It seems like one dilemma here is that we have many local housing markets but just one federal interest rate and one federal mortgage lending standard. If we have different situations in the closed-access cities than the rest of the country, what’s the correct single policy?
Something I haven’t heard you address (apologies if you have and I just haven’t seen it), is that there really was speculation built on the assumption that homes in Las Vegas, Phoenix, and Orlando would just keep skyrocketing in price. I think you make a compelling point that this was about spillover from closed-access cities and so misunderstood (ie there was already a plateau coming, Phoenix was going to catch up to some large fraction of LA prices but not exceed).
So how should the federal government understand the many different markets, and when pressured to “do something” with its uniform national tools, what should it do?
I think this is a difficult question. In a way, I think it could be somewhat solved by removing rent from inflation indexes. At its base, the problem is that Closed Access cities have a cap on real growth and any additional growth creates a process where rent inflation is necessary to motivate regional sorting.
I've been an avid reader of your content for about 6 months. I've been confused about something for a while, so I figured I'd ask.
For a builder, what is the difference between selling to a landlord who rents out the property for say $2,000/mo, and selling to a home buyer who will pay $2,000/mo in a mortgage? Why didn't builders immediately pivot to build-to-rent after the mortgage shutdown? After the crash, why did rents have to rise in order to make build-to-rent feasible, when build-to-sell was already feasible beforehand?
Hector, great question and thanks for reading and engaging!
The mortgage crackdown lowered the price/rent ratio on existing homes in neighborhoods that are now locked out of borrowing. So the first shift after 2008 was that existing homes were cheap to buy. New homes and existing homes compete with each other. Landlords won’t buy new homes if they can get existing homes cheaper. That’s still the case in Kalamazoo.
There are a lot of advantages to owning a home, so where families can get funding, they always outbid corporate landlords for homes. When the mortgage crackdown cut them out of the market, prices had to fall to the lower level that landlords are willing to pay.
Rents had to rise far enough to get those prices of existing homes back up to a point where existing homes were worth enough to large landlords that they would pay as much for them as a new home would cost.
Does that make sense, or is there still a point of confusion I need to clarify?
A shorter answer is that a builder would sell to a family with a $2,000 mortgage but after 2008, that family was allowed to pay $2,000 rent, but federal regulators refuse to allow anyone to loan the $2,000 mortgage to them.
Thanks for the explanation! So basically, do I have it right: A family is willing to pay $2,000/mo for the house, either renting or on a mortgage. However, a landlord is *not* going to take out a mortgage for $2,000/mo and then rent the house out for $2,000/mo, because then they would not make a profit. Thus, now that the family cannot get the mortgage, the prospective landlord might only buy the house for a $1,800/mo mortgage and then rent it out for $2,000/mo. Thus, the house has lost value, but the family pays the same amount.
And if the price penalty for rental is big - say 1/3 - then homes that sold to owner-occupiers for $300,000 would now only sell to prospective landlords for $200,000. If it had been costing $300,000 to build the house, then there won't be any new houses of that kind built until rents increase proportionately such that the landlords will buy a house for $300,000.
It's really interesting to poke around Zillow and see how the price/rent dynamic relates to home prices.
Most of us who are doing ok and are homeowners live in neighborhoods where the mortgage/rent ratio is >1. Zillow's mortgage estimate for my house is about 25% higher than its rent estimate. If I run that through a sophisticated net present value calculation, ownership is still advantageous for me under some realistic assumptions.
So, in a market with funded homeowners, using a mortgage/rent benchmark of 1 is actually very conservative.
"There is a simple and clear explanation for the appearance of a glut. But there was only the appearance. There weren’t too many homes. There was a lack of families with permission to be owners."
This is a great insight. The core of your argument, that low income buyers aren't "allowed" to be buyers is also brilliant. I think it even applies to California markets like Irvine. The ripple effects limit housing buyers for both expensive and inexpensive properties, keeping rents high for existing stock.
It seems like one dilemma here is that we have many local housing markets but just one federal interest rate and one federal mortgage lending standard. If we have different situations in the closed-access cities than the rest of the country, what’s the correct single policy?
Something I haven’t heard you address (apologies if you have and I just haven’t seen it), is that there really was speculation built on the assumption that homes in Las Vegas, Phoenix, and Orlando would just keep skyrocketing in price. I think you make a compelling point that this was about spillover from closed-access cities and so misunderstood (ie there was already a plateau coming, Phoenix was going to catch up to some large fraction of LA prices but not exceed).
So how should the federal government understand the many different markets, and when pressured to “do something” with its uniform national tools, what should it do?
I think this is a difficult question. In a way, I think it could be somewhat solved by removing rent from inflation indexes. At its base, the problem is that Closed Access cities have a cap on real growth and any additional growth creates a process where rent inflation is necessary to motivate regional sorting.
I did write about it here:
https://kevinerdmann.substack.com/p/idle-thoughts-on-monetary-policy
Hi Kevin,
I've been an avid reader of your content for about 6 months. I've been confused about something for a while, so I figured I'd ask.
For a builder, what is the difference between selling to a landlord who rents out the property for say $2,000/mo, and selling to a home buyer who will pay $2,000/mo in a mortgage? Why didn't builders immediately pivot to build-to-rent after the mortgage shutdown? After the crash, why did rents have to rise in order to make build-to-rent feasible, when build-to-sell was already feasible beforehand?
Thanks so much!
Hector, great question and thanks for reading and engaging!
The mortgage crackdown lowered the price/rent ratio on existing homes in neighborhoods that are now locked out of borrowing. So the first shift after 2008 was that existing homes were cheap to buy. New homes and existing homes compete with each other. Landlords won’t buy new homes if they can get existing homes cheaper. That’s still the case in Kalamazoo.
There are a lot of advantages to owning a home, so where families can get funding, they always outbid corporate landlords for homes. When the mortgage crackdown cut them out of the market, prices had to fall to the lower level that landlords are willing to pay.
Rents had to rise far enough to get those prices of existing homes back up to a point where existing homes were worth enough to large landlords that they would pay as much for them as a new home would cost.
Does that make sense, or is there still a point of confusion I need to clarify?
A shorter answer is that a builder would sell to a family with a $2,000 mortgage but after 2008, that family was allowed to pay $2,000 rent, but federal regulators refuse to allow anyone to loan the $2,000 mortgage to them.
Thanks for the explanation! So basically, do I have it right: A family is willing to pay $2,000/mo for the house, either renting or on a mortgage. However, a landlord is *not* going to take out a mortgage for $2,000/mo and then rent the house out for $2,000/mo, because then they would not make a profit. Thus, now that the family cannot get the mortgage, the prospective landlord might only buy the house for a $1,800/mo mortgage and then rent it out for $2,000/mo. Thus, the house has lost value, but the family pays the same amount.
And if the price penalty for rental is big - say 1/3 - then homes that sold to owner-occupiers for $300,000 would now only sell to prospective landlords for $200,000. If it had been costing $300,000 to build the house, then there won't be any new houses of that kind built until rents increase proportionately such that the landlords will buy a house for $300,000.
Yep. That's it.
It's really interesting to poke around Zillow and see how the price/rent dynamic relates to home prices.
Most of us who are doing ok and are homeowners live in neighborhoods where the mortgage/rent ratio is >1. Zillow's mortgage estimate for my house is about 25% higher than its rent estimate. If I run that through a sophisticated net present value calculation, ownership is still advantageous for me under some realistic assumptions.
So, in a market with funded homeowners, using a mortgage/rent benchmark of 1 is actually very conservative.
https://www.zillow.com/homedetails/608-Oak-St-Kalamazoo-MI-49007/84495185_zpid/
Zillow says the mortgage here is $802/mo, and property is currently rented at $1325/mo. The mortgage is 40% cheaper than the rent.
"There is a simple and clear explanation for the appearance of a glut. But there was only the appearance. There weren’t too many homes. There was a lack of families with permission to be owners."
This is a great insight. The core of your argument, that low income buyers aren't "allowed" to be buyers is also brilliant. I think it even applies to California markets like Irvine. The ripple effects limit housing buyers for both expensive and inexpensive properties, keeping rents high for existing stock.
Really a brilliant piece of writing!
Thank you!