Thursday, June 28, 2018

Housing: Part 308 - Why is inventory so low?

One facet of the housing market that gets a lot of attention is the very low level of inventory, especially in low-tier markets.  It looks like a strange market.  Prices seem high on a price-to-income basis, and they continue to rise.  Low inventory tends to correlate with a seller's market, and it is frequently treated as a sort of causal element.  Prices will rise because inventories are low.  I don't find that sort of framing very helpful.  But, the mysteries about the current housing market go beyond that.  If inventories are low and prices are high, why aren't buyers just moving into new stock?  Why aren't homebuilders filling this market?

Timothy Taylor has some comments on this today, here.  He covers some of these issues.  He references a study that mentions rising costs, limited lot supply, builder caution coming out of the crisis, etc.  I think all of these are false flags.  They appear to be important issues, but until a full reconsideration of the housing boom and the crisis is undertaken, it would be impossible to solve the mystery of low inventory.  The truth is that, relative to high tier home prices, low tier prices are very low.  And, taking into account very low long term real interest rates, prices are also low.  There are many regulatory barriers to new lot development, so it appears that this is the constraint.  It is a constraint, but it's not binding.  On the margin, builders are being outbid for land because the use of the land that they are trying to develop is underpriced by 20-40%.  Is there any doubt that lots would be widely available if home prices were 40% higher and builders could double their bids for lots?

But, if inventory is so low, then why don't prices rise until that happens?

The reason is that we have imposed a regime shift in regulatory barriers to home ownership, and probably more than a third of households live in homes that they would not currently qualify for.  We have created non-price barriers to ration housing through mortgage regulation, so now about half the country are housing have-nots, who must rent.  Renting comes with higher costs for management, vacancy, tenant conflicts, etc.  So, supply for rented units tends to be lower, rents relative to unit value tend to be higher, and so the quantity demanded by renters is lower than it is by owners.  This is only made worse by income tax benefits targeted at owners.

But, there are millions of households who are have-nots in the current regime who were haves in the previous regime, and they still live in homes that they own.  Given the current regulatory regime, they are over-consuming housing.  They are living in homes that are more valuable than the homes they would be allowed to live in today if they were starting out fresh.  This is one basic way to think about it.  Inventory is low because there are millions of homeowners who are sucking up more housing supply that the FHFA and the CFPB would let them if they could.  Households who were foreclosed on have reduced their housing consumption, but households that managed to maintain ownership are grandfathered in to previous levels of housing consumption.  If the current regime remains in place, then real housing consumption will be lower, rents will be higher on existing properties, and prices will be relatively lower.  In this regime, we don't need to build that many more homes.  But, in the meantime, these households are grandfathered in, and the process of shifting down real consumption of housing will be very slow.  So they have a temporary claim on a portion of the housing stock that will slowly be cured by reduced housing consumption rather than by new building.  While this transition takes place, there is less housing left for other households to claim, but no means or incentive to build new housing to make up for it because it is a temporary disequilibrium.

Thinking of their homes as financial securities, the grandfathered owners are earning very high yields on their investments based on current market values.  Partly that is because rents have generally risen after a decade of crimped supply.  But, mostly, it is because the new regime pulled prices down.  These are sunk costs.  The existing owners didn't benefit from it.  The high yield comes from their unrealized capital losses.  But, the oddity here is that the reason the prices of their homes is low is because owner-occupier demand is being arbitrarily constrained by mortgage regulators.  The reason their homes are underpriced is because buyers are being held out of the market - including them!

The great and comprehensive annual report from the Joint Center for Housing Studies of Harvard University, cited by Taylor, notes that length of tenure has risen for both owners and renters. American Housing Survey data I have seen also shows this, and the AHS data shows length of tenure that is flat until the crisis, then climbs. The reason is that households are stuck in their homes. They are grandfathered in. And, the reason that length of tenure for renters has also increased is that people who intend to remain in a unit for many years generally should be owners, but the current regime locks them out of ownership.  So, the marginal households that have become renters over the past decade are naturally stable households with longer tenures.

So, let's walk through what the market looks like for a grandfathered owner.  If they want to downsize, they probably can do that, because they would be reducing their expenses, and they might even be able to swing a mortgage, since any home equity they have would go farther toward a smaller home.  But, higher regulatory costs and limits on fees have made small loans very difficult for lenders to make.  If they want to upgrade, they are unlikely to qualify.  A home in 2002 that sold for $140,000 might have rented for $1,000 and had a monthly mortgage payment of $750.  That family would still have a monthly payment of $750 (or slightly more or less if they refinanced along the way), but now rent would be more like $1,300.  So, a move to a similar property would entail an increase in their monthly cash outflow from $750 to $1,300, and it would only get worse if they tried to trade up to a better unit.

Homeowners get a tremendous deal today because home prices are being held down by repressed lending.  Moving out of a home that is owned to a rental unit is a terrible deal, right out of the gate.  The same factor that prevents this household from moving into another owned property is the reason that the deal they have for remaining in the property they own is so great.  No marginal shift in price is going to overcome that.  The only way to break this logjam is for prices to rise significantly, and the only way that will happen is for mortgage markets to loosen up significantly.

This is why "low inventories will lead to rising prices" is not a useful framing.  If prices rise, it will almost certainly be associated with rising inventories.  And, if the public understanding of the housing market remains mired in its current form, that will be accompanied by dire calls for economic contraction, because rising prices in the face of rising inventories will look like a market top that is leading to oversupply.  Intentional contraction will lead to....well, contraction....and the contraction will be blamed on loose lending and oversupply.

If your model for managing the macro economy calls for contraction, then model error and model confirmation both look exactly the same.  That is the problem with models from the Minsky school or the Austrian business cycle.  If their calls for cutting the boom off at its knees are wrong, they actually create unnecessary instability, and that only leads to calls for doubling the dose of poison.  That sort of conclusion infects much of the thinking about the housing boom and bust.  As long as Fed policy is viewed as a function of interest rates, it will be an infection that is difficult to cure.  We can see how difficult it is to cure, since low tier markets tied up in knots with very little activity or building don't seem to have dampened the idea that loose money is the cause of high prices.

Wednesday, June 27, 2018

Housing: Part 307 - Apartment Supply and Rent Inflation

I have been seeing reports of falling rents in various cities.  Zillow data generally shows a decline in rent inflation over the last couple of years. Here is a report from has a nice report out with data for many cities that also generally shows declining rent inflation.
This is generally attributed to rising supply because of strong multi-unit building.  I don't doubt that this is true to a certain extent.  Seattle seems like an especially good case for this.  Here is a chart of permits issued for multi-unit and single family unit homes, and the Case-Shiller home price index in Seattle.

Single family home building remains low in Seattle while multi-unit building expands at strong rates.  Meanwhile, according to the Seattle Times and, above, rent inflation is declining and according to Case-Shiller, single family home prices are rising.

Looking at the zip code level data from Zillow for either multi-unit or single family, rent inflation appears to be strong in low-tier zip codes and moderating in high-tier zip codes.  But, the rise in single family home prices appears to be concentrated in the high tier zip codes.

I'm not sure what is going on in Seattle, but I think there is more substitution between these markets than is frequently assumed, especially in today's context.  I'm not sure that even in Seattle this is a simple story of apartment supply leading to rent deflation.  Across Seattle, it seems that high end rents are leveling out while low end rents remain strong, yet high end prices are rising more than low end prices.  I haven't spent the effort to get to the bottom of it.

Thinking more broadly, it is interesting that the decline in rent inflation that is showing up at places like isn't showing up in CPI or PCE data.  Here is a graph of the growth in real and nominal tenant housing expenditures.  I have also included the measure of the number of new multi-unit permits here (black dashed line, right hand scale).  Notice that there isn't much of a relationship between the growth in tenant-occupied real housing expenditures and the growth of multi-unit permits.  I think that is because, at least for the last 20 years or so, the growth in tenant-occupied housing expenditures has been largely determined by the shift of single family units between rented and owned.  From 1994 to 2004, the shift was from tenant-occupied to owner-occupied, so while there was a decent growth in multi-unit permits, the rate of tenant-occupied housing expenditures was flat, even though rent inflation was stable and high.  Then, after 2004, there was a shift of single family units back to tenant-occupied, because we killed the mortgage market as part of the moral panic against the housing boom.  So, for several years, new unit growth was low, but tenant-occupied housing expenditures rose.

Now, we have switched back to the pattern that was in place during the boom.  And, it so happens, homeownership rates have begun to rise again.

There are a couple points to consider here:

  • Whether this rise in homeownership will persist remains to be determined.  The level of mortgages outstanding has been growing slowly for a few years, but there hasn't been any shift toward more lending to households with FICO scores below the mid-700s.  If that doesn't happen, then there is a limit to how much homeownership could rise.  There just aren't that many households with FICO scores over 760 who don't already own homes.
  • Rent inflation has been high for the last several years, but one reason it hasn't been higher is that households have been contracting their housing expenditures in the aggregate in order to try to moderate rising housing costs caused by the shortage of housing.  This should put a floor on rent deflation, because even if homeownership expands and single family homebuilding increases as a result, much of that expansion will be accommodating pent up demand.  That isn't a guarantee against declining rents.  Certainly, a fully functional housing market should equate to rent levels on existing units that are relatively lower than they are in today's constrained market. But, while intuition would tell us that rising supply will pull us down the demand curve to a lower price level, in today's context, rising supply will be associated with a demand curve shifting out.  The net effect on price may not be positive, but it will be much higher than it would be with a static demand curve.
In sum, what this suggests is that (1) it is the shift in single family units that will probably affect multi-unit rents more than the direct supply of multi-unit building, (2) for that shift to be significant enough to lower rents, the increase in single family building would probably have to be very large, and (3) an effective hedge against multi-unit rentals would therefore probably be exposure to single family home builders or to prices on owner-occupied units in either single family or multi-unit markets.

This third point is important and contrarian.  Rising supply will be associated with rising price/rent multiples.  If rents decline or stagnate because of rising supply, prices will necessarily be rising, because the lack of single family home expansion has been the result of credit repression that has pushed prices of existing properties below replacement value.  To builders, this looks the same as a market where costs have risen.  In either case, they are unable to compete with existing stock on price.  But, unless interest rates rise significantly, this divergence will have to be solved with rising prices.  And, interest rates are unlikely to rise until trillions of dollars of pent up demand for new homebuilding are unlocked to suck up the low risk savings that are pushing interest rates down.  So, while this may be counterintuitive, the hedge against falling rents now would be a long position on rising prices.

Monday, June 25, 2018

Housing: Part 306 - The boom was good. The bust was bad.

The Federal Reserve has a new article (HT: Noah Smith) posted that is a great example of the problem of trying to develop new understanding in a context where canonized wisdom is wrong.

The main point of the article is that, "The rise in rent-inclusive PIRs for below-median income households suggests that many of these households are about as vulnerable as near the onset of the financial crisis, as more of their income is committed to rent payments, possibly at the expense of saving for down payments for home purchases."

PIR's are payment to income ratios.  They are saying if we estimate housing expenditures only using mortgage payments, then it looks like housing costs have declined since the housing boom, but if we include rent payments in that measure, then households with lower incomes actually have more precarious housing expenses than they did during the boom.

This is the correct conclusion.  What's fascinating is that the data they use to come to this conclusion also contradicts the idea that the housing boom was associated with unsustainably high housing expenditures.  But, the idea that there was an unsustainable housing bubble is canonical.  So, the fact that this data contradicts that presumption is not important.  The canon does not require empirical confirmation.

I don't blame the authors of the article for this.  We have to have a canon.  We can't require that the canon be reconfirmed every time we try to learn something new.  But, it still fascinates me to see a single data set that is used to confirm some new idea within the canon of accepted facts, even while the fact that the data disputes the canon itself goes unnoticed.  As long as the canon is wrong, this will be inevitable.

We can see what is happening in the graphs from the article.

Here (figure 2 from the article), the portion of households with debt payments (which are mostly mortgage payments) above 40% of income is shown in blue.  The portion of households who spend more than 40% of income on the sum of debt and rent is shown in red.

The point that the authors try to make here is that debt payments are an incomplete measure of distressed housing costs.  But, this graph supports an interesting point about the housing boom.  There was a lot of concern expressed about that rising debt-to-income ratio from 2001 to 2007.  This rise in high levels of debt was completely from increased debt among households with high incomes.  And, notice what we see in the graph here.  If we add rent payments to mortgage payments, there was little change from 2001 to 2007.  In other words, households were not increasing their total housing expenses.  They were simply substituting mortgage payments for rent payments.  The households who were taking on mortgage payments greater than 40% of their incomes had been making rental payments that were more than 40% of their incomes.  These mortgages were rent hedges being taken out by households with high incomes who lived in housing deprived cities.

From 1995 to 2007, there was a housing boom, and that boom was associated with a reduction in rent payments.  Since 2007, mortgage repression has lowered the prices of homes, so that households that own homes spend less, but renters are spending more.

If we could expunge the error-plagued canon from the public consciousness, then the obvious lesson to be learned from this graph is that the housing boom greatly reduced the number of households with distressed levels of housing expenditures.

Here, I will compare Figure 1 and Figure 4 from the article.  Again, the blue line is for debt payments.  The red line is for debt payments plus rent payments.  (These are rough approximations of the measures shown.  See notes in the article for details.  Some other minor payments are included in some of these measures.)  Figure 1, on the left, shows the portion of all incomes going to these payments.  Figure 4, on the right, shows the portion of incomes going to these payments for households with below median incomes:

For all households, we can see that total payments (in red) were fairly stable throughout the boom, and have declined since then.  As described above, the boom reflected mostly a substitution of mortgage payments for rent payments.  But, take a look at payments for households with below median incomes.  Remove the terrible, distorting, wrong canon from your head so that you can actually see this graph in full.  There is one overwhelming point that this graph makes clear: The housing boom was associated with a significant decline in total housing payments for households with low incomes.  The housing boom was reducing economic distress of households with low incomes, and that process was halted in 2007 when the housing boom was interrupted.

The authors do not note this because even though the idea that low income households were especially vulnerable at the cusp of the financial crisis is wrong, it is canonical.  It is not a point that can be disputed with a single data point.  So, the most significant piece of information that this graph makes clear is not noticeable.  I would suggest that it is effectively invisible to the naked eye, even though it lies in plain sight.

I will point out a couple of other details from Figure 4.  As with the broader measure I described above, the rise in debt payments in 2004 is completely countered by a decline in rent payments.  There was no net increase in housing expenditures.  But, note that this measure peaked in 2004 (which is when homeownership rates peaked).  The so-called subprime bubble happened from 2004 to 2007.  Mortgage payments for households with low incomes peaked before the subprime and Alt-A markets exploded.  That is because the rise in private securitizations was mostly associated with the households with high incomes buying homes in housing deprived cities while households with lower incomes migrated to less expensive parts of the country.

The housing bubble was the acceleration of the national segregation by income that is set in motion by localized housing deprivation.  Households with high incomes were taking on the expense of claiming their piece of limited residential space in order to claim high incomes in the Closed Access cities.  Households with low incomes were fleeing from those cities and making compromises in order to reduce their expenses.  The public obsession with predatory lending has blinded us to the primary social development of our time.  And, for a decade we have been poisoning our economy as a result.

Here is Figure 6 from the article.  The general reaction I see to this graph from most audiences is that (1) the period since 2007 is just another example of the common American getting screwed - that things keep getting harder for those with less power and easier for those with more power - and also (2) the most important thing we must do is to avoid going back to the policies that were in place from 1995 to 2007.

What is happening here is that we "solved the problem" of high home prices by kneecapping the mortgage market - especially mortgages for households with lower incomes, FICO scores, etc.  This has reduced home prices across the board, and it has especially reduced home prices in entry level markets.  Since entry level prices are so low, homebuilders can't compete with existing homes on price, and new entry level supply has been curtailed.

So, for households with high incomes who can qualify for a mortgage, housing is cheap.  For households with high incomes who can't afford a mortgage, rents are high, but they can make adjustments in their real housing consumption to bring payments down (smaller unit, longer commute, etc.)  Households with lower incomes have less elastic demand for housing because they already tend to spend more of their incomes on housing that is smaller or less convenient than they would prefer.  Few of them can qualify for a mortgage, so they don't get to take part in the housing sale.  And, as renters, they must eat much of the rising costs.

The data is all there.  There is no need to argue about the details.  I take no issue with the facts in this article.  That is the good news.  The facts can be stipulated.  The bad news is that the canon needs to be erased and rewritten, and as the old saying goes, you can't easily reason people out of something they weren't reasoned into.  Yet, it seems like there is room for optimism when there are so many pieces of highly informative and accurate research out there about this topic, such as this article, which simply need to believe their own findings.

Saturday, June 23, 2018

Housing: Part 305 - If only we could burn all the extra houses down.

From Andrew Ross Sorkin's "Too Big to Fail"(pg. 190), from the summer of 2008 before Fannie and Freddie were taken over by the Treasury.
Paulson and a half dozen staff members huddled over the Polycom on his desk to hear the former Fed chairman's faint voice through the speaker.
Rattling off reams of housing data, Greenspan described how he considered the crisis in the markets to be a once-in-a-hundred-year event and how the government might have to take some extraordinary measures to stabilize it.  The former Fed chairman had long been a critic of Fannie and Freddie but now realized that they needed to be shored up.  He did have one suggestion about the housing crisis, but it was a rhetorical flourish befitting his supply-and-demand mind-set: He suggested that there was too much housing supply and that the only real way to really fix the problem would be for government to buy up vacant homes and burn them.
After the call, Paulson, with a laugh, told his staff: "That's not a bad idea.  But we're not going to buy up all the housing supply and destroy it."
IW readers know there weren't too many homes.  The only things the American housing market and the economy needed were sufficient money and credit.

I have the same feeling reading these retrospectives as I do hearing debates about the market today. It's like we're a tribe that shares a religious origin story in which the spirit of spring floods plays the devil's role. We're in the midst of a terrible drought, but it is simply part of our cultural DNA that water cannot be part of the solution.  So the elders desperately engage in plans and discussions about dealing with the drought in which they cannot reference water as a solution.

Dig a well? Build an irrigation canal? It's not that arguing for these things would be fruitless. It's that it wouldn't occur to a respectable person to mention them.  To mention canals would only serve one purpose - identifying yourself as a heretic.

To suggest that Fannie and Freddie should seek to expand their balance sheets in the summer of 2008 would only serve to besmirch one's own character.  (Look who's the first to pray to the spirits of the flood when things go bad.)

In effect, the entire country became taken with some version of what Robin Hanson would call "far thinking".  Far thinking is where we can impose our ideals on a map of the world that is clean and easy, where our ideals don't have to be moderated by messy reality.  In far mode, the Wall Street Journal can talk about the virtues of a financial panic. FOMC members can talk about letting the market discipline risk takers.  The President can explain that it's not his job to bail out speculators. Elizabeth Warren can ask why aren't more bankers in jail.  In far mode, we can know that they did this to us.  In far mode, just deserts keep us on the straight path.

In effect, Greenspan and Paulson are dealing with the cognitive dissonance of far mode here.  Burning down homes is an obvious solution to the problem in far mode.  Unmoderated by messy reality, far mode can get pretty absurd.  They recognize the absurdity of it. That's why the suggestion is funny.  If only they had taken it seriously enough to force them to confront the "near" - to confront the cognitive dissonance that made it funny - their plans might have been moderated by messy reality.

I wish I could travel back and take them to some townhouse in Brooklyn whose family was moving out of the state because they couldn't afford to spend half their income on rent anymore.  Here's some lighter fluid and a match, Al.  Should we start with this one?

As the crisis wore on, others echoed Greenspan's sentiment.  Frequently the concern was about old working class neighborhoods in rust belt cities, which were devastated by foreclosures.  Now, isn't it strange that in a country that had supposedly just built millions of unneeded homes in Arizona, Forida, etc., that the excess supply was in 80 year old neighborhoods in Cleveland?

Here is an article from Cleveland in 2010 about their program to tear down homes.  Now, in cities that have been depopulating, it may be the case that there are parts of town that call for demolition programs.  But, my point here is that we have conflated this problem with the subprime lending crisis in ways that have led us astray.  From the linked article: "Blame our region's economic stagnation and the nation's recession; blame lenders who bent and broke old rules to make loans to people who couldn't afford them; blame Wall Street speculators who bundled and resold those toxic loans, poisoning the economy. Or blame our drive to expand, leave the old neighborhoods and make new suburbs out of countryside."

For "Wall Street" to be implicated as a source of unneeded homes, those loans would have had to have been associated with a building boom.  Here is the rate of new housing permits (compared to civilian labor force for scale) in the US as a whole and in Cleveland.  I show a long time frame here, just as a reminder that even at the national level, there was nothing unusual about the rate of building in the 2000s.  But, Cleveland didn't have any part of the 2000s housing boom, such that it was.  The rate of building in Cleveland was low and steady, until 2006, when it fell off a cliff along with the rest of the country.

The reason home building fell off a cliff in 2006 in every city across the country is because buyers lacked money and credit.  Cleveland didn't build a bunch of homes and then suddenly discover that they couldn't afford them.  In fact, in Cleveland, as in just about every city in the country, rent inflation rose in 2006 and early 2007 because of the shock to supply created by tight monetary policy.

By 2010, when neighborhoods were devastated by the blight of foreclosed properties, those neighborhoods suffered from one problem: not enough money.  This was not a supply issue.  Even today, homes in those neighborhoods generally fetch rents of around $1,000 a month.  The collapse was purely a nominal issue.  2018
Here, I compare home prices in the three most expensive ZIP codes in Cleveland (blue, right scale) with the three least expensive ZIP codes (orange, left scale).  Cleveland is like most other cities.  During the boom, prices across the city increased at similar rates.  Then, after we pulled the rug out from under low tier mortgage markets, prices diverged.  After mid 2008, low tier markets collapsed.

Low tier homes have prices that are similar to prices in 1996.  High tier prices have risen in the range of 50% over that time.  Working class balance sheets have been devastated.  Low tier homes in Cleveland lost half their value after 2008.  This is not because rents have suddenly been cut in half, because this isn't a supply issue.

When Hank Paulson and Alan Greenspan jokingly wished they could burn down some homes, what those homeowners needed was some cash. Cash that the Federal Reserve, Fannie Mae, and Freddie Mac were in prime position to provide.  The thought didn't even occur to them.  It couldn't have.  It would have been heresy.  2018
Here, I have graphed mortgage affordability for the median home in ZIP code 44137, Maple Heights, OH.  It's the yellow line in the previous graph.  There was no affordability crisis in Cleveland.  The monthly payment required to buy those homes with a conventional loans was similar to what it had been for at least 10 years, after adjusting for inflation. (This graph is in current dollars.)

Foreclosures in Cleveland had been rising throughout the boom, and they spiked from late 2005 to 2007, and then remained high.  Maple Heights continues to have many foreclosed properties.  In the "bubble" cities, foreclosures tended to be a lagging factor - after prices collapsed.  This is the case in Cleveland, too.  Clearly, after 2008, foreclosures were a function of household income shocks in properties that had lost all of their equity, so that the owners couldn't make payments and couldn't tap equity as a rainy day fund.  But, Cleveland did see a rise in foreclosures before the collapse.  This suggests that there was a market in risky mortgages in Cleveland during the boom that called for some moderation.

But, this is the important yet subtle point: The mortgage boom didn't have any significant effect on home prices or supply in Cleveland.  It had little effect on aggregate demand for housing.  The sloppy way in which housing affordability is commonly equated with home prices instead of with rents and the sloppy way that price booms in places like San Francisco or Phoenix have influenced our image of housing markets in places like Cleveland have led to disastrously wrong consensus in policy.  So disastrously wrong that when working class households in Cleveland just needed some cash, the public officials who could have provided that cash were wishing they could destroy real assets.

This over-reaction caused home values to collapse.  By 2010, when the over-reaction was codified in the terms of Dodd-Frank and the Consumer Finance Protection Bureau, the affordability of homes for buyers was unprecedented.  Actual affordability (in terms of rent) was worse than ever, because of the supply shock.  But, in Maple Heights, where the median home required monthly mortgage payments of about $600 for the decade leading up to 2008, it had fallen to less than $400.  And, the further collapse in home values that followed Dodd-Frank eventually pulled the median mortgage payment down to $200.

Excessive lending had little effect on mortgage affordability in 2005.  But, the over-reaction against lending had such a devastating effect on home values, that mortgage expenses declined by 2/3.  While pundits and critics blamed the Fed for saving Wall Street instead of Main Street and while they demanded cram downs, forced refinancing, and subsidies to borrowers, and while Greenspan and Paulson wondered how to get rid of all those houses, what those neighborhoods needed was for someone to just offer them some run-of-the-mill mortgages, of the type that they had successfully been paying for decades.  Not only the existing borrowers, but the potential new borrowers.

We were so upset about mortgages that stretched some borrowers too thin when mortgages in Maple Heights required monthly payments of $700 in 2005 that we were bound and determined to prevent mortgages from being made in 2010 that required payments of $200.  And we did it in the name of affordability.

This is a crazy disconnect.  The idea that homes were too cheap because of oversupply was consensus.  Greenspan and Paulson were hardly staking new ground here.  Consider the scale of the religious zeal against lending that had to be in place for them to think this was a problem.  Even if oversupply had been a problem, sane people would not have wanted to destroy the extra homes.  The obvious solution would be to buy them for pennies and then give them away to working class households.  If there was an oversupply, then working class households could just double the square footage of the homes they were living in at no extra cost.  The reason this wasn't happening in reality was because there was, in fact, a shortage of homes, and rents were rising.  But, if oversupply was the "problem", then the obvious solution at any time from 2009 on would have been for Fannie and Freddie, under federal control, to open the flood gates, and to spread our overabundance of homes to working class borrowers, who could now have twice the house at half the expense by shifting from renters to owners.  This is still, basically, the case today.  And, today, we still maintain a religious zeal against letting that happen.

To get back to normalcy those low tier home prices in Cleveland would need to double from today's price.  This is fabulous news.  For working class homeowners who have managed to keep their properties, simply returning to a normal market would double the value of their homes.  It's amazing how easily one can attain new health simply by refraining from taking poison.

But, the problem with human affairs is that sometimes, when we are wrong enough, being wrong is an impediment to correction.  The disconnect between reality and the consensus view is so great that the truth seems too outrageous to entertain.  So, burning down houses makes more sense than giving them away and to suggest otherwise seems like madness.

In the meantime, working class homeownership is on a 50% off sale in Cleveland while many complain that homebuilders aren't building enough new homes for the entry level market.  And, homebuilders complain that labor, and lumber, and lots are all too expensive.  Everything is too expensive when you're trying to compete against a 50% off sale.  So, because the consensus is so wrong on this issue that it requires a religious conviction to maintain it, this leads many today to complain that those costs are too high because we have too much money.  The solution to homes that are undervalued by half is to raise interest rates and suck cash out of the economy to bring those other costs down.  An awful lot of bad things will happen before those costs are low enough to compete with the 50% off sale.

Thursday, June 21, 2018

Upside Down CAPM: Part 5 - Returns on real estate investments

To review: upside down CAPM is the idea that CAPM models should start at the expected rate of return on diversified at-risk capital and the rate of return on risk free savings is the at-risk rate of return minus the premium savers pay for the service of protecting savings for deferred consumption.  Changes in actual returns for at-risk capital come from cyclical changes in profit and from changes in expected long term real returns, but expected real returns at any point in time tend to remain fairly stable at 7-8%.  Fluctuations in real risk free returns come from shifts in the premium savers are willing to pay to avoid risk with deferred consumption.  The equity risk premium doesn't come from changes in expected at-risk returns. It comes mostly from changes in the premium for safety that determines the risk free rate.

This model has led me to realize that I have probably been approaching real estate markets with some misplaced hubris.

Mortgage rates generally follow risk free rates with a small spread, so that mortgages basically fall in the category of low risk saving - deferred consumption.  To the extent that we can measure returns on home equity systematically, real rates of return seem to generally follow risk free rates. Owned home equity is also basically a low risk fixed income security.

But, that doesn't seem to be the case on institutionally owned real estate.  Equity REITs seem to have a fairly stable cap rate and dividend rate.  I had chalked this up to an undeveloped marketplace, where there aren't aggregate market measures that change everyday like in bond markets.  So it seemed like this asset class was like a fixed income asset class, but with a real yield that didn't fluctuate as much.  That didn't seem rational.

However, thinking with an Upside down CAPM framework, having a more stable expected rate of return is a characteristic of equity.  There isn't a mystery here. Institutionally owned real estate is basically a low-beta equity, and it has a low and stable expected rate of return, just as we would expect low beta equity to have.  Its risk comes from cyclical and long term shifts in real returns.

Keep in mind that I am talking about the entire market, so that cap rates are similar to expected returns on all equities, conceptually.  For developers, expected returns on individual projects, or even on all new projects at a given time, may fluctuate more, just as the market for IPOs or private equity seems more volatile and cyclical than the equity market as a whole.

The reason it is more equity-like than owned real estate is because it comes with management costs and vacancies.  This makes net margins lower and more cyclical than owner-occupied real estate.

So owner occupied real estate acts more like low risk fixed income, and the level of debt on a property is mostly related to the owner's need for capital.  Young owners tend to be more leveraged and older owners are less leveraged. Investor owned real estate is like low beta equity and the use of credit is more a product of the market and the property. To the extent that a property can offer the service of safe savings because of relatively certain cash flows, equity holders can optimize profit by using credit as a source of capital.  In fact, market forces will cause profit to be bid down to the point where real estate equity holders have to use credit to achieve a market rate of return.  This is similar to the utilities sector.

This would mean that real long term interest rates would moderate real estate activity between owned and rented properties.  When interest rates are low, at the margin some households would be induced to ownership. There are several ways to think about this. Low real rates reflect demand for low risk savings and deferred consumption. Owner equity serves this function in a way that investor owned equity doesn't. Another way to think about it is to think in terms of cap rates. Cap rates on investor owned properties, being more equity-like, remain stable.  But "cap rates" on owner occupied properties fluctuate with long term real interest rates, so as rates decline, owner-occupied property is worth more than investor-owned property.

It happens that homeownership rates (controlling for age demographics) were high in the late 70s and the 2000s.  In the 70s, inflation (and nominal rates) was high, so rising ownership was explained as an inflation hedge.  In the 2000s, inflation (and nominal rates) was low, so rising ownership was explained as a result of cheap and easy credit.  (Most of the rise in homeownership happened in the late 90s when rates weren't particularly low, so that's not a great explanation.)

Low long term real rates can explain why price/rent ratios were high at both times, but I haven't felt that comfortable explaining why that would lead to higher ownership rates.  Maybe this relationship between owned and rented properties, and the difference between equity and low risk savings, could be part of the explanation for why ownership rates rise when long term real interest rates decline.  (This isn't the case today because housing markets are dominated by credit repression which keeps millions of households out of the market.)

This framework also suggests that multi-unit building should have been much stronger in the 1990s when long term real interest rates were relatively high.  The bias toward equity exposure at the time should have translated to a bias for investor owned real estate.  Maybe some of the increase in homeownership rates in the 1990s was already coming from limits on multi-unit developments in the Closed Access markets, which was blocking this natural shift to rented property when real interest rates were high.

This is all still speculative.  Please provide conceptual or factual criticisms in the comments.

Tuesday, June 12, 2018

May 2018 CPI

More of the same this month.  I think this month might accelerate the slow motion train wreck, because it is being widely reported as accelerating inflation.  But, non-shelter core prices really haven't risen at all since February.  The only reasons year-over-year core CPI inflation has risen to 2.2% are (1) shelter inflation is at 3.5% and (2) the three months that just fell off the back end of the year-over-year range had cumulative deflation of non-shelter core CPI of 0.34%.  So, three months which had cumulative inflation of 0.02% caused the non-shelter core inflation rate to rise from 0.9% to 1.3%.  And shelter inflation adds the other 0.9%.

This will add confidence for maintaining an aggressive schedule of rate hikes.  Households are already into the territory where rent expense is taking a larger portion of personal budgets than is normal.  That suggests that consumption of shelter is already into inelastic territory, so that there won't be a cyclical reduction in shelter consumption.  That suggests to me that shelter inflation will remain high if the Fed overtightens, which will continue to push them to tighten more.

In today's context, I'm not sure that non-shelter inflation at 0.5% or even 0% leads to any sort of acute crisis.  But, it seems like that is where the risk lies.  One problem is that the obsessions and biases that developed during the housing bubble led to a canonized belief that the net effect of rising mortgage levels, home prices, and housing starts is consumer inflation.  But, that is wrong.  To the extent that consumption was fueled by mortgage credit, the source was rising rents in Closed Access cities where housing starts are persistently low, and Closed Access homeowners were spending some of their capitalized future rental income.  Except for the foreclosure crisis in 2008-2011, 2005 was the only time in the last 20 years when rent inflation finally reverted back to general inflation.  The housing boom was moderating inflation.  Closed Access homeowners were spending from their ill-gotten rentier profits, but the Fed is perfectly capable of countering that - and they were throughout the boom, with unusually low currency growth.  The Fed could do that today too, and obviously would, given the general hawkish atmosphere.  But, in the meantime, ironically, the first order effect of opening the floodgates on housing credit markets would be significant disinflation because of falling rent.

Monday, June 11, 2018

Housing: Part 304 - The problem of the displacement of long-term renters.

One of the dilemmas of in-fill housing expansion is that some existing tenants are usually displaced.  That can happen directly because units are taken down to make room for new development, or it can happen indirectly because rents will rise in a "hot" area, leading to a reconstitution of the local population - "gentrification".

A primary cause of this problem is the existence of long-term renters.  These are households who have deep roots in the local community and ties related, very locally, to place, who do not own the properties they reside in, and therefore lack control over these changes.

Frequently, tenants rights policies are advocated for to try to solve this problem, but those sorts of frictions in the dynamics of local housing markets are a big part of the problem that has prevented urban housing markets from shifting to meet new demand for urban tenancy.  The better solution would be for these households to be owners in the first place, and the fact that they are not owners is a sign that our financial and housing markets are underdeveloped.

Landlords provide two sorts of liquidity services.  First, they provide liquidity for frequent movers.  Many frictions exist in the market for transacting real property, which make it quite expensive.  Thinking of homeownership as an ownership stake in a flow of rental income, this makes homeownership unprofitable for tenants who cannot commit to a long tenancy.  This service is very valuable.  Landlords allow tenants to move without incurring all of the costs of buying and selling real property, so that households who might move often are not burdened by the cost.

Second, they provide liquidity through access to capital.  Some households might be able to commit to a long-term tenancy, but they don't have the access to capital markets that would allow them to purchase a property.  In the real estate market that exists, this is a valuable service, also.  But, the goal of housing and financial public policy should be to eliminate the need for this service.  In a fully functional market, households that can commit to long-term tenancy should be able to be owners.  There should be financial products available to them that allow that to happen.

So, the fact that there are long-term tenants in some urban neighborhoods who can be evicted because they are not owners is a sign of a suboptimal system.  If there are a large number of residents in an area who have developed a sense of endowment about the area, but who are renters, then the solution we should seek for them is to find a way for them to be owners.

This is why I really don't like the focus on affordability, whether in terms of debt payments to income or price to income.  If a household can afford to rent a home, they can afford to own a home.  The transactional frictions may be harder to solve, so it is reasonable at this point in time for short term tenants to opt out of ownership.  But, that isn't really so much of a problem, because short-term tenants will not tend to have as much of an endowment effect about the neighborhood they currently live in.

On the other hand, there should be a financial product that allows a long-term tenant to own their home, and the fact that some can't is a problem, because they do feel more of a spiritual ownership of their location.  It does hurt them more to be forced to move.  But, many long term tenants can't be owners because the only financial products we have for ownership involve down payments, amortization, and a mismatch between the asset, which is real, and the typical mortgage product, which is nominal.

Actually, since the crisis, even with the inflation premium embedded in mortgage payments, most tenants - especially those for whom affordability is most difficult - could purchase their homes with a mortgage that would have a monthly payment that is less than their rental payment.  In many cases, it is much less.  This is the case, because in our errant haste to solve what was presumed to be a credit-bubble induced affordability crisis, we have done the opposite of what we should have done.  Instead of finding more ways for households to access ownership, we have eliminated the option of ownership for a large portion of the country.

Our financial system has failed, but the failure wasn't in making too many households homeowners before 2007.  The failure was in preventing households from becoming owners after 2007.

The problem that tenants in gentrifying neighborhoods have is that the financial market has not developed enough to give them a true ownership stake in their properties, so some advocates try to give them second-best ownership stakes through tenants rights.  It would be better if those households could benefit by selling into a hot market, or by borrowing from rising home equity, and choose individually how to capture those gains.

That doesn't solve all of the problems.  From white flight in the 20th century to NIMBYs in today's coastal urban centers, homeowners have never reacted well to any sort of change in their neighborhoods.  And, why should they?  Change is difficult, and when change encroaches on an area, it induces the need for compromise which is a sort of bad luck for those who would prefer that their neighborhoods remain the same.  Some of the reasons for disliking that change may be more morally justifiable than others, but all of those households are reacting to the same human desire - that the world we live in should stay just the way we like it.  But, these compromises are a fact of life.  We currently are missing some dear neighbors who recently have moved away.  Isn't it funny how flexible our sense of political privilege can be?  In this case, it would be absurd of us to demand that our neighbors remain in this house in order to keep our neighborhood intact.  Our sense of political assertiveness comes mostly from our sense of who are outsiders and, thus, who we can boss around.  So, of course it would be ludicrous of us to demand that our dear neighbors stay.  But, it doesn't seem so ludicrous to try to stop strangers from some other social class from moving into our neighrborhoods.  The reason that doesn't seem ludicrous is because they are outsiders and so we feel more comfortable asserting control over them.*

So, even neighborhoods full of owners frequently prefer stability over change, and are willing to assert control over outsiders in order to maintain it.  But, if we focused on access over affordability, and developed tools and products that provided that access, at least we would marry actual ownership with the legitimate sense of ownership that households feel about their long-term homes.  Next time you witness a debate about how new developments will displace longtime tenants, instead of wondering how to protect that class of households, you should wonder why they exist at all, and think of solutions that make them owners, in law, in a way that matches their sense of ownership, in practice.

Edit: a commenter makes the great point that in cities where prices reflect political exclusion, ownership carries more risks and isn't such an obvious improvement in today's environment.

* This is not entirely explanatory.  While there is a strong social norm against preventing our neighbors from moving away, there are many cases of neighbors preventing each other from making aesthetic changes to their properties.  So, there are selected contexts where legal or social norms allow us to obstruct the activities of our existing neighbors.

Thursday, June 7, 2018

Housing: Part 303 - The Fed Balance Sheet

Scott Sumner shared my recent Mercatus papers over at EconLog.  Scott generously supports much of my push-back against the bubble story.  Economist Bob Murphy saw the post and reacted with some chagrin that Scott or I could question the idea that the pre-crisis housing market should be broadly characterized as a bubble, or that the crisis could be blamed on tight monetary policy.

In support of his chagrin, he uses the measure of the Federal Reserve's balance sheet (the blue line in this graph).  The Fed balance sheet shot up in late September and October of 2008, and then continued to grow with the QEs.

I have probably gone over all of this before, in some form, but this seemed like a good excuse to look at it again.  First, it is worth taking a closer look at this graph.  Here is a close-up look at the Fed balance sheet in 2008 along with the Fed Funds Rate.

By mid-November, the Fed had added more than $1 trillion to its balance sheet.  Half of that rise came in September and October when the Fed Funds Rate was sitting at 2%.  Even Ben Bernanke admits that holding the rate at 2%was a mistake.  The initial burst in the Fed balance sheet was due to interest on reserves, which the Fed began to pay because the 2% target rate was so far above neutral at that point that they would have had to sell every single Treasury they had in order to hit their target.  As crazy as this sounds, this was the actual reason for the policy (see here and Bernanke's memoir).

Most of the rest of the increase came when the target rate was still at 1.5%, and the target rate was still at 1% when the balance sheet topped out.  Until QE3, most of the increase in the Fed balance sheet dates to this period that was before QE and was even before the Fed Funds rate hit the zero lower bound.  Heck, half of it happened while the Fed was maddeningly trying to keep the Fed Funds rate at 2%.  They couldn't keep the rate at 2% because they had induced a financial panic, so interest on reserves was intended to force a rate floor by sucking funds out of the banks.  So the initial increase in the Fed balance sheet has nothing to do with loose monetary policy.  It seems as though many people who use the monetary base as a measure of monetary policy haven't accounted for this at all.

QE1 really didn't add much to the balance sheet.  It was mostly swapping Treasuries and MBSs for emergency loans to banks.  The short hand that I use for what happened is that the Fed had policy so tight it was running out of ways to suck cash out of the economy, so instead it started sucking credit out of the economy by offering to borrow cash from the banks and then stick it in a vault so it couldn't be used (excess reserves).  And, looking back at the first graph, we can see that happening.  From September 2008 to the end of QE1, bank lending dropped way off while deposits continued to grow at somewhat normal rates.  So, the gap in bank lending roughly equals the amount of excess reserves.  The banks "loaned" cash to the Fed so that it could hoard the cash and do nothing with it instead of loaning it into the private economy.

Clearly the growth of the Fed balance sheet ceased to be a good measure of monetary accommodation at this point.

Considering conditions today, it seems as though what we should see happen as the Fed reduces its asset base is that bank lending should re-converge with the level of deposits.  There is a bit of a delicate balance here for the Fed, because if they reduce the balance sheet size too fast with monetary policy that is otherwise too tight, the net effect will be for that convergence to happen through declining deposits.  If they reduce the size of the balance sheet while being too accommodative (for instance, this might policy happen if they stopped paying interest on reserves and returned the Fed Funds Rate back to zero, though even then I'm not sure the net effect would be accommodative if it coincided with a reduction in the balance sheet) then possibly banks would lend at such a pace that deposits would start to grow more quickly.

Unfortunately, it appears that they may be erring on the side of reducing the balance sheet while maintaining policy that is too tight.  Here are the 1 year rates of change in deposits and bank lending.  Both are growing at less than 5% and are decelerating.  Lending had looked like it was stabilizing, but over the past 4 weeks, levels of Commercial and Industrial Loans and Closed End Residential Real Estate loans have both declined.

But, the more important story here is that clearly the monetary base is not a good measure of monetary policy under the current regime, and certainly it wasn't in 2008.

Tuesday, June 5, 2018

Housing: Part 302 - Austan Goolsbee was right

I saw a link to this March 2007 New York Times Op Ed by Austan Goolsbee, titled "‘Irresponsible’ Mortgages Have Opened Doors to Many of the Excluded" on Twitter. (HT: NT*)  The point of the tweet was that it isn't fair to judge people with gotcha's about things they said before the crisis, because most people were caught off guard, and this op-ed is an example of something that Austan Goolsbee, a respectable economist, wrote that everyone now knows was horribly wrong.

The interesting thing is that the op-ed that is used as an example of something obviously wrong was presciently correct.  It is something Goolsbee should, and I hope someday will again, be proud of.

Goolsbee wrote (in 2007):
Almost every new form of mortgage lending — from adjustable-rate mortgages to home equity lines of credit to no-money-down mortgages — has tended to expand the pool of people who qualify but has also been greeted by a large number of people saying that it harms consumers and will fool people into thinking they can afford homes that they cannot. 
Congress is contemplating a serious tightening of regulations to make the new forms of lending more difficult. New research from some of the leading housing economists in the country, however, examines the long history of mortgage market innovations and suggests that regulators should be mindful of the potential downside in tightening too much.
This is exactly what happened.  And we have paid dearly for it.

Compare this to statements from Case & Shiller in their 2004 paper "Is there a bubble in the housing market?":
(J)udging from the historical record, a nationwide drop in real housing prices is unlikely, and the drops in different cities are not likely to be synchronous: some will probably not occur for a number of years.  Such a lack of synchrony would blunt the impact on the aggregate economy of the bursting of housing bubbles. 
This is not what happened.

Yet, here we are in 2018, and Austan Goolsbee is supposed to be embarrassed by what he wrote while Case & Shiller are commonly credited for calling the bubble. 2018
Source: Median prices by zip code, sorted by IRS income
Here is a chart comparing home prices for the entire period from 1998, before the price run-up, to 2013, when prices were near the bottom.  Does this look like the picture of a housing market where a few high priced cities finally fell back to earth?  Or, does this look like a market where we took a billy club to low-tier lending markets until they relented?  As I have pointed out previously, there is usually very little difference within metro areas between price appreciation of high tier and low tier markets, on average, over time, because, contrary to conventional wisdom margin shifts in credit access just don't have that much of an effect on prices in functional markets. 2018
Source: Median prices by zip code, sorted by IRS income
How can I say that?  Well, in most cities, during the boom, there wasn't much difference between high tier price appreciation and low tier price appreciation (here shown from 1998 to 2006).  So, either there was a credit bubble in the 2000s and it didn't have much of an effect on low tier prices, or there wasn't a credit bubble in the 2000s.  (The reason the rise in low tier prices is limited to the Closed Access cities likely has little to do with credit markets, which I explain here.  But we can infer that it has little to do with credit markets just by looking at these graphs, since it would be odd if only a handful of cities were affected by the credit bubble and those cities were the only cities where long term prices in low tier neighborhoods held up well.  You could plausibly explain that away by arguing that in the Closed Access cities, a credit bubble led to price increases while in other cities it led to oversupply.  But for oversupply to explain this scale of a price drop, surely tenant vacancy levels would be high while subsequent low tier rent inflation was low - and both would be extreme.  Yet, in most cities, there is nothing.  Rents are rising and vacancies never rose.)

My point here is to note that in order for credit markets to really move prices between market tiers, the shift in credit access has to be extreme.  The credit boom in the 2000s that appeared extreme had little effect within metro area housing markets.  To knock 30% off of low tier prices in a city, compared to high tier prices, you really have to apply Godzilla level shifts to the market.

Goolsbee referenced this paper from Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton.  They write, "We find that over the past several decades, housing markets have become less imperfect in the sense that households are now more able to buy homes whose values are consistent with their long-term income prospects."  In hindsight, this was absolutely true and continued to be true during the bubble.  According to the Survey of Consumer Finance, the rise in homeownership was focused on households with high incomes, college degrees, and lucrative careers.  And, even the rise in distressed levels of debt (debt payments greater than 40% of income) that happened at the end of the boom, was among households with top incomes.  Those were the households that accounted for much of the small, early wave of defaults in 2007.  Middle and lower-middle income borrowers who are the type of borrower that we might think of as credit constrained in a functional market, accounted for much of the later, much larger wave of defaults that happened well after we went and did exactly what Austan Goolsbee told us not to do.

"Also, the historical evidence suggests that cracking down on new mortgages may hit exactly the wrong people....When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages."  I didn't say that.  Austan said that, in 2007.  And it's even worse than he feared.  Originations to borrowers with FICO scores above 760 have continued at at least the same pace since 2007 as they had been issued from 2003-2007.  Originations below 720 have been cut by two-thirds, even though there had been no increase in low FICO score originations during the boom compared to high FICO scores.  Even lending to FICO scores between 720 and 760 has dropped by more than half.  We didn't stop at 87% of the subprime market.  We killed half of the prime market.  That's how much life you have to stomp out of credit markets to get low tier markets to collapse.  There isn't anything subtle going on here.

Austan.  You were right.  Claim your crown.

* The original tweet isn't there anymore, but the tweets and replies to it remain.

Sunday, June 3, 2018

Housing: Part 301 - When the canon is wrong, there is little hope for constructive learning

It happened again.  I thought I'd been scooped.  The Mises Institute headline reads: "Housing: High Prices, Few New Units" (HT: JW)  They have noticed that a supply shock in housing is having important effects.  But, conventional wisdom has foiled them.  It is simply impossible to come to terms with the true state of our national housing problem with "bubble" colored glasses on.  This is why a new view on this is so important.  Until conventional wisdom about the housing bubble gets overturned, public consensus about the economy in general and the housing market in particular will be anything but wise.

Let me walk through the article.

First, the tags on the article - "Booms and Busts, Money and Banks" - give insight into the strength of presumptions in the conventional wisdom.  Housing quantities and prices fall under these categories.  Money, credit, fear, and greed.  Instability is inevitable, it is driven by money, and it begins with a boom.  The reason these are the tags is because this is canonical.

It starts by contrasting the current market with the bubble. "At the same time, home prices were increasing, driven up in part by fact that everyone was convinced that housing prices always go up, and real estate — any real estate — was a rock solid investment."

This is also part of the canon.  It doesn't need to be questioned.  And, thank goodness, because there isn't really any way to establish plausibility or causality here.  If you tried to use this sort of assertion as the foundation for a contrarian point of view, it wouldn't fly.  The nice thing about it is that, since it has become part of the canon, it could explain prices rising by 10%, 50%, 200%, or 400%.  And, the higher prices rise, the more we could conclude that people are irrational.

The author notes that building is not nearly as strong as it was in 2005.  This is true.  He says,"Now, some might think 'it's good we not going back to bubble levels.' True enough."

Again, this is an uncontroversial statement.  That there were too many homes is canonical.  So, here, the author exhibits unusual wisdom, by correctly noting that, adjusting for population, housing starts are much lower than they have ever historically been.  This has been the case for a decade.  Here is a graph he shares:

Do you notice anything funny about that graph?  That graph either displays a good measure of housing expansion, which supports the author's point, or it shows that there wasn't anything close to an overexpansion of housing in 2005, in which case it would seem to display a poor measure of housing expansion if the bubble story is true.

IW readers know that this is a good chart, and that it correctly shows moderate housing expansion in 2005 and very low housing expansion since then.  But, the author just breezes right past this oddity in his presentation.  I don't really fault the author, per se, because the bubble is canon.  It resides in a different part of the brain than ideas that require confirmation.  There is no motivation and no point in even paying a moment's notice to whether this chart supports the bubble story, because the bubble story isn't a story that needs support.  It is something we know.  It might be worth pondering why housing starts per household in 2005 aren't higher than they are in the graph here, but surely there are more useful things to do with our time.  That's the point of the canon.  You can't spend half your day confirming that gravity still exists.

But, when the canon is wrong, the truth trolley goes off the rails.

The author notes that the Kansas City Fed has also noticed this problem, and the Kansas City Fed lists the following possible reasons: (1) shortage of qualified construction workers, (2) small builders having trouble funding lot acquisitions and construction, (3) limited availability of lots.

All of these problems would be solved with more money and looser credit.  And, since credit conditions in the mortgage market have tightened to extremes, especially in low tier markets, you might think this would merit a mention.  But, too much money and credit is what caused this mess, according to the canon.  That's like suggesting that birds can fly because gravity doesn't apply to them.  The answer can't contradict the canon.  For the most part, in our daily lives, it wouldn't (and shouldn't) even occur to us to do that.

The author wonders if lower Mexican immigration is a cause of this.  Or "finding inexpensive financing for land acquisition and construction has been difficult as money has been siphoned off to other forms of bubble investment as central-bank produced asset inflation continues."  And, "nowadays, as Brendan Brown has often noted, other investment "narratives" have directed many investors' attention elsewhere. It's no longer assumed that housing prices will always go up. Meanwhile, lumber costs, labor costs, and regulatory costs at the local level continue to push up production costs."

As for rising costs of lumber, regulations, etc., those are plausible, and they might even be true.  But, then low tier housing would be selling at a premium.  Instead, in every city during the bust, low tier housing took on a large discount, and for the most part those discounts remain.  If higher cost was what was keeping supply mysteriously low, wouldn't that make prices move up?  Rents are up, but prices are what builders are concerned with, and prices are very low, given current rents and interest rates.

What could possibly cause relative prices to remain low in low tier markets after a decade of depressed supply?  That answer contradicts the canon.

The author concludes by noting that homeownership rates are lower than they were before the bubble started.
Vacancy rates are down and housing prices in both rental housing and in single-family housing continues to head upward.
Nearly a decade out from the last financial crisis, one is tempted to wonder if we'd have all been better off without constant federal "help" designed to increase homeownership rates and build an "ownership society."
Originations for 720<FICO<760 are also down.
When the canon is wrong, this is how bad it can get.  Without the canon, one might suggest that at the end of a decade when mortgage lending to borrowers with FICO scores of less than 760 has been made especially difficult through public policy (the average FICO score is around 690) that maybe the lack of federal help might have something to do with the fact that there was an unprecedented collapse in homeownership during that actual decade.
And this lackluster production is all happening during a period of expansion. Presumably, it should be easy to find financing to build housing right now, and to find buyers who can pay a price that will cover expenses for homebuilders. That doesn't seem to be happening. 
One would presume, wouldn't one.  One might presume that there would be easy financing to plant strawberries in a healthy economy, too.  But, if the CFPB decided that only people with college degrees should be able to eat them, strawberry farmers might find themselves in the odd position of finding it hard to rent acreage where they could profitably grow strawberries.  High school educated cooks would be forced to only buy more expensive processed foods that used the strawberries.  College educated cooks would be rolling in an abundance of relatively cheap strawberries.  And, the country would be united in castigating strawberry growers for only serving the educated.  (Ain't that how it always is.  You can only make profit selling to the high end, you know. Or by selling expensive pies to people who really can't afford them. Typical late-stage capitalism.)

Related imageAs I said, I can't blame everyone for not seeing something that any reasonable person, by now, is allowed to consider a settled issue.  But, it is amazing how deeply blinded and wrong the consensus can be because of this unavoidable need to ignore information that contradicts the canon.

I feel like Indiana Jones in the Last Crusade, at the leap of faith.  There is a bridge across the chasm between the canon and the truth that nobody can see.  Sane people don't just step off into chasms.  I get it.  Maybe if I scatter enough pebbles, we can all walk across it.  There is a room across the chasm that contains a chalice that can heal our ailing economy and make late-stage capitalism young and vibrant again.