Moody's Talks - Inside Economics - Housing and Happy Birthday

Episode Date: May 28, 2021

Jim Parrott at Urban Institute, joins Mark Zandi and the Moody's Analytics team to discuss the state of the U.S. housing market and the supply issues its facing. We also discuss this week's key economic data.  Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Hello, and welcome to Inside Economics. I'm Mark Zandi. I'm the chief economist of Moody's Analytics, and I'm joined by my two colleagues, Ryan Sweet, who's head of real-time economics, whiz with the data, and we'll come back to that in just a second. Chris DeReedy's the Deputy Chief Economist. And we have a, oh, and I should have said something nice about you, Chris, too. Sorry about that. You know a lot about, I don't need to. Okay, then I won't. That's fine. Yeah.

And we're also joined by a special guest, Jim Parrott. Jim and I have been working together. Jim, this is a quiz. What was the first paper we ever co-authored? Do you know? Actually, I think that's an easy. I think I can get that one. I think it's opening the credit box, right?

Wasn't that the first? That's it. Do you happen to remember the year? Yeah, because it's when I left. So it would have been 2013? Yeah, absolutely. Do you remember the month? Oh, geez.

Come on, you're pushing it. Let's see. Let me think about this. So when I left the White House, I went into hiding for, I don't know, six months. So maybe July, August, something like that. That's when we wrote it. We actually published it in September of 2013. opening the credit box because that back then, of course, the issue was coming out of the financial

crisis. Credit was still pretty tight. And you know, I hated that title, even though the credit box thing got to be a thing. And the reason is it evoked Pandora's box to me. I thought, oh, God, we don't want to open that box. That seems like a terrible thing to open. But it stuck. Like opening the credit box became like a thing. Like we didn't talk in terms of really the credit box even that we've taken that for granted sense, but that wasn't really a term so much until that paper. So I was wrong. My Pandora box confusion or concern was misplaced, it turned out. I think we coined that term credit box.

I'm pretty sure. I think so. Yeah. Yeah, I think we did. And we've written just a lot of papers since then. I mean, we actually should, I should do this, go back and just take a look. But can I ask you this? What was your favorite paper that we wrote?

Oh, goodness. You know, it's probably the series of papers we did on GSU Forum just because we got to actually come up with a soup to nuts kind of plan, which was fun. I mean, actually doing the whole whiteboard king for a day, what would you do? Beginning to them was kind of fun, as opposed to complaining about what somebody else is doing, which we often do. Or like, haggling around the edges of some issue, we got to sort of build the car out from the, the beginning to end, which is kind of fun. So probably that series, I totally agree. I think we wrote four papers around the promising road papers. And I'm sorry for the listener. I didn't even introduce you. I just took it for granted that, yeah. So Jim is at the Urban Institute, has his own

firm with Bob Ryan, a former official at the senior official at HFA, the regulator for Fannie Mae and Freddie Mac, and is just very well known and very well respected in Washington. to go in housing and housing finance circles. And before that, you were in the White House. So you mentioned that. And were you on NEC? Were you in the national? Yeah, yeah, yeah.

I was the housing guy at the NEC. NEC. Kind of like what Barat is doing now. Yeah, although Barat covers a broad range of issues. And I did. I was, so I came in after the team was pretty well fleshed out. And so there was like a manufacturing guy and an energy guy and a small business gal and so forth. So I was sort of the housing person. At this point, it's much more thinly staffed. And so you've got a few

people covering lots of issues. Back then, at least when I showed up, it was a little more fully, fully formed than that. Well, of course, housing in that period was like front and center, right? I mean, that was the financial crisis. Yeah, it was a mess. And even going before that, you were at FHA, you were senior advisor to Sean, the governor. Yeah, I was sort of a, uh, yeah, I was sort of a, a roving, I joined to be his advisor on whatever he needed help with. And it just turned out that the first big mess that he needed help with was FHA. They had discovered from their accountant that they were going to go below the statutory minimum capital level. And so Sean said, what is that exactly? You know, the MMI fund. He wasn't quite sure with North's eyes, sure what any of that

meant and so Dave Stevens happened to be joining at the same time as head of FHA he knew almost as little as I did so the two of us together had to hold lots and lots of meetings to figure out what earth was going on and so I think if they've done like a public housing crisis in in sort of June of 2009 I would have become maybe a public housing person instead it happened to the housing finance mess and so here I am did did you know that for that that actuarial report FHA puts it together of year they use our form Our interest rate forecast. Oh, do they really?

Yeah, right. So, and I didn't know that until someone told me, and they've been doing it for a couple years, turns out if the interest rate forecast changes, you know, not by very much. Oh, it's dramatic. It's dramatic. Yeah, well, it affects HECOM dramatically. HECOM, yeah, which in turn affects everything else. So, yeah.

Yeah, HECOM being the reverse mortgage, you know, a program that FHA runs. And prior to that, how did you even do you even? get into to Washington. Yeah, that's a, that's a, I don't even ask you that question. I'll try to make that a brief story that is less meandering than the reality that it will describe. But so my wife was dying to get back to D.C. We live in Chapel Hill and lived in Chapel Hill and lived in Chapel Hill. And I was a sort of civil litigator down here and had been a civil litigator up at Sullivan, Cromwell, and New York. And I knew that whatever I would do in

DC, it couldn't be, you know, a white true law firm gig again. And so I thought, well, what is one do in D.C.? Well, you go do political stuff and policy stuff, but I had no background in either. And luckily, that was 2008. And I loved Obama as a candidate at that point. Well, I'll just, I'll go see if they need help over on the campaign. I've never done any campaign work or anything. And talked my way into the campaign, the North Carolina campaign office, which is not too far away, talked my way into the director of policy position for the state of North Carolina in the general election. And that, you know, obviously went well. And then when the madness of job searches happened once Obama won, housing just seemed like the most interesting thing to sort of do

at the time. I had no background on housing whatsoever. Literally, if you looked at my resume, the word housing wouldn't have been on there anywhere. But it just seemed like that would be the most interesting place to be. And so I thought, well, where does one go to do that? I thought, well, I guess you either go to Treasury or HUD. I thought, oh, goodness, there's bound to be lots of people that want to go to Treasury. They'll put me in a basement if I can get in at all. But HUD, I mean, maybe there's an angle there. So I put all of what, you know, minimal resources and juice I had on getting into HUD. And so I managed to get into HUD. And the chief of staff at HUD, look at my resume, also noticed that word housing wasn't on there. And she said, well, like, what do we

do with you? And I said, honestly, I don't care. As long as I get to answer, and secretary, we'll figure it out. And so suddenly, you know, that seemed to work. And they put me, my first job title, I discovered this cleaning out the attic the other day because you get a little certificate. I was special assistant to the office of administration, which didn't actually exist.

That is, there was no assistant secretary. It was like a, it's like a Kafkaesque sort of, you know, non-agency within a non-building sort of thing. But it's where they put me because that's where funding was something. I'm not sure I quite followed. And so I walked into my job the first day and went and visited Sean. It just so happened as he's trying to get what on earth to do with me that this FHA mess hit his desk about the same time I walked in. And he had no idea what else to do with me. So he said, go meet this guy, Dave Stevens and figure out what to do. Oh my gosh. That's a great

story. And that random, utterly utterly circuitous. Yeah, well, thank goodness that happened that way, because otherwise we wouldn't have written the dozen papers we had and have this great friendship and the, actually, the country would be diminished by it because you've been so important to helping guide things through over the, well, since the financial crisis. I appreciate that. I mean, it does suggest that life is a little less linear and predictable than one might think. When I'm asked to give career advice to kids, it's always a disaster because my story is utterly impossible to replicate. It makes almost no sense to anybody who's trying to decide what to do with one's one's career. Yeah, that's a good point. That's a good point.

Okay, so this podcast by tradition, and we've now got two months of tradition here on inside economics. Hard to believe, right, Chris? Part one is we talk a little bit about the data in our favorite statistics of the week, and we're going to do that in just a second. Part two, and the big topic, and we're going to talk about housing, housing finance, and great to have you here to help with that discussion. And then I'll just to kind of bring it all together in part three very quickly. So, so we always generally, not always, generally we start with Ryan because he's a maven on the data. So Ryan, what statistic is at top of mind for you today? This was a hard week. There were so many data points that came out, but I picked 2.3%.

2.3%. 2.3%. 2.3%. This week is going to be really hard. I mean, there was so much stuff that came out. Yeah. Do you know, Chris, what that would be? 2.3%. 2.3. No. I'll give you a clue. I mean, I want to go back to the, go ahead. What's the clue? One part of the economy that's booming. Well, most parts of the economy are booming. What are you talking about? That's not a clue. Not all. No. Come on. If it was like one part of the economy, telling me that was not booming, I'd say, okay, 2.3%. Ah, geez, I want to go to the personal consumption report. Yeah.

No, not go to. Okay, I give up. I give up, what is it? Non-defense capital goods orders, except. Oh, of course. Of course. I know you guys are gonna give me crap

about the number of the pick, but this isn't an important one. It is. It feeds into business investment, and equipment in the NIPAA accounts. It does. And it has been really, really strong. So after the number came out, our high-frequency GDP model now has real business investment

in equipment up 16% annualized in the second quarter. Oh, so what is GDP in the second quarter now? It's tracking 9.9%. Oh, really? Okay. Yeah. That's very close. I think our forecast is just a little over 10, isn't it?

I believe. I think so. But we're well about the consensus. Are we really for Q2? We're above the consensus. Okay. So that's a good sign. So businesses are investing.

feels like they're really kicking into gear. Good. If you look at the investment details of the Q1 GDP revisions, intellectual property investment got revised up a lot, like six percentage points. That's one of your favorite. You said that leads productivity growth, which I guess makes intuitive sense. So that's a good sign. Yeah. Good.

Okay. That is a good statistic. Yeah, I shouldn't have made fun of you. But that was a pretty bad clue. That was a pretty bad clue. Jeez, Louise. Okay, Chris, you're up with your statistic. All right, 106.2, down 4.4% from March.

Oh, I know what that is. Yeah, I know you would. It's thematic. What is it? Actually, I don't know what it is. Hold on a second. Pending. Yes.

I was going to say that. That's fair. You were not going to say that. That is not fair. I was going to say that. Listener, listen to me. I was going to say that. But they didn't give me a chance.

Yeah, okay. You had an opportunity, but. Yep. You all see, here's a problem with Chris. Chris always goes to the housing data. Well, Chris, can I ask you a question? Yeah. How big a deal is that?

I mean, what does that mean? And first of all, explain what pending sales are. Well, I think a lot of people don't know what that is. So pending sales are sales contracts that have not yet closed, right? So they're, it's a leading indicator of, of home sales. All right. a one, two months ahead of time. Yeah.

So I see, so because of that, it is a, it's an important statistic to follow because it gives you a sense of where things might be headed. Now, things can change. It's not perfect, right? Things could accelerate or slow down, but it's a pretty good leading indicator for housing activity. Yeah. It's the lowest it's been since May of last year, May of 2020.

So it's in at least an indication that things may be, maybe slowing down either due to supply constraints, that's what most people chalk it up to. But we also see some data that's suggesting that home buyers are frustrated and some of them are giving up. They're saying, I can't find anything to buy. I'll just, you know, stay put, remodel, wait things out, or as a renter, I, you know, I'm going to enjoy my scummer. I'm not going to, but I can't even try to look for a home. And what is 106 measure exactly? Like, what is the number? It's just an index value. Oh, that index. Got it. No one in the world talks about that index. itself. They're always looking at the change.

So he threw me off initially with 106. Well, that was telling you. I knew that. I did know that. I knew that. I was going to say that's just not fair. So existing. You're young. You're young. You're going to draw. You've got to give the old guy a little chance to. All right. I'll give you first tips now.

But pending home sales lead existing by one to two months. That sounded patronizing. That sounded patronizing. I'm just saying. It's just payback. For the last 16 years. You're right. Stick. Yeah, you're doing okay with sticking with me. You're doing fine. No, yeah. It's fun. Okay. All right. Okay. Okay. I got a great place to correct them if you feel otherwise.

Yes. All right. I got one for you. This, this is a, this is a good one. And I think it's a fair one. 34.6. 34.6. I think, I think, Ryan, you should get this one. And this came out this week. I think it did. I'm pretty sure it did. Yeah, I'm pretty sure. The weeks all blend in together. You know, this whole zooming thing is messing me up. I don't know if it's this week.

I think it's this week. And it is related to the labor market. So it related to the job market. But it's not a labor market statistic per se. It's based on a survey. I know what you have. Okay, what is it? No, I'll let Chris gas or Jim, because I don't want to get in trouble again.

We sing Jim, this is what we do for fun. We sit around. Cuss this number. Ryan's dog behind him is already falling asleep. So I hate his guests. You're listening to do it. Oh, boy. That was rude.

All right, go for it, Ryan. First, wasn't there a game show name that tune? Yeah, absolutely. It's kind of like that. It's the boring version of that. So it's the conference board. Is it the percent of consumers saying jobs are plentiful? Yep.

Or less percent saying that they're hard to get. Yep. So it's the labor market differential. The so-called labor market differential. This is the interesting thing about it. 34.6 is about as high as it was in late 2019 before the pandemic when the labor market was rip-roar and tight, when the unemployment rate was three and a half percent. So that would, you know, if that, and that measure is a pretty good proxy for unemployment rate, right, right?

I mean, it does a pretty good job. And you use that in trying to forecast, like for next Friday, we're going to get the jobs number and the unemployment rate data. And you use this statistic to help you estimate what that unemployment rate is going to be. Yeah, it's one of the inputs, yeah. One of the inputs. So that, that's a, that's a very strong number, suggests labor market's coming back very, very fast. So the economy is doing well. I remember last week, before we dive into housing,

we were going to do that in just a second. We did talk about a few indicators we should be watching on a regular basis. And Chris, you mentioned unemployment insurance. That was also good news, right? Yes. Yep. Yep. What was it?

404? 404? Yes, I reckon. And that's coming in pretty quickly now. It is. It is. So, yeah, all the labor market signs are, are very positive at this point.

And again, just for context, a really good, the economy's great, everything's perfect, would be 250, you know, weekly unemployment claims. So we're coming in pretty fast here, and that's very good. The other was copper prices. That's a pretty good proxy for broader strength in the global economy and inflationary pressures.

I just looked, that was $4.66 a pound. And remember, the threshold is if you're over four bucks, that means things are really booming, and there's a lot of inflationary pressure out there in commodity markets and industrial markets. So that's still very, very strong. Very, very close to record highs. And Ryan, you had one, too. I can't remember. Oh, sorry, sorry, Chris. I was just going to ask, do you shift that at other? Do you consider at all the shift in demand for electric vehicles and the kind of the greener economy and how that might affect copper prices, at least in a medium term here?

Is that threshold? Should we change that? Yeah, maybe if, no, no, I don't, I think it's a big deal. I mean, certainly not for what we're using it here for, you know, trying to gauge where we are in kind of the business cycle. You know, maybe it matters if you look out two, three, four, five years. Maybe, you know, it'll start drifting higher kind of the trend level, the long run level. But I don't know that's a big deal at this point in time.

Still not yet. Ryan, you had one too, right? I can't remember what yours was. 10-year treasury yield. Oh, and that would have happened there? It really hasn't budged that much. I mean, it's crept lower recently, which is a little bit surprising given the really strong inflation numbers that we've gotten. So it's holding in there, 1.59, 1.6%. Yeah. Hey, did you happen to notice in the president's budget that came out today that they are assuming a 2.8% 10-year treasury yield in the long run? Did you talk to that? that was not my forecast that's their forecast what do you think of that is that prudent prudently 2.8% in the long run yeah they're probably a little low but probably a little low you

probably think they're really low yeah no i i think three and a half percent is the long run that quality room right so i don't know 70 basis points low but you know it's it's in the ballpark, I think, you know, given all the uncertainty here. Okay, all right. Well, that was very good. Although, I'm not sure Ryan, Ryan's playing, you know, he's just not playing fair. How is that not fair? It's one of the, I know's not too much. He knows the durable goods numbers. Do you guys have money riding on this or something? Is there like, we bet. We bet. There's some kind of tension here that I'm picking up on. No, we have a bet. And actually, I lose every bet I have with these guys. So it's like, you know, very disappointing. Um,

Okay, so let's talk about housing. And, you know, top of mind is these surging house prices that we're seeing across the country. Did I see? I think FHFA came out with its house price for, I think for the month of April, I believe. And it was 13, 14, 15 percent, something like that year or year. I think it might be the strongest, could it be the strongest on record? I'm not quite sure. But, you know, the statistics are. the housing price statistics here, no pun intended, literally through the roof. And the question I'm now getting from clients in media and just everyone is, are we in a bubble? Is this a bubble in the housing market? And I don't know, Jim, do you have any perspective on that? You know, I'll be curious to what you guys say because I get this question too, and I struggle with it probably in part because I struggle with the whole concept of a bubble. But to the degree, one thinks of a bubble as a spike in demand or caused by a spike in demand

that's driven, at least in part by, less by judgment about sort of underlying economic conditions or realities, and at least in part by the perception of consumers about what other consumers think value looks like. So you're sort of betting on this projection you've got of how others are going to evaluate the same product. And so when it becomes unmoored from underlying sort of economic reality and becomes this social phenomenon in a way that obviously lends itself to speculation and price spikes because confidence has this almost geometric impact where everybody's confidence reinforces everybody else's confidence and off you go. And of course, it makes the heights you hit pretty precarious because a little bit of doubt then has the same geometric impact going down that it had going up. But here, I mean, there's some obvious economic realities that are driving all this.

Obviously, you've got supply constraints that are playing a significant role, which you know I've written a fair amount about. And then, you know, you've got this sort of mass migration in reaction to the virus, you know, of folks looking to buy homes elsewhere. And so it at least started from a place that didn't feel very much like, at least how I think of a bubble. And I guess the question I now struggle with, so I would have said definitively a few months ago,

no, it's not a bubble. It's driven by economic reality that's this rational nature. But you can't help, I can't help but wonder whether or not what began in a very unbubble-like way has begun to take on, at least in some pockets, a bubble-like feature. where people see that home prices are going up, even if they're going up for rational economic reasons, and they think differently about the product that is housing

and begin to speculate a little and think about how they value it in ways that feel a little more bubble-like. So I was not concerned a few months ago. I'm a little more concerned now because of that, because I'm not sure if we've transitioned from something that felt unbubble-like to something that might be more bubble-like. That's a very quasi-economist. quasi-economists like one hand, on the other hand.

No, no. It's kind of how I feel at the moment. I think you nailed the definition of a bubble, right? It's kind of when markets get infected by speculation. And speculation is people buying and selling simply based on the idea that they can sell what they bought a couple months ago or several months ago at a higher price with nothing other than that, you know, simply that. So, I mean, I think that's what you said.

I mean, I think that's a very good description of, you know, of a bubble. Let me ask you, someone was saying this to me yesterday, Jim, that they were concerned that, that, because Fannie and Freddie are not, this is my wife, listener, this is my wife. This is how we communicate when I'm talking to the world. What time is your podcast? it is now. Do you, do I want brownies today? It's my birthday.

It's my birthday today. It's your birthday today? Oh, you're kidding. Whoa. He leaves out all the good stuff until the end of the pot. I mean, I think you're making it matter. I don't think there is a sticky note

that your wife handed you. I think you're just telling the world that it's your birthday. That is such a sad way to announce it's your birthday. Yes? Yes or no? Yes or no? I don't know we're handwriting. I'm not sure that I buy that.

All right. I'm checking why not yes. There's no downside to yes. No, that's fair. I get some brownies. As long as they're straight up brownies. I don't know. This podcast could go sideways pretty quickly.

That's crazy. Anyway, what was I saying? Oh, so this was what someone was saying to me yesterday that I guess Fannie and Freddie are waiving appraisals. I don't know, I think maybe certainly on refi. I'm not sure they're doing it on purchase. Streamline refi, right? Streamline refi. I don't think they thought that this might be contributing to kind of the,

what's going on in the market. Because, you know, the, there's no tying it back to any kind of fundamental value, that they're making loans based simply, well, without an appraisal. They feel fine with that with doing that. Do you sense that as an issue? No, in fact, I had heard somewhat the opposite in the sense that we, Fannie and Freddie moved to a much higher tolerance for automated appraisals during the virus because the logistical challenges of actually going on getting a human being and having them walk around your

house when nobody knows who's got the plague, as it were. So they, to their credit, took steps to make it easier to get an automated appraisals so so as not to sort of impede closings and the like. And I think many of us had assumed that that and other moves towards more automated processes, which will lend themselves very more sort of digitized, automated sort of housing finance infrastructure, which seems like a good thing, at least in the abstract. I at least had assumed that the virus was going to expedite this transition we were going to see anyway and that it was going to force FHA to sort of move into the 20th century, if not the

21st century and all that. And interestingly, what I've heard from clients, and it's just anecdotal, I haven't dug into it yet. FHFA is beginning to roll some of that shift back. And appraisals was an example where they are putting back into place rules that are going to force you to go and get a manual appraisal where two months ago you could have made due with an automated appraisal. That, of course, slows, you know, turnaround times up. It increases cost. And so the lenders I've talked to have been complaining about that. So the sense I've gotten, I don't know how illustrative is the bigger problem,

but cuts in the other direction. Yeah, I hadn't heard that until someone had mentioned that yesterday. And that makes more sense to me. Hey, Chris, I know you've been thinking about this, too, in looking at some of the data. It sounds like I think you're kind of lining in the same place that the gym is, right, on this issue about a bubble in the housing market? Yeah, that's right. Yeah, that's right.

So in terms of the need for some speculative fervor to define it, right? I also leverage isn't a requirement, but certainly would fuel it as well. And we don't see the crazy type of lending going on. Mortgage standards are still relatively tight. So from that perspective, it doesn't sound to me like a bubble. Could we have a correction of some sort? Could things slow down? Certainly I could see that happening. But I don't see a 2009 style crash anytime soon. Yeah. And of course, we've gotten some data on flips, right? So we get actual transactions. And a flip is defined, we define it as a sale that occurs within one year of the previous sale.

Right. So it's, you know, that, and it's arm's length transactions. transaction. And I think we found that in the most recent few months, it's been 7, 8% of sales. So 7.8% of sales are flips by that definition. And that compares to in the bubble something that's at least three times that. I think it was like 20, 25%, something like that. That's right. And actually 7, 8% is low by historical standards. Yeah. Yeah. So that's right. kind of gives you a sense that based on kind of Jim's definition of speculation that, you know, that we're not seeing that yet in the market. So it feels, market feels highly valued, overvalued, stretched, but hard to conclude that it's a bubble, at least at this point.

You know, I can give you an anecdote, a local anecdote that is probably only worth the value of an anecdote. But we had, where I live in Chapel Hill, we had a lot of sales. over the last quarter as home prices, the appreciation of home prices seem to lure a lot of folks into the market who sort of woke up to realize that their homes were worth more than they realized, and so their tolerance to move had shifted. And so it felt like we had a sudden influx of supply in our community that led to a fair amount of interesting sort of churn.

A lot of people were moving down from New York and elsewhere because of the virus. There are other dynamics, too. But the supply has largely disappeared in town. And the number of homes in various parts of the market, you know, a fraction of what they were a few months ago. And so the sales have kind of, I wanted to dry it up. So home prices remain quite high. But if you're metric, I would think in a bubble, it's not just prices, it's actual transactions that are, you know, that are a factor in all this.

And so in Chapel Hill, if you were to judge, if you were to ask the bubble question in terms of home prices, then this month looks just like it did three months ago or four months ago, but would be very misleading because we're not have much sales, if any. And so it's hard to imagine defining what we've got now here is a bubble when no one's actually buying or selling. Transacting. Yeah. That makes a lot of sense. Hey, Ryan, do you want to weigh in on this question of a bubble? Do you have a different perspective or any thoughts? No, I agree with everything.

I mean, the other thing is, it's hard to pin a bubble. Also, I think bubbles can get a lot bigger before they pop, and it's, you know, hard to predict that. But I also think it's, it's, this demand is going to remain strong for the next few years, which means house prices are likely going to be rising year in and year out because of the millennials. You get what a huge wave of millennials are coming into their prime, first time home buying age. Yeah. Okay. Hey, another fundamental reason for the view that, you know, the market may, well, may be overvalued and, you know, may go sideways here a little bit when interest rates start to rise. But won't crash. It's not a bubble bursting is the supply side of, and Jim, you were alluding to this and talking about it. Supply side of the market is very constrained, both in terms of inventory for sale, but also in terms of new housing supply.

And you and I recently wrote a paper about this. And, you know, it would be good to get your perspective on how big a deal you think this issue, this issue is around affordable housing supply. Yeah, it's a real mess. I don't envy the policymaker community at all having to deal with it because it's creating a pretty brutal affordability problem right in the part of the market where you don't want it, which is entry-level homes and areas. with jobs, right? I mean, it's just a, the worst possible sort of headwind you could come up with because it affects, you know, labor mobility. It affects the ability of folks who get into home ownership to begin with and all that. And then it's being driven by a bunch of factors that largely fall outside of a normal housing policy toolkit. You know, it's being driven

by an immigration policy and education policy that's affecting labor costs. It's being driven by trade policy that's affecting the cost of materials. It's being driven by, you know, municipality level decision making that's affecting the cost of land because of zoning and the like. And so if you're the housing, if you had my job and you're sitting at the NEC and you're trying to come up with, you know, what tools in my toolkit am I going to deploy to deal with this problem? It's not obvious which ones you latch onto. And until they deal with it, until you at least shrink the size of the problem, it kind of freezes them in place on a bunch of other issues. So, for instance, they're rightfully concerned about, you know, the racial homeownership gap. But it's not quite clear

what you do with big demand-side solutions that aren't going to get folded into home prices. You know, if you've got limited stock and you give a broad, a broad segment population more money to spend. You know, there's a concern that all you're going to do is drive up pricing and not really, you know, help expand homeownership in any sort of obvious way. And so it's both hard to solve or it's both important and hard to solve and it's got ripple effects that really affect sort of the whole housing policy landscape in a way that is pretty unnerving.

So I think it's a big deal and I think it's not going away anytime soon, unfortunately. Yeah. And Chris, you've done a lot of work in this area, too. Do you have a sense of the size of the problem? I mean, the scale of the problem? Can you give us any context in terms of that? It's a little tricky, right? It depends on how you want to measure it, right? If you look at, you know, if you look at rental or the strain on renters today, renters are more strained, but they're actually less strained, right? Fewer are severely burdened relative to 2011. So, you know, I think we have to be a little cautious here not to over-emphasize the problem. Clearly, there is an affordable housing issue, but I'm not sure, to your point, Jim, I don't think we're actually focusing on the right tools to address it. If we focus on the inputs, wages, lumber, all of these things, these will adjust,

these markets will adjust. From my mind, it's the zoning. That's the real issue. And that is, it's gotten some attention now in the latest Biden plan, but it's still very, very small relative to all the other programs that are trying to emphasize, you know, really putting more money at, throwing more money at the problem. But until we resolve the zoning issue, we're not going to create or build out a lot more supply here.

Well, what would you have them do, Chris? I mean, the federal government has limited tools to address what's going on at a local level, particularly around zoning. So what would you have them do? They have some tools. And I think there was a good start in the... The latest proposal I saw, there's $5 billion allocated to provide grants to areas that do address their exclusionary zoning issue. So more of a carrot approach, right?

So address the zoning and government will give additional funds. I think that's a good approach. But you're right. It is tricky, given the local politics. But I think that's probably the best we can do. but I would certainly put much more emphasis on that part of the plan than the other parts. I mean, increasing the trust fund. That's good.

That's helpful, but it's not going to really increase the supply as much as... You mean the housing trust fund? Correct, correct. The housing trust fund, which is, I think the biggest part of the Biden, the most costly part of what President Biden has proposed, is to expand the housing trust fund, which goes to building out affordable rental property, right? Yeah, low-to-moder income. Yeah, right. Subsidies, right.

The zoning stuff, though, is, it's interesting because I think we discovered in the last election cycle how controversial it can be. I mean, I agree wholeheartedly that it's at the center of the thicket of challenges and all this. And until you deal with it aggressively, it's hard to see how you solve much of the problem. I mean, other tools will help for sure that zoning strikes me as maybe the biggest impediment of all. But it seems like $5 billion, given the scale of the problem, is a pretty small carrot to wave around, unless you're going to give to one community. So either they need a much

larger carrot or stick. And the stick problem is, if you think back to the most recent election, the only way housing made it in to the general election was when Trump brought up scary high rises in white suburban America. I mean, he dropped the race car just as clearly as one could drop it. And it was focused on affirmatively furthering fair housing. So it was a slight different variation of all this.

But it is very easy to see how you could sweep in any aggressive move to use a stick here to that populist sort of narrative of, you know, scary people at high rises coming in threatening soccer moms,

which is essentially what Trump was suggesting. So I agree that in an ideal world, that's probably where you've got to go, and you probably have to have a stick. It's probably not just a carrot. It's probably tying transportation funds to, you know, a community is being open to inclusionary zoning. Mark and I've written by this before, or it's time or HUD funding that these communities depend on to some, you know, steps on inclusionary zoning. So it's probably, there's a sort of passive-aggressive, you know, carrots maybe. So you're getting all this money anyway,

but we're not going to give it to you anymore unless you play nice. But the moment they play that card, they may be in a better be ready to play some pretty rough politics over this because of, I think, the whistle that Trump blew in the last election. That's not to say they shouldn't do it.

But I think that's probably one of the reasons why they went a little small on this in their proposal. Well, I guess the $5 billion, it's almost like a pilot, right? Yeah. Let's see if it works. You know, let's see what kind of behavioral response we get from a local government, you know, how much will they engage with us on this? Yeah, sure enough.

And you do have some experiments going on around the country, right, in Portland, Minnesota, right? You have some areas that are upzoning. They're trying. So we'll get some data off of that. Yeah. Yeah, I mean, the way I view the Biden housing proposal, you know, as everyone, well, as most people know now, because we've been talking about it on this podcast for quite a bit. And I know you're all careful listeners of inside economics. In the American Jobs Plan, that's the infrastructure proposal that President Biden put forward back now, probably six, eight weeks ago.

Housing is part of that. If you add it all up, it's almost $300 billion in additional support. Chris, you mentioned the housing trust fund. That's the biggest piece of that. It's $300 billion over 10 years. And sort of my sense of it is that it's kind of a second best solution. So, you know, the political landmines and just the practicality of trying to get local governments to change their zoning, that's a process at best.

That's going to take a while to actually get results there. But the second best solution is let me provide funding to help build. You know, let's go build. You know, LI-Tech credits for, you know, low-income rental, housing trust fund, you know, grants, direct grants, the more money for, you know, public, the capital fund for public housing, the home program. Jim, is that a fair way? Do you think of thinking about it? Yeah. I mean, I, we tend to oversimplify what we mean when we say there's a housing supply problem. There are like 15 different versions of a housing supply. There's Cleveland's got one version. The choice got a slightly different one.

Seattle's got a different chapter, you know, so, so the fact. that it's feels like a bit of a hodgepodge, I'm not sure as a criticism, at least to me, because it feels like what they've done is they have put together a mix of block grants for some communities that can spend the money to solve their idiosyncratic challenges in a way that's appropriate. Investments that will like to CDFIs and the like that will hopefully attract private capital to help solve the problem a bit. So in tax credits that you know, will also bring some more private capital to bear. So it feels like they've come up with a pretty wide range of tools,

which shouldn't surprise, shouldn't have surprised us ex ante, because there are pretty wide range of impediments to all this. So if I've had a criticism, it would be twofold. One, I wish they were a little more aggressive on the zoning piece, but that's not an end all be all. They're more problems in zoning and they've hit the other problems pretty hard. And then my second criticism, which isn't necessarily criticism of the White House, it's more of the political policy culture

generally is it just hasn't gotten enough attention. I mean, this strikes me as a pretty significant problem that flows through a lot of other economic sort of policies that we are paying more attention to, whether it's broadband or bridges and roads or whatever. But somehow housing, it just hasn't broken into a lot of. a top tier kind of category for people to lock onto. And that, that I'm more critical of that and I am of the specifics of what they've actually proposed.

So if they, in other words, if we saw everything they proposed, make it through, I think it would, you know, wouldn't solve the problem that's entirety because of zoning and some other things and because it'll take a long time to solve anyway. But it'll go about as far as they could go without fixing zoning. So my concern is more like, are we going to. see this whole package get through anyway, or are they going to settle for focusing on other areas or are going to be more attention? So I'm a little more nervous about that than I handle up with them actually proposed. Yeah, how would you handicap things at this point? Do you think a

package will get through that will include some of the housing-related? You know, so I think yes. I think eventually once the dust settles and we've seen, you know, whatever regular order stuff get past, get past, and the reconciliation stuff get through, I think you'll see. see at least in the reconciliation package, housing is a part of that. What the size is, I don't know, it probably depends on what mansion is willing to spend by way of tax increases. I do worry, though, that if they've got to lower their overall expenditure in this, that housing is one of the first to get downsized. So I'm a little nervous that it winds up being half of what they proposed. It seems, though, that it's very unlikely to make it into any regular order package, you know,

out of a bipartisan agreement. It seems like the Republicans have, for reasons I don't quite follow, defined infrastructure in a way it just has no room for housing. And so that's just not confined its way into there to bipartisan package. But I'm pretty comfortable that assuming there's a reconciliation package to follow, it'll make it swing into that. I'm just a little worried that it's not as big as what they've put on the table. It's interesting.

If you do the arithmetic and they've got the total $300 billion package through, that would create, you know, by my calculation, a couple million homes on top of all the other homes that will be built without the support. And that's almost exactly equal to what my estimate would be of the shortage. So if I look at the shortfall today, and the way I do that is I just look at the vacancy rate across the housing stock date compared to its long run average, the difference is the shortage. And if you do the arithmetic, that comes up to 1.5, 1.6 million units. And then if you look at current supply, new supply, and compare that to underlying demand for new housing, household formation, obsolescence, second vacation homes.

We're shy by about 100,000 a year. So if you kind of do the arithmetic, it comes up to about a couple million. So that feels like what we need. You know, we need something like that to address this in a reasonable amount of time in the next, you know, three, four, five years, something like that. So I did want to ask. about the presidents, you remember back in the campaign, when president then candidate Biden talked about housing, he often talked about it in the context of down payment assistance. And, you know, it was a way for him to talk about the racial equity gap, wealth gap. And big part of that is

the fact that communities of color have homeownership rates that are meaningfully below white households. And that goes a long way to explaining the difference in wealth between households of color and white households. So you've got to get people into homes so they can build wealth. And his kind of go-to solution, and every time he had a town hall or an interview, this came up, it was down payment assistance. I think it was a $15,000 tax credit that was refundable and advanceable, which was the really interesting thing about it, meaning when you closed on the home,

the money was sitting there so that you could actually close on the home. Magically, magic. It was a magic one solution. Yeah. So I know you saw a lot about that. So I'm curious, what do you think of that down payment assistance program in the context of all the supply issues? Yeah.

You know, how would you address that? Yeah. So, I mean, I go back to, I don't envy the policymaker set right now because this too is a typical challenge. So my sense is that if they were to deploy a vastly broad-based down-payment assistance program where all first-time home buyers, which is the way it was framed, get $15,000 towards a down payment, it's really hard for me to see how that doesn't get folded into or some large part of doesn't go fold into their own prices.

So my guess is the reason why you haven't seen it folded into their proposals as far is they're struggling a bit with how to make good on that campaign promise in a way that is actually effective. And I think the solution is to target the down payment assistance in a way that goes after the part of the problem that he has talked about going after, which is a racial wealth gap. And to the way you described it was exactly right. They, I think, correctly view the racial home ownership gap is playing a pretty significant hole in the racial wealth gap. And so the flip side of that is the closing the racial homeownership gap can play a significant role in closing the racial wealth gap. So my sense is if they can find a way to target the down payment

assistance to try to do that as opposed to helping everybody that's going to buy the first home, they can target in a way that makes it small enough not to further distort. their market by folding all this in the home prices yet meaningfully help solve the problem to try to help so for instance urban did a blog it wasn't me but some others who urban did a blog in which they show that if you were to limit down payment assistance not just by airy mean income which is how people traditionally think about it but by airy mean income and those whose parents didn't own a home or don't currently own a home their variations on this first generation idea then roughly two-thirds of the recipients of the subsidy are families of color.

Whereas if you remove that first-generation filter, how it's defined, the number drops to like 40%. The reason for that is a lot of folks that are below 120 area median income, which is often the threshold people talk about here, it gets overwhelmed by folks who are LMI, low-monent income, only because they're 25 years old, who aren't going to be low-marned income in four or five years once they're out of college of ways. And that's arguably not who we should be targeting an enormous subsidy to. So if you filter that out and you target it to people whose parents didn't own a home, and as a result, they don't have mom and dad to lean on for down payment. And you go and provide down payment assistance for that group. The other ones arguably need it. Then the equities of the

targeting make a lot more sense. And the numbers get a lot smaller. That is, you're helping a small enough number of people that the overall subsidy doesn't get lost in home prices necessarily. So I'm not sure whether that's the right set of filters exactly, but it feels like it's that kind of solution that they're going to need to sort of land on in order to do good and not see half of the good they're trying to do washed away in home prices. And I know you and I've been working on a kind of a different approach to helping bridge that racial equity gap. And I want to, I'm going to, I'd like you to describe that idea.

And then we're going to ask Chris and Ryan whether they like the idea. So let's, so I don't think they know, they, I haven't talked about this with them. So go ahead and describe. Okay. Well, for the record, for listeners who can't see you, Mark had a very serious look on his face when he asked them to opine on this. So I, I'm not sure. I'll discount the, uh, the honest, honesty. No, no, no, no, no.

I want to hear the, I want to hear the unvart. You look meaning. Again, see again, I'm just letting you, I want you full transparency. I don't think that. We're a thousand flowers, intellectual flowers bloom. Mean again, mean again. Don't buy it. Listeners, I'm glad.

Okay, so the idea of the program is a high level pretty simple, which is come up with a product, a loan product for a certain targeted set of borrowers. And we too were thinking about this sort of first generation, lower market income group of folks as the ideal target. For those folks, offer a product where they can take out an FHA loan that has monthly payments that are roughly equal to what a loan through FHA of the same size would have been in a 30-year product, yet this product will be a 20-year product. So in essence, you're a lock again, whatever they would have qualified for,

FHA, so hopefully it's something they can afford at least vis-a-vis that FHA is sort of underwriting system. But putting them into a 20-year loan instead, and the logic there is, A, it's ideally it's affordable because you've solved for what they could have qualified for in a 30-year, but they're going to build wealth at roughly twice the clip that they would have in a third year. And if you look at the numbers, I mean, it's, it's, it's, it's, it's, pretty remarkable because of the amortization schedule. You're roughly building twice the equity at the three-year mark, the five-year mark, the 10-year mark,

sort of all the way through that you would in a 30-year. The numbers are just pretty remarkable that way. And so if you put folks into that product, two things happen. One, their risk profile diminishes pretty quickly. They wind up with enough equity in the home that the severity of loss to FHA drops pretty dramatically, pretty quickly. And secondly, they obviously build wealth for a much greater clip than they would have in a 30 year. And so that's sort of the idea.

And we can get into the mechanics of how you actually do it, which is sort of behind the scenes and maybe not relevant. And the political, the politics of this, which are mildly interesting, and then I'll stop and let you guys opine, is it's got a bit more bipartisan appeal than normal down payment assistance does, the whole 20-year fast amortizing loan has been a conservative sort of idea for a long time anyway. And if you target it in a way that has a particular strength among families of color, there's a way to dock that thinking, the logic that conservatives have brought to this to what's been a recently pretty strongly, you know, progressive, strongly felt progressive policy, which is trying to marshal homeownership as a lever to close the racial wealth gap. So the hope is we can get some bipartisan appeal here

to push something that, you know, at the end of the day, we estimated it's three or four million folks over, over, is it five years, Mark? I forget the horizon. I think we came up with two million over the five years. We had a budget constraint. So go figure, they gave us a budget and said, you know, what can you do with this budget? And we said with $25 billion over the next four or five years, we expect two million homeowners to benefit from this. Anyway, there's a long-winded explanation. But you sort of, do you get the concept? I mean, it's a pretty straightforward concept.

Yeah, what do you guys think? What do you, honest, honest opinion? Just, you know, go ahead. What do you think? Chris, you first. Me first. All right. Chris is always cautious.

No, no, I'll jump right in. And now he's going to come with like 10 questions. No, no, no question. I've heard a lot of these pitches over the years, right? I've been in mortgage industry a long time. No, that's my preamble. So, yeah, it sounds great. It sounds a lot like a graduate equity mortgage or effectively you're subsidizing the rate, right?

So all good, all nice. But again, I've seen a lot of these programs, a lot of pilots, and they all have a certain success, but they never reach the critical mass. So I think that's fine. I think it's good to try, but I don't see this as the real issue. I think it's more about financial literacy, education, providing opportunities. Those are the real issues that I see here. And to be honest, I think you can approximate what you're doing already with a 30-year mortgage. I don't know if we need another product type out there to accomplish this.

So that's my view. I've seen, again, a lot of these. It's a good idea, but, again, I don't see it as the root cause of the issue here. In terms of the take, it sounds like you're saying that it may not get the take-up we expect it to get. Is that kind of when you say critical mass? Is that what you mean? Yeah, there's also the, I don't know, I guess you're going to hold these on portfolio. There's the liquidity perspective of this.

I guess this is you're saying this is a government program or just kind of hold it on the No, we securitize. We securitize. Another Ginny security. Yeah. It's subsidized. It's definitely subsidized, yeah. It's not going to be terribly liquid though, right?

It's, uh, I don't know how the investor would look like, look at it. Exactly. Yeah, those are all reasonable concerns. Yeah. You've got to, I mean, this is not to get too far to the hood, but the idea would be Treasury, frankly, buys NBS backed by these loans at a premium sufficient to get lenders to make them. They in turn sell them in the secondary market at a discount large enough to attract investors. And that's how you sort of generate the liquidity. And the $25 billion is just the sum of those two of those two subsidies.

And the thinking is, we talked to some secondary market folks, and their assumption is that prepay speeds on these things will be like zero. No one's going to prepay out of these things because of the discount rate. And so there will be if you get the discount right, there will be a decent market for them because they'll be a relatively secure investment over a period of time. But it just depends on how much it's subsidized both ends. Yeah, my sense is that home buyers are very, very sensitive to the month. payment. So if you give them a 20-year mortgage with a monthly payment that's anywhere in the ballpark of a 30-year, why wouldn't I do that, right? I mean, for the same monthly payment, I can build equity twice as fast, you know, over the next decade, you know, something like that.

So I don't, I know that I'm not sure take-up would be an issue. It just depends on how you price it. I mean, if you get close enough to the 30-year, I don't know why you wouldn't get take-up. Or do you have a different? Yeah, but you're not. you're going to. No, no, I think that's true, but you're going to limit the population significantly that is, that qualifies for this. That population has to know about it. They have to be interested. They have to be, right. There's a lot of skepticism out there about all these new products. So. Well, you heard Jim sell it. No, there's not going to be. There you go. There you go. No, no problem. He should, he's going to be there. I wish you all the best. I'm just skeptical. Yeah, yeah, yeah. No, no, it's fair. That's all, that's all very reasonable. Ryan, do you have a perspective on that? Well, until Chris chimed in, I really liked it. I mean, you guys are the housing experts.

So I'm going to leave it to you. But, you know, Chris is, you know, the party pool. No, no. Come on. And then with regards to the secondary market, couldn't the Fed player role in this? I mean, they're already buying MBS under the, every MBS under the sun. They could. And then that's how you kind of link their new initiative of all-inclusive type recovery.

I mean, yes, they're going to aim for low unemployment rates on. That's an interesting. interesting thought. And then you get them to be, they purchased this. So you say to Chair Powell, hey, Chair Powell, this is a way to use monetary policy to help become a more inclusive economy. That's interesting. Correct. Or just the wealth inequality. And Powell's chimed in on this, you know, all the time. I mean, to be clear, it's a, I mean, it would be overly defensive about this. It's not intended to solve, like if you were to come up with a list of the housing problems of the day, which we spent the first chunk of the podcast talking about, like this isn't, this isn't a supply side thing. This doesn't expand homeowners.

Like it's not intended to do any of that. It's intended to simply accelerate the sort of utility of homeownership as a wealth building tool for those that, you know, that need it most. So it's not meant to be a grand slam. It's sort of like a double when you need it kind of thing. Well, it also fits in the context of the current environment, right? Because if you, again, if you do something that juices up demand, it's counterproductive. That's not what this does. It's not about creating new demand.

It's about for those people who are going to become homeowners, helping them build that wealth more quickly, you know, over time. Okay, well, very good. You know, we've already, I can't believe it. I think an hour has passed. So I think we probably should call it quits. I did want to say that, you know, I've been a professional economist for 30 plus years. This is my birthday, by the way. Did I tell you that?

That was my birthday. And thank you. Thank you. And I've spent a lot of time and energy on the housing and housing finance market. Of course, I'll give you my three cents about almost anything. But housing and housing finance has always been front and center for me. And that goes to the fact that housing is so central to a well-functioning economy. It feels like every single business cycle, housing finance has something to do with what's going on in that business cycle.

And that's clearly that was the case 10 years ago. It was, you know, go back to the 1990s, the SNL crisis. even today we've got, you know, a different set of problems in the housing, housing finance markets, but problems that are, you know, difficult and, you know, really make a difference in people's lives. So it's been a very important for me to, a place for me to focus my attention. And I think that we have some very large problems here with regard to homeownership and for getting people into homeownership with the severe affordable supply issues we have. And we really do need to focus policy on addressing these questions.

And hopefully in the debate and discussion that's going on now in Washington, housing does take on a more central role. Because without addressing the housing issues, the affordable little issues, the homeownership issues, a lot of these other problems that policymakers are trying to address will be much more difficult to solve. So it's a very critical issue for Washington to focus on. And hopefully we see more of that over the next few weeks, few months. So with that, we're going to call it a podcast. I want to thank you for listening in. I did want to say if you have any questions for us.

I know I've said this a couple weeks now. We're collecting questions. But if you have any questions for us or anything, any topics you want us to address, please let us know we have what's the URL that we have I can't remember is it inside economics what is it does anyone remember what the email the email the email yeah the email email address what is the email address go ahead Chris oh go ahead inside economics at moody's dot com inside economics at moody's dot com okay that that's our email address please uh please fire away and we're going to

answer those questions in the not too distant future. So with that, thank you and we'll be back next week. Happy birthday. Happy birthday, Mark. Happy birthday. Thanks, guys.