Hey there!
Something fascinating happened in Argentina’s housing market.
What happened illustrates why the U.S. housing market is at such a critical turning point …
… and why the solutions proposed in the U.S. Presidential election might be missing the mark entirely.
In Buenos Aires, the supply of rental properties surged by 211.9 percent, while rental prices (adjusted for inflation) fell by 26.6 percent, between December 2023 and today.
“Wait, what? How is that even possible?”
Here’s the thing:
One in seven housing units in Buenos Aires was sitting vacant. When the government relaxed certain rental restrictions (like caps on deposits and lease terms), these units flooded the market overnight.
Imagine discovering that while everyone struggled to find housing, your neighbors were hoarding empty apartments as inflation hedges. Oucchhh.
Here’s where it gets interesting:
The U.S. doesn’t have this massive stash of vacant units. Our occupancy rates are sky-high, and we can’t fix our shortage overnight.
Here’s why:
In the housing market, demand is like a jet ski – it can turn quickly based on interest rates, employment, migration patterns.
But supply is like an ocean liner – changes in direction happen very, very slowly.
Unless, of course, you have one of two scenarios:
- A huge stash of vacant housing being held off the market (like Buenos Aires)
- A massive economic shock that forces many properties onto the market (like 2008 – but that was unique)
We have neither. Instead, we’re dealing with structural supply constraints that started 38 years ago.
The Origin of Our Supply Crisis
The Tax Reform Act of 1986 completely reshaped how we build housing in America.
The Act made several changes that specifically targeted real estate development:
- It lengthened depreciation schedules for apartment buildings to 27.5 years
- It eliminated “declining balance depreciation,” meaning builders could no longer take larger deductions in the first year
- It limited tax deductions for passive losses
- It raised capital gains taxes on real estate sales
In plain English? The government made it much harder for developers to recover their costs when building apartments.
The result was dramatic: Multi-family construction plummeted from 515,000 units in 1985 to just 140,000 by 1991.
That’s not a typo. Multi-family construction dropped by nearly 75 percent in just six years because building apartments suddenly became far less financially viable.
And we’re still feeling the effects today.
This single piece of legislation, which passed 38 years ago, fundamentally altered how much multi-family housing gets built in America.
It’s a cornerstone of why housing is so expensive today.
Here’s what our housing market looks like right now:
#1: The “Lock-in Effect”:
About 70 percent of homeowners have mortgage rates that are two percentage points or more below current market rates.
Result? A 57 percent plunge in existing home sales last year pushed prices *UP* by 5 percent. (!!)
#2: The Construction Puzzle:
New construction is hampered by local zoning restrictions. Most cities still ban multi-family housing in huge swaths of residential areas. And building permits face endless bureaucratic hurdles.
#3: The Inventory Problem:
We’re not just low on homes – we’re low on the right kinds of homes. Multi-family units (which could help affordability) face the biggest constraints.
The homes that are being built tend to be larger, more expensive single-family units. Simply stated, it’s more profitable to build/flip a McMansion.
____
Argentina could solve their housing crisis quickly by relaxing regulations (the jet ski solution).
The U.S., on the other hand, has a long, slow slog ahead (the ocean liner).
Which brings us to the election …
Both candidates are proposing solutions to our housing crisis.
Interestingly, they actually agree on two major proposals:
#1: Opening up certain federal lands for housing development
#2: Streamlining regulations to make home construction easier
But here’s what’s fascinating:
When we look at what just happened in Argentina, we can see why these proposals, while well-intentioned, might miss the mark.
#1: The Federal Land Proposal
Location matters enormously, and neither candidate has been specific about exactly which lands, where. If these lands aren’t where people actually want to live (think: job centers, good schools), we’re not solving the real problem.
Building apartments in Boise won’t help affordability in Dallas, and vice versa.
#2: The Regulatory Streamlining
Here’s the thing – most of the regulatory red tape isn’t at the federal level. It’s local: city and county zoning laws, density restrictions, height limits, minimum lot sizes. The federal government has limited power to change these.
This means the candidates’ hands are tied. Other than tax reform, most meaningful solutions need to happen locally.
If we want to see meaningful change in housing supply (without needing Argentina’s vacant unit windfall), we need three things:
#1: Local-Level Reform:
- Zoning changes to allow more density
- Faster permit processing
- Fewer restrictions on multi-family housing
#2: Market Innovation:
- Support for accessory dwelling units (ADUs)
- New construction technologies and methods
- Creative financing options for developers
#3: Tax Policy Changes:
- Better depreciation schedules for multi-family construction
- Incentives for converting commercial to residential
- Reforms to encourage smaller, more affordable units
The first point happens at (duh) the local level. The second point happens in the private sector.
Only one of these solutions — tax policy changes — can happen at the federal level. Essentially, we need to reverse the damage done by the 1986 Tax Reform Act.
Yet neither candidate is proposing sweeping tax policy changes that would spur a massive groundswell of new construction.
What This Means for You
Here’s how to navigate this reality if you’re thinking about buying a home:
#1: Consider house hacking with a duplex, triplex, or 4-plex.
If you have – or want – a single-family home, look into building an ADU (also known as a guesthouse, casita, or in-law suite), or building an apartment into the basement/attic/garage.
This isn’t just about reducing your living costs. By creating additional housing units, you’re becoming part of the solution to our supply crisis. Win-win.
#2: Look for properties that could benefit from future zoning changes.
If there’s talk that a certain neighborhood might relax their zoning to allow more single-family homes to become duplexes, for example, then I’d favor buying a home in those areas.
#3: Don’t wait for some magical supply surge – it’s not coming like it did in Buenos Aires. This means prices will probably keep climbing.
And please don’t fall prey to the magical thinking that “prices have to come down because they’re already too high.”
I’ve heard this argument from dozens of people, who speculate that home prices will peak, and then recede, as buyers are increasingly unable to afford to purchase homes.
Well, I have bad news for those of you who are hoping for this outcome: it ain’t gonna happen.
As homes become unaffordable for individuals and households, they’ll increasingly get purchased by private equity groups, hedge funds and foreign investors.
This might seem counterintuitive.
After all, if homes are getting too expensive for Americans to buy, why would foreign investors want them?
The answer brings us back to Argentina, which had a jaw-dropping annual inflation rate of more than 230 percent as of August 2024.
When inflation is high, people convert cash into tangible assets: real estate, gold, art. People also flee into more stable currencies.
If you were battling 230 percent inflation in Argentina, wouldn’t you convert your money to U.S. dollars and buy American real estate?
Some foreign investors don’t calculate ROI in the same ways that we do. They’re not crunching the cap rate. They’re trying to hedge against inflation in their home country.
In fact, this is the reason why the Buenos Aires rental market had so many vacant units – property owners were treating real estate purely as an inflation hedge, rather than as income-producing properties.
This is why I’m a STRONG proponent of encouraging ordinary people to become mom-and-pop real estate investors, which is a million times better than Wall Street guzzling up the inventory.
If a tenant is going to rent from someone, wouldn’t you rather it be YOU? (Not Wall Street?)
The Bottom Line
The Argentina story shows us something crucial: Housing supply can change quickly – but only under very specific circumstances that don’t exist in the U.S.
Real change here will require fundamental policy shifts, most of which need to happen at the local level.
As we head into the election, remember:
While federal policy matters, your local government’s decisions about zoning, density, and development will likely have a bigger impact on housing in your area.
And as you think through your own homebuying and real estate investing plans, remember:
Thanks to the housing supply crunch, home prices are likely to keep climbing. Do with that information what you will.
