Friday, March 11, 2016

Housing: Part 126 - Homebuilding and Rent Expense

After I finished the recent post about rental costs and housing stock, I noticed how much these measures had been moving together.  Somehow I had missed this before.

Here is a graph comparing the housing stock as a proportion of the US population to the percentage of income required for the median housing unit, as estimated by Zillow.

The next graph is a graph of the level of mortgage debt held by households.  I would love to have a housing market that wasn't built on leveraged debt.  There are ways to do that.  Maybe someday we can.  Today, in the world we live in, housing stock expansion requires mortgage debt.  As long as we are all allergic to bank expansion and as long as we insist on presuming that banks will be to blame for future housing shocks, we will be harming the most vulnerable households - renters.  Because housing costs, which are borne the most by renters, will continue to rise until we allow the housing stock to expand, and the housing stock is only going to expand when banks are unfettered.

There is a common belief that the so-called housing bubble was a predation of Wall Street on the poor.  This is wrong.  There is predation on the poor by planning commissions and housing obstructionists.  During the so-called bubble, Wall Street was mostly funding mortgages to the top 40% of households, by income.  The bottom 40% are divided between older homeowners who have little or no mortgage debt and renters.  The bottom 40% were largely untouched by the first-order effects of the bubble and bust.  For the older, unleveraged homeowners, some experienced a brief gain in equity that was subsequently reversed, with little effect on their year-to-year finances.  For the renters, the housing bubble meant that they may have briefly had a reprieve from relentless rent increases.  This may have required a move away from the coastal cities.  But, it was available.  The bust has turned the screws even tighter.

I have presented a body of evidence that suggests the bust should not have happened, that what we call the bubble or the boom was simply the beginning of the process of overcoming the predation imposed by anti-development policies.  But, even if we accept that there was a bubble, at worst the bubble was helping the poorest Americans at the expense of upper middle class households.  Clearly, the net benefits of the bubble flowed to low income households, while it lasted, and the eventual dislocations of the bust hit the middle class and upper middle class the hardest.

The bottom 40% are an insignificant portion of the mortgage market.  You want to help poor households?  Then let the banks make mortgages to the top 40% - which is largely what they were doing to begin with.  In 2007, 77% of mortgage debt outstanding was held by the top 40% of households, by income, and 92% was held by the top 60%.  From 1995 to 2007, those predatory banks had managed to increase the proportion of mortgages issued to the bottom 60% of households from 22% to 23% - a whopping 1%!

1 comment:

  1. Another excellent post. I am not sure home ownership should be encouraged, but certainly everything should be done to boost housing production.

    My understanding is banks will finance multifamily development. Ergo, the problem must be in zoning.

    I suppose it is a pipe dream, but it would be nice to see a city declare the equivalent of a free-trade zone, or any sort of (safe) construction is allowed to test the results.