How is it that homes are both unaffordable and soaring in price? As with so many other things that shouldn’t be, the answer can be found at the intersection of Wall Street and easy money.
During the previous decade’s Great Recession, hedge funds and private equity firms figured out that they could borrow for next-to-nothing and buy up the houses that banks were repossessing, then rent those houses back to millions of newly homeless Americans for good returns. Combine these positive cash flows with massive recent price appreciation, and those foreclosed houses turned out to be phenominal investments.
Now Wall Street is doubling down, using hundreds of billions of essentially free money to outbid individual buyers for whatever houses are still avalable.
In some cases investment giants like Blackrock buy up entire neighborhoods at big premiums to the asking price, pushing everyone else out of the market. Hence the disconnect between home prices and family incomes. …
Looks like housing is yet another example of how easy money perverts formerly free markets. Where family income used to dictate (and limit) home prices, now the driver is the yield on corporate and asset-backed bonds. The lower those rates go, the higher home prices climb. If individual buyers are priced out, well, they can just rent from Wall Street, on whatever terms our new landlords think is fair.
Steven Saville, on all that “transitory” inflation:
The clue that the price action has monetary roots is in its frequency, that is, in the number of markets that are experiencing huge price run-ups. Each huge price run-up in isolation can be put down to market-specific supply constraints, but when the same thing happens in so many different markets at different times within a multi-year period then we can be sure that the root cause is linked to the monetary system itself.
In the current environment, the root cause is the combination of rapid monetary inflation courtesy of the central bank and a huge increase in government deficit-spending.
Thanks to the Fed, the supply of US dollars is about 50% greater today than it was two years ago.