WEBVTT - Is There an Extremely Simple Fix for Affordable Housing? 0:00:02.720 --> 0:00:16.400 Bloomberg Audio Studios, Podcasts, radio News. 0:00:18.560 --> 0:00:22.639 Hello and welcome to another episode of The Odd Lots Podcast. 0:00:22.720 --> 0:00:25.279 I'm Joe Wisenthal and I'm Tracy Alloway. 0:00:25.480 --> 0:00:30.280 You know, obviously, obviously we're a little distracted these days 0:00:30.720 --> 0:00:33.640 because there is so much news all the time. It 0:00:33.680 --> 0:00:35.960 doesn't feel like we have much time for sort of 0:00:36.440 --> 0:00:39.760 classic episodes where we talk about some big idea. But 0:00:39.880 --> 0:00:41.760 one thing that we had heard a lot over the 0:00:41.840 --> 0:00:45.720 years really is that for the public, you know, when 0:00:45.720 --> 0:00:48.160 they think about inflation or they think about the cost 0:00:48.200 --> 0:00:51.519 of living, housing costs are really central to their view. 0:00:51.800 --> 0:00:55.040 Right, And you see this not just in house prices 0:00:55.120 --> 0:00:59.120 but also in rents. Right, everything has gone up since 0:00:59.280 --> 0:01:02.880 the pandemic, and people people don't like it. People don't 0:01:02.920 --> 0:01:06.520 like it when the cost of housing shelter goes up. 0:01:06.760 --> 0:01:08.959 People don't like when the cause of gasoline goes up. 0:01:08.959 --> 0:01:11.560 People don't like the cost of eggs for certain But 0:01:11.600 --> 0:01:14.000 I feel like when it comes to the cost of living, 0:01:14.400 --> 0:01:19.000 everybody must have shelter. Basically, it's also. 0:01:18.880 --> 0:01:20.840 A big chunk, it's a huge chunk of. 0:01:20.959 --> 0:01:25.520 The consumption basket, the consumption of shelter. And we've had 0:01:25.959 --> 0:01:28.640 prices going up for like I don't know, fifteen years 0:01:28.760 --> 0:01:31.720 or something like that. Even the raid hikes didn't do 0:01:31.880 --> 0:01:35.600 much to slow house prices. They slowed other housing activity. 0:01:36.120 --> 0:01:37.840 But it is a real problem and it gets to 0:01:37.880 --> 0:01:41.000 the center of like what people call the American dream. 0:01:41.040 --> 0:01:43.040 And we've talked to people over the years with different ideas, 0:01:43.080 --> 0:01:46.560 you know, yimbi types. They talk about zoning, or people 0:01:46.640 --> 0:01:48.800 say there should be some sort of more public investment, 0:01:48.960 --> 0:01:52.400 et cetera. I don't think like we've fully cracked it, 0:01:52.440 --> 0:01:55.720 and certainly policy makers have yet to solve the problem. 0:01:55.600 --> 0:01:59.160 Right, although it is interesting. It's like one of the few, 0:01:59.320 --> 0:02:03.160 by part of in areas where both sides of the 0:02:03.200 --> 0:02:07.040 aisle will say that housing supply is an issue and 0:02:07.160 --> 0:02:10.280 they want to do something to rectify it. 0:02:10.840 --> 0:02:13.200 So go back to the Great Financial Crisis. Do you 0:02:13.240 --> 0:02:16.360 remember in like twenty ten or something, or maybe middle 0:02:16.360 --> 0:02:18.600 of two thousand and nine, there were actually some people 0:02:18.800 --> 0:02:23.960 that proposed raising like destroying empty houses just to get 0:02:24.000 --> 0:02:25.799 the supply demand imbalanced. 0:02:26.040 --> 0:02:27.600 Just I don't remember that. 0:02:27.800 --> 0:02:28.560 Yeah, this was. 0:02:28.520 --> 0:02:30.799 Absolutely a thing. So we were like, well, why don't 0:02:30.800 --> 0:02:33.480 we just like pave over a bunch of existing houses 0:02:33.520 --> 0:02:35.280 and then we won't have this glut and then the 0:02:35.280 --> 0:02:38.120 prices will keep falling that we can This was a 0:02:38.440 --> 0:02:41.280 I'm going to google this while we're talking, but hopefully 0:02:41.520 --> 0:02:44.040 no one never took that seriously. We'll be absurd because 0:02:44.080 --> 0:02:46.720 now we're in an era of housing scarcity. But that 0:02:46.840 --> 0:02:47.680 was a crazy time. 0:02:47.760 --> 0:02:50.960 M hm. There is a lot of craziness in these 0:02:51.000 --> 0:02:54.560 sort of two thousand and eight to twenty twelve era. 0:02:55.000 --> 0:02:57.040 And one of the things that we know about crises, 0:02:57.120 --> 0:02:59.959 you know, look, there's all this subprime lending, all that stuff. 0:03:00.200 --> 0:03:03.040 So afterwards there was this big impulse to say, like, 0:03:03.320 --> 0:03:06.919 we're never going to allow things to get that crazy again. 0:03:07.000 --> 0:03:09.440 We're never going to allow people to buy a home 0:03:09.520 --> 0:03:14.320 with no down payment, no documentation, and terrible credit scores again. Anyway, 0:03:14.320 --> 0:03:17.080 we're going to be talking to someone whose argument is 0:03:17.120 --> 0:03:18.800 that we may have overshot. 0:03:19.080 --> 0:03:21.600 Great, I'm excited, all right, I'm really psyched. 0:03:21.639 --> 0:03:24.320 We do have the perfect guest, someone who's writing I've 0:03:24.360 --> 0:03:26.920 followed for a long time, and the gist of his 0:03:27.120 --> 0:03:31.160 argument is that we overshot that various post greadte financial 0:03:31.200 --> 0:03:37.119 crisis policy changes in pursuit of bubble avoidance are the 0:03:37.160 --> 0:03:40.240 cause of our housing shortage. Today, we're going to be 0:03:40.280 --> 0:03:43.520 speaking with Kevin Erdman. He is an affiliated scholar at 0:03:43.520 --> 0:03:46.400 the Mercadis Institute and he's the author of the book 0:03:46.440 --> 0:03:49.840 Building from the ground Up. He's a great newsletter. Uh, Kevin, 0:03:49.880 --> 0:03:51.760 thank you so much for coming on O lots. 0:03:52.000 --> 0:03:53.080 Yeah, thanks for having me. 0:03:53.480 --> 0:03:57.440 That's true, right where't there's some headlines about bulldozing over houses. 0:03:57.920 --> 0:03:59.560 I mean, it was like a weird time because like 0:03:59.840 --> 0:04:02.600 there were three things. There was like the home price appreciation. 0:04:03.240 --> 0:04:05.800 There was the amount of housing that was being built, 0:04:05.840 --> 0:04:08.160 and then there was the sort of liberal lending standards 0:04:08.280 --> 0:04:10.280 mortgages to people couldn't afford them. And then there was 0:04:10.280 --> 0:04:12.840 all the also the financial engineering around it. Like there 0:04:12.880 --> 0:04:14.480 was st a lot going on in those days. 0:04:14.760 --> 0:04:17.560 Yeah. Yeah, and there were people that proposed that green span, 0:04:17.680 --> 0:04:20.320 even I think in Hank Paulson's book he mentions that 0:04:20.400 --> 0:04:24.719 green span sort of half jokingly mentioned it. But the 0:04:24.800 --> 0:04:28.520 idea that you would even think of it is crazy. 0:04:28.520 --> 0:04:30.880 In fact, I actually wrote a post on my substock 0:04:30.960 --> 0:04:36.440 recently that Tyler Collen interviewed Joe Stiglitz very recently, and 0:04:36.520 --> 0:04:39.720 Joe Stiglitz was still sort of basing his ideas of 0:04:39.880 --> 0:04:43.279 you know what happened in the recession on this idea 0:04:43.279 --> 0:04:45.480 of overbuilding, and he talked about like there were all 0:04:45.520 --> 0:04:49.239 these low quality houses built in Las Vegas that basically 0:04:49.240 --> 0:04:52.080 were built where nobody would want them. Yeah, and made 0:04:52.120 --> 0:04:54.080 some quip that like the best thing about them was 0:04:54.120 --> 0:04:56.960 they were so poorly built that they wouldn't last long 0:04:57.080 --> 0:04:59.520 or something. And the crazy thing about that is that 0:04:59.560 --> 0:05:01.840 they're actual. If you look back at the data, there 0:05:01.920 --> 0:05:04.039 wasn't actually a building boom in Vegas. There was a 0:05:04.080 --> 0:05:07.480 price bubble, but the rate of home building never actually 0:05:07.520 --> 0:05:09.279 increased in Vegas during that time. 0:05:10.360 --> 0:05:12.440 Why don't you go ahead and give us the sort 0:05:12.480 --> 0:05:15.720 of two minute elevator pitch of your argument just so 0:05:15.760 --> 0:05:17.000 we fully understand it. 0:05:17.320 --> 0:05:21.520 Yeah. I think basically we have had a regional supply 0:05:21.680 --> 0:05:25.080 problem going back into the eighties and nineties, where the 0:05:25.120 --> 0:05:27.960 coastal metros like New York City in Boston and LA 0:05:27.960 --> 0:05:32.800 and San Francisco have clamped down on housing construction and 0:05:32.839 --> 0:05:36.640 so they basically can't grow as cities anymore in total. 0:05:37.240 --> 0:05:40.240 And so when the economy is doing well, when incomes 0:05:40.240 --> 0:05:43.880 are growing, population is growing, people just having babies and 0:05:43.960 --> 0:05:46.880 people growing up and wanting to form households. When that 0:05:47.040 --> 0:05:50.080 sort of all gets moving, those cities actually have to 0:05:50.120 --> 0:05:53.679 depopulate at this point because you know, if per capita, 0:05:53.720 --> 0:05:56.920 we're sort of demanding one or two percent more housing 0:05:56.960 --> 0:06:00.160 per person and they're only willing to build a half 0:06:00.200 --> 0:06:03.680 a percent of housing per year, that means a person 0:06:03.720 --> 0:06:05.960 and a half has to leave the city. So we 0:06:06.000 --> 0:06:10.360 actually have this weird countercyclical migration pattern into and out 0:06:10.360 --> 0:06:12.520 of those cities now. So like, for instance, the last 0:06:12.760 --> 0:06:17.000 several years, even pre dating covid LA has been for instance, 0:06:17.000 --> 0:06:20.040 has been losing population every year. It's down probably three 0:06:20.120 --> 0:06:23.320 or four percent now from its peak population in twenty seventeen. 0:06:24.120 --> 0:06:27.800 So basically that happened during the housing bubble. This counterintuitive 0:06:27.839 --> 0:06:31.039 thing was happening because when we're in good times or 0:06:31.040 --> 0:06:34.080 when people are demanding more housing, people actually have to 0:06:34.080 --> 0:06:37.480 move out of those cities. And the process for doing 0:06:37.520 --> 0:06:40.120 that is the rents go high enough until somebody's cries 0:06:40.240 --> 0:06:43.320 uncle and decides to leave town. And so the cities 0:06:43.320 --> 0:06:47.039 we think of as bubble cities Florida, Nevada, and Arizona 0:06:47.320 --> 0:06:51.000 in inland California were really just the landing places for 0:06:51.080 --> 0:06:55.400 those housing refugees. So those cities truly had a bubble, 0:06:55.400 --> 0:06:57.559 but it was a bubble in fundamentals, so it's actually 0:06:57.560 --> 0:07:00.280 a bunch of families moving there, and ironically those families 0:07:00.320 --> 0:07:03.840 were moving there to lower their housing costs. But all 0:07:03.880 --> 0:07:08.280 that got interpreted just as a bubble period and it 0:07:08.320 --> 0:07:13.120 was blamed on excess lending and speculation and all those 0:07:13.160 --> 0:07:16.320 things that it was really at its core, it was 0:07:16.320 --> 0:07:19.520 a lack of housing that drove all these migration patterns 0:07:19.560 --> 0:07:22.760 that then overwhelmed the cities where prices sort of temporarily 0:07:22.960 --> 0:07:25.720 rose and fell. And so basically what we did is 0:07:25.760 --> 0:07:28.240 we solved all the wrong problems. We blamed it on lending, 0:07:28.240 --> 0:07:30.720 and we cut off lending, and that basically closed down 0:07:31.080 --> 0:07:33.880 home building across the country. And so now the housing 0:07:33.920 --> 0:07:36.040 shortage that was just a a half a dozen coastal 0:07:36.080 --> 0:07:37.800 cities now is countrywide. 0:07:37.880 --> 0:07:40.960 This is very interesting. So I remember the Inland Empire, 0:07:41.040 --> 0:07:44.120 they called them the Sand States, like Arizona and Nevada, 0:07:44.280 --> 0:07:47.080 And the way it was certainly portrayed was that it 0:07:47.160 --> 0:07:49.840 was a speculative bubble, that there was all this like 0:07:49.960 --> 0:07:53.040 household speculation, and you know, there probably was some of 0:07:53.040 --> 0:07:55.320 that and people buying more house than they need because 0:07:55.320 --> 0:07:57.239 they thought they could flip it and flip this house. 0:07:57.480 --> 0:07:59.440 It was a popular TV show. But you're saying the 0:07:59.440 --> 0:08:03.440 fundamental were very sound, that basically it was like spillover population, 0:08:04.160 --> 0:08:07.040 the fundamentals of demand for shelter. What did we do 0:08:07.440 --> 0:08:10.360 after the Great Financial Crisis that, as you see it 0:08:10.720 --> 0:08:12.160 massively slashed lending. 0:08:12.400 --> 0:08:15.080 You know, it's tough to pin it down to one thing. 0:08:15.440 --> 0:08:17.960 You know, there are a series of sort of official 0:08:18.000 --> 0:08:22.760 and unofficial, sort of just pressures that were put on lenders. 0:08:22.800 --> 0:08:24.720 So you know, there was the subprime boom and bus 0:08:24.760 --> 0:08:28.559 that really heated up in sort of late two thousand 0:08:28.600 --> 0:08:30.520 and three, early two thousand and four and then was 0:08:30.560 --> 0:08:34.600 really dead by mid two thousand and seven. And you 0:08:34.640 --> 0:08:36.400 can see sort of the effects of that. And again, 0:08:36.559 --> 0:08:38.560 you know, I assert that the effects of that on 0:08:38.640 --> 0:08:41.920 home prices and everything have been greatly overstated because it's 0:08:41.920 --> 0:08:45.040 basically been inflated to explain everything that actually is explained 0:08:45.040 --> 0:08:48.080 by the supply shortage. But it caused a few percentage 0:08:48.120 --> 0:08:51.559 point increase in home prices on average, and that reversed 0:08:51.559 --> 0:08:54.360 then when that market died, And then then there's this 0:08:54.520 --> 0:08:57.160 second event that happens that sort of just got lost 0:08:57.200 --> 0:09:00.720 in the chaos a because it was popular, be because 0:09:00.760 --> 0:09:04.760 this idea that lending had been so outrageous that there 0:09:04.840 --> 0:09:07.560 was sort of no amounts of pulling back that seemed 0:09:07.559 --> 0:09:10.280 like it was satisfying enough. And so over the course 0:09:10.320 --> 0:09:12.720 of two thousand and eight, there were just formal and 0:09:12.760 --> 0:09:17.800 informal pressures on the federal agencies, the FHJA, Fannie Maine, 0:09:17.840 --> 0:09:21.040 Freddie Mack to you know, be careful and tighten up lending. 0:09:21.120 --> 0:09:23.480 And you can see it in the numbers. They report 0:09:23.520 --> 0:09:25.600 in their books that over the course of two thousand 0:09:25.640 --> 0:09:28.600 and eight, any year up to that, even back into 0:09:28.600 --> 0:09:32.920 the late nineties, the typical Fanny and Freddie borrower had 0:09:32.960 --> 0:09:36.000 a credit score of say seven to ten and which 0:09:36.040 --> 0:09:38.839 is about average. And then by the end of two 0:09:38.840 --> 0:09:41.000 thousand and eight, mid two thousand and nine, it's more 0:09:41.080 --> 0:09:44.439 like seven sixty, which is you know, sort of top 0:09:44.559 --> 0:09:47.960 quarter credit score. And so basically, over the course of 0:09:48.000 --> 0:09:50.680 a year, year and a half, the average score on 0:09:50.760 --> 0:09:53.440 an approved mortgage goes up by forty or fifty points 0:09:53.440 --> 0:09:57.640 and stays there. It's really still there today. So basically, 0:09:58.000 --> 0:09:59.840 you know, I would say probably ten or twenty million 0:09:59.840 --> 0:10:02.240 five family's three two thousand and eight to post two 0:10:02.280 --> 0:10:04.480 thousand and eight have lost access to mortgage funding. 0:10:05.760 --> 0:10:08.600 But just on this point, I mean, I can go 0:10:08.800 --> 0:10:11.439 get a loan at Fannie May with a six to 0:10:11.520 --> 0:10:14.240 twenty credit score or something like that. I think it's 0:10:14.240 --> 0:10:18.360 a little higher over at Freddie Mac. And there's minimum 0:10:18.520 --> 0:10:23.360 down payments. I think it's three percent. But overall those 0:10:23.440 --> 0:10:27.560 haven't moved that much from the early two thousands. Like 0:10:27.640 --> 0:10:29.960 back in two thousand and six, at the height of 0:10:30.000 --> 0:10:33.840 the housing bubble, the minimum down payment was still three percent, 0:10:34.080 --> 0:10:38.680 and I think the FICO scores were generally lower. Is 0:10:38.720 --> 0:10:44.520 there perhaps just a lack of viable home buyers out there? 0:10:44.640 --> 0:10:48.520 I mean, credit card debt is at a record, wages 0:10:48.679 --> 0:10:53.520 have been kind of sluggish. Maybe those people people who 0:10:53.600 --> 0:10:58.000 are asset light, as Chimoth would say, maybe they just 0:10:58.080 --> 0:10:59.880 they're not thinking about buying houses. 0:11:00.520 --> 0:11:04.440 No, it's definitely so. I mean those products exist, but 0:11:04.559 --> 0:11:08.760 the quantity of loans being originated to borrowers with those 0:11:08.760 --> 0:11:12.080 credit scores is really negligible. So like if you look 0:11:12.080 --> 0:11:15.480 at Fannie May, for any year two thousand and seven 0:11:15.559 --> 0:11:19.000 or before, about two thirds of their book of business 0:11:19.200 --> 0:11:23.080 was to borrowers with seven forty scores or less, and 0:11:23.120 --> 0:11:27.600 then immediately then by two thousand and nine it's only 0:11:27.679 --> 0:11:30.640 one third, and then it's stayed basically one third of 0:11:30.679 --> 0:11:32.959 their new business to the point where now their book 0:11:32.960 --> 0:11:36.040 of business is basically flip flopped. So the thing is 0:11:36.080 --> 0:11:39.000 that you know they have products, but there's the ability 0:11:39.040 --> 0:11:42.520 to repay standards that have been put in place and tightened, 0:11:42.600 --> 0:11:44.960 and there's just you know, there's just a black box 0:11:45.000 --> 0:11:48.960 of underwriting boxes that have to be ticked off that 0:11:49.200 --> 0:11:51.720 in theory, there's a product that goes to people with 0:11:51.800 --> 0:11:55.040 six twenty credit scores, but in practice, very few of 0:11:55.080 --> 0:11:57.400 those families can run the gauntlet to actually get the 0:11:57.480 --> 0:12:12.000 yes at the end of the approval process. 0:12:14.360 --> 0:12:17.679 Well, speaking of black boxes, I was trying to find 0:12:17.920 --> 0:12:22.199 like the average approval rate for Fannie and Freddy for mortgages, 0:12:22.240 --> 0:12:25.920 and ideally you could break down approval rates by FICO 0:12:26.000 --> 0:12:29.800 scores or something like that, and I couldn't find anything. 0:12:30.280 --> 0:12:33.560 Do you have a sense of a are there official 0:12:33.640 --> 0:12:37.000 numbers out there that I just couldn't find and be 0:12:37.720 --> 0:12:39.839 do you have a sense of what the approval rates 0:12:39.920 --> 0:12:40.800 might actually be? 0:12:41.320 --> 0:12:43.679 Yeah, I don't have like an index that I tracked 0:12:43.840 --> 0:12:46.480 you months to month, and in a way that gets 0:12:46.520 --> 0:12:50.040 difficult that that number gets less informative over time. I 0:12:50.120 --> 0:12:54.280 have seen claims that there's this very specific period over 0:12:54.320 --> 0:12:55.880 the course of two thousand and eight and early two 0:12:55.880 --> 0:12:59.880 thousand and nine where those standards change, and soon after that, 0:13:00.120 --> 0:13:02.240 you know, two thousand and nine or ten. I know 0:13:02.320 --> 0:13:04.480 one of the mortgage I cite it in one of 0:13:04.520 --> 0:13:09.040 the books that one of the mortgage tracking institutions noted 0:13:09.040 --> 0:13:12.880 that the average score on denied mortgages at that point 0:13:12.880 --> 0:13:14.720 in two thousand and nine or ten had a higher 0:13:14.760 --> 0:13:18.440 average score than approved mortgages had had before two thousand 0:13:18.440 --> 0:13:21.760 and eight. And one of the oddities about the subprime 0:13:21.800 --> 0:13:24.880 boom and bust is that the subprime boom really wasn't 0:13:25.240 --> 0:13:28.560 associated with much of a change in the average It 0:13:28.600 --> 0:13:32.840 was mostly about terms getting reckless, but the average borrower quality, 0:13:32.920 --> 0:13:36.240 surprisingly enough, didn't really change that much in total during 0:13:36.240 --> 0:13:39.480 those boom times. So you know, as you get farther 0:13:39.559 --> 0:13:42.040 away from two thousand and eight, the denial rate becomes 0:13:42.120 --> 0:13:45.800 less informative because at some point families know who can 0:13:45.880 --> 0:13:49.480 qualify and who can't, And you know, somebody that has 0:13:49.520 --> 0:13:52.480 a seven to ten credit score and something wrong with 0:13:52.520 --> 0:13:54.280 their income that they know is going to be a 0:13:54.720 --> 0:13:56.600 prevent one of the boxes from getting checked off. They're 0:13:56.640 --> 0:13:58.160 not going to keep going back to the bank year 0:13:58.200 --> 0:14:00.559 after year after year to show up on the denial rates. 0:14:01.360 --> 0:14:03.360 But you can see sort of the effects of this 0:14:03.440 --> 0:14:05.240 in a lot of ways, Like if you go back 0:14:05.280 --> 0:14:08.520 to pre COVID when interest rates were really low, before 0:14:09.320 --> 0:14:12.719 home prices took off, there were houses across the country 0:14:13.280 --> 0:14:17.360 that would have previously been owner occupied where you go 0:14:17.400 --> 0:14:19.600 to Zello and they would estimate the rent on that 0:14:19.680 --> 0:14:23.080 house to be like fifteen hundred and a mortgage, you know, 0:14:23.080 --> 0:14:25.200 for what it was selling for the mortgage might only 0:14:25.240 --> 0:14:27.240 be five or six hundred a month, like it was. 0:14:27.400 --> 0:14:30.920 The mismatch after these families were cut out of the 0:14:30.920 --> 0:14:34.720 market is you know, pretty extreme during those post two 0:14:34.720 --> 0:14:35.600 thousand and eight years. 0:14:36.000 --> 0:14:40.640 Let's stipulate that there is a cohort out there that 0:14:40.960 --> 0:14:44.880 you know has some sort of stable income, potentially able 0:14:44.960 --> 0:14:48.480 to buy a home, wants to buy a home, and 0:14:48.840 --> 0:14:51.480 can't get a mortgage for all of the reasons that 0:14:51.560 --> 0:14:54.880 you laid out, How does that actually feed through to 0:14:55.400 --> 0:14:58.680 lack of supply out there? Talk to us about the 0:14:58.800 --> 0:15:03.840 link between the pressures that you described to constrain the 0:15:03.880 --> 0:15:07.760 supply of credit and just the lack of abundance, the 0:15:07.840 --> 0:15:08.480 lack of building. 0:15:08.800 --> 0:15:12.160 Yeah, so you can see a real effect. Credit scores 0:15:12.200 --> 0:15:16.400 are highly correlated with incomes, okay, and they're correlated with age, 0:15:16.480 --> 0:15:19.920 which correlates with savings. So you can sort of use 0:15:20.280 --> 0:15:22.880 like neighborhood income or zip code income as a proxy 0:15:23.080 --> 0:15:26.440 for you know, the average credit score in that zip code, 0:15:26.800 --> 0:15:30.840 and you can just see how zip codes after two 0:15:30.840 --> 0:15:33.960 thousand and eight, the majority of the country had actually 0:15:34.000 --> 0:15:36.720 not really had a boom and bust, like you had 0:15:36.800 --> 0:15:40.800 the coastal cities and the sand state cities where prices 0:15:40.840 --> 0:15:42.960 had gone way up and then sort of, you know, 0:15:43.000 --> 0:15:46.640 come back down. But you know, cities like Atlanta or Chicago, 0:15:46.960 --> 0:15:50.080 or Indianapolis or Saint Louis, you know, they had all 0:15:50.200 --> 0:15:53.520 sort of been just moving along with regular building rates 0:15:53.560 --> 0:15:55.960 and prices that were sort of staying about where they 0:15:55.960 --> 0:15:59.000 had been in terms of price to income ratios. And 0:15:59.040 --> 0:16:01.800 then once this tight happens, you can see in all 0:16:01.840 --> 0:16:05.360 those cities, whether they had abubble or not, the price 0:16:05.400 --> 0:16:08.640 to income ratios and the poorer zip codes, you know, 0:16:08.720 --> 0:16:13.280 go down by twenty thirty forty fifty percent, while the 0:16:13.360 --> 0:16:17.720 high end neighborhoods sort of stayed flat. And so you know, 0:16:17.800 --> 0:16:21.160 you get this drop in the market price of existing 0:16:21.200 --> 0:16:26.200 homes that's very income correlated, and so it basically just 0:16:26.280 --> 0:16:29.800 dropped the price of existing homes below the cost of 0:16:29.960 --> 0:16:33.240 building new homes, but very regressively. So at the high 0:16:33.360 --> 0:16:36.120 end they could still build new ones, they were still 0:16:36.160 --> 0:16:38.840 selling for basically the same price they had been, but 0:16:38.960 --> 0:16:40.240 at the low end, you know nothing. 0:16:40.560 --> 0:16:43.560 So this gets into the economics of the home builder, 0:16:43.880 --> 0:16:46.240 the home builder economics, which is that because you have 0:16:46.320 --> 0:16:51.920 this bifurcation in basically price relative to income, is just 0:16:52.160 --> 0:16:56.200 no longer made sense for them to build what we 0:16:56.320 --> 0:16:57.800 call a starter home. 0:16:58.080 --> 0:17:00.840 Yeah, and I would say that's totally results of the 0:17:00.880 --> 0:17:03.680 crackdown in lending. The rents didn't really go down on 0:17:03.720 --> 0:17:06.600 those units, it was just the prices. And the prices 0:17:06.640 --> 0:17:10.639 went down because we basically made it illegal for those 0:17:10.800 --> 0:17:14.639 traditional home owner occupiers to be buyers. So basically the 0:17:14.680 --> 0:17:16.800 prices fell. One way you could look at it is 0:17:16.840 --> 0:17:20.800 that landlords require a higher yield than owner occupiers do, 0:17:20.880 --> 0:17:23.199 and so the price first there was sort of just 0:17:23.359 --> 0:17:27.960 a chaotic drop and then by say twenty fifteen, they 0:17:28.000 --> 0:17:31.160 sort of leveled out at basically the lower price point 0:17:31.200 --> 0:17:34.320 that a landlord would be willing to invest in those houses. 0:17:35.000 --> 0:17:38.280 You mentioned mortgage rates earlier, and I'm wondering how big 0:17:38.320 --> 0:17:42.080 a factor those are in your analysis. So, say, if 0:17:42.080 --> 0:17:45.600 mortgage rates dropped to three percent again, would there be 0:17:45.680 --> 0:17:50.679 more supply because there's more demand, And also presumably the 0:17:50.720 --> 0:17:54.520 cost of building of financing for the home builders would 0:17:54.560 --> 0:17:57.600 also go down in that scenario, so maybe they would 0:17:57.600 --> 0:17:58.840 build more as well. 0:17:58.960 --> 0:18:01.760 Now I used to put weight on that, just analytically, 0:18:01.800 --> 0:18:03.879 over the last decade that I've been studying this, I 0:18:04.119 --> 0:18:07.919 just keep lowering my estimation of how important the actual 0:18:07.960 --> 0:18:10.960 mortgage rate is. And you know, one example, which is 0:18:11.000 --> 0:18:12.840 the example I give earlier, is that there were tons 0:18:12.880 --> 0:18:15.720 of houses across the country where families could have cut 0:18:15.720 --> 0:18:19.080 their housing costs by more than half in the late 0:18:19.119 --> 0:18:22.880 twenty tens that they weren't able to just because there 0:18:22.960 --> 0:18:26.320 isn't a government agency that's telling if they're qualified to 0:18:26.359 --> 0:18:29.359 be a renter. There's only agencies telling them they're unqualified 0:18:29.400 --> 0:18:33.600 to be buyers. So just that economic decision isn't available 0:18:33.600 --> 0:18:36.960 to them, and for families they can get a mortgage. 0:18:37.040 --> 0:18:42.400 The economics I think were unusually positive before twenty twenty one, 0:18:42.560 --> 0:18:45.439 but at this point there's still positive on the margin. 0:18:45.520 --> 0:18:49.280 So basically, anyone who can qualify for mortgages in general 0:18:49.400 --> 0:18:52.680 is probably willing to be a buyer at today's prices 0:18:52.720 --> 0:18:55.200 and rates, and I'm not sure that that changes much 0:18:55.240 --> 0:18:57.120 more than marginally if raids go back down. 0:18:57.560 --> 0:19:01.959 You said that the government agencies de facto telling people 0:19:02.000 --> 0:19:04.679 that they are not allowed to be a borrower, and 0:19:05.000 --> 0:19:09.119 that's not strictly true. There's not allowed to be a 0:19:09.200 --> 0:19:13.760 borrower from a mortgage that's backed by Fanny and Freddy. 0:19:14.160 --> 0:19:18.720 If there is a substantial population of theoretically starter home 0:19:18.960 --> 0:19:22.359 would be starter home owners with low on the income ladder, 0:19:22.480 --> 0:19:26.199 lower on the FCO score scale. Why couldn't there be 0:19:26.240 --> 0:19:29.480 a private sector solution, because when you talk about the math, 0:19:29.760 --> 0:19:32.480 you don't have to have a mortgage backed by Fanny 0:19:32.560 --> 0:19:35.920 and Freddy. Why not a private sector solution to sound 0:19:36.040 --> 0:19:38.960 like what in your case seems like a fairly big arbitrage, 0:19:39.600 --> 0:19:40.160 It would. 0:19:39.960 --> 0:19:44.119 Be the regulatory liabilities on the banks and the mortgage 0:19:44.200 --> 0:19:47.720 riginators are even tighter than they are on Fanny and Freddy. 0:19:47.880 --> 0:19:50.760 So it's again it's tough to quantify. There's a lot 0:19:50.760 --> 0:19:56.479 of just sort of potential backward looking penalty potential. You know, 0:19:56.560 --> 0:19:58.720 if we have another recession and a bank has a 0:19:58.720 --> 0:20:03.040 bunch of defaults, the regulators could come in and say, oh, 0:20:03.160 --> 0:20:05.879 you know, those were mortgages that shouldn't have been made. 0:20:05.920 --> 0:20:08.560 In an addition to the cost of foreclosure, we're going 0:20:08.600 --> 0:20:10.679 to give you a bunch of penalties. And you know, 0:20:10.720 --> 0:20:12.840 there's just a lot of limits on how big of 0:20:12.840 --> 0:20:15.800 a spread they can use, plus limits on what they 0:20:15.840 --> 0:20:19.280 can count as income, plus you know, mandates on things 0:20:19.320 --> 0:20:21.520 they have to do in underwriting. That just all add 0:20:21.600 --> 0:20:25.720 up to low dollar mortgages being very hard to make. 0:20:25.760 --> 0:20:27.560 And if you make them, then you've got these sort 0:20:27.600 --> 0:20:31.719 of vague liabilities that you're carrying, so to the point 0:20:31.760 --> 0:20:35.719 that just lenders haven't been willing to make them. And 0:20:35.800 --> 0:20:38.000 so you know, for most of the past ten or 0:20:38.040 --> 0:20:41.840 fifteen years, there's been this qualified mortgage patch where if 0:20:41.840 --> 0:20:45.199 you could get Fanny and Freddy and the FAHA to 0:20:45.240 --> 0:20:48.679 buy your mortgages and put into their system, then it 0:20:48.720 --> 0:20:52.800 would give you a liability waiver on all those regulations. 0:20:52.800 --> 0:20:55.840 And it was called the QM patch, and so basically, 0:20:55.840 --> 0:20:58.960 if you could get the q impatch, you made the loan. 0:20:59.119 --> 0:21:01.880 And very few bankers have been willing to make any 0:21:01.920 --> 0:21:05.159 mortgages with any default risk at all that couldn't get 0:21:05.160 --> 0:21:08.040 the q impact. So really, I would say pre two 0:21:08.040 --> 0:21:10.840 thousand and eight, you could say that the agencies were 0:21:10.880 --> 0:21:13.680 sort of a subsidy that they lowered the average mortgage 0:21:13.760 --> 0:21:15.959 rate by probably a quarter of a percent or something. 0:21:16.359 --> 0:21:18.600 Since two thousand and eight, really, they're just running a 0:21:18.640 --> 0:21:22.720 monopoly on default risk, where the government imposes a bunch 0:21:22.760 --> 0:21:26.240 of liabilities on private lenders for default risk, and so 0:21:26.880 --> 0:21:30.719 the agencies actually can overcharge for taking that risk and 0:21:30.880 --> 0:21:33.160 just keep their very tight standards right. 0:21:33.240 --> 0:21:38.280 And the agencies, i mean, GSE guaranteed mortgages absolutely dominate 0:21:38.440 --> 0:21:39.600 the market nowadays. 0:21:39.800 --> 0:21:42.960 Yeah, and the government's pulling in billions in profits every year. 0:21:43.000 --> 0:21:45.880 On well, on that note, this is kind of exactly 0:21:45.920 --> 0:21:47.720 what I wanted to ask you. There is a lot 0:21:47.760 --> 0:21:50.720 of buzz at the moment about the possibility of Fanny 0:21:50.760 --> 0:21:54.439 and Freddie getting privatized, and we've seen, you know, some 0:21:54.520 --> 0:21:57.439