Insufficient housing supply is the issue. Low supply means housing costs too much and it means the housing market fails to clear. The lack of clearing creates bottlenecks similar to gridlock on a city street. But why is there insufficient housing supply? It is because of government regulations.
Where I live in Maryland, restrictions and regulations on new construction mean new SFH construction is only economical if it has a price level in excess of $1.2 million. New town home construction sells for $700k. New condos sell for $500k. There is a huge increase in construction cost as the housing density is decreased. Given there is plenty of land what explains this? It is artificial constraints imposed by local and state governments. Three of the biggest regulatory costs are (1) Impact fees (2) Fire suppression (3) Septic. Combined, these add several hundred thousands of dollars to the price of a SFH. Recognize that Fire suppression and stricter septic regulations are new requirements added in the past dozen years. Escalating impact fees are also a recent development.
These issues are not just blue state blues. I have a friend in Tennessee who bought land several years ago with the intent to build a house. This new house remains unbuilt due to the the difficulty in hiring a builder to do the work at a reasonable price. Because my friend cannot build a new house, he is living in a small house that would otherwise be a starter home for someone else. This is the gridlock that happens because governments have made new home construction so expensive and difficult.
Up until 20 years ago, new home construction in growth areas of the country was a constant activity. This meant there were plenty of skilled suppliers / contractors and there was a diverse market of homes always on the market. People could buy new low cost homes and then in a few years move up to a more expensive home, allowing the previous home to add to the supply of homes available to new buyers.
The GFC killed this economic model and I think you are correct that financial regulations are a factor. I believe the greater issue now is over-regulation of home construction. Suppliers and contractors cannot commit high capital to building single family homes because the time and costs to permit new lots, homes and infrastructure is too high.
I think you point to a legitimate problem. But, I think it's secondary. Sort of like, once we get our cancer into remission, we then also should start exercising more and cutting down on fat and sugar.
One way I try to parse that out is that low productivity and over-regulation in construction should generally make structures more expensive. I would expect rental expenditures to remain level, but families to live in somewhat smaller or less desirable units than they would have otherwise. Real residential would be low and home prices would be stable.
The urban land use obstructions and the mortgage crackdown were sharp enough binding constraints that families have had to actually downgrade, either in unit desirability or location. Families resist this. So, they pay exorbitant rents in LA or NYC before they cry uncle and move. And, since 2008, the same thing has been happening in Kalamazoo.
So, I think we can separate these issues quantitatively. And, my thesis is that the near doubling of residential real estate values (which is mostly an inflation of the cost of land under old units) is a sign of these more acute pressures.
This was jam packed dense. I won't take issue with any of it. I will ask a question on motivations and zoning. Let's posit that all buyers want their purchase to appreciate, at least to keep up with inflation and possibly more, Say "Rate of inflation + 6%". Normal housing would expect "Rate of Inflation, only". So to get that extra 6% (making housing an "investment" equal to a long term stock index) you need to either stimulate demand, or throttle supply. The normal situation in growing cities is to do both. They stimulate demand by attracting industry, and they throttle supply by saying "no" to increased density. That pushes prices up, and pushing prices up drags rents up, pricing the lower income half of the population out of the purchase market, and very possibly out of the rental market as well. So no matter what the interest rate is, or the mortgage qualifying standards are, most purchases become cash buyers. [ And current homeowners want to keep it this way to keep their invest type returns.] To some extent Freddie and Fanny are just on the sidelines for this. They were severely (self) wounded in GFC, and are still over cautious. But isn't the real story here the Demand for mortgage backed securities in the secondary market? And isn't that demand low?
Now, one suggestion. How about a lending standard change that says two years of rental housing payments in good standing, qualifies a buyer for a mortgage with a PI of 90% of the rental payments?
Think of the homeowner as a landlord to themselves. Even if real home prices don't appreciate, they return "rate of inflation +6%" because they provide the service of shelter, which is measured by rental value. Homes don't have to appreciate in order to match other investments in risk/return.
I don't think low demand for MBSs has anything to do with reduced housing supply.
I'm fine with your underwriting idea. That could be one of many dimensions on which mortgages could be made more accessible.
Your analysis of subsidies seems completely unaware of the Strong Towns point about the extent to which municipal bonds underwrite unrealistically low property taxes.
It just makes me curious: are you in dialog at all with ST? Is this your own homegrown analysis?
But ST’s calculus that most property taxes are roughly 2-5x too low belies your notion that only rich homeowners are benefiting.
Rather, ST’s contention is that most of the people who benefited from the era of looser mortgage standards that you want to return to, also benefited from buying new construction in sprawling municipalities that were basically built as a Ponzi scheme — most of the up-front infrastructure costs were covered by muni bonds, and in order to make the numbers work assumed “growth” that never materialized.
The point I’m working towards is, the solution simply can’t be as simple as “we should go back to looser standards”, since that would just re-incentivize a form of development that you admit you don’t even want. And that’s not because I’m just waving my hands and pretending that’s the ONLY possible outcome of loosening standards; no, it’s based on a ST observation that nearly the entire planning profession is trained on an unsustainable development pattern, and they’ll go right back to it unless corrected.
Arguably, loosing the standards will only get us more sprawl surrounding nodes of 5-over-1s and very little missing-middle.
So… unless I’m misinterpreting what you actually want out of loosened standards, the conclusion appears to me that we can’t just loosen standards, we need to revamp the planning profession, the zoning rules, and probably the way we do underwriting — since, as Chuck Marohn noted in his most recent book, one of the biggest problems with getting back to a traditional, sustainable, incremental development pattern is that banks don’t think they can profitably bundle the millions of small, non-standard projects it would involve.
That is an interesting long-term debate. But, I don't think we should artificially choke off new supply until every other debate is settled and every other problem is worked out. I think that sort of veers into NIMBY territory in practice. Units, of any kind, are currently massively undersupplied, and so getting more units, of any kind, is my priority.
I’m all for harm reduction… but I’m also not TOO young to personally remember and just plain observe that the treadmill we were on with the Suburban Growth Ponzi Scheme was itself incredibly harmful.
I really despise “Heighten the Contradictions” arguments, but mostly that’s out of a recognition that (1) most people who advocate HtC are advocating doing something to actively worsen what are usually mostly-imagined “contradictions”, while (2) most of the time, the contradictions simply get ignored and the can gets kicked down the road in some new direction that creates new contradictions.
The former doesn’t really apply here, since I’m not arguing for intentionally making anything worse, I’m just saying that one arena of solutions is a lot worse than how things already are, even if it has one and only one salutary effect (building more SFH + 5-over-1’s). It’s similar to the objection I have (and I believe you share, no?) to continuing to build up the housing-subsidy state: it just puts us back on a treadmill where things get worse, not better.
And the latter… well, going back to harm reduction, I’d rather we kick the can in the direction of “re-legalizing missing middle and rebuilding the small-developer ecosystem” over “legalize the financing for more shitty exurbs that are going to be wastelands in 40-60 years and create a mortgage bubble that pops in another 5-10” just because it would also marginally get us more owner-occupied 5-over-1s. Like, if you only have the political capital to do ONE of those, the answer is pretty friggin clear to me, on both ST grounds and my own cognizance.
To be more precise, I think 1->2 would be the optimal sequencing, and I don’t see how starting 2->1 would ever have an impetus behind actually completing the task of getting us from the 2 to the 1. I *really* would dislike the latter strategy resulting in 1 simply never happening.
However, I won’t pretend to be some purist martyr. There’s probably some point at which I’d relent my opposition to #2 — I still might not move to the shitty exurbs myself (my revealed preference is that I already haven’t done that despite it being the easiest path to homeownership within 1 hr drive of my job), but I’d be plenty happy to let other people bite the lemon of shitty exurbanism while I continue working to revitalize my small downtown’s own urbanism while paying a premium for it — I can still afford that… for now.
But given that #1 is well on its way to happening, I don’t see why we should all of a sudden pivot to #2 midway through the process. I do agree with you that loosening mortgage standards may be a good thing to pivot to once #1 is in full swing (IE YIMBY policies win popularity and we’re building enough units to start closing the shortage), but I’d actually prefer a separate set of mortgage standard reforms (or similar financial reforms achieving the same goals!) that preferentially financed missing middle over SFH and 5-over-1’s — since these would only unlock more of #1’s transformative force.
Kevin,
Insufficient housing supply is the issue. Low supply means housing costs too much and it means the housing market fails to clear. The lack of clearing creates bottlenecks similar to gridlock on a city street. But why is there insufficient housing supply? It is because of government regulations.
Where I live in Maryland, restrictions and regulations on new construction mean new SFH construction is only economical if it has a price level in excess of $1.2 million. New town home construction sells for $700k. New condos sell for $500k. There is a huge increase in construction cost as the housing density is decreased. Given there is plenty of land what explains this? It is artificial constraints imposed by local and state governments. Three of the biggest regulatory costs are (1) Impact fees (2) Fire suppression (3) Septic. Combined, these add several hundred thousands of dollars to the price of a SFH. Recognize that Fire suppression and stricter septic regulations are new requirements added in the past dozen years. Escalating impact fees are also a recent development.
These issues are not just blue state blues. I have a friend in Tennessee who bought land several years ago with the intent to build a house. This new house remains unbuilt due to the the difficulty in hiring a builder to do the work at a reasonable price. Because my friend cannot build a new house, he is living in a small house that would otherwise be a starter home for someone else. This is the gridlock that happens because governments have made new home construction so expensive and difficult.
Up until 20 years ago, new home construction in growth areas of the country was a constant activity. This meant there were plenty of skilled suppliers / contractors and there was a diverse market of homes always on the market. People could buy new low cost homes and then in a few years move up to a more expensive home, allowing the previous home to add to the supply of homes available to new buyers.
The GFC killed this economic model and I think you are correct that financial regulations are a factor. I believe the greater issue now is over-regulation of home construction. Suppliers and contractors cannot commit high capital to building single family homes because the time and costs to permit new lots, homes and infrastructure is too high.
I think you point to a legitimate problem. But, I think it's secondary. Sort of like, once we get our cancer into remission, we then also should start exercising more and cutting down on fat and sugar.
One way I try to parse that out is that low productivity and over-regulation in construction should generally make structures more expensive. I would expect rental expenditures to remain level, but families to live in somewhat smaller or less desirable units than they would have otherwise. Real residential would be low and home prices would be stable.
The urban land use obstructions and the mortgage crackdown were sharp enough binding constraints that families have had to actually downgrade, either in unit desirability or location. Families resist this. So, they pay exorbitant rents in LA or NYC before they cry uncle and move. And, since 2008, the same thing has been happening in Kalamazoo.
So, I think we can separate these issues quantitatively. And, my thesis is that the near doubling of residential real estate values (which is mostly an inflation of the cost of land under old units) is a sign of these more acute pressures.
This was jam packed dense. I won't take issue with any of it. I will ask a question on motivations and zoning. Let's posit that all buyers want their purchase to appreciate, at least to keep up with inflation and possibly more, Say "Rate of inflation + 6%". Normal housing would expect "Rate of Inflation, only". So to get that extra 6% (making housing an "investment" equal to a long term stock index) you need to either stimulate demand, or throttle supply. The normal situation in growing cities is to do both. They stimulate demand by attracting industry, and they throttle supply by saying "no" to increased density. That pushes prices up, and pushing prices up drags rents up, pricing the lower income half of the population out of the purchase market, and very possibly out of the rental market as well. So no matter what the interest rate is, or the mortgage qualifying standards are, most purchases become cash buyers. [ And current homeowners want to keep it this way to keep their invest type returns.] To some extent Freddie and Fanny are just on the sidelines for this. They were severely (self) wounded in GFC, and are still over cautious. But isn't the real story here the Demand for mortgage backed securities in the secondary market? And isn't that demand low?
Now, one suggestion. How about a lending standard change that says two years of rental housing payments in good standing, qualifies a buyer for a mortgage with a PI of 90% of the rental payments?
Think of the homeowner as a landlord to themselves. Even if real home prices don't appreciate, they return "rate of inflation +6%" because they provide the service of shelter, which is measured by rental value. Homes don't have to appreciate in order to match other investments in risk/return.
I don't think low demand for MBSs has anything to do with reduced housing supply.
I'm fine with your underwriting idea. That could be one of many dimensions on which mortgages could be made more accessible.
Your analysis of subsidies seems completely unaware of the Strong Towns point about the extent to which municipal bonds underwrite unrealistically low property taxes.
It just makes me curious: are you in dialog at all with ST? Is this your own homegrown analysis?
I think ST and I have similar positions on property taxes and the benefits of city-building that is less dependent on sprawl.
But ST’s calculus that most property taxes are roughly 2-5x too low belies your notion that only rich homeowners are benefiting.
Rather, ST’s contention is that most of the people who benefited from the era of looser mortgage standards that you want to return to, also benefited from buying new construction in sprawling municipalities that were basically built as a Ponzi scheme — most of the up-front infrastructure costs were covered by muni bonds, and in order to make the numbers work assumed “growth” that never materialized.
The point I’m working towards is, the solution simply can’t be as simple as “we should go back to looser standards”, since that would just re-incentivize a form of development that you admit you don’t even want. And that’s not because I’m just waving my hands and pretending that’s the ONLY possible outcome of loosening standards; no, it’s based on a ST observation that nearly the entire planning profession is trained on an unsustainable development pattern, and they’ll go right back to it unless corrected.
Arguably, loosing the standards will only get us more sprawl surrounding nodes of 5-over-1s and very little missing-middle.
So… unless I’m misinterpreting what you actually want out of loosened standards, the conclusion appears to me that we can’t just loosen standards, we need to revamp the planning profession, the zoning rules, and probably the way we do underwriting — since, as Chuck Marohn noted in his most recent book, one of the biggest problems with getting back to a traditional, sustainable, incremental development pattern is that banks don’t think they can profitably bundle the millions of small, non-standard projects it would involve.
That is an interesting long-term debate. But, I don't think we should artificially choke off new supply until every other debate is settled and every other problem is worked out. I think that sort of veers into NIMBY territory in practice. Units, of any kind, are currently massively undersupplied, and so getting more units, of any kind, is my priority.
I’m all for harm reduction… but I’m also not TOO young to personally remember and just plain observe that the treadmill we were on with the Suburban Growth Ponzi Scheme was itself incredibly harmful.
I really despise “Heighten the Contradictions” arguments, but mostly that’s out of a recognition that (1) most people who advocate HtC are advocating doing something to actively worsen what are usually mostly-imagined “contradictions”, while (2) most of the time, the contradictions simply get ignored and the can gets kicked down the road in some new direction that creates new contradictions.
The former doesn’t really apply here, since I’m not arguing for intentionally making anything worse, I’m just saying that one arena of solutions is a lot worse than how things already are, even if it has one and only one salutary effect (building more SFH + 5-over-1’s). It’s similar to the objection I have (and I believe you share, no?) to continuing to build up the housing-subsidy state: it just puts us back on a treadmill where things get worse, not better.
And the latter… well, going back to harm reduction, I’d rather we kick the can in the direction of “re-legalizing missing middle and rebuilding the small-developer ecosystem” over “legalize the financing for more shitty exurbs that are going to be wastelands in 40-60 years and create a mortgage bubble that pops in another 5-10” just because it would also marginally get us more owner-occupied 5-over-1s. Like, if you only have the political capital to do ONE of those, the answer is pretty friggin clear to me, on both ST grounds and my own cognizance.
Here are 2 propositions, assuming nothing else changes at all:
1) Zoning and land use regulations are loosened to allow adequate housing to be constructed within the footprint of the largest existing metro areas.
2) Mortgage access is loosened so that adequate housing can be constructed within the current constraints of urban land use rules.
I would support either of those.
It sounds like you would only support the first proposition. Is that correct?
Pretty much, at least for now.
To be more precise, I think 1->2 would be the optimal sequencing, and I don’t see how starting 2->1 would ever have an impetus behind actually completing the task of getting us from the 2 to the 1. I *really* would dislike the latter strategy resulting in 1 simply never happening.
However, I won’t pretend to be some purist martyr. There’s probably some point at which I’d relent my opposition to #2 — I still might not move to the shitty exurbs myself (my revealed preference is that I already haven’t done that despite it being the easiest path to homeownership within 1 hr drive of my job), but I’d be plenty happy to let other people bite the lemon of shitty exurbanism while I continue working to revitalize my small downtown’s own urbanism while paying a premium for it — I can still afford that… for now.
But given that #1 is well on its way to happening, I don’t see why we should all of a sudden pivot to #2 midway through the process. I do agree with you that loosening mortgage standards may be a good thing to pivot to once #1 is in full swing (IE YIMBY policies win popularity and we’re building enough units to start closing the shortage), but I’d actually prefer a separate set of mortgage standard reforms (or similar financial reforms achieving the same goals!) that preferentially financed missing middle over SFH and 5-over-1’s — since these would only unlock more of #1’s transformative force.
Does that make sense?