Is There an Extremely Simple Fix for Affordable Housing?

Housing affordability remains one of the single greatest sources of economic stress. Even if inflation measures were to come down, the simple cost of shelter is a huge burden on a wide swathe of the population. Hardly anyone disagrees with the idea of increasing supply, but this is easier said than done. There isn't a lot of spare construction capacity and the political fights over liberalizing zoning are tedious and slow. On this episode, we speak with Kevin Erdmann, a senior affiliated scholar at the Mercatus Center at George Mason University, who proposes a simple idea. He argues that after the Great Financial Crisis, regulators over-tightened lending standards, and in so doing, took out the entire "starter home" segment of the new housing market. He says that if Fannie and Freddie were to liberalize their lending standards, homebuilders would be incentivized to build more homes that cater to people with lower incomes and lower FICO scores, essentially re-creating a whole slice of the new home market that's disappeared over the last 15 years. Read More:US Homebuilders Face a Supply Chain Snarl From Tariff BattlesUS Mortgage Rates Decline to 6.88%, Lowest Level This Year Only Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting and hiring practices.

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• 2:27Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 2:33Tracy Alloway?

  And I'm Tracy Alloway.

• 2:34Joe Weisenthal?

  You know, obviously, obviously, we're a little distracted these days because there is so much news all the time. It doesn't feel like we have much time for sort of classic episodes where we talk about some big idea. But one thing that we had heard a lot over the years, really, is that for the public, you know, when they think about inflation, or they think about the cost of living, housing costs are really central to their view.

• 3:00Tracy Alloway?

  Right. And you see this not just in house prices, but also in rents, right?

• 3:05Joe Weisenthal?

  Yes.

• 3:05Tracy Alloway?

  Everything has gone up since the pandemic and people, people don't like it. People don't like it when the cost of housing shelter goes up.

• 3:15Joe Weisenthal?

  People don't like when the cost of gasoline goes up. People don't like when the cost of eggs for certain. But I feel like when it comes to the cost of living, everybody must have shelter, basically.

• 3:27Tracy Alloway?

  It's also a big chunk.

• 3:28Joe Weisenthal?

  It's a huge chunk of the consumption basket, the consumption of shelter. And we've had prices going up for like, I don't know, 15 years or something like that. Even the rate hikes didn't do much to slow house prices. They slowed other housing activity, but it is a real problem. And it gets to the center of like, what people call the American dream. And we've talked to people over the years with different ideas, you know, YIMBY types, they talk about zoning, or people who say there should be some sort of more public investment, etc. I don't think like we've fully cracked it. And certainly policymakers have yet to solve the problem.

• 4:04Tracy Alloway?

  Right. Although it is interesting, it's like one of the few bipartisan

• 4:09Joe Weisenthal?

  Yeah.

• 4:10Tracy Alloway?

  areas where both sides of the aisle will say that housing supply is an issue and they want to do something to rectify it.

• 4:19Joe Weisenthal?

  So going back to the great financial crisis, do you remember in like 2010 or something, or maybe middle 2009, there were actually some people that proposed raising, like destroying empty houses just to get the supply demand in balance?

• 4:34Tracy Alloway?

  What? I don't remember that at all.

• 4:36Joe Weisenthal?

  Yeah, this was absolutely a thing. So we were like, well, why don't we just like pave over a bunch of existing houses and then we won't have this glut and then the prices won't keep falling and then we can, this was a, I'm gonna Google this while we're talking, but hopefully no one ever took that seriously. It would be absurd because now we're in era of housing scarcity, but that was a crazy time.

• 4:57Tracy Alloway?

  Mm hmm. There was a lot of craziness in the sort of 2008 to 2012 era.

• 5:03Joe Weisenthal?

  And one of the things that we know about crises, you know, look, there was all the subprime lending, all that stuff. And so afterwards, there was this big impulse to say like, we're never going to allow things to get that crazy again. We're never going to allow people to buy a home with no down payment, no documentation and terrible credit scores again. Anyway, we're going to be talking to someone whose argument is that we may have overshot.

• 5:27Tracy Alloway?

  Great, I'm excited.

• 5:29Joe Weisenthal?

  All right, I'm really psyched. We do have the perfect guest, someone who's writing I've followed for a long time. And the gist of his argument is that we overshot that various post great financial crisis policy changes in pursuit of bubble avoidance are the cause of our housing shortage today. We're going to be speaking with Kevin Erdman. He's an affiliated scholar at the Mercatus Institute and he is the author of the book Building From The Ground Up. He's a great newsletter. Kevin, thank you so much for coming on Odd Lots. Yeah, thanks for having me. That's true, right? Weren't there some headlines about bulldozing over houses? I mean, it was like a weird time because like there was three things. There was like the home price appreciation, there was the amount of housing that was being

• 6:14Joe Weisenthal?

  built, and then there was the sort of liberal lending standards, mortgages to people couldn't afford them. And then there was also the financial engineering around it. Like there was just a lot going on in those days.

• 6:23Speaker 05

  Yeah, yeah. And there were people that proposed that Greenspan even, I think in Hank Paulson's book, he mentions that Greenspan sort of half jokingly mentioned it, but, but the idea that you would even think of it is, is crazy. In fact, I actually wrote a post of my Substack recently that Tyler Cowen interviewed Joe Stiglitz very recently. And Joe Stiglitz was still sort of basing his ideas of, you know, what happened in the recession on this idea of overbuilding. And he talked about like, there were all these low quality houses built in Las Vegas that basically were built where nobody would want them. Yeah. And made some quip that like, the best thing about them was they were so poorly built that they wouldn't last long or something. And the crazy thing about that is that they're

• 7:08Speaker 05

  actually, if you look back at the data, there wasn't actually a building boom in Vegas. There was a price bubble, but the rate of home building never actually increased in Vegas during that time.

• 7:18Tracy Alloway?

  Why don't you go ahead and give us the sort of two minute elevator pitch of your argument, just so we fully understand it?

• 7:26Speaker 05

  Yeah, I think basically, we have had a regional supply problem going back into the eighties and nineties where the coastal metros like New York City and Boston and LA and San Francisco have clamped down on housing construction. And so they basically can't grow as cities anymore in total. And so when the economy is doing well, when incomes are growing, population is growing, people just having babies and people growing up and wanting to form households. When that sort of all gets moving, those cities actually have to depopulate at this point because, you know, if per capita, we're sort of demanding one or 2% more housing per person, and they're only willing to build a half a percent of

• 8:09Speaker 05

  housing per year, that means a person and a half has to leave the city. So we actually have this weird counter cyclical migration pattern into and out of those cities now. So like, for instance, the last several years, even predating COVID, LA has been, for instance, has been losing population every year. It's down probably 3% or 4% now from its peak population in 2017. So basically, that happened during the housing bubble. This counterintuitive thing was happening because when we're in good times or when people are demanding more housing, people actually have to move out of those cities. And the process for doing that is the rents go high enough until somebody cries uncle and decides to leave town.

• 8:51Speaker 05

  And so the cities we think of as bubble cities, Florida, Nevada, and Arizona, and inland California, were really just the landing places for those housing refugees. So those cities truly had a bubble, but it was a bubble in fundamentals. It was actually a bunch of families moving there, and ironically, those families were moving there to lower their housing costs. But all that got interpreted just as a bubble period, and it was blamed on excess lending and speculation and all those things. But it was really, at its core, it was a lack of housing that drove all these migration patterns that then overwhelmed the cities where prices temporarily rose and fell. And so basically, what we did is we solved all the wrong problems.

• 9:35Speaker 05

  We blamed it on lending and we cut off lending, and that basically closed down home building across the country. And so now, this housing shortage that was just in half a dozen coastal cities now is countrywide.

• 9:46Joe Weisenthal?

  This is very interesting. So I remember the inland empire. They called them the sand states, like Arizona and Nevada. And the way it was certainly portrayed was that it was a speculative bubble, that there was all this like household speculation, and there probably was some of that, and people buying more house than they need because they thought they could flip it and flip this house, it was a popular TV show. But you're saying the fundamentals were very sound, that basically it was like spillover population, the fundamentals of demand for shelter. What did we do after the great financial crisis that, as you see it, massively slashed lending?

• 10:21Speaker 05

  You know, it's tough to pin it down to one thing. You know, there are a series of sort of official and unofficial, sort of just pressures that were put on lenders. So you know, there was the subprime boom and bust that really heated up in sort of late 2003, early 2004, and then was really dead by mid 2007.

• 10:43Speaker 05

  And you can see sort of the effects of that. And again, you know, I assert that the effects of that on home prices and everything have been greatly overstated because it's basically been inflated to explain everything that actually is explained by the supply shortage. But it caused a few percentage point increase in home prices on average and that reversed then when that market died. And then, then there's this second event that happens that sort of just got lost in the chaos. A, because it was popular and B, because this idea that lending had been so outrageous that there was sort of no amount of pulling back that seemed like it was satisfying enough. And so over the course of 2008, there were just formal and informal pressures on the federal agencies, FHA, Fannie Mae and Freddie Mac,

• 11:28Speaker 05

  to, you know, be careful and tighten up lending. And, and you can see it in the numbers they report in their books, that over the course of 2008, any year up to that, even back into the late 90s, the typical Fannie and Freddie borrower had a credit score of say 710, and which is about average. And then by the end of 2008, mid 2009, it's more like 760, which is, you know, sort of top quarter credit score. And so basically, over the course of a year or year and a half, the average score on an approved mortgage goes up by 40 or 50 points and stays there. It's really still there today. So basically, you know, I would say probably 10 or 20 million families pre 2008 to post 2008 have lost access to mortgage funding.

• 12:13Tracy Alloway?

  But just on this point, I mean, I can go get a loan at Fannie Mae with a 620 credit score or something like that. I think it's a little higher over at Freddie Mac. And there's minimum down payments, I think it's 3%. But overall, those haven't moved that much from the early 2000s. Like back in 2006, at the height of the housing bubble, the minimum down payment was still 3%. And I think the FICO scores were generally lower.

• 12:47Tracy Alloway?

  Is there perhaps just a lack of viable home buyers out there? I mean, credit card debt, is that a record? Wages have been kind of sluggish. Maybe those people, people who are asset light, as Chamath would say, maybe they just, they're not thinking about buying houses.

• 13:09Speaker 05

  No, it's definitely, so I mean, those products exist, but the quantity of loans being originated to borrowers with those credit scores is really negligible. So like if you look at Fannie Mae for any year 2007 or before, about two thirds of their book of business was to borrowers with 740 scores or less. And then immediately then by 2009, it's only one third. And then it stayed basically one third of their new business to the point where now their book of business is basically flip flopped. So the thing is that, you know, they have products, but there's the ability to repay standards that have been put in place and tightened.

• 13:51Speaker 05

  And there's just, you know, there's just a black box of underwriting boxes that have to be ticked off. That in theory, there's a product that goes to people with 620 credit scores. But in practice, very few of those families can run the gauntlet to actually get the yes at the end of the approval process.

• 14:23Speaker 00

  What's next for virtual assets? I'm Jacob Rees, host of Economy Scale, a series exploring growth in key global sectors. And this episode, we're diving into the digital forces shaping finance. Sean McHugh from Dubai-based Virtual Assets Regulatory Authority has this to say.

• 14:39Speaker 06

  We're seeing a lot of institutional players come in, digital asset dedicated hedge funds, high frequency traders and that sort of thing, and folks who service institutional clients.

• 14:47Speaker 00

  As more capital enters the market, adaptive regulation is likely to become increasingly key. Reece Merrick of Ripple says.

• 14:55Speaker 05

  A lot of regulators globally would like to keep the industry at arm's length. That's the opposite here. I think also what you'll find is that. And frameworks can come out, but some of them are maybe a slight iteration on some eighty year old policy and not actually in line with what the technology can do and offer. And again, that's very different in Dubai.

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• 15:25Speaker 01

  This is the Bloomberg Tech Minute brought to you by Chat GPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for comment on its recruiting

• 16:07Speaker 01

  and hiring practices, but according to recruiters, advisors and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company and Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates quote must be willing to work extended hours and weekends as needed. One major perk for all that hard work? Employees access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute brought to you by Chat GPT. Get started at ChatGPT.com.

• 16:47Tracy Alloway?

  Well, speaking of black boxes, I was trying to find like the average approval rate for Fannie and Freddie for mortgages and ideally you could break down approval rates by FICO scores or something like that. And I couldn't find anything. Do you have a sense of A, are there official numbers out there that I just couldn't find? And B, do you have a sense of what the approval rates might actually be?

• 17:14Speaker 05

  Yeah, I don't have like an index that I track, you know, month to month. And in a way that gets difficult, that that number gets less informative over time. I have seen claims that there's this very specific period over the course of 2008 and early 2009 where those standards change. And soon after that, in, you know, 2009 or 10, I know one of the mortgage, I cited in one of the books, that one of the mortgage tracking institutions noted that the average score on denied mortgages at that point in 2009 or 10 had a higher average score than approved mortgages had had before 2008. And one of the oddities about the subprime boom and bust is that the subprime boom really

• 17:57Speaker 05

  wasn't associated with much of a change in the average. It was mostly about terms getting reckless, but the average borrower quality, surprisingly enough, didn't really change that much in total during those boom times. So, you know, as you get farther away from 2008, the denial rate becomes less informative because at some point, families know who can qualify and who can't. And, you know, you, you, somebody that has a seven, 10 credit score and something wrong with their income that they know is going to be a, prevent one of the boxes from getting checked off. They're not going to keep going back to the bank year after year after year to show up on the denial rates. But you can see sort of the effects of this in a lot of ways. Like,

• 18:38Speaker 05

  if you go back to pre-COVID, when interest rates were really low, before, uh, home prices took off, there were houses across the country that would have previously been owner occupied, where you go to Zillow and they would estimate the rent on that house to be like 1,500. And a mortgage, you know, for what it was selling for, the mortgage might only be five or 600 a month. Like, it was the mismatch after these families were cut out of the market is, you know, pretty extreme during those post 2008 years.

• 19:09Joe Weisenthal?

  Let's stipulate that there is a cohort out there that, you know, has some sort of stable income, potentially able to buy a home, wants to buy a home, and can't get a mortgage for all of the reasons that you've laid out. How does that actually feed through to lack of supply out there? Talk to us about the link between the pressures that you described to constrain the supply of credit and just the lack of abundance, the lack of building.

• 19:42Speaker 05

  Yeah, so you can see a real effect. Credit scores are highly correlated with incomes.

• 19:47Joe Weisenthal?

  Okay.

• 19:48Speaker 05

  And they're correlated with age, which correlates with savings. So you you can sort of use like neighborhood income or zip code income as a proxy for, you know, the average credit score in that zip code. And you can just see how zip codes after 2008, the majority of the country had actually not really had a boom and bust. Like you had the coastal cities and the sand state cities where prices had gone way up and then sort of, you know, come back down. But, you know, cities like Atlanta or Chicago or Indianapolis or St. Louis, you know, they had all sort of been just moving along with regular building rates and prices that were sort of staying about where they had been in

• 20:30Speaker 05

  terms of price to income ratios. And then once this tightening happens, you can see in all those cities, whether they had a bubble or not, the price to income ratios in the poorer zip codes, you know, go down by 20, 30, 40, 50%, while the high end neighborhoods sort of stayed flat. And so, you know, you get this drop in the market price of existing homes that's very income correlated. And so it basically just dropped the price of existing homes below the cost of building new homes, but very regressively. So at the high end, they could still build new ones. They were still selling for basically the same price they had been. But at the low end, you know, nothing would.

• 21:14Joe Weisenthal?

  So this gets into the economics of the home builder, the home builder economics, which is that because you have this bifurcation in basically price relative to income, it just no longer made sense for them to build what we call a starter home.

• 21:31Speaker 05

  Yeah. And I, and I would say that's totally a result of the crackdown in lending. The rents didn't really go down on those units.

• 21:38Joe Weisenthal?

  Hmm.

• 21:38Speaker 05

  It was just the prices and the prices went down because we basically made it illegal for those traditional homeowner occupiers to be buyers. So basically the prices fell. One way you could look at it is that landlords require. Higher, a higher yield than owner occupiers do. And so the price, first, there was sort of just a a chaotic drop. And then by, say, 2015, they sort of leveled out at basically the lower price point that a landlord would be willing to invest in in those houses.

• 22:07Tracy Alloway?

  Hmm. You mentioned mortgage rates earlier, and I'm wondering how big a factor those are in your analysis. So say if mortgage rates drop to 3% again, would there be more supply because there's more demand? And also presumably, the cost of building, of financing for for the home builders would also go down in that scenario. So maybe they would build more as well.

• 22:32Speaker 05

  You know, I used to put some weight on that, just analytically, over the last decade that I've been studying this. I've just keep lowering my estimation of how important the actual mortgage rate is. And, you know, what one example, which is the example I gave earlier, is that there were tons of houses across the country where families could have cut their housing costs by more than half in the late 2010s, that they weren't able to, just because there isn't a government agency that's telling if they're qualified to be a renter. There's only agencies telling them they're unqualified to be buyers. So just that economic decision isn't available to them. And for families that can get a mortgage, the economics, I think, were unusually positive

• 23:14Speaker 05

  before 2021. But at this point, they're still positive on the margin. So basically, anyone who can qualify for mortgages, in general, is probably willing to be a buyer at today's prices and rates. And I'm not sure that that changes much more than marginally afraid to go back down.

• 23:31Joe Weisenthal?

  You said that the government agencies, de facto, telling people that they are not allowed to be a borrower. And that's not strictly true. There is not allowed to be a borrower from a mortgage that's backed by Fannie and Freddie. If there is a substantial population of theoretically starter home, would be starter home owners with lower on the income ladder, lower on the FICO score scale, why couldn't there be a private sector solution? Because when you talk about the math, you don't have to have a mortgage backed by Fannie and Freddie. Why not a private sector solution to sound like what, in your case, seems like a fairly big arbitrage?

• 24:13Speaker 05

  It would be the regulatory liabilities on the banks and the mortgage rich nagers are even tighter than they are on Fannie and Freddie. So it's again, it's tough to quantify. There's a lot of just sort of potential backward looking penalty potential. You know, if we have another recession and a bank has a bunch of defaults, the regulators could come in and and say, oh, you know, those were mortgages that shouldn't have been made. And in addition to the cost of foreclosure, we're going to give you a bunch of penalties. And there, you know, there's just a lot of limits on how big of a spread they can use, plus limits on what they can count as income, plus, you know, mandates on things they have to do and underwriting.

• 24:54Speaker 05

  They just all add up to low dollar mortgages being very hard to make. And if you make them, then you've got these sort of vague liabilities that you're carrying. So to the point that just lenders haven't been willing to make them. And so, you know, for most of the past 10 or 15 years, there's been this qualified mortgage patch where if you could get Fannie and Freddie and the FHA to buy your mortgages and put into their system, then it would give you a liability waiver on all those regulations. And it was called the QM patch. And so basically, if you could get the QM patch, you made the loan. And very few bankers have been willing to make any mortgages with any default risk at all that couldn't get the QM patch.

• 25:39Speaker 05

  So really, I would say pre 2008, you could say that the agencies were sort of a subsidy, that they lowered the average mortgage rate by probably a quarter of a percent or something. Since 2008, really, they're just running a monopoly on default risk where the government imposes a bunch of liabilities on private lenders for default risk. And so the agencies actually can overcharge for taking that risk and just keep their very tight standards.

• 26:06Tracy Alloway?

  Right. And the agencies, I mean, GSE guaranteed mortgages absolutely dominate the market nowadays.

• 26:13Speaker 05

  Yeah. And the government's pulling in billions in profits every year on it.

• 26:17Tracy Alloway?

  Well, on that note, this is kind of exactly what I wanted to ask you. There is a lot of buzz at the moment about the possibility of Fannie and Freddie getting privatized. And we've seen, you know, some of their stock move in response to that. Bill Ackman seems to be very excited about that possibility. What would you expect to happen to credit standards if the GSEs were actually privatized? Because I can kind of argue it both ways, I guess. Like, on the one hand, I imagine they would want to increase their capital cushion. And in fact, they've been doing that. If investors are going to invest, they have to feel that this is a safe investment. So maybe they keep tightening.

• 27:00Tracy Alloway?

  On the other hand, they're in the business of making loans. Maybe the volume of loans, the absolute volume of loans, is more important than the profit margin. But then again, I don't know. I can see it both ways.

• 27:12Speaker 05

  Yeah, you know, to be honest, I don't understand how this is supposed to work. Like, these institutions were created by a public charter that sort of had, you're going to have this mission, and for taking this mission, you know, we'll sort of give you this protection, right? I mean, originally, they were just public. And then when they were made private, the first time, you know, everybody assumed that they would be backed by the federal government if they needed to be. And of course, they were. And if they didn't have that charter, that agreement, nobody would go do an IPO for a new bank and say, hey, we've got this great business model. We're only going to do securitized mortgages, and we're going to be totally undiversified, and now we're going to collect capital for this new bank.

• 27:57Speaker 05

  If we get rid of the federal support behind it, I don't see how it's viable as a private institution. To me, the value that they have is that as public institutions, they don't need capital. And that's where the, sort of what lies at the base of what makes them function as institutions. So The only way I could see them operating as they are is to still have government backing. And if they're privatized, but still with government backing, that just seems like privatizing in name only.

• 28:26Joe Weisenthal?

  Right.

• 28:27Speaker 05

  I actually think they have value as a public utility, not because of the subsidy, but because systemic cyclical risk is like the one thing that basically you have to be paid for in capital markets because you can't diversify away from it. And these institutions basically are able to isolate systemic risk. And there's no really better place for that than in the federal government. And the federal government can sort of take that risk with really out. One of the little known trivia points about 2008 is the those that Fannie and Freddie never actually needed cash. The big, you know, $200 billion injection that they supposedly got, but they they never used any of that cash. They actually just bought treasuries with it.

• 29:07Joe Weisenthal?

  You can understand why investors would like access to all those profits that Fannie and Freddie are getting. It does seem hard to imagine how the government could credibly commit to never backstopping again. It seems like it would always be.

• 29:22Tracy Alloway?

  Well, I don't think they would. Like, I think what investors want is both.

• 29:27Joe Weisenthal?

  Yeah, I know.

• 29:45Speaker 01

  This is the Bloomberg Tech Minute brought to you by ChatGPT. I'm Carol Muster. Getting hired at SpaceX requires exceptional ability and may include having Elon Musk review a candidate's resume. So writes Bloomberg Business Week's Lauren Grush. She reports that the company culture is defined by Musk and job candidates must understand that a commitment to SpaceX means adhering to this culture and exhibiting loyalty to Elon Musk. To get hired, candidates must demonstrate their achievements from past jobs and hands-on experience matters more to recruiters than advanced degrees, with the company looking for people with raw innate intelligence. A spokesperson for SpaceX didn't respond to a request for Comment on its recruiting and hiring practices.

• 30:29Speaker 01

  But according to recruiters, advisors, and those who've interviewed for jobs there, it's the space exploration dream that draws people to the company. And Musk invokes that dream regularly to remind workers why they're there. Prospective hires are told that the job will require stamina, including in job ads that candidates, quote, "must be willing to work extended hours and weekends as needed." One major perk for all that hard work? Employees' access to equity, either the right to buy shares or payment in the form of restricted stock units that vest over time. That's the Bloomberg Tech Minute, brought to you by ChatGPT. Get started at ChatGPT.com.

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• 32:08Joe Weisenthal?

  Obviously, today in 2025, you know, there are reasons why building a new home, a new starter home, would be more expensive. Labor costs more, especially if we have lumber tariffs. Everything costs more, et cetera. So there's going to be some increase. But tell us, A, what could we do, in your view, to safely reverse some of the excess tightening that we did post-GFC? And how much can it move the dial in terms of incentivizing home builders to get reenthused about the starter market?

• 32:41Speaker 05

  I'll say, you know, obviously, underlying all of this, if at the local level, if cities allowed enough apartment construction,

• 32:49Joe Weisenthal?

  Right.

• 32:49Speaker 05

  then it wouldn't necessarily have mattered that much that lending standards were tightened. Effectively, you know, home buyers prefer single-family homes and landlords prefer apartments. And there typically has been very little overlap. And historically, the single-family rental market was just old depreciated units owned by little mom and pop landlords.

• 33:15Speaker 05

  So if we didn't have all of the zoning regulations at the local level that prevent apartments from being built

• 33:22Joe Weisenthal?

  Right.

• 33:22Speaker 05

  at a higher scale, we probably would have just switched to a market where we were building a million apartments a year instead of three or 400,000, like we've been doing for the last 15 years.

• 33:33Joe Weisenthal?

  All right, but it's hard, even be politics are hard. So let's say we, let's assume this, let's assume the spillover.

• 33:39Speaker 05

  Yeah, so that, you know, that's the long-term project. But I do want to mention it because I tend to harp on the mortgage issue for exactly the reason you're saying. It's like, it seems like the attainable solution.

• 33:49Joe Weisenthal?

  Yeah.

• 33:49Speaker 05

  But it does sort of work in concert with the zoning problem. But yeah, I mean, in practical terms, it's easy. Just go back to pick a standard from before 2008 and go with that. If everyone's too afraid to call it the 2005 standard, use the 1998 standard. Any standard that the agencies used or that was applied to private lenders in the last 40 years would be good enough to change the marketplace. And yeah, I mean, I think it would be astounding, the effect. One thing that I've done, I compared, so the Census Bureau publishes sales data on new homes by price point. And if you compare 2006, which is before the crackdown, to 2017,

• 34:32Speaker 05

  and the reason I use those two years is because the average home price in those two years was about the same. You know, the prices had collapsed and then by 2017, the average price was about up to where it had been in 2006. If you look at new home sales by price point, basically every category, every bin, like 300,000 and Higher, new homes were being built at those prices at exactly the same rate they had been building in two thousand and six. Before two thousand and eight, it had been like a half million units a year. Uh, at those price levels and now it was basically negligible and it's still negligible. So basically, you know, you can add up, the builders stopped building homes. You know, at those price points that, you know, a half million a year for now more than a decade.

• 35:17Speaker 05

  And basically how that plays out in the marketplace is the mortgage crackdown had, you know, lowered the prices of existing homes in a way that correlated with incomes. And with home values, and so just systematically in every city, there's some price point where below that price point. Existing homes were so cheap that if you could get one, you would just go buy an existing one. And it's just taken us like twenty years to sort of get back to where I think in most cities now. Where we're hitting a tipping point where those houses can be built again. But again, they can't be built for the occupier because they can't get the mortgage. So I, I think we're gonna see, uh, build the rent market in the single family segment really take, it has taken off. And I think it's going to continue to take off.

• 36:01Speaker 05

  And actually, that's the one thing that I'm afraid of in terms of, you know, thinking offense versus defense. There's a defensive thing that has to happen here with policymakers. And that there's already a push to ban corporate ownership of single family homes. And that's literally the last form of housing on the margin that can grow above the rate that we're building now. So if we ban that, then we really are legislating homelessness in effect.

• 36:23Tracy Alloway?

  Hmm. One of the things I remember from the post-crash period, I don't remember proposals to bulldoze empty houses. But one thing I remember is adjustable rate mortgages. And there were a lot of them and we used to write headlines like option Armageddon as they blew up. That was a fun time. No, it wasn't fun. It was fun for headline writers, not for actual borrowers. But those adjustable rate mortgages actually all but disappeared after the financial crisis. I think they dropped to like single digits as a proportion of total mortgage originations.

• 37:01Tracy Alloway?

  Is that a factor here? The idea that once upon a time you could get an arm, you could get a really cheap teaser rate going in, and then eventually it went up as interest rates were raised? Maybe that would suggest that the structure of the loan is more of a factor.

• 37:21Speaker 05

  Yeah, I don't, you know, I don't think so. Just going back to that sort of pre-COVID, you know, market, it just doesn't seem that the marginal affordability of mortgages is the fact here. In fact, I would love to see, you know, there's people making documentaries about all sorts of different aspects of the housing market and the housing shortage. I'd love to see somebody do a documentary where they go to one of these new build-to-rent neighborhoods and find 10 families and say, would you have liked to have bought instead of rented? And they'll find plenty of them and then go to the bank with them and see what happens. Because, you know, I think what's happening is it's just become bureaucratic and there's no discretion left for the bankers. And I think for the typical potential borrower,

• 38:04Speaker 05

  I think we would be shocked at the reasoning sometimes that's being used to deny them. You know, just, you know, forms of income that, you know, maybe aren't, you know, strict W2 that just count for zero, you know? You know, just a bunch of things like that that really just make it a hard no. And there's no marginal tinkering you can do with a mortgage to get that to a yes.

• 38:27Tracy Alloway?

  Big picture question. It feels like in the US, part of the problem is perhaps that America has never decided what it wants housing to be. So does it want housing to be a wealth generator? In which case, prices need to keep going up. Does it want housing to be actually affordable so that people can live places? And it is true that housing has been one of the biggest wealth effects over time. And I'm thinking specifically, you know, there are people in New York that bought a dilapidated building in Soho, and they're now multimillionaires just because they bought at that particular time. How should America actually think of housing?

• 39:14Speaker 05

  You know, I think there's a temptation to benchmark to the peculiarities that we're living in and sort of consider them to be a state of nature. And you think of that, you know, the, the famous, you know, Case Shiller housing chart that shows that home prices were flat, you know, adjusted for inflation, home prices were flat for a hundred years, and then they shot up. You know, there's a deep, deep history of homeownership in this country where the house is not expected to appreciate in value. And in fact, even up till 2008, in two thirds of the country, nobody had experienced any unusual increase in the value of their houses. So I don't think that's actually a necessary part of

• 39:59Speaker 05

  how we should think about housing. Housing can be a very good investment for an owner occupier without ever really increasing in real market value. It comes from the shelter that it's providing you.

• 40:11Joe Weisenthal?

  Right.

• 40:11Tracy Alloway?

  But there is a peculiar American thing here, which is the dream of homeownership, right? Like the American dream. And that doesn't exist as much in other countries. So if you look at Europe, Germany, people tend to be happy being renters, for the most part. I'm sure costs went up recently, but it's a totally different model.

• 40:35Speaker 05

  Yeah, but I just don't think that it requires this ongoing battle between price appreciation and affordability. I think housing done right, up until 2002 in Phoenix, houses across Phoenix were selling for about three times their tenants' incomes. And they had been for decades. And they're, you know, people were moving to Phoenix by the tens of thousands to become homeowners all through that time. So I think the benefits of homeownership come more from You know, just getting rid of the principal agent issue you have between the landlord and the tenant that, you know, has value for, you know, being your own landlord or your own tenant is a value that a landlord or a tenant on their own can't capture. And

• 41:18Speaker 05

  just, you know, the, the sense of ownership and the sense of neighborhood that you can get from that, you know, all those things are, are sources of value that, that make homeownership valuable, even if the home doesn't give you excess profits.

• 41:32Joe Weisenthal?

  Right. Even without the profits, you've at least covered your housing short. Every person in the world is born with a short position on housing that they have to theoretically cover at some point. And so, once you own your house, you never have to worry about that again. I have to say, I want to do more actually, on the existence of the build to rent market, because I knew that was one of the areas of home building that actually has grown rapidly. And it hadn't clicked to me sort of before, that perhaps a big part of it is who has access to that credit and is able to own the house, is an institution which can obviously borrow easily, or someone with low income and likely low FICO and like, likely low ability to make a down payment. That is a very interesting phenomenon.

• 42:15Joe Weisenthal?

  Kevin Erdman, thank you so much for coming on Odd Lots. Really, really appreciate you joining us.

• 42:20Speaker 05

  Yeah, it's been a pleasure.

• 42:33Joe Weisenthal?

  Trishy, I love that it's 2025, and like, we're not done trying to figure out what happened in the housing bubble.

• 42:42Tracy Alloway?

  Well, this is exactly it, right? Memories are long. And so, I'm not sure if you waved a magic wand and loosened credit standards at the GSEs, that all of a sudden, home builders would be like,

• 42:54Joe Weisenthal?

  That's true.

• 42:54Tracy Alloway?

  Yes, we're going to build a lot because they all remember what happened

• 42:58Joe Weisenthal?

  Yeah.

• 42:58Tracy Alloway?

  in the early 2000s. And then the other thing I would say is, one of the big themes of the post 2008 period has been bifurcation entails in the economy. So, the rich get richer, the poor get poorer. And I think in that scenario, lower income people just aren't thinking about buying houses, and they're not trying either. And so, that's one reason why you've seen the average FICO score for GSE approved loans actually go up.

• 43:30Joe Weisenthal?

  It would be interesting to Kevin's point at the end. This way, we should actually do something more on the build to rent market because that to me, what you just said is sort of the key question here is, does there exist a significant block of Americans who are a little bit lower on the FICO score spectrum, lower on the income spectrum, but otherwise stable enough and sort of confident enough that they want, this is where they want to own and build a family.

• 44:03Tracy Alloway?

  Yeah.

• 44:03Joe Weisenthal?

  And that's sort of like the big question because, right, you can loosen it all you want, but do the like, how many of those people are there? Is there, would the home builders then, you know, like start building for them?

• 44:14Tracy Alloway?

  Well.

• 44:14Joe Weisenthal?

  Would it be a meaningful part of the market, given the bifurcation and the sort of barbell nature of the economy where like, because to my mind, it certainly seems plausible that the home builder is like, yeah, that's great. We still want to serve the really rich people.

• 44:27Tracy Alloway?

  Yeah, exactly. And the margins on those houses tend to be fatter. And the other thing I would say is the question isn't whether people want to buy homes. I think in America, almost everyone really wants to buy a home, although there are some people who find renting more convenient. The question is, can they actually afford a home?

• 44:47Joe Weisenthal?

  Yeah.

• 44:47Tracy Alloway?

  And will they apply? And I think that pool of potential home buyers has gone down.

• 44:53Joe Weisenthal?

  It would, I do remember that in like pre 2020, people posting Zillow links and showing the gap between what you can rent them out for and what they would cost to get a mortgage on them. And man, I really regret not getting a pool of capital together. And they're all like in the Midwest, like, you know, random houses in Indiana or something. I really regret not getting a pool of capital together and buying a bunch of those houses and renting them out.

• 45:19Tracy Alloway?

  A mansion in Austin.

• 45:20Joe Weisenthal?

  Yeah, no, not, you know, just some like normal house in, you know, the suburbs of Indianapolis or whatever.

• 45:26Tracy Alloway?

  You're gonna, you're gonna become one of the financial institutions of snapping up all the single homes, single family homes.

• 45:33Joe Weisenthal?

  It's too late. But this is the, this is the interesting thing he pointed out, which is like that financial institution, you know, people, to his point, you know, the reason that they're able to make a spread is this idea that they could get access to credit to buy those homes and then individual can't. So it does seem like if you want to Tilt the dial between whether a financial institution or a family can own a home, you at least have to like probably start by making the credit available.

• 46:00Tracy Alloway?

  Yeah, absolutely. Shall we leave it there?

• 46:02Joe Weisenthal?

  Let's leave it there.

• 46:03Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alockway. You can follow me at Tracy Alockway.

• 46:09Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at theStalwart. Follow Kevin Erdman. He's at K A Erdman and check out his newsletter Erdman Housing Tracker. It's over on Substack. Follow our producers Carmen Rodriguez at Carmen Armand, Dashal Bennett at Dashbot and Kel Brooks at Kel Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots where you can find all of our episodes and a daily newsletter. And you can chat about all of these topics 24/7 in our Discord. We have a real estate channel on there. We even have an HGTV channel where Tracy shows off her new tractor. Go check it out discord.gg/oddlots.

• 46:45Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we talk about affordability in the housing market, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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