In a society with a weak social safety net, homelessness is the inevitable result of exuberant real estate prices. Those living on the street are the indirect victims of loose monetary policy and low interest rates that foster high property and rental prices.
First, the good news: HUD data show that between 2007 and 2017, homelessness fell nationwide by about 15%, before increasing by 6% by 2020. Roughly two-fifths of these unfortunate folks are “unsheltered,” i.e., living in the open or in their vehicles.
The situation is worse, though, in the nation’s priciest large cities – New York, Los Angeles, San Francisco, Seattle, Honolulu, and San Jose – where homeless rates have skyrocketed above 350 per 100,000, that is, more than 0.35% of the local population.
Sound personal finance dictates that it’s unwise to spend more than 30% of income on either rent or a mortgage; not unsurprisingly, one academic study found that once the median housing cost rises above 22% of income, homelessness begins to rise; and above 32%, that increase accelerates.
Counterintuitively, a depressed local economy, because it lowers real estate prices, does not necessarily increase homelessness; even casual observers in the nation’s superstar cities cannot help but notice that the problem is far worse in those places than it was in the immediate aftermath of the global financial crisis (2007–2009).
Conventional economic wisdom has it that the primary cause of high housing prices in desirable cities is zoning policies driven by “not in my backyard” (NIMBY) property owners. In the British housing market, where NIMBYism is even more intense than in the U.S., median unit prices have risen 170% in inflation-adjusted terms since 1995 to an astounding eight times the median salary (versus four times median salary in the U.S.).
A recent analysis, though, suggests that NIMBYism, at least in Britain, is not the primary culprit for high prices, noting that as housing becomes more expensive, dwellings get subdivided; if a home gets split into two apartments, the “dwelling stock” contributed by that location has doubled, while its contribution to the “housing stock” does not change. And while the conventionally measured British “housing stock” has not kept pace with population growth, it turns out that its “dwelling stock” has outpaced it.
This is not to suggest that in the U.S. a shortage of housing doesn’t result in higher prices and consequent homelessness, but rather that additional contributing causes need to be sought, and around the world the most obvious factor is central banks, which have been driving down interest rates by aggressively purchasing fixed-income securities.
If there is anything that makes me want to reach for my revolver, it’s the mass media and political commonplace that lower mortgage rates make home ownership more affordable. Lower rates in fact accomplish exactly the opposite; if lenders are loath to extend a mortgage beyond, say, monthly payments totaling more than 30% of annual income, then a drop in the mortgage rate necessarily increases loan amount offers, and with them, purchase prices, and, worst of all, down payments.
Current Fed policy can be thought of as attempting to fill a bucket – in this case, the economy and employment – with liquidity through a hose nozzle aimed at a bucket 10 yards away. While much of the fluid lands in its intended target, more splashes around it – into stocks, bonds, and, importantly for our purposes, real estate – pushing its prices well beyond the 32% “danger zone” in superstar cities.
Macroeconomists and policy wonks have long argued over the relative merits of today’s Keynesian approach to economic shocks. Its proponents consider central-bank and fiscal economic stimuli the essential tool to fix what they consider the primary problem: a decrease in aggregate demand. Opponents, the followers of the late Friedrich von Hayek, argue that the Keynesian “cure” inevitably produces malinvestment in speculative assets – that is, bubbles – which when they burst cause even more damage than the aggregate-demand disease. (For those who need a refresher on the controversy, this famous musical video provides a highly entertaining primer on the topic.)
Further, real estate ranks as the most destructive of all speculative assets, for two reasons: it adds nothing to overall productivity; and because a real estate bubble’s bursting hits hardest at individuals, who cannot print money like governments or recapitalize like businesses, they drastically decrease their consumption in response. Even the communist leader of China, Xi Jinping, recognized the dangers of real estate speculation when he famously said, “Housing is for living in and not for speculation.”
The debate between Keynesians and Hayekians (or, as they’re more commonly known, “Austrians”) has smoldered for nearly a century, and it will likely never be resolved. But at least on the homelessness front, score one for Hayek.
William J. Bernstein is a neurologist, co-founder of Efficient Frontier Advisors, an investment management firm, and has written several titles on finance and economic history. He has contributed to the peer-reviewed finance literature and has written for several national publications, including Money Magazine and The Wall Street Journal. He has produced several finance titles, and four volumes of history, The Birth of Plenty, A Splendid Exchange, Masters of the Word, and The Delusions of Crowds about, respectively, the economic growth inflection of the early 19th century, the history of world trade, the effects of access to technology on human relations and politics, and financial and religious mass manias. He was also the 2017 winner of the James R. Vertin Award from CFA Institute.
In a society with a weak social safety net, homelessness is the inevitable result of exuberant real estate prices. Those living on the street are the indirect victims of loose monetary policy and low interest rates that foster high property and rental prices.
