The Dual Housing Market

Everyone can agree that the housing market is a bit crazy at the moment. Even before COVID, it was a solid seller’s market and the pandemic has just exaggerated the market state that was already there. A lot of people are talking about the various reasons behind this, but there is one facet that isn’t talked about much. There exists two wildly different groups of people trying to buy into the market and because they are competing for the same resource the prices are going crazy.

There are some people who are buying houses because real estate holds its value well.  Even when the market crashes, real estate holds a significant portion of its value.  When the market does well, it does really well.  In the meantime, the properties can be rented out and produce a source of income without having to sell.  This makes real estate a great asset to have in a broader investment portfolio.

At the same time, there are people who are not interested in investing but want the logistical benefits of owning the property they live in.  These people are seeking the financial freedom of no longer being burdened by rent payments.  They are also seeking the physical freedom to modify their home to customize to their tastes.  For these people, homeownership is an important part of their financial independence and personal satisfaction.

For the first group, it is considered a good thing when market prices go up.  That means that their return on investment is better.  They aren’t especially concerned with barrier to entry because they are already in a comfortable position and waiting a few years to buy in on a dip doesn’t make a big difference for them.  They are also content buying low-quality homes because they can still get a return on investment on those and don’t have to live in them.

For the second group, it is considered a good thing when market prices hold steady.  While they don’t want to experience a drop in prices and be stuck with a mortgage worth more than their home, they also don’t want to see prices climb too high.  This makes it difficult for first-time buyers to purchase their first home and it makes it harder for others to size up into a home that is a better fit after they build a bit more equity.  They aren’t concerned with the growth of their home not beating inflation because they have no intention of ever turning it back into a liquid asset.

Most markets don’t have to deal with this kind of difference in people buying into the market.  A side hustle vs a necessity.  A fraction of their assets vs the bulk of their net worth.  A lifestyle that is unaffected by if they are in the market or not vs a major step that changes everything about their life.  For most markets, the commodities are either one or the other.  Rarely is it both.

As more money from the first group enters the market, it makes life difficult for the second group.  Investors competing for properties drives the price up, leaving the second group unable to afford the place they want to live.  To make matters worse, these investment properties are often rented out with the rent set by the home’s total value.  As home values climb and potential homeowners have trouble making that first leap, they also see rents climb and they can afford to put less and less of their money away as a potential down payment.

The end result is a situation that only serves to deepen the class divide by making it difficult for people to achieve the independence of homeownership.  I’m sure some people are malicious in this as they actively seek to make money off of rent, but I’m equally sure that many are simply ignorant of the situation.  Especially upper-middle-class people who might think of themselves as the second group, but in actuality are a part of the first group that only has a single property they are invested in.

If you are a homeowner, you might be asking yourself “How do I tell which one I am?”  To tell them apart, imagine yourself in a scenario where all home values in your area double overnight.  Are you excited because now you can sell for more when you retire, or are you now afraid that you’ll never be able to afford the mortgage on the home you were hoping to upgrade to?

As loathe as I am to admit it, I don’t have a solution to suggest for this problem.  This is ultimately because of a third group that isn’t interested in buying property at all.  Some people prefer renting for a variety of reasons.  Maybe they like the flexibility of being able to move often.  Maybe they don’t like being responsible for property management.  Maybe they don’t want the financial risk of a natural disaster destroying the property.  There are many reasons people might prefer to rent and it’s certainly not my place to tell them they are wrong.  For some lifestyles, I can see it as the right choice.

The problem is that now any attempts to control the market needs to be balanced for three groups.  One wants to see property values go up, one wants to see property values stay steady, and the third doesn’t care about property values but needs a sufficient amount of the first group acting as landlords and for the rent to stay stable.  This is a complicated situation and can’t be solved by any sort of ham-fisted measures.  A complicated situation requires a complicated solution.  My hope is that enough people will become aware of the issue and start working towards a solution that a nuanced compromise that works for everyone can be reached.

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