This is an audio transcript of the Unhedged podcast episode: ‘How to fix the housing market’
Robert Armstrong
Aiden, you’re a young man who recently moved to New York City.
Aiden Reiter
Indeed.
Robert Armstrong
How’s it going finding a place to stay?
Aiden Reiter
Well, I’m now on my third sublet while essentially hopping around the apartments around the city, sleeping in friends’ beds who are on vacation, so can’t say it’s easy.
Robert Armstrong
No. What’s your long-term plan? What are you gonna do? Not gonna couch surf forever, I wouldn’t think.
Aiden Reiter
In a sense, yes, waiting to move in with some family. But, you know, that’s not a great solution as a 26-year-old either.
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Robert Armstrong
Well, Aiden, while your experience is probably different from many Americans in that New York City is a is a place of its own kind, the general theme here will resonate with a lot of people. Because we don’t have enough houses in this country, house prices are up, housing starts are down. Ladies and gentlemen, this market is broken. Today on the show, can we fix it?
This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am proud homeowner Rob Armstrong, coming to you from Unhedged world headquarters in New York City, joined by couch surfer Aiden Reiter, who is my partner in crime on the Unhedged newsletter. Aiden, I’m not making fun of you. I was a young couch surfer once myself. I remember those years fondly, as it happens.
Aiden Reiter
You know, I now live nine months in a row living out of one suitcase. And honestly, you know, there’s something lovely and minimalist about it.
Robert Armstrong
You will look back on that with nostalgia one day, I promise. Aiden, in a functioning market, if the price of something is extraordinarily historically high, somebody shows up and makes more of it. That, in a thumbnail sketch, is the genius of capitalism. That is not happening with American housing.
Aiden Reiter
No, it is not.
Robert Armstrong
The median price of an American house is $430,000 or something, which doesn’t sound like a lot of money to a New Yorker, but sure does to everyone else. I think even inflation-adjusted, we’re near highs here.
Aiden Reiter
Yeah. The Case-Shiller index, which is a typical index of raw housing affordability, is at its highest ever. It’s never been more expensive to buy a house in America relative to the amount of money that Americans earn.
Robert Armstrong
Exactly. So the Atlanta Fed helps us measure this. They have this measure of the relationship of prices to incomes. And the old rule of thumb our listeners will remember is 30 per cent of your income going to housing. And the Atlanta Fed has this tracker, a numerical tracker where 100 stands for the median income, 30 per cent of it is the median cost of owning a house. Right now we’re at 68.5, which is lower than it was even in 2007 during the housing bubble. So houses are more expensive relative to incomes even than during the housing bubble.
Aiden Reiter
It’s not a pretty picture.
Robert Armstrong
No. We’ve talked about this before, but just to review: what has gone wrong in this market?
Aiden Reiter
There’s a couple things. Well, there’s been a longtime building gap.
Robert Armstrong
What’s the opposite of a glut? Is a dearth.
Aiden Reiter
A dearth. That’s it. There’s been a dearth in homebuilding the past, you know, five to 10 years. American homebuilders, Americans have not been building enough houses relative to population growth, relative to household formation.
Robert Armstrong
And part of that is the whole industry got scared to death in the great financial crisis. There was a huge amount of building very briefly before the financial crisis. Building as a leveraged industry, it got completely wiped out and the industry’s to some degree, never gotten over it.
Aiden Reiter
Never gotten over it. And also, you know, it started looking into new areas to build, right? High-end condominiums, commercial real estate, there’s plenty of things that it had built over the past 15 years, but they’re not necessarily what we need to build to actually address the housing shortage.
Robert Armstrong
Of course, part of the problem here is high interest rates. If you look at a chart of housing starts, how many new houses are being started every month, it’s like a 1.2mn-a-year or something number now. It was going up. And then the instant the Fed starts in 2022, builders start pulling back.
Aiden Reiter
Yeah. And interestingly, you know, over the past I believe couple of quarters, there has been a gap between permits and starts, which means builders are actually applying to local zoning councils to states to build things and getting the permits to do so. And then not even starting construction.
Robert Armstrong
Yes. So this is the area we’ve talked a lot in both in the newsletter and on the show about how higher interest rates have had less of an effect on the economy than we expected. Not here, construction. But, you know, as a country, we should be able to build houses when interest rates are at 5 per cent. And what drives me slightly crazy and makes me think I don’t understand something that’s going on in this market is that the big homebuilders, the big publicly traded homebuilders, are doing great. Their stocks have crushed the S&P 500 during the pandemic and everything after. They’re making loads of money as reflected in the stock prices. Why don’t they just jam the pedal to the metal and build more houses?
Aiden Reiter
Well, potentially they’re now having the ability to only cater to pricier customers, people who are really willing to spend money, maybe paying cash.
Robert Armstrong
Pay a big premium.
Aiden Reiter
Not to be, you know, oh, they’re evil corporation. But if they don’t actually address all the outstanding demand, they have a lot of pricing power.
Robert Armstrong
True. But I’m just suggesting. I don’t know what it is. Maybe listeners know, but it does suggest there’s something wrong with the market that somebody doesn’t come in and say, and we’ll talk about some reasons why this might be, somebody doesn’t come in and say, well, look, the big homebuilders are focusing on the high end of the market where they have the highest margins. Let me come in and build some mini homes, some affordable homes, some efficient homes.
Aiden Reiter
Yeah. But you know, the cost of materials, the cost of getting, you know, whatever loans they need for the bank are going up because of interest rates. So maybe those low-end producers are who, if they do exist, are just being priced out of the market as well.
Robert Armstrong
Yeah. Our colleague Stephen Gandel had a good article this week in the FT about US banks lending. The home construction is falling. It’s not even flat. It’s going backwards. Five straight quarters of falling home loan contraction. So the market’s . . . I don’t think it’s too much to say the market’s in a bit of a crisis. Lucky for us Aiden, we have politicians.
Aiden Reiter
We do. Well we should, before we jump into politics, that maybe it’s worth noting that part of the issue here is that a lot of people also get new houses because people sell old houses. But right now you’re totally frozen, right? If you had a 30-year market mortgage and you finance it way back in the day when it was a lower cost to fix mortgage, why would you give that up to then get a new mortgage on a new house at a much higher rate?
Robert Armstrong
I am that person. I got my mortgage in like 2018. I’m gonna die in that house, Aiden. I don’t know much about my future, but I know you’re gonna pry that mortgage out of my cold, dead hands.
Aiden Reiter
Yeah. Mortgages right now are, at least for 30 years, are north of 7 per cent, which is much higher than they had been in the era of free money after the recession.
Robert Armstrong
So we all acknowledge this is a problem and it’s become an issue in the election. So what is Vice-President Harris and former President Trump, what are they proposing?
Aiden Reiter
Yeah. So Vice-President Harris and former President Trump have both brought up housing on the campaign trail. Harris has made an actual pledge. She wants to build 3mn new homes in one term if she were to be elected. So that’s 3mn homes in four years. We should note that…
Robert Armstrong
Can we just pause on that number for a second? Three million homes is a damn city.
Aiden Reiter
A city. And also it’s less than the current shortage. So most people put our shortage around 4.5 to 7.2mn homes. There’s a range of estimates. So yes, 3mn is a great goal and something we haven’t been able to do.
Robert Armstrong
And ambitious goal, is what I’m saying. It’s like 3mn houses. Its like I don’t know what city is 3mn. So that’s a city of 6.2mn people or something that we’re just gonna invent. Not all in one place. It’ll be scattered all over the place.
Aiden Reiter
Scattered or, you know, it could be rehabilitations. The idea is bringing new homes to market. But that’s in excess of what otherwise would be built. And on top of that, that’s still not enough homes to market.
Robert Armstrong
OK. So how are we gonna build three? What gets that done (inaudible) that big?
Aiden Reiter
Well, we should note that President Trump has also said things about housing. He said he wants to protect the suburbs. He said he wants to bring down prices. He has not been so explicit in giving goals. But…
Robert Armstrong
I don’t even wanna ask what protecting the suburbs means. It’s a kind of chilling phrase. Also, I’m a snobby city dweller, so I’m quite snotty about the suburbs. But still, protecting the suburbs.
Aiden Reiter
Well, that and everything kind of comes down to zoning. So Harris and theoretically Trump want to pull on the levers available to them. But the thing that we have to keep in mind is housing is principally governed at the local level. Local zoning boards are people who live in a place, get elected or get on the zoning board, and they determine the laws of what can be built in their area, right? There are some federal affordable housing and state quotas they have to abide by. But for the most part, they can kind of do whatever they want.
Robert Armstrong
So you’re Vice-President Harris, what can you do? Are you just powerless?
Aiden Reiter
Yeah. So I think there’s four things that a federal government or a next presidential administration could do to boost supply. And as we noted, zoning is always gonna come into play. So the first thing they can do is try to incentivise zoning changes. The Biden administration actually unleashed a programme I believe it was last year called Pathways to Removing Obstacles to Housing or Pro Housing, which is essentially a broad-based carrot to anybody who wants to change those zoning laws to allow for the building of more homes.
Robert Armstrong
So like we will give your town a tax credit if you . . .
Aiden Reiter
We’ll give your town up to $10mn if you came up with some interesting zoning change that will allow there to be more homes built in your town. If you change your zoning laws, you can apply and get this money from the government to be used on housing, to be used on schooling, whatever it is. Essentially, it’s a broad-based general carrot.
Robert Armstrong
So pay people to weaken zoning laws.
Aiden Reiter
Yeah. So there’s a couple issues with that though. The first is the federal government is relatively new to changing local zoning, right? This is a relatively recent phenomenon, and arguably we don’t actually know that much about the broad-based zoning of different counties and what works to get people to change their zoning laws to allow for more housing but also allow them to keep their property values and the things that they think are important. We’re relatively new to this world. So we right now, as you see, we said, you know, that Biden administration programme is very broad. Do something and here’s some money. We haven’t gotten to a point where really it’s targeted and saying this is what you need to do.
Robert Armstrong
Yeah. And I can imagine the kind of warren of different laws in a single state or a single metropolitan area, and then multiply that by all the metropolitan areas and all the states, and you’re like trying to reform a zillion different laws all at once.
Aiden Reiter
Yeah, it’s really complicated. I mean, states have tackled this, right, multiple states. And there’s been a huge issue in California of people trying to provide incentive to build more homes. So states will try to get local governments to change their zoning laws either by legal mandate because they have some jurisdiction, or by some other carrot to, you know, for example, allow there to be accessible dwelling units on a property, right? Build the shed in the backyard that grandma can live in. So there are things that have been done at the state level. But again, to your point, it’s a big, big, giant country with so many different laws, it’s hard for the federal government to really pinpoint what they need to do.
Robert Armstrong
OK. What’s the next thing?
Aiden Reiter
The second thing they could do is arguably what they are most poised to do, which is provide tax credits to build new things. So historically, there is the low-income housing tax credit, which is an effort to get private developers to make affordable homes. It’s a tax credit. If you are a private real estate developer, you make affordable homes, you get a tax credit on building those homes.
Robert Armstrong
And that’s what Harris kind of gestured at. I know she’s been very vague, but she said we will work with the industry.
Aiden Reiter
Exactly. And LIHTC, which is that programme, is very popular. It’s been around since 1986. It’s kind of never going to go anywhere. It’s touched the third rail of American politics.
Robert Armstrong
So, well, it hasn’t been enough so far.
Aiden Reiter
It has built about 3.5mn homes the past 30 years, which is a lot, but again, not enough and not at the clip that they need. She’s also mentioned something about, you know, affordable starter homes for families. It’s unclear if that would be different from LIHTC and different from those types of tax credit. So yeah, that’s the second thing. Give some money to developers, make it more appealing to build more homes in certain areas, work with the industry.
The third thing they could do is start to incentivise conversions and rehabilitations. So currently there’s a lot of old homes in America, old buildings that are really expensive to rehabilitate to allow people to move in, right? The math doesn’t math, right? The math doesn’t math for a developer, huge cost. You’re not gonna get a lot of money on the flip side, especially if it’s a place that has old funky sewage systems that are hard to rehabilitate.
Robert Armstrong
There is an old joke that an empty house ages like half a head of cabbage. If you don’t have people living in the house, it becomes uninhabitable really quickly. The plumbing rusts out, the electricity, the walls come down, you get mould. And so there are. And you see a lot of these in sort of small towns where the industrial base has left a little bit. The earth kind of reclaims housing very quickly if there’s nobody in it.
Aiden Reiter
It’s expensive to fix those houses. So the idea here, and there’s actually proposals in Congress to do this right now, is the Neighbourhood Homes Tax Credit. It’s a Senate proposal, it’s a House proposal to give a tax credit to developers who would want to rehabilitate old homes. The Harris administration, in the little that it’s actually given us, has very explicitly said they want to support that bill.
Robert Armstrong
Have you ever been to Detroit?
Aiden Reiter
I have not been to Detroit, no.
Robert Armstrong
There is some amazing, like the parts of old Detroit that have kind of been abandoned, whole blocks that have been, bulldozed. But a couple of years ago, they were like, you know, we’ll sell you this house for a dollar if you’ll take it on, if you’ll take on the property.
Aiden Reiter
Yeah, it’s expensive. So the idea is get people to take on the issue. So it’s expensive. That has been something explicit they want to do. There’s nothing yet on the books, but it’s upper Senate proposal.
The other thing you could do is incentivise the conversion of commercial real estate into housing units. You know, we’ve had this commercial real estate crisis. People built us a lot of buildings. People didn’t go back to the office. The Biden administration has flipped it doing this, right? They have an action plan that includes converting commercial real estate. There’s no explicit thing on the book that would theoretically incentivise it. There are some other federal housing tax and credits that it could incentivise, right? There are credits to build clean homes. There are credits to build more affordable homes if you could make a commercial building into something that qualifies for other tax credits at the federal level than it is incentivised, but right now there’s no explicit commercial real estate conversion tax credit.
Robert Armstrong
A big issue in New York City.
Aiden Reiter
Big issue in New York City. But again, it might also be politically hard to do because it could be seen as a bailout of these large commercial real estate developers that played their hands very poorly pre- or post-Covid.
Robert Armstrong
There’s been a fair amount of writing in the FT about commercial real estate conversion. Our excellent colleague Josh Chaffin has written quite a bit about this. It’s tough, man. Like these office buildings are not laid out.
Aiden Reiter
Yeah. One bathroom per floor.
Robert Armstrong
(Laughter) It is. So, I mean, I think they’ll figure it out. You know, these big buildings in the middle of Manhattan that there’s not really the office demand. They’ll figure it out, but it’s gonna take some time.
Aiden Reiter
Yeah. It’s hard to imagine that happening within one year, one administration, right? One term, one four-year term.
And the final thing you could do at the federal level is to incentivise more sales. So, right, we’ve talked a lot about building new homes. Currently, you know, 20 per cent of homes sold are net additive to the market, meaning that either investors were holding a bunch of homes at the same time or a family had a vacation house and, you know, an apartment in a bunch of places. There’s 20 per cent . . .
Robert Armstrong
Pied-à-terre.
Aiden Reiter
Exactly. Twenty per cent of the homes weren’t sold.
Robert Armstrong:
I just wanted to say that word. It makes me sound sophisticated.
Aiden Reiter
It is a lovely word. Does it mean like put your feet up?
Robert Armstrong
Yeah, I don’t know.
Aiden Reiter
My French is no good. So 20 per cent of homes sold typically in a typical time — right now we’re not in a typical time — are net additive. Somebody died or somebody got rid of their access to (overlapping speech).
Robert Armstrong
And the great problem in the market right now, of course, is because people are holding on to their old mortgages or whatever, people aren’t selling. There’s not enough inventory on the market from people who are willing to sell.
Aiden Reiter
Yeah. So this is an area where, you know, the easing of financial conditions, the lowering of rates will help, but you could also give it a little extra juice by starting to tax the sale of real estate differently. Currently, real estate sales are taxed at capital gains rates. You could lower that. But again, politically, that would be very sensitive. It’s hard to imagine a government that has been populist, positioned as both the Trump campaign and the Harris campaign had been, to say we’re gonna start taxing the whole…
Robert Armstrong
Tax break for the rich.
Aiden Reiter
Tax break for the rich who own multiple homes or tax break for investors that have bought up all these properties that are probably contributing to the housing issue.
Robert Armstrong
Yeah. That ain’t gonna sell.
Aiden Reiter
Not gonna sell.
Robert Armstrong
No.
Aiden Reiter
So yeah, but that’s essentially what the government can do.
Robert Armstrong
OK. So we have this list of options. Most of them come down to subsidising or incentivising construction, renovation, resale, release of existing homes, all of this stuff. And we have this goal that the Harris campaign has articulated: 3mn incremental new units. Is any of this stuff gonna work, in your judgment, Aiden?
Aiden Reiter
I think it’s a really good thing we’re focused on supply. Past administrations have not looked at the supply side of the issue. Usually it’s spurring demand by giving you more money to buy something. So I’m heartened by the change. And I think a lot of the housing experts we spoke with were really excited there is a focus on supply. But as we said before, everything comes down to local zoning laws. And until we get a little more targeted and really figure out how to incentivise local zoning laws to change to allow for more housing, it’s hard to imagine that 3mn additional new units on top of the building that was already gonna happen will happen in four years.
Robert Armstrong
It’s almost like we have to do a bunch of experiments and see what works to kind of crack the zoning and the Nimbyism that is doing so much to make US housing sclerotic.
Aiden Reiter
Which is a good thing. I mean, I think we should have policies that are meant to be experimental. I think it’s great when the federal government and state governments work together to find things that work. But in terms of actually hitting the goal and addressing the housing market issues we have right now, easing financial conditions will help. But really building new homes is gonna be a long haul.
Robert Armstrong
Yeah, this is a seriously broken market and seriously broken markets take a long time to fix.
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On that pessimistic note, we will be back shortly with Long and Short.
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Welcome back listeners. This is Long and Short, that portion of the show in which we go long things we like and short things we do not like. Aiden, do you have a long or a short for us?
Aiden Reiter
I do. Well, it’s something I like. I think it’s really interesting. But I am short Turkish equities.
Robert Armstrong
Short! We wrote an article about this the other day and I thought they sounded pretty good. It’s interesting that your takeaway from all the things we learned was different from mine.
Aiden Reiter
Well, I thought they sounded good in the sense that it was really fun and really interesting to write, but I’m short Turkish equities because essentially, the Turkish market has been in complete disarray for a couple of years. Inflation has hit 90 per cent.
Robert Armstrong
But stocks have been on the rip.
Aiden Reiter
Stocks have been on a rip, and now they’re starting to fall for two reasons. The two groups that piled into stocks — one was Turkish households who were looking for an inflation hedge, and two was foreign investors — are now starting to sell off the equities. Turkish households are getting way better returns by putting their money in really hyped bank accounts. And then the foreign investors have also pulled because they’ve seen that change of local investors and for a couple other, you know, macroeconomic and local reasons. So . . .
Robert Armstrong
So the great . . . The supports are coming out from under the thing.
Aiden Reiter
The supports are coming out from under. I think there is a case to be long Turkish equities. There are some things that are going well for the Turkish economy, going forward. But in terms of the recent market rise and the recent rut, I think right now it makes sense to not be buying.
Robert Armstrong
The bears have the upper hand.
Aiden Reiter
The bears have the upper hand.
Robert Armstrong
That’s two animals in one market sentence. (Aiden laughs) I for my part, I’m gonna be short something too. I’m short the yield curve. The yield curve has everybody excited right now because it uninverted. For those listeners who are not super huge nerds, the yield curve is the difference in interest rates at different time periods. An inverted yield curve means that short-term interest rates are higher than long-term interest rates, which is the reverse of the normal relationship. And for a long time they were reversed. And that was supposed to be a recession indicator.
And now they’re back in their . . . They’ve just gotten back into their normal relationship and people are speculating about what that might mean for the economy. And I’m here to say it means nothing. The pandemic and the policy actions that were taken after it have rendered this indicator useless for economic prediction and we should all just ignore it.
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With those two pieces of advice, listeners, we will be back in your feed next week. Stay sharp out there.
Aiden Reiter
Build some homes.
Robert Armstrong
(Laughter) Until then, build a damn house. (Aiden laughs).
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com/unhedgedoffer.
I’m Rob Armstrong. Thanks for listening.
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