The Housing Bubble’s Silver Lining

As rents climb, developers large and small take out their calculators and dreams of wealth blossom: but no, this is not bubble.

The disastrous blowback from inflating housing bubbles is painfully obvious: as housing becomes unaffordable, households impoverish themselves to “get in now before it’s too late;” malinvestment (i.e. McMansions in the middle of nowhere) flourishes as housing becomes a speculative financial vehicle rather than shelter; retirement funds are sold designed-to-default mortgage-backed securities, and when the bubble finally pops, those lured into buying at the top are left underwater, owing more on their mortgage than their house is worth.

But there is one silver lining to housing bubbles: some of the money squandered in the speculative frenzy ends up rehabilitating old buildings or erecting new housing in useful locales.

Let’s not overstate this silver lining: a rational, productive set of financial policies would have directed capital into useful construction without the dubious aid of a speculative bubble. Every dollar wasted on a marginal-return housing investment (for example, a shoddy house with Chinese drywall that renders it cheaper to tear the house down than attempt to fix everything that’s wrong) is a dollar that could have gone into rehabbing a well-constructed building from a previous era or building shelter that will last 100 years with little maintenance.

But the euphoria and greed of the bubble mindset do serve one valuable purpose: rundown properties that would not attract any investment in more rational times are viewed as undiscovered gold mines in bubbles.

As rents climb, developers large and small take out their calculators and dreams of wealth blossom. This gold-rush mentality quickly spreads to forgotten areas such as small-town Main Streets and abandoned urban zones–for example the Mid-Market area in downtown San Francisco, a seedy stretch of Market Street that is being redeveloped at a furious pace. Decrepit storefronts are being torn down and thousands of new high-rise apartments and condos are being built in their stead.

The tens of thousands of well-paid techies who have flooded into the city in recent years have driven rents off the scale, and so developers of cubbyhole studios are rubbing their hands in anticipation of collecting $3,000 a month for each cubbyhole from Tech Bros earning $10,000 a month.

All bubbles eventually pop–not just in housing, but in tech employment, and every other bubble in which the participants are absolutely confident that the bubble is not a bubble and the good times will roll essentially forever.

Thus we can anticipate thousands of Tech Bros will lose their jobs when the current frenzy runs its course, just as we can anticipate developers with empty cubbyhole flats will be forced to lower the rents. Many will go broke and the buildings will be auctioned off for a fraction of their construction cost, and the new owners will be able to make a go of it at rents that are a fraction of the asking price in the Tech Bro glory days.

But the city and the future residents got new buildings that will provide shelter for decades, and that’s a good thing. As the massive speculative bubbles propping up the U.S. economy all pop, the value of those new and rehabbed buildings will plummet, along with rent and the price of condos. Andf that will be a good thing, too.

When will this unfold? Nobody knows. Bubbles are not entirely predictable phenomena; we can identify them easily enough–when every participant is sure it can’t be a bubble, that guarantees it is a bubble–but we cannot predict when the fever will break. We can only predict that all speculative bubbles will pop, and that the deflation will be commensurate to the trendline of the bubble’s ascent.

If we’re left with some renovated buildings and new shelter in practical locales, we can count our blessings.


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