The World Ahead 2022

Will the world economy return to normal in 2022?

If it does not, a painful economic adjustment looms

Will the stagflationary forces acting on the world economy last? 

Throughout 2021, central banks and most economists have said that the factors causing inflation to rise and growth to slow would be temporary. 

Supply-chain bottlenecks would subside, energy prices would return to earth and the rich-world workers staying out of the labour force—for reasons nobody fully understands—would return to work. 

And yet as 2021 draws to a close financial markets, the public and even central bankers themselves are beginning to lose faith.

The dilemma facing policymakers is acute. 

The textbook answer to inflation caused by supply disruptions is to ignore it and let it go away on its own. 

Why damage economies with higher interest rates, which will not unblock ports, conjure up new supplies of natural gas or bring the pandemic to an end? 

In 2011 inflation in Britain rose to 5.2% as a result of rising commodities prices, but the Bank of England kept interest rates low.

In the euro area the European Central Bank raised rates, helping send its economy back into recession, and before long found itself with inflation well below its target. 

Like then, inflation in 2022 driven by high energy prices is likely to subside. 

(Inflation is the rate of change of prices, meaning that even if prices do not return to previous levels, merely not rising as quickly is enough.)

Yet the comparison with the early 2010s is inexact. 

The woes of global trade in 2021 have not just been caused by disrupted supply, such as covid-19 outbreaks shutting Vietnamese factories. 

There has also been excess demand. 

Massive fiscal and monetary stimulus, combined with social distancing, led consumers to binge on goods, from games consoles to tennis shoes. 

In the summer of 2021 Americans’ spending on physical stuff was 7% above the pre-pandemic trend. 

In other countries, too, there is only a shortage of goods relative to unusually high demand for them. 

For the world economy to return to something like normal, consumers need to spend more of their plentiful cash on services, such as restaurant meals and travel.

Unfortunately economies are plagued by shortages of workers needed for service industries to thrive. 

Wages in leisure and hospitality are soaring. 

Many economists hoped that workers would return as emergency support for labour markets, such as furlough schemes and emergency unemployment insurance, ended. 

So far there is surprisingly little sign of that happening. 

For inflation to be temporary, wage growth as well as price growth probably needs to fall. 

The alternatives are an unlikely surge in productivity, or lower profit margins, which for businesses such as restaurants are already thin.

Some monetary policymakers are beginning to fear the reverse: wage growth that continues to rise as workers come to expect higher inflation. 

The rich world has not seen a wage-price spiral since the 1970s, and doves argue that in economies without widespread unionisation, workers are unlikely to negotiate higher wages. 

But if rising inflation expectations do prove self-fulfilling, central banks’ job would suddenly get much harder. 

They would not be able to keep inflation on target without sacrificing jobs. 

Emerging markets are used to this painful trade-off between growth and inflation, but it has not bitten hard in the rich world for decades. 

In big rich countries, the Bank of England is the closest to tightening—purely to preserve the credibility of its inflation target, rather than because it is warranted by underlying economic conditions.

Central bankers in a tightening spot

It is easy to imagine monetary policymakers raising interest rates and coming to regret it. 

Though inflation will remain high in the early months of 2022, central bankers typically think it takes a year and a half for higher interest rates to have their full effect on the economy. 

The forces that previously kept global rates and inflation low—demographic change, inequality and rampant global demand for safe assets—may have reasserted themselves by then. 

Imminent fiscal retrenchment in many countries will help cool economies: Britain has announced large tax rises and President Joe Biden is struggling to get large spending bills through Congress. 

And slower growth in China, which is struggling with a property-market slowdown, could spill over globally.

Above all else, the pandemic is not over. 

The spread of the virus could yet disrupt economies once again if immunity wanes and new variants can evade vaccines. 

But with supply chains at their limits, the world cannot repeat the trick of maintaining economic growth using stimulus that shifts consumer spending towards goods. 

Instead central banks would have to choke off spending with higher rates to avoid excessive inflation while the supply-side of the economy adapts to patterns of spending and working that are vastly different from what prevailed in the 2010s. 

If normality does not return in 2022, the alternative is a painful economic adjustment. 

The Fed’s inflation miscalculations risk hurting the poor

The slower the response to increasing prices, the greater the threat of contractionary forces for the economy

Mohamed El-Erian 

The later the Federal Reserve is in easing its foot off the monetary stimulus accelerator, the greater the probability that it will have to hit the brakes more aggressively down the road © Reuters

Once again, a widely watched inflation data release surprises on the upside. 

Once again, the underlying drivers of inflation continue to broaden. 

Once again, it is the most vulnerable segments of the population that are hit hardest.

And once again, those who all year long have been characterising this inflation episode as “transitory” appear hesitant to revisit their convictions despite consistently contradictory data.

At one level, this hesitancy should not come as a huge surprise given the usual behavioural traps: in this case, they include inappropriate framing, confirmation biases, narrative inertia, and resistance to a loss of face. 

Yet, its persistence in the face of repeatedly contradictory data seriously increases the risk of otherwise-avoidable economic, financial, institutional and social damage.

According to the data released on Wednesday, US consumer prices rose 0.9 per cent in October alone, well above the median forecast of 0.6 per cent. 

This took the annual inflation rate to 6.2 per cent, again above the 5.9 per cent consensus expectation and the highest in 31 years.

Such unusually high inflation is likely to continue in the months ahead given price increases already in the pipeline. 

This week alone, the indices of producer prices in China and the US registered rises of 13.5 per cent and 8.6 per cent respectively.

Wage increases are also moving higher and, judging by the recent corporate earnings season, many companies are preparing for the underlying drivers — from supply chain disruptions, insufficient truck capacity and clogged ports to high freight rates and labour shortages — to last into next year.

It is not surprising that the run of recent months of persistently high inflation has started to change behaviour. 

Wage demands are going up across more sectors, as is the threat of strikes. 

Companies are feeling more comfortable about lifting their prices given robust demand. 

There are even indications of consumers bringing forward purchases.

Despite the trifecta of persistently higher-than-expected inflation, further price rises in the pipeline and changing behaviour, the inflation narrative is proving particularly slow to evolve at the US Federal Reserve. 

With that, monetary policy continues to fall behind realities on the ground.

The lack of a credible central bank voice on inflation also leaves markets in somewhat of a muddled middle. 

Witness the high volatility in government bond markets that is managing to whipsaw even the most sophisticated and seasoned investors.

Fed hesitancy is a material risk to economic and social wellbeing. 

I say this in the full knowledge that a lessening of the emergency-level monetary policy stimulus will not solve supply chain disruptions and labour shortages, the two major causes of accelerating cost-push inflation.

Yet the continued sidelining of the inflation threat by the Fed risks making things worse by de-anchoring inflationary expectations due to the persistence of extremely loose monetary policy, record easy financial conditions (according to the weekly Goldman Sachs index of them), and the lack of adequate forward policy guidance.

It will also bolster the view that the Fed is captive to financial markets, especially given its relatively lax regulatory stance, and insensitive to the continuous worsening in inequality.

There is a lot at stake here. 

The later the Fed is in easing its foot off the monetary stimulus accelerator, the greater the probability that it will have to hit the brakes more aggressively down the road. 

This would unnecessarily undermine an economic recovery that needs to be strong, inclusive and sustainable.

By undermining macro-economic stability, this would also make green financing and other climate initiatives harder to follow up on, and place more obstacles in the path of the Biden administration’s ambitious economic agenda. Inflation will continue to hit low-income households particularly hard. 

Already, surging food and petrol prices are taking big chunks out from household budgets.

The adverse risk scenario is also getting more worrisome. 

The more the Fed falls behind, the greater the threat of it being a driver of three of four simultaneous contractionary forces in the middle of next year if not earlier: higher interest rates, financial market instability, a reduction in the real value of household savings and the erosion of fiscal stimulus.

Should these materialise together — and the possibility is rising — the US economy would end up in an otherwise-avoidable recession, also dragging down growth rates in the rest of the world. While this would bring down inflation, it would do so at a huge cost.

This week’s inflation numbers amplify an alarm bell that has been ringing for a while. 

Let’s hope that, this time around, the alarm prompts the Fed into taking additional monetary measures, starting with an acceleration next month in the timetable for the tapering of large-scale asset purchases.

The good news is that there is still a window for an effective monetary policy adjustment. 

The bad news is that the window has narrowed and is becoming uncomfortably small. 

Failure to act promptly would turn the Fed’s increasingly discredited “transitory” characterisation from one of the worst inflation calls in decades to also a big policy mistake with widespread and unnecessary damage, particularly for the most vulnerable segments of society.

The writer is president of Queens’ College, Cambridge and an adviser to Allianz and Gramercy

Mall Stocks Are Back in Fashion as Shoppers Return. How to Play It.

By Sabrina Escobar Miranda and Logan Moore

The photographs throughout this story were taken at Tysons Corner Center, near Washington, D.C., on Nov. 6, 2021. The mall is owned by Macerich, which has seen its stock price nearly double this year. / Photograph by Scott Suchman

By the time the pandemic hit the U.S. economy, the outlook for Abercrombie & Fitch seemed dire.

Once a mall staple that captured the hearts and wallets of teenagers with stark, sexy advertising and dark, perfume-drenched stores, Abercrombie’s (ticker: ANF) stock price hit fresh lows in 2017. 

Shoppers’ distaste for the brand and a steady decrease in mall traffic clouded its future. 

Then, in March of 2020, the coronavirus began closing malls and stores across the country.

The retail apocalypse, it seemed, was about to claim another victim.

But something surprising happened on the way to the funeral: Abercrombie enjoyed one of its best years since its 2000s heyday. 

Under CEO Fran Horowitz, the company rebranded, putting out a more inclusive message and pivoting its focus toward young professionals while fine-tuning its Hollister brand for teenagers.

Revenue increased 24% year over year in the company’s fiscal second quarter ended July 31, and 3% from prepandemic levels. 

Its stock is up 120% this year as shoppers flush with cash flock back to stores.

“Perception of a brand is a hard thing to turn, and it takes time in order to build back trust with your consumer,” Horowitz says in an interview with Barron’s. 

“So, here we are happy to say in 2021 that we are seeing, obviously, the wonderful effects of all of that hard work.”

Abercrombie isn’t the only retail brand that is coming into a new period of growth. 

Over the past year, many of America’s retailers have not only clawed their way out of the abyss, but have harnessed macroeconomic changes ushered in by the pandemic to propel themselves into an unexpected renaissance.

Brands that successfully merged their bricks-and-mortar operations with digital strategies are seeing sales soar and stock prices rise, lifted by a strong market and consumers champing at the bit to spend their pandemic savings. 

The stock prices of many major mall-based retailers have soared, including Macy’s (M), Nordstrom (JWN), Famous Footwear parent Caleres (CAL), and Signet Jewelers (SIG), which all gained at least 100% in the past 12 months.

These companies are now poised to reap the benefits of a potentially record-setting holiday season. 

Consumers could spend $851 billion, a 9.5% increase from last year’s record $777 billion and more than twice the 4.4% average increase over the past five years, according to the National Retail Federation.

No one knows whether the party will last or whether these stores are simply capturing sales that would have happened in the future. 

Before retail sales normalize, companies need to navigate a host of supply-chain and inflationary pressures that could put a damper on holiday sales.

But the unexpected revival has reaffirmed the faith of many brands in the power of the physical stores. 

While still heavily investing in online operations, they are continuing to bet big on a bricks-and-mortar future. 

And as investments in physical stores continue, the demise of the bricks-and-mortar retailer that many once expected no longer seems so certain.

Wealthy households plan to spend an average $2,624 this holiday season, 15% more than last year. / Photograph by Scott Suchman

The pandemic wasn’t exactly ideal for retailers, but it offered some unique opportunities. 

The problems were obvious. 

People were afraid to shop in person. 

Shoppers—even baby boomers—flocked online in unexpected numbers. 

Retail behemoths such as (AMZN) and Walmart (WMT) saw their best year ever.

“The investor sentiment—especially from short term, hedge fund type investors—had just turned very negative on the group,” Columbia Threadneedle Investments retail analyst Mari Shor says. 

“I just think that investors weren’t really giving the companies, or the consumers, the benefit of the doubt.”

Shor says the doubt among investors was rooted in the notion that traditional retailers, both prepandemic and postpandemic, wouldn’t make it out alive.

But the pandemic gave retailers the rare chance to close poorly performing locations and focus on great ones. 

Many retailers also focused on getting better online, and shifted their sales strategies to target consumers wherever and whenever they wanted to shop—whether online, mobile, or in-store.

In one example of a company looking to fuel growth while connecting digital and in-store operations, the parent company of Saks Fifth Avenue spun out its e-commerce arm, which is now expected to go public with a target valuation of $6 billion.

Malls and physical stores are growing in popularity among digitally savvy teenagers and young adults. / Photographs by Scott Suchman

Such approaches proved critical. 

Online and other non-store sales are expected to increase between 11% and 15% this holiday season, potentially reaching a high of $226 billion, according to National Retail Federation estimates.

“We’d like to think that the pandemic not only accelerated the adoption of e-commerce around the world but also expanded the market,” says Pedro Palandrani, a research analyst at Global X who covers e-commerce.

Abercrombie invested hundreds of millions of dollars in its digital strategy, emphasizing smooth transitions from digital to in-store experiences with initiatives such as improving the company’s website and instituting in-store returns and pickups for online purchases. 

The arrival of the pandemic prompted Abercrombie to close 130 stores worldwide and 50% of the brand’s flagships, bringing total store closures in the past 10 years to about 500, while strategically opening a few key new stores, Horowitz says.

“Stores matter, but they have to be the right size, the right location, and the right economics,” she says. 

“You put that together with the digital and it equals magic.”

Not only are physical stores cost-effective ways to draw in-person shoppers, but they also can serve as crucial distribution centers for online pickups and returns, as well as local shipping, says B. Riley Securities analyst Susan Anderson. 

In recent years, even online retailers such as Warby Parker (WRBY) have expanded their physical presence to accommodate shopper preferences. 

“The consumer wants to shop when and where they want to,” Anderson says.

That behavior can evolve in unexpected ways. 

Malls and physical stores are growing in popularity among digitally savvy teenagers and young adults.

According to a survey of 1,000 shoppers earlier this year commissioned by BHDP, a design firm that counts retail among its specialties, 55% of 14-to-17 year olds say they are now shopping at indoor malls, and 90% plan to head to a mall in the next year. 

The 18-to-24-year-old shoppers surveyed are also back at the mall, trying on products, using in-store promotions, and making returns. 

Such shifts have led retailers to ditch old views and assumptions about specific demographics, says Rod Sides, vice chairman of U.S. retail and distribution at Deloitte.

The shifts in strategy during the pandemic put many retailers in a better position for the reopening of malls and downtowns this year—and shoppers were eager to open their wallets.

During the pandemic, some consumers became unexpectedly flush. 

They got stimulus payments, saved up from a decline in travel expenses, and saw the markets soar. 

Today, consumer savings at all income levels are at or near a record. 

Wealthy households are planning to spend 15% more than last year this holiday season, averaging $2,624 per household and driving much of the season’s growth, an annual Deloitte study found.

Brands that successfully merged their bricks-and-mortar operations with digital strategies are seeing sales soar and stock prices rise. / Photograph by Scott Suchman

“You got a lot of cash and there’s a fair amount of pent-up demand,” says Mark Zandi, chief economist at Moody’s Analytics.

Retail and food-services sales increased to an estimated $625 billion in September, up 0.7% from October and 13.9% year over year, according to the U.S. Census Bureau. 

Sales in retail alone rose 0.8% from August. 

“We were expecting that you’d see some pullback in September, and we didn’t,” says Citigroup economist Veronica Clark.

Retailers are much healthier than they were a decade ago heading into the holiday season, Matthew Shay, president and CEO of the National Retail Federation, said in a media briefing in October. 

A yearly Mastercard spending index forecasts U.S. retail sales to increase 7.4% this season, with significant gains in apparel, department stores, jewelry, and luxury items.

Luxury retailer Burberry Group (BRBY.UK), known for its tartan fabric and scarves, said this past week that comparable sales for its first half of fiscal 2022 rose 37%, and that full-price sales are growing at a double-digit rate. 

And Tapestry (TPR), the parent company of Coach, posted better-than-expected fiscal first-quarter earnings, raising its outlook for 2022 sales and profits.

Some analysts are bullish on the retail sector, with Cowen saying that “many of the luxury brands have successfully been able to take price increases and will likely benefit from the historically strong consumer balance sheets in the U.S. and internationally.” 

Wolfe Research favors Nordstrom and Tapestry, among others, with analysts writing in a note that “nearly all the major drivers of U.S. consumer spending favor the high end.”

Retail and food-services sales increased to an estimated $625 billion in September, up 0.7% from October and 13.9% year over year. Above, diners at Wasabi Sushi at Tysons Corner Center. / Photograph by Scott Suchman

Meanwhile, more Americans started coming out to the mall. mall-traffic statistics show that foot traffic for indoor malls was up 3% in October compared with 2019 levels, and traffic for outdoor malls was up 5%—one of the reasons mall stores are seeing their stocks soar. 

Simon Property Group (SPG), which owns the malls themselves, saw its stock gain about 90% in 2021.

“With the combination of more individuals becoming fully vaccinated, paired with many shopping early for the coming holiday season due to supply-chain concerns, we have seen a steady rise in foot traffic since July,” says Lindsay Petak, senior marketing manager for Tysons Corner Center in the Washington region. 

The mall is owned by Macerich (MAC), which also has seen its share price nearly double this year.

All of this added to a stock run-up for the ages for beaten-down retailers. 

Over the past year, the SPDR S&P Retail exchanged-trade fund (XRT) was up 85%, while the S&P 500 rose 33%. 

The Invesco S&P 500 Equal Weight Consumer Discretionary ETF (RCD) has outperformed the S&P 500 by five percentage points this year, a sign that investors remain bullish on retail sales.

“We’ve seen department stores and apparel and discretionary retailers really bounce back as soon as the economy reopened,” the NRF’s Shay says. 

“Department stores are always a popular destination for the holiday season, based on the consumer survey work we do....

They continue to be at the top of the list of the places people shop this year.”

All that said, analysts and investors alike remain confident of the role physical stores play, which might look different from their online counterparts, but they’re here to stay.

The verdict on whether the retail renaissance is sustainable in the long term isn’t in yet. 

Retailers are operating in a macroeconomic environment far from the norm, making any guesses even more speculative.

“I don’t think we have normal insight yet because there are just too many complexities throughout the business right now,” says Jefferies analyst Janine Stichter.

Macy’s is among the mall-based retailers that have seen their stocks gain at least 100% in the past 12 months. / Photograph by Scott Suchman

Companies are struggling to manage ongoing supply-chain concerns, inflationary pressures, and a persistent labor shortage, which are likely to bite into earnings despite all signs pointing to a strong holiday quarter. 

“The supply-chain issues, they’re real,” Horowitz says.

Abercrombie is assuming a modest impact on sales due to supply-chain constraints, with even bigger impacts coming from freight inflation, the company said in its second-quarter earnings call.

To ease supply-chain pressures, retailers are encouraging consumers to start their shopping early—a trend that could skew end-of-year sales data, Citigroup’s Clark says. 

If shoppers pull their gift-buying forward, there could be a decline in November and December compared with previous years. 

“It’s not necessarily that spending is much weaker; it’s just that the distribution over months is different,” she says.

On the flip side, low inventories will give retailers higher pricing power that can help offset supply-chain disruptions, Stichter says. 

While beneficial to retailers, this could drive prices up even more, says Sasha Tomic, an economist at Boston College.

Whatever the risks, strong performance won’t last forever, says Matthew Forester, chief investment officer at BNY Mellon’s Lockwood Advisors. 

“The U.S. economy, overall, is clearly slowing down,” he says. 

“And we’re going to slow down into the next year. 

Plus, as we get back to trend growth, that’s just what’s likely to happen.”

The economy will eventually exit its euphoria as stimulus continues to dwindle, he says. 

And while the comedown might not be “terrible,” he says, it will still be a decline from where consumer spending is now.

Abercrombie, though, is powering through the headwinds with the help of its bricks-and-mortar stores. 

The company is planning to position more inventory in stores, and is routing e-commerce orders to stores as well as partnering with Uber, Shipt, and Postmates to offer same-day delivery.

To ease supply-chain pressures, retailers are encouraging consumers to start their shopping early. / Photograph by Scott Suchman

Other retailers have taken supply-chain solutions in their own hands. 

Specialty-apparel company American Eagle Outfitters (AEO) recently announced it was acquiring Quiet Logistics, an operator of automated distribution centers near city centers, just weeks after it bought AirTerra, which focuses on middle-mile logistics—the delivery of products from a warehouse to a retail store.

“We’re going to just continue at it,” Horowitz says.

As retailers forge ahead, doomsayers might have to hold off on heralding a retail apocalypse. 

For now, the sentiment is clear: Consumers are rediscovering the joys of bricks-and-mortar shopping. 

The mall has become cool again.


Minimum wage, maximum rage

A fight about worker pay pits a Scandinavian duo against the rest of the EU

Everyone wants to be a little bit Danish. 

Hygge, a sense of Nordic contentment attained via baking, candles and good company, became the philosophy du jour during lockdown. 

Danish dramas win garlands, while its comedies contain jokes so enjoyably dark that viewers may worry about finding themselves on a Europol watch list. 

Even Danish semen has become a booming export, thanks to the country’s combination of liberal rules for donors and reputation as a small nation of tall hunks.

But it is the Danish labour system that attracts the most plaudits. 

Leftists drool over a model that sees burger flippers in McDonald’s paid the equivalent of $22 per hour. 

Those on the right marvel that the country has no statutory minimum wage. 

Instead, employers and stakeholders sit down together and hammer out collective agreements that cover most workers. 

It is the same in neighbouring Sweden. 

Employees benefit from wages and benefits that are among the most generous on the continent; employers can hire or fire with ease during boom or bust. 

Denmark and its Scandi neighbours manage to be both a worker’s paradise and a capitalist’s dream.

Telling Scandinavians how to run a labour market is akin to teaching the French how to bake baguettes. 

Yet this is the position in which the Nordic countries have found themselves. 

Ursula von der Leyen, the president of the European Commission, wants all workers to be covered by a minimum wage, whether through national law (as in most of the club) or through collective agreements (as in Scandinavia). 

Proposals that will see the topic of minimum wages dragged into eu law are being negotiated among meps and national governments.

At first glance, Denmark and Sweden have little to worry about. 

A common minimum wage is not on the table. 

Indeed, that would be impossible for a club that includes Luxembourg, whose minimum wage is €2,202 per month ($2,550) and Bulgaria, where it is €332. 

According to the eu’s own treaties, only national governments can set a minimum wage. 

Indeed, the commission came to praise the Scandinavian system, not to bury it. 

It would rather everyone looked a bit more like Sweden or Denmark, with collective agreements galore.

Instead, the commission wants to shape how national governments guarantee decent wages, rather than to set their level. 

Under its proposals, countries would still be in charge of the details. 

Those with statutory minimum wages would be forced to ensure these are adequate when measured against average incomes. 

For those without a minimum wage, a group which includes Italy, Austria, Cyprus and Finland as well as the Scandinavian duo, the commission wants at least 70% of workers to be covered by collective agreements—a hurdle that the Scandinavians already meet.

Yet the Scandinavian duo are still fretting, and with some cause. 

All legislation comes with unintended consequences, particularly at the European level, where the European Court of Justice is a player as much as a referee. 

In Sweden about 60% of collective agreements do not include a minimum wage, points out German Bender, an analyst from Arena Idé, a Swedish think-tank. 

With eu law now encompassing minimum-wage rules, legal challenges would become possible. 

And peculiar things can happen. 

A case in the 1960s involving an unpaid electricity bill worth a few lira ended up establishing the primacy of eu law, which means eu rules trump national ones if the two clash. 

The so-called “no bailout” clause in the eu’s treaties did little to stop a series of bail-outs. 

A single judgment might upend the Nordic labour model.

When proposals start rolling, they are tricky to stop. 

Employment legislation gets agreed by a qualified majority of governments, so vetoes do not apply. 

Usually, though, the eu avoids topics that are sacred to national governments. 

Pleas that legislating—rather than issuing suggestions—on minimum wages violates the Scandinavian principle of no government interference in wage-setting fell on deaf ears. 

Denmark and Sweden “yellow-carded” the proposal for a directive on minimum wages, a formal protest, but to no avail. 

In the eu’s ministerial council, where national governments haggle over a position, the lawyers say it is perfectly legal. 

The French government, which will shepherd negotiations on the topic from January, is keen to get it done sharpish.

Beyond the bare minimum

New rules on minimum wages are only the beginning of a wider push on workers’ rights at the eu level. 

Laws to make pay transparent have been put forward by the commission. 

Proposals on how countries must treat “platform workers”—such as Deliveroo riders and Uber drivers—are in the works. 

For some it is a welcome shift in eu policy. During the austerity years governments were to be lean and mean. 

Angela Merkel was fond of noting that the eu was 7% of the world’s population, a quarter of its economy, but about half of all its welfare spending. 

Today, the tune has changed. 

Generous welfare states and high worker protections were once held to be the cause of the eu’s woes; now they are the solution.

For the Scandinavians, this shift is cause for concern. 

Their system is not broken, yet the eu insists on fixing it. 

There is little scope for dodging the legislation. 

Denmark has an opt-out on the euro, as well as on European laws on justice and home affairs. 

Sweden is in theory obliged to join the euro eventually, but uses a loophole to cling on to its krona. 

Such derogations are a thing of the past, however, and of no help in the present case. 

Europe is no longer à la carte. 

Systems that work well, such as those of Denmark and Sweden, may have to change in order to help systems that work less well, such as those of Cyprus or Italy. 

“United in diversity” is the eu’s slogan. 

But unity increasingly trumps diversity as the eu delves ever further into the lives of its citizens. 

Everyone wants to be a bit like Denmark. 

But Denmark may soon start to resemble everywhere else.

Will Real Estate Ever Be Normal Again?

In Austin and cities around the country, prices are skyrocketing, forcing regular people to act like speculators. When will it end?

By Francesca Mari

Credit...Photo Illustration by Dan Winters

The third time Drew Mena’s manager asked him about relocating to Austin, Texas, he and his wife, Amena Sengal, began to seriously consider it. 

They had deliberated each time before, in 2017 and 2018, but landed on a hard no: Drew and Amena had lived in New York for more than 10 years, and they loved it. 

They owned a two-unit townhouse in the Bedford-Stuyvesant neighborhood of Brooklyn, and they felt lucky to have it, with its yard and the kind of close-knit neighbors who compete to shovel one another’s sidewalks after a snowfall.

But now it was August 2020, and the pandemic had changed their calculus. 

When the city shut down, their daughter, Edie, was 7 months old; Drew and Amena co-parented while working full time, one at the kitchen island, the other at the breakfast table. 

In May, they escaped to Drew’s family’s cottage in New Hampshire, and gradually their tether to the city began to fray. 

When the relocation offer came in from Drew’s employer, an asset-management company, they started browsing listings online, and it looked as if they could get a lot more space in Austin. 

They would certainly save money on everything else, like gas and groceries. 

The world is ending, they said to themselves. 

Why the hell not?

Amena, who was born and raised in Houston and attended the University of Texas at Austin, called her parents to solicit their opinion. 

They were so thrilled at the thought of her return that they suggested she consider buying, and offered to help with the down payment. 

They could all share the home as an investment property if Drew and Amena moved on. 

Amena crunched the numbers and quickly realized a truth about America: Thanks to persistently low interest rates and tax policies that favor the rich, you can almost always get more space with a mortgage than with the same amount in rent.

So she threw herself into the search with zeal. 

She mapped commutes to Drew’s new office downtown; she found a dozen preschools she liked, and video-toured more than half of them. 

In her mind’s eye, she drew a backward C around central Austin, cutting out downtown and the expensive west side. 

Their maximum budget was $550,000, $575,000 tops. 

They were looking for a house that was move-in ready, maybe around 1,500 square feet overall, with three to four bedrooms, two baths and a shed or office space for Amena in the backyard — she planned to keep her New York job in education policy and telecommute.

She reached out to John Gilchrist, a close friend from college who was now a real estate agent and, in January, he began taking her on up to four FaceTime tours a day. 

In the background, she could see other intent buyers, masked but often encroaching on one another. 

She could sense quality, but scale was harder to discern. 

“How many paces is that?” Amena would ask Gilchrist. 

“Can you put your hand in that sink? 

It looks tiny.”

The day that she and Drew were scheduled to fly to Austin for house-hunting, at the beginning of February, New York was buried in snow and flights were being canceled, so they opted to reschedule theirs. 

Feeling stranded and agitated, Amena began bidding on houses. 

There were two for sale in Johnston Terrace, on Emmitt Run, on the same block as Amena’s best friend from high school. 

Both were two stories and 1,700 square feet. 

One, listed for $437,700, was a bouquet of beiges — beige interior and exterior paint, beige carpets, beige linoleum floors and beige oak cabinets. 

The other, listed for $50,000 more, was being remodeled by its owner and his friends: modern gray paint, white cabinets, dark wood luxury vinyl plank. 

“We’re all putting lipstick on a pig trying to get our houses sold,” the owner told me.

Amena bid on the beige, imagining she’d use the extra money to do her own remodel. 

It went under contract for $45,800 over the asking price, or $43,500 more than her bid. 

A few days later, Amena bid on another home she’d been dying to see on their trip, a black-and-white ranch house in South Austin listed at $460,000. 

At the urging of Gilchrist, who told her how tight the market was, she bid more aggressively, offering $495,000, and was chagrined when she lost that house too.

For Amena and Drew, their Austin home-buying odyssey was just beginning — a monthslong ordeal that would teach them quite a bit about the cruel realities of America’s housing market, in which home prices nationwide have risen by an astonishing 24.8 percent since March 2020. 

And this first lesson, appropriately enough, demonstrated just one of many ways that the old, measured rules of home-buying no longer applied — that the cutthroat competitiveness that once defined only a few U.S. markets (San Francisco, New York, Los Angeles) had now become standard across the country, as the median home price in small- and medium-size metropolitan areas rose by jaw-dropping levels: Boise, Idaho, 46 percent; Phoenix, 36 percent; Austin, 35 percent; Salt Lake City, 33 percent; Sacramento, 28 percent.

By bidding on two properties she had never visited, in a city nearly 2,000 miles away, Amena joined the 63 percent of North American home buyers in 2020 who made at least one offer on a home that they had never stepped into. 

Homes had been one of the few things resistant to online shopping: We browsed online, but we didn’t buy. 

The pandemic changed that. 

The result was a market that moved much, much faster.

What Amena and Drew would ultimately learn about Covid-era real estate was not just the necessity of raising their budget and lowering their expectations. 

It was also that the whole mind-set required to buy a house, the most important purchase that most Americans will ever make, had undergone a fundamental transformation — possibly a long-term one, given the realities of both supply and demand. 

Freddie Mac estimated at the end of 2020 that the United States was 3.8 million housing units short of meeting the nation’s needs. 

Combine that with the surge of millennials into the housing market — they represented more than half of all mortgage originations last year — as well as the insatiable appetite of investors, who now snatch up nearly one in six homes sold in America, and the contours of a new, lightning-fast, permanently desperate housing market come clearly into view.

“It’s so irresponsible,” Amena lamented, when discussing those first, remote bids they made, and Drew chimed in: “In a normal market you would never do that.” 

By “normal,” Drew meant a time when a home buyer could tour a house in person, mull it over, go back a second time with her parents or friends and then make an offer with time for an inspection and an appraisal. 

But there’s reason to fear that America’s real estate market, after passing through the pandemic madhouse, might never get back to that kind of normal again.

A housing development in Southeast Austin. Credit...Dan Winters for The New York Times

Several Austin real estate agents told me the same story about when the “flip switched” during Covid: a sale on Ephraim Road, in the suburb of Brushy Creek, on New Year’s Day 2021. 

The house was “well cared for,” a buyer’s agent told me, but “nothing out of the ordinary”: two stories in brick, with a large arched window — the sort of place one of Tony’s underlings might own in a Texas spinoff of “The Sopranos.”

It was listed on Dec. 30, 2020, for $370,000, and it seemed like mere minutes until buyers and agents began lining up in the bitter rain to tour the house one by one, a process that took hours. 

Agents texted Google Maps screenshots to one another, noting the red traffic jams around the property. 

By the 11 a.m. deadline on New Year’s Day, the house had received 96 offers, with the winning bid clocking in at $541,000 — a mind-boggling 46 percent above asking. 

“Just when you think you know a lot about real estate, you realize you don’t know anything,” the listing agent told me. 

“The market shifts and keeps shifting.”

Austin real estate has been hot for years. 

Over the last decade, an average of more than 100 people have moved into the area every day. 

But 2020 broke the levees. 

In July, Tesla announced it would build an auto plant in Austin. 

Facebook and Apple, meanwhile, were expanding their local campuses. 

All were attracted by Texas’ lower cost of living and business-friendly tax and regulatory environment.

In December, the database giant Oracle said it was moving its headquarters from California to Austin. 

That month, the median sales price for homes in the Austin metropolitan region was up 23.7 percent year-over-year. 

“Before the pandemic, you would see a line of 20 people standing outside a restaurant downtown,” Albert Saenz, who has been a real estate agent since 2003, told me at the time. 

“Now you drive downtown, there’s nothing happening. 

But out in the suburbs, you see lines of 20 people waiting to see a house.”

The last time U.S. housing saw such rampant price growth was in 2005, and the market corrected itself, infamously, in 2008. But the underlying reality today is different. 

Back then, a geyser of subprime adjustable-rate mortgages sputtered out as borrowers defaulted. 

(According to Bloomberg News, 60 percent of mortgages during the bubble years were adjustable rate; fewer than 0.1 percent of mortgages are now.) 

The current boom is better compared to a river, one fed by streams that have long been visible on the horizon: high demand, low supply and a dysfunctional economy in which wages are stagnant while restrictive zoning and poor public policy have turned housing into an artificially scarce commodity. 

Historically low 30-year fixed mortgage interest rates, hovering between 2.68 and 3.08 for the last year, are narrowing the riverbed, quickening the current.

After a decade of too little development, the pandemic made the low inventory lower. 

Construction stopped. 

Sellers, afraid of inviting the virus into their homes or reluctant to move in uncertain times, didn’t list, and inventory declined by nearly a third from February 2020 to February 2021, falling to the lowest level relative to demand since the National Association of Realtors began record-keeping almost 40 years ago. 

At one point in January 2021, the month the Ephraim Road sale broke everyone’s brains, Austin had just 311 homes listed for sale; in a normal month, the number would be 5,000. 

An estimated 65,000 starter homes were completed nationwide in 2020, less than a fifth of the number built annually in the late 1970s and early 1980s. 

A typical home listed for sale on Zillow was available for a median of 14 days in December 2020, compared with 33 days the year before. 

Now it’s nine.

As the pandemic made the poor poorer, meanwhile, it made the rich richer. 

Homeowners, already more than 40 times as wealthy as renters, were more likely to keep their jobs, profit from the stock market and have enough savings to take advantage of low interest rates.

Then there’s the role played by investors and speculators. 

Large corporate and Wall Street landlords, like Invitation Homes, American Homes 4 Rent, BlackRock and Blackstone, are arguably the most toxic players, driving up rents in the select markets they saturate, lobbying for corporate tax cuts and fighting tenant protections. 

But a majority of investment buyers are smaller companies and individuals: mom-and-pop landlords, tech workers looking to diversify their portfolios, teachers who supplement their paltry paychecks by Airbnb-ing properties on the side. 

The ease with which they can access credit strains the market and drives up prices. 

Those effects are likely magnified when investors target homes in cities less expensive than the ones in which they live, whether they’re Chinese investors in California or Californian investors in Texas.

Perhaps the most important factor driving the new housing market is demographic inevitability. Millennials — the 72 million Americans born between 1981 and 1996, including Amena and Drew — are aging into their prime home-buying years and belatedly entering the market. 

This has been made possible in part by a recent rise in wages, after years of stagnation. 

Even so, millennials, many of whom came of age during the Great Recession, will probably never make up all those lost earnings from their early adulthood. 

Now the largest living generation, they control just 4 percent of America’s real estate equity; in 1990, when baby boomers were a comparable age, they already controlled a third. 

What’s more, because of the financialization of housing, millennials need more savings or to take on greater debt to buy a house than previous generations did. 

The end result is that millennials buying their first home today are likely to spend far more, in real terms, than boomers who bought their first home in the ’80s.

Given these handicaps, they have to approach things differently, and that’s changing real estate, too. 

In a housing market riddled with speculators, the only way millennials can break in and compete is by acting like speculators themselves.

Stephanie Douglass, a former fourth-grade teacher turned real estate agent and investor and home-buying instructor.Credit...Dan Winters for The New York Times

Back in 2012, Stephanie Douglass greeted a new East Austin neighbor in her usual manner, with a tin of pecan sandies. 

The woman who opened the door reminded Douglass of herself: cute and casual and blond. 

Except while Douglass was teaching fourth grade and bleeding away half her earnings on rent, this woman, just a few years older, had bought her house, and was building equity. 

As a math teacher, Douglass could crunch the numbers.

Shortly afterward, Douglass, who was 24 and had $35,000 worth of student loan debt, bid on nine houses in East Austin before winning one so far east it was almost outside the city: $180,000 with 5 percent down. 

Her friends thought she was nuts, planting roots at such a young age, but she fixed up the home herself; to cover half her mortgage, she rented the second bedroom to a friend from grade school in Houston. 

When Douglass moved in with her boyfriend, she rented out her whole house, and when the relationship ended, in 2016, she told her mom that she didn’t want to waste money renting until her tenants left. 

They decided to buy a bungalow together and found one with popcorn ceilings and terrible wood paneling that would accept a 5 percent down payment. 

They spent July and August sharing a mattress on the floor and fixing up the place themselves.

Douglass loved her fourth graders, but not the way she loved her houses. 

At the end of summer, she dreaded returning to school, dreaded waking at 6 a.m. to work from 7 a.m. to 5 p.m. 

“Remodeling this house was the first time I had been passionate about anything,” Douglass told me.

She was a high achiever, but she had fumbled through college looking for a sense of purpose. 

With real estate, “I’d figured out how to take control of my life, and it was insanely exciting. 

I thought, This is cool, and everyone needs to know there’s another way.”

That same year, she got her real estate license and moonlighted as a sales associate, soon earning more than $100,000 annually in commissions. 

Her closest friends, who once thought she was crazy, now saw her as their financial guru. 

They began to follow in her footsteps — using her as their real estate agent, of course. 

Six of them now own homes within a mile and a half of her in East Austin; four of those friends, all under age 35, own at least two properties. 

“We wouldn’t be able to stay in the city if we hadn’t bought,” Douglass told me. 

She has invested in 13 properties around Austin, often adding additional units. 

Her mother, Meshelle Smith, oversees 10 of them as Airbnbs. 

(Smith quit her teaching job to found an Airbnb management company, which has 51 listings.) 

Douglass’s passive net cash flow is $14,000 a month, and her net worth exceeds $3 million.

In 2017, Douglass had what she calls “the best first date ever” with Kristina Modares, a real estate licensee and investor who messaged Douglass on Instagram after following her home-renovation posts. 

They talked for seven hours and over the next few months decided to found an agency focused on the clientele they were already serving, clients most Austin agents don’t want to touch: first-time buyers looking at homes under $200,000 or $300,000. Douglass quit teaching, and in June 2019, they opened their agency, Open House Austin, with a party at their office, a once-derelict commercial property on the east side that they (of course) bought and renovated themselves. 

In 2020, Douglass and Modares started offering Homeschool, a self-directed, six-week course (“The Surprisingly Simple Path to Buying Your First Home With an Investor Mind-Set — Even if You Know Nothing About Real Estate”), which quickly sold out. 

Amid the economic turmoil of 2020, Open House sold 101 homes to millennials and earned a million dollars in net profits.

On a recent Wednesday evening, Douglass and Modares logged on to a video chat to answer questions from their third Homeschool class, a group of 30 students from across the country, almost entirely millennials and younger. 

It was the first meeting, which called for an icebreaker. 

“What is your first item you want to buy in your new house?” Kristina Modares asked. 

“Or first renovation,” Douglass added.

“I live in the Washington, D.C., area, in the suburbs, in Maryland, currently at my childhood home,” a young woman said. 

“Hopefully temporarily, but then we had a pandemic, so I was sort of stuck here. 

I’ve been looking to buy for a long time, looking to stay in my area and just find a house and a yard. 

The first thing I want to get is a dog.”

Another woman said that she and her husband lived in San Francisco but were originally from Fort Worth; they were torn about whether to buy in the Bay Area or in Texas near most of their friends and family. 

“We are in a super, super small apartment in San Francisco, so I imagine we’ll have to buy a lot of furniture.”

Another attendee, a local, said, “I’ve always dreamed of building a little ‘catio’ for my cat, so that she can just go outside safely whenever.”

Most of the students found Open House through word of mouth or social media, and they signed up for the class ($979 for the homeowner track, $1,697 for investors) because they were intimidated by the market. Open House has more than 8,600 Instagram followers and 41,800 on TikTok. 

In one TikTok post with 1.1 million views, Modares acts out “Your parents buying a house VS You buying a house”:

MOM [Modares in ’80s glasses and a gray blazer]: Well, you’re definitely going to have to save 20 percent for your down payment.

DAUGHTER [Modares in a black tank]: I don’t think so. I talked to my lender, and they said actually I could put 3 percent down.

MOM: Me and your father have been living there for 30 years. It’s a big commitment.

DAUGHTER: Yeah, wow, so I’m actually going to live here for maybe two, three years tops, and then I’ll probably rent this out on Airbnb.

MOM: Well, don’t you think you should be married before you buy your first house?

DAUGHTER: No, I got preapproved on my own. I’m actually going to house-hack, and my whole mortgage payment will be covered by someone else.

MOM: [Looks puzzled at the phrase “house hack”]

DAUGHTER: [holds up a sticker that reads, “Houses before spouses”]

Joking aside, the skit encapsulates a truth: Much of Open House’s messaging nudges buyers to think beyond the traditional path of homeownership, built on long-term investment in one home. 

Instead, they encourage first-time home buyers to start as early as possible with whatever they can afford, typically small or farther-out homes chosen primarily for their investment potential. 

Open House advises buyers to use credit to leverage whatever they have to bet on appreciation and swiftly vault themselves into better and better homes in different budget brackets.

House hacking, cash flow, passive income, financial independence: These are the buzzwords, but they aren’t new concepts. 

This is the natural culmination of the way in which housing has been transformed into an investment vehicle over the last 50 years — and it’s a recognition of the economy younger generations have inherited.

An East Austin home under renovation by Douglass and her family.Credit...Dan Winters for The New York Times

When Amena and Drew finally made it to Austin on Thursday, Feb. 11, they brought Snowmaggedon with them: sleet, snow, freezing temperatures and statewide power failures that amounted to one of the costliest disasters in Texas history. 

“We thought: We’re rugged New Yorkers. 

No one else wants to drive on this ice, but we’ll do it as a competitive advantage,” Drew told me. 

Gilchrist had scheduled more than 20 showings, and so on that first weekend, as the state froze, they saw as much as they could, including trendy new houses and the Emmitt Run home being remodeled by its owner and his friends. 

It was weirder in person. 

Drew said they built the base of one vanity out of two-by-fours. 

“And then just like slapped the sink on top of it. 

It wasn’t even sanded.”

But by Sunday, much of the city lost power, including the friends they were staying with. 

They moved in with friends at a different house — which lost power an hour later. 

Everyone slept in the dark, and the next day they trucked over to a third friend’s house. 

The kitchen was being renovated, and they were washing dishes in the tub, but it had a hot plate and heat.

One of the last homes Amena and Drew were able to visit was a powder blue condo on a street crammed full of identical homes. 

It retained power because it was on the same grid as a major hospital. 

Driving up to the address, Malvina Reynolds’s “Little Boxes” played in Amena’s head: “Little boxes on the hillside,/Little boxes made of ticky tacky,/Little boxes on the hillside,/Little boxes all the same.” 

“It was just like, Oh, my God, they’re all the same! 

But it was fully done, had the backyard, had all of the space and the rooms that we wanted, had a loft upstairs for me to have an office plus a guest bedroom and a room for the baby and the master,” Amena told me.

As night fell, Amena submitted three offers on her phone: on the powder blue little box; on a 2005 home that felt too far south but was across from a good Montessori school; and on an East Austin condo from 2006 with concrete floors that reminded Drew of the Greenpoint loft apartment they once rented in a former pencil factory. 

Doing three at once “felt so reckless,” Amena told me. 

But they weren’t the only ones submitting simultaneous offers — a taboo during “normal” times. 

The highest offer on the first house they bid on, the black-and-white ranch house in South Austin, fell through within an hour of execution, because the buyers learned they were also the highest bidders on another home that they liked better. 

“People kind of just started losing their minds: ‘I’ll offer whatever it takes,’” the listing agent, Ashley Tullis, told me. 

“We learned some big lessons about the buyer’s remorse.” 

As a consequence of backing out, the buyers lost their option fee, a sizable $3,000 (before 2020, a typical option fee was $500 or less). 

But such was the price of playing in this market.

On their simultaneous bids, Amena and Drew never went more than 8 percent over asking price, and they returned to New York having lost out on all three. 

Amena began to panic. 

The second house they considered on Emmitt Run, the one with the homemade vanity, erupted in flames during its inspection, injuring the inspector. 

The buyers pulled out, and it was taken off the market and re-listed, a month later, for nearly $50,000 more. 

It was hard to imagine a better metaphor for their search: Austin real estate was literally on fire. 

(The house sold above listing price, after again receiving multiple offers.)

By the end of February, Amena and Drew realized that if their budget was $550,000, they had to look at houses listed for $400,000. 

“Turnkey” — move-in ready — properties in central Austin were out of reach. 

For a brief moment, they sought homes needing a gut renovation. 

But anything less than $300,000 was inevitably being hoovered up by some investor paying all cash. 

Frenzied buyers were waiving their inspection periods and their appraisal contingencies, meaning they were contractually committing to buying homes even if their lender wouldn’t cover the full price. 

And the market was moving so fast that this had become a real risk: Prices from a month before — generally the most recent data available to appraisers — were already outdated, leaving buyers scrambling to make up gaps of as much as $100,000. 

Others buyers were offering absurdly large option fees (say, $10,000) that they wouldn’t get back if they canceled the contract.

Amena began bidding on any house that seemed acceptable, click-click-clicking through DocuSign at 11 p.m., exhausted, right before falling asleep. 

Homes blended together. 

A 1949 bungalow, totally renovated, in East Austin. 

A fixer-upper owned by a professor of Russian literature at U.T. A handful of other 1950s ranch houses in Windsor Park. 

Amena was offering between $40,000 and $95,000 over asking. 

A squat yellow home from 1977 stood out because of its location on Duval Street, walkable to the coffee shops and vintage stores of North Loop. 

But the one that most seized Amena’s imagination was a 1955 home on Westmoor Street, brick and wood that was painted purple, green and blue, like a preschool. 

“It was a mess of a place — we would have to do everything over — but it was huge and beautiful in terms of its potential,” Amena told me. 

It was listed at $375,000, and she bid $400,000, needing to reserve cash for renovations. 

In her love letter to the seller, she wrote, “You will probably be offered all cash by someone, but please don’t take it.” 

Amena and Drew couldn’t bail on Austin. 

Drew had signed a contract, and they’d rented out their New York apartment.

“More bad news, my friends,” Gilchrist texted. 

“We got passed over for Duval and Westmoor. 

Westmoor acknowledged how brutal the market is with an apology, and Duval said they got 28 offers.” 

Westmoor got 27.

“This is market is no fun,” the Westmoor listing agent told me. 

“People think that realtors are making money hand over fist, but that means 26 realtors didn’t get to feed their families.

“My client had a big heart and was sentimentally attached, but the less risky bids for her were cash and no contingencies,” the listing agent continued. 

“This was her nest egg.” 

She chose an all-cash bid from a buyer planning to tear down her house and rebuild.

At this point Amena and Drew were on their 10th failed bid. 

“It’s like a danceathon,” Drew told me. “Last person standing wins.”

Matt Holm, who describes himself as Austin’s “Tesla realtor.”Credit...Dan Winters for The New York Times

Often, the person still standing was that most hated figure in the Austin real-estate market, the California investor. 

The winning bidder for Ephraim Road, for example, was Michael Galli, a Silicon Valley real estate agent. 

“Here’s the interesting truth,” he told me. 

“I’ve never been to Austin.” 

He toured the Ephraim Road house on FaceTime.

In 2019, Galli decided he wanted to diversify, so he spent eight months studying cities online and kept coming back to Austin. 

It had high-income job growth and an influx of venture capital, the very things that had made Bay Area real estate so lucrative. 

Galli bought a large map of Austin and mounted it on the wall, studying it in the evenings with a glass of red wine in hand. 

He stuck Post-its onto points of interest: Apple, Samsung, Tesla, new transit lines. 

He believed he understood what tech workers wanted: spacious feng shui- and Vastu-compliant homes, with a bedroom on the first floor to accommodate foreign parents on long visits. 

And most important, good school districts. 

He resolved to acquire 10 homes within a 12-minute drive of Apple. 

For $1 million down, he’d own $5 million in assets that he would rent out for top dollar and that he believed would double in value in five years and double again by 12 years.

Then there was a 35-year-old tech worker in Long Beach, Calif., who bought a house in Round Rock for $300,000 last October. 

By January 2021, it was worth roughly $400,000; in February, he bought two more. 

His winning bids were two of dozens that his real estate agent, a former equities trader who now works primarily with individual investors, made sight unseen, all of them for at least $40,000 over the asking price. 

“I’m part of the problem,” the buyer acknowledged to me, though he was not your stereotypical speculator: Despite earning six figures, he drives a 2005 Honda Civic and, when I spoke to him, was renting a room for $900 a month, preferring to save and invest. 

(Scarred by graduating into the Great Recession, he aligns with the Financial Independence, Retire Early movement popular on Reddit.) 

He marveled at how FaceTime, DocuSign and electronic transfers made everything seamless, but because real estate money can now move so easily, it meant what he had liked about real estate investing in the first place — its stability and relative slowness — no longer held true. 

“We’re gamifying real estate investment to the point that it’s almost like throwing money at the stock market,” he told me.

Some Austin real estate agents have positioned themselves to capitalize on all this out-of-town money. 

On a steamy 95-degree day in late June, Matt Holm lifted the winged door of his Tesla Model X so that I could hop in the back seat behind his client, Jon, a man who worked in commercial real estate financing in Santa Monica. 

(Jon asked that I withhold his last name because he hasn’t shared his relocation plans with his friends and family.) 

During the pandemic, Jon, originally from Madison, Wis., began to rethink what was keeping him in California. 

“I’m getting a little anxiety about making a longer-term commitment to L.A., just given the political climate, the tax climate, the homelessness problem,” he told me.

Jon had traveled to Austin three times in as many months and was getting a handle on the “resi” market. 

He was looking for a home where he could declare residency to take advantage of Texas’ lack of income tax — but he also wanted to live elsewhere half the year, and so he was looking for a place he could easily rent out and make money on. And he wanted guaranteed appreciation. 

“I mean everything’s an investment, right?” he told me. 

A friend of his who had just relocated to Austin introduced him to Holm, whose dirty-blond hair was pulled into a sleek ponytail. 

He founded the Tesla Owners Club of Austin in 2013 and proudly referred to himself as the “Tesla realtor” in town. 

When Jon slipped in to look at a short-term rental, Matt told me that Jon would like to spend $500,000 to $700,000, “but he’s going to spend 1.3 to 1.5 by the time he’s done.”

“There’s nine million square feet of office being built,” Holm said, as we drove through downtown, cranes and glass skyscrapers glinting above stalky yellow-limestone and red-granite buildings. 

(The Austin Chamber of Commerce gave a lower but still shocking figure, 6.2 million square feet.) 

“And it’s being built, like, it’s not occupied. 

So those jobs are coming. 

People are telling me, like, Oh, you know, we peaked. … As far as the metrics, the Texodus is not slowing down. 

We’re about to get a tidal wave.”

“People haven’t even factored in the Elon effect,” he continued, “I can’t tell you the number of people that are saying, Oh, Elon’s building a factory. 

Like, no, Elon’s not building a factory — this is headquarters for everything Elon. 

He hasn’t officially announced it, and I don’t know anything behind the scenes, but I can see very clearly the people that are moving here, and they’re not factory workers.” 

(Indeed, in October, Musk made it official.)

Holm and Jon spoke the same language. 

They analyzed every parcel for how to maximize profits and shared tips for minimizing taxes. 

Walking through a cavernous tiled-and-carpeted two-story in Travis Heights, Holm suggested that with its many bedrooms, it would make an excellent Airbnb. 

Although Austin and the state stipulated that owners could rent only their homestead and only for a maximum of six months a year, “that could be every weekend,” Holm said.

“The investor I know that’s killing it right now is a systems guy,” he continued. 

“And I told him for four years that he had to get into the Airbnb business and he thought I was him on the numbers. 

And finally, he believed me, and now he has 13 Airbnbs.”

“How does he do that?”

“Because he’s bought them all in the ETJ” — the Extraterritorial Jurisdiction, a broad swath of unincorporated land bordering Austin that isn’t subject to the city’s short-term rental restrictions. 

“Dripping Springs is about 30 minutes west of here, and it’s the wedding capital of Texas,” Holm said. 

“You see these people getting married with cowboy boots on and a wedding dress, and they’re on top of a hill and all that [expletive]. 

That’s where they are. But there’s like no hotels out there. … 

Well, if you can get a big-ass house out there where the entire wedding party can stay together, jump in the pool after the wedding ... there’s almost a completely unlimited market. ... 

He doesn’t take any Airbnb bookings that don’t gross rent $30,000 a month.”

“I like this place,” Jon said of the house. 

At 3,000 square feet and $1.2 million, this home was over Jon’s budget. 

The question was how much was he willing to live in his investment. 

“I don’t need so much house unless I was really going to take on the project you describe,” he said. 

“But that puts me in a bit of a conundrum, because I am living here six months a year. 

You don’t want it to be a complete party house either.”

Next up was a condo with clean white walls, black fixtures and gray oak floors. 

At $1 million, it didn’t offer the same opportunities for monetization: He couldn’t build, and there were fewer rooms to rent.

“Everybody is from San Francisco today,” the seller’s agent said when we got there. 

“What about you guys?”

Douglass and Kristina Modares, co-founders of Open House Austin.Credit...Dan Winters for The New York Times

Despite the competitive market, despite having to work double the hours and write triple the offers, Open House’s agents were moving cash-strapped millennials and some Gen Z’ers into houses in record numbers: 130 so far this year, 88 percent of them first-time home buyers, at an average price ($369,000) far below the Austin metro median of $450,000. 

Because they were encouraging clients to think of property first and foremost as an investment, their young charges were going after what they could, buying new homes in neighborhoods with homeowners’ associations, older condos with perhaps-less-than-ideal natural light and suburban fixer-uppers that reeked of cigarette smoke. 

Anything to break in and start building equity.

At those price points, Open House clients were inevitably snapping up stock in once-affordable neighborhoods. 

For the last decade, East Austin, the historically Black and Latino neighborhood atop the city’s less-desirable clay soil, has been among the city’s hottest destinations. 

It began with a couple of fun dive bars and an excellent Japanese fried chicken truck and exploded into the site of award-winning restaurants, a hipster honky-tonk, a Whole Foods and, now, some of the highest-price-per-square-foot real estate in Austin. 

Gut-renovated bungalows and new homes in moody shades of midnight blue, hunter green or white were rapidly multiplying, squeezing out the weathered old houses with pit bulls and barbacoa pits, the piñata shop, the tire-repair place.

In the spring, Douglass, Smith and Douglass’s uncle, Moose Mau, took out a hard-money loan to buy their fifth property together (and Douglass’s eighth property in East Austin), a run-down 1,614-square-foot home on the floodplain, along with a vacant lot next door. 

The cost for both was $550,000. 

As usual with Douglass, one project spawned another: The empty lot came with a shipping container filled with junk, and she decided to turn it into an Airbnb. 

For $20,000 she was going to carve out some windows, add a kitchen and bathroom and insulate it from the inside. 

For another $78,000, she ordered a tiny house to put in back. 

(During one drive, I saw three such miniature homes traveling the Texas highways.)

The Latino family that sold the two lots was using the profits to purchase a larger parcel of land outside the city, a move common among people of color selling their homes on the east side. 

Gentrification has different effects in different geographies, as research by Virginia Tech’s Hyojung Lee and Georgetown’s Kristin L. Perkins has shown. In New York, where the cost of living is high for miles and miles, it tends to lead to densification — doubling and tripling up. 

But in Texas, where the sprawl is decidedly more affordable, it spurs suburban migration. 

The proportion of the Austin population that is Black has been declining for decades. 

Many of those selling homes in the city were moving to the parched suburbs of Pfluggerville, Butta and Bastrop.

Or they were moving on to the next phase of life, aging into retirement or nursing homes.

In the late spring, Mau flew in from Southern California, where he works as a mortgage broker, to help with the renovation. 

He was clearing trash in the front yard when a young man walked by and asked if he needed help. 

As they worked alongside each other, the man mentioned that his girlfriend was helping the woman next door. 

The woman said she’d sell her home for between $200,000 and $250,000, he said.

“We’re like, ‘Whoa, that’s supercheap,’” Smith told me. 

So she went over to the run-down yellow house, which seemed to be made of little more than splinters and asbestos. 

The owner, Maria Saldaña, was in her late 60s and partially blind and spoke little English. 

An orange Home Depot five-gallon bucket with a toilet seat on top sat beside her bed, because the toilet didn’t work. 

She was eager to sell and asked for $210,000. 

Smith agreed. 

Micah Domingues — Smith’s employee at her Airbnb management company and her middle daughter’s 28-year-old boyfriend — was interested.

Before the sale closed, one of Saldaña’s sons moved her into an affordable senior living facility. 

He vaguely described where it was located so that Smith and Domingues could visit her and finalize the sales contract. 

After studying the map, Domingues and Smith drove to the most likely complex, but the receptionist didn’t think Saldaña had arrived. 

So the two started knocking on doors there, rapping, rapping, rapping as instructed by Saldaña’s son, who told them to continue to knock so that she could follow the sound. 

She opened the third door they tried. 

She was alone and unfamiliar with her surroundings, so Smith and Domingues led her by the hand around the room.

“You have a new couch, and it’s over here,” Smith said, helping her grasp the cushions. 

“Here’s your table, and there’s a box of cereal on top of it.”

“There’s cereal?” Saldaña said. 

“I have a little milk.”

Smith poured milk and cereal into a bowl, and Saldaña dug in as if she hadn’t eaten all day. 

The air-conditioning was too cold for Saldaña, and so before leaving they led her out onto the patio she didn’t know she had and brought out a chair so she could sit in the sun.

In the end, the sale fell through. 

There was a cloud on the title. 

Saldaña had been married, and although her husband was dead, he had grandchildren from a previous marriage who potentially could claim a share of the property, and two of them wouldn’t sign off. 

Micah, who had been so excited to purchase his first property, told me that by the end, “I had no more emotions.” 

Given his budget — $300,000 was his upper limit — he worried he’d have to wait a long time before stumbling upon another off-market house.

Real estate agents have a saying: “There’s a buyer for every house, but there might not be a house for every buyer.” 

That’s the definition of a seller’s market — and a pithy indictment of the way America subsidizes homeownership, in an era when a majority of Americans are utterly shut out of it. 

All the changes that Covid brought to the market have only made things worse. 

It doesn’t exclude just those who can’t muster all-cash offers, or those without the financial cushion to take on the risk of losing a large option fee or forgoing an inspection. 

It also disadvantages those who are unable to drop everything to make a play for properties. 

In the Covid-era Austin market, there was seldom a house for anyone who couldn’t house-hunt full time.

In keeping with seasonal trends, September 2021 brought an easing in the market, both in Austin and nationwide — but the city’s median sale price was still its highest on record for a September. 

The Case-Shiller home price index reported that the August 2021 year-over-year appreciation was 19.8 percent nationwide: “That’s just an astronomical pace of price appreciation,” Jeff Tucker, a senior economist at Zillow, told me. 

“The only remotely comparable points in time in the modern era of low inflation were late 2005, when price appreciation peaked in the 14 percent range for many months, and 2013,” when prices finally began to rebound after the Great Recession. 

“And again, there it didn’t quite crack 11 percent,” Tucker said.

As for Drew and Amena, things were still dire a month before Drew had to report to work in Austin. 

Amena began flirting with the idea of renting, but friends of hers were having as much difficulty finding a rental in Austin as she was with buying. 

Renters were offering $500 more than the monthly asking price and signing two-year contracts. 

Some were offering an entire year up front. 

Amena applied to four or five, and was rejected on all of them.

But two days later, miraculously, she and Drew were under contract to buy. 

The home had taken extra clicks to be located on Zillow because it was for sale by owner. 

It was smaller than they had wanted — 1,200 square feet, about the same size as their unit in Bed-Stuy. 

But it had a guest room for Amena’s parents, and the master bedroom was at the back of the house looking onto a huge backyard with a mature fig tree. 

They could build a home office, they figured — or a home gym or a rentable backhouse.

It was also in Windsor Park, a sleepy community of ranch houses that they’d come to love. 

The neighborhood was so close to so many major highways that it was no more than 20 minutes away from almost all of the major tech campuses. 

At $525,000, it was listed higher than comparable homes, but Drew and Amena had learned their lesson. 

They bid $50,000 over asking with an expedited five-day option period.

On their 16th bid, Drew Mena and Amena Sengal (photographed here with their daughter, Edie) finally landed a home in the Windsor Park neighborhood. The house was listed for $525,000, and their winning bid was $575,000. Credit...Dan Winters for The New York Times

“I think, maybe, it’s looking good,” Gilchrist said shortly after they submitted. 

“The guy is currently asking whether or not you will water and harvest the potatoes in their backyard for them once you close and then share the potato harvest.”

“We will take a potato-cultivating class if that’s what he wants us to do,” Amena said.

Amena and Drew went under contract, having seen only photos of the house online and a video shot by Gilchrist. 

The backyard was recently added to the flood zone, meaning they’d have to pay for a FEMA-approved flood-insurance policy. 

While talking to their lender, they also learned that the city wouldn’t let them add anything to the backyard — a heartbreaker.

With two days left on her option period, Amena flew to Austin for 24 hours. 

Gilchrist picked her up at the airport and drove her directly to the home. 

She walked through the low-slung rooms with their boxy windows and opened every drawer, closet and cabinet. 

She FaceTimed Drew: The living and dining area was cramped, but the owners, who were moving with their two children 30 minutes south of Austin to Niederwald, where they could afford more square footage and more outdoor space, had large furniture. 

Most important, the house didn’t smell, and it was theirs if they wanted it. 

They would redo the bathroom and reconfigure the kitchen. 

It would work.

The home was still under renovation when they moved in, in July. 

And it would be for quite some time, because houses weren’t the only thing in short supply during the pandemic: The same was true of appliances, cabinets, vanities, sinks and shower heads. 

In October, they still didn’t have kitchen counters. 

They were creatively laying cardboard and cutting boards atop the open cabinets. 

“It’s actually convenient from the standpoint of the silverware drawer,” Drew told me. 

“You don’t have to open anything,” Amena said. 

“You just reach in and grab.”

But even before they were settled in, Amena couldn’t see staying in Austin long term. 

The problem with Austin wasn’t that housing deals sometimes hinged on potatoes. 

(The owners harvested them and left Amena and Drew a small bounty, which was reportedly delicious.) 

The problem, they felt, was that the city seemed too staid, too homogeneous, too white — and each sale in this crazy real estate market seemed to be making it even more that way. 

When it came time to celebrate Drew’s 40th birthday, they considered a number of destinations: Mexico, Cuba, Portugal. 

But in the end, the place they most wanted to go was New York.

“I still miss Brooklyn — I kind of want to move back,” Amena said, her voice echoing off the bare walls and hardwood floors of her empty new home. 

“To be honest, the Austin housing market was a little demoralizing.”

A housing development in Austin, Texas. With companies like Tesla, Oracle, Facebook and Apple moving or expanding operations there, a hot housing market has grown even more competitive. Credit...Dan Winters for The New York Times

Sidebar: Photographs by Kat Teutsch for The New York Times; house No. 8: Cat Groth/Twist Tours.

Francesca Mari is a journalist based in Providence, R.I., and a national fellow at New America. She has written about housing, inequality and con men for The New Yorker, The Atlantic and The New York Review of Books, in addition to the magazine. Dan Winters is a photographer and portraitist based in Austin, Texas. He is widely recognized for his celebrity portraits, scientific photography, photo illustrations and drawings.