Brandon Donnelly — Daily insights for city builders. Published since 2013 by Toronto-based real estate developer Brandon Donnelly. — Page 862

I have been writing about algorithmic home buying on the blog since Opendoor launched back in 2014.

I don't have anything new to report on that today, but this recent article from the WSJ is interesting in that it talks about why Phoenix, in particular, has become ground zero for algorithmic home buying, as well as for institutional investors looking to buy cheap rentals.

Across Opendoor, Offerpad, and Zillow, nearly 500 homes are now being purchased -- largely by software -- in Phoenix each month:

One of the reasons why Phoenix is well suited to these platforms is that the housing stock is cheap and fairly homogenous. (The WSJ calls it "stucco sprawl.") This makes it easier for the algorithms to put a value on the homes.

A big chunk of the housing stock is also relatively new. Just over 36% of it was built in 2000 or later. And it tends to trade fairly often. Below is the percentage of homes in 2018 that were resold within a year of purchase.

It's also worth noting that Arizona is a non-recourse state, meaning you're typically not personally liable if you default on your home mortgage. You simply hand back the keys. So it's viewed as a fairly risk tolerant state, which may be one of the reasons why Phoenix's median home price chart looks like this:

I'll end with this quote from the article: “It’s the dawn of e-commerce for real estate,” said Zillow Chief Executive Rich Barton . “Phoenix is ground zero.”

Charts: WSJ

Berlin just approved a five year "rent freeze" on apartments in the German capital. The rent caps will be implemented on January 1, 2020, but will apply retroactively to all rental agreements from June 18, 2019 onward (which is when the decision was made). It is estimated that this new law will apply to some 1.5 million apartments.

The move is in response to rapidly rising apartment rents, which grew about 12% in 2017 alone . So I can appreciate where this is coming from.

From what I have read, it will not apply to new construction, which is the first thing I checked when I saw the decision. That would have almost certainly choked off any new apartment construction in the city. With a capped top line, it wouldn't take long for costs to increase and make new rental construction infeasible.

That said, a similar squeeze is liable to happen for existing buildings. It is one thing to cap rents (revenue), but what about utility, maintenance, labor, and other operating costs (expenses)? As costs rise and operating margins tighten, it can become exceedingly difficult to reinvest in, or even maintain, an apartment building.

For more on the announcement, here's an article from FT .

This week, Google announced a $1 billion investment in housing across the San Francisco Bay Area. Here is the blog post announcement by CEO, Sundar Pichai. And here are a couple of paragraphs from the post explaining how this is expected to work:

First, over the next 10 years, we’ll repurpose at least $750 million of Google’s land, most of which is currently zoned for office or commercial space, as residential housing. This will enable us to support the development of at least 15,000 new homes at all income levels in the Bay Area, including housing options for middle and low-income families. (By way of comparison, 3,000 total homes were built in the South Bay in 2018). We hope this plays a role in addressing the chronic shortage of affordable housing options for long-time middle and low income residents.

Second, we’ll establish a $250 million investment fund so that we can provide incentives to enable developers to build at least 5,000 affordable housing units across the market.

In addition to the increased supply of affordable housing these investments will help create, we will give $50 million in grants through Google.org to nonprofits focused on the issues of homelessness and displacement. This builds on the $18 million in grants we’ve given to help address homelessness over the last five years, including $3 million we gave to the newly opened  SF Navigation Center  and $1.5 million to  affordable housing  for low income veterans and households in Mountain View.

Google is not alone in its efforts to improve housing supply in the Bay Area but, according to CityLab , this is "the single largest commitment by a private employer."

There's a lot of debate about the value of housing supply, alone. But in 2017, the Bay Area added 3.5x as many jobs as it did housing . I think most people would agree that's a suboptimal, and potentially unsustainable, mismatch.

Also, if large companies such as Google and Microsoft are making these sorts of investments, it is likely that they're worried about housing unaffordability impacting their ability to attract and retain top talent going forward.

Perhaps this is a signal for just how unsustainable this mismatch has gotten.