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Benjamin Cole's avatar

"There are 3 ways to end the American housing crisis. (1) Allow cities to adequately construct multi-family and infill housing. (2) Return to 20th century lending standards. Or (3) Allow the new single-family build-to-rent segment to grow."--KE

Without No.1, then No. 2 and No. 3 become somewhat inert.

If Hollywood ever makes a black comedy about housing and macroeconomics, maybe John Cochrane will have a leading role (although he seems like a nice guy).

I will reiterate, whenever a modern macroeconomist is interviewed by the media, the first sentence out of their mouths should be, "Well, you ask about inflation, but that leads back to housing...."

Or, "Well, criminalizing imports may be a flawed idea, but far, far more important is the criminalization of domestic housing construction."

Modern macroeconomists have a bottomless ability to pontificate (well, moralize) about inflation, tariffs and the Great Depression.

Like the baseball manager, a former economist, whose team has lost three games by scores of 15-4, 17-2, 13-5.

The manager: "We need better hitting!"

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Cranmer, Charles's avatar

I disagree that things are as dire as you describe. Anyhow, the problem NOW is not a housing shortage but a looming housing glut. See; https://charles72f.substack.com/p/housing-goodbye-drought-hello-glut

A few other things that might help clarify things.

1. The housing construction shortage from 2008-2020 resulted from the regulatory kibosh on regional bank construction lending. This meant that small, independent builders were starved of credit and that small (1-20 acre) lots were not developed.

2. Similarly, Dodd Frank forced banks out of the mortgage business. (See excerpt below.)

3. The paper referred to below will confirm your argument concerning mortgage credit standards.

A superb 2017 study by the Urban Institute corroborates the argument that regulation artificially suppressed loan availability. In “Quantifying the Tightness of Mortgage Credit and Assessing Policy Options,” economist Laurie Goodman asks why the growth in single family mortgages from 2009 — 2015 was so much slower than one would have expected. To find the answer, she compares actual mortgage production to what it would have been had the industry adhered to credit standards prevalent in 2001-2002 (prior to sub-prime excesses.)

Goodman finds that between 2009 and 2015, 6.3 million fewer mortgages were made than would have been made under 2001-2002 credit standards. At $150k a pop, that’s $945 billion in foregone mortgages – more than a trillion dollars in foregone home sales. Worse, average FICO scores rose to 700 from 660 in 2001-2, indicating that low income borrowers were disproportionately denied mortgages. This exacerbated US economic inequality.

Goodman does not explicitly blame Dodd-Frank for these shortfalls, but several rules stemming from Dodd Frank help to account for it. Most important was the “put back rule.” This rule allows the GSE’s to “put back” to a mortgage originator any loan that goes bad if the GSE can find a flaw in the application. Of course, if you’ve ever taken out a mortgage, you know that the applications can be riddled with small errors, any one of which could result in the mortgage being returned to the originator. Understandably, mortgage lenders stopped approving any mortgage that was close to borderline in quality, and most banks abandoned the business.

Two further contributors were: 1. post crisis, mortgages requiring down payments of less than 20% were scarce and 2. Banks were compelled to deduct from capital the value of their mortgage servicing intangible.

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