Wednesday, April 29, 2020

Housing: Part 364 - Rising homeownership rates

This graph from Len Kiefer at Freddie Mac shows the latest movements in homeownership rates.  The Census Bureau reported updated homeownership rates, and the trend continues to be relatively positive.

Now, you can see from the graph that homeownership rates are still very low, when accounting for age.  The best looking group in terms of recent trends is the under 35 group, which has managed to just touch the bottom end of historical norms.  That age group was largely not in the housing market when the crisis struck, so they benefit from having less damaged balance sheets.

In the other age groups, the scars from the crisis are still quite large.  Yet, even though there is a long way to go, it is nice to see movement in the right direction.
However, there is limit to this movement, and I think really what we are seeing here is the continued settlement of American households into the "new normal".  According to the New York Fed, the median FICO score of mortgage borrowers before the crisis tended to float around 715.  During the crisis it moved to as high as 780, and has generally stayed high - 770 as of the end of 2019.
It is difficult to imagine homeownership rates increasing much further without further loosening in lending standards.

In fact, an important source of rising homeownership now is probably the work American households are doing to improve their credit.  The  Fair Isaac Corporation estimates that the average FICO score for the entire market (not just mortgage originations), has moved up from the low in 2009 of under 690 to 706.

That sounds great.  Macroprudential regulations are pressing Americans to be more prudent.  But, there is really only so much Americans can do.  As much as anything, credit scores are a measure of how old you are.  Are you young, with student loans or a bare bones credit card?  Or are you a retired couple with the remains of a mortgage you took out in 1995, living off of a pension and an IRA?

The thing is, you know what was an important factor for that retired couple with the 830 FICO score, paying off the last few years of their mortgage?  In 1995.....they were able to get a mortgage.
The average rising FICO score and the tentatively rising homeownership rate reflect the attempts by some Americans to meet the new more strict norms for owning a home.  All else equal, maybe that is a good thing.  It seems like it must be.  But, we should keep in mind that the way we are creating this trend - really the only way to - is through policies of exclusion.  Rules and regulations that put an extra gatekeeper on the path of the household credit lifecycle.

For some number of households on the margin, the new standards are within reach, and they have made the effort to adjust.  According to Ethan Dornhelm at Fair Isaac, this group has driven the increase in FICO scores.  Many households have been intermittently locked out of credit markets.  But, analysis of households that have had continuous use of credit since 2009 shows that those households have increased their average FICO scores by 29 points.

Account-level delinquencies down double-digit percentages, substantially lower credit card utilization, lengthier credit histories, and less credit seeking activity — it is no surprise that this population has experienced a major improvement in their FICO® Score.

Those households have delayed homeownership a bit, but their balance sheets are healthier.  And, the reason that they are engaging in this adjustment is that exclusion makes returns better.  Locking a lot of households out of entry level homebuyer markets means that entry level homes are a much better deal for those who can get them.

That is one price of "macroprudence".  It creates a rift between the haves and the have nots.  Marginally better-off Americans get an even better deal as homeowners, but they have to work at it a bit harder to be "qualified".  Other Americans will be unlikely to clear that bar, and they end up paying higher rents because when homeownership becomes a better deal for families, it also becomes a better deal for landlords.  Exclusion raises their rental income.

If this is the new normal, then in the long-term, homeownership will rise a bit from here, but not back to earlier norms.  Maybe really just a few percentage points lower than they used to be.  Americans that are homeowners will live in somewhat nicer or larger homes.  Or maybe they will bid up the prices of homes in favored locations.  Americans that aren't homeowners will live in somewhat less nice units, rents will go up over time, and will take a slightly larger portion of their incomes.  This won't be noticeable.  It's not like you could visit a $600,000 home today and then go to an apartment renting for $800 a month, and then revisit similar places again in 10 years and be hit with the realization, "Huh, it really seems like the relative amenities of that apartment have declined by 20% or so compared to the amenities and the rental value of that nice home."  It will just happen, and the newspapers will just keep printing columns about how awful it is when "Wall Street is your landlord."  We will notice, vaguely, that things just seem harder for the tenant in that apartment.
There is no magical resting place where we know we have made the correct set of compromises between prudence and access.  But, one thing to keep in mind when reading those articles about greedy Wall Street landlords is that access to homeownership isn't important because of the financial speculation ownership entails.  That's as least as much a cost as an opportunity.  What is important about it is that homeowners are never in those angry articles about greedy landlords.  What is important about it is that our homes have a sacred quality about them, and when a home has a landlord and a tenant, that sanctity is split.  It has an inherent conflict that cannot be cured.
Set aside those bromides about the American Dream.  Not everyone should be or wants to be a homeowner.  In many dense urban settings, in high-rise apartment buildings, the inherent conflicts of ownership might even outweigh the inherent conflicts of tenancy.  We shouldn't thrust this choice on Americans.
In an age where some cities have political regimes that create extremely high home prices, it is easy to start to think that the important reason that the retired couple has an 830 FICO score is that they were speculators.  But, really, there are couples like that in St. Louis just as there are in San Francisco.  The couple in St. Louis may not have gotten the gains of speculation that the couple in San Francisco did, but they are likely to share a high FICO score.  The reason is that for the past 30 years, they have had the world’s best landlord, who never engaged in a sacred conflict with them, and who, furthermore, didn’t raise their rent in order to compensate for the landlord’s portion of that conflict.
As we continue along in the “new normal”, when you see articles about greedy Wall Street landlords, it is worth keeping in mind that the conflict they are engaged in isn't a product of "Wall Street".  It is an ageless conflict.  And, for households who must engage in it because, on some margin, we have decided, through public gatekeepers of credit access, that they must, their conflict was a public imposition.  We have taken something sacred from them.  Maybe, all told, for the best. But, even so, we should acknowledge our role in their travails.  We must attempt to account for these costs in the quest for public prudence.
If the major cities made it easier to build more dense housing in and near city centers over the next twenty years, then the homeownership rate might become even lower than it is now.  That would be fantastic, because it would reflect Americans engaging in voluntary tradeoffs – moving to the city because of the opportunities and lifestyle it provides, even if it comes with sacred compromises about control over personal space.  Today, public housing policy is making those voluntary trade-offs more difficult while simultaneously imposing other involuntary trade-offs.

Sunday, April 19, 2020

A Missed Prediction and A Couple of Articles

First, just to make it official, my bold coronavirus prediction in the previous post went up in flames.  I had hoped that widespread lockdowns would lead to a sharper decline in new cases, but the decline has been less pronounced.

Earlier in the month, I mapped out two trajectories.  Nothing particularly scientific about them, but at the time, either trend fit the earlier data.  It appears in the last two weeks that new case growth is following the less optimistic trend.

Second, I have seen a couple of recent articles that I figured I would comment on here.  First, here is an interesting article from Salim Furth at Market Urbanism where he comes to a counterintuitive conclusion - that coronavirus infections within the NYC metro area are negatively correlated with subway usage and density.  An interesting and thought-provoking finding that I'm not entirely sure I know what to do with.

Second, here is an article at Bloomberg: "Another U.S.-Wide Housing Slump Is Coming: The coronavirus pandemic will cause many cash-strapped Americans to sell their homes, flooding the market with excess supply." It makes many predictions about a coming housing bust due to the coronavirus.  It's hard to know exactly what will happen, so I will let you decide how much you should fear their predictions.

Obviously, in general, I will take a more optimistic view than the author.  One reason comes from this snippet at the end of the article:
It’s also impossible to quantify how Americans will perceive homeownership given the hardship so many will endure. If frugality is embraced as it was after the Great Depression, homes will once again be viewed as a utility. The McMansion mentality is at risk of extinction.
The reason why the collapse in the subprime mortgage market hit the housing market so hard was because the lead up was predicated on the fact that there had never been a nationwide decline in home prices. But now for the second time in a little more than a decade, Americans are poised to witness the impossible.    
The idea that the housing bust was fueled by the idea "that there had never been a nationwide decline in home prices" is ludicrous no matter how many times it is repeated.  It's the sort of unfalsifiable assertion that has filled in the many gaps in the bubble narrative that couldn't be filled in with data.  Even Case and Shiller didn't predict a nationwide decline in home prices. And the reason they didn't is because there was no reason for one. The reason there was a nationwide decline in home prices is because we made it effectively illegal to sell mortgages to millions of households who would have been homeowners for decades before.  We wiped out demand for housing in their neighborhoods, and prices cratered.  The bad news is that was tragic.  The good news is that you can only perform amputation once.  So, there is a lot of analysis that treats a housing collapse as a natural part of an economic downturn, based on data from the financial crisis, and it just doesn't reflect a natural response of a housing market.  Practically everyone will make that mistake, which is why I think there are potential bargains among the homebuilders.  Asset markets are usually efficient, but occasionally the humans that make them are universally wrong enough to make them inefficient.

Another myth about housing is the "McMansion mentality" as contrasted with the frugal post-depression generation.  This myth can be falsified, however.  Here is a graph that is an estimate of net residential investment.  It is residential investment (excluding brokers commissions) minus the BEA's estimate of the aging of the existing stock of housing.

The period that has been deemed the "housing bubble" period was the culmination of one or two decades of the slowest pace of residential investment since the Great Depression.  Those frugal post-Depression families were building homes like crazy - at a rate not seen since.

One reason they were building like crazy is because they built so little during the Depression.  The last decade - the decade this author associates with "the McMansion mentality" matches the Great Depression in the lack of residential investment.  Homes aren't viewed as a utility.  They are a banned substance.  Would that we were about to engage in a corrective decade like those frugal post-Depression families did.  But we won't. We can't. We're tied up in knots with ungenerous and untrue myths about our fellow countrymen.  So, we will struggle to do much better than a Depression. But it will be a Depression in real growth and consumer surplus, not a Depression in rents, prices, or landlord profits.  Coronavirus might create a brief contraction in prices, but unless we escape the real Depression, it won't be permanent.

Wednesday, April 8, 2020


I haven't been writing about coronavirus here.  There are plenty of places to get coronavirus news. But, I have been posting daily updates on Facebook, just doing some basic data analysis, and people there seem to appreciate it, so I figured I'd add a post here.

My pathway on this subject has been thus: I basically wasn't paying too much attention, and was roughly in the "it's just a bad flu" camp in January and February.  But, I was increasingly nervous because people like Tyler Cowen and Robin Hanson were especially worried about it, in a conspicuous way that seemed unlike them.  Eventually, I looked closely enough to realize it was a potentially big problem.  By early March, I was wondering what we would need to do.  By mid-March most of the country had come to that realization, so I don't know that my path was much different than most people. By mid-March, I was watching exponential growth of the contagion, and worrying about the considerable damage that each new day's growth would bring.

By late March, though, I saw the first faint signs of a bending curve, and so I started tracking the numbers daily more carefully.  On March 30, I took to Twitter to predict that the high point in the national number of new daily cases would happen that week and that daily new cases would be below 5,000 by April 15.  I just barely made my first prediction.  It appears that Saturday, April 4 might be the high point for new cases.  My second prediction might be a little more difficult, though.

The first graph here is the US daily growth rates in the cumulative number of cases, hospitalizations, and deaths.  A lot is made of problems with the data.  Certainly they aren't perfect, but in terms of trends, I think it's more informative to work with it than it is to act like the data is extremely biased.  There are a lot of reasons to think that, which I'm not going to get into here.  But, one reason is that trends in all three of these measures are running parallel to each other in basically the fashion one would expect.  Also, the variation in outcomes limits the potential for the data to be too far off.  New York shows us what it looks like to have more cases.  Very few places look anything like that.  Also, we know that the death rate for older people is north of 10%.  If cases were much higher than what we think they are, there would be a lot more dying old people.  It is easy to come up with plausible reasons to doubt the data, but I just don't see the doubts standing up to the same level of scrutiny that the doubters are applying to the data.

Anyway, this is a lot like valuing equities.  You just have to be comfortable with quite a bit of unfalsifiable noise.  And, even with that, there are stories to discover.

The interesting thing about these growth rates is that they are declining in a pretty linear way.  The same is true generally of the individual states, too.  But with data this noisy and a time frame this short, it is difficult to see the difference between a linear trend and a convex trend.

Here is the national daily growth rate of cases since March 21, and I have fitted two trends to it, beginning on March 28. One is a linear decrease in the growth rate of 0.93% each day.  The other is a proportional change in the growth rate. Each days growth rate is the previous day x .93.  They both could describe the recent trend, and I would say they might serve as a decent estimate of the range of expectations going forward.

The last graph shows the results of each, in terms of daily new cases.  It makes a big difference. The linear change in the daily growth rate would have to be more or less right in order for my April 15 prediction to come true.  In the next few days, it should become clear what the actual trend is.

Exponential growth can come at you fast.  All in all, I think we did a pretty good job in most places of getting out in front of it.  But, the change in trend in the other direction can be just as surprising.  It could make a big difference for a lot of lives, a lot of jobs, and a lot of investments, if many states around the country can be mostly rid of new cases over the next couple of weeks. Then, the conversation can turn to how quickly we can get back to normal.  We'll see.

PS. The April 9 report shows more new cases than on April 4, so my first prediction failed also.

Monday, April 6, 2020

March 2020 Yield Curve Update

Well, so much has happened, I hardly need to update the yield curve.  Coronavirus has given us one big push into the recessionary outcome that we have been tentatively dancing around for some time.

The first graph here is the comparison of the 10 year yield and Fed Funds Rate.  The imminent recession has pushed the neutral rates of both down considerably.  But, the Fed has been very responsive.

There are so many moving parts moving in such extreme directions, I really don't have anything to say at this point.  Normally, I would suggest that we should be hoping for 10 year yields eventually to run up above 1.5% or 2% as a first step to recovery, but it is all so complicated now, and the Fed makes it even more complicated than it needs to be, so for now I'm just going to watch.

 Here is the yield curve at several points since the early days of the coronavirus development. Short term rates have steadily moved down but long term rates have bounced around a lot.  Again, I'm not sure I have much to say. A lot of the movement on the long end may have been related more to market disequilibrium than to any systematic trends or expectations.  Again, I am in waiting mode.

Inflation expectations have declined to less than 1%.  As long as that is the case, there is probably a pretty tight limit to how high long term rates will go.

The one thing that might be even slightly informative this month is the expected low point of the Federal Funds Rate.  It had been at September 21 for a while, suggesting that Fed policy was expected to allow some sort of economic contraction that would settle in for more than a year.

But, the coronavirus has made everything suddenly more acute and one interesting result of that is that the expected low point of the Fed Funds Rate is now March 2021. It had gone as early as September 2020, but that might have been related to short term market disequilibria.

If this holds up, it suggests that the Fed has been spurred into a more vigorous reaction, and even though the recession will be much deeper than whatever was going to happen, we might recover more quickly because the Fed has jumped from a "minding the store" approach to a "whatever it takes" approach.

We have suddenly switched from a set of fiscal and monetary approaches that were, mistakenly, aimed at making American household assets illiquid, to a new approach where the Treasury and Fed are creating liquidity wherever they can.  Because the bias for the past decade has been so far in the other direction, there is a lot to be gained by this.

But, of course, the virus creates many uncertainties.

Saturday, April 4, 2020

Investors, Gentrifiers, and Flippers, Oh My!

Last summer there was surge in the "Beware real estate investors!" genre.

Here is NPR, the Wall Street Journal, and the New York Times.  These are all quite similar in content and tone.  I will generally review the NYT piece here.

It starts with "This house in Atlanta was sold three times in one year, a sign of exploding investor interest in starter homes that is reshaping the nation’s housing market and driving up prices."  The house was in a neighborhood that had "fallen on hard times" and went from $85,000 to over $300,000 over the course of those transactions, which, according to the article, included extensive renovations and treatment for a termite infestation.

Here is some of the rhetoric in the article regarding this house:
A confluence of factors — rising construction costs, restrictive zoning rules and shifting consumer preferences, among others — has already led to a scarcity of affordably priced housing in many big cities. Investors, fueled by Wall Street capital, are snapping up much of what remains.
“If it weren’t bad enough out there for first-time home buyers, the additional competition from investors is increasingly pushing starter homes out of the reach of many households,” said Ralph McLaughlin, deputy chief economist at CoreLogic, a provider of real estate data.  
Mr. Makarovich, 34, arrived in 2016, part of a wave of young professionals moving into one of the last affordable parts of Atlanta.  
Ms. Ellis looks at the changes in her neighborhood — and her role in those changes — with some ambivalence. She once derided the out-of-towners moving into the area as carpetbaggers. Now, she is playing at least some role in that transformation. “I was like, what are we doing?” she said. “Are we doing the same thing, ultimately, bringing in people who are going to change the place?”  
Later, investors are described as “locusts (that) came down and bought everything up.” 2019
Source: Zillow Data
Here, I will just start with a graph comparing rent affordability and mortgage affordability for both the US and for Atlanta.  This is the portion of the median household income required to either buy a home with a conventional mortgage or to rent the same home. 2019
Source: Zillow Data
Beginning in 2007, there was a sharp divergence between rent and mortgage affordability.  The reason investors flooded the market, and are still active is because owning real estate suddenly became very profitable and that divergence has barely closed at all.  Even the recent small amount of reconvergence was mostly from rising mortgage rates, which have reversed since I produced these charts.  Starter homes are usually purchased with a significant amount of leverage.  Entry level buyers are absolutely not being priced out of the market.

If rising costs and zoning rules were the problem here, then both rent and mortgage affordability would be high, which is exactly what you see in a place like Los Angeles, where zoning restrictions and high costs are the actual reason for a lack of affordability.

Clearly, the problem in Atlanta isn't that investors are "snapping up" all the homes.  The problem is that homeowners aren't snapping them up.  As for young homeowners moving into the "last affordable parts of Atlanta", what can one say?  There are vast swathes of Atlanta where homes are available for less than $150,000.  In fact, there are several homes for less than $150,000 within a block of the house profiled in the story.  The reason the buyers didn't buy those houses was because they wanted a nicer house and they had the money to pay for it.  This is not a story about affordable housing.  The house that sold for over $300,000 sold to a relatively affluent couple expressing a preference.

Are all those sub-$150,000 neighborhoods suffering from too much residential investment and too many interlopers?  None of these reporters seem capable of imagining anything else. The article goes on to lament the struggles of another potential homebuyer who is shopping in the $300,000+ range in Atlanta.  Her real estate agent, who also represents investor buyers and who invests in properties himself, says, “If it is anybody’s fault, it’s probably mine, because I brought people in.”

A question one might ask here is, how can the same market provide good investment opportunities for the real estate broker while simultaneously being bereft of affordable units for the tenants?  These homes are affordable for the investor, but not potential home buyers?

One might also wonder why all that capital isn't funding new housing units.  The truth is, that capital is funding new units, but only for the "haves".  Sales of new homes with prices above $200,000 is back near the boom peak, but new homes under $200,000 are practically nowhere to be seen.  We suffer from a lack of affordable housing while mortgage affordability is fabulous, and yet home buyers just aren't interested in building new homes that sell for less than $200,000?

The truth is that there is great demand for affordable homes, but the families who would live in those homes have a very difficult time getting mortgages today.  Here is a graph comparing two measures.  The black line is the average FICO score of new mortgage borrowers.  After the crisis, loans to average American families dried up and the average FICO score of today's borrowers is much higher than it was before.  The orange line is a comparison of home prices in the most expensive 20% of Atlanta's zip codes compared to home prices in the least expensive 20% of zip codes.  When high end prices rise compared to low end prices, this line rises.  After lending standards were tightened, low end homes in Atlanta dropped by more than 30% compared to high end homes, even though there hadn't been much difference during the boom.

The real estate broker and investor is buying the homes whose tenants are blocked from getting mortgages.  Those homes are affordable, but unavailable to their tenants.  The brokers' clients are the types of buyers who can qualify for mortgages.  They aren't interested in living in $150,000 homes.  They are buying the homes above $200,000 that have risen in value and that have ample new supply coming on line.

There is no natural shortage of homes with affordable prices.  There is a shortage of Americans with permission to buy them.

It is the lack of lending that is creating this gentrification process.  Since lower tier homes have been underpriced, investors have incentives to buy those homes and fix them up so they are nice enough to attract high end buyers in the market that isn’t underpriced.  The way to stop this is to allow more working-class households in those neighborhoods to buy homes.  That will be associated with rising prices, until they are high enough that those investors aren’t attracted to the neighborhood anymore.  But, even with higher prices, those mortgages will be more affordable than rents are today.  Instead of bemoaning greedy landlords that jack up rents and evict working class tenants, why don’t we let those tenants solve their own problem?  Many of those tenants are capable of being their own landlords, and regulators today are preventing that from happening.

As the chart shows, low tier prices have been catching back up with high tier prices lately.  This makes it very tempting to point to low tier price increases since 2012 and react in fear that another credit-fueled bubble is on the way.  But, clearly, those rising prices are catch up growth.  It needs to happen.  It is a sign of a return to sustainability, not a return to unsustainable excess.  There should be more of it, and the demand should be coming from the tenants themselves rather than investors.

There is a shortage of homes with affordable rents because their tenants are denied other options and because the prices on those homes are too low to justify building more and increasing supply.  The investors are buying them because they are great deals, but they are only great deals if you can get funding.

Rents have been on the rise, and the only way they will moderate is by increasing supply - bringing in capital.  Yet, these articles routinely paint capital as the enemy.  But the lack of capital is what is driving up rents.  Residential investment in new single family homes is well below any levels in the decades before the financial crisis.  The affordability problem certainly isn't due to too much investment.

Every home has to be owned by someone. If, as a matter of public policy, it can't be the tenant, then it's going to be an investor.  Presumably, New York could only have become such a great city because it was a place that welcomed change, that welcomed newcomers, and that welcomed the capital needed to house them.  How else could it become a metropolitan center with 20 million people?  Those days are in the past.  An early step in that trend was the implementation of zoning laws that led to the condemnation of tenements that housed the newcomers.  Today, these articles suggest that one is expected to apologize for fixing dilapidated units or for becoming a new resident in a long-growing city.  This is not a frame of mind that will help maintain affordability in Atlanta or regain it in New York.  A primary challenge for the twenty-first century economy is that many of our legacy economic centers now fail to perform the most basic function of an urban center – to attract and house people.  We can’t let New York spread that pathology to cities like Atlanta.