aren't happy with the youngster's apocalyptic fantasies. One internet tabloid said, "Entitled Millennials Are Cheering for a Housing Market Crash." I don't blame the Boomers and Gen-Xers for their scorn. After all, 82% of homeowners worry a crash would leave them with a mountain of debt far outweighing their homes' values.

Businesses like VineBrook have been credited with staunching the bleeding during the last housing crisis. "Last time the market bottomed, in early 2012, that's when the investors came in in a big way," Zandi said. "They were the reason why house prices stopped falling, why the market bottomed out." I worry if those investors will swoop in to save the day, spoiling the party for me and my cohort.

The idea of corporate investors saving the day is laughable to much of the country. Countless politicians and journalists blamed much of the disarray on these investors — the hedge funds, real estate investment trusts, and private equity firms like Blackstone and Carlyle Group. That's because, in the glass-walled towers of midtown Manhattan, these firms have turned analysts into full-time house hunters. They pour over data to find markets with solid supply-demand dynamics. Is there an influx of home buyers? A shortage of entry-level homes? These questions led to America's Sun Belt, where cities like Tampa, Phoenix, and Atlanta have seen a vast influx of investor capital.

These firms adhere to the Vito Corleone rules of negotiation: make an offer that the seller can't refuse. They pay all cash, above market value, and waive the right to an inspection and appraisal. Real estate agents love selling to investors. "They [private equity investors] don't even send anybody to come look at the house," says Brenda Oliver, a realtor in Odessa, Missouri. "It's too easy."

These firms may have skewed the market and forced prices up by throwing cash indiscriminately at anybody with four walls and a roof. They've made renting more expensive throughout many Sun Belt neighborhoods, though there's been little impact on the national level. Have these investors made the buying process more difficult for countless would-be homeowners? That seems likely. But most experts have been reluctant to pin all the housing market's issues on Wall Street.

"The growth of institutional investors is a symptom, rather than the cause, of extremely tight housing markets," Jenny Schuetz, a senior fellow at Brookings Metro, said in her testimony at a U.S. House of Representatives hearing called Where Have All the Houses Gone? Private Equity, Single Family Rentals, and America's Neighborhoods. "Institutional investors benefit from tight housing supply, but they did not create the problem."

Corporate investment in single-family homes largely began with the 2008 housing crash and the subsequent Great Recession, as more than six million American households, unable to make their mortgage payments, lost their homes to foreclosure. Private equity firms and real estate investment trusts watched with excitement as lenders pooled foreclosed properties and hawked them en masse from the auction block, giving investors access to the world's largest asset class at all-time low prices.

Investors converged around the auctioneers. One private equity firm, Colony Capital, regularly sent employees with several million dollars worth of cashier's checks to a typical auction, according to the Wall Street Journal. In the summer of 2012, at the height of investor purchases of foreclosed homes, Colony frequently sent more than 50 employees to auctions around the country. The firm purchased 133 homes in the Atlanta area in one day. Not to be outdone, Blackstone bought 1,380 Atlanta-area homes — worth over $100 million — in a day.

Within a few years, institutional investors went from having a minimal footprint in residential real estate to making 20% of all home purchases. In late 2011, no single landlord or corporation owned more than 1,000 American homes. By 2021, the five most prominent investment firms in the real estate industry owned more than 350,000 homes.

Today, their business model is becoming more expensive. They're still bringing in healthy returns on their rentals. But purchasing new homes, the easiest path to growth, has become expensive. After a decade of buying houses on the cheap, margins are compressing. "If the housing market can normalize, then this business model becomes less attractive for them [the investors]," Zandi said.

Nobody at VineBrook, Invitation Homes, Blackstone, or any other investment group would admit to pulling for a crash. But the incentives are simple enough. Gone is my guilt for wanting a housing crash now that I have 140 million Americans and the force of some of the world's largest investment firms in my corner. Gone are my fears of investors stopping the market from crashing. They'll wait for it to go down big — 10, 20, maybe 30% — then, just like me, they'll swoop in.

The Burau's former home in Phoenix.

In March 2022, Clark Burau and his wife, Brien, listed their four-bedroom Phoenix home at $525,000. The white stucco home had the modern desert charm one finds in the bustling Southwestern city, with its flat red-tile roof, emerald turf, and palm trees. The Buraus' house had become the greatest investment of their lives.

Twelve years earlier, the Buraus had purchased the one-story house for $78,000. They spent upwards of $100,000 on renovations, including resurfacing the pool. But, after more than a decade in the Valley of the Sun, they decided it was time for greener pastures.

Within a few days of putting the house on the market, Clark and Brien Burau received 17 bids, including an all-cash offer for $550,000. The buyer was an investor looking to turn the property into an Airbnb. They waived the right to an appraisal and closed the deal within a few weeks. "The whole situation was unreal, bizarre," Clark Burau told me. When they first considered listing in 2021, Clark was shocked to learn they could get $475,000. "We would've been thrilled with $475,000, but six months later, we could ask for another $50[-thousand]? It didn't feel real."

The Burau's had almost tripled their investment, but it wasn't because they made a savvy decision. It was because they timed their purchase perfectly. They bought their property in 2010, the last time the housing market bottomed out. Nobody blamed the Buraus for taking advantage of the crash or the perfect timing of their purchase. It was a natural cycle of the housing market. They got lucky, and I want some of that luck for myself.

I'm not alone in praying for a collapse. Three of every four Americans believe the housing market will crash in the next few years. Unfortunately, I'm not so sure, regardless of the role that investors might play in the market. The experts — whether realtors, economists, home builders, or your dad's friend from work who just bought a home — swear that a crash is unlikely.

"Is a crash possible? Sure. Anything's possible? You could step outside right now and get hit by a car. That's possible. But, is a crash probable? No," said Enrique Teran, the president of the Miami Association of Realtors' residential board.

"There will be falling prices in some areas. But I don't expect widespread sharp declines," said Matthew Speakman, a senior economist at Zillow. "I'd call it a rebalancing, and we're in the midst of it now."

"I'm seeing the headlines that say a crash is coming, but I'm not so sure," said Jessica Lautz, deputy chief economist at the National Association of Realtors. "We're moving towards a regular pace in the housing market, as opposed to an overheated market."

So, a crash — or a fall of more than 10% — is unlikely. A correction — a drop of less than 10% — is possible, or even likely. But forecasts of the impending correction have been coming since May or June. Since then, home price growth has decelerated, which means prices have still slowly grown in much of the country.

Even the most pessimistic metrics show only the slightest decline in home values, often less than 1%. "The pace of slowdown in home prices that we expected to see just hasn't materialized," said Danielle Hale, chief economist at Realtor.com.

Meanwhile, predictions for 2023 are relatively mild. Redfin estimates that home prices could fall by 4%, far too small of a drop to have any significant impact on affordability. Zillow projects "home values to remain relatively flat." Realtor.com, always the optimist, forecasts price growth of 5.4%. The projections are confusing when paired with the cynical headlines permeating the press today. But they make sense when we look back at the most fundamental determinant of markets: supply and demand.

Demand may continue to fall, as it has for much of the past year. But, with supply still near historic lows, there's not much room for prices to fall. Even with housing inventory expected to climb by more than 20% next year, it will still lag the pre-pandemic level.

But what about all those headlines? Tales of the beginning of the end are every. In October, Money published a story called "Home Sellers Are Slashing List Prices at a Record High Rate." But realtors claim even these stories of falling listing prices don't tell the whole narrative.

I thought of a story that Daniel Blatman, the New York realtor, told me. Blatman had a client with a budget of $2.5 million. When he took that client to see a home listed at $3 million, the client reasserted their budget. Blatman pushed back. "Listen, we're gonna see this because, to me, it's worth $2.5 million on a good day,'" he told them. The client loved the place. They offered $2.5 million, and the selling realtor happily agreed. "That looks like a 20% price drop, but really it fell to the realm it should have been priced at."

"For some people, falling prices are better because maybe, if they tried to buy a home last year, they couldn't win a bidding war. And now competition is finally easing," said Daryl Fairweather, the Redfin economist. "But if someone couldn't afford a home earlier this year, they probably still can't afford a house now."

As I looked at Zillow, I saw dozens of apartments in my neighborhood with little down-facing arrows next to the asking price. An apartment three blocks south had dropped by $6,000. Four blocks further south and two blocks east, a two-bedroom came down $46,000 to $399,000. About six blocks west of there, I found a 500-square-foot one-bedroom with a listing price that had fallen by more than $60,000 this year. But it didn't matter. The place is still on the market because, at $299,000, it's still unaffordable for almost every first-time home buyer in America.

The housing crash might not be coming next year, and it might not come in 2024. For all I know, it could be a decade. But, however long it takes, we will be waiting. It's our only hope.

I still don't quite know whose fault it was that my generation and I can't afford homes. I want to blame the construction industry for underbuilding, but that was hardly their fault when governments kept restrictive zoning in place. I could do what so many politicians do and blame the investors, but as easy as that would be, it still didn't add up. There's even a large constituent that blames millennials and Gen-Zs for the predicament since the two generations save such a small portion of their income. Does that mean we can pass the blame on to cafes selling avocado toast and $8 lattes? Who knows.