Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of The Odd Lots Podcast.
Speaker 3: I'm Joe Wisenthal and I'm Tracy Alloway.
Speaker 2: You know, obviously, obviously we're a little distracted these days
Speaker 2: because there is so much news all the time. It
Speaker 2: doesn't feel like we have much time for sort of
Speaker 2: classic episodes where we talk about some big idea. But
Speaker 2: one thing that we had heard a lot over the
Speaker 2: years really is that for the public, you know, when
Speaker 2: they think about inflation or they think about the cost
Speaker 2: of living, housing costs are really central to their view.
Speaker 3: Right, And you see this not just in house prices
Speaker 3: but also in rents. Right, everything has gone up since
Speaker 3: the pandemic, and people people don't like it. People don't
Speaker 3: like it when the cost of housing shelter goes up.
Speaker 2: People don't like when the cause of gasoline goes up.
Speaker 2: People don't like the cost of eggs for certain But
Speaker 2: I feel like when it comes to the cost of living,
Speaker 2: everybody must have shelter. Basically, it's also.
Speaker 3: A big chunk, it's a huge chunk of.
Speaker 2: The consumption basket, the consumption of shelter. And we've had
Speaker 2: prices going up for like I don't know, fifteen years
Speaker 2: or something like that. Even the raid hikes didn't do
Speaker 2: much to slow house prices. They slowed other housing activity.
Speaker 2: But it is a real problem and it gets to
Speaker 2: the center of like what people call the American dream.
Speaker 2: And we've talked to people over the years with different ideas,
Speaker 2: you know, yimbi types. They talk about zoning, or people
Speaker 2: say there should be some sort of more public investment,
Speaker 2: et cetera. I don't think like we've fully cracked it,
Speaker 2: and certainly policy makers have yet to solve the problem.
Speaker 3: Right, although it is interesting. It's like one of the few,
Speaker 3: by part of in areas where both sides of the
Speaker 3: aisle will say that housing supply is an issue and
Speaker 3: they want to do something to rectify it.
Speaker 2: So go back to the Great Financial Crisis. Do you
Speaker 2: remember in like twenty ten or something, or maybe middle
Speaker 2: of two thousand and nine, there were actually some people
Speaker 2: that proposed raising like destroying empty houses just to get
Speaker 2: the supply demand imbalanced.
Speaker 3: Just I don't remember that.
Speaker 4: Yeah, this was.
Speaker 2: Absolutely a thing. So we were like, well, why don't
Speaker 2: we just like pave over a bunch of existing houses
Speaker 2: and then we won't have this glut and then the
Speaker 2: prices will keep falling that we can This was a
Speaker 2: I'm going to google this while we're talking, but hopefully
Speaker 2: no one never took that seriously. We'll be absurd because
Speaker 2: now we're in an era of housing scarcity. But that
Speaker 2: was a crazy time.
Speaker 3: M hm. There is a lot of craziness in these
Speaker 3: sort of two thousand and eight to twenty twelve era.
Speaker 2: And one of the things that we know about crises,
Speaker 2: you know, look, there's all this subprime lending, all that stuff.
Speaker 2: So afterwards there was this big impulse to say, like,
Speaker 2: we're never going to allow things to get that crazy again.
Speaker 2: We're never going to allow people to buy a home
Speaker 2: with no down payment, no documentation, and terrible credit scores again. Anyway,
Speaker 2: we're going to be talking to someone whose argument is
Speaker 2: that we may have overshot.
Speaker 3: Great, I'm excited, all right, I'm really psyched.
Speaker 2: We do have the perfect guest, someone who's writing I've
Speaker 2: followed for a long time, and the gist of his
Speaker 2: argument is that we overshot that various post greadte financial
Speaker 2: crisis policy changes in pursuit of bubble avoidance are the
Speaker 2: cause of our housing shortage. Today, we're going to be
Speaker 2: speaking with Kevin Erdman. He is an affiliated scholar at
Speaker 2: the Mercadis Institute and he's the author of the book
Speaker 2: Building from the ground Up. He's a great newsletter. Uh, Kevin,
Speaker 2: thank you so much for coming on O lots.
Speaker 4: Yeah, thanks for having me.
Speaker 2: That's true, right where't there's some headlines about bulldozing over houses.
Speaker 2: I mean, it was like a weird time because like
Speaker 2: there were three things. There was like the home price appreciation.
Speaker 2: There was the amount of housing that was being built,
Speaker 2: and then there was the sort of liberal lending standards
Speaker 2: mortgages to people couldn't afford them. And then there was
Speaker 2: all the also the financial engineering around it. Like there
Speaker 2: was st a lot going on in those days.
Speaker 4: Yeah. Yeah, and there were people that proposed that green span,
Speaker 4: even I think in Hank Paulson's book he mentions that
Speaker 4: green span sort of half jokingly mentioned it. But the
Speaker 4: idea that you would even think of it is crazy.
Speaker 4: In fact, I actually wrote a post on my substock
Speaker 4: recently that Tyler Collen interviewed Joe Stiglitz very recently, and
Speaker 4: Joe Stiglitz was still sort of basing his ideas of
Speaker 4: you know what happened in the recession on this idea
Speaker 4: of overbuilding, and he talked about like there were all
Speaker 4: these low quality houses built in Las Vegas that basically
Speaker 4: were built where nobody would want them. Yeah, and made
Speaker 4: some quip that like the best thing about them was
Speaker 4: they were so poorly built that they wouldn't last long
Speaker 4: or something. And the crazy thing about that is that
Speaker 4: they're actual. If you look back at the data, there
Speaker 4: wasn't actually a building boom in Vegas. There was a
Speaker 4: price bubble, but the rate of home building never actually
Speaker 4: increased in Vegas during that time.
Speaker 3: Why don't you go ahead and give us the sort
Speaker 3: of two minute elevator pitch of your argument just so
Speaker 3: we fully understand it.
Speaker 4: Yeah. I think basically we have had a regional supply
Speaker 4: problem going back into the eighties and nineties, where the
Speaker 4: coastal metros like New York City in Boston and LA
Speaker 4: and San Francisco have clamped down on housing construction and
Speaker 4: so they basically can't grow as cities anymore in total.
Speaker 4: And so when the economy is doing well, when incomes
Speaker 4: are growing, population is growing, people just having babies and
Speaker 4: people growing up and wanting to form households. When that
Speaker 4: sort of all gets moving, those cities actually have to
Speaker 4: depopulate at this point because you know, if per capita,
Speaker 4: we're sort of demanding one or two percent more housing
Speaker 4: per person and they're only willing to build a half
Speaker 4: a percent of housing per year, that means a person
Speaker 4: and a half has to leave the city. So we
Speaker 4: actually have this weird countercyclical migration pattern into and out
Speaker 4: of those cities now. So like, for instance, the last
Speaker 4: several years, even pre dating covid LA has been for instance,
Speaker 4: has been losing population every year. It's down probably three
Speaker 4: or four percent now from its peak population in twenty seventeen.
Speaker 4: So basically that happened during the housing bubble. This counterintuitive
Speaker 4: thing was happening because when we're in good times or
Speaker 4: when people are demanding more housing, people actually have to
Speaker 4: move out of those cities. And the process for doing
Speaker 4: that is the rents go high enough until somebody's cries
Speaker 4: uncle and decides to leave town. And so the cities
Speaker 4: we think of as bubble cities Florida, Nevada, and Arizona
Speaker 4: in inland California were really just the landing places for
Speaker 4: those housing refugees. So those cities truly had a bubble,
Speaker 4: but it was a bubble in fundamentals, so it's actually
Speaker 4: a bunch of families moving there, and ironically those families
Speaker 4: were moving there to lower their housing costs. But all
Speaker 4: that got interpreted just as a bubble period and it
Speaker 4: was blamed on excess lending and speculation and all those
Speaker 4: things that it was really at its core, it was
Speaker 4: a lack of housing that drove all these migration patterns
Speaker 4: that then overwhelmed the cities where prices sort of temporarily
Speaker 4: rose and fell. And so basically what we did is
Speaker 4: we solved all the wrong problems. We blamed it on lending,
Speaker 4: and we cut off lending, and that basically closed down
Speaker 4: home building across the country. And so now the housing
Speaker 4: shortage that was just a a half a dozen coastal
Speaker 4: cities now is countrywide.
Speaker 2: This is very interesting. So I remember the Inland Empire,
Speaker 2: they called them the Sand States, like Arizona and Nevada,
Speaker 2: And the way it was certainly portrayed was that it
Speaker 2: was a speculative bubble, that there was all this like
Speaker 2: household speculation, and you know, there probably was some of
Speaker 2: that and people buying more house than they need because
Speaker 2: they thought they could flip it and flip this house.
Speaker 2: It was a popular TV show. But you're saying the
Speaker 2: fundamental were very sound, that basically it was like spillover population,
Speaker 2: the fundamentals of demand for shelter. What did we do
Speaker 2: after the Great Financial Crisis that, as you see it
Speaker 2: massively slashed lending.
Speaker 4: You know, it's tough to pin it down to one thing.
Speaker 4: You know, there are a series of sort of official
Speaker 4: and unofficial, sort of just pressures that were put on lenders.
Speaker 4: So you know, there was the subprime boom and bus
Speaker 4: that really heated up in sort of late two thousand
Speaker 4: and three, early two thousand and four and then was
Speaker 4: really dead by mid two thousand and seven. And you
Speaker 4: can see sort of the effects of that. And again,
Speaker 4: you know, I assert that the effects of that on
Speaker 4: home prices and everything have been greatly overstated because it's
Speaker 4: basically been inflated to explain everything that actually is explained
Speaker 4: by the supply shortage. But it caused a few percentage
Speaker 4: point increase in home prices on average, and that reversed
Speaker 4: then when that market died, And then then there's this
Speaker 4: second event that happens that sort of just got lost
Speaker 4: in the chaos a because it was popular, be because
Speaker 4: this idea that lending had been so outrageous that there
Speaker 4: was sort of no amounts of pulling back that seemed
Speaker 4: like it was satisfying enough. And so over the course
Speaker 4: of two thousand and eight, there were just formal and
Speaker 4: informal pressures on the federal agencies, the FHJA, Fannie Maine,
Speaker 4: Freddie Mack to you know, be careful and tighten up lending.
Speaker 4: And you can see it in the numbers. They report
Speaker 4: in their books that over the course of two thousand
Speaker 4: and eight, any year up to that, even back into
Speaker 4: the late nineties, the typical Fanny and Freddie borrower had
Speaker 4: a credit score of say seven to ten and which
Speaker 4: is about average. And then by the end of two
Speaker 4: thousand and eight, mid two thousand and nine, it's more
Speaker 4: like seven sixty, which is you know, sort of top
Speaker 4: quarter credit score. And so basically, over the course of
Speaker 4: a year, year and a half, the average score on
Speaker 4: an approved mortgage goes up by forty or fifty points
Speaker 4: and stays there. It's really still there today. So basically,
Speaker 4: you know, I would say probably ten or twenty million
Speaker 4: five family's three two thousand and eight to post two
Speaker 4: thousand and eight have lost access to mortgage funding.
Speaker 3: But just on this point, I mean, I can go
Speaker 3: get a loan at Fannie May with a six to
Speaker 3: twenty credit score or something like that. I think it's
Speaker 3: a little higher over at Freddie Mac. And there's minimum
Speaker 3: down payments. I think it's three percent. But overall those
Speaker 3: haven't moved that much from the early two thousands. Like
Speaker 3: back in two thousand and six, at the height of
Speaker 3: the housing bubble, the minimum down payment was still three percent,
Speaker 3: and I think the FICO scores were generally lower. Is
Speaker 3: there perhaps just a lack of viable home buyers out there?
Speaker 3: I mean, credit card debt is at a record, wages
Speaker 3: have been kind of sluggish. Maybe those people people who
Speaker 3: are asset light, as Chimoth would say, maybe they just
Speaker 3: they're not thinking about buying houses.
Speaker 4: No, it's definitely so. I mean those products exist, but
Speaker 4: the quantity of loans being originated to borrowers with those
Speaker 4: credit scores is really negligible. So like if you look
Speaker 4: at Fannie May, for any year two thousand and seven
Speaker 4: or before, about two thirds of their book of business
Speaker 4: was to borrowers with seven forty scores or less, and
Speaker 4: then immediately then by two thousand and nine it's only
Speaker 4: one third, and then it's stayed basically one third of
Speaker 4: their new business to the point where now their book
Speaker 4: of business is basically flip flopped. So the thing is
Speaker 4: that you know they have products, but there's the ability
Speaker 4: to repay standards that have been put in place and tightened,
Speaker 4: and there's just you know, there's just a black box
Speaker 4: of underwriting boxes that have to be ticked off that
Speaker 4: in theory, there's a product that goes to people with
Speaker 4: six twenty credit scores, but in practice, very few of
Speaker 4: those families can run the gauntlet to actually get the
Speaker 4: yes at the end of the approval process.
Speaker 3: Well, speaking of black boxes, I was trying to find
Speaker 3: like the average approval rate for Fannie and Freddy for mortgages,
Speaker 3: and ideally you could break down approval rates by FICO
Speaker 3: scores or something like that, and I couldn't find anything.
Speaker 3: Do you have a sense of a are there official
Speaker 3: numbers out there that I just couldn't find and be
Speaker 3: do you have a sense of what the approval rates
Speaker 3: might actually be?
Speaker 4: Yeah, I don't have like an index that I tracked
Speaker 4: you months to month, and in a way that gets
Speaker 4: difficult that that number gets less informative over time. I
Speaker 4: have seen claims that there's this very specific period over
Speaker 4: the course of two thousand and eight and early two
Speaker 4: thousand and nine where those standards change, and soon after that,
Speaker 4: you know, two thousand and nine or ten. I know
Speaker 4: one of the mortgage I cite it in one of
Speaker 4: the books that one of the mortgage tracking institutions noted
Speaker 4: that the average score on denied mortgages at that point
Speaker 4: in two thousand and nine or ten had a higher
Speaker 4: average score than approved mortgages had had before two thousand
Speaker 4: and eight. And one of the oddities about the subprime
Speaker 4: boom and bust is that the subprime boom really wasn't
Speaker 4: associated with much of a change in the average It
Speaker 4: was mostly about terms getting reckless, but the average borrower quality,
Speaker 4: surprisingly enough, didn't really change that much in total during
Speaker 4: those boom times. So you know, as you get farther
Speaker 4: away from two thousand and eight, the denial rate becomes
Speaker 4: less informative because at some point families know who can
Speaker 4: qualify and who can't, And you know, somebody that has
Speaker 4: a seven to ten credit score and something wrong with
Speaker 4: their income that they know is going to be a
Speaker 4: prevent one of the boxes from getting checked off. They're
Speaker 4: not going to keep going back to the bank year
Speaker 4: after year after year to show up on the denial rates.
Speaker 4: But you can see sort of the effects of this
Speaker 4: in a lot of ways, Like if you go back
Speaker 4: to pre COVID when interest rates were really low, before
Speaker 4: home prices took off, there were houses across the country
Speaker 4: that would have previously been owner occupied where you go
Speaker 4: to Zello and they would estimate the rent on that
Speaker 4: house to be like fifteen hundred and a mortgage, you know,
Speaker 4: for what it was selling for the mortgage might only
Speaker 4: be five or six hundred a month, like it was.
Speaker 4: The mismatch after these families were cut out of the
Speaker 4: market is you know, pretty extreme during those post two
Speaker 4: thousand and eight years.
Speaker 2: Let's stipulate that there is a cohort out there that
Speaker 2: you know has some sort of stable income, potentially able
Speaker 2: to buy a home, wants to buy a home, and
Speaker 2: can't get a mortgage for all of the reasons that
Speaker 2: you laid out, How does that actually feed through to
Speaker 2: lack of supply out there? Talk to us about the
Speaker 2: link between the pressures that you described to constrain the
Speaker 2: supply of credit and just the lack of abundance, the
Speaker 2: lack of building.
Speaker 4: Yeah, so you can see a real effect. Credit scores
Speaker 4: are highly correlated with incomes, okay, and they're correlated with age,
Speaker 4: which correlates with savings. So you can sort of use
Speaker 4: like neighborhood income or zip code income as a proxy
Speaker 4: for you know, the average credit score in that zip code,
Speaker 4: and you can just see how zip codes after two
Speaker 4: thousand and eight, the majority of the country had actually
Speaker 4: not really had a boom and bust, like you had
Speaker 4: the coastal cities and the sand state cities where prices
Speaker 4: had gone way up and then sort of, you know,
Speaker 4: come back down. But you know, cities like Atlanta or Chicago,
Speaker 4: or Indianapolis or Saint Louis, you know, they had all
Speaker 4: sort of been just moving along with regular building rates
Speaker 4: and prices that were sort of staying about where they
Speaker 4: had been in terms of price to income ratios. And
Speaker 4: then once this tight happens, you can see in all
Speaker 4: those cities, whether they had abubble or not, the price
Speaker 4: to income ratios and the poorer zip codes, you know,
Speaker 4: go down by twenty thirty forty fifty percent, while the
Speaker 4: high end neighborhoods sort of stayed flat. And so you know,
Speaker 4: you get this drop in the market price of existing
Speaker 4: homes that's very income correlated, and so it basically just
Speaker 4: dropped the price of existing homes below the cost of
Speaker 4: building new homes, but very regressively. So at the high
Speaker 4: end they could still build new ones, they were still
Speaker 4: selling for basically the same price they had been, but
Speaker 4: at the low end, you know nothing.
Speaker 2: So this gets into the economics of the home builder,
Speaker 2: the home builder economics, which is that because you have
Speaker 2: this bifurcation in basically price relative to income, is just
Speaker 2: no longer made sense for them to build what we
Speaker 2: call a starter home.
Speaker 4: Yeah, and I would say that's totally results of the
Speaker 4: crackdown in lending. The rents didn't really go down on
Speaker 4: those units, it was just the prices. And the prices
Speaker 4: went down because we basically made it illegal for those
Speaker 4: traditional home owner occupiers to be buyers. So basically the
Speaker 4: prices fell. One way you could look at it is
Speaker 4: that landlords require a higher yield than owner occupiers do,
Speaker 4: and so the price first there was sort of just
Speaker 4: a chaotic drop and then by say twenty fifteen, they
Speaker 4: sort of leveled out at basically the lower price point
Speaker 4: that a landlord would be willing to invest in those houses.
Speaker 3: You mentioned mortgage rates earlier, and I'm wondering how big
Speaker 3: a factor those are in your analysis. So, say, if
Speaker 3: mortgage rates dropped to three percent again, would there be
Speaker 3: more supply because there's more demand, And also presumably the
Speaker 3: cost of building of financing for the home builders would
Speaker 3: also go down in that scenario, so maybe they would
Speaker 3: build more as well.
Speaker 4: Now I used to put weight on that, just analytically,
Speaker 4: over the last decade that I've been studying this, I
Speaker 4: just keep lowering my estimation of how important the actual
Speaker 4: mortgage rate is. And you know, one example, which is
Speaker 4: the example I give earlier, is that there were tons
Speaker 4: of houses across the country where families could have cut
Speaker 4: their housing costs by more than half in the late
Speaker 4: twenty tens that they weren't able to just because there
Speaker 4: isn't a government agency that's telling if they're qualified to
Speaker 4: be a renter. There's only agencies telling them they're unqualified
Speaker 4: to be buyers. So just that economic decision isn't available
Speaker 4: to them, and for families they can get a mortgage.
Speaker 4: The economics I think were unusually positive before twenty twenty one,
Speaker 4: but at this point there's still positive on the margin.
Speaker 4: So basically, anyone who can qualify for mortgages in general
Speaker 4: is probably willing to be a buyer at today's prices
Speaker 4: and rates, and I'm not sure that that changes much
Speaker 4: more than marginally if raids go back down.
Speaker 2: You said that the government agencies de facto telling people
Speaker 2: that they are not allowed to be a borrower, and
Speaker 2: that's not strictly true. There's not allowed to be a
Speaker 2: borrower from a mortgage that's backed by Fanny and Freddy.
Speaker 2: If there is a substantial population of theoretically starter home
Speaker 2: would be starter home owners with low on the income ladder,
Speaker 2: lower on the FCO score scale. Why couldn't there be
Speaker 2: a private sector solution, because when you talk about the math,
Speaker 2: you don't have to have a mortgage backed by Fanny
Speaker 2: and Freddy. Why not a private sector solution to sound
Speaker 2: like what in your case seems like a fairly big arbitrage,
Speaker 2: It would.
Speaker 4: Be the regulatory liabilities on the banks and the mortgage
Speaker 4: riginators are even tighter than they are on Fanny and Freddy.
Speaker 4: So it's again it's tough to quantify. There's a lot
Speaker 4: of just sort of potential backward looking penalty potential. You know,
Speaker 4: if we have another recession and a bank has a
Speaker 4: bunch of defaults, the regulators could come in and say, oh,
Speaker 4: you know, those were mortgages that shouldn't have been made.
Speaker 4: In an addition to the cost of foreclosure, we're going
Speaker 4: to give you a bunch of penalties. And you know,
Speaker 4: there's just a lot of limits on how big of
Speaker 4: a spread they can use, plus limits on what they
Speaker 4: can count as income, plus you know, mandates on things
Speaker 4: they have to do in underwriting. That just all add
Speaker 4: up to low dollar mortgages being very hard to make.
Speaker 4: And if you make them, then you've got these sort
Speaker 4: of vague liabilities that you're carrying, so to the point
Speaker 4: that just lenders haven't been willing to make them. And
Speaker 4: so you know, for most of the past ten or
Speaker 4: fifteen years, there's been this qualified mortgage patch where if
Speaker 4: you could get Fanny and Freddy and the FAHA to
Speaker 4: buy your mortgages and put into their system, then it
Speaker 4: would give you a liability waiver on all those regulations.
Speaker 4: And it was called the QM patch, and so basically,
Speaker 4: if you could get the q impatch, you made the loan.
Speaker 4: And very few bankers have been willing to make any
Speaker 4: mortgages with any default risk at all that couldn't get
Speaker 4: the q impact. So really, I would say pre two
Speaker 4: thousand and eight, you could say that the agencies were
Speaker 4: sort of a subsidy that they lowered the average mortgage
Speaker 4: rate by probably a quarter of a percent or something.
Speaker 4: Since two thousand and eight, really, they're just running a
Speaker 4: monopoly on default risk, where the government imposes a bunch
Speaker 4: of liabilities on private lenders for default risk, and so
Speaker 4: the agencies actually can overcharge for taking that risk and
Speaker 4: just keep their very tight standards right.
Speaker 3: And the agencies, i mean, GSE guaranteed mortgages absolutely dominate
Speaker 3: the market nowadays.
Speaker 4: Yeah, and the government's pulling in billions in profits every year.
Speaker 3: On well, on that note, this is kind of exactly
Speaker 3: what I wanted to ask you. There is a lot
Speaker 3: of buzz at the moment about the possibility of Fanny
Speaker 3: and Freddie getting privatized, and we've seen, you know, some
Speaker 3: of their stock move in response to that. Bill Ackman
Speaker 3: seems to be very excited about that passable stability. What
Speaker 3: would you expect to happen to credit standards if the
Speaker 3: gsees were actually privatized, Because I can kind of argue
Speaker 3: it both ways. I guess, like, on the one hand,
Speaker 3: I imagine they would want to increase their capital cushion,
Speaker 3: and in fact, they've been doing that. If investors are
Speaker 3: going to invest, they have to feel that this is
Speaker 3: a safe investment, so maybe they keep tightening. On the
Speaker 3: other hand, they're in the business of making loans, maybe
Speaker 3: the volume of loans, the absolute volume of loans, is
Speaker 3: more important than the profit margin. But then again, I
Speaker 3: don't know. I can see it both ways.
Speaker 4: Yeah, you know, to be honest, I don't understand how
Speaker 4: this is supposed to work. Like these institutions were created
Speaker 4: by a public charter that sort of had you're going
Speaker 4: to have this mission, and for taking this mission, you know,
Speaker 4: will sort of give you this protection, right, I mean,
Speaker 4: originally they were just public, and then when they were
Speaker 4: made private the first time, you know, everybody assumed that
Speaker 4: they would be backed by the federal government if they
Speaker 4: needed to be, and of course they were. And if
Speaker 4: they didn't have that charter, that agreement, nobody would go
Speaker 4: do an IPO for a new bank and say, hey,
Speaker 4: we've got this great business model. We're only going to
Speaker 4: do securitized mortgages and we're going to be totally undiversified,
Speaker 4: and now we're going to collect capital for this new bank.
Speaker 4: If we get rid of the federal support behind it,
Speaker 4: I don't see how it's viable as a private institution.
Speaker 4: To me, the value that they have is that as
Speaker 4: public institutions, they don't need capital, and that's where the
Speaker 4: sort of what lies at the base of what makes
Speaker 4: them function as institutions. So the only way I could
Speaker 4: see them operating as they are is to still have
Speaker 4: government backing. And if they're privatized but still with government backing,
Speaker 4: that just seems like privatizing and name only. I actually
Speaker 4: think they have value as a public utility, not because
Speaker 4: of the subsidy, but because stain mex Cyclical risk is
Speaker 4: like the one thing that basically you have to be
Speaker 4: paid for in capital markets because you can't diversify away
Speaker 4: from it. And these institutions basically are able to isolate
Speaker 4: systemic risk, and there's no really better place for that
Speaker 4: than in the federal government, and the federal government can
Speaker 4: sort of take that risk with really out. One of
Speaker 4: the little known trivia points about two thousand and eight
Speaker 4: is those that Fanny and Freddy never actually needed cash
Speaker 4: the big you know, two hundred billion dollar injection that
Speaker 4: they supposedly got, but they never used any of that cash.
Speaker 4: They actually just bought treasuries with it.
Speaker 2: You can understand why investors would like access to all
Speaker 2: those profits that Fanny and Freddie are getting. It does
Speaker 2: seem hard to imagine how the government could credibly commit
Speaker 2: to never backstopping again. It seems like it would always
Speaker 2: want Well.
Speaker 3: I don't think they would like I think what investors
Speaker 3: want is both is both?
Speaker 4: Yeah? No.
Speaker 2: Obviously today in twenty twenty five, you know, there are
Speaker 2: reasons why building a new home, a new starter home
Speaker 2: would be more expensive. Labor costs more, especially if we
Speaker 2: have lumber terraffs. Everything costs more, et cetera. So there's
Speaker 2: going to be some increase. But tell us a what
Speaker 2: could we do in your view to safely reverse some
Speaker 2: of the excess tightening that we did post GFC and
Speaker 2: how much can it move the dial in terms of
Speaker 2: incentivizing homebuilders to get re enthused about the starter market.
Speaker 4: I'll say you know, obviously underlying all of this, if
Speaker 4: at the local level, if cities allowed enough apartment construction,
Speaker 4: then it wouldn't necessarily have mattered that much that lending
Speaker 4: standards were tightened effectively. You know, home buyers prefer single
Speaker 4: family homes and landlords prefer apartments, and there typically has
Speaker 4: been very little overlap. And historically the single family rental
Speaker 4: market was just old, depreciated units owned by little mom
Speaker 4: and pop landlords. So if we didn't have all of
Speaker 4: the zoning regulations at the local level that prevent apartments
Speaker 4: from being built at a higher scale, we probably would
Speaker 4: have just switched to a market where we were building
Speaker 4: a million apartments a year instead of three or four
Speaker 4: hundred thousand like we've been doing for the last fifteen years.
Speaker 2: All Right, but it's hard, youmbie. Politics are hard. So
Speaker 2: let's say we let's assume this, let's assume the spillover.
Speaker 4: Yeah, so that you know, that's the long term project.
Speaker 4: But I do want to mention it because I tend
Speaker 4: to harp on the mortgage issue for exactly the reason
Speaker 4: you're saying. It's like, it seems like the attainable solution,
Speaker 4: but it does sort of work in concert with the
Speaker 4: zoning problem. But yeah, I mean, in practical terms, it's
Speaker 4: easy just go back to pick a stand hundred from
Speaker 4: before two thousand and eight and go with that. If
Speaker 4: everyone's too afraid to call it the two thousand and
Speaker 4: five standard, use the nineteen ninety eight to any standard
Speaker 4: that the agencies used or that was applied to private
Speaker 4: lenders in the last forty years would be good enough
Speaker 4: to change the marketplace. And yeah, I mean, I think
Speaker 4: it would be astounding the effect. One thing that I've done,
Speaker 4: I'd compared. So the Census Bureau publishes sales data on
Speaker 4: new homes by price point, and if you compare two
Speaker 4: thousand and six, which is before the crackdown to twenty seventeen.
Speaker 4: And the reason I use those two years is because
Speaker 4: the average home price in those two years was about
Speaker 4: the same, you know, the prices had collapsed, and then
Speaker 4: by twenty seventeen the average price was about up to
Speaker 4: where it had been in two thousand and six. If
Speaker 4: you look at new home sales by price point, basically
Speaker 4: every category, every bin, like three hundred thousand and higher
Speaker 4: new homes were being built that those prices at exactly
Speaker 4: the same rate. They had been building in two thousand
Speaker 4: and six, but four two thousand and eight it had
Speaker 4: been like a half million units a year at those
Speaker 4: price levels, and now it was basically negligible, and it's
Speaker 4: still negligible. So basically, you know, you can add up
Speaker 4: the builders stopped building homes, you know, those price points
Speaker 4: at a you know, a half million a year for
Speaker 4: now more than a decade. And basically how that plays
Speaker 4: out in the marketplace is the mortgage crackdown had you know,
Speaker 4: lowered the prices of existing homes in a way that
Speaker 4: correlated with incomes and with home values, and so just
Speaker 4: systematically in every city there's some price point where below
Speaker 4: that price point, existing homes were so cheap that if
Speaker 4: you could get one, you would just go by an
Speaker 4: existing one. And it's just taken us like twenty years
Speaker 4: to sort of get back to where I think in
Speaker 4: most cities now where we're hitting a tipping point where
Speaker 4: those houses can be built again. But again they can't
Speaker 4: be built for the occupier because they can't get the mortgage.
Speaker 4: So I think we're going to see build a rent
Speaker 4: market in the single family segment really take It has
Speaker 4: taken off, and I think it's going to continue to
Speaker 4: take off. And actually that's the one thing that I'm
Speaker 4: afraid of in terms of, you know, thinking offense versus defense.
Speaker 4: There's a defensive thing that has to happen here with policymakers,
Speaker 4: and that there's already a push to ban corporate ownership
Speaker 4: of single family homes. And that's literally the last form
Speaker 4: of housing on the margin that can grow above the
Speaker 4: rate that we're building now. So if we ban that,
Speaker 4: then we really are legislating homelessness and effect.
Speaker 3: One of the things I remember from the post crash period,
Speaker 3: I don't remember proposals to bulldoze empty houses, but one
Speaker 3: thing I remember is adjustable rate mortgages. And there were
Speaker 3: a lot of them, and we used to write headlines
Speaker 3: like option armageddon as they blew up. That was a
Speaker 3: fun time. No, it wasn't fun. It was fun for
Speaker 3: headline writers, not for actual borrowers. But those adjustable rate
Speaker 3: mortgages actually all but disappeared after the Financial crisis. I
Speaker 3: think they dropped to like single digits a proportion of
Speaker 3: total mortgage originations? Is that a factor here? The idea
Speaker 3: that once upon a time, you could get an arm
Speaker 3: you could get a really cheap teaser rate going in
Speaker 3: and then eventually it went up as interest rates were raised.
Speaker 3: Maybe that would suggest that the structure of the loan
Speaker 3: is more of a factor.
Speaker 4: Yeah, I don't, you know, I don't think so. Just
Speaker 4: going back to that sort of pre COVID you know, market,
Speaker 4: it just doesn't seem that the marginal affordability of mortgages
Speaker 4: is the fact here. In fact, I would love to see,
Speaker 4: you know, there's people making documentaries about all sorts of
Speaker 4: different aspects of the housing market and housing shortage. I'd
Speaker 4: love to see somebody do a documentary where they go
Speaker 4: to one of these new build to rent neighborhoods and
Speaker 4: find ten families and say would you have liked to
Speaker 4: have bought instead of rented? And they'll find plenty of them,
Speaker 4: and then go to the bank with them and see
Speaker 4: what happens, because you know, I think what's happening is
Speaker 4: it's just become your cratic and there's no discretion left
Speaker 4: for the bankers. And I think for the typical potential
Speaker 4: borrow where I think we would be shocked at the
Speaker 4: reasoning sometimes that's being used to deny them. You know,
Speaker 4: just you know, forms of income that you know, maybe
Speaker 4: aren't you know, strict W two that just count for zero,
Speaker 4: you know, you know, just a bunch of things like
Speaker 4: that that really just make it a hard no. And
Speaker 4: there's no marginal tinkering you can do with a mortgage
Speaker 4: to get that to.
Speaker 3: A yes, big picture question. It feels like in the US,
Speaker 3: part of the problem is perhaps that America has never
Speaker 3: decided what it wants housing to be. So does it
Speaker 3: want housing to be a wealth generator, in which case
Speaker 3: prices need to keep going up. Does it want housing
Speaker 3: to be actually affordable so that people can live places?
Speaker 3: And it is true that housing has been one of
Speaker 3: the biggest wealth effects over time. And I'm thinking specifically,
Speaker 3: you know, there are people in New York that bought
Speaker 3: a dilapidated building in Soho and they're now multimillionaires just
Speaker 3: because they bought at that particular time. How should America
Speaker 3: actually think of housing?
Speaker 4: You know, I think there's a temptation to benchmark to
Speaker 4: the peculiarities that we're living in and sort of consider
Speaker 4: them to be a state of nature. And you think
Speaker 4: of that, you know, the famous you know, case Schiller
Speaker 4: housing chart that shows that home prices were flat, you know,
Speaker 4: adjusted for inflation. Home prices were flat for one hundred
Speaker 4: years and then they shot up. You know, there's a deep,
Speaker 4: deep history of home ownership in this country where the
Speaker 4: house is not expected to appreciate value. And in fact,
Speaker 4: even up till two thousand and eight, in two thirds
Speaker 4: of the country, nobody had experienced any unusual increase in
Speaker 4: the value of their houses. So I don't think that's
Speaker 4: actually a necessary part of how we should think about
Speaker 4: Housing can be a very good investment for an owner
Speaker 4: occupier without ever really increasing in real market value. It
Speaker 4: comes from the shelter that it's providing you.
Speaker 3: But there is a peculiar American thing here, which is
Speaker 3: the dream of home ownership, right like the American dream,
Speaker 3: and that doesn't exist as much in other countries. So
Speaker 3: if you look at Europe Germany, people tend to be
Speaker 3: happy being renters for the most part. I'm sure costs
Speaker 3: went up recently, but it's a totally different model.
Speaker 4: Yeah, But I just don't think that it requires this
Speaker 4: ongoing battle between price appreciation and affordability. I think housing
Speaker 4: done right. Up until two thousand and two in Phoenix,
Speaker 4: houses across Phoenix were selling for about three times their tenants' incomes,
Speaker 4: and they had been for decades, and they're you know,
Speaker 4: people were moving to Phoenix by the tens of thousands
Speaker 4: to become homeowners all through that time. So I think
Speaker 4: the benefits of home ownership come more from, you know,
Speaker 4: just getting rid of the principal ancient issue you have
Speaker 4: between the landlord and a tenant that you know has
Speaker 4: value for you know, being your own landlord or your
Speaker 4: own tenant is a value that a landlord or a
Speaker 4: tenant on their own can't capture. And just you know,
Speaker 4: the sense of ownership and the sense of neighborhood that
Speaker 4: you can get from that. You know, all those things
Speaker 4: are sources of value that make home ownership valuable even
Speaker 4: if the home doesn't give you excess profits.
Speaker 2: Right, even without the profits, you've at least covered your
Speaker 2: housing short Every person in the world is born with
Speaker 2: a short position on housing that they have to theoretically
Speaker 2: cover at some point, and so once you own your house,
Speaker 2: you never have to worry about that again. I have
Speaker 2: to say I want to do more actually on the
Speaker 2: existence of the build to rent market, because I knew
Speaker 2: that was one of the areas of home building that
Speaker 2: actually has grown rapidly, and it hadn't clicked to me
Speaker 2: sort of before that. Perhaps a big part of it
Speaker 2: is who has access to that credit and is able
Speaker 2: to own the house. Is an institution which can obviously
Speaker 2: borrow easily, or someone with low income and likely low
Speaker 2: FICO and likely low ability to make a down payment
Speaker 2: is a very interesting phenomenon. Kevin Erdman, thank you so
Speaker 2: much for coming on Odd Lots. Really really appreciate you
Speaker 2: joining us.
Speaker 4: Yeah, it's been a pleasure.
Speaker 2: Chrissy, I love that in twenty twenty five and like,
Speaker 2: we're not done trying to figure out what happened in
Speaker 2: the housing bubble, Well.
Speaker 3: This is exactly it, right, Memories are long, and so
Speaker 3: I'm not sure if you waive to magic wand and
Speaker 3: loosen credit standards at the GSS that all of a
Speaker 3: sudden home builders would be like, true, yes, we're going
Speaker 3: to build a lot, because they all remember what happened
Speaker 3: in the early two thousands. And then the other thing
Speaker 3: I would say is one of the big themes of
Speaker 3: the post two thousand and eight period has been bifurcation
Speaker 3: entails in the economy, so the rich get richer, the
Speaker 3: poor get poorer, and I think In that scenario, lower
Speaker 3: income people just aren't thinking about buying houses and they're
Speaker 3: not trying either, And so that's one reason why you've
Speaker 3: seen the average FICO score for GSE approved loans actually
Speaker 3: go up.
Speaker 2: It would be interesting, to Kevin's point at the end, way,
Speaker 2: we should actually do something more on the build to
Speaker 2: rent market, because that, to me, what you just said
Speaker 2: is sort of the key question here is does there
Speaker 2: exist a significant block of Americans who are a little
Speaker 2: bit lower on the FCO score spectrum, lower on the
Speaker 2: income spectrum, but otherwise stayle enough and sort of confident
Speaker 2: enough that they want this is where they want to
Speaker 2: own and build a family. Yeah, And that's sort of
Speaker 2: like the big question, because right, you can loosen it
Speaker 2: all you want, but to the like, how many of
Speaker 2: those people are there? Is that would the homebuilders then,
Speaker 2: you know, like start building for them. Will it be
Speaker 2: a meaningful part of the market given the bifurcation and
Speaker 2: the sort of barbell nature of the economy where like,
Speaker 2: because to my mind, it certainly seems plausible that the
Speaker 2: home builder is like, yeah, that's great, we still want
Speaker 2: to serve the really rich people.
Speaker 3: Yeah, exactly, and the margins on those houses tend to
Speaker 3: be fatter. And the other thing I would say is
Speaker 3: the question isn't whether people want to buy homes. I
Speaker 3: think in America almost everyone really wants to buy a home,
Speaker 3: although there are some people who find renting more convenient.
Speaker 3: The question is can they actually afford a home?
Speaker 4: Yeah?
Speaker 3: And will they apply? And I think that pool of
Speaker 3: potential home buyers has gone down.
Speaker 2: I do remember that in like pre twenty twenty, people
Speaker 2: posting Zillow links and showing the gap between what you
Speaker 2: can rent them out for and what they would cost
Speaker 2: together on them, and man, I really regret not getting
Speaker 2: a pool of capital together, and they're all like in
Speaker 2: the Midwest, like you know, random houses in Indiana or something.
Speaker 2: I really regret not getting a pool of capital together
Speaker 2: and buying a bunch of those houses and renting them out.
Speaker 3: As in Austin.
Speaker 1: Yeah.
Speaker 2: No, not, you know, just some like normal house and
Speaker 2: you know, the suburbs of Indianapolis or whatever.
Speaker 3: You're going to become one of the financial institutions and
Speaker 3: snapping up all the single homes. It's too family homes.
Speaker 4: It's too late.
Speaker 2: But this is the this is the interesting thing he
Speaker 2: pointed out, which is like that financial institution, you know,
Speaker 2: people to his point, you know, the reason that they're
Speaker 2: able to make a spread is this idea that they
Speaker 2: could get access to credit to buy those homes and
Speaker 2: then an individual can't. So it does seem like if
Speaker 2: you want to tilt the dial between whether a financial
Speaker 2: institution or a family can own a home, you at
Speaker 2: least have to, like probably start by making the credit available.
Speaker 3: Yeah. Absolutely, Uh, shall we leave it there?
Speaker 4: Let's leave it there.
Speaker 3: This has been another episode of the Oudlots podcast. I'm
Speaker 3: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 2: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 2: Follow Kevin Erdman, He's at ka Erdman and check out
Speaker 2: his newsletter Erdman Housing Tracker. It's over on Substack. Follow
Speaker 2: our producers Carmen Rodriguez at Carmen armand Dash'll Bennett at
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