Paul Krugman says the Fed has to raise interest rates in order to get control of inflation:
There is, however, a problem. The Fed’s efforts to control inflation will work mainly through the housing market, driving down sales and construction. Which wouldn’t be so bad if it weren’t for the fact that America hasn’t been building enough houses over the long term.
....What’s going on here? The answer is that after the housing bubble and bust of the 2000s, housing construction plunged and never fully recovered.
I don't get this. It's practically conventional wisdom, and it's true that housing construction plunged in the late 2000s and never returned to its bubble peak. But should it have? That was a bubble peak, after all. Here's a more useful chart showing not construction rates, but total housing available:
During the early aughts, housing supply grew far faster than population. After the bust, household formation caught up by around 2013, and since then housing supply has matched household growth and has exceeded population growth.
So do we have a housing shortage? Everyone keeps saying we do, and the housing groupies keep yelling at me that my chart is meaningless. But why? It sure looks right to me.
By the way, I was browsing through some OECD stats the other day looking for health care information and I happened to run into their league rankings for housing. Guess how we compare?
Based on indicators such as rooms per house; basic facilities; and affordability, they rank us #1 in the entire OECD group of rich countries for the year 2020. We must be doing something right.¹
¹And something wrong. According to the OECD, we rank second from last among housing affordability for low-income tenants.
It is true that the Fed raising rates will increase the cost of capital for loans (commercial and personal). It is also true, our current inflation level (well above our recent averages) changes behavior.
One strategy being deployed today, is to invest in 'hard' assets such as commodities and real estate. There, real estate (ESPECIALLY commercial real estate such as the construction of new apartments) is impacted by more than interest rates. It is possible, some might say likely, that apartment valuations will increase even with rising interest rates.
Cost of capital??? Then banks come in with lower lending standards. You don't get how price is set.
So. To my mind, it's kind of hopeless to expect new construction to focus on low-income housing. That's not where the money is.
Low income housing is housing that used to be higher rated, but is now old. That's how it works, and why people like Krugman think we aren't building enough housing.
More housing at the high end would relieve some price pressure not just at the high end, but everywhere in the curve, over time.
I'm not sure what time frame this works over, but it seems to me that someone must have studied this extensively.
"Low income housing is housing that used to be higher rated, but is now old."
No, that is NOT how it worked/works. Older housing does trickle down over decades, but it's not goddamn impossible to just build housing without luxury amenities and accoutrements.
"More housing at the high end would relieve some price pressure"
Not unless you can x10 the amount of "high end", which would make those units being built suddenly not viable because the market demand would no longer be there for them. More supply does ease the demand a little bit, but the knock-on effects of upward price pressure from building infill at 3x/4x the price of surrounding stock also eliminates more moderately priced housing.
"Someone must have studied this extensively" - not you, I guess.
This is actually kind of false. In much of the US it IS functionally impossible to build low-end housing both because costs are so comical and because those things you call "luxury amenities" are required by law. Live in most of and want an apartment without a parking space or X amount of common space? Well fuck you that's illegal.
For luxury amenities, the things I'm talking about are in-complex gyms, pools, rooftop terraces, concierge desks, etc.
I know all about the things like off-street parking minimums (doesn't have to be secured garage parking, though), floor area ratios, and so forth. They're also slowly going away.
The market crap (that first group) remains proliferated.
You're right, though, about the costs of building being a driver of price. It's just that you can actually build a no-frills housing unit for far less, but you also earn less profit (I assume, else why aren't they being built?). But when your economy props up housing as an investment commodity... Well, you get this.
Do you disagree with the costs given in this piece? https://www.npr.org/local/309/2019/05/27/726811306/factory-built-three-flats-are-chicago-s-newest-affordable-housing
If it's $375K per unit based on the "requirements around materials and wages paid to workers" (or even the cheaper $335K that the factory-built units being discussed are), I don't think it's simply luxury amenities that prevent lower cost housing from being built. Also, a lot of it is land cost, of course.
A cost of 375K in costs to build a unit in Chicago doesn't sound so bad... if you said 375K in, say, Des Moines, that price wouldn't be viable.
Land costs per unit depend mostly on how many units are going on the land. Single units (i.e., single family homes) almost always have higher land costs per unit.
Overall we may not have a shortage of housing, but we do have a mismatch between where high paying jobs and affordable market rate housing is. If you want to work/live on the West Coast or the Acela corridor, housing in the rust belt won't help you.
Exactly. Talking about national housing supply is meaningless.
Thank you Joshua, I was going to point this out if nobody else had. My job requires me to be within commuting distance of the physical place I work for with the expectation that I will be required to be in person once a week in the near future.
The fixer upper behind my house that went on the market 2 weeks ago after the old woman who owned it passed away a few months ago sold in a few days with an asking price of $850,000, it's nothing special a 5 bedroom late 1960s house but a double lot so maybe an accessory dwelling unit could be added.
Houses that are tear downs are going for 650,000 or more.
Lower wage workers are SOL around here as the rents have skyrocketed. I could afford my house at market rates but I purchased it 19 years ago for a lot less and I refinanced it into a super low 15 year fixed rate.
So no a house in West Virginia does me no good, I need the house to within 50 miles of my employment location.
This has to be it…I don’t doubt Kevin’s chart but the fact is that housing prices where I live are rising at an incredible rate. Demand is clearly outstripping supply. Kevin seems particularly prone to making a single simplistic chart for a complex topic and drawing an over broad conclusion. I do appreciate how he finds nuggets of interesting data from unsung government agencies though.
Came here to say exactly this. Thank you Joshua for saying it first.
I'm so old I remember a few years ago when progressives were absolutist about the environment and forecast all kinds of Malthusian doom for California due to resource shortages. Now they're like YOLO BUILD IT LMAO!!!1!!1!
So, of course there's no housing shortage. The more the far left repeats something, the more you can be sure it has nothing to do with good government or good liberal policy. It's just a shibboleth for campus socialism LAPRing.
It's so funny how Republicans literally beatify their popular presidents and Democrats write mean Oedpial rage hit pieces about theirs and turn their back on all of their successful policies.
Imagine liking Obama and Bill Clinton. It's twenty twenty two, people! Wake up!
Housing is just the latest schizo attempt by the far left to solve the field equations of the universe. Along with ending "voter suppression." This after we contend with biased media, unfair campaign finance laws (that have tended to favor Democratic presidential candidates), and whatever the previous "if only for" magic bullet that would turn everyone into a raging bumper-sticker applying Bernie/Kucinich/Dean/Nader immediately.
There's always some reason the Democrats aren't winning. At least the Republicans are clear that they don't care about voting and want whatever outcome favors them. The Democrats just want to tilt the field their way except every time they do it doesn't improve the outcome.
Quit worrying about tilting the table. Get the most votes.
Far Left? Nope. Stop calling progressives......liberals......new liberals or what else they call themselves since wwii, leftists and maybe your brain will get it. Revolution they do not want. It's why conservative revolutionaries like myself confuse this board so much.
This graph doesn't try to account for second home ownership (short term rentals) or whether or not homes are located where people want to live.
Are we oversupplied with Airbnb's, vacation homes and empty homes in the NE and Midwest? Undersupplied everywhere else?
I am in Boulder and have family in Austin....there are certainly no homes to be found in either place, all the empty houses everywhere else dont address the housing shortages in both locations.
This reminds me of the charts showing GDP, total wealth or TV/cell phone ownership that are supposed to prove there is no poverty......
Then what explains the mismatch leading to upward prices in many markets?
Are there hundreds of thousands of unoccupied units in the middle of nowhere somewhere?
Or did the Russians & UAE royalty actually buy up and leave idle a similar number?
Or... what?
I think it is a "devil in the details" thing. A lot of highly desirable urban areas have had aggressive home and rent price increases, while lots more areas have outright depopulation, and it kind of balances out in the short term.
But unless remote working takes off even more, having a bunch of cheap empty houses in small towns across America doesn't help folks trying to work in high demand markets.
To interpret the first chart you need to know what the definition of a "household" is. The Census bureau says it's anyone living in one housing unit together, whether related or not. (Does that mean by definition the number of housing units equals the number of households? I dunno...)
A quick look around the net suggests the number of people in an average household has been trending downward very slowly. Looks like it was 3 in a household back around 1973, and now it's close to 2.5.
I'd be curious to know if there's a "households in large urban areas" figure. Just anecdotally, it sure seems like on my street of apartments, 20 years ago a 1 bedroom had 1 person living in it, and now it has at least 2.
Housing starts *per capita* are still low. Only in the last couple of years have they exceeded the previous lowest points since WWII:
https://fred.stlouisfed.org/graph/?g=OpvN
and there were over 10 years when they were even lower. Normalize, Normalize.
No they aren't. Real U.S. Population has slowed since 1920 and again in 1965.
Raising rates are being offset by declining lending standards. The costs may not change.
Mismatches, no. Over priced homes due to low real rates and investors buying up property to rent.
To pile on a bit, what's the housing + rental supply measured within 10 miles of job openings? A house in Topeka does me no good unless I have a job or am getting a job in Topeka, KS. In the meantime, if I need a house or rental in NYC and there aren't any open houses or rentals, I'm having to bid higher to capture existing units.
Also remember to subtract units owned or leased as investment properties. A person owning a house as a primary residence is one thing. A bank trying to flip someone's July getaway retreat shouldn't be counted the same way.
There isn't a single national housing market. Houses aren't fungible. Plentiful housing in Akron and Mobile don't aid home searchers in Los Angeles and DC.
That no shortage comes from the data at the national level is no relief to folks whose property taxes are skyrocketing or folks who can't afford housing where the jobs are.
2001 seems like it might be cherry picked. Housing starts were a little bit low near that recession, and maybe housing was tight and we started to actually get enough housing during the "bubble" and now housing is tight again.
For the last time:
Housing is not national.
This chart shouldn't start in 2001, but should go back 5-6 decades at minimum.
It's correct that we don't have *A* housing shortage, we have *MANY* housing shortages in the places where demand is outpacing supply.
We have a housing surplus in depopulating rural and semi-rural areas. That's mucking with the numbers.
Stop with this "there is no housing shortage" bullshit.
For the last time: Housing is not national.
Depends on what we're talking about. For consumers of housing, the national picture is indeed not very relevant. If I'm trying to find a house in a red hot market, the fact that the country's housing market might be cooling in the aggregate does me little good. HOWEVER, that same national, aggregated housing market can (and does!) affect everybody in the country, and so it quite rightly is analyzed (at least some of the time) with a national perspective. We saw this to spectacular effect in 2007-2010.
Sure, but "we don't have a housing shortage" isn't one of those things that the properties of the housing markets within the national housing sector can be used to support.
It leans entirely on this stupid national #-households/#-units comparison, which is flawed in its premise because the number of units nationwide just isn't relevant to whether there is or isn't a housing shortage, given that the actors within the housing market don't function nationally. They function regionally, with very few exceptions.
Yeah, I'm just not quite sure why Kevin is going to bat so hard defending this "there is no housing shortage" talking point. Beyond the myriad of reasons why the data in the national housing chart may not be exactly accurate to the current market (housing isn't national; it's not accounting for housing that has been turned into 2nd houses; we now have a new phenomenon of corporate/investor owned houses that are sitting empty for some reason; etc), he seems to just be burying his head in the sand and refusing to see what is ACTUALLY HAPPENING.
Fine - let's take it as a given that, technically, nationwide, there are "plenty of houses". OK then - YOU TELL ME why nearly every single mid-sized city and larger across the entire country has record low inventories of for sale houses and median prices in some cities have literally doubled in 5 years. If you want to hang your hat on "there's plenty of houses" - fine, whatever. Then 1) at least admit SOMETHING is beyond fcked up with the housing market right now, and 2) let's figure out what the hell it is.
and affordability, they rank us #1 in the entire OECD group of rich countries for the year 2020. We must be doing something right.¹
A big part of what the US is "doing right" is spreading out its population in a much larger number of metros, the vast majority of them mid-size or small. Most other OECD countries cram a larger share of the overall population into a smaller number of "blue" style urban areas. Vancouver and the Golden Horseshoe (Toronto) account for something like a third of Canada's population. About half of Japanese live in three big urban regions. Australia's four biggest metros account for fully 60% of Australia's population. And so on.
In the US, the four largest, expensive CSAs (NY/LA/DC/SF) are home to only about 17% of the country's people.
I live in a semi-rural/semi-exurban county in Maryland. When my wife and I got married twenty years ago we moved into a one bedroom apartment. Then she got pregnant and we needed more space. We considered a larger unit, but ended up buying a townhouse about a block away from the apartment. This was almost fifteen years ago, which means we bought when housing prices were peaking. I pretty much knew prices were going to drop, but we were in it for the long haul, not expecting to move any time soon, so we bit the bullet. This proved an excellent decision. Rental rates skyrocketed, and have never come down. That one bedroom apartment's monthly rent is nearly exactly the same as my monthly payment for mortgage, property tax, and insurance. We were under water on the house for years, but if Zillow is to be believed (and it isn't), the market price for the house is about what I paid for it.
The point being that while it may be something more complicated than "housing shortage," something is going on. Otherwise rent on a one bedroom apartment would not be the same as the monthly payments on a three bedroom townhouse.
You're checking to see if anyone bothers to click through to read Krugman, right?
Let's expand on his chart. Here's the rental vacancy rate: https://fred.stlouisfed.org/graph/fredgraph.png?g=LOxy
And here's the total estimated renter-occupied units: https://fred.stlouisfed.org/graph/fredgraph.png?g=NVDw
So yeah, there is a rental unit construction problem. Big one, in fact.
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