Category: land and how we use it

“iBuyers” are gearing up to grow massively in the coming years, with unforeseen consequences for the U.S. housing market.

Oh, I think we can foresee the consequences pretty well. No homes for sale, only to rent, making the predictions of an Age of Access more accurate.

“There’s almost an arms race to get the most inventory possible,” said Daren Blomquist, vice president of market economics at Auction.com, who described the state of the iBuyer market as “almost frenzied.” “It’s less about making money off that inventory, at least initially, and more about who can get the most inventory the fastest.”

Get big fast, may the devil take the hindmost…it worked for other players (Amazon, Google) so why not try it here as well? I wonder if the investors know what this means for anyone who isn’t already on the property ladder.

It seemed like Zillow and Redfin were some kind of market research/listing service where you can see what homes might sell for, maybe even your own. But we see the game:

High-tech middlemen like Opendoor and Zillow Offers, Zillow’s home-buying platform, first inserted themselves into the housing scene a few years ago, armed with cheap money and hoping to profit off the bedrock of American middle-class wealth. iBuyers target mid-level homes that are in decent condition, offer to buy the house with cash, and make the selling and moving process quick and convenient. They then make a few repairs and quickly put it back on the market, ideally at a higher rate. In exchange, they charge the homeseller a fee that varies according to a variety of factors.

So anyone’s dreams of sweat equity or making something their own becomes a lot harder. The fixer-uppers are going and any remodel options will likely have be done to generate a quick reality show type sale. No one wants to tear out a new kitchen or master bath that the flippers put in, designed to sell rather than use on a daily basis.

As Erik Selberg told me many years ago, anyone who says they are trying to reduce the friction in some transaction is actually trying to become the friction: case in point —>

“We’re at a moment of change,” said Greg Schwartz, a former Zillow executive who now runs Tomo, a fintech startup that tries to improve the homebuying experience. Schwartz said iBuyers don’t need to dominate the overall market to become big businesses, noting that 5 to 6 million U.S. homes are sold in a typical year. “If only 500,000 of them sell through iBuying, it’s a massive, massive opportunity,” said Schwartz.

I hear messages from outfits that claim to want to simplify home buying, as if the process is why people can’t afford to buy their own homes. The process is simple but the housing market is disappearing.

(Zillow’s gross profit per home sold was $33,849 in the second quarter, according to the company.) “Putting it to scale gets very, very interesting,” [Viet Shelton] added. “Buying and selling 5,000 homes a month? It gets interesting,”

That’s $169,245,000 each month. The incentive to build new homes isn’t there if prices are rising that fast: why vote for a development that will lower the price of your home? Since cities aren’t in the housing business, there is no one to drive construction that would deflate this bubble. Any development that does get built will be a rental, not for sale, and zoning will keep it out of the affordable housing segment. There is no affordable housing without affordable land and cities control the land within their borders. They don’t have to own it: all that’s needed is the power to tax and zone it. They have that.

The inflationary pressure this will create should be obvious, but don’t take that from me: “With the growth of population, land grows in value, and the men who work it must pay more for the privilege.”

In Pratchett’s Discworld® book Making Money, Moist von Lipwig,in his new role as Master of the Mint and personal dogs body to the bank’s chairman, discovers that cities are the value, the backing store of the local economy:

Hmm. Moist stared at the bill. What does it need to make it worth ten thousand dollars? The seal and signature of Cosmo, that’s what. Everyone knows he’s good for it. Good for nothing but money, the bastard.

Banks use these all the time, he thought. Any bank in the Plains would give me the cash, withholding a commission, of course, because banks skim you top and bottom. Still, it’s much easier than lugging bags of coins around. Of course I’d have to sign it too, otherwise it wouldn’t be secure.

I mean, if it was blank after “pay,” anyone could use it.

Desert island, desert island…on a desert island a bag of vegetables is worth more than gold, in the city gold is more valuable than the bag of vegetables.

This is a sort of equation, yes? Where’s the value?

He stared.

It’s in the city itself. The city says: In exchange for that gold, you will have all these things. The city is the magician, the alchemist in reverse. It turns worthless gold into…everything.

How much is Ankh-Morpork worth? Add it all up! The buildings, the streets, the people, the skills, the art in the galleries, the guilds, the laws, the libraries…billions? No. No money would be enough. — emphasis added

The city was one big gold bar. What did you need to back the currency? You just needed the city. The city says a dollar is worth a dollar.

Not that I think cities need their own currency, but if the city wants to borrow against the value of itself, it should be able to do that. And the way to do that is to tax the land value represented by the buildings, the streets, the people, the skills, the art in the galleries, the guilds, the laws, the libraries…

It’s clear cities already have their own wealth to draw on, to borrow against and to tax for the good of all. They just let speculators and rentiers pocket it every month.

Since the pandemic began, home prices and rents have drastically risen. And a new analysis from the Shelby County Property Assessors Office found out-of-town investors are scooping up thousands of properties.
“It’s the Hunger Games of housing. How did we get to a place like this where you can’t provide people with the basics of shelter?” said Roshun Austin, and Affordable Housing Advocate.

This article is just more proof that houses aren’t homes anymore…they’re assets, commodities to buy and sell. The scarcity is the point. When people vote against development or zoning changes, they’re trying to control the supply and hold on to the wealth they think they deserve or worse, feel that they earned. Imagine a world where some have to pay more and more for the privilege of living and where others demand to be paid for the use of those resources that they were lucky enough to buy.

Bailey said a recent analysis of homes sales found in the past two years, 7,000 single family homes in Shelby County have been purchased by out-of-town investors and turned into rentals.

That’s 7,000 families who will not be able to invest in the community they call home, all so some out-of-town investor can siphon off their locally-earned wages each month. Renting a single family home might be necessary — a military or other deployment with the intent to return — but homes that have been rentals for two or more generations are commercial property and should be treated as such.

If nothing else, local taxpayers should be annoyed that local wages, many of them paid out of local taxes, are being pulled out of the local economy each month. That’s educators and first responders, librarians and public health workers, none of whom make market wages and few of whom will truly call where they live home if they can never buy in. Why does New York need Shelby County’s tax dollars more than Shelby County does?

But as a first step, long-term rentals of single family homes should be illegal: if people are so adamant that homes and neighborhoods are for families, then they can’t at the same time be assets, with rotating tenants. Anti-density/development types love to talk about neighborhood character but they don’t mean anything by that, other than thinly-disguised racism. They’re just pulling up the ladder behind them, making sure no one else has the same opportunity to build wealth from artificial scarcity (land is truly scarce but how we develop and use it is where the artificiality comes from). There is a caste system, as Isabel Wilkerson pointed out.

Hard to imagine this ever changing. Without a social safety net that obviates the need to accumulate the wealth in land for a secure retirement, no one will give that up.

Nothing to see here, just an international investment concern making $120 million dollars simply by having the $370 million to invest. The working people of Seattle did the rest.

Kilroy Realty bought the building from a Deutsche Bank-affiliated real estate fund, according to documents filed Monday with King County. The building was built in 2009 and last sold in 2016 for $370 million.

Maybe some halo effect from Amazon but more from Seattle itself…

Despite an overall decline in office leasing in the United States, technology companies gobbled up more space in the Seattle area than they had the previous year.
[…]
Among the 100 largest technology leases, 14 were in the Seattle area, totaling 3.4 million square feet, about 85 percent more space than in Manhattan, the No. 2 market on the list.

This is just silly…

Downtown Seattle is “closer to capacity build-out,” said Mr. Yasukochi, but the so-called Eastside has room for companies to expand. Some businesses are creating mini-campuses, and others are flocking to new developments like Bellevue’s Spring District.

Downtown parking lots, a acre+ hole in the ground across from City Hall, and all manner of other underused land, but go off, I guess.

“It’s the talent pool that drives the real estate market,” Mr. Yasukochi said. It’s easier to hire specialists in cloud computing, machine learning or virtual reality when so many live in the area.

Large companies also attract start-ups. “If you want to be part of the tech industry, you’ll want to be where the action is,” Mr. Paolone said.

And the speculator/rentier will be there with their hand out, doing nothing, making money while working people sleep.

I am always looking for examples of land rents, examples of home ownership without the need to buy increasingly expensive land. I didn’t expect to find one off the coast of New York’s Long Island.

The town of Babylon owns the island; homeowners pay a $1,800 fee to lease their land, which is added to the town’s annual taxes. Homeowners also pay an annual fee of $2,500 to the Great South Bay Isles Association for maintenance of community property, such as a repair to the floating docks off the parking lot. The association’s directors are elected by and composed of island homeowners. The lease, expected to be automatically renewed in 2065, limits occupancy to seasonal summer use.

[…]
Imagine what these homes would sell for if they came with land:

Houses here don’t often come up for sale because “people keep them in the family,” said Lisbeth English, an associate agent with Netter Real Estate in West Islip. She is the listing agent of 24 Oak Street, a two-bedroom built in 1914, on the market for $249,880.

A red shingled house is under contract for above its asking price of $399,000, said Matthew Arnold, an agent at Netter. And Listing Pro has a four-bedroom, two-bath house listed on the island for $485,999.

Maybe not the most practical example, as this is a summer-only community. Yet it exists. And $1800/year for the land lease plus $2500 as a quasi-HOA isn’t onerous. The article mentions other taxes (likely on the buildings) but $360/month plus whatever that is seems to be something the residents are willing to pay. Here in Seattle, I would gladly pay the current property tax on a house and land as a ground rent if I only had to take on a mortgage for the house. That could cut the cost of an $800,000 property in half. Sure, you’d lose some of the benefits of a mortgage interest deduction but you’d also have more money each month, instead of waiting for the taxman to cough it up once a year.

I wonder how this property became so valuable? From land valued at $4.5 million with negligible improvements to a quarter of a billion in five years.

Alexandria Real Estate Equities has sold a 70% interest in its 400 Dexter life sciences building in the South Lake Union neighborhood for $254.8 million, or $1,255 per rentable square foot.

Could it be the development taking place nearby?

“This transaction marks another strong data point reflective of the current demand for core life science product in Seattle,” said Kevin Shannon, co-head of U.S. capital markets for Newmark. “Life science fundamentals are faring better than the overall office fundamentals with rents that are now ranging from $65 to $80 (including operating expenses) annually, which allowed us to achieve record-setting pricing for the Puget Sound marketplace.”
[…]
“The Puget Sound ranks third nationally for life science growth over the past five years with venture capital having increased 200% during that time frame,” Jesse Ottele, executive managing director for Newmark, said in a statement.

What doesn’t make sense to me is how the building, shown here as improvements, is assessed at higher values each year while the land rises more slowly. The building was assessed at $24,330,400 in 2015, $230 million in 2020, while the land was assessed as being worth $5,160,000 in 2015 and $9,114,000 in 2020. The land — the location — is what become more valuable, not the building. And we know the rents charged by the landlord haven’t stayed where they were in 2015 while the land and location remained the same.

The property taxes are $1,773,255.28/year on property valued at $212,266,000 on about .27 of an acre. If the 1% rule holds, that should be about $2.1 million but I think the balance between the value of land and improvements is what needs recalibrating. That rise in value should be assessed on the land, not the improvements: the location is what’s making the money for the landlord and that value should be remitted back to the original investors — the taxpayers and those who live and work here.

New transit stations open in Seattle tomorrow (Oct 2, 2021) and I am reminded that one of them is in a neighborhood called Brooklyn (after one of the five boroughs) and not far from neighborhoods called Morningside and Chelsea.

“Somebody told me this: In New York, your world will be within a four-block radius,” she said. “It’s true. You get lazy to walk beyond four blocks.” She rarely needs to, as Target and plenty of other stores are within that range.

“There are always people outside,” she said. “I really like to feel surrounded by people. I have a new circle of friends as a result of living here.”

New York remains the cultural capitol of the USA, no matter what Atlanta or LA or Seattle do. And people in those cities really want that experience, a world within walking distance, but aren’t willing to give up their addiction to the “independence” of cars and the big lots and single family housing that cars require.

Thinking about how to explain ground rents/land rents/land value taxation…

Economic rents differ from shelter rents, the checks many of us write on the first of the month. Economic rent is what landlords claim from the ownership of land, the proceeds of the work performed on that land. A residential tenant’s wages are the crop harvested each month, as they represent the labor that tenant sells in the market. It’s economic rent and the related term rentier — defined as “[a]n individual who receives an income, usually interest, rent, dividends, capital gains, or profits from his or her assets and investments” — that we are concerned with here.

Going back to the notion of economic rent, not shelter rent, what apartment or house tenants pay, here is the Ricardian definition.

“Portion of the produce of the earth which is paid to a landlord on account of the original and indestructible powers of the soil, Ricardo in his theory of rent has emphasized that rent is a reward for the services of land which is fixed in supply. Secondly, it arises due to original qualities of land which are indestructible”. (The original indestructible powers of the soil include natural soil, fertility, mineral deposits, climatic conditions etc., etc.).

To this we add Adam Smith’s description:

“The rent of land, therefore, considered as the price paid for the use of the land, is naturally a monopoly price. It is not at all proportioned to what the landlord may have laid out upon the improvement of the land, or to what he can afford to take; but to what the farmer can afford to give.” — Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, Book I, Chapter XI “Of the Rent of Land”

We have to recall the times in which they lived and their focus on or simplification of land for agriculture. What Ricardo formulated was the idea that land’s value was based on what it could produce from its location and other properties (bottomland vs hillsides, sun exposures vs shade, rain or access to water). So the landlord can rent an acre of bottomland with access to the river for more than he will get for an acre on the hillside where water has to be carried uphill. Also included in his definition is that land is finite, fixed in supply, and that it is original (ie, not made by man) and indestructible.

Smith’s explanation is more direct: the landlord owns a monopoly on the land she owns and can charge what she likes for the use of it. If her tenant brings in a good crop, she can demand more rent from her tenant based on the higher income from the land.

What Henry George saw was that the price to acquire land to work in a given area, either as farmland or to site a factory, became more expensive as more people moved to that area. Supply and demand for a monopoly good can only benefit the owner.

So as the cost to acquire land rises, who pockets the increase? The landowner. But who created that value? Everyone else. All the investment by the taxpayers — roads, utilities, public safety — and those who work their land nearby accrues to the landowner’s benefit. As nearby or adjacent land is developed, the value of land increases, partly through scarcity and partly through the increased desirability of it for new or existing businesses. If I am in business, I will pay more for land near businesses or markets I need access to. And rather than the public whose taxes and consumer spending created that value, the landowner — the rentier — reaps the benefit.

When a fraction of an acre sells for millions of dollars, that’s all unearned income. That windfall should be subject to a ground/land rent or land value tax that returns that value to those who created it, derived as it was from “the original and indestructible powers of the soil.” In this case we don’t care so much about the power of the soil so much as the value of the location, its proximity to other commercial interests. Once a city develops a presence in some industry — banking in New York or London, for example — that location becomes more valuable and the land under it more expensive. The idea that someone can live off the proceeds of land their long-dead ancestors bought as farmland sounds a lot like feudalism. Land speculation is as corrosive to social mobility and a free market as dynastic wealth. They are not unrelated.

The ideal price to acquire land for commercial use is $0, with the value of the land payable as a ground rent to the municipality. This is the premise of ground rents, that the map is not the territory. The map coordinates are not the land itself, and we can allow someone to hold, buy, or sell the exclusive rights to a set of map coordinates but the value of the land belongs to no one or everyone:

I do not propose either to purchase or to confiscate private property in land. The first would be unjust; the second, needless. Let the individuals who now hold it still retain, if they want to, possession of what they are pleased to call their land. Let them continue to call it their land. Let them buy and sell, and bequeath and devise it. We may safely leave them the shell, if we take the kernel. It is not necessary to confiscate land; it is only necessary to confiscate rent.

So does this mean that home prices will rise even higher in overheated markets? That depends. If commercial property is assessed and taxed on its highest and best use, residential rates may well go down. There is no reason why a downtown office block pays the same tax rate as a family home. One of those two properties is using the land expressly to make money and it should pay a higher rate to use the land. If there is a monopoly in land, the value should be held in common with the proceeds being returned to those who created it.

There is really no reason to own land, other than to extract economic rents through scarcity. Imagine a home purchase that didn’t include land in a city like Seattle: it could cut the price in half, with the current property tax being assessed as a ground rent. A look into the King County property database makes clear that land prices have risen faster than home prices (yes, they are tracked separately, in preparation for a ground rent/land value tax).

The ideal tax model would be split-rate, with a higher tax on the land (higher than the current 1%) than on the improvements, to both discourage land speculation and encourage development. If the cost to hold land is increased to discourage speculation but can be defrayed by developing it, that’s what we will see. Accepting surface parking lots or single story buildings downtown in the face of homeless emergency and a housing affordability crisis should be unacceptable but Seattle and other cities can’t seem to find their way out of this mess. We already know that developers will pay close to $1,000,000/acre per year to rent land: putting an equivalent ground rent on surface parking lots and other disused or underused land might impoverish a few parking lot operators but cars have reached their peak anyway. The reality is anyone holding land downtown in many of our expensive cities will make out just fine. Let them cash in their winnings and go.

In his kitchen at Cedar’s of Lebanon Restaurant, owner John Khalil expects more customers, but fears growth and high property values will someday shove him out of his monthly lease.

“It’s like we’re digging in a mine and finding the gold, and don’t know what to do with it. Do we mine it, or split it, or fight over it?” Khalil said.

He’s saying what many of us have saying…that the wealth of cities is in the land, and we don’t even have to dig for it. As Tyrone Beason pointed out a few years ago, Seattle is in the midst of a new Gold Rush but the people getting fleeced aren’t going to the Klondike. They are staying here.”We wanted workers…but we got people instead.”

City zoning reflects the push from small business to “Save the Ave.” All blocks surrounding U District Station are upzoned to allow buildings 240 or 320 feet tall — except University Way itself, which remains capped at 65 feet.

Current construction projects include eight tower cranes. A tiny-house village will move into a Sound Transit surplus construction lot along 45th, until bigger plans hatch. The U District added 2,173 new housing units since 2015, with 2,480 more permitted or under construction.

This is good but 2,000 units over 6 years seems little slow: the additional 2,500 over that time wouldn’t be all that impressive, tbh. A ground rent that reflected a higher and better use than what’s there now might drive development a little harder. Those “bigger plans” could be farther along. These transit stations have been under construction for years and a good business reporter would have pulled all the tax records for all the land that has changed hands around those three stations since ground was broken. The higher sales prices reflect value created by the people who live and work around those stations, all of which should flow back to the community through a ground rent.

How many pop-up Halloween shops are there near you? I make 6 of them within 10 miles.

The argument here (or arguments) is that these are an example of how poor use of land can look like dynamic growth but is really just predatory profit-seeking.

“While I might once have just seen run-down buildings through my windshield and kept on driving, now I see people doing what they can with what they have,” he writes. “It’s not perfect. […] But it’s better than abandonment and blight.” He has a point. I would much rather see an old Kmart used as a Halloween costume store, even if it’s only temporary, than have that store go empty in perpetuity, and I’m sure the owners of the building would, too.

Ok, that sounds fine…

Today’s Spirit is pretty much a bottom-feeder business that works only at the expense of other stores; if there weren’t vacant storefronts, this business wouldn’t exist. Or, as the Times puts it, “Spirit is merrily feasting on the corpses of its fallen foes.”

Huh. That’s not so good.

Maybe seasonal shops could take turns with a rotating storefront downtown; there’s no reason a single space couldn’t be a Halloween store from September–October, a Christmas store from November–December, and a beach-gear store from May–August. Or maybe these shops would fill in during temporary vacancies of commercial spaces, between random store tenants.

You know what used to fill this role? Department stores. And what was once thriving in the vacant spaces where these seasonal shops now appear? Department stores. And they employed local people year round, not just a few weeks at a time. They were often a local destination, with a restaurant or coffee shop inside, and specialty services (repairs and alterations) that are now hard to find.

We shouldn’t be building a world where it’s normal to have dozens of vast empty stores propped up by millions of taxpayer dollars in public infrastructure.

Or empty spaces, like parking lots downtown. We should be angry when we see these shops coming in to scoop up a few dollars and leaving no trace, no investment, nothing behind.