Monday, August 11, 2014

The Counterintuitive Conundrum in Housing

Soberlook had a recent post on housing rent that serves as a great starting point into the problem of conceptualizing the conundrum of the housing market in the current context.   They point out that household formation continues to be slow, along with recovery in home building, and the problem appears to be a supply problem, as rent continues to outpace wages, pricing renters out of the housing market:

The tricky thing to think about here is, how do we increase supply?  By paying the builders to build more homes.  How do we do that?  Well, the clear bottleneck right now is the real estate credit market, which has flat-lined for 7 years.

Housing supply will rise when housing credit comes back.  And this will likely coincide with a significant increase in home prices.

So, to make houses more affordable, we need to make them more expensive.  I doubt I'll be winning any elections with that slogan, but I'd be happy to have someone explain to me how it's wrong.  If anyone wants to try, please keep in mind that prices of durable assets have denominators.

Here is a graph, using the Federal Reserve's measure of 30 year mortgage rates, the median price of new homes, and the median household income, to estimate the mortgage payments over time, relative to income.  They are currently at the bottom of the long-term range.  I have argued that when the real portion of long term interest rates declines, this should actually make the equilibrium mortgage payment go up.  So, if rates increase due to an increasing inflation premium, we should justifiably be at the top of the range.  And, keep in mind that, ignoring any changes in the inflation premium, real long term rates can go up more than a percentage point and still be at historically very low levels.

1 comment:

  1. This is a common economist's analysis, and it's wrong. Go read the research by the urbanists.

    Housing finance was focused on building suburban tract housing, which has become very expensive to live in due to transportation costs as gas and auto prices rise. Fixing "housing finance" can, at best, reinflate this bubble and provide people with houses which they can't afford to commute from.

    Instead, much more housing needs to be built downtown in urban areas and in walking distance of major employers -- areas where the transportation costs don't eat up income. But zoning makes this illegal or impossible in most places. Where it is legalized, it is getting built very fast and the finance is available.

    So the problem is actually, to a large extent, regulation!