"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.
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.
Thanks for the details and for the Urban Institute reference! I should link to that when people ask what exactly caused mortgages to retract so much. A great compendium of many of the problems!
I think you have to be careful using household formation as a measure of housing demand. That's great when there isn't a shortage, but when there is a shortage, the causation goes the other way. Not enough homes means fewer households.
Here are a couple of posts where I wrote about that.
Also, keep in mind that the construction of the real Case-Shiller price index itself assumes that when prices rise, it will trigger new construction that moderates rents and prices. So he deflates it with general CPI instead of with rent inflation. Shiller assumes that in the long run, there won't be cumulative rent inflation. Rent inflation has now accumulated to something like 30%, and most of that is due to the mortgage crackdown. It will take millions and millions of homes to reverse that.
Thanks for the links. I would never say that localized housing shortages do not exist. My daughter lives in Fort Green Brooklyn, a neighborhood in which I would not have set foot back when I lived in Manhattan. (A friend of mine taught school there and got shot.) I help her pay $3,000 for a one bedroom apartment. In Brooklyn, a half acre buildable lot costs anywhere from $2 million to $20 million depending on the neighborhood. (Don't get me started on rent control.) Affordable housing is a pipe dream in the Big Apple. But where else would a civilized person live? Outside Philly, like me?
In my opinion, the most important chart in my post by far is about half way through (I haven't figured out how to paginate in Substack). It shows that new home inventory is soaring as builders raise cash while existing home inventories remain suppressed. I think today is an exact replay of 2006 (albeit for different reasons) when existing homes for sale were at an all time low, until suddenly they weren't.
I think it is also important to bear in mind that institutions were HUGE buyers in the COVID ramp up. Cash burning a hole in their pockets.
By the way, I worked with Chip Case a bit back in the early '90's when Bank of New England was having its troubles. He was a great guy, and left us far too soon.
Brooklyn and Manhattan were much more affordable a hundred years ago when their combined population was higher than it is today. There is no reason for it to be unaffordable. Zoning did that. They can change the zoning.
Homebuilder inventory is not high. Builders are selling finished homes more quickly than at any time before 2020 as far back as data goes. Across the board, homebuilder inventory under construction is moderate relative to their rate of deliveries. To be fair, the details are tricky to understand under current conditions. I cover a lot of these issues in my paid posts.
That is fascinating. Do you know when it was zoned? The housing stock is mostly beautiful. Jefferson Ave in Bed Stuy is a beautiful tree lined street bordered by gorgeous brownstones.
Sure, that's one way of looking at it. Another is that If we had 20th century lending standards in 2001-2007, mortgage originations wouldn't have been as high in that period. You'll have to be more specific about which part of the 20th century you want to revert to. Bear in mind that FICO credit scores weren't used for mortgage lending in 94% of the 20th century. So, it's very difficult to say what a 20th century FICO score cutoff would have been. It varied pretty widely in the period 1994-1998 while we were all adjusting to them, and then round one of private subprime began to build. One thing is for certain, the credit quality box (using FICO as a proxy) in 1999 was way more lenient that it had been prior to 1994. For about half of the 20th century prudent mortgage lending had a max LTV of 66.67%. The triumvirate of LTV, LTI/DTI, and FICO are the objective measures of mortgage credit quality that you can track. LTV and LTI/DTI distributions are still way to the right of (more risky than) "20th century standards". FICO is the only metric that appears to be tighter, but that's because the subprime market, which was only invented in the late 1990's, has essentially been eliminated.
Fannie Mae reports average loan amounts and LTV going back to 1996 and FICO scores back to 2000. There is no evidence from those metrics that the borrowers and homes Fannie Mae was lending to changed significantly from 1996 to 2007.
Fannie Mae has published lots of data, little of it complete, you can't take Fannie Mae in isolation as a representative sample of the total market, and averages tell you nothing about the distribution. I don't know which data of theirs you are looking at, but their distributions of LTV, FICO, and DTI changed dramatically between 1996 and 2007, and not in a monotonic fashion. What percent of loans they purchased or guaranteed in 1996 were 100LTV? What was that in 2007?
"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!"
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.
Thanks for the details and for the Urban Institute reference! I should link to that when people ask what exactly caused mortgages to retract so much. A great compendium of many of the problems!
I think you have to be careful using household formation as a measure of housing demand. That's great when there isn't a shortage, but when there is a shortage, the causation goes the other way. Not enough homes means fewer households.
Here are a couple of posts where I wrote about that.
https://kevinerdmann.substack.com/p/housing-supply-per-capita-eats-your
https://kevinerdmann.substack.com/p/housing-supply-per-capita-eats-your-e00
Here's a post where I estimated the number of missing households.
https://kevinerdmann.substack.com/p/how-many-homes-do-we-need
Also, keep in mind that the construction of the real Case-Shiller price index itself assumes that when prices rise, it will trigger new construction that moderates rents and prices. So he deflates it with general CPI instead of with rent inflation. Shiller assumes that in the long run, there won't be cumulative rent inflation. Rent inflation has now accumulated to something like 30%, and most of that is due to the mortgage crackdown. It will take millions and millions of homes to reverse that.
Thanks for the links. I would never say that localized housing shortages do not exist. My daughter lives in Fort Green Brooklyn, a neighborhood in which I would not have set foot back when I lived in Manhattan. (A friend of mine taught school there and got shot.) I help her pay $3,000 for a one bedroom apartment. In Brooklyn, a half acre buildable lot costs anywhere from $2 million to $20 million depending on the neighborhood. (Don't get me started on rent control.) Affordable housing is a pipe dream in the Big Apple. But where else would a civilized person live? Outside Philly, like me?
In my opinion, the most important chart in my post by far is about half way through (I haven't figured out how to paginate in Substack). It shows that new home inventory is soaring as builders raise cash while existing home inventories remain suppressed. I think today is an exact replay of 2006 (albeit for different reasons) when existing homes for sale were at an all time low, until suddenly they weren't.
I think it is also important to bear in mind that institutions were HUGE buyers in the COVID ramp up. Cash burning a hole in their pockets.
By the way, I worked with Chip Case a bit back in the early '90's when Bank of New England was having its troubles. He was a great guy, and left us far too soon.
Brooklyn and Manhattan were much more affordable a hundred years ago when their combined population was higher than it is today. There is no reason for it to be unaffordable. Zoning did that. They can change the zoning.
Homebuilder inventory is not high. Builders are selling finished homes more quickly than at any time before 2020 as far back as data goes. Across the board, homebuilder inventory under construction is moderate relative to their rate of deliveries. To be fair, the details are tricky to understand under current conditions. I cover a lot of these issues in my paid posts.
That is fascinating. Do you know when it was zoned? The housing stock is mostly beautiful. Jefferson Ave in Bed Stuy is a beautiful tree lined street bordered by gorgeous brownstones.
I think the original zoning plan in NYC was in the 1920s with another big round of downzoning in the 1970s.
LA was a bit later. Zoned capacity in LA was massively reduced in the 1980s. It was affordable until then too.
"(2) Return to 20th century lending standards."
Okay. HTI max 28, DTI max 36. Let us know how that works out.
So, if we had 20th century lending standards, mortgage originations would have declined even further?
Sure, that's one way of looking at it. Another is that If we had 20th century lending standards in 2001-2007, mortgage originations wouldn't have been as high in that period. You'll have to be more specific about which part of the 20th century you want to revert to. Bear in mind that FICO credit scores weren't used for mortgage lending in 94% of the 20th century. So, it's very difficult to say what a 20th century FICO score cutoff would have been. It varied pretty widely in the period 1994-1998 while we were all adjusting to them, and then round one of private subprime began to build. One thing is for certain, the credit quality box (using FICO as a proxy) in 1999 was way more lenient that it had been prior to 1994. For about half of the 20th century prudent mortgage lending had a max LTV of 66.67%. The triumvirate of LTV, LTI/DTI, and FICO are the objective measures of mortgage credit quality that you can track. LTV and LTI/DTI distributions are still way to the right of (more risky than) "20th century standards". FICO is the only metric that appears to be tighter, but that's because the subprime market, which was only invented in the late 1990's, has essentially been eliminated.
Fannie Mae reports average loan amounts and LTV going back to 1996 and FICO scores back to 2000. There is no evidence from those metrics that the borrowers and homes Fannie Mae was lending to changed significantly from 1996 to 2007.
Fannie Mae has published lots of data, little of it complete, you can't take Fannie Mae in isolation as a representative sample of the total market, and averages tell you nothing about the distribution. I don't know which data of theirs you are looking at, but their distributions of LTV, FICO, and DTI changed dramatically between 1996 and 2007, and not in a monotonic fashion. What percent of loans they purchased or guaranteed in 1996 were 100LTV? What was that in 2007?