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Why To Not Invest in Real Estate Part II

Last time, we learned why Tomas Pueyo of Uncharted Territories is concerned about the future of real estate.  Here’s a summary of Mr. Pueyo’s observations:  Home price appreciation that seems assured only dates to about 1950.  Prior to that, home prices were flat.  Going forward, Mr. Pueyo is concerned that the demand drivers of home price appreciation are evaporating while supply constraints are lifting.  The result will be home price stagnation or even decline.  You can read Mr. Pueyo’s original post here.

But is he right?

While Mr. Pueyo has many important observations, the short answer is no, he is wrong.  Here’s why:

  1. While macroeconomics are important, real estate is a local business.
  2. Population growth in the US is predicted to continue driven by immigration.2
  3. There are limits to migration.
  4. Continued Affluence will continue to drive home prices skyward.
  5. Constraints on development will continue.
  6. Population mobility will also fuel growth.

Macro versus Microeconomics

Unless your idea of investing in real estate is to buy a portfolio of REITs, investing in real estate is a fiercely local business.  Of course, there are important macroeconomic drivers like interest rates.  However, real estate investing is a bet on the local economy.  Cities can blossom and boom while the rest of the country struggles with recession.  This was a key premise in my book, Cash In on the Coming Real Estate Crash.

In fact, variability in outcomes isn’t limited to cities versus the rest of the country.  It’s even more granular.  One area of a city can thrive while another area is in decline.  This is readily discernable for any investor that’s lived in a particular area for a reasonable length of time.

US Population Growth to Continue

Mr. Pueyo does a good job of noting declining fertility rates, even in the US.  However, the US compensates for declining fertility through immigration.  In my opinion, this trend is likely to be sustained, even accelerated.

First, we’re already seeing unprecedented immigration happening right now, partly as an outcome of our essentially open southern border.  Over the short term, immigration may fluctuate with political whims.  But the long-term trend is for more immigration and the Congressional Budget Office backs this thinking.1

Historically, the US has been a nation of immigrants.  The desirability of living in a free country with boundless opportunity hasn’t changed.  What is changing is the experience of living just about anywhere else.  Declining fertility and net out migration will lead to economic decline in foreign countries and an acceleration of outmigration just like the potato famine of the 19th Century.  Their loss will be our gain.

There Are Limits to Migration

Remote work means that you can live in Timbuktu and still work for a big corporation.  And we’ve seen plenty of folks fleeing urban chaos for more rural areas.  But while remote work is never going to go away, remote work itself is in decline.2

Corporations are rediscovering the desirability of collaboration and the need to work in person.

Cities will either get their act together, restore order and enforce the law or their recent population losses will become permanent.  There will be a myriad of outcomes.  Some cities will be unable to break free of their disastrous policies and will suffer accordingly.  Other localities willing to pursue law and order will thrive.  Already we’re seeing cities like Detroit and Louisville experience a renaissance.

Further, there are entertainment options that cities have that can’t be duplicated in rural areas.  Witness sports teams, museums, the arts and even movie theaters that can be lacking in outlying areas.  More importantly, populations are aging.  That means an expanded need for healthcare.  There’s already a crisis in delivering healthcare in rural areas.  Elite medicine congregates in cities and our aging population will want to be nearby.

A current and ongoing trend in multi-family is walkability.  In other words, our desire to be close to various entertainment options and necessities like grocery and healthcare is measured in our ability to walk to these amenities.

Continued Affluence

The affluence we enjoy today is driven by technology.  And technological advance is exploding.  We haven’t even mined the entirety of internet benefits and now AI has entered the scene, another promising technology.

Wars and recession will never go away, but the long-term trend is peace and progress.

Continued affluence means that household size can decrease below one if people own multiple houses.  In the immediate future, the continued impact of temporary housing opportunities like Airbnb and Vrbo will be more prominent than vacation home ownership.  But over time, we may see more seasonal occupancy of private residences.

As Mr. Pueyo observed, most of our population growth has occurred since 1950.  That means that most of our housing stock has been built since 1950.  This housing stock faces two factors – aging and obsolescence.

Real estate isn’t forever.  Stuff wears out to the point that maintaining the property is no longer viable and a tear down makes more sense.  This situation is further accelerated by obsolescence.  Even before it wears out, real estate “obs” out, or becomes obsolescent.  It’s not just the size of the population that’s changing.  The inventory of existing real estate to serve the population is always changing and always declining.

Continued Constraints on Development

As a developer, as much as I would like for Mr. Pueyo to be right about the decline of NIMBY, I don’t see it happening.  Again, there will be a myriad of outcomes.  Some communities will never summon the political will to shake off their insane restrictions.  Others will realize that new development is an opportunity, not a problem.

Fundamentally, a person’s home is their castle.  Once you’ve got yours, there is an innate human tendency to keep the other person from getting theirs.  After all, once the others move in, there will be more traffic and congestion and you were happy with the way things were.

A home is a the most significant investment most people ever make.  Technology and circumstances change over time, but human nature does not.  Count on NIMBY to continue to preserve the status quo and discourage development.

Population Mobility

Another outcome of technological advance and affluence is population mobility.  We’ve already touched on this on the section on migration, but this driver is so significant, it deserves further exploration.

For most of recorded history, the limits of technology and economics meant that you rarely ventured far from the place you were born.  Travel was expensive and dangerous.  Obviously, that has changed.

Mobility means simply that a geographic solution exists to many problems.

Is your community plagued by open drug markets, public defecating, and criminals roaming freely without repercussions?  Move.  And people have been.

Taxes too high and unfair?  Move.

The US is a federation of 50 states.  All kinds of policy strategies are being pursued.  States that are able to execute advantageous policies will flourish while localities with the wrong ideas will languish.  People will vote with their feet.

Conclusion

Mr. Pueyo has concluded that demographics and supply and demand do not favor real estate.  He has decided to invest elsewhere.  He is missing a terrific opportunity.

 

His soul shall abide in well-being, and his offspring shall inherit the land.

Psalm 25:13

Just an aside, this verse is really talking about spiritual well-being and the land being inherited is Canaan, or the promised land, which is again an illusion to spiritual blessing and not a piece of real estate!  But hey, I needed a little poetic license here 😊.

Notes

  1. In CBO’s projections, the U.S. population increases from 342 million people in 2024 to 383 million people in 2054. Net immigration increasingly drives population growth, accounting for all population growth beginning in 2040.
  2. Remote jobs have been dropping as a percent of the total workforce and continues to drop each month. From June to November 2023, in-person work increased by 3.1%, while remote jobs were down between 2.2% and 6.7% depending upon the industry sector.
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