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for less residential investment fewer buyers and fewer homes limiting the supply of homes has had a predictable effect of increasing rents in other words the problem of affordability in terms of price was solved after 2007 affordability in terms of rent was not understanding the difference between these two measures will be an important factor in correcting the policy errors that led to the crisis and creating better more equitable more stable economic outcomes in the future i argue in my book shut out that the housing collapse and the financial crisis were not inevitable they weren t even useful in fact their very purpose was mistaken the fundamental measure for housing affordability is rent not price and trying to bring down prices instead of bringing down rents inevitably will fail on its own terms in the long run prices will be determined by rents anyway what are landlords good for more efficient markets lead to higher real estate transaction productivity the resulting higher prices convey that information owning a home is more valuable now because it can be done with less hassle landlords would be less necessary because transaction costs would be a smaller problem making homeownership more valuable only focusing on price might tempt one to suggest that transaction cost reducing innovation should be avoided because it would only increase prices homeowners make the best landlords when considering the benefits of home ownership on the margin the focus should be on capturing the excess yield that seems to be widely available to owners it is this yield that is most important to marginal potential owners not capital gains it may be more accurate to think of that excess yield as a form of patronage a lucrative wage available to those with access to ownership the wage is earned by performing the duties and taking the risks of a landlord upon becoming the owner the wage remains but the duties of the job can be shirked there is no problem tenant to evict no vacancies to fill no complaints to manage it s a cushy job you can get because your uncle sam pulled some strings down at the bank real estate investment doesn t increase spending the housing bust is creating more excess capital income than a housing bubble ever could have rising prices lower rents rising rents rising prices the suppression of credit has lowered closed access prices but they are still high because rents are high open access housing has been pushed to a level well below previous norms but attempting to solve the price problem in open access cities has created a rent problem where building new homes is permitted rising prices lead to declining rents but rising rents lead to rising prices in the long run even the solution to rising prices begins with a focus on lowering rents the myth about bubble buyers f or households 45 to 54 years in age the homeownership rate in 1982 when the census bureau started tracking it annually was 77 4 percent it bottomed out at 74 8 percent in 1991 and then recovered to 77 2 percent at the peak in 2004 by 2017 it was down to 69 3 percent rental expenses as a proportion of incomes figure 1 belie the conventional wisdom the rental value of owned homes was more stable as a portion of owner income than the rental value of rented homes from the late 1990s to the mid 2000s in other words if there was an increase in relative spending on housing it was among renters the rental value of homeowners was rising in line with their incomes there is no sign of marginal homebuyers being induced into homeownership and overconsumption squeezing unqualified borrowers considering this set of circumstances the idea that housing affordability is getting worse because prices are high and that the solution is even higher interest rates or tighter credit access is a disastrous misreading it will lead to a vicious cycle of segregation between households that can qualify under today s standards and who then can buy ample units at favorable terms and households that cannot qualify and who must keep economizing while a large portion of their wages is transferred as rent to the ownership class there are two options re opening credit markets to entry level buyers will return the market to a more equitable equilibrium maintaining the market as it is will continue down the path of settling at a new equilibrium where certain households live in smaller less adequate units either because of size amenities or location tight lending regulations are a wealth subsidy thinking in terms of rental value public policies and market innovations that lower mortgage interest rates can be broadly beneficial to consumers even if those benefits don t accrue to the actual borrowers who use those low rates that is because higher mortgage interest rates have a similar effect on price as exclusionary lending standards downward pressure on price creates a rental subsidy for home buyers who don t require a mortgage property taxes are rent to a public landlord if there is concern that the net effects of government policies in total favor housing and lead to market volatility a return to higher levels of property taxation can be a useful tool for countering it property taxes can be a tax on monopoly power if politically maintained monopoly power is going to remain claiming monopolist profits through taxes is an improvement the fact that the tax doesn t affect rents is a sign of efficiency if rents must be elevated better that they go to local public services than to the real estate cartel low property taxes and obstructed housing supply are a bad mix it would seem that raising property taxes would make housing more expensive they are effectively a tax on materials to build homes but the binding constraint to affordable and reasonable housing in twenty first century america isn t material it isn t a lack of affordable physical space it is the political obstruction to placing those materials in dense urban centers are property taxes regressive a region that allows ample new supply and imposes higher property taxes is friendlier to households with lower incomes than a region with obstructed housing supply and low property taxes income tax benefits to homeowners are regressive two of the most important changes to the tax code made by the tax cuts and jobs act of 2017 tcja relate to housing a reduction in the deductibility of state and local taxes and a reduction in the mortgage interest deduction because of housing all taxes on capital tend to be regressive t he income tax code as it exists has regressive effects regarding housing affordability given those effects it is inaccurate to treat capital taxation in general as a progressive tax corporate taxation in general creates a regressive rent subsidy a different tax regime that focused on property taxation rather than generalized capital taxation could plausibly produce public revenue in a way that would be more progressive than a tax code that taxes capital income more generally this should cast doubt on common presumptions about how and why to change the tax code does homeownership really increase household liabilities the idea that paying 700 in rent is preferable to a 300 mortgage payment comes from the idea that a potential home buyer would be adding a new liability to their household balance sheet it would involve leverage and leverage is dangerous but this idea is itself a product of mental framing there are assets and liabilities that we explicitly include on balance sheets like the value of a home and a mortgage or the market value of a corporation s future profits and there are assets and liabilities that we don t explicitly include like future rental expenses or the market value of a laborer s future wages the explicit financial engineering that spread before the financial crisis has taken on a lot of criticism over the past decade that financial engineering ironically created risks and costs that were more transparent and visible than the implicit financial engineering that has been an unwitting side effect of deleveraging americans explicit balance sheets a significant part of corporate financial analysts academic training is to properly account for the liability of the rents corporations have committed to paying wouldn t it be prudent for mortgage regulators to account for this liability also when evaluating the benefits and costs of the lending standards applied to households a conceptual starting point for housing affordability and public policy understanding this value and the systematic returns that homes provide leads to a somewhat paradoxical conclusion that 1 homeownership is usually a good investment and 2 the smaller the investment the better in other words an owner occupied home with a low rental value can be a great investment but the downside is that it requires living in a home with a low rental value the various posts in this series have considered housing affordability with a focus on rent this focus has led me to the following policy suggestions we should 1 maintain relatively high property taxes 2 reduce or eliminate income tax benefits of homeownership including the non taxability of the rental value of owned units 3 eliminate urban supply constraints 4 reduce regulatory barriers to mortgage lending especially in low tier markets and 5 encourage innovation in real estate markets that reduces transaction costs posted by kevin erdmann at 1 55 pm 75 comments email this blogthis share to x share to facebook share to pinterest labels housing wednesday september 1 2021 book news lots of book stuff happening scott sumner s the money illusion is coming out this is an important account of the 2008 recession it is the framework for viewing the economy that drew me into my housing work rowman littlefield is releasing a paperback version of my first book shut out this month and here is a code you can use to get it for only 18 90 use code rlfandf30 here https rowman com isbn 9781538163009 shut out how a housing shortage caused the great recession and crippled our economy and in january my followup book building from the ground up reclaiming the american housing boom will be out should be an exciting few months ahead posted by kevin erdmann at 12 25 pm 37 comments email this blogthis share to x share to facebook share to pinterest labels book lernin boxing above my weight class housing monetary policy shameless self promotion friday june 25 2021 the curious sine curve of equity returns occasionally i take a new look at how equities are doing compared to a long term sine wave over the course of the last century or so real total returns on the s p 500 follow a sine curve pattern in a surprisingly regular way i m just fitting curves here so i don t want to say too much about it but it is interesting the positive performance of the stock market over the last few years is actually right in line with the long term trends here are charts comparing real total returns to the sine curve fitted to 20th century results with the last 21 years out of sample posted by kevin erdmann at 4 50 pm 107 comments email this blogthis share to x share to facebook share to pinterest labels don t worry honey i have a system asset allocation monday june 21 2021 more on interest rates and home prices some follow up thoughts on yesterday s post there might be some more to think about regarding interest rate sensitivity and local supply constraints i asserted yesterday that the decline in yields from 2000 to 2005 was concentrated among the more expensive cities but that yields remained relatively stable in other cities during that time one implication is that expensive cities may be more rate sensitive i am unusually flummoxed by the patterns here for some reason but digging around some more i think i have become less sure of my intuition about sensitivity to interest rates and about relative housing yields across metros this first chart suggests the reason for expecting more yield volatility in expensive cities and possibly more sensitivity to interest rates clearly over time high rents have become an increasingly important factor in housing markets systematically where rents are higher gross yields are lower and where rents are low yields seem to remain relatively stable over time the relationship between rent levels and yields moves up and down through hot and cold markets in other words a bit counterintuitively where rents rise the rent price ratio declines and becomes more volatile data from zillow com affordability measures but when i look more closely at cyclical changes i just don t see the pattern that this suggests there should be during the 2000 2005 boom the closed access cities and the contagion cities experienced anomalous declines in gross yields long term interest rates also declined during that time but i think the decline in yields in those markets was a result almost purely of these anomalies in the closed access cities the anomaly was mostly continued strong rent inflation and in the contagion cities it was from short term price surges having to do with big shifts in migration that stressed their local markets taking the closed access and contagion cities out of the mix in the rest of the country if anything housing in cities with higher yields was somewhat more sensitive to changing interest rates than housing in cities with lower yields as housing has moved through the aftershocks of the boom and the crisis this seems to continue to be the case once those anomalies from 2002 2006 worked their way out of the system housing seems to be only somewhat sensitive to long term rates and it is more sensitive to rates where housing is less expensive zillow has detailed rent data going back to 2014 looking very broadly at the numbers up to 2014 gross rent price was in the same range that it had been in the 1990s and that this was more or less the case across msas over that time 30 year tips rates had declined from about 3 5 4 to around 1 one could suppose that this is because housing yields are not rate sensitive or because shifts to very tight lending had added a premium to housing yields counteracting the change in tips rates i m working very broadly here but it appears that there could be three general forces at work here 1 expected rent inflation 2 long term real rates 3 tight lending since 2007 in shut out being a little more thorough i suggested that expected rent inflation could explain differences in home prices across cities plus about a 20 price increase due to declining rates rates have declined about that much again since the boom these two factors may be correlated because if low rates trigger more home buying demand that should lower rents where supply is elastic and raise rents where supply is inelastic it s complicated from 2014 to about september 2019 housing yields appear to have declined the most in metros with higher yields this changed after september 2019 and maybe this has mostly been due to covid issues but ...
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