Wealth Growth During the Pandemic

In the US wealth distribution, which group has seen the largest increase in wealth during the pandemic? A recent working paper by Blanchet, Saez, and Zucman attempts to answer that question with very up-to-date data, which they also regularly update at RealTimeInequality.org. As they say on TV, the answer may shock you: it’s the bottom 50%. At least if we are looking at the change in percentage terms, the bottom 50% are clearly the winners of the wealth race during the pandemic.

chart created at https://realtimeinequality.org/

Average wealth of the bottom 50% increased by over 200 percent since January 2020, while for the entire distribution it was only 20 percent, with all the other groups somewhere between 15% and 20%. That result is jaw-dropping on its own. Of course, it needs some context.

Part of what’s going on here is that average wealth at the bottom was only about $4,000 pre-pandemic (inflation adjusted), while today it’s somewhere around $12,000. In percentage terms, that’s a huge increase. In dollar terms? Not so much. Contrast this with the Top 0.01%. In percentage terms, their growth was the lowest among these slices of the distribution: only 15.8%. But that amounts to an additional $64 million of wealth per adult in the Top 0.01%. Keeping percentage changes and level changes separate in your mind is always useful.

Still, I think it’s useful to drill down into the wealth gains of the bottom 50% to see where all this new wealth is coming from. In total, there was about $2 trillion of nominal wealth gains for the bottom 50% from the first quarter of 2020 to the first quarter of 2022. Where did it come from?

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Two Decades of Real Estate Data

Total spending on real estate construction has been rising since 2011. By 2016 it had reached its previous 2006 peak. However, total spending on *residential* real estate construction didn’t reach its previous 2006 peak until November of 2020. The graph below also includes the proportion of residential construction spending (Green). It has been rising since 2009. In and of itself, nothing is good or bad about this figure. We might be spending less on non-residential construction because we are getting better at using less land per unit of good or service produced. Or, it could be that our real investment in future production is falling relative to our current residential consumption.  Regardless, the share of residential construction hasn’t been at this level since 2003.

Importantly, the difference in spending has not been driven by different construction costs. Both residential and non-residential construction costs have moved in tandem since 2010. Therefore, the rise in residential construction spending is not merely nominal – a greater proportion of resources are being consumed by residential construction. Indeed, real residential construction is up about 25% from 2019. The figure below illustrates real residential and nonresidential construction.

That figure requires a double-take.

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I Miss Paying Rent

I’ve been a homeowner not quite long enough to watch the entire run of Parker Lewis Can’t Lose in one sitting, but I have already arrived at the incontrovertible conclusion that being a landlord is foolish. Renting is a blissful paradise that I am wistfully nostalgic for, a glorious time when I had only one job: feasibly above-average economist. Now I’m also the worst plumber, woodworker, mason, electrician, and landscaper I’ve ever met. To be clear, none of that is true. Rather, I am a poor home inspector and over-qualified errand boy who moonlights as the manager of a hastily assembled team of contractors to whom I write a litany of checks.

I know the rent is too d*mn high, but the interesting question is why? Thinking about high rise apartments, rowhouses, or detached homes, its seems pretty clear that there are significant returns to specialization and scale. Whether its 212 apartments or 25 detached homes, a team of salaried handymen, inspectors, and property managers offers considerable efficiency gains, a reality borne out by the inexorable rise of HOAs and their continuing growing reach into their constituents lives. But as anyone who’s ever attended an HOA meeting can attest, the limits to contracting and the value of our time provides the opportunity for an industrious individual or firm to bundle collective ownership and services into a single entity, selling the turnkey solution that is the modern rental residence, at considerable potential savings to the tenant in a competitive market.

So why are we so mad at our landlords? I see a couple possible answers:

  1. The rent isn’t too high, we’re all just greedy and would complain about the purveyor of any good that represented 40% of household expenses, regardless of how much value we were or were not receiving for the price.
  2. Landlords have considerable market power, allowing them to reduce supply and jack up the price, leaving us little recourse but to either nationalize housing or apply that sweet, never-ever-backfired rent control.
  3. The market is relatively well-functioning, but with incomplete contracts, leaving us all nervous that our tenants are going to bankrupt us while our landlords cast us out into the streets.

(1) likely has some behavioral truth to it, but isn’t a very satisfying explanation*, while (2) has likely more merit in the short run or in areas where landlords have solved their collective action problem sufficiently to stymie growth of the housing supply at every turn (<cough> San Francisco <cough>).

But perhaps (3) is underappreciated. Everyone who’s ever lived in a major city, especially when they were young, has a story about how they were screwed over by their landlord. At the same time, landlords (particularly smaller, independent ones) live in terror of tenants arriving at a cost-benefit conclusion that paying their rent is a suboptimal decision. Plenty of states and cities have enacted tenant bills of rights, creating considerable variation across states, often making it incredibly difficult and costly to evict someone. Regardless of state laws, however, I am comfortable saying without any evidence or additional research that landlords and tenants continue to have a strained relationship. Tenants think landlords are getting rich off their backs without any labor, only the property their wealthy parents no doubt handed them on a silver platter, property they themselves acquired by exploiting their employees while running a puppy mill. Landlords, meanwhile, find out real quick they’re not actually making that much profit trying to keep a home intact as their hippie tenants burn sofas and flush paper towels while the bathtubs been flooding the 2nd floor for a month.

The interesting question, to my mind, isn’t whether landlords are exploiting tenants or vice versa, but rather why have property tenant laws evolved to such an inefficient equilibrium, where there doesn’t seem to be any satisfied parties?** If no one feels protected by a contract, then it’s likely not a very good one.

* The behavioral answer in (1) shouldn’t be dismissed too quickly, to be fair. Given that size of rent as a fraction of most household budgets combined with profits to be had churning tenants in supply-restricted cities, its possible that all parties are constantly trying to scam each other, leading to the observed acrimony.

**Yes, I know people have become quite wealthy as landlords, but my read on that market outcome is not the profitability of property management but rather of property speculation, with equal parts winners and losers. Rental management is principally in service of subsidizing said speculation and lower property tax rates.