#1283 Kevin Erdmann | National Emergency for Affordable Housing Is Here

Kevin Erdmann is one of the most interesting analysts when it comes to the US housing market. He writes on Substack at kevinerdmann.substack.com. He also has 2 books, called “Shut Out” and “Building from the Ground Up: Reclaiming the American Housing Boom.” In this conversation, we go through ideas on how to make housing more affordable, how we get here, Federal Reserve, who is responsible, and solutions. ======================= Base is making it their mission to bring a billion people onchain. But what exactly is Base? It's an Ethereum L2 offering a seamless experience for both builders and users. With near-zero gas fees and rapid transaction speeds, Base is shaping the future of the onchain world. Base is a canvas for everyone, with hundreds of apps in the Base ecosystem, whether you're an emerging creator, a seasoned developer, or someone exploring the onchain space for the first time, Base is designed to bring your ideas to life. So, if you're looking for a platform where the future of onchain is being built daily, Base is your destination. Join in and make onchain the next online. Learn more at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠base.org⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and follow along on Twitter at @BuildOnBase to see cool things to do onchain, everyday. ======================= Trust and Will has simplified the process of creating and managing your will or trust online. They leverage a data-driven, design-first approach and amazing customer support to help you protect your legacy from the comfort of your home starting at just $159. Sign up today for 10% off using ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://trustandwill.com/pomp⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ======================= Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:02Anthony Pompliano?

  What's up everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Kevin Erdmann is one of the most interesting analysts when it comes to the US housing market. He writes on Substack at kevinerdeman.substack.com and he has two books, the first called Shut Out and the second called Building From The Ground Up: Reclaiming The American Housing Boom. In all of his writing and his analysis,

• 0:47Anthony Pompliano?

  Kevin breaks down a new framework for understanding the housing bubble, the financial crisis, and the costly housing markets. He understands why is housing so unaffordable in America and he's got a couple of ideas on how we could solve it. This conversation, we go through many of his ideas, including how we got here, who's responsible, and how we move forward with more affordable housing in the United States. Here is my conversation with Kevin Erdeman.

• 1:13Speaker 01

  Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only.

• 1:37Anthony Pompliano?

  Today's episode is brought to you by Base. Base is making it their mission to bring a billion people on-chain. What exactly is Base? It's a layer two offering a seamless experience for both builders and users. With near zero gas fees and rapid transaction speeds, Base is shaping the future of the on-chain world. Base is a canvas for everyone with hundreds of apps in the ecosystem, whether you're an emerging creator, a seasoned developer, or someone exploring the on-chain space for the first time. Base is designed to bring your ideas to life. So if you're looking for a platform where the future of on-chain is being built daily, Base is your destination. Join in and make on-chain the next online. Learn more at base.org or follow along on Twitter at BuildOnBase. Again, that's at BuildOnBase

• 2:23Anthony Pompliano?

  to see cool things to do on-chain every single day.

• 2:27Anthony Pompliano?

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  Get a leverage, their excellent customer support, available via phone, email, or chat. They have thousands of five-star reviews and a rating of excellent on TrustPilot. It takes most people 20 to 30 minutes to complete their estate plan with Trust and Will. And not only that, but if you go to trustandwill.com/pomp, you'll get 10% off, plus you'll get free shipping of all your estate planning documents. So go to trustandwill.com/pomp and make sure you get an estate plan in place. Whether it's for you or one of your loved ones, having a trust and/or a will can literally be the difference between someone being taken care of and someone not. Go check them out today at trustandwill.com/pomp. All right, guys. Bang, bang, I've got Kevin here with me.

• 3:57Anthony Pompliano?

  Kevin, we are in probably the single worst housing affordability in the last 40 years or so. How did we get here?

• 4:06Speaker 02

  We got here by not building enough houses for about 30 years straight. And so, yeah, I think one of the things that people tend to do is they think of home prices sort of as this, this idea that's unrelated to, you know, the fundamental. If we're talking about stocks, we'd be talking about earnings, and for some reason, rent just sort of gets forgotten in the estimate of what's happening in housing. Housing is unaffordable because the rents are high and the rents are high because we haven't been building enough houses.

• 4:41Anthony Pompliano?

  It really is just supply and demand equation is determining it.

• 4:45Speaker 02

  Yep, yeah, completely. To first approximation, 100% of it is rent.

• 4:51Anthony Pompliano?

  Now, in the first book that you wrote called Shut Out, you described something called closed access cities and then contagion cities. And I thought maybe that'd be a good place to understand, okay, why is where the houses are being built so important as well?

• 5:07Speaker 02

  Yeah, um, yeah, so I, you know, this goes back to the, to the 2000s bubble and bust. And, you know, one of the major sort of touchstones of my work that, that leads off to a different path of analysis is there was a very, there's a very strong presumption that there was an over, you know, a, a period of excess and overbuilding. By 2008, we had this like excess of housing inventory that we had to work off. And, uh, and that was really the first thing that brought me into this space to, to, to study this space and, and end up writing two books and everything else is discovering that really what was happening back then was these localized places.

• 5:51Speaker 02

  It's a very distinct list. It's Boston, New York City, San Francisco, LA, San Diego. I call those, those are the close access cities that just build far fewer, you know, permit far fewer homes than in the other major metropolitan area, including the Rust Belt cities. And so really what happens is anytime you get any sort of economic expansion or just anything that would naturally sort of increase people's demand for things, including housing, there is no extra housing in those cities. If you think of it in terms of a sort of a units per capita, if you can't add units and if demand is sort of, or think of it as people per unit, maybe if, if, if demand is sort of.

• 6:35Speaker 02

  Well, no units per, sorry, units per capita is the best. If demand is sort of increasing the units per capita, if everyone's sort of consuming a little more housing, a little more square footage, and you know, uh, uh, young adults moving out sooner, et cetera, et cetera, et cetera. If units is fixed, then your capita has to go down. And literally, that's what happens is these cities have a, have a countercyclical migration pattern, which was on steroids back then. Tens of thousands, hundreds of thousands of residents moving out of those five cities into what you mentioned is the contagion cities, which then was, you know, Phoenix and Las Vegas and the Florida cities. So

• 7:16Speaker 02

  really, at a space that the conventional wisdom was upside down. It was treated as this period of excess and overbuilding, when really it was localized areas of underbuilding, like very distressed underbuilding that actually created sort of a refugee event. And the places that looked like they were building in excess were, were just trying to keep up with this migration event, and they couldn't. And so they had what you would conventionally call a bubble, but it's a bubble driven by demand that's coming out of the places that have an undersupply. Now, since then, what we've done is sort of spread this shortage nationwide. And so we sort of have, we've been underbuilding everywhere for 15 years now. But, you know, you got a little bit of that

• 8:01Speaker 02

  again with COVID of, of people moving out of certain cities. And it was a sort of, the contagion cities were a slightly different set this time. It was the Boise's and Austons, and Phoenix is still part of that. But, um, yeah, it's all driven by a lack of housing, which is creating these, these cyclical migration events.

• 8:20Anthony Pompliano?

  So it makes sense to me in terms of going into the global financial crisis and coming out of it, uh, this idea of the closed access cities, not enough, uh, supply, therefore, people got to go somewhere else if they want to live. They move into the contagion cities. People are like, oh, here they come. Let's build a bunch. Wait, not as many of them showed up because there's other kind of cyclical events. And now we've got oversupply and undersupply in the two different types of cities. You just said that for 15 years, we've been underbuilding nationally. So not just closed access, not just contagion cities, but across the country. Why has that been happening?

• 8:52Speaker 02

  I mean, very simply, I mean, you can think of it in terms of sort of categories of housing. And we've sort of just been making different categories illegal a step at a time over the last 50 years. So first, it was just generally in those closed access cities. You know, there's sort of a metropolitan area wide obstruction to really all kinds of housing. But, you know, at the core is sort of this, you know, over the course of the 20th century, we sort of sort of put a, put a, an obstacle in front of just the natural historical way that cities developed. You know, you go to, you go to the few places we have that are true cities like downtown Chicago or Manhattan.

• 9:35Speaker 02

  The building on the corner is like the fifth thing that's been there, right? It was a sheet metal, then it was a, then it was a cottage, then it was a, a, a large home, then it was a duplex. And now it's a, you know, a brownstone or something, right? Or a, or a high rise. We basically, over the course of the 20th century, better punch it, put a bunch of zoning rules in place that said cities can't develop anymore like they used to. Once, when somebody's there that has enough political power, they can say, okay, this is what the city's going to look like forever. And it's an affront to me if anything happens from now on. And that, you know, that became binding in those five cities, but it's, but it was in the background of every city. And most of the other cities were making up for it by building entry level, uh, single family housing out in the exurbs.

• 10:20Speaker 02

  Uh, and effectively what we did in 2008 is killed the entry level, single family home market through mortgage over regulation.

• 10:29Speaker 02

  The, uh, the, in fact, that's really the, the first thing that brought me into this topic was realizing back in 2000, that, that, that the market back in 2005, all that supposed excess in mortgage lending is a little bit, it's greatly overstated and sort of misstated that there wasn't really a surge of low income owner occupiers at the time.

• 10:52Speaker 02

  But we but that's the problem we tried to solve was we tried to we we thought that was the problem. We basically regulated entry level owner occupiers out of the mortgage system that the average, the median credit score on a new mortgage went from it had been seven twenty ish for years up until two thousand eight and then it went up to seven sixty and it's just been there ever since. And so effectively this Band-Aid that every other city had on its housing supply, which is we it's very hard to build duplexes and apartment complexes downtown and all that. We ripped off that Band-Aid by saying, you know, anybody that would be buying a two hundred and fifty thousand dollar new home out on the outskirts of town can't get a mortgage anymore. And we just killed

• 11:37Speaker 02

  we that was that was more than a half million units a year going into the crisis and it just dissipated. They're just that market went away. So it really took a decade for effectively, we took the owner occupiers out of that market. They had to eventually be replaced by institutional buyers landlords and renters. And now you've got these institutions buying building rent neighborhoods that are that are finally triggering new supply and really that to trigger that supply, it really took a decade of rents rising enough to get the price points back up to where landlords want to build those houses because it's still a condition where the the owner occupiers can't get the mortgages for them. And so

• 12:18Speaker 02

  that's basically where we are today is we had this basically this thirty percent shock to rents to get the price to rent rate to get to get these lower price to rent ratios up to where the price will trigger new building for this new landlord tenant situation. Now, those as a first step, those families should just be owners. They should be able to just get the mortgage and own those houses and they'd be willing to pay a little more than the landlords are because it's easier to be a landlord to yourself. But also, a lot of those families would just be living in duplexes and and apartment complexes and high rises downtown if we could build those. And they'd be living in one in L A instead of Phoenix if L A, you know, got off.

• 13:01Speaker 02

  Trends of overregulation. So there's sort of several steps of housing that that we've been just regulating out of existence to the point now where the only thing left that that's that's that we're capable of allowing is on the margin is is institutionally owned, single family owns.

• 13:24Anthony Pompliano?

  So this excess of building, like the the fear of excess building, really, and I think this is kind of a key component to the second book that you wrote, Building From The Ground. Why are people so fearful? Like, what are they scared of for us to build more homes? Is it like an aesthetic thing? Like in a San Francisco, they don't want to go above a certain level? Is it a overpopulation? Like, what is the thing that is driving the fear?

• 13:49Speaker 02

  I mean, as far as the regulatory, I mean, there's sort of an investor macroeconomic fear of like of thinking that overbuilding was the cause of 2008 and being afraid of of like the market doing that again. But in terms of the locals that are actually creating these regulations, I mean, I think it really does just come down to that Band-Aid that that, you know, nobody ever likes change. There was always some discomfort with with the with the the, you know, fluctuations of of development within a city. There were always people that didn't like what was going down at the corner. And I think just, you know, the automobile sort

• 14:32Speaker 02

  of allowed us to avoid that discomfort for a century. Because, you know, it's just a lot less trouble to to build the place that, you know, the developers can get approved to build that neighborhood out in the exurbs. And so it gets approved. And I think we sort of just, we spent a century sort of having these political.

• 14:58Speaker 02

  The sort of the the skill, the political skills to let us any change sort of atrophied because we had this Band-Aid in the excerpts and the automobiles that allowed us to get from those houses to where we wanted to get. And and this just sort of built up over a century and now all of a sudden, especially then when we pulled the Band-Aid off in 2008, it's like, oh, we need a way to build houses. Well, we've spent a century putting rules in place that we sort of could avoid dealing with. And of course, there's now the YIMBY movement, you know, there's a lot of movement sort of to erase some of those developments. And I think that'll continue. But, you know, I just think it's it's a it's a matter of

• 15:40Speaker 02

  there being a slight discomfort that sort of all of us share when something's happening around us. And it was easy to sort of let the political power, the sort of the petty local political power to to stop those discomforts from happening to sort of just billow up and build up within our political processes. So now I think that the political power sort of is a mismatch of really the true discomfort. But of course, in that negotiating process in the local politics, those discomforts get yelled, you know, yelled at and and exaggerated. And, you know, and so it seems like a big deal, right? But for the most part, you know,

• 16:21Speaker 02

  having the the the the fourplex down the road is really is not actually going to ruin the neighborhood, you know?

• 16:29Anthony Pompliano?

  Now, you mentioned the institutional ownership of single family homes kind of being like the endgame here. If you listen to the Peanut Gallery on the Internet, they will tell you that like big bad, you know, a large financial institution is going to buy up all the homes and you will rent everything, you will own nothing, you will be happy type mantra. Maybe there is some truth to that. Obviously, they do own a lot of homes. What are the pros and cons of institutional ownership of single family homes in America?

• 16:58Speaker 02

  I mean, I, I think it's, it's, I mean, if you compare it to, say, a small-scale landlord, it's, it's the traditional sort of pros and cons. You know, there's some ways that they're better, they're more, you know, that they really need to have some reputation if they own thousands of units and they, and they don't want to get a reputation as a, as a landlord to avoid. Um, you know, you have a lot more variability and a lot less ability to understand whether a, a small-scale landlord is a good person that's going to give you your deposit back or not, you know. Um, so there's pluses and minuses either way, and there's all sorts of studies about, you know, oh, uh, the institution, the large institutions evict people more and that sort of stuff. But I think those differences are all really

• 17:41Speaker 02

  on the margin and probably don't matter that much in the big picture. Um, I do think, for the most part, it's a, it's a big, it's a big con to have, uh, to, to be, especially if you're a long-term resident, you should own the place you live in. It doesn't make sense to, to have a landlord relationship in that mix. Um, but I think the mistake people make is thinking that it's the institutions coming in that, that that's really more of an effect than a cause. The cause is that we took 10 or 20 or 30 million households and decided in 2008 they weren't qualified to get a mortgage anymore, even though they had been for decades, and they really didn't have that much to do with what happened in

• 18:23Speaker 02

  2008. So, uh, you know, what I find, um, uh, a little bit frustrating is that, uh, that, you know, there's, it's sort of a misidentification to say that these, that these institutions are, say, driving up the prices and whatnot. The, the core issue is that those families can't get mortgages, and the people that complain about the private equity in the big institutions are generally just totally, uh, incurious about the, about this, probably the biggest political, um, uh, act to take place in generations, which was drive, you know, locking those families out of the mortgage market. No, nobody really...

• 19:03Speaker 02

  Seems to have no care or really have noticed that it happened because it happened in the in the chaos of the crisis. But really, you know, part of my work is sort of pulling the data, the, the, the evidence from the data that you can really see that closing down those mortgage markets had a tremendous effect on, on real estate values after 2008. There was this late collapse in working class neighborhood home values that clearly was a result of this tightening of lending that really matters a lot more than the stuff that was happening in the closed access in these places from Dallas to Atlanta to, you know,

• 19:45Speaker 02

  every city across the country, whether they had a bubble or not, the low end loses 10, 20, 30% compared to the high end after 2008 because we did this policy decision on mortgage regulation really was, it's just a nuclear bomb in the middle of working class balance sheets and really just nobody, nobody even knows that it happened.

• 20:07Anthony Pompliano?

  Given what you said so far, my conclusion is that how to solve housing affordability is to build more housing. If that is correct, how do we determine what type of housing, where and who should be building it? Seems to be a big question as well. How do you think about those three things?

• 20:25Speaker 02

  I mean, I think we just have to make the market work. So, you know, but in theory, in theory, you would like to have municipalities sort of planning out how that's going to develop. There's two problems with that. The first problem is that if, you know, that we're really talking about a metropolitan area, like each metropolitan area is sort of an entity, you know, there's, the commuter zone really defines what's going to happen and you can't, when you divide that up into these municipalities that all have their little part of the metro area, there's just no way that they can govern that planning process.

• 21:08Speaker 02

  So what happens is they all sort of become little fiefdoms of trying to ensure that they're not the part of town that declines in socioeconomic status. And so what happens is you just get sclerosis throughout the market of everyone making it illegal to build anything that might bring in families that have a slightly different socioeconomic status than the ones that are there. And I think that problem still would exist even at the metro area level.

• 21:37Speaker 02

  Even if we did fix that government's problem. So, you know, I'd like to think that there is a potential for careful planning, but a hundred years of experiences, we just aren't capable of doing it well. And actually, at the point we are now, anarchy is an improvement. Anarchy is probably not optimal, but it's better than what we've, where we've come to. So, you know, there's a lot of people that work on the politics of it, and that's not really my focus, but it does sort of help to drive my, my project to realize that really there's nothing we could do that's worse than what we're doing now.

• 22:21Anthony Pompliano?

  When we think about inside some of these dense cities, one of the areas that I probably have the most familiarity with is in New York City, maybe in the mid 2010s, there was a lot of foreign buyers that were coming to the market and they were buying up apartments, but mainly kind of luxury type apartments. And in talking to people in the market, they were like, oh, here comes all this money, we need to build, right? And we need to be able to satisfy that demand. Similar to your idea of closed access cities and contagion cities, and people never kind of showing up in full force to the contagion cities, there was capital controls in some of these foreign countries, including places like China.

• 23:01Anthony Pompliano?

  And so when the buildings finally got built and the inventory came online, it almost feels like there's a bifurcation. In the luxury market, there is much more supply available, and some of these units will sit for very long periods of time. But New York City rents are at all time highs because the kind of lower part of the market is actually the opposite imbalance, right? There's way more demand than there is supply. And so how do you think about maybe the bifurcation of luxury versus non-luxury in some of these cities?

• 23:33Speaker 02

  Yeah, really, that's at the heart of the model that I use at the Substack is that I have a series of papers that I put out through the Mercatus Center. And if you go to my Substack, the little menus across the top of the research button is where you can see links to those papers. And really, what the model I developed just by sort of looking at the trends in home prices and seeing what was different about the closed access cities versus other cities is that when you have an endemic shortage of housing,

• 24:11Speaker 02

  I think sort of the basic understanding of what's happening within the metropolitan area can be thought of as just that the natural elasticity of demand for low-income families versus high-income families. And you know, you can think of it in terms at the low-end, housing is a necessity. And you know, what we call housing is a basket of all sorts of things that actually are a part of what you're buying with housing. There's the actual walls and the ceilings, you know, they're staying dry in a rainstorm, having a place to sleep, a place to make your meals.

• 24:49Speaker 02

  There's, you know, neighborhood character, people like to live around people that are wealthier than they are, in a nice school district, with a park nearby.

• 25:03Speaker 02

  You know, access to amenities, you know, there's all these sorts of things that are a part of that basket. And so you start with staying dry and cooking your meals, but all that other stuff is sort of, you know, that's a necessity. And everything else that you're adding is sort of a luxury, that it's all part of a basket of what is housing, right? And so at the high end, it's mostly luxury, that foreigner buying the penthouse suite in Manhattan.

• 25:30Speaker 02

  And demand for luxuries is elastic. If you, if you have less money, you're just gonna go without it. It's not a big deal, right? And as you move down to the low end where it's a necessity, then demand becomes inelastic. You know, I'm trying to, to hang on to the job and the family I have in LA. And if rents go up another, you know, I'm sort of at the, at the location that's the least I can put up with. And the rents go up another 10%, what am I gonna do but pay, pay the 10%, right? So you get this natural gradient of demand behavior from top to bottom. And so what happens is when you have an endemic lack of supply at the top, it's, it's almost not noticeable.

• 26:13Speaker 02

  Like, I have X amount of dollars, it's normal for a person with my amount of dollars to spend this amount on housing. And in this city, that gets you a 2,000 square foot condo, you know, on, on Fifth Avenue or something, right? And so that's what you get. And that, you know, it's not like you're, you're gnashing your teeth and, and rending your garments that you didn't get an extra thousand square feet, right? So you naturally would actually compromise on the real housing, the amount of housing you get, right? And as you move down market, you don't change how much housing you get, you just pay the extra price. And so what happens is you get this systematic sort of substitutions that all go downward.

• 26:55Speaker 02

  Where you start at the top and, and there's not the 3,000 square foot condo that you would have available in Atlanta or Dallas. And so you literally like trade down neighborhoods, right? You trade into it, you buy into a neighborhood that's lower socioeconomic status than you would have been in Atlanta or Dallas. That means there's less units available in that neighborhood for the people that would normally live there, right? So they have to trade down. And that trading down like builds up as you move down the, the, you know, the stock of housing within the metropolitan area. And it really creates this distinctive systematic picture where we're in cities where you don't have enough housing, the rents and the prices go up the most at the low end.

• 27:38Speaker 02

  And then, and then related to that is you, you, you always have more outmigration from that city from the low end. Eventually it gets to the point where they don't have options left and some half family on the margin moves away from the city entirely. So, so where you have a supply problem, it's like a cantilever. You know, at the top end, the prices really don't change that much because everyone's just changing their, their consumption. And the prices and rents systematically go up at the low end. So a lot of times what people do is they do analysis where they look at the median price of homes in, in a city.

• 28:17Speaker 02

  And what's, what I have found is that really the median doesn't mean anything except that it's halfway to the bottom. Right? So the median house in LA or New York City is expensive, but it's only expensive because it's a part, it's halfway in this process to, you know, the price down here that it takes to get somebody to move out of the city entire.

• 28:38Speaker 02

  And so that's really a way you can tell the difference between an LA and an Austin. Is in Austin, they don't have this endemic supply problem and, but Austin was a contagion city. You know, in this, in the post-COVID period. So in Austin, prices went like this. Right? They went up and down everywhere because it was just this migration surge and it wasn't this systematic behavior that comes from the lack of supply. Uh, so you can, you can really tell the difference between a housing, a temporary housing boom and endemic shortage. Cause in a city, you know, if you're looking at zip code incomes here and prices in a, in a city that's just having a boom and bust like Phoenix in 2005 or Austin in 2020.

• 29:19Speaker 02

  It goes like this, but in a city like LA or New York City, it goes like this. Actually, it's just, in those cities now, it's just stuck like this. And actually, it's just a process of people moving into neighborhoods and people getting kicked out the bottom, moving to the other places. And so they're just stuck at this level, uh, where it's, it's more, it's almost more of a flow issue when you're looking at home prices in the housing market. And those cities are just households basically flowing out, uh, getting priced out through rising rents and prices. So yeah, that's, that's fundamentally at the core of how I analyze cities to know what's going on there.

• 29:58Anthony Pompliano?

  Now, when we see the home builders, especially the ones that are publicly traded, I think that gives us the best sense in terms of, you know, where are they going? What are they doing? Do you glean any data from them in terms of potentially are we solving the problem? Like, are they going to just ramp up building? And, you know, we talk in five years and we're like, all right, we recognize that we underbuilt. Now we're building enough and we get out of the problem. Or is the message maybe a little bit more dire? And it's like, look, there really isn't any sort of data point or sign that we're headed in the right direction now?

• 30:29Speaker 02

  Hmm, you know, there's, there's sort of multifamily and there's single family. And multifamily is a lot more, you know, private equity and REITs and, and, you know, these sort of distributed institutions that, you know, build a project at a time. And I would say that part of the market is just, has just been hitting its regulatory peak in terms of just,

• 30:54Speaker 02

  you know, I think we've been hitting 400,000 units a year or so that basically just it's because they're all waiting at the permit office to get permission for that next unit. And that's basically just happening in cities across the country. So I think that will slowly loosen up as the MBE political movement gains ground. But it's really a political question. Now, as far as the public home builders that are building single family home neighborhoods, I think that's a really interesting space because they have really been,

• 31:27Speaker 02

  supply constrained in the COVID era. And so if you look at completions since 2019,

• 31:37Speaker 02

  single family home completions, it's basically a straight line. Now, what happened is COVID hit and everyone didn't know what was going to happen at first. And then all of a sudden, there was this housing boom and sales went way up. And when sales went way up, basically all the buyers, you know, they bought up all the finished units that were setting, you know, the sort of normal amount of inventory that was setting there. They brought all that up. They bought up all the units under construction. And then for a year, year and a half, the supply, the COVID related supply issue really prevented us from actually meeting demand. So really, for about a year and a half, what was happening is the buyers were sort of paying a premium

• 32:20Speaker 02

  to be put in a queue at the back of the line for a house that wasn't going to be built any faster than if they weren't buying it. Because there was no inventory, the builders were going to build it. But if you're willing to pay us an extra 10%, we'll put your name on it. It's still going to take an extra three months to build compared to what it used to. But your name's in the queue. And that really was what was happening during the inflationary period. And so what happened is eventually when the inflationary period stopped and everything leveled out, sales declined quite a bit. People tend to view that as like a normal cyclical,

• 32:59Speaker 02

  you know, ups and downs. But really,

• 33:04Speaker 02

  the reduction in sales was just the end of this, you know, negotiation to put you in the queue. The sales really never declined past, you know, below the point where we can complete houses anyway. The home builders are still at capacity and they're going to be at capacity in a year. And they're not, they haven't had any trouble selling finished homes and they're not going to have any trouble selling finished homes. So we're not really at the like the bottom of a sales collapse. We're at the end of this very unique period. And as far as I can tell, it's never happened before in American housing markets where home builders literally just didn't have

• 33:45Speaker 02

  units to sell and weren't going to. So I think it looks bearish if you look at that trend, that downtrend in sales. But really, the home builders are basically at the top end of a normal market, what would normally be a normal market. And I think from here, we're just going to see actually a very boring, as those COVID supply constraints get worked out and they can get transformers into the, to the electrical infrastructure to open the neighborhood and get the windows in and everything else that's been delaying construction. Then we're just going to glide into, back into a growth, a growth in completions and sales are just going to follow along with that.

• 34:32Anthony Pompliano?

  Now, there's two other topics I want to talk about before I let you go. The first is politics, second is the Federal Reserve. Federal Reserve is not a political organization, unless you talk to some people and they may think so. So maybe we'll start there. The Federal Reserve's loose monetary policy, I think a lot of people say, you know, drove immense rises in prices of both real estate, but also, you know, higher inflation, et cetera. And that's the cause of some of this. How much credence do you put to the Federal Reserve's kind of contribution to housing affordability? Or the lack thereof? Or is that maybe an easy lazy excuse? And it's really not as intense of an involvement?

• 35:12Speaker 02

  Yeah, I am definitely a have a, I suppose you'd call it a heterodox view on that. I don't think the Fed really has had anything to do with housing affordability and price trends over the last year, three years, five years, 40 years.

• 35:31Speaker 02

  So as a, I'll start saying the 2010s, there's, you know, the ZER, the zero interest rate policy that gets a lot of gruff.

• 35:45Speaker 02

  And what I say is ZER wasn't a P. It wasn't a policy. The natural interest rate was, was low. Mortgage rates are what mortgage rates are because the market has put them there. Partly because we locked 20 million families out of the mortgage market. So there's no demand for mortgages. And so, you know, in Building From The Ground Up, I go, that's the book that's really about sort of the timeline of the, of the financial crisis. And initially, when

• 36:26Speaker 02

  When the Fed started QE, it was actually because they were trying to keep the target interest rate at 2%, and it was so far above neutral that in Ben Bernanke's memoir, he says, if they hadn't started doing QE, where effectively initially what QE was, was basically borrowing cash back from the banks instead of printing it, because they were trying to maintain their 2% target, which they never could actually hit. The Fed went to 0% screaming and kicking, and they actually created a crisis trying not to. So the initial drop to 0% interest

• 37:06Speaker 02

  rates was certainly not a Fed policy. And in fact, had they dropped rates to 0% when they should have, we might not have had a crisis. And it's not, the period since then isn't that different. Like, the low rates are, the rates are low because the, as Milton Friedman used to say, low interest rates aren't a sign of current loose policy, they're a sign of past tight policy. And that's basically where we've been for 15 years. So I just wouldn't, I wouldn't attribute any of the stuff that was happening in housing pre-COVID to the Fed. The Fed was, we were at zero because zero is the market rate. And home prices

• 37:51Speaker 02

  weren't high because mortgages were low, because you can explain high home prices with high rents. And if we were overstimulating housing for the last 40 years, surely you'd expect to get a little bit of rent relief from that. But we've seen the opposite for 40 years. So, so I just don't attribute anything to Fed policy. And in terms of the post-COVID period, I'm fully on Team Transitory. The inflation was international, it was due to these supply constraints. You know, I suppose we could have sucked every dollar out of the economy and, and, you know, used.

• 38:28Speaker 02

  Gold bars and clamshells to buy things with, but I don't think that would have made us any better off. I don't think the Fed should have tried to lower. You know, it was inflation that came about from other reasons, not not really from them overstimulating and they had no business trying to reverse it. And in fact, that inflation reversed before any significant

• 38:53Speaker 02

  interest rate increases happen. So as of, you know, the the last real above you know, excess month of of inflation was June 2022. Where I I like to look at CPI inflation without the shelter component for a number of reasons. And it's actually much higher in the summer of 2022 without the show because the shelter component has this this lag. Because of the way they measure it through survey data. So if you take this shelter component out, June 22, it's it's like 14% inflation. And then July, it's back to basically 2% and it's been 2% since, you know, for 18 months since then.

• 39:38Speaker 02

  In June 2022, the Fed target rate is like a percent and a quarter. And there there's just, there's no, it's it's implausible that you could reverse 14% inflation with one and a quarter percent target rate, you know.

• 39:57Speaker 02

  Nobody, back in Volcker's day, nobody would have said that, oh, he's he's increased the target rate to a percent and a quarter. The 70s are over now, right? If it's truly monetary inflation, they would have needed to raise rates to 10 or 15%. Inflation dropped because it was transitory, had nothing to do with them. And actually, they did a great thing by not trying to reverse it, which actually ended up raising long term rates. And so really, what I think the Fed mostly did is chase those long term rates up, which is great. The long term rates rose because sentiment improved. And there's a lot of pent up production potential because of.

• 40:38Speaker 02

  All these COVID supply constraints that we've been dealing with. So, um, so I think, I think the Fed was actually pretty loose in mid 2022, which was, which was exactly what we want them to be because now we didn't get a deflation when, when that transitory inflation dropped. Because the Fed's been loose, I think that probably helped keep inflation above zero right now. And, um, and so, you know, I do think they need to lower rates a little bit. Going forward and of course, we've seen a shift in the last month or so of, of expectations moving that way. So I think eventually they'll get back to three or 4% and we'll have a nice upward sloping yield curve and, and, um, yeah, I, I think Jay Powell has been fantastic.

• 41:24Anthony Pompliano?

  The, uh, the last question I have is around politics. Many of the cities that you, uh, described, um, in, in terms of these, uh, closed access cities. Uh, I think the narrative online is they're Democrat controlled. You know, they have very kind of destructive policies. Um, whether that is true or not, um, on those specific cities, uh, how do you think politics plays into this and, and is one political party maybe more to blame? Or, or their policies tend to create or help, uh, the situation?

• 41:52Speaker 02

  Uh, yeah, you know, the housing issue is sort of funny because it's very, it, it doesn't, uh, it doesn't map to the normal left, right. Um, uh, you know, um, map that we use. There, there's Yimby's and Nimbys are both into the extreme. Uh, I, I think, you know, I used to be sort of more of a like, oh, the progressives are, you know, hypocrites and they're ruining the cities with, but.

• 42:22Speaker 02

  You know, there are natural, um, stresses that come from urban living, but you know, when, when we're all in close quarters, it, as a city is a hard thing to manage. And I think it tends to lend itself to, um, you know, to more, uh, more blue, you know, politics than, than a small city or rural area does. Because you end up with all these, you know, um.

• 42:54Speaker 02

  Relational things that you have to deal with between classes and between neighborhoods and between, you know, because everyone's in close quarters. And a lot of, you know, problems with, with public benefits or crime, you know, sort of lend themselves to a communal politics. So I'm not sure that, I, I think sort of cities are where this problem is, the problem we have to deal with, and it just so happens that cities tend to be more blue. And so the, the blue politicians are there where the problem is difficult.

• 43:33Speaker 02

  But, you know, you certainly, you know, it, it's irritating to see some of the, you know, sort of hypocritical, you know, anti-market rhetoric that you see in the cities, you know, sort of pretending to be for the, for the poor families when really the policies just, the, the de facto policies are to just make it impossible to build housing at all, that at the end of the day, leads to this migration within the city that basically leads to all the poor families moving out. So it certainly, the, the progressives in those cities certainly are good at playing that sort of hypocritical pay yourself on the back game while they make sure nobody

• 44:17Speaker 02

  of lower socioeconomic status is ever going to move there.

• 44:19Anthony Pompliano?

  Where can we send people to find your books or find you online if they want to learn more about this or engage further with these ideas?

• 44:26Speaker 02

  At Twitter, I'm at K A Erdman, it's K A E R D M A N N is my, is my handle there. The Substack is kevinerdman.substack.com. And it's called The Erdman Housing Tracker. And then the two books are Shut Out, which Shut Out is sort of a, sort of sets the background like, you know, here's what, here's all the ways that a shortage of housing is affecting our economy. And sort of a big part of that is that it created this boom and bust cycle in the 2000s.

• 45:10Speaker 02

  And then I sort of tease that in Shut Out, and then Building From The Ground Up is more of the timeline of.

• 45:17Speaker 02

  Walking through tho- those events with this, with these different, you know, colored glasses on in terms of thinking of it as being a housing shortage instead of a housing bubble. And so, yeah, both of those are, and I would say the shutout is probably a little more academic, whereas building from the ground up is, I think, a little more accessible in terms of the writing. And you could think of shutout as sort of, it's sort of the microeconomics and building from the ground up is sort of, sort of the macroeconomics of the, of housing and the economy of the last 20 years. So, yeah, that's where, that's where people can find me.

• 45:58Anthony Pompliano?

  I highly suggest people go read the books and subscribe to your Substack. You do a fantastic job talking about the housing market and I've learned a lot. So, thank you so much for all the time, energy, effort that goes into, into all the work and we definitely do this again in the future.

• 46:11Speaker 02

  Great, yeah, I'd love to. Thanks.