Plain English with Derek Thompson - How the U.S. Housing Market Became Such a Dumpster Fire

Episode Date: November 1, 2022

Skyrocketing mortgage rates. Rent prices falling by their fastest pace in years (from their highest inflation rate in decades). Buyers and sellers are freaked out. What the hell is going on with American real estate?Today is a very special crossover event, featuring one of my favorite finance podcasts: 'Odd Lots' hosted by Tracy Alloway and Joe Weisenthal. Most of what I think I know about the housing market is a river that flows from the headwater that is 'Odd Lots' and the online commentary of Tracy and Joe. So, this is a thrill for me. I hope it’s a thrill for you. Host: Derek Thompson Guests: Tracy Alloway and Joe Weisenthal Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

An Instagram post gets an unexpected boost. A TikTok catches in the algorithm. Sometimes that's all it takes to launch someone into internet fame. But then what? This blew up is a new podcast documentary that reveals how social media stardom is made. It's a different kind of fame. That's not always as glamorous as it looks. From Spotify and the Ringer Podcast Network, I'm Alyssa Boresnak.

You can listen to This Blue Up on Spotify or wherever you get your podcasts. Today's episode is about the U.S. housing market. You know, I thought about doing a big windup here, but the truth is this is pretty straightforward. The housing market is kind of broken right now. And it's not just me saying that. And it's not just you thinking that and your friends thinking that when they think about buying a house or selling a house. It's economists. It's financial analysts.

They look at the supply side. They look at the demand side. They're saying something looks broken here. You've got skyrocketing mortgage rates. Rent prices are falling by their fastest pace in years from their highest inflation rate in decades. Builders are shaking in their boots, and the Fed doesn't seem anywhere close to being done with raising rates. That means everything that is weird right now is likely going to keep getting weirder. Today is a very special crossover event.

One of my favorite finance podcasts, Oddlots, hosted by Tracy Alloway and Joe Weisenthal, is here on plain English. Tracy and Joe are today's guests. This is great news for you. Most of what I think I know about the housing market is basically a river that flows from the headwater that is the Odd Lots podcast and the online commentary of Tracy and Joe.

So it's a thrill for me, and I think you will learn a lot from this episode as well. If you have any questions, comments, criticisms, ideas for future episodes, please do not hesitate to email us at plain English at Spotify.com. I'm Derek Thompson. This is plain English.

Tracy and Joe, welcome to the podcast. Thanks for having us. Thanks for having us. It is really fantastic to have both of you. You are two of the most expert financial and economic guides that I know of in the entire podscape. Uh-oh. No pressure. No pressure.

Yeah, sorry. I don't to damn you with that phrase. What I would like to do narrowly is to use our time together to understand what the hell is going on with the U.S. housing market. But since you've both been following this story for years, I thought what we might try to do is pull together like a brief history of housing in the 21st century to understand how we got here and then where we might go next. So, Tracy, if I could, I'd like to start with you. Let's go back to 2007, 2008. How did the global financial crisis set the stage for the next decade plus of the real estate industry? Yeah, I think one thing we seem to be learning right now is that people kind of have short memories. And the assumption always seems to be, well, why aren't people reacting to this exact economic moment in time? So people look around at the situation, you know, after the pandemic in 2020,

2020, 2021, and they say, well, house prices were soaring and people were clamoring for homes. And we were all talking about a housing shortage. So why didn't home builders just build more houses? And the answer is, because they definitely remember what happened in 2007 and 2008. For them, it was, you know, for anyone that survived, it was a near-death experience. They remember the capacity issues that marked pre-2008. They remember the mortgage issues, people taking out lots of credit to buy numerous houses, you know, subpar quality mortgages, things like that. And no one wants to rush into the market for fear of basically repeating that mistake.

Now, I should caveat that the housing market has changed a lot since 2008. But ultimately, home builders are run by people. These are people who, if they were around pre-08, they definitely remember the risks of that time. And they're not that eager to ramp up capacity. Housing prices didn't just fall for a few months as they have this year after the 2007-2008 crisis. Housing prices fell between 2006 and 2012, according to Kay Schiller. Six years of housing price declines, including basically Obama's entire first term. And Tracy, as you just said, to put some numbers on that theory, on that theory, annual housing starts per 1,000 Americans. The previous low in the last 50 years was 3.9 in 1991. After the global financial crisis, in 2010, it fell to 1.8. So housing starts per capita didn't just fall to the lowest on record. It fell 50% lower than the previous low on record. We didn't get back to 3.9 until 2019. So,

By that measure, at least, it took a full decade to essentially dig out from underneath this absolute crash that we saw to housing in 2007, 2008. Joe, what do you want to add to this picture in terms of understanding the aftershocks we're still living with post-GFC? Well, you know, obviously, and we'll talk about it more, but, you know, obviously mortgage rates are a really important driver of housing activity, as everyone knows. But I think an important thing to remember is that mortgage rates aren't everything and that mortgage rates can't mechanically move the housing market in one direction or another. You know, going back to pre-grade financial crisis peak, you know, the Fed was raising rates for several years leading up to the financial crisis, partly because they looked at what everyone saw was going on in housing and perhaps they were getting anxious about that.

But a lot of the worst housing lending activity that Tracy mentioned came even with the Fed attempting to tighten financial conditions. So I think that's an important place to start that there is this sort of behavioral element in finance, in home buying, where they can't just, you know, you can't just turn the economy like a dial. It's like a little hot, little cool. Of course, the Fed is discovering that right now. But pre-GFC, there was a lot of rate hiking going on. and yet still some of the worst loans of the financial crisis, some of the worst frothiest activity occurred well into the hiking cycle. And you mentioned, too, that, you know, there were years of negative housing prices.

So it really took several years, even after the great financial crisis for things to get going. Again, you know, they dropped rates to zero at the end of 2008. So if you want to take a sort of purely rate-centric view of the housing market, you're going to miss so much because it's not like cutting rates to zero at the end of, end of 2008, early 2009, created this big bounce. We're seeing now in 2022 that the surge in mortgage rates really is putting a freeze on housing activity, it's putting a freeze on home sales. We're seeing this sort of crash in new housing starts and so forth.

But again, it's not totally mechanical. And to this point about, you know, the number of houses that are being built, it really was, you know, I hate to use, you know, it's this overused cliche, perfect storm, but, you know, we did see this big boom and housing demand started in like the middle of 2020, et cetera, with the drop in mortgage rates. But the supply chain issues were, you know, a big part of it. I mean, there was a lot of, there were a lot of homes that was demand for, there were home builders willing to sell it. They just couldn't get them built. And so you just see this sort of like brutal after effects of the great financial crisis.

simply in the ability of the industry to ramp up and create more housing in line with demand. I'm really glad you said that, that you can't just look at what the mortgage rate is or what the federal funds rate is and say, aha, now I know what's happening to the housing market. Because you look back between, say, the 1970s and 2010. The 30-year mortgage interest rate had never fallen below 5% for a single month. Not for a single month. Then for the next decade, it never exceeded 5%. I think actually you've seen it for exactly one month.

So you have this decade that really is historic in two ways. It is a great time to get a mortgage. You have the lowest mortgage rates that you've seen in a half century. But also, nothing is getting built. You have the least amount of construction per capita that we've seen on record. And as you pointed to, Joe, you're also getting this sort of perfect storm dynamic of demographics. You're setting the stage for supply crunch at the exact same time that the millennial generation is moving into its 30s. So you've got two little supply.

Mortgage rates are really low. Millennials are all about to turn 31. You know, the modal millennials about to turn 31. It's really a perfect recipe for the rise in prices. Tracy, one more aspect that I want to hit on before we get to the pandemic itself is the factor of where people were living, where they were moving. Maybe you disagree with this interpretation, but it seems to me that like in the first half of the decade, the first half of the 2010s, that was like the year of the cities. like all the headlines were like cities are coming back, New York is raging again. And then that narrative continued to live in headlines for a while.

But ever so secretly, in the second half the decade, domestic migration of cities plummeted. And it was the suburbs that were booming from the sunny swoosh from the Carolinas through Texas to the upper northwest. To what extent do you think this migration story is another ingredient we should throw into the jambalaya? Well, I think it kind of fits into the supply chain shortages that Joe was just describing. And again, one thing that we are recognizing post-pandemic is how bad our economy tends to be at adapting to abrupt change. So everyone wanted to move to the city. They all did that. City properties, city real estate prices went through the roof.

Then lots of people decide they want to move to the suburbs. Then we have the pandemic and the sort of shift to the suburbs gets even more extreme. And it's just really hard for these types of longer-term assets to adjust. just to these rapidly shifting changes in supply and demand patterns. And the other thing I would say, just to touch on the structural underinvestment that we mentioned earlier, but a lot of economics is not set up to deal with these types of, I guess, human emotions and human preferences. Again, the assumption in economics is always that everyone's a rational actor, everyone

will do, you know, exactly the most rational thing for them. it's not that good at taking into account long-term emotional scars that you might, you know, endure by being a home builder in 2008 or, I don't know, like moving to the city and having a terrible time and deciding that you want to move back to the suburbs or something like that. The assumption is always that people are perfectly rational, that they're looking at the situation around them with perfect rationality. And that's not necessarily the case. Joe, jump right in.

You mentioned in the early part of last decade, you know, the narrative of like cities are back. And that's definitely true because it's interesting thing about where was the foreclosure crisis the worst post-GFC? It was like Arizona, Nevada, the inland empire of California. And people like talked about like the sand state, parts of Florida, they're awful. But like these parts of the country are great places to live. Like many of them are warm. They're cheap. And this is a really key thing.

And so I think, you know, the other narrative of the early 20th, like, oh, the millennial. aren't going to want to be homeowners at all. They're just going to want to rent, they're going to be sort of like transants or whatever it is. And it's really amazing. I think one advantage that Tracy and I have had of working in finance media for a long time is like how many narratives like completely fall apart

and the short-sightedness of, frankly, the media itself or commenters on all these things, always mistaking an immediate crisis or frequently mistaking an immediate crisis for some sort of like fundamental change. But the idea that like people were going to stop wanting to live in like Arizona where like there's so much land that can be built on or outside of Las Vegas where there's just endless acres that can be built on or Florida,

which is like all we, you know, people are never going to want to stop moving to Florida. It's just sort of this like, it's funny to, in retrospect, think like we ever thought these things that these would like no longer be popular places to live. Yeah, the media has a funny habit of looking at macroeconomic phenomena and associating it with a cultural change. So, for example, we've all recently seen this phenomena of the Great Resignation and Quiet Quitting, this idea that all of a sudden no one wants to work anymore in America. Everyone wants to quit their job. And when they get a job, they don't really want to work that hard on the job.

And it's like, well, actually, this is a total misread of BLS data. The quits rate isn't pointing to people who don't want to work anymore. It's pointing to people who want to continue working at a higher wage, typically in low-income industry. like in the services economy. And so they're getting a job at, you know, TGI Fridays or another restaurant or hotel that's going to pay them a lot more. That's not suggesting a lack of interest in working,

a great resignation, suggesting a sort of boom in job switching. I have to say, I am myself, I'm guilty of this. I wrote an article for the Atlantic 2010, 2011. Joe, you're like, yes, Derek, you are guilty of this. No, I read. I've seen it.

I was going to, like, chime in. I too are guilty. Like, sorry. No, no, it's fine. You can express your own guilt. We can all go to church together and do our confessional. But in 2010, 2011, I did this piece called the cheapest generation about the fact that millennials clearly weren't buying as many houses and cars

as previous generations had, and that maybe the suggested a sort of a shift in cultural demand for housing and car ownership. And at the time, it was something you could generally argue with the data available to you, but now 10 X years later, it looked like a effing idiot because millennials clearly want to buy houses. They clearly want to not only own their own place,

but also own it in the suburbs. They are basically exactly like their parents. Anyone else want to join me in the confessional here about mistakes that they've gotten wrong in housing in last few years? Oh, Matt. What were you going to say? I was just going to say, you know,

on the quiet quitting thing, a lot of us are just burnt out, right? And so it's like part of like maybe it's like journalists like read the BLS data wrong, but maybe just a lot of journalists are just like, you know, sort of like tired and stuff like that and then assume that their individual experience is extrapolated to everyone. That was that was the, that was what I was going to say, you know, my sort of like trying to forgive the us journalists for sometimes getting things wrong is just extrapolating our own experience too much. Yeah, Freudian projection. Let's move to the pandemic because you guys are doing a great job, I think, sort of setting us up for

what happened in 2020. Again, mortgage interest rates have been low. You've got the millennial generation coming online. Not a lot of home has been built in the previous decade. And then all of a sudden, the world falls off a cliff in the middle of March. Joe, tell us here, what happens in the middle of March, monetarily and fiscally, that affects the housing market for the next few years? I mean, I think that what's incredible about that month, March and April 2020, is we basically had like the shortest depression of all time, it really may have been just simply a matter of weeks, like from like mid-February to like the end of March.

And so we basically saw all commerce, more or less sort of grind to a halt. And then immediately people started buying again. But what happened was, as Tracy mentioned all those home builders, you know, everyone has like these like memories of the time, you know, all kinds of industry were basically shut down like,

oh, if it's happening again, we're going to, you know, we're going to have another housing slump. This is 2008 again. It's totally understandable. The initial jobless claims were soaring and says, like, oh, well, people are going to be able to pay their mortgages if they don't have a job. People are going to certainly buy new hogs if they don't have jobs. And well, instead, what happened was the fiscal response was extraordinary. So by and large, household balance sheet shot up. You had the rates dropped to zero. So if you had a job and if you had income. It was actually a good time to buy. And the industry, everyone just got completely

flat-footed. And the boom was so intense. And right after such an intense drop. And so we really, you know, you see it in lumber, like all the sawmills and lumber yards sell down their inventory to zero. Like, let's get out of this. And then right from then, you just saw this industry that could not keep up with the demand and a supply chain, whether it's windows, whether it was lumber, whether it's garage doors, whether it's roof tiles, whether it was washing machines, never able to catch back up from that sort of like standing start in the middle of a in spring of 2020. Tracy, I want to ask you about the demand side here. There was one study from the Federal Reserve Bank of San Francisco that found that remote work

was a key driver of the surge in housing prices between 2020 and 2021. I mean, the market just went insane. People felt so cabin-fevered that it, that I feel like not only was the decline in, you know, mortgage rates and federal funds rates, a huge factor in the pan. pandemic weirdness of the housing market, but it was also the fact that just suddenly a lot of people with means wanted to move, right? Yeah, well, this kind of gets back to the point I was making about how economics isn't that good at taking into account really sharp shifts in preferences. So, you know, everyone decides they don't want to live in the city anymore. They want more space because they

don't want to be cooped up with their husband or their wife or their little kids, like screaming in the background while they're trying to do Zoom calls. And the market isn't really, set up for that, no one anticipated that in 2020, we would suddenly have a significant proportion of the population who would suddenly want to change jobs, well, not change jobs, change cities and do their job in a different way. And then similarly, if I could just go back to the supply side for a second, you know, to Joe's point on the undercapacity in the housing market, everyone was making decisions in early 2020 based on the information at the time. And what a lot of companies saw and here, you know, I'm trying to, I'm trying to help the, the reputation of journalists,

I guess. It wasn't just journalists who mis-underestimated what was going on. There were plenty of business owners who did this too. People who said, oh, like, look what's happening in the market. A depression is coming. This is going to take years to resolve. Let's cut back on orders. Let's cut back on investment. We don't want to spend money. We want to be really conservative at this time. It turns out that wasn't really the right move because things got better very, very quickly. but we were left with the impact of that decision from everything from lumber to washing machines that maybe use semiconductors. We had a semiconductor capacity struggle to build back up, mostly because we had a lot of car companies that cut back on their orders and that kind of put pressure on the entire chip supply chain. So it was a sort of cascade effect of decisions, the impact of decisions that turned out to not be that correct.

So the supply side is pulling back. The demand side is pushing ahead. The market goes insane. Inventories fall to record lows. There's nothing for sales. So price is skyrocket. You've got people promising to name their kids after the people selling their home. It's total pandemonium. Let's move forward. So you have essentially the conditions for an inflationary market. K-Shiller home prices absolutely sore in 2020 and 2021. And obviously you have general head. inflation and core inflation. And this is where I want us to finally walk our story into the year 2022, the late COVID years, the inflation year. Joe, let's start by talking about interest rates. You guys just did this really interesting podcast about how the spread between the federal funds rate with the Federal Reserve controls and mortgage interest rates has never been higher. What is that about? So I want to break into two, and I'm going to let Tracy talk about the spread between, but I, you know, but I want to talk about the underlying the Fed to start. And then Tracy can talk about the spread. But I think there's something really important here because I'm looking at rates right now. You know, in 2020, at late 2020, the Fed holds its Jackson Hole meeting. And at that time, the unemployment rate was still quite elevated. And they too, you know, again, the story keeps coming. back memories of the great financial crisis. The big imperative for the Fed was, let's not make the

mistake that policymakers made post-grade financial crisis and start hiking rates prematurely before the unemployment rate comes down. Like, let's solve the employment puzzle first before we do anything, because there's a lot of regret about early tightening and early austerity post-GFC. And so what that means is, you know, you mentioned this housing boom, and we're talking about this housing boom that started in 2020 and certainly went all the way through 2021. The Fed, you know, still kept rates rock bottom because there was still so much work to do on the employment side, a very unusual situation. So you have this absolute boom in housing. A lot of people feeling wealthy due to the stock market, a lot of people holding on to their jobs, etc. So you have this boom, but sort of no

rate side response. And as such, you basically have like rock bottom rates all through 2021. even with the case Schiller surge they are talking about. So when we talk about mortgage rates, obviously part of it is government rates and part of it is that spread. I just think it's sort of worth thinking about the calculations that the Fed was thinking on raising rates and why they didn't raise rates sooner in 2021.

And it's because there was still so much work to do on the employment side of the mandate. Maybe Tracy could do a summary of like that spread between Fed rates and mortgages. I, yeah, Tracy, I'm going to throw to you just a second. I just want to pause there to say that to double down on Joe's point because I think it's so important that policymakers seem to always be fighting the last war. You know, we had austerity after the 2007-2008 crisis, certainly the UK had even

worse austerity, in part because people are looking back to say, you know, the early 90s rate of the early 90s recession saying, okay, austerity or, you know, tax increases and spending cuts for the right medicine then, so it's the right medicine now. But then you see that austerity gives you this prolonged unemployment, prolonged economic weakness. I think liberals and people on the left successfully lobby a lot of influential policymakers to say, you can't do this again. And so we have the opposite response in 2020. And maybe the pendulum will swing right back to austerity in whatever the next recession is. But I just want to sort of pause on that point because it's a great sort of conceptual point that policymakers seem to always be fighting the last war. The unemployment rate was 5.9% in summer 2021.

So it's not crazy the policymakers were still so focused on that. It did come down rapidly. But I just think it sort of speaks to what the data at that point was looking at, which was that, no, there really still was a lot of work to do on fulfilling, on getting people back to work. All right. I'll let Tracy pick it up. The other thing I was going to say is I think one of the things we're learning right now

is also that interest rates are just a real, I know it's a cliche to say this now, but just a really blunt tool to solve all the economic problems in the economy. And to that point, you know, when we look at mortgage rates, like mortgage rates are not just the sum of whatever the Federal Reserve sets benchmark rates as. There's a whole ecosystem attached to the mortgage market, and that influences how mortgage rates are actually set. And this was the topic of our recent odd lots episode. It's the fact that, you know, the average fixed rate 30-year mortgage right now is above 7%, which is the highest it's been since 2001. But that is actually much higher than you would think it should be just by looking at benchmark rates.

So the interest rate or the yield on equivalent 30-year treasuries right now is something like 4%. So the spread between those two has gotten a lot higher. And that's not because of stuff that the Fed is doing, although it has stepped away from the MBS market. A lot of it is just down to the behavior of particular MBS buy. like commercial banks or like big bond funds who do not want to be buying mortgage-backed securities in a rising rate environment because there's not that much payout for them.

And one of the thing that's happening here is the inventory market is frankly very confusing to me. So I'm looking at Bill McBride's data right now. The 90-day average inventory nationwide is roughly at November 2020 levels. But inventory is still down 40 percent compared to 2019. So there's not a lot of houses on the market. But the pipeline right now is really, really strange. And it speaks the fact that something in the housing market seems kind of broken. There are a record high number of houses under construction today.

But newly listed homes are way, way down. So maybe, Joe, you're nodding along to this. Maybe you can help me understand what's going on with inventory right now. So I think there's two things. The number of homes that are under construction, I believe is in large function, this sort of catch up of all the supply chain issues that we've talked about. So if you started a house or if you started building ones,

you know, again, the windows may have finally come, the roof or the garage door. And so you had this situation for a long time in 2021, where housing starts breaking ground on the new house with far outpacing housing completions, whereas you actually like get the house done and this gap was persistent for a long time. Now housing starts are plunging, but I think we're mostly seeing these housing completions or the house that's under construction is essentially a function of this long, unusually large lag time between the start and the completion, and there's still some room to go on that.

But there are not a lot of like starts in the pipeline. As for the inventories, the basic issue is you'd be kind of crazy to sell your house right now unless you have to. It's not a great buyer's market because mortgage rates are so high. If you're going to move and buy a new house, you're going to get a mortgage that might be like double what you're paying. So there's this huge gap between, you know, what everyone is paying versus what they would get. And so basically there's just a, you know,

you might sell your house if you're moving if you're moving to a new city for a job. I suppose you might sell your house if you lose your job and can't pay your mortgage. But the unemployment rate is below 4%, and initial jobless claims have barely ticked up. So there's not a big increase in sort of like forced economic sellers. And you might sell your house if you're getting a divorce or something like that.

But even then, maybe not. Because again, it's just not a, it's not a, there's very no, there's no great reason to sell. So we're in this very strange market where it's neither a buyer's market nor a seller's market. And so it's essentially just a sort of frozen market. And it's the entities that are really bearing the brunt are anyone whose business is transactions. So it's like if you're a realtor, it's a very painful time. You're just in the business of transactions. But whether you're a house or a seller, it's a standoff.

And it's not clear how that's going to end. It's so interesting because you would think, or at least one might think, I might think, that the flash freeze recession that we got in 2020, that's what would have frozen the housing market. Right? It's a flash freeze recession. It sounds like the sort of thing that freezes the housing market. Instead, it didn't do that at all. The housing market went totally berserk.

the response to the inflation that we got after the pandemic is what's frozen in the housing market. What Tracy said, mortgage rates are rising even higher than you would expect given the rise to the federal funds rate. Inventories are still low. There are a lot of houses that are under construction, but you would be a crazy person to list your house unless you really, really had to get out of there. When you put all of this together and you think, wait, we're in a kind of intermission right now, a kind of a frozenness in the story of the housing market in the 21st century,

doesn't it mildly suggest that in a few years, things are just going to get crazy again, that millennials will still really want to buy houses? You've got a record high number of homes under construction. You're going to have a lot of stuff coming online. I mean, are we just maybe in a period where a couple years from now, we're going to say, wow, it's all back to being as frothy as it's ever been? Well, I think this is why we're seeing opinions about the future direction.

of housing so polarized at the moment. So there are some people who see rates going to, you know, a 20 plus year high and say, well, obviously this is going to be terrible for the housing market. It's going to be just like 2007 or 2008. The whole thing is going to fall apart. We're going to have massive price declines, especially in all those areas that people rush to move into post-pandemic and that experience the highest price increases. But then you have opinions like the one that Joe just laid out saying, well, actually, there's a lot of reason why people would just stay in place, and if we're not having that many housing sales at new transaction prices, then actually house prices might not move around that much at all because of this lock-in effect. And I think the real wild card here,

and Joe kind of alluded to it, it's going to be inventory, right? If we have a bunch of baby boomers who unfortunately start, you know, dying off and you have that glug of inventory suddenly released to the market, that's going to put pressure on house prices. If you have a big recession where the unemployment rate actually starts to go up and people do start to lose their houses, that's obviously going to add to inventory. And if you do get that big supply side response, you know, if all the home builders suddenly decide, as you just laid out, Derek, that actually things are going to be fine in a year or two, we should ramp up production now. If you had lots of capacity coming into the market because of that, I think that could have a downward effect.

on house prices as well. So it's a really weird moment in the housing market, and that's kind of why you're getting these very, very different opinions. So let's say a friend comes to you and says, what should I do? Like it looks like mortgage rates are going to be high for a while, like Tracy just said.

But what does that mean for the market, and specifically whether I should wait things out indefinitely to move? Joe, what would you say? You know, even in the old days, people would like come to me and they would say, oh, I'm about to buy a house and the mortgage that they're offering is 4.8.

Should I wait? I was like, man, if I knew the answer to what, like, rates we're going to do or anything like that, it's like, do not ask me. I'm just a journalist. You know, look, I think, like, it comes down to, and this sort of gets to, I think, I'll say, I'll say two things.

You know, one of the tragedies of this sort of, like, what we've seen with housing starts is, like, we've had, the demand for shelter just keeps going up, right? And also demographically, it is like sort of unambiguous that like millennials are in like prime demand time now, et cetera. And so like it's sort of this tragedy that the housing market, the supply side is so cyclical. And it when the fact of the matter is we just need more shelter and the fact that like the raising rates to cool inflation and maybe the rate hikes will work to cool inflation, we'll see. But like it is this sort of like unfortunate that one byproduct is that we're going to clobber do how. housing start when they're clearly insufficient and clearly, you know, below where they were 15 years

ago, it's sort of, it's perverse, right? It's sort of like, it's worsening the problem. If someone says, you know, look, I think that it's plausible that in a couple years, that if you buy a house right now, that in a couple years, rates will be lower and you can always refi. And if rates go higher, then it would be happy you buy it. I think it sort of comes down to, It's very cliche advice, but it's like, my advice to a friend if someone said to it, it's like, well, if you like the house and you see yourself staying there for a long time and you need the shelter and you want the stability, I mean, there are big disadvantages of renting, right? So it's like if you rent, you don't know where you're going to live from year to year,

you don't know a rate you're going to have from year to year, et cetera. So if the other puzzle pieces are in place where it's like, it makes sense to buy this house for all the reasons you want to stay there, you like the house, you like the stability. probably got to bite the bullet and just do it. Tracy, do you have advice for my hypothetical friend? Well, as someone who bought a house earlier this year, I might be slightly biased. But I mean, I think to Joe's point just that, I think one of the big things that we have learned from the pandemic is this tension between reacting to short-term developments and then reacting to longer-term secular trends. and people, humans, have a tendency to overreact to particular situations.

And it turns out it takes a lot of time to correct bad decisions or just for the economy to switch gears. And really, you kind of want someone to come in and try to smooth some of those business cycles. And, you know, one of the things that has emerged from a lot of our odd lots episodes is the idea of a lot of this risk-taking, this smoothing effort, should be undertaken by governments or authorities that have the capital and have the sort of deep pockets and the willingness to try to smooth these really sharp business cycles. And then maybe we wouldn't end up in a situation where the Fed has to cool inflation by raising interest rates. That's going to take a big chunk out of housing supply. And that's going to come back to haunt us in a few years when millennials are still going to be looking for houses.

Yeah, Paging Employ America, Skanda Amernoff, creates some kind of Yeah, some financing mechanism. Strategic Petroleum Reserve. Strategic Housing Reserve. Yeah, the strategic rental units reserve. You know, it's great. I don't know, like, if people remember it, but you can find there were articles written in 2009

where people were calling on the government to demolish houses on the argument that, well, we have this huge glut of houses, and as long as that blood exists, that it's going to put downward pressure on the price of existing houses, And as long as there's downward pressure on the price of existing houses, then, you know, that holds back the banks, that holds back consumers, that hold... And so there were calls like demolish houses.

Obviously, there's a terrible idea because people need shelter. But I do think, again, it does speak to this sort of like tragedy that something is crucial as housing supply, which we all need, whether we're homeowners or renters, ends up being so determined by cyclical factors. This is something that I've learned a lot from Arna Bhata and Skanda Amranath at Employ America. They've been on an episode of this podcast. If listeners want to go back, we did an episode on gas prices and their plan on sort of stabilizing gas prices. And one thing that I definitely learned from them is that there is a benefit to having a Goldilocks price in a lot of these industries. That in oil, if the price gets too high, you can have a recession. But if the price gets too low, then a lot of these oil companies don't want to invest in the production of new oil.

and so you have a supply chain crunch down the line, which means that prices are higher later. You could say the exact same thing for houses. That when housing prices get too high, it's really bad, but when housing prices are seen to be in some kind of, you know, deflationary cycle, why if you're a builder in your right mind, would you build more houses? You don't want to do that.

This has been great. You guys hit every single point that I wanted to hit. I want to just end with a little coda on rents. Rent growth in 2022 has been super hot. But apartment list and Zillow are now showing that rents are falling at their fastest pace in the last few years. As we head into winter, where they're probably just going to fall seasonally even further. And that's a little bit of disinflation. It's a little bit of seasonal effects because people don't move a lot in December, especially if you live and say, you know, Boston, Maine.

You guys have done several episodes on the jankiness of rent inflation measures. Tracy, how do you make sense of where the rent market is right now? Let me meet the question as specific as possible because I don't want to go like rent, colon, explain. Do you think that the Federal Reserve is properly assessing what is happening in the U.S. rental market? Oh, man, that is quite a question. Let me think how to approach this one. I mean, this kind of comes down to how the Fed looks at inflation overall and the idea of stripping out such vital things as shelter and energy and food prices from their measures just because they're volatile, and yet they

are the things that all of us actually need to live in. Like, those pressure, you know, rental prices have been going up. There is an ongoing debate about whether they've overshot, whether or not they'll fall hard and fast now. I think there's an element of some of the corporate profit-taking story in the rental market as well, so this idea that, well, maybe people are raising prices because as they can in the current environment. Maybe landlords are taking advantage of some of the current headlines to raise their rents, and especially in places like New York, where people are used to double-digit rental increases.

No one is really going to complain that much until the labor market really starts to falter, and then we see some pressures on salary and things like that. But it's a tough one. Joe, Jerome Powell calls you. He says, hey, how should the rent inflation picture, affect my plan to continue raising the federal funds rate, 0.75 percentage points, 0.5 percentage points. What is your counsel to Chairman Powell? Come on our thoughts.

Come on all thoughts. No, you know what? We did an episode very recently with Omerer Sareep who everyone should follow his work. He knows more about these measures of inflation than literally anyone else. Probably a good guest on this show at some way because he's just so good at explaining how these things are. And one of the things he said was that, look, there is this lag between the so-called market rents with a Zillow apartment list, which are turning down, and the measures that the BLS has. But, you know, there's some reasons for that. One is these market rents are new rents, whereas most people's rents aren't adjusted very often because, you know, they're on 12-month leases and so forth. And also, if you're renewing the lease, as probably anyone who rents knows, if you have a good relationship with the landlord and you usually make your payments, they're probably not going to jack up the rents and.

to the absolute market max, right? That doesn't usually happen right away because they want to keep you. They don't want to miss a month. But the flip side is the official measures, they move much slower. So they probably will turn down at some point relative to what we're seeing with these online prices. But it is just a good reason why it's a slower price, a slower adjustment. It doesn't mean that one is broken the other. And the other thing that Omer said, and I'll just believe him, because I don't know anything

more than anyone else is that the economists at the Federal Reserve are fully aware of this. So it's not like they're just getting their numbers from the BLS and saying, well, this is what we see. It's like, no, they look at all these other things that we can look to online. You know, so I don't know. All that is a short way of saying, I don't know the answer, but I suspect that I have very little insight that Jerome does not have from his staff. All right. Joe Eisenthal, Tracy Alloway.

Thank you so, so much. I really appreciate it, guys. Thanks, Derek. That was a lot of fun. Thanks, Derek. Thank you for listening. Plain English is produced by Devin Manzi. If you like the show, please go to Apple Podcasts or Spotify. Give us a five-star rating.

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