Carol Roth, the author of “You Will Own Nothing: Your War with a New Financial World Order and How to Fight Back” has an op-ed at Fox News titled, “Five ways the Trump administration can save the American Dream and prevent socialism: Home ownership shouldn’t feel out of reach for young Americans”
Really enjoyed this one! I've always thought that the most compelling part of your thesis is the argument that the government killed demand by cracking down on mortgages, and this piece put that concept front and center.
I work in real estate development in Cambridge, MA, and the city has begun to focus a lot more on trying to expand the housing supply to bring prices under control. I've found it useful to keep your posts in mind as I navigate the local ecosystem - keep it up!
It may sound ironic, but this whole project has made me feel freed from argumentation. I feel like I discovered something compelling and important, and I write and speak about it so that others can share in that discovery. Feedback like yours really means a lot to me.
I'm looking forward to seeing if Cambridge can turn its reforms into real progress. God's speed!
It is compelling, and it runs completely counter to conventional wisdom. Have you ever thought about trying to write simple primers to introduce laymen to these concepts? I’d like to share your work with friends, but your posts are admittedly a bit esoteric/technical for people who don’t think about real estate or economics often.
We are trying our best in Cambridge! My company is currently underwriting a 60 studio apartment building - interesting times, indeed.
I don't know why housing is so hard to understand, even for economists who should know better.
Maybe a parallel is the topic of education. Everyone knows the four-year college (grad schools may be worse, outside of hard sciences) idea is not working...but academia is on the gravy train...so...
How many academics say something like "Probably two-thirds of college students don't need to be there. Many grad school programs should be folded into a four-year degree. We need to create high-prestige two-year programs in technical and mechanical skills."
But...elites and better-off academics own housing. Wipe out property zoning and let it rip?
A condo with ground-floor retail in your SFD neighborhood?
The real answer is to build more housing, build way more housing, and then build even more. Zone for unlimited housing density across whole metropolitan areas. If you want to subsidize housing, give $10,000 or $20,000 to developers for every unit completed and sold.
And remember, all new housing is affordable housing. A new luxury unit means someone moves into that one, opening up another home, perhaps for middle-income buyers, and so on.
You know what happens when there is too much supply? Rents go down. See downtown Los Angeles office markets.
> The reason they weren’t in the single-family market before 2010 is because families with access to mortgage credit have and will always be willing to outbid corporations for single-family homes. Corporations didn’t gain an advantage after 2008. Families were put at a disadvantage by overzealous regulation.
>> Today, in the poorest parts of Dallas, homes now cost 5x their residents’ incomes, while homes in the richest parts of Dallas still sell for about 3x. Why? Because of the rent inflation. And the rent inflation is caused by elevated land values. Land values are elevated because of the collapse in new home construction.
Maybe this is a way of saying the same thing in general, but it seems obvious that the lack of starter homes led newly-forming households to rent while they saved up to by and that they’d therefore bid up the cheapest segments of the market — expressly because of their goal to save up for eventually buying a house.
Land values don’t seem to be the core issue to me. It’s the price points and availability of stock at those points.
Or, let me put it this way: According to Zillow, the typical home in ZIP Code 30038 in Atlanta sold for $156,000 in 2007, then $65,000 in 2012, and $262,000 today. Do you think that homes suddenly depreciated from 2007 to 2012 and then from 2012 to today the owners all did massive upgrades? Or, did the land under those homes suddenly have negative value before massively inflating?
Frankly, it's not a debatable point.
On the other point, it's complicated. It is true that the missing units have been units that would have been low tier units within the market for new single-family homes. But, in terms of the broader market, it's more of a donut hole. Low tier among new single-family homes is more like mid-tier within the entire housing stock. And apartment construction continued at the previous pace, which are generally lower tier than single-family units. Also, the affordability of homes is not a result of their poor condition. If more homes had been built, existing homes would have become cheaper, and under normal conditions, families reinvest in the depreciating stock of homes to maintain them at a better condition than they would otherwise be, and they are able to do that because ample new housing keeps the land under the older homes cheap.
In other words, if there had been more construction in Dallas, homes across the city would still sell for price/income of 3x, and that would be because many of them would have sold for price/income of 2x and would have been improved by the families that lived in them.
>> Do you think that homes suddenly depreciated from 2007 to 2012 and then from 2012 to today the owners all did massive upgrades?
I mean, there was a pretty huge crash in the market during that time (2007-2012) and then the market recovered and then started inflating.
It feels wierd to attribute changes in the overall price to massive swings in land value, when the surrounding built environment that drives the land value hasn’t changed much.
IOW, if there’s a nationwide recession and no one can afford the same prices for housing as before, then it’s wierd to me to say that the *land* changed, rather than the market.
Three things drive land value: The surrounding built environment, scarcity, and nominal spending power. Is it commonplace to only call the portion of the price attributed to the surrounding built environment "land value" and to refer to the other factors as "market value"? Do practitioners think of the price of homes in 3 buckets, land, structures, and market? I'm not familiar with that.
I mean, I don’t have any strong claims to either professional authority nor as a well-informed amateur to quibble with the prevailing nomenclature.
But it *does* seem to me that having a nomenclature that lumps those three categories your mention, kind of obscures which specific market dynamic we should be blaming.
Like, in the case of Detroit, large chunks of the city’s housing stock have indeed undergone dramatic deterioration and affected land values.
In the Detroit exurbs, though, your own hobbyhorse of the mortgage crackdown (no shade!) would have been the driving factor behind land value fluctuations.
And in the suburbs and/or gentrifying inner-ring areas, it’d be a mix of that and the typical NIMBY problem of the built structures not being allowed to redevelop to capture the underlying land value.
Just as a humble amateur, it seems wierd to lump those three together, even just for statistical purposes.
Really enjoyed this one! I've always thought that the most compelling part of your thesis is the argument that the government killed demand by cracking down on mortgages, and this piece put that concept front and center.
I work in real estate development in Cambridge, MA, and the city has begun to focus a lot more on trying to expand the housing supply to bring prices under control. I've found it useful to keep your posts in mind as I navigate the local ecosystem - keep it up!
Thanks so much!
It may sound ironic, but this whole project has made me feel freed from argumentation. I feel like I discovered something compelling and important, and I write and speak about it so that others can share in that discovery. Feedback like yours really means a lot to me.
I'm looking forward to seeing if Cambridge can turn its reforms into real progress. God's speed!
It is compelling, and it runs completely counter to conventional wisdom. Have you ever thought about trying to write simple primers to introduce laymen to these concepts? I’d like to share your work with friends, but your posts are admittedly a bit esoteric/technical for people who don’t think about real estate or economics often.
We are trying our best in Cambridge! My company is currently underwriting a 60 studio apartment building - interesting times, indeed.
Here is a post with links to a couple articles and a policy brief that might serve that purpose.
https://kevinerdmann.substack.com/p/we-need-wall-street-in-housing-this
I don't know why housing is so hard to understand, even for economists who should know better.
Maybe a parallel is the topic of education. Everyone knows the four-year college (grad schools may be worse, outside of hard sciences) idea is not working...but academia is on the gravy train...so...
How many academics say something like "Probably two-thirds of college students don't need to be there. Many grad school programs should be folded into a four-year degree. We need to create high-prestige two-year programs in technical and mechanical skills."
But...elites and better-off academics own housing. Wipe out property zoning and let it rip?
A condo with ground-floor retail in your SFD neighborhood?
The real answer is to build more housing, build way more housing, and then build even more. Zone for unlimited housing density across whole metropolitan areas. If you want to subsidize housing, give $10,000 or $20,000 to developers for every unit completed and sold.
And remember, all new housing is affordable housing. A new luxury unit means someone moves into that one, opening up another home, perhaps for middle-income buyers, and so on.
You know what happens when there is too much supply? Rents go down. See downtown Los Angeles office markets.
> The reason they weren’t in the single-family market before 2010 is because families with access to mortgage credit have and will always be willing to outbid corporations for single-family homes. Corporations didn’t gain an advantage after 2008. Families were put at a disadvantage by overzealous regulation.
!
>> Today, in the poorest parts of Dallas, homes now cost 5x their residents’ incomes, while homes in the richest parts of Dallas still sell for about 3x. Why? Because of the rent inflation. And the rent inflation is caused by elevated land values. Land values are elevated because of the collapse in new home construction.
Maybe this is a way of saying the same thing in general, but it seems obvious that the lack of starter homes led newly-forming households to rent while they saved up to by and that they’d therefore bid up the cheapest segments of the market — expressly because of their goal to save up for eventually buying a house.
Land values don’t seem to be the core issue to me. It’s the price points and availability of stock at those points.
There are active markets for urban land and you can go look at indexes that track them or talk to someone that deals in them. (Here's AEI data: https://www.aei.org/housing/land-price-indicators/ )
Or, let me put it this way: According to Zillow, the typical home in ZIP Code 30038 in Atlanta sold for $156,000 in 2007, then $65,000 in 2012, and $262,000 today. Do you think that homes suddenly depreciated from 2007 to 2012 and then from 2012 to today the owners all did massive upgrades? Or, did the land under those homes suddenly have negative value before massively inflating?
Frankly, it's not a debatable point.
On the other point, it's complicated. It is true that the missing units have been units that would have been low tier units within the market for new single-family homes. But, in terms of the broader market, it's more of a donut hole. Low tier among new single-family homes is more like mid-tier within the entire housing stock. And apartment construction continued at the previous pace, which are generally lower tier than single-family units. Also, the affordability of homes is not a result of their poor condition. If more homes had been built, existing homes would have become cheaper, and under normal conditions, families reinvest in the depreciating stock of homes to maintain them at a better condition than they would otherwise be, and they are able to do that because ample new housing keeps the land under the older homes cheap.
In other words, if there had been more construction in Dallas, homes across the city would still sell for price/income of 3x, and that would be because many of them would have sold for price/income of 2x and would have been improved by the families that lived in them.
Just to respond to a specific point:
>> Do you think that homes suddenly depreciated from 2007 to 2012 and then from 2012 to today the owners all did massive upgrades?
I mean, there was a pretty huge crash in the market during that time (2007-2012) and then the market recovered and then started inflating.
It feels wierd to attribute changes in the overall price to massive swings in land value, when the surrounding built environment that drives the land value hasn’t changed much.
IOW, if there’s a nationwide recession and no one can afford the same prices for housing as before, then it’s wierd to me to say that the *land* changed, rather than the market.
Three things drive land value: The surrounding built environment, scarcity, and nominal spending power. Is it commonplace to only call the portion of the price attributed to the surrounding built environment "land value" and to refer to the other factors as "market value"? Do practitioners think of the price of homes in 3 buckets, land, structures, and market? I'm not familiar with that.
I mean, I don’t have any strong claims to either professional authority nor as a well-informed amateur to quibble with the prevailing nomenclature.
But it *does* seem to me that having a nomenclature that lumps those three categories your mention, kind of obscures which specific market dynamic we should be blaming.
Like, in the case of Detroit, large chunks of the city’s housing stock have indeed undergone dramatic deterioration and affected land values.
In the Detroit exurbs, though, your own hobbyhorse of the mortgage crackdown (no shade!) would have been the driving factor behind land value fluctuations.
And in the suburbs and/or gentrifying inner-ring areas, it’d be a mix of that and the typical NIMBY problem of the built structures not being allowed to redevelop to capture the underlying land value.
Just as a humble amateur, it seems wierd to lump those three together, even just for statistical purposes.