How to Adjust the Housing Market

No one needs a chart to prove that housing is unaffordable right now but here are a couple from Apollo anyway:

The Trump administration has offered ideas in recent weeks to help with affordability.

The first idea to close a home ownership center:

The idea here is that if you remove demand from professional investors, that should free up the supply of homes.

In theory, this makes sense, but this feels like pushing a tightrope. Institutional investors are not a large part of the real estate market.

John Burns points out that they make up about 1% of all home purchases right now:

Most real estate investors are still moms and dads. Also, it is possible that by removing this collection it may reduce the supply because it would mean that fewer homes are built.

Another idea is to buy mortgage bonds to reduce loan amounts:

This makes sense to me.

If the Fed lowers short-term interest rates, that does not guarantee that loan rates will decrease. In fact, when they cut rates for the first time in this cycle, mortgage rates actually went up.

Buying mortgage-backed securities can help narrow the spread between mortgage rates and the 10-year Treasury yield. This spread exploded after mortgage rates rose from 3% to 8% quickly.

If we really want to be creative I have other ideas.

Why not give all first time home buyers a 3% mortgage rate at once? Missed the low mortgage rates of the early 2020s? Now you get another shot.

Anyway – let’s make mortgages affordable. All those people holding on to 3% mortgages for dear life have slowed down the mortgage industry. What if you have the ability to keep your same low mortgage rate on a new home loan?

That will certainly open up the housing supply.

But here’s the problem with all these ideas – they don’t address the real problem. This adjustment can create demand, sure, but it can also increase prices.

The real problem is housing supply.

We need to build more homes!

I can’t believe we don’t have more politicians making this a policy priority.

To be honest, this is a very difficult solution to implement. Every municipality has its own rules and regulations for building codes and so on. Cutting through all the red tape to allow more structure may not be easy but we know it works.

In Austin, they built multifamily units and rents dropped:

Guess what else happened when they built more apartments? Home prices are also falling!

The same thing happened in Minneapolis:

To make a big enough difference across the country you’ll probably have to incentivize homebuilders somehow to build more.

Some people don’t like the government getting involved in markets like this. They would rather let the market sort things out. Maybe that will work, but in some countries things have already become difficult as they have done nothing to fix the problems.

It is noteworthy that the government played a major role in building the middle class after World War II. They support all the bills so that the home builders can go nuts and build enough housing in the suburbs for all the soldiers coming back from the war.

There were plenty of houses and they were affordable.

If you want affordable housing, the government needs to encourage more supply.

Michael and I talked about the housing market and more in this week’s Animal Spirits video:

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Further reading:
Why Don’t We Build More Houses?

Now here’s what I’ve been reading lately:

Books: