Marketplace - How homeownership got so out of reach

Episode Date: August 20, 2024

The gap between median household income and median income for homebuyers in the U.S. has been growing, putting housing affordability in its “worst spot” in the last 40 years, an economist told us. In this episode: How homeownership got so out of reach. Plus, a tax deduction business owners love expires in 2025, community colleges that are more training ground than stepping stone, and the debate over open-source AI.

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It is Tuesday today, the 20th of August. Good as always to have you along, everybody. The speechifying continues in Chicago tonight. Our eyes, though, remain firmly fixed on Jackson Hole come Friday and what Fed Chair Jay Powell is going to say. Something about data, almost certainly, and the labor market and how the central bank is making progress toward its 2% inflation goal. All y'all know his list of particulars as well as I do.

What is not entirely clear, though, is what more the Fed's going to be able to do to get that economy to 2% because as Powell himself and others have said on this program and elsewhere, this, this last percentage point or so is going to be the hard part. How hard and why is it so hard? Marketplace's Kristin Schwab starts us off. To understand what the Fed is up against in the coming months, year, however long it takes, it's helpful to understand why the Fed will start cutting rates before inflation hits 2%. Narayana Koch Lakota is a former president of the Minneapolis Fed.

One of the analogies people give is you're driving a car, but you only get to look in the rearview mirror. We don't exactly know what's happening now because data lags. That means inflation could already be lower. So the Fed needs to plan ahead because not only is there a lag in data, there will be a delay in how consumers and businesses respond to interest rate cuts. It'll take time for the effects of that rate cut to filter through the economy. Now, you might wonder, can't the Fed just plug all the data into a model and make some predictions?

The Fed does do that. But forecasting doesn't account for the infinite uncertainties. What's going to happen with commercial real estate? Could there be more tariffs? What if the last few months of data were a fluke? Ken Kuttner is a former staff member at the Chicago and New York Fed. You know, that's very, very hard to predict, but I'm sure people at the FOMC are going to be wringing their hands about, well, where are the risks? It's one reason why Kuttner says the Fed will likely move slow with rate cuts.

Then you might see a pause between meetings and say, okay, well, you know, cut in December, maybe not in January, because we want to see how things play out. The Fed will also move slowly because to borrow an admittedly tired metaphor, the smaller the target, the more precise the tool has to be. David Wessel directs the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution. When inflation is at 9%, anybody could be a central banker. You raise interest rates. So now they're at the part where it takes a lot of judgment and good luck to hit it

just right. The chances of making a mistake and pushing the unemployment rate too high, those chances are greater now. I'm Kristen Schwab for Marketplace. Wall Street today. Ah, winning streak, we hardly knew you. We'll have the details when we do the numbers. According to the Census Bureau, the median household income in this economy, median, remember means half below, half above, the median household income here is economy, median, remember, means half below, half above. The

median household income here is $80,000 a year, give or take, which sounds okay, except that according to a new report on the mortgage market from the lending technology firm Maxwell, the median income of a home buyer in this economy is now up to $96,000. And that gap between them has been growing for years. Marketplace's Kaylee Wells is on that one. Not only is the median home buyer earning more, they're also older and making bigger down payments. All of it points to one truth, says economist Jessica Loutz with the National Association of Realtors. Housing affordability is really towards the worst spot that we have seen it in the

last four decades. And two things are making the problem worse. Both home prices and mortgage rates are making it very unaffordable for your typical American to be able to purchase a home. And the amount that potential home buyers need is increasing faster than the median income, says Redfin's chief economist, Daryl Fairweather. I think we've been moving towards the place of owning a home being something that is more upper middle class for a long time. Fairweather says four years ago, during a pandemic era pocket of cheaper housing,

45% of homes were affordable to a household on the local median income. Now it's down to 16%. So that's a big gap. I mean, it's essentially saying that even if you are solidly in the middle class in America, you will not be able to buy a home. And even if the Fed cuts interest rates next month, the relief will be temporary, says John Posenen, because of a bigger issue.

What we've seen is over the last decade in this country, severe underbuilding of inventory. And so we have a severe lack of supply. Pasenon is CEO and co-founder of the lending technology firm Maxwell that released the report. He says low rates will lead to more demand, and more demand without more supply means higher prices. Because now, instead of getting two offers on my house, I'm getting five offers on my house, I'm getting two offers on my house, I'm getting five offers on my house.

I'm getting 10 offers on my house. And so that's just going to exacerbate the pricing affordability challenge. As for tips, there isn't a silver bullet. Pay down your debt, scrape together some savings, and, Pasenan says, buy something, no matter how small or cheap, soon, to start accumulating wealth. I'm Kayley Wells for Marketplace. Much of the digital world relies on something called open source software, computer programs where the underlying code is published out on the internet free for developers to tinker with.

Mozilla's Firefox browser and the publishing platform WordPress are just two examples, maybe the best known. That is the backdrop for this. There's a big debate in Silicon Valley over whether companies should make artificial intelligence open source. Google and open AI are keeping everything pretty much walled off.

Meta though has gone open source, letting pretty much anybody have access to their powerful large language models, which is what those things are called, LLMs. The stakes are high for which company or companies are going to come to dominate AI, but it's also high for the safety of us humans too. With that set up, here's Marketplace's Matt Levin. HOFFMAN Nils Tracy admits his business probably wouldn't exist without Lama. That's the name of Meta's open source AI.

NILS No, I don't think it could. The backing of Meta and the power Meta has to build that model enables us to do this. Tracy is the founder and CEO of a North Carolina startup called Blinder. It's basically AI for law firms. It can do things like redact documents or automatically file for copyright protections.

Tracy's company copied all of Llama's source code, made some tweaks, and then retrained the AI to write like a lawyer. We have contracts from a law firm or other types of documents they might have that are written in their style. We will train it off of that and we will get it to learn that style of writing. Tracy could have tried to adapt large language models from OpenAI or Google or other AI companies, but without their underlying code, he'd have to trust they weren't misusing his data.

Also, they're not free. Are you paying Meta in any way? No. How happy are you about that? Very happy about that? Very happy about that. That open source model is extremely valuable for anyone downstream who wants to use it to be able to develop a new product or a new application.

Elizabeth Seeger is director of digital policy at the Thinktank Demos. If you're wondering why Meta would spend tens of billions developing its own AI only to give it away for nothing. Seeger says there's an economic strategy behind that. It's called commoditizing the complement. Let's say you are a hot dog producer. So you make hot dog buns completely free. So everybody can get their hand on hot dog buns, but then they need to buy your hot dogs. In this case, Meta's free hot dog buns would be its open source AI,

and the future hot dogs could be data sets Meta will sell you to train it, or Meta hardware the AI runs on. Traditionally with open source software, there's another benefit too. If there's a security problem, the global developer community is there to spot it. Ali Farhadi is CEO of

the nonprofit Allen Institute for Artificial Intelligence. Do I rather live in a world where there is actually a large number of practitioners who know how to fix AI models when an attacker misuse happens, or a world in which I'm at the mercy of a couple of institutes? But not everyone agrees that open source sunshine is the cure for AI security. Programmers have already removed safety restrictions from some open source AI models

to create deep fake pornography. Aviv Avadia at the AI and Democracy Foundation says he worries about future catastrophic outcomes like bad actors figuring out how to use open source AI to build a biological weapon. It's much easier to improve and learn about AI systems if they're open and available, but it's also much easier to weaponize them. And there's no undo once they're out in the world.

Avadia says thinking about AI as completely open source or completely black boxed is kind of a false binary. Different levels of openness can apply to different types of AI. I'm Matt Levin for Marketplace. This next story is brought to you by two competing rules of thumb, cause and effect and supply and demand, prefaced by this statement of fact. The United States is producing more natural gas right now than it ever has. So on with it. Number one, last winter was the warmest on record in the lower 48.

That is the cause of which I spoke. The effect is that we've got plenty of natural gas left over this spring because we didn't use it to heat our homes and instead just pumped it into storage tanks. Number two, while electricity demand is up this summer, it's really hot, air conditioners use a lot of power, right? Natural gas supplies are still outweighing demand for net gas, keeping prices low.

Marketplace's Henry Epp then has more on where the natural gas market stands just a couple of moments before furnace season. Here's the problem for natural gas producers who are trying to figure out how much gas the market wants. If you drill a well today, you're not going to see the gas associated with that well for another six to nine months. Samantha Dart is the head of global natural gas research at Goldman Sachs. When demand and prices for natural gas spike, it takes a while for production to actually ramp up.

And when prices start to fall and companies want to hold back supply. That's all well and good, but I'm not going to see an actual decline in production for at least six to nine months. So when last year's warm winter held back demand, companies couldn't just turn off the switch. You just have a lot of natural gas molecules being produced, chasing really not a lot of

demand. Ryan Kellogg is a professor at the University of Chicago's Harris School of Public Policy. To be clear, there is growing demand for electricity in the U.S. right now, he says, but even with some of the natural gas surplus being used to generate power, there's still a lot left over. Barring something really unexpected happening, we should expect natural gas prices in America to stay fairly low to moderate, at least for the foreseeable future, as in the next year or two.

That's good news for consumers who need to heat their homes in the winter, not so good for natural gas companies. But don't feel too bad for the industry, says Anna Mikulska at the Institute for Defense Analysis. The ability of current US industry to survive these prices is very different than what it was five or 10 years ago. Thanks to technology improvements and industry consolidation, she says, gas companies can

still make money even when prices are low. I'm Henry App for Marketplace. If you need an early update on prices and markets and all the rest of the day's business and economic news, you know what to do, right? Get out of bed. Listen to Marketplace Morning Report, David Br day's business and economic news. You know what to do, right? Get out of bed. Listen to the Marketplace Morning Report, David Brancaccio and the gang.

Giving it to you before you know you need it. Coming up... I didn't feel uncomfortable returning to this school being 20 years older than typical college students. Age is just a number, people. But first, let's do the numbers. Dow Industrial is off 61 points today two tenths percent finished at forty thousand eight hundred and thirty four the Nasdaq down 59 points about a third of one percent closed at 17,000 to 860 and the S&P 500 gave back eleven points

two tenths percent 55 and 97. We're from Kaylee Wells at the median salary of a homebuyers at a record high of $96,000 in this economy. How about some residential real estate stocks then, huh? Realogy Holdings, which owns Coldwell Banker and Corcoran, grew 1% Compass, down 2.5% mortgage lender Rocket Companies, up 6 tenths of 1% today. Heard from Henry Epp about the current natural gas flood in this country

In related stocks kinder Morgan at the one and a half percent Cotera energy slid about 1.8 percent Tellurian picked up two percent today Boeing's had a new setback for its embattled triple 7x jetliner test lights revealed cracks in the plane structure That is never good Boeing dips four and two tenths percent today. Bonds went up, yield on the ten, your Tino down 3.81%. You're listening to Marketplace. Ever wonder how artificial intelligence or 3D printing

is used to solve medical problems? Or how research is discovering new ways to slow or even stop medical conditions we used to think of as untreatable. I'm Cathy Wörzer. Listen to Tomorrow's Cure, a podcast where I interview experts from Mayo Clinic and other renowned organizations. What they describe may sound futuristic, but listen and you'll find out Tomorrow's Cure

is already here. Find it now wherever you get your podcasts. This is Marketplace. I'm Kai Rizdal. We turn now to the tax code, which while maybe not a top tier issue in this election, quite possibly it ought to be because if the Congress that's elected this fall doesn't make some changes to that tax code at some point next year, Americans taxes are going to be quite a bit higher come 2026.

What's going on is that a whole slew of provisions in the 2017 Tax Cuts and Jobs Act, the Trump's tax cuts, they expire at the end of next year, including what is known as the pass-through deduction. As Marketplace's Kimberly Adams reports, whether or not it survives could make a big difference for millions of business owners. Most businesses in the U.S. are pass-through businesses. Businesses that are organized as sole proprietorships, partnerships, or S corporations. Neil Bradley is executive vice president and chief policy officer at the U.S. Chamber of

Commerce. For these businesses, rather than the owners taking a straight salary and paying income taxes on that, they instead take a share of the business' profit as their own. Prior to 2017, owners had to pay regular income taxes on that money. But now they get a 20% deduction on some of that income. So think about small companies, small businesses on main streets all across America. The Chamber is strongly advocating for an extension of the tax deduction on pass-through income. Bradley says companies that have used it?

They employ about 50% of the entire private sector for-profit workforce. The pass-through deduction exists because when Congress was trying to cut tax rates for businesses in 2017, it ran into a problem. It was easy enough to just slash the overall rate for big corporations, known as C corporations, which Congress did, from 35% to 21%. But what do you do with the profits these smaller companies generate? Garrett Watson is a senior policy analyst at the Tax Foundation. The main goal of the deduction when it was created in the end of 2017 was to ensure that

the tax burden faced by pass-through businesses overall was in the ballpark of the big C corporations. The pass-through deduction effectively allows certain business owners to exclude up to 20% of their income that passes through their business from federal income tax up to a certain point. Chai-Chenk Wang, executive director of NYU's Tax Law Center, says the law is really complex. The simplified IRS flowchart of this thing is 14 steps long, and the pamphlet that Congress's official researchers wrote for lawmakers trying to summarize how it works is 15 pages. Business owners who take the pass-through deduction end up with a top federal tax rate of just under 30 percent,

while their employees who get paychecks are taxed at up to 37 percent. Huang says that's encouraged some owners to game the system. Many high-income filers stop paying themselves income as a type of profit that is not eligible for the deduction and instead paid themselves in a form that is eligible for the deduction. Tax policy experts are quick to point out the benefits of the deduction are not distributed equally. Over half of the benefit goes to business owners who have more than a million dollars of income. Samantha Jacoby is deputy director of federal tax policy at the Center on Budget and Policy Priorities. People with over 10 million dollars in income who claim the deduction claimed a one million dollar deduction and that's compared to an average

deduction of seven thousand dollars. So very wealthy people are just benefiting much more than sort of ordinary people. Plus the overall cost of the deduction, it was originally projected to deliver upwards of a $400 billion hit to federal revenues. If it's extended another 10 years, says Garrett Watson at the Tax Foundation, that's another $700 billion. And while I don't think there's any firm conclusion, there's not a lot of strong evidence that the deduction spurred an above normal amount of investment or economic activity that would have been surprising to folks. And as we get closer to the provisions expiration date at the end of 2025, Congress will have to decide if keeping the deduction is worth it.

In Washington, I'm Kimberly Adams for Marketplace. After taking a big hit during the pandemic, college enrollment is bouncing back. According to the National Student Clearinghouse Data Center, enrollment was up 2.5% last spring. Community colleges led the way, making it more than half of that total overall bump. And the students who are returning to those classrooms today are less interested in earning a bachelor's degree. They're coming more for vocational training

and high-tech skills. From WBUR in Boston, bachelor's degree. They're coming more for vocational training and high tech skills. From WBUR in Boston, Carrie Young reports. In order to go inside the clean room lab at Middlesex Community College, students and staff like laboratory technician, Veronica Tay, have to pass through a number of safety procedures. Walking over a sticky floor pad is first.

Just helps pick up the dirt off your shoes. After a thorough hand washing, students put on a long lab coat, a face mask, and safety glasses. Because you'll end up putting little booties on, and then it'll cross over the red line as you put one on. Tay explains this lab is used

by the college's biotechnology students. It's intended to simulate working conditions in this region's pharmaceutical industry. Students even work with live cells. So we've got CHO, which stands for Chinese hamster ovarian cancer cells. We grow them at 37 degrees Celsius. The lab work is part of a certificate and associate's degree program in biotechnology at this community college. New graduates often find jobs nearby, with starting salaries of over $55,000 a year. This biotech program has been around for more than 30 years, but officials decided to invest even more into the major when they started planning to build this clean room about 10 years ago.

That was around when Massachusetts community colleges were starting to move away from their traditional role of being a stepping stone to a four-year degree. Today, they're more of a training ground for high-tech and vocational jobs in the region. They are playing an increasing role in linking people directly into employment opportunities, particularly in that modern technician space. Bob LaPage is the Massachusetts Assistant Secretary for Career Education. He says the biggest growth area right now is in new, environmentally friendly HVAC technologies, like heat pump installation. Cybersecurity is in demand, too.

It's become more visible in part because of market demand, in part because individuals are thirsting for upward mobility. And recently, the growth in free community college in the area has turbocharged this trend. Maine's free program launched about two and a half years ago. David Daigler, the president of the Maine Community College System says a president of the main community college system,

says a lot of the students enrolling now are interested in vocational programs. They're looking to become plumbers and electricians. They're looking to become fabricators and precision manufacturers. In addition to growing the supply of workers with special skills, community college graduates also tend to come from a diverse range of age and cultural backgrounds.

Alex Colburn, a director of training at Eversource, says that's benefited the utility company's workforce. They have a reach into the communities that extends beyond what we can do. How they market to different types of communities extends for us as well. For Megan Gurros, a recent graduate of the Middlesex Community College Biotech program, student diversity was precisely what drew her into the school when she decided to go

back to class in her late 30s. There's all ages, all backgrounds, all ethnicities. I didn't feel uncomfortable returning to this school being 20 years older than typical college students. And I feel like that really makes the experience stronger. And she adds, it helps that her degree led to a well paying job at a pharmaceutical company without having to take on tens of thousands of dollars in student loans. In Lowell, Massachusetts, I'm Carrie Young for Marketplace. This final note on the way out today saw this on CNBC that the soon-to-be new Starbucks

CEO Brian Nicol has done it again, negotiated quite the deal from his new employer. Nicol is going to be able to keep on living in Newport Beach, California and commute three days a week up to Seattle on the company Jet. The last time Nickel changed jobs to move from Taco Bell to Chipotle, Nickel convinced Chipotle to move its corporate headquarters from Denver to Southern California. Not so bad, right? Our digital and on-demand team includes Carrie Barber, Jordan Mangy, Dylan Mienthen and Janet Wynn, Olga Oxman, Ellen Rolfus, Virginia K. Smith,

and Tony Wagner. Francesca Levy is the Executive Director of Digital and On Demand. And I'm Kai Rizdal. We will see you tomorrow, everybody. ["The Daily Show Theme"] This is APM.