Category Archives: Housing and housing finance

House prices up

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The WSJ reports,

In nearly two-thirds of the metro areas tracked by NAR, prices posted double-digit gains. The biggest gainers were Bridgeport, Conn., where the median price rose 27.3%, and Crestview, Fla., up 27.1%.

My thoughts:

1. The NAR tracks the median price of homes sold, which depends on the mix of homes transacted. If the demand surge is for bigger homes, some of the rise in the NAR measure represents a mix shift.

2. I assume that not all of the real estate market is healthy. Apartment rents are probably down, at least in places like NY and SF. Commercial real estate is probably in bad shape.

3. The economic impact of the virus is probably very uneven. Affluent people who have kept working from home are spending less and banking their salaries, which can now go into housing. But job losers are not getting into the housing market.

4. Maybe we are starting to see some inflationary consequences of lockdown socialism.

Freddie, Fannie, investors, and questions

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The WSJ covers the Administration’s plans to return Freddie Mac and Fannie Mae to private ownership, while retaining their government guarantee.

The principles announced Thursday represent a major reversal from what leaders of both parties over the past decade promised—to abolish the companies, which guarantee roughly half the U.S. mortgage market. The approach, which doesn’t require approval by Congress, would mark an important win for investors who have been betting politicians wouldn’t follow through on those promises.

Exactly. Back in 2008, government officials claimed to understand that privatized profits and socialized risks was a bad model. The main thing this plan accomplishes is to reward the speculators who bet that the government officials would forget that it is a bad model.

The Administration did throw a sop to me, so to speak:

Treasury also said FHFA should reassess whether the companies’ purchases of cash-out refinancings and loans for investment and vacation properties align with the firms’ core mission.

You could get them out of that business without returning them to private ownership. In fact, private owners were will lobby much harder to continue to provide loans that do nothing to promote saving through home ownership.

An economic idea to promote housing development

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Anup Malani writes,

New residents are willing to pay significantly more for additional housing than it costs to build it. They could compensate existing property owners for the reduction in prices caused by new construction and still gain from moving to the city. Such a compromise is possible until the point at which new construction reduces the value of existing homeowners’ property by an amount greater than the value it affords new residents. Allowing incoming residents to compensate homeowners would help cities grow to their ideal size, at which the cost of adding one more resident is equal to that resident’s benefit to the city’s economy.

This sounds like a Coasian problem. Malani’s solution is to charge new residents an above-normal property tax rate and to return the proceeds to affected residents in the form of lower property taxes, while getting rid of the regulations that inhibit new development in order to protect incumbent residents. My thoughts:

1. In theory, this is sound economics. By replacing quantity rationing of new development with price rationing, you reduce deadweight loss.

2. In our area, developers are charged by the local jurisdiction for the costs they impose on infrastructure, so the basic mechanism is in place to include additional taxes. Then these taxes on developers would be passed on to the new residents.

3. In practice, it might prove difficult or impossible to eliminate the regulatory impediments to new development, so that high taxes on new residents (or on developers) would just be an additional deterrent to new construction.

4. In practice, it is likely to be very difficult to target the tax reductions to the most-affected residents. If you spread the tax reductions across many residents, each household only receives a minimal, meaningless amount. If you target only a few residents, then a lot of effort has to go into the process for determining who is most effected by the new development and how much they should receive.

House flipping

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From the WSJ:

The investment house known for corporate takeovers [KKR} has agreed to pump another $250 million into Toorak Capital Partners LLC, which buys short-term loans made to real-estate investors who purchase, renovate and resell residential properties.

. . .Builders have struggled to produce homes affordable for many first-time buyers. The median sales price of newly built homes was $342,000 in April, according to the Federal Reserve Bank of St. Louis. That has left a big market for rehab specialists who can get their hands on physically distressed or out-of-date properties for peanuts. The median sales price of flipped homes during the first quarter was $215,000, according to Attom Data Solutions, a real-estate information firm.

From The Real Deal:

According to a recent study by CoreLogic, 10.6 percent of U.S. home sales in the fourth quarter of 2018 were flips, close to the 2006 house flip rate of 11.3 percent. The market these days is quite different that the one that preceded the recession: flippers in the fourth quarter on average made a nearly 23 percent profit on flips, compared to 6 percent in 2006. Institutional investors comprise more than 40 percent of flippers today, with companies like Opendoor, Zillow and Redfin all placing big bets on the space.

The markets where this is popular seem to be quite different from the high-cost urban markets that get most of the media attention.

I think that this is a difficult phenomenon to explain. Why has there been a profit opportunity in buying a run-down house and fixing it up in Memphis, but new construction there doesn’t pay off so much (or does it)?

The WSJ has a subsequent article, focused on Phoenix. The WSJ also has this article, which says

Big private-equity firms, real-estate speculators and others that buy properties comprised more than 11% of U.S. home purchasers in 2018, according to data released on Thursday by CoreLogic Inc.

It used to be extremely risky to be residential property without a lot of local knowledge. Now, with more data available, these big companies believe they can buy in distant locations without running into adverse selection (aka the “lemons” problem).

It wouldn’t surprise me to see the profits from this activity quickly fall to zero–or less.

Zoning and liberty

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John Cochrane writes,

I received a few comments from fellow libertarians last time I wrote about these issues. Shouldn’t communities have the right to pass whatever restrictions they want? If they want to preserve a $5 million per house replica of 1950s suburbia, and wall out the unwashed masses, hypocrisy aside, why should the state stop them? I counter, this is not libertarianism, the defense of private rights, this is untrammeled majoritarianism, by which your neighbors via the city strip you of your right to sell your house to the highest bidder, do what you want with it, and strip the ambitious kid from Fresno who wants to move here of his right to be supplied by a competitive marketplace.

But there are externalities in neighborhoods. If my neighbor’s house gets sold to someone who puts up a ten-story apartment building, my porch will no longer get any sun. I may have to put up a fence to keep my lawn from being trampled. The increased traffic on our street could mean that every time I want to pull out of my driveway I have to wait ten minutes for someone to let me in. The noise level may be much higher.

In theory, you can handle all of these issues with well-specified property rights and Coasian bargaining. In reality, this is a difficult problem.

I am not saying that government solves the problem well. I am not saying that existing zoning practices make sense. But a simple rule that says that you are allowed to sell your property to the highest bidder, with no restrictions, probably does not make sense either.

What to do with Fannie, Freddie

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Karl Smith writes,

Trump administration officials announced last week that if Congress doesn’t come up with a plan to overhaul Fannie Mae and Freddie Mac in the next couple years, they will. Their plan is to simply privatize the two giant mortgage banks. A better one would be to liquidate them.

1. Liquidation would not be so simple. Their assets are very atypical. They consist primarily of servicing fees, which are small fees that they take on mortgage payments before they pass those payments on to investors. They also have many contracts with counterparties involving financial derivatives, including complex derivatives known as credit risk transfers (CRTs). So who would buy these servicing streams and derivative positions, and how would the buyer value them?

2. Getting rid of Freddie and Fannie would probably result in the death of the 30-year mortgage, because regulators would not allow banks to take on the sort of interest-rate risk that the savings and loan associations carried in the 1960s, which caused their demise in the 1970s and 1980s.

3. I was invited to offer my opinion on the future of Freddie and Fannie to senior staff at their regulator. But we could not get the scheduling to work. I instead submitted my thoughts in writing. I will paste them in below.

Comments on Housing Finance

Arnold Kling
April 2019

1. From approximately 1950 until 2008, housing finance in the United States was characterized by private profits and socialized risks. Through the 1970s, Savings and Loan associations took on interest-rate risk. When many went bankrupt, taxpayers took the losses. Subsequently, Freddie Mac and Fannie Mae dominated housing finance. They took on credit risk, and taxpayers took the losses.

2. Currently, some of the profits from the mortgage guarantee business go to taxpayers, in the form of earnings taken from Freddie Mac and Fannie Mae. Most of the risk in mortgage loans is borne by the private sector. Mortgage-backed securities transfer interest-rate risk to private firms. Credit risk transfers (CRTs) put much of the credit risk of mortgages into the private sector.

3. It would be a mistake to try to take away the profits from taxpayers and return the functions of Freddie Mac and Fannie Mae to the private sector. Once the profits are privatized, socialized risk-taking is likely to follow. Firms that are vital to the mortgage market will have either an explicit or implicit government guarantee. They will find ways to exploit that guarantee, putting taxpayers at risk.

4. Policy makers should be wary of changing the current system. Housing finance today is more sound structurally than it has ever been in my lifetime. Re-introducing old systems or introducing different entities and new regulatory methods would be unwise.

5. There are some tweaks to the current structure that are worth considering:

6. Congress could clarify and limit the charters of the housing finance agencies. In particular, the agencies could be limited to providing guarantees for 30-year, fixed-rate mortgages. Other mortgages, including ARMs and 15-year fixed-rate mortgages, can be supplied by the private sector. The government guarantee is only needed for the 30-year fixed-rate mortgage.

7. Congress could limit to moderately-priced priced homes the mortgages that the agencies can guarantee. Note that the home price ceiling ought to be national. In high-price cities, the problem is one of supply. Subsidized mortgage lending does not enable middle-income people to afford homes in expensive cities. Instead, it simply drives prices up further.

8. Congress could restrict the loan purpose for agency eligibility to primary residences only. It could forbid the agencies from guaranteeing mortgages that are cash-out refinances. This would ensure that the agencies support household saving through home ownership, rather than speculation or consumer borrowing.

9. Congress could ask the regulators to ensure a single, coherent credit policy and pricing policy for Freddie Mac, Fannie Mae, and FHA. This would prevent mortgage lenders from playing one agency off against another.

10. Congress could ask regulators to periodically monitor concentrations of risk in the private sector. We do not want to see one or two firms take on a dominant role in absorbing interest-rate risk or credit risk.

Downward mobility?

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Joel Kotkin writes,

by 2016, home ownership among older millennials (25-34) had dropped by 18 percent from 45.4 percent in 2000 to 37 percent in 2016.

That is in the U.S., but he goes on to cite similar data for Australia.

So why has home ownership fallen? Largely due to regulations that have placed new affordable housing beyond the reach of younger Australians, something we also see in major cities in Great Britain, the United States, and Canada. In all these places, the main culprit has been “smart growth,” a notion that encourages the reluctant to move closer to dense urban cores and give up the dream of owning a home.

. . .In Sydney, planning regulations, according to a recent Reserve Bank study, now add 55 percent to the price of a home. In Perth, Melbourne, and Brisbane the impact is also well over $100,000 per house.

Housing finance policy

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Peter J. Wallison and Edward J. Pinto write,

The Trump administration has finally turned its attention to housing policy. Unfortunately, the president’s Memorandum on Housing Finance Reform, issued last week, is a major disappointment. It will keep taxpayers on the hook for more than $7 trillion in mortgage debt. And it is likely to induce another housing-market bust, for which President Trump will take the blame.

Friday’s WSJ reported that Mark Calabria has been confirmed as head of the Federal Housing Finance Administration. It will be interesting to see what he does.

In my opinion, what he ought to do is the following:

1. Coordinate the credit policy and marketing policy of Freddie Mac, Fannie Mae, and FHA. As it stands now, they are dealing with the same mortgage lenders on somewhat different terms. That situation is ripe for gaming by the mortgage lenders.

2. Get the government out of the business of subsidizing mortgage loans that do not contribute to saving through equity buildup in a primary residence. Stop guaranteeing loans for income properties and for second homes. Stop guaranteeing loans for second mortgages, home equity lines of credit, or cash-out refinances. Stop guaranteeing loans with negative amortization.

3. After that, it might be desirable to gradually reduce the agencies’ presence in mortgage markets. The most straightforward way to do this would be to slowly bring down the maximum size of a mortgage eligible for guarantees by agencies. But this really ought to be done through Congress.

Households up, population down

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A commenter writes,

The best explanation that I have seen is that the number of occupants per residence has declined. The number of single occupant tenants has rapidly increased as a share of residents.

This is a story that could reconcile rising rents and house prices in what Kevin Erdmann calls the “closed-access” cities with a loss of population in those same cities. Although young singles may double up to save on rent, this is probably swamped by the decline in households with children. And there is a general, long-term trend of much more housing space per person in the U.S.

My guess is this:

1. In open-access cities, the result is many more people and much more space per person.

2. In closed-access cities, the result is slightly fewer people and only slightly more space per person.

Kevin Erdmann watch

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1. Joel Kotkin writes,

In fact, as a new Brookings study shows, millennials are not moving en masse to metros with dense big cities, but away from them. According to demographer Bill Frey, the 2013–2017 American Community Survey shows that New York now suffers the largest net annual outmigration of post-college millennials (ages 25–34) of any metro area—some 38,000 annually—followed by Los Angeles, Chicago, and San Diego. New York’s losses are 75 percent higher than during the previous five-year period.

. . .The top 20 magnets include Midwest locales such as Minneapolis–St. Paul, Columbus, and Kansas City, all areas where average house prices, adjusted for incomes, are half or less than those in California, and at least one-third less than in New York.

2. I now have a review copy of Shut Out. On p. 5, he writes,

we did not have a housing bubble. We had a housing supply bust–first in the places where people want to live, in places where there is more economic opportunity. That supply bust caused prices to rise to extreme levels in those cities–most notably in New York City, Los Angeles, Boston, and San Francisco–metropolitan areas I call the Closed Access cities. After the turn of the century, millions of households flooded out of those cities because of a shortage of housing–so many that they overwhelmed cities in the main destinations for those households, such as inland California, Arizona, and Florida. Then we imposed a credit and monetary bust on the entire country in a misplaced attempt to alleviate the problem.

I have a difficult time wrapping my head around the idea of a “supply bust.” It suggests a supply curve rapidly shifting to the left. I find it more plausible to think of housing supply in the Closed Access cities as relatively fixed, with demand increasing rapidly. But how to reconcile “demand increasing rapidly” with net out-migration without resorting to a Yogi Berra theory?

One possibility is non-resident foreign buyers making up the difference. Another possibility, going back to the supply bust idea, is that there is a lot of reconstruction taking place with the existing housing stock, and while these houses are being fixed up, no one is living in them.

Overall, there are a lot of cross-currents here, and there are multiple housing markets even within a single metropolitan area. It’s a difficult picture to sort out.