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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 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 h...