High Home Values, Low Housing Prices, Choose One
Overcoming the zero-sum politics of housing reform.
The saying goes, “you are born short housing.” We all need somewhere to live in our adult years, but few of us start with any equity in a home.
The situation is similar to that of the speculator with a “short” position in a stock, meaning he has borrowed shares and sold them, betting their value will decline. But if the stock goes up, he is on the hook—he will have to repurchase the shares at some point, paying more than he received from the sale. Every day the stock rises, he falls further in the hole. Likewise, every day the housing market rises without you owning a piece of it, your financial position worsens whether you are looking to buy or just want to rent. This is the crux of the housing affordability crisis.
What makes the crisis intractable is the other side of the trade. Where people trying to buy their first home want to see a “decrease in housing prices,” the people who own homes are looking for a prosperity-advancing “increase in home values.” Politicians try to tell both groups what they want to hear. But that latter group is more than twice as large and also votes at a much higher rate. In the 2024 presidential election, homeowners cast nearly four votes for every vote cast by a renter. Notwithstanding the drumbeat in the media, most people are about as excited about lower home prices as they are about seeing their 401(k)s take a dive. Notwithstanding the polling that shows “affordability” in general to be a top issue, most policymakers understand this.
A hilarious example of the confusion on this point came last week, after President Trump returned housing legislation passed by the Senate but stuck in the House to the front burner. The bill’s most controversial elements would sharply restrict ownership of single-family homes by large institutional investors. (Daniel Kishi wrote about this a couple of months ago.)
Enter Marc Short, Mike Pence’s chief of staff in the West Wing and now chair of his Old Right think tank, Advancing American Freedom. Short wrote an op-ed for the Washington Examiner rejecting the notion that Wall Street firms could possibly maximize their profits in a way harmful to ordinary Americans. I expressed skepticism about his blind faith that more private equity firms buying houses means more affordable houses for young families. He responded that supporters of the bill “will have to explain to home sellers they passed legislation to limit number of buyers in marketplace.”
Take a moment to parse this. Short appears to be saying that restrictions on Wall Street will “limit number of buyers” in the housing market, which is precisely the point of the restrictions. He appears to be saying that home sellers will be upset by this, presumably because it means less demand and therefore lower sale prices, which are, again, precisely the point. Maybe Short is focused less on price and more on the dream shared by so many sellers of passing their houses on to nice private equity firms with internal rates of return to deliver, which would be frustrated if they instead had to sell to some damn family that’s going to just move in, act as stakeholders in their community, and raise kids there. But he likely means price.
In the op-ed, he rejected the notion that “institutional investors are responsible for pricing ordinary Americans out of the market.” To the contrary, he wrote, they provide “capital needed to construct new homes.” The bill “will be a dead-end, leaving families with both unaffordability and fewer options.” But pressed on those points, he just flipped to precisely the opposite position. Apparently, institutional investors do drive up prices for home sellers, and that’s good.
It’s a thrilling, downright acrobatic display of market fundamentalism. Upon realizing that the bill would, in fact, improve affordability by intervening in the market, he does not grudgingly support the intervention, rather he switches to the view that improving affordability is bad. I know I harp on this point often, but it’s important to understand the character and quality of the Old Right’s economic thinking, and then to reject it.
With that said, it’s worth considering whether a path does exist to reconciling what seem like zero-sum positions for buyers and sellers. One argument, which has a lot of truth but is probably a political stinker, is that we should support lower home values as a form of redistribution. Yes, more people will see their wealth decline than will benefit from more affordable housing, but the former group is much wealthier, and, particularly insofar as it has come from home value appreciation, that wealth is a windfall rather than a result of any value created. Lower home values are fairer, do much more to improve the lives of buyers than to harm the lives of sellers, and strengthen the social fabric by helping young families form and build decent lives. This argument will satisfy some, but infuriate others.
So let me try a second: Homeowners shouldn’t worry about falling home values. We think of the act of buying a house as creating huge exposure to the housing market. But recall the notion of being born with a short position in housing. The person who buys a house closes that position. Think in terms of the stock market for a moment. A short-seller who buys back the shares does not create a position in the stock and root for it to go up. He becomes indifferent.
Likewise, it is the person who does not yet own a home who cares most deeply whether prices are rising or falling. The typical homebuyer should care much less, because if he is going to sell a home, he will have to use the proceeds to buy another one (or rent at a price set by the broader market). What does it matter to him whether the median price at that point is $200,000 or $400,000? Indeed, the joke is somewhat on all Americans who think, “housing prices have doubled, I’m twice as rich!” Sorry, but you owned one home, and you still own one home, and if you sell it, you’re going to need another home.
Of course, this is an oversimplification in some respects. There are reasons a homeowner prefers a higher home value. (There are also reasons a homeowner should prefer a lower one, for instance, insurance and property taxes.) The Baby Boomer eager to downsize in retirement and use the proceeds to fund a life of cruises would prefer to downsize with the biggest possible difference in absolute value between the larger house and the smaller condo.
But as a matter of broader political economy, thinking in these terms could help to shift the calculus. We have non-owners in America who benefit when home values decline. We have late-in-life owners who will be selling for the last time and benefit if home values go up. In between is an enormous pool of Americans who do own homes but, if they want to sell, would properly consider themselves seller-buyers. They care as much about a low price for their next residence as they care about a high value for their current one. They may not be indifferent, exactly, but they should be close enough to indifferent that fairness, the well-being of their neighbors, and the quality of the social fabric become more salient considerations. A growing family looking for a larger house might actively prefer to see the value of both their current and next house held down.
So long as the typical American sees his home value as a central measure of his wealth, the politics of bringing down housing prices will be extraordinarily difficult. If we could see ourselves as closer to market-neutral in most situations, we could turn our focus to whether we care more about maximizing windfall gains at the end of life or providing a clear pathway to middle-class security at the start. We will all be young at one point in life and, hopefully, old at another, but we need one of those opportunities much more than the other.
Somewhere we lost the point that buying residential real estate is making a home, not a portfolio.
This "short" position on housing is a REALLY good metaphor, Oren. It takes the investment framework that's frequently (and incorrectly) used to analyze home data and turns it on its head. Buying a home is NOT an investment; it is the paying off of a debt you were born with.