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this this doesn t indicate a housing shortage any more than high prices for gucci bags indicates a shortage of purses it seems like folksy wisdom and surely there is a basic truth to it new generations tend to have it better than older generations and frequently cry foul at conditions that their grandparents would have embraced or accepted the current generation is no different than any other generation in this regard but this point is simply wrong this is a new era in american housing the most economically dynamic cities have been shedding domestic migrants by the hundreds of thousands for years now that is anomalous one can see this both within the history of those cities and in other cities nyc and la are dominant because when they originally were ascendant they were magnets for the working class of course they grew so large because given their economic draw they were affordable looking elsewhere the norm until recent decades was for metro areas to grow when they are economically ascendent and to stop growing when they struggle during the early and mid 20th century the detroit metro population grew by nearly 3 annually back then there weren t individual cities with incomes far above the norm like there are today over the early 20th century people moved to opportunity and regional incomes were converging as a result today they can t so some metro area incomes are skyrocketing away from the norm this is new also it isn t the nice neighborhoods that are getting expensive it s the cheapest neighborhoods in the most housing constrained metros here is a graph of home prices in the la metro since 2000 the pressure here is to trade down on the socio economic status of a neighborhood in order to get into the la metro young americans aren t complaining that they can t move straight into beverly hills they are actually bidding up home prices in compton to try to get into a massive metro area that refuses to grow population growth of american cities with the most buoyant local incomes has been recently countercyclical they barely ever grow and when the economy starts to do better they actually start shrinking this is really weird in fact a decent portion of their ascendent local incomes is really just a side effect of the poorest residents systematically being forced to other cities this is something that i would expect kevin drum of all people to be really bothered by this isn t just the way it s always been on his more empirical claims i will just lay out one of my pedantic points he highlights two facts that appear to downplay the supply crisis narrative first he compares cpi housing inflation with cpi inflation excluding shelter he finds that housing inflation is up 7 more than non shelter inflation since 2000 he says that of the data he highlights this is only one of two metrics that point to a housing shortage but they are very tiny ones i have a pedantic sub point here he uses cpi housing here which includes furniture utilities etc there is a better metric cpi shelter which only includes the actual shelter but even that includes things like lodging you can even dig down deeper and look at cpi rent of primary residence here s a chart the measure he uses shows 7 excess inflation since 2000 shelter excess inflation is 10 rent of primary residence excess inflation is 21 is that still very tiny then he highlights rent as percent of household income from 2000 to 2020 which increased from 22 to 25 he counts this as a lack of evidence that rents are skyrocketing but think about this for a minute if rent inflation is high and in fact much higher than his housing metric suggested and yet total spending on rent is relatively level then that means that american households are greatly decreasing their relative real housing consumption here are a couple of graphs showing how the long term trend in gross rent gdp started rising in the late 1970s before 1980 there was generally below average rent inflation and growth in real housing consumption which averaged out to a level 8 5 ish of gdp being spent on shelter after 1980 rent kept taking more of us incomes but after 1980 this was a combination of high rent inflation and below average real housing consumption the real consumption hasn t receded fast enough to make up for the inflation so total spending on housing has increased there is one period where the 5 year rolling average in real housing expenditure growth was faster than real gdp growth 2009 2012 that isn t because we were building lots of housing then ironically that s because in 2007 2008 the fed was convinced that we had too much housing and as i described in building from the ground up they basically lowered american incomes until americans were willing or able to purchase less housing since americans were actually lacking in adequate housing and already spending more of our incomes on it than we would like to this was catastrophic that error the same error drum is still making about the supply problem was basically the cause of the financial crisis and recession since the crisis only worsened the housing supply issue americans have spent the last decade growing real housing consumption at the lowest relative rate since ww ii because we have no other choice yet as long as we continue to be deprived of adequate housing supply this will only partially offset rising rents there are several implications of this first this certainly doesn t sit well with drum s general assertion that younger generations expect to hit the ground running increasing their housing consumption more and earlier than their parents and grandparents had they are increasing their real housing consumption at a lower relative rate than any previous recent generations did some people will try to suggest that the reduction in real housing consumption is voluntary smaller families the norm that as real incomes rise real consumption of housing tends to grow at less than a 1 1 ratio with income etc but if that was the case rent inflation should be lower the fact that rent inflation is above average even though real housing consumption has been low for decades points to a substantial supply problem so this is a case of drum highlighting two parts of the elephant that look like they push against the housing supply narrative when in fact taken together they point to a supply problem where i would like to conclude however is something that drum gets right that many people don t he closes with what about all those investors snapping up houses so the rest of us can t buy them isn t that killing off the housing supply no housing supply is the same regardless of who owns the homes besides corporate and real estate investors buy a small fraction of all the houses sold in america there are a few specific areas where they re very active but that s it the real lesson from this trend is not that housing supply is tight but that in certain areas starter homes are selling too cheaply and apartment rents are too high that s why it s profitable to buy low end homes and turn them into rentals this suggests that in certain places there s an imbalance of what s being built and what people want but that s likely to balance out before long this is correct except for thinking that it isn t evidence of tight supply and i find this interesting for two reasons first it would be easy for a skeptic to produce an empirical retort to his closing statement very similar to his retort here against the housing supply narrative they could show that low tier prices have been increasing along with rising institutional ownership they could argue that when corporate owners buy up more of the housing stock they ruthlessly raise rents and that they are raising rents even though new construction has been growing for a decade they could point out that homeownership rates are lowest in the places where home prices have been bid up the highest they could point out that prices are in fact rising the fastest where rents are rising the fastest drum is right on this and they would be wrong yet there are many empirical points just lying in wait to support a number of sets of premises i suppose that means you should be skeptical of all of us or unfortunately it means that before you can really settle on a point of view here you re going to have to put in a lot of difficult work parsing the various empirical assertions second this is a very good example of how mortgage suppression since 2007 has completely muddied the rhetorical waters on this issue and made it very difficult to do that parsing drum is right that the prices are too low and rents are too high in many places the reason that is the case is because we killed off low tier mortgage lending in 2008 which is part of what has made housing supply even worse here s a chart of home prices from 2002 2015 by zip code income the myth about 2002 2006 was that loose lending drove up the prices of low tier homes to unsustainable levels and busting the hobgoblin at the center of that myth was part of what we tried to do in 2008 we did it disastrously well over the entire period from 2002 2015 low tier home prices rose much less than high tier prices and in fact for the most part they rose together from 2002 2006 and then we shit all over low tier mortgage lending and created a low tier housing bust in the shadow of the primary housing bust that people are still making excuses for today the crappy outcome of sucking 30 out of low tier home prices relative to high tier prices is bad enough we should talk about that but that s not the end of it at the end of the day though it s complicated prices of homes are going to tend toward the cost of alternative new homes so you can t just push home prices around to wherever you want if you push home prices unsustainably low like we did to low tier prices with suppressed mortgage lending they will eventually want to rise again and the way they will rise is through rising rents as even drum must agree based on the charts he highlights the housing bust did little to bring down rents so now the next chart is a scatterplot where the 2002 2015 price appreciation is on the x axis and the subsequent rent inflation from 2015 2021 is on the y axis quite systematically where a lack of mortgage financing drove prices down rents increased excessively until prices rose back up the graph not shown of price changes from 2002 2021 rather than 2015 is flat prices at the low end and high end have increased similarly but to get there low end rents had to skyrocket because we made it extremely difficult for low tier owner occupiers to create demand as buyers as opposed to renters and so supply in the most credit constrained cities has been in the crapper for a decade with price rent ratios still pushed down because of a lack of owner occupier buying power the only way for prices to rise back to their natural level was for rising rents to make up for low prices notice how the recent rise in low tier rents and prices would seem to bolster the argument of people who falsely believe that the institutional buyers are the cause of all of that given all of this if we aren t willing to stop suppressing mortgage lending then institutional buyers funding build for rent neighborhoods is the only solution left for balancing out those markets as drum suggests they will there is a budding movement to stop that from happening which is just one more step down the road of creating supply constraints and then trying to solve the damage of those supply constraints with more supply constraints at least on this issue it seems drum will be on the side of allowing new supply or maybe he ll take the same approach he takes about current supply conditions when he writes why are you willing to force people to move away from the places they were raised just so you don t have to look at an apartment building near your home i m not as far as i m concerned you may build as many apartment buildings as you want near me i m not trying to prevent higher density i m just gathering data about the amount of housing in the united states so maybe he ll just watch as all his neighbors fight to block to build to rent neighborhoods so that the price and rent levels can t come back into balance continuing to feel like his conscience is clean and that the problem isn t severe enough to worry so much about his neighbors consciences in the meantime we are at quite a crossroad because if we find ourselves in a position where working class families can t get mortgages to build their own homes cities keep fighting multi unit infill developments and now we start blocking the single family build for rent developments that are one of the dwindling number of options for reversing our housing shortage things are gonna get real dark posted by kevin erdmann at 6 56 pm 115 comments email this blogthis share to x share to facebook share to pinterest labels there is a great deal of ruin in a nation boxing above my weight class confirmation bias in practice credit housing thursday march 17 2022 16 part series on housing affordability in 2019 i wrote a 16 part series of posts for the mercatus center that laid out a way of thinking about housing affordability here are the links to those posts thinking clearly about housing affordability here is the core analytical error housing affordability should be measured in terms of rent but our understanding and policies have erroneously focused on price to disastrous ends from monetary policy to credit policy to regulations on local development responses to the housing bubble have consistently and explicitly aimed 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 h...
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