Percent loss in value of residential real estate oligopolies due to hybrid work

[thepupil]

really not much wisdom to share. I don't think work from home will drastically affect well-located single family homes that derive some of their value from being close to cities.

maybe that's me just being delusional. I just think that for the most part rich people pay to be around other rich people: good schools/amenities/etc. and that proximity to major metropolitan areas has appeal beyond short commutes. we'll see. perhaps my straight up and to the right zestimate is making me feel overconfident.

it all varies by market. maybe some areas do very well, some see a correction. but in answer to the question of the thread title: my aggregate guesstimate for the overall market effect would be 0% for SFH.

just to use my own backyard as an example. Between 7-9% of DC/ Maryland, and Virginia households have $1mm or more of liquid assets; DC has more millionares/capita than any state and Maryland is number 2. Incomes are high. There are only so many homes and no buildable land. no more SFH being created. I estimated there were likely more millionaires than SFH's in the the desirable parts of DC/MD/VA*. a large percentage of transactions are cash buyers. the wealthy towns have median family incomes of $150K+ and houses can still be had for less than $1mm. Why should houses be cheap / prices fall?

because a few people are going to remote in from the mountains or the exurbs now so they can FIRE at 40?

I think multifamily is going to have a brutal time over the next few years but would be a buyer of super well capitalized REITs on the way down (per the thread).

 it's not clear to me that 5 or 10 year out urban residential values will be lower than they were in February 2020. EQR trades for $377K / unit. Are nice urban apartments going to be available for $300/$250K?$200K? I mean that just seems absurd to me and self-correcting, can you imagine being able to buy an apartment in SF/NYC/DC/LA on a first year analyst/programmer/whatever salary. a first year analyst shouldn't be able to buy an apartment in NYC with his bonus as a down payment. that would be kind of awesome, but i don't think it will happen.

the competition for cool fun space to live and global real estate as a place to store value is too fierce for that.

just my delusional view.

*~300K households, 30,000 detached single family homes, some of which aren't in areas where people would buy expensive homes. 9% of households have >$1mm in investable assets, 20% make >$160K, the immediate wealth suburbs are wealthier and higher income because they don't have the poor parts of DC messing with the stats, so it kind of makes sense why when you're buying a "expensive" house there are 10 other qualified buyers bidding against you.

[KJP]

Demographics appear to be another SFH tailwind:  https://www.calculatedriskblog.com/2020/10/demographics-renting-vs-owning.html

[LearningMachine]

really not much wisdom to share. I don't think work from home will drastically affect well-located single family homes that derive some of their value from being close to cities.

maybe that's me just being delusional. I just think that for the most part rich people pay to be around other rich people: good schools/amenities/etc. and that proximity to major metropolitan areas has appeal beyond short commutes. we'll see. perhaps my straight up and to the right zestimate is making me feel overconfident.

it all varies by market. maybe some areas do very well, some see a correction. but in answer to the question of the thread title: my aggregate guesstimate for the overall market effect would be 0% for SFH.

just to use my own backyard as an example. Between 7-9% of DC/ Maryland, and Virginia households have $1mm or more of liquid assets; DC has more millionares/capita than any state and Maryland is number 2. Incomes are high. There are only so many homes and no buildable land. no more SFH being created. I estimated there were likely more millionaires than SFH's in the the desirable parts of DC/MD/VA*. a large percentage of transactions are cash buyers. the wealthy towns have median family incomes of $150K+ and houses can still be had for less than $1mm. Why should houses be cheap / prices fall?

because a few people are going to remote in from the mountains or the exurbs now so they can FIRE at 40?

I think multifamily is going to have a brutal time over the next few years but would be a buyer of super well capitalized REITs on the way down (per the thread).

 it's not clear to me that 5 or 10 year out urban residential values will be lower than they were in February 2020. EQR trades for $377K / unit. Are nice urban apartments going to be available for $300/$250K?$200K? I mean that just seems absurd to me and self-correcting, can you imagine being able to buy an apartment in SF/NYC/DC/LA on a first year analyst/programmer/whatever salary. a first year analyst shouldn't be able to buy an apartment in NYC with his bonus as a down payment. that would be kind of awesome, but i don't think it will happen.

the competition for cool fun space to live and global real estate as a place to store value is too fierce for that.

just my delusional view.

*~300K households, 30,000 detached single family homes, some of which aren't in areas where people would buy expensive homes. 9% of households have >$1mm in investable assets, 20% make >$160K, the immediate wealth suburbs are wealthier and higher income because they don't have the poor parts of DC messing with the stats, so it kind of makes sense why when you're buying a "expensive" house there are 10 other qualified buyers bidding against you.

Thanks Pupil for sharing your words of wisdom.

Shelter vs. farm products: A rich analyst doesn't pay a big percentage of annual income for products from farms either because there is no oligopoly-type ownership concentration so far with farms.  If they had the option to buy farm products from only a few non-competing farm owners, those few options could have easily extracted a big percentage of their annual income, but fortunately that is not the case so far.  Both shelter and farm products come from real estate but former has been taking much more income because of need for close proximity to work so far, which has created oligopoly type structure by reducing options.

I had done a survey of a group I am part of on what percentage of people would consider moving if WFH became permanent.  I got about half the people.  Redfin did the same survey and found about 50% people ready to move in some cities: https://www.redfin.com/news/wfh-leaving-new-york-san-francisco/

This is what I am starting to see in practice as well.  The folks I'm seeing do this are not into FIRE.  Rich working single folks are moving for multiple reasons, e.g. to be close to their family and buying a house in another city, etc.  Rich working folks with families are buying bigger properties farther away from work.   I hear you on rich folks like to be together.  Here, I'm seeing working rich folks in the tech who are getting the flexibility to move and starting to leverage that flexibility together.  This is similar to how we saw white flight in the 60s, where those who could afford a car, started moving to suburbs.  This time also, the reason for many is not FIRE but a bigger property, newer homes, etc.  Savings are just icing on the cake.

 All it would take is about 10-20% move to make a big impact on pricing as 20% vacancy did in Detroit. 

[Jurgis]

Personally, I am with mostly with thepupil although I would not try to predict RE pricing based on my thoughts.

We are in somewhat-close suburbs of Boston.
We talked about moving to exurbs for bigger-or-nicer house/more land/more forest or water/etc.
The problem is that infra does not move. So we'd lose (or be forced to drive way longer to):

- Tai Chi studio we go to, meditation place we go to
- PCP and medical specialists we go to
- restaurants
- other Boston culture, shopping, etc.
- friends

Ultimately, I don't think losing all of these are worth what we'd gain.

OT: why do American builders continue to build the 1930s/1950s esthetics SFHs? Unlike Europe there are no look restrictions and yet everything except multi-million custom houses look like they were plopped from a 1960s sitcom.  Lithuanians build nicer looking new houses than Americans... 

[SharperDingaan]

The major catches to all this is availability of high-speed internet with adequate band width, zoning restrictions within the surrounding small towns, and integration. There is often a very real drop-off in connectivity as soon as you go rural, limiting where you can go. That 60's style SFH in a small town is typically demolished and replaced with a new-build monster home - with every other new (& rich) arrival on the street doing the same thing. Yes it reflects highest and best use of the serviced lot - but it really pisses the old-timers off. Small towns are sleepy - because they like it way. A few rich folk is one thing, too many is gentrification. 

SD

[LearningMachine]

Personally, I am with mostly with thepupil although I would not try to predict RE pricing based on my thoughts.

We are in somewhat-close suburbs of Boston.
We talked about moving to exurbs for bigger-or-nicer house/more land/more forest or water/etc.
The problem is that infra does not move. So we'd lose (or be forced to drive way longer to):

- Tai Chi studio we go to, meditation place we go to
- PCP and medical specialists we go to
- restaurants
- other Boston culture, shopping, etc.
- friends

Ultimately, I don't think losing all of these are worth what we'd gain.

OT: why do American builders continue to build the 1930s/1950s esthetics SFHs? Unlike Europe there are no look restrictions and yet everything except multi-million custom houses look like they were plopped from a 1960s sitcom.  Lithuanians build nicer looking new houses than Americans... 

Agreed, you wouldn't want to lose these.  That said, assuming you were close to your work before, would you now willing to be 30 minutes away from some of these needs if you could get an estate now for the same price, e.g. say with a farm, view, horses, heliport, airport, or something else you like?  Maybe you have to go too far in your area, but do you think some small percentage of people might be willing to consider that option for their next house?

For each extra mile you're willing to add now, the options grow quadratically with new options being available in area of size pi * (new_distance ^2 - old_distance^2).  So, if you were willing to be only 5 miles away from these options before, you could cover only pi^25 square miles.  Now, if you can go 20 miles, your options for living go up to pi^400 square miles.  If you are willing to go 30 miles, your options for living have expanded to pi^900 square miles.

I feel the oligopoly power of the living options within pi^25 square miles has certainly diminished by the availability of living options in p^900 square miles, while keeping access to things that are important.

All it takes is a small percentage of people to start exercising this option of leveraging increased effective supply as 20% incremental supply can lead to moves in prices as 20% vacancy in Detroit showed us.  Here, the effective supply has increased quadratically by many multiples not just 20%.

[thepupil]

WhT exactly are you referring to with respect to Detroit? During/after GFC or like the general decline of the 20th century?

You’re probably my right.

 Covid and WFH  has destroyed my stock portfolio, now it can go after my house

[Spekulatius]

The Covid-19 turbocharged WFH trend provides an option for people, who want well paying jobs who formerly were only available in a city, to move elsewhere and do the same job.

Some pole will like this and take this option and some don’t because they prefer to live in a City anyways. How these net movements work out is any wine guess, but it seem certain that there is a net migration out of large expensive cities.

The places these people move to (suburbs) will see stronger home appreciation and large apartment buildings in large cities will probably be less desirable.

[LearningMachine]

WhT exactly are you referring to with respect to Detroit? During/after GFC or like the general decline of the 20th century?

I meant during and after GFC, Detroit residential vacancy hit above 20%, causing banks to give away houses for $1 in some cases to avoid liability for property taxes and vandalism.

I am not saying it will get that bad in every city.  What I am saying is 20% vacancy can cause more than 50% drop in prices. 

I'm also not saying prices will fall 50% in cities with certainty.  What I am saying is the effective supply of options is going up way more than 20% for that well-paid analyst or software engineer, and that in history, we have examples of even just a 20% effective supply increase causing a big drop in prices.  So, I think probability is high that there will be some drop in prices for residential real estate in expensive cities.  Many factors will determine the amount of that drop, e.g. how fast the trend materializes, how much existing housing is already available in desirable locations [desirable defined in the new era where they don't have to be within 5 miles from work], how fast can developers build new houses on the outskirts in good school districts that these folks would want to move to, the magnitude of new supply from developers vs. the demand, how much regulations and zoning slow down these developers, etc.

[bizaro86]

How steep the demand curve is matters as well. There are absolutely people who currently either don't live in expensive cities or take long commutes solely because they can't afford to live closer. Small drops in price have the potential to increase demand from people who are priced out of the market.

Of course, gateway cities are probably also seeing condo inventory formerly dedicated to airbnb convert to residential usage...