The rise of ‘Zoomtowns’ is going to make home prices and rents cheaper for everyone

t’s easy to blame remote workers for the pandemic’s chaotic housing market. Highly paid white-collar employees who exercised their newfound freedom and turned once cheap locales into expensive “Zoomtowns” make for vivid villains.

But a new analysis from the Economic Innovation Group, a bipartisan public-policy organization, argues that, eventually, the shift to working from home may turn into the antidote for the price spikes that we’ve seen. That’s because the places where remote workers are flocking — the Sun Belt region in the Southern US and suburban areas outside big coastal cities — are exactly the kinds of locations that are best-equipped to build cheap housing to absorb the flood of newly remote workers.

“People are able to consider affordability more, while putting less weight on, ‘I need to be near the office,'” Adam Ozimek, the chief economist at the Economic Innovation Group and one of the authors of the paper, told me.

These areas generally offer cheaper land to build on, less red tape for developers, and a strong record of new housing construction, all of which bodes well for their ability to accommodate thousands of new residents. The population shift to these popular remote-working spots will also help alleviate some of the price pressure in major cities such as New York City and San Francisco, which have struggled for years to build enough housing to ease prices. Once housing supply in the newly popular areas starts to catch up to the demand surge created by the pandemic, rents will come down — and they may even end up lower than pre-pandemic levels, according to EIG’s model.

But the march to cheaper housing isn’t imminent. A lot of multifamily apartments and condos are scheduled to be completed in the next year, but those new units won’t be nearly enough to meet the rise in housing demand. Climbing interest rates and recession fears have prompted developers to delay plans for more projects. And while it’s clear that the job market has changed forever, the exact future of remote work remains uncertain — some employers are rolling back their “remote-first” policies and ordering workers back to the office.

Still, there’s reason for optimism. The shift to working from home may have fueled dramatic increases in housing costs earlier in the pandemic, but in the long run, it’ll enable more workers to live in areas where housing is plentiful and easier to build — which is good news for America’s housing market.

Remote work pushed housing trends into warp speed

In some ways, the pandemic’s housing shifts were a long time coming. Americans have been migrating from expensive coastal cities like New York and San Francisco and industrial towns in the Midwest to the Mountain West and the Sun Belt for years. But with many white-collar workers suddenly untethered from their office desks in bustling downtowns, the shift from densely populated cities to places where housing was cheaper went into overdrive. In places like Phoenix; Boise, Idaho; and Charlotte, North Carolina, rents and home prices exploded. Jay Parsons, the head of economics for the real-estate-software company RealPage, said he believed most of these relocations would have happened eventually. But the pandemic lit a fire under many people to go ahead and make the move. 

“These are trends that started well before COVID, but it certainly accelerated that shift,” Parsons told me. “We saw just enormous demand from 2020 to 2021 across the suburbs in general, and in the Sun Belt specifically.”

The shift to remote work also hastened many people’s desire for more space. When your bedroom suddenly doubles as a home office, you realize how cramped your apartment is. Across the country, remote workers chose to part ways with roommates or seek out larger homes.

The twin desires for a new location and more space combined to drastically increase the demand for housing. Instead of a slow drip of people looking for new apartments or moving to the burbs, a cascade of movers hit the market all at once. But because of disruptions to construction and the naturally slow pace of building, homebuilders and developers struggled to keep up. “This was a fairly unique event in real-estate history, to see the fundamental shape of demand for housing change for millions of people in the span of just a few months,” Jeff Tucker, a senior economist at Zillow, told me.

Between 2020 and 2022, rents rose 8% and home prices rose by more than 20% nationally, adjusted for inflation. In Phoenix, rents surged 26% in the same period, according to inflation-adjusted data from Zillow. In Las Vegas, rents jumped 23%. Charlotte residents saw rents climb 13%. A paper published this year by the Federal Reserve Bank of San Francisco estimated that the widespread adoption of remote work explained more than half of that national home-price increase since 2019 and a similar share of the change in rents.

There’s reason for optimism

As things start to normalize, however, supply is on the rise. A first wave of new supply is coming in 2023, when apartment deliveries are projected to spike after two years of elevated construction levels. More than 917,000 units are under construction across the US, RealPage Market Analytics found. That’s the second-largest volume the nation has ever seen and will increase the nation’s apartment base by 4.9%.

Most experts say the coming increase in the number of homes, condos, and apartments available means better days are ahead for renters. “This spike in prices in the short term should be followed by moving toward a new equilibrium, which does mean a bit of a cooldown in housing costs,” Tucker told me. 

A decline in housing costs will be accelerated by the same thing that caused prices to explode earlier in the pandemic: people moving to cheaper places. The Sun Belt, with its promise of warmer weather, more space, and cheaper homes, also happens to be a wonderland for developers. In the region, developers enjoy lower costs for land, smaller regulatory fees, and faster approval processes for new developments, all of which make it easier to add housing there than in other parts of the country, Parsons said. These less-expensive markets “tend to be places where they build more,” Ozimek of the Economic Innovation Group said — after all, that’s why they’ve managed to remain cheaper in the first place.

Residents of remote-working hot spots might ask, “Won’t all of these remote workers just bring New York or San Francisco prices to my city?” But “superstar” cities like San Francisco, Seattle, New York, and Los Angeles have grown increasingly unaffordable because their housing supply is fairly inelastic. Land in these locations is harder to come by and more expensive, while restrictive zoning laws limit the number of housing units that developers can build on a single parcel. The Sun Belt and more-rural locations, by comparison, “should do a pretty good job of meeting that demand,” Tucker said, because they have fewer of these hurdles. 

“The types of places that this pandemic and remote work happened to push people are exactly the types of places in America where supply is pretty elastic,” Tucker told me.

Take, for example, Houston and Dallas, a pair of Texas metros that have been able to remain “impressively affordable for being in-demand places,” Tucker said. In Houston, changes to zoning laws have dramatically reduced minimum lot sizes across the city, allowing developers to build more houses on the same amount of land. Dallas, meanwhile, had the highest permitted number of future housing units of any metro in the country at the beginning of 2022, with Houston coming in a close second, according to data compiled by the National Association of Home Builders. 

In the long run, these shifts should help cool off rents and home prices and, in some cases, could bring prices down below where they were before all the chaos started. According to EIG’s model, the wave of new supply coming online should bring inflation-adjusted rents down by 3.7% in the long run. People are also moving to places that tend to build more housing and away from places that don’t, which will likely lower rents in an average housing market by another 0.5%. Additionally, because more people will be living in cheaper locations, the average American’s housing costs will likely be 1.7% cheaper.

The timing of this pressure release is fuzzy, since the EIG researchers don’t know when there will be enough new supply. And these are national averages, so individual markets could see even bigger changes. There are also reasons to think that the estimates are conservative, Ozimek added — if it turns out that most of the change in housing demand was due to low interest rates, rather than remote work, or if even more employees start working remotely, the drops in rent may be even bigger.

On the other hand, there’s a lot we still don’t know

None of those positive effects will come to fruition if we don’t build more housing. But now developers are pulling back because of higher interest rates and recession fears. That could delay some of the affordability gains from pandemic-era migration. 

“We need to get through this high inflationary period that the Fed is trying to tamp down,” Ozimek said. “Then I think we’ll see more normalized conditions in the housing market and some sort of gradual adjustment of supply to demand.”

There are other factors to consider, including the ultimate fate of our remote-work shift. Between 2019 and 2021, the number of people primarily working from home tripled to 27.6 million people, or about 18% of the labor market, according to the US Census Bureau. In a survey conducted by the consulting firm McKinsey in spring, more than one-third of US employees said they had the option to work remotely five days a week. But we don’t yet know to what extent employees will continue to work from home in the long term, or how much that will play into relocation decisions. We’re already seeing more executives push employees back to the office. Snap recently ordered employees to work in the office at least four days a week starting in February. Elon Musk asserted his authority at Twitter by putting an end to remote work.

A weakening economy might make CEOs feel like they have more license to dictate employees’ working arrangements. On the other hand, as my colleague Aki Ito previously argued, a recession could further ingrain remote work as employers look to cut spending on real estate. In the future, a labor market in which there is an abundance of fully remote jobs could embolden more workers to move to cheaper areas where housing supply can better meet demand. Only time will tell. 

Despite the turmoil of the past 2 ½ years, there are ample reasons to believe that brighter days lie ahead for renters and homebuyers. The country’s housing shortage is massive — as many as 3.8 million units, by some estimates — and we still have to sort through all the effects that the pandemic had on demand for homes. But we shouldn’t overlook the positives that could come from reshuffling the country’s labor force.

Source: https://www.businessinsider.com/remote-work-home-house-prices-rent-cost-decline-cheaper-cities-2023-1?r=MX&IR=T

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