Considering it’s size and importance, the housing market seems very poorly understood. It sure seems like we have a supply problem, but on the flip-side we are currently at a record number of housing units per capita. We apparently had new household formation during Covid but didn’t we also lose a million people? There is already talk of homebuilders pulling back on production despite extraordinary margins, how is that possible?

I don’t think we know how many people own unoccupied 2nd/3rd/4th homes and that seems relevant. Strikes me that part of the problem is when homes have rising real values (after taxes & maintenance) there is no perceived cost to hoarding.

Or maybe if you print enough money it simply looks like there are supply shortages everywhere.

In terms of what to do, better zoning is obvious but clearly can’t happen. All the “next best” ideas are basic some version of “subsidize housing and hope it produces a supply response.” That logic seems terrible - imagine subsidizing SUVs in the hope it gets us to drill more oil!?

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In my new development which is all single family homes of 4000+ SQFT with yards I'd say half of the homes are occupied by couples without children living there. The house across from us has a single woman who only lives there maybe 25% of the year tops. The rest of the time the house stays empty. Seems insane to me.

All of these buyers are retired boomers from DC area and have a bunch of government money.

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I'm normally no fan of government messing with markets but I might be able to get behind a vacant property tax. When a resource is scarce and supply-constrained, hoarding it seems very suboptimal for society.

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I'm not suggesting some kind of punishment for this. I think the government printed a lot of money and the people that got that money aren't sure what to do with it and much of it ended up invested in property. The problem was the money printing.

Given what the government did with evictions I think its very sensible not to just rent your home out to whoever.

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Agree the ideal scenario is to get the government out of both subsidizing demand and restraining supply. Good luck :)

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I raised this point to Erdmann of unoccupied homes (because they are held by the same owner). He simultaneously agreed and disagreed. I have read Erdmann for a long time so I think I know his position. He strongly believes in the need for for increased housing supply and easier lending policies. I agree on the need to facilitate the construction of new housing. I don't see current lending policies as restrictive. An immediate family member just qualified for a loan valued at nearly 5 times annual income! My goodness, how accommodative can lending be?

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Erdman also believed in a housing shortage causing rising prices in the bubble period where we had easy lending and large increases in supply. I pointed out to him years ago on his blog that the bubble years had records amounts of sq footage of housing per person and record units per household and he wouldn't accept that as evidence of oversupply because in his mind 'price increases = short supply'. He does a fantastic job tracking data but if he finds a higher rent story in the data its going to be 'low supply pushing up rents pushing up housing prices' and not 'higher prices shifting rents, making it look like supply shortages'. He might be correct, he might be incorrect, but that is the conclusion he is coming to.

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Easier lending definitely falls under the category of "subsidize demand hope it creates a supply response." I'd like to see examples of when that has ever worked because I'm skeptical.

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One of the great tragedies of the last decade has been that the existence of Fannie, Freddie, and the FHA has led traditional defenders of free markets to treat mortgage deregulation as a subsidy, and so middle class families who borrowed functionally for decades were regulated out of homeownership and those who owned homes already took on tremendous losses when potential buyers were regulated away, and there has been nobody to advocate for them.

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Case Shiller disagrees. The last 10 years have perpetually higher prices. Even before Covid you had 8 years of higher prices and no period where home owners were taking on tremendous losses. There is only one period that comes close to fitting that narrative, and that is the 2004-2008 stretch of 5 years. When the homeownership rate bottomed in 2016 the Case Shiller index was 2% off its all time high.

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Aug 29, 2022·edited Aug 29, 2022

Interesting, i'd be curious to hear more.

Big question is: if we eliminated the GSE's would mortgages be harder and more expensive to get? My assumption is yes, but i'm far from an expert. If i'm right then the existence of the GSE's is a subsidy relative to other loan markets without large government players. Is your point then that the subsidies used to be higher and have been reduced?

I also fail to see how demand subsidies help keep prices in check. I've never seen "stimulate demand to induce supply to cool off prices" work in practice. Is your theory it might work in housing?

And if we do want to subsidize housing wouldn't it be far smarter to do it thru direct subsidies than via the mortgage market. Something like a means-tested first-time buyer subsidy makes a lot more sense to me than a blanket mortgage subsidy.

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Pre-2008, the GSEs probably represented a very small subsidy. To give a sense of scale, they probably led to $12 billion/year in interest savings, compared to more than $200 billion in targeted subsidies through the income tax code and more than $200 billion in taxes targeted at housing through property taxes. So, I don't think it has ever been that helpful to view them through a "subsidy" lens. Since 2008, basically the government took them over, regulated private mortgages with default risk out of existence, and charges excess premiums for the regulatory protection provided by the GSEs. Now, effectively it is a tax that is collected through the government monopoly. Again, the scale of the amount is very low. Most of the damage has come from deadweight loss of the millions of households who are barred from getting a mortgage in any way through their local bank because the regulatory threats are too high.

I'm not interested in subsidies for housing. I'm interested in removing deadweight loss from the multitude of obstructions in both local land use and now nationally through mortgage suppression.

I would argue that, to the extent the GSEs boost market activity, it has increased price/rent ratios, but mostly by reducing rents rather than increasing prices, and the rent inflation I discuss in the post Arnold cited is largely the result of overregulating mortgages.

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What keeps private lenders from making loans and keeping them on their books? I understand they'd all prefer to sell the loans to the government, but that's proof of a valuable subsidy, no?

If attractive borrowers want mortgages at profitable rates of interest I can't imagine banks simply ignore the opportunity. I think you're saying no one can compete with GSEs so they defacto set terms and pricing. But again, that's evidence of a valuable subsidy that wouldn't exist otherwise.

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Aug 29, 2022·edited Aug 29, 2022

I don't know how large an impact it has on the big picture, but AirBnB has been a game changer in some areas, turning the whole 'residential' housing stock toward what was formerly mostly restricted to hotels. I've seen a popular beach area go from being an an actual community with a small number of properties let out to tourists, to what is now nearly 100% vacation rentals which are effectively vacant 8 months out of the year, basically a "hotel community".

That means more detached structures per capita, but I'll let Erdmann do the math on whether it makes any difference in the scheme of things.

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Lots of moving pieces there so it seems hard to know. I think by Erdmann's logic anything that increases housing demand is good b/c it will eventually lead to supply. Skeptical.

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There is a Coasian bargain to be made between people who have the ability to stop new building, and people who want cheaper housing. But even putting transaction costs aside, I'm pretty sure any actual deal would satisfy the elements of illegal political bribery. So the first reform is to add this particular case to the list of the legalized forms of political bribery.

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Sounds like the issue there is less about housing and more about limiting the ability to make hotels in the area. I wonder how much of the over all issue are those sorts of frictions regarding using land and building stock for what people actually want.

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With money itself a commodity used as a store of value with a negative real interest rate the analysis becomes different. When the real interest rate (nominal interest - inflation -- including energy and food) is negative by over -7%, as it is now), if you can borrow in nominal dollars at any interest rate less than the inflation rate , it makes sense to borrow to the max and invest in any "real" asset from land to housing or even scrap aluminum. You will make a profit of 3% or more on other peoples money that you borrow. This assumes the FEDs will keep the inflation rate high.

This would really be a bet that the FEDS will repeat the '70s and be political pawns, while allowing the real interest rate to remain negative as inflation eat the store of value in money and gives it to big debtors like the government itself. As inflationary instability of the '70s forced people to protect themselves against this theft of value with COLA (cost of living adjustments) the inflation rates became a solid double digit amount with contracts tied to inflation indexes, the government effectively stole enough "value" to pay down a lot of debt from Vietnam and the Great Society spending blowouts.

In other smaller countries when the local government debases the currency to steal value from the citizens, the citizens can shift to using dollars. What will happen when the "reserve" currency for the world is debased?

If the FEDS don't raise the nominal interest rate faster than the inflation rate there is every reason to expect the system is unstable and inflation will go the way of the late '70s making the correction impossible and transferring wealth to owners of "real" assets of all kinds and big debt holders like Trump where everything is leveraged.

With housing being a store of value available to most citizens at high leverage, negative real interest rates will increase demand creating housing shortages as it is in the self-interest of the citizen to buy more highly leveraged property than they need or desire, especially with government backed and subsidies loans typical of housing.

Running the real interest rate to inflation + 2 to 3% (a nominal 11+%) would create housing demand decreases and downsizing would create effective supply increase. Of course the huge spending debt and fiscal irresponsibility of the government will become apparent.

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Aug 29, 2022·edited Aug 29, 2022

Arnold, thanks for reading and for commenting! Back before my books were even published, I enjoyed trading notes on these topics with you. I hope we get back in the habit of doing that again.

This is basically also how I would think about the relationship between rent and price. You have outlined well some of the reasons why we might see a positive relationship between rising rents and rising price/rent ratios. I wrote that statement intentionally. (“For each 1% increase in rents, you always see more than a 1% increase in prices.”) I did not mean it to be a conceptual or theoretical assertion. The reason I stated it so bluntly is that after years of slicing and dicing this data, I cannot think of a single example where systematically rising rents on some dimension were not associated with rising price/rent ratios.

You can see this across metro areas at any given point in time in Figure 4 and Figure 5 of my post on rising rents and prices. You can see it within metro areas in Figure 12 and Figure 13. In Figure 13, you can see that the price/rent ratio has become pretty flat in a lot of metro areas, probably due to some of the expectations you write about in your post. But, I haven’t seen a price/rent ratio pattern become systematically negative in a metro, where price/rent ratios are lower in ZIP codes with higher rents or incomes.

It is also true over time. Over the past 50 years, the portion of GDP going to rental expenditures has increased by 30%, and real estate values/GDP have doubled. Increasingly, I have come to see that 30% rise in rents as the primary cause of the doubling in prices. You can see how that is likely the case in Figures 4 and 5, because it has happened proportionately across MSAs. In other words, where rents have risen 60%, prices have likely tripled, etc.

This is one of the big blind spots in the academic literature about the housing boom and bust. As far as I can tell, nobody accounts for this relationship at all. The issue is so far off the radar that in most articles, rent is simply ignored. One important place where the error is made explicitly is on page 158 of the Financial Crisis Inquiry Commission (FCIC) report. They wrote,” the cost of owning rather than renting was much higher than had been the case historically: … In some cities, the change was particularly dramatic. From 1997 to 2006, the ratio of house prices to rents rose in Los Angeles, Miami, and New York City by 147%, 121%, and 98%, respectively.” Ironically, what the FCIC had inadvertently done there is explicitly identify 3 metros that had seen the highest rent inflation over that period. That was why they were the best examples of rising price/rent ratios. The FCIC went on to spend another 400 pages reaching around the elephant in the room that they had now agreed not to notice, trying to explain how prices could have changed so much.

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Current mortgage rates are 5.7%. 30 year t-bonds are 3.25%. So they aren't really equivalent.

Mortgage interest is tax deductible. I pay taxes on t-bond interest.

Home appreciation is tax free. Asset accumulation and dividends are subject to taxes.

If rates increase I'm locked in at a lower rate. If they decrease I can re-finance.

The home remains one of the best tax adjusted inflation hedges out there.

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The long term cost of housing should track the long term inflation rate. Any deviation would be explained by changes in consumer preferences. However, any price increases in housing above the inflation trend must be capped by affordability. At the end of the day, people have flexibility in their housing - people can trade down in housing quality, rent basement apartments and stay with a friend or family member.

The volatility of house prices since 2001 correlate with extremes in US policy. Post 9/11 interest rates were slashed and the Bush administration, with the eager support of lenders, pushed a pro-housing agenda. There was a financial bubble, driving by home loans, and when this bubble cracked there was a housing depression. Between 2011 and 2020 the housing industry regained its confidence. Than in 2020 interest rates were dropped to zero and money poured again into housing. We had another bubble - more a buying frenzy - and now that bubble is popped. Homes priced to sell with mortgage rates below 3% now must sell with mortgage rates above 5%. At the margin this requires prices to drop.

I am concerned with government / social agendas that appear to be anti-housing. I concur that zoning can be unnecessarily restrictive. What I see as a larger issue is government blocking development. They do this by adding building restrictions and by enabling litigation on environmental and social concerns. This interference blocks small developers from the market and adds to the overall costs of housing.

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Erdmann has great data - but I don't believe all his analysis. He notse how housing is both a consumer (use value) product AND and investment. Even for the rich who own multiple houses.

Housing is part of the Investor Price Index asset-hyper inflation that we've been having since the 2008 crash. As the asset price of housing goes up, it pulls the use-price rent with it. I don't even try to prove this, but Erdmann doesn't convince me it's rent price first, then asset price.

He also is good in using ZIP code data - altho for big cities, individual school zone area is likely more significant as well as more difficult to find. The big increases in house prices are those city & suburban houses in good school districts. LA city schools district is too big, the smaller high school community borders are more important.

His 4 Demand categories are interesting, but might not be comprehensive enough to cover Detroit.

Demand outstripping capacity. Sales high, homes under construction increasing.

Demand normalizing. Sales declining, homes under construction high but decreasing.

Demand overcorrecting. Sales declining, homes under construction declining.

Demand excessively overcorrection. Sales bottoming, homes under construction declining, prices declining.

But the national trends aggregate different school district markets, so it remains more Location than Erdman credits.

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I'm in Miami where the vast majority of buildings are slab on grade/CBS, in other words, lots of concrete. Concrete is next to impossible to source in a timely fashion this year, it's also very expensive. Also, virtually every home built in this region features impact doors and windows, which currently have a lead time of 6 to 8 months. It's hard to seal a building's envelope and start your fit and finish without windows, which means even if you're hustling on all other disciplines, you're going to hit a long standstill if you are not on your window order extremely early. Labor is another issue altogether.

My point here is that the sudden increase in average build time is indeed almost entirely supply-chain related. All you need are one or two of these quirky supply issues in large markets (e.g. South Florida) to put a dent in national averages. I would not be surprised if the 2022 numbers are worse.

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"Homes have taken 6-7 months to construct for decades, until 2021. It currently stands at 9.7 months.

As he points out, this is symptomatic of supply bottlenecks."

Or labor bottlenecks. I have a neighbor who is a builder who complains about not being able to recruit and retain full crews at a wage viable for the business. Working with partial crews to cope would tend to slow things down.

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