Plain English with Derek Thompson - Why It’s So Hard to Buy a House Right Now—and Why It Might Get Better Soon

Episode Date: December 8, 2023

Today, we’re examining the U.S. housing market, starting with a specific question: Should you look to rent or buy your next home? By some metrics, this is the worst time to buy a house in 40 years. Housing prices are near record highs, especially compared to local rents. For many young people, the dream of homeownership might seem completely impossible right now, thanks to huge national demand colliding with short supply, especially in high-income areas. Meanwhile, high mortgage interest rates have failed to reduce home prices, as owners are rate locked into their old mortgages. When will this sorry state of affairs turn around? Mark Zandi, the chief economist of Moody’s Analytics and host of the Inside Economics podcast, joins the show to answer our questions. If you have questions, observations, or ideas for future episodes, email us at [e-mail]. Host: Derek Thompson Guest: Mark Zandi Producer: Devon Manze Learn more about your ad choices. Visit podcastchoices.com/adchoices

What's up everybody? It's Austin Rivers from Offguard, and I've got some exciting news. Offguard hosted by me and my guy Pasha Gigi is officially moving to our own podcast feed. We are now dropping two shows every week. Me and Pasha go way back and talk so much hoops already that we figured it was time to fire up the mics and let you in on these conversations. Every week, Pasha and myself will hit on the biggest stories happening around the league. Tap into the show twice a week on our new Offguard feed on Spotify or wherever you get your podcast. Today is a deep dive into the U.S. housing market, which begins with a very specific question. Should you look to rent or buy your next home?

So let me back up here. Two years ago, in the spring of 2021, a family member of mine was looking to buy a house in Southern California. She asked me for some advice on the housing market, and I said, well, I'm not really sure about the housing market in SoCal. I'm not a real estate agent. To which she said, well, you're a journalist. Maybe go do a journalism. and call some people and figure this out for me. So I did some reporting and came to the conclusion

that the U.S. housing market in L.A. and San Diego, and really nationwide, was just about as surreal as it has ever been. Half of the houses listed nationwide in April 2021 were sold in less than half a week. In Bethesda, Maryland, a suburb of D.C., one resident included in her written offer to buy a house, a pledge to name her firstborn child after the seller, and she did not get the house.

So surely I wrote, this was evidence of peak ridiculousness. But I was wrong. I was wrong. Sorry, Kara. 2021 was not peak ridiculousness when it came to housing prices. In fact, home prices have now increased 40% since the start of the pandemic in 2020. A 40% appreciation is what we saw over the entire previous decade from 2010 to 2020. And as a result, as the Atlantic's Annie Lowry has written,

a lot of young people today, especially in high-income areas, Los Angeles, San Francisco, D.C., New York, feel like the housing market is completely closed off to them for the foreseeable future. This matters broadly because expensive housing shapes where people live, what jobs they take, when they start families, if they start families. Housing is never just about houses. Housing is about everything. And it is arguable that when it comes to housing, many people should rethink everything they know or think they know about ownership. On the Daily podcast earlier this week,

host Michael Barbaro asked the New York Times writer David Leonhardt, whether young people should just give up entirely on the prospect of buying a house. Here was their exchange. So if you're somebody thinking about buying a home right now, should you just pretty much give up on the idea? Give up on the idea that has been seen as a ticket to adulthood and a reliable path to creating wealth, and just accept that you're going to be a

renter? Yes. For most people, the answer is yes, you should give up on the idea. You shouldn't feel bad about it. Renting has this... David made some excellent points after this. In America, he said, we're told that renters are setting their money on fire when they handed over to a landlord.

Housing, on the other hand, we're told, is a solid investment. And sometimes it is. But in the short term, it's a considerable cost burden compared to renting. Of course, there's the down payment. But then there's the broker's fee, which is significantly higher in the U.S. than other countries, about 6% of the total home price on average in the U.S. versus just 2% in Australia and Britain. And then there's the opportunity cost of all that money. Because for every $10,000 that you put into a down payment, that you essentially stick into the walls of your new home,

That's $10,000 you're not putting somewhere else, say, into the stock market, which, by the way, has historically outperformed real estate. And you add all that up, all of this up, and you add it to historically high home prices and historically low availability, which we have today, and relatively elevated mortgage rates. And you get what Mark Zandi, today's guest, the chief economist of Moody's analytics, calls a particularly uniquely, unusually bad housing market for buyers. Today's guest is Mark Sanding. We talk about the brief history of how housing went so berserk in America and why high mortgage rates are not reducing average home prices, but we also talk about the subtle ways in which this story is already changing at the margins.

Mortgage rates are already coming down just a bit. Building material demand is perking up. Across the country, so-called yimbies who support urban housing construction are notching winds large and small. Buying a house in America absolutely sucks right now. We'll talk about why, but we'll also talk about why the worst is probably, hopefully, mercifully behind us. I'm Derek Thompson.

This is plain English. Mark Zandi, welcome back to the show. It's good to be back, thank you. So I think what I would like to do here is have you start us off by offering a kind of thesis statement for this episode and to answer the big question on my mind and on lots of people's minds.

And then after you answer that question, we'll back up and do a brief history of the housing market and how we got to this insane place. So the question of the moment for me here is if the typical person listening to this show is at a moment in their life where they're thinking, I need a new place. Should I buy or should I rent? When I click into Zillow, should I press the rent tab or the buy tab? What's your advice for them? Is this a decent moment for most people to think about buying a home?

Tough time to buy a home. I'd be patient. Prices are high. Mortgage rates are high. There isn't a lot to choose from. So at the current point in time, is difficult. Renting is, I think, probably for most people, the best to root, at least for the foreseeable future. So, I mean, relative to other years in the 21st century, which has not exactly been a golden century for housing in America, is this a particularly bad time to look to buy? Particularly, very bad, unusually bad. I mean, in house prices have gone skyward since, even before the pandemic, but obviously since the pandemic hit for lots of different reasons that we'll, I'm sure, we'll discuss.

Mortgage rates have surged. You know, they come back in a little bit in recent days, a couple weeks, but they're still very, very high. And people just aren't selling their homes for very reasons that are very idiosyncratic to the current point in time. So there's just nothing to choose from. I mean, if you wanted to buy a home, you know, to find one that's consistent with your needs is pretty tough.

So, yeah, this is a very unique, unusual period in our housing history. I want to speed through some chronology to get us started because I do think it's useful to understand the history of how we got to hear, the history of sort of the U.S. housing market in the 21st century, which, you know, in my mind, to understand this moment, you really do have to go back to the Great Recession and 2007, 2008. So you go back to 2007, 2008, and I'm going to speed through this and then give you a chance to sort of edit my brief history. You have the famous financial crisis, the housing market in the U.S. crashes. Construction remains in a depression for a decade. We build fewer homes per capita in the 2010s than any decade on record. The market slowly starts to normalize in the late 20 teens under the Trump administration. Interest rates are still low.

Construction is on the mend. The millennial generation is rounding into its 30s. That's creating a lot of demand pressure that's driving up housing prices. It's the prime home buying years for this large millennial generation. generation. And then, bam, right as things are normalizing, we get a pandemic. And the pandemic does a bunch of things. It sends the housing market into a frenzy. All these people with means feel cabin fever and to cure their cabin fever. They want to buy bigger homes. Maybe they want to buy a house with an extra room for remote work. You see prices rise in the suburbs and excerpts around rich metros. Meanwhile,

the construction market on the supply side is socked with all of these shutdowns and snags. So demand for bigger houses soars in the face of decades of supply constraints, and surging demand times constraint supply always equals higher prices. So prices skyrocket through and after the sort of peak pandemic years. And then atop everything off, the end of the pandemic economy, the lockdowns are over, people are going back to restaurants, movie theaters and everything, that creates an inflation crisis, which the Fed responds to by jacking up interest rates. Higher interest rates means higher mortgages, higher mortgages means the cost.

of buying a house rises. And now we seem to have like the worst of all possible worlds. We still have the sky high prices from the pandemic and pre-pandemic years, but now we also have sky-high mortgage interest rates. So the two worst things you could possibly look at if you're sort of an average person looking to buy a house. What part of this sort of brief rushed through history of the last sort of 15 years leading us up to the 2023 housing market? Do you think I might have left out or misconstrued? great job. That was great. I think you nailed it. I mean, I'm an economist, I'll quibble about everything you just said on the margin. But I thought you got the narrative, you know, just right. I mean,

it did begin with the financial crisis back a little over a decade ago. That was a housing crash. That was at the center of that crisis. Remember back to subprime mortgage, all the foreclosures. There was vast overbuilding, you know, during that period of time. And because of the collapse, It just wiped out so much, a lot of builders and all the infrastructure to build. And, you know, people don't recognize, but the home building industry is a very fragmented business. You know, you've got some big publicly traded builders, but you've got a lot of smaller builders that are, you know, on the margin financially. And they got wiped out. And so just the infrastructure to build wasn't there.

The other thing that happened was the fixed cost to build increased during that period because of the collapse and, prices, local governments couldn't generate property tax revenue. You know, those revenues are based on the value of the housing, but the housing collapsed. So localities raise permitting fees and other costs. Then there was significant zoning restrictions that have gotten even more restrictive over the time. And so if you're a builder, you know, you got to cover those fixed costs. And the way you do that is you build bigger homes. You build homes that you can sell to wealthier, higher income households at higher margins, and they forgot about the entry level homes, you know, the kind of homes that people buy when they first get into the single-family housing market,

the first-time homebuyers. And so that's where the shortage of homes has been particularly cute, and that's where prices have been have risen most significantly and where the affordability issues at this point in time are highest. But I, you know, I can go on to each aspect of your narrative and we can discuss it, but you're absolutely right. The genesis for this mess we're in began well over a decade ago. I want to drill down just one level deeper into what you just said, which is that this is a part that I left out of my brief history, and it's something that's left out of a lot of critiques of the housing market, which is that the average new home is significantly larger than the average house that was being built in, say, the 1970s, 1980s, 1990s.

homes are much bigger than they used to be. You suggested that one aspect of this is that fixed costs are higher. Permitting is more expensive. Zoning is more restrictive. So if you're going to start to build a house, if you're going to have a housing start, you might as well build a bigger house that you can sell for more money in order to cover all of these high fixed costs. That's a part of it. what else is driving the increase in the average size of new homes, which, again, to our point here, it's important that houses are getting bigger because bigger houses are more expensive, and more expensive houses make it further out of reach for someone who's sort of middle, low income, which means you have this decline of sort of starter houses in America.

What else is driving this sort of housing inflation, that is the size, not just the price? Yeah, just a kind of factual correction there. I mean, homes have gotten a lot bigger compared to 20, 30, 40 years ago, and no doubt about it. But they've come in a bit since kind of the McMansion period. I mean, you know, before the financial crisis, we were putting up really big homes. You know, this come in a little bit. It's just the distribution of the kind of homes that are being constructed have shifted up in general. We're just not producing nearly as many kind of smaller homes, entry level of homes, that kind of thing.

And, you know, there's lots of reasons. I think I'll point out one additional, and that's just, you know, the income and wealth distribution has become more skewed, right, over time. And, you know, if you go back since the early 1980s, really, for lots of other, you know, reasons, the wealth of the population, the income that we earn is become increasingly more top-heavy. You know, the share going to the folks in the top part of the distribution, top 10%, top 20%, top-thirt, top-thirt, is increased quite significant. And so, you know, those folks have more income, more wealth, and they invest in everything, everything, stocks, bonds, crypto, gold, whatever, and housing, and housing. So people, you know, put more into housing. So it's interesting, you can see, you got a lot of single person, two-person households out

there with a lot of house. I mean, a lot of square footage. And that's been, that's happened, you know, over the last couple, three decades. And I think one key reason is this skewing of the wealth and income distribution. Let's talk about this particular moment. And one of the big mysteries to me and to a lot of people looking for a home is why, even with sky high mortgage interest rates, at least relative to the rest of the 21st century, why haven't prices come down? What's your explanation for why higher rates have not reduced prices more significantly? Yeah, well, it does go back to that shortage. There's just not a lot of homes out there that are vacant. I mean, for example, the homeowner vacancy rate, that's the, the percent of homes out there for sale that are vacant is at a record low and falling. We've seen some pick up in the rental vacancy rate very recently. It's low by historical.

standards, but it's picked up a little bit, but mostly at the high, again, back to the high end of the multifamily market. You know, all those big multifamily apartment towers that are going up, you know, my hometown of Philly or in D.C. or in Chicago or in Seattle, that part of the market, we're getting supply and rents or soft. But at the lower end of the market, the kind of the, what I call the, you have to rent because you can't afford to buy, that part of the market, you know, vacancy rates are extraordinarily low. So, you know, the most fundamental reason here for the high house prices is there's just no homes. You just have no supply. Anything that's going on, and this is particularly important in the low end of the market,

again, where the price increases have been most acute and the affordability issues most severe is the so-called lock-in effect. This is during the after the financial crisis up until almost to the pandemic, we lived in a world of very low interest rates, again, for lots of different reasons. And of course, when the pandemic hit, the economy was in a free fall and mortgage rates got down to record lows. I mean, almost any person I talked to these days has a mortgage sitting at, you know, two and three quarters percent, three, three and three quarters. And the typical homeowner out there with a mortgage has a mortgage rate of three and a half percent. It's okay. So if you have a three and a half percent mortgage and mortgage rates are seven, which is where they

are roughly today, you know, that doesn't make a whole lot of economic sense because you're you know, you sell your home, extinguish the mortgage at three and a half, go buy another home, get a mortgage at seven, your monthly mortgage payment is just going to skyrocket. You know, it's a little more nuanced than that because, you know, if you're not selling, you're not buying, but at the low end of the market, you know, you are severely restricting the supply because of the so-called lock-in effect, and that's where you've seen these big price increases. So it's not one thing, but a couple of things have come together that have caused and conspire to keep prices up.

Just one other quick point, people don't like to cut price. Once you see is your price, you know, everyone looks at Zillow. If you're a homeowner, I'm pretty sure, I look at Zillow. You know, it's actually a pretty good measure of valuations. It's gotten better over time.

And you watch that and you get in your mind, oh, my home is worth whatever that is. And you're going to be very reluctant to sell it at less than that, no matter what's going on. You will eventually do so. And we should talk about the future, but I do think people are because of life events are going to have to start selling. But nonetheless, you know, people have this resistance to, you know, lowering their price,

you know, the kind of the so-called reservation price they have in their mind. Yeah, fewer new homes coming online, plus fewer existing homes being put up for sale, as you said, because of rate lock-in. And it all adds up to fewer homes listed for sales. And in fact, I was playing around with Fred's statistics this morning. And it looks like, at least according to Fred, like existing home sales as a share of the population are lower than just about any month on record I could find. And that would explain why in the University of Michigan Consumer Survey, when you ask consumers about buying conditions for homes, if anyone wants to

check this out, this is chart 41 on the University of Michigan Consumer Survey, buying conditions for homes are worse now than basically any year since the recession of the 1980s. So if you are 40 years old, at least according to survey data, this is the worst market for home buying in your lifetime. Now, that's survey data, that's people's sentiment, not necessarily any hard statistic from the market. Do you think that's a reasonable reflection of the market right now? I mean, Does this feel to you when you add everything together like the worst market for buying a home in 40 years? Well, first let me say, I'm really impressed. Your listeners know what Fred is?

Fred, oh, yeah. Fred, I hope some of them do. Yeah, Fred is the... Hey, oh, that's pretty cool. You guys are pretty wonky. I think we're pretty won't. Fred, if you just, guys, you can Google Fred if you want, FRED. It's an acronym.

It's the Federal Reserve, St. Louis Fed's database. searchable database of economic statistics. And if you want to just look up just about any series, any statistical series to create a graph of any of the most significant economic statistics you can think of, you know, in the labor market, in the housing market, in prices and inflation, go to Fred, and it'll whip up a graph for you super quick. So yeah, Fred, somewhat wonky, but certainly a mainstay of my journalistic life. Yeah, I'd say big time wonky. Well, to answer your question about the housing market, yeah, it's bad. In terms of sales in particular, home sales, when I think of housing, people say, how's housing market doing? Well, it's demand, supply, and price.

In terms of demand, I mean, how many homes are transacting, it's about as bad as it gets, you know, very, very low. One quick other point, which I think is relevant, if you look at new home sales, they're down, but they're not down nearly as much as existing homes. home sales. And that goes to the fact that home builders have been aggressive. They have actually cut price. You know, existing buyers, they're not cutting their price. They haven't, at least not so far. But new home buyer and new home sellers, the home builders, they have. And, you know, you have these interest rate buy downs and they have other different ways of getting that effective price down. In fact, by my calculation, the effective price of a new home has actually

fallen about 10% from its peak. So, you know, that, you know, that's helped keep new home. sales from completely collapsing that kind of held in there reasonably well. But existing sales, no, they're rock bottom. They're about as low as they get. And that makes sense that the builders would cut their price because they're sitting on inventory that isn't making them any money. Whereas if you're living in a house that you're, especially if you're paying a low mortgage rate on it, why would you accelerate your sale? Why would you cut the sale price by, you know, $50, $100,000 if you don't have to move? And this is helping to create this lock-in effect you've described. There's one more wrinkle that I want to add to this picture, which relates to a

phenomenon that the economist Nick Bloom is called the donut effect. That is, if you look at certain metros, say San Francisco, Washington, D.C., Philly, where you live, expensive neighborhoods in the downtown urban cores have actually seen prices grow much less than the cheaper suburban neighborhoods on the outskirts of cities. And you can go all the way back to the pandemic and say this is all about the fact that people were feeling cabin fever during the pandemic. They wanted to get out. They wanted another room for remote work. They wanted to spread out, have a lawn, have a pool.

And so they left the urban core and moved out to the suburbs. This phenomenon still seems to be happening now, even if at a slower rate. And to my mind, the reason it adds to this overall picture is that it makes affordability harder. Tell me if you disagree with this. I mean, if the formerly cheaper parts of metros, are getting expensive faster than the already expensive urban cores, that means that overall affordability is vanishing if you're a sort of lower middle income consumer. Does that make sense?

Yeah, although I'd say that dynamic is not nearly as prevalent as it was a year or two, three years ago. I mean, if you look at migration floods, we can look at, we get all the credit files in the country, anonymized, and I can see address changes, you know, this person moving from here to there, that kind of thing. And I can see exactly how many people are moving from the urban corps out to the suburban ring or the exurbs or rural areas. It's still a bit elevated compared to pre-pandemic, but I'd say just a bit. You know, it's coming quite a bit. And in many markets is completely normalized. So that dynamic is not nearly as prevalent. But I do think you're right.

I mean, it just complicates where the demand is compared to where the supply is. And that just, you know, in that kind of mismatch, that causes, you know, these kinds of problems with regard to sales and also in terms of pricing. So, yeah, I think that did play a role, probably less so at the moment and going forward probably even less. I mean, remote work is here to stay. I agree with Nick that, you know, that's going to continue.

But I think it's kind of a slow-moving process. I don't think that's a big part of the story at this point in time. That's a totally fair correction, that it might not be an active ingredient in the dynamic that we're seeing today. It just makes me think, like, if you're a middle class or lower middle class family or home buyer or someone looking to buy a home

in a city like, you know, Los Angeles, Washington, D.C., Philadelphia, there's always that part of town. There's always that part of the metro where you can say, oh, well, that's where prices are lower. That's where I can move to. And if those price, if prices are rising faster in those more affordable places than they are even in the urban cores, then it makes it harder for homebuyers and more stressful, for homebuyers to identify that so-called affordable neighborhood, right? And so that's maybe the part of it that I'm thinking else. On the other hand, if you think that this is all being driven by remote work, I mean, now you can

go anywhere you want. You don't necessarily need to go to the suburban ring. You can go, you know, I live in Philly, and, you know, we have a very clear urban core. We have a clear suburban ring. We have a clear ex-urban ring. And you don't have to go too far. You're in rural areas, and it's cheap, much cheaper. And if you don't need to, if you're not nailed down to having to go to some specific location or office, you know, that gives you freedom to go to other places and lower those housing costs. And I think that is starting to happen and will continue to happen. So all this leads to a question, the question of the podcast. I listened to David Lianhart on The Daily this week after he spoke to you. And David said there that for most young people, they should just about give up on the idea of homeownership for the next few years. How do you feel about that assessment? Well, I would be patient, but I would, I'd be actively looking.

I mean, one of the keys to being a good, getting a good home, becoming a homeowner and getting a good deal, is really understanding the market, understand the location, understand the housing choices that you have. And that takes time. That's not easy. You've got to go, you know, got to watch the listings. You've got to go take a look. You've got to really try to understand what's going to do. going on in the place you want to live. And so do that.

You should be doing that. And, you know, who knows? I mean, mortgage rates go up. They go down. They go all around. I don't know if you're watching, but they move pretty darned fast. I mean, it wasn't, but a few weeks ago, we were in 8% mortgage rate. Now we're at seven.

And, you know, I think the best forecast is, you know, it's not going to be below six anytime soon and probably another year or two down the road. But, you know, things happen. You know, a window could open. So I'd be prepared. So I'd be looking. I, you know, I'm older. You know, I'm one of those boomers and, you know, thinking about another second home and I'm, I'm watching. You know, I have, you know, a market in mind and I'm watching very carefully. Definitely not a time to buy at this point, but, you know, I understand

that market pretty darn well. I know it down to the street. I know it down to the, you know, I know exactly the homes that I'm looking at. So you should prepare. I want to help people, I want to give people a tool to understand the degree to which certain markets are amenable to buying versus renting. And one tool that you have and that you've talked about is the price rent ratio. Tell us a little bit about what the price rent ratio is and how homebuyers should use it, or prospective home buyers or renters should use it. Yeah, it's just a rule of thumb.

It's like a measure of value. It's kind of like if you buy stocks, you've heard the term price, price to equity ratio, the price to earnings ratio, price being the price of the stock, earnings being, you know, what the company, the profits of the company that are underlie the value of that stock. If prices get really high relative to earnings, then it's highly valued and may not be a good, all else being equal, a good deal. Same with homes. You know, homes, there's a price of the home, and then kind of the rents generated by the home, either explicit rents if you're renting out the house

or so-called implicit rents because you're kind of, you're living there, but you're effectively renting it to yourself. And so, you know, if you look at the price of the home relative to that stream of rent, it gives you a sense of valuation. Is it overvalued? Is it undervalued, that kind of thing?

But it's only a rule of thumb. And that, I would caution people to be very careful with that because it varies a lot by market. you know, for lots of different reasons. The price to rent ratio in San Francisco is very, very different than the price to rent ratio in, let's say, I don't know, Des Moines, Iowa or Pittsburgh, you know, Pennsylvania. So you've got to be careful using that. What I would do is going back to New York Times. They got a great calculator, in part because I helped build a calculator for them, and you can plug in all the relevant information that you need. And actually, it's a really good thing to do

because you get a real sense of all the variables involved in this rent-by-decision, you know, there's defaults there for you if you don't really know what the answer is to the question, how long I'm going to live in the home, that kind of thing. But you can go there and you can play with that and you can exactly see the rent that is kind of break-even, you know, between buying the home and renting the home. And so that helps you make the decision. I think that's a much more useful tool. Yeah, you've said that people should lean toward renting unless the rent-

ratio in the neighborhood, which is the annual purchase price of a house, divided by the annual cost of renting a similar house, is below 18. Is there any brief parsimonious way to explain what's so magical about the number 18? There's nothing magical about it. It's just, it's just, you know, like in the stock market, kind of the rule of thumb, it used to be that, you know, if the price of earnings ratio was above 15, the market's overvalued. That's kind of migrated higher for lots of reasons. That's actually close to 18. Same in the housing market. If you go back 10, 15 years ago, kind of the rule of thumb looking historically was about a 15 price to rent ratio. Now it's about 18. But it's just a historical regularity. You kind of sort of how people value

the asset as an investment, housing as an asset. And right now, based on historical, the behavior, your, that rule of thumb is about 18. But again, you know, if I go to San Francisco, it's, the rule of thumb is probably closer. I'm making this up, but it could be 2530. And in Philadelphia, it's actually very low. It's like 10 to 15, you know, something like that. Well, yeah, and of course, the U.S. is not just one housing market. It's a thousand housing markets that we call a national housing market when we have to briefly describe what's happening in headlines. And one way to see that is to go metro by metro by looking at the price rent ratio, which I did this morning. So, To your point, it's 50 in San Francisco right now.

Oh, it's 50. It's 40 in New York, L.A. and Seattle. It's about 30 in D.C., San Diego, and Portland. It's roughly 20 in Miami, Phoenix, and Chicago. And as for cities under the magic line of 18, which, as you've just said, is not quite a magic line, but a roughly magic line. Under the 18, we have Dallas, we have Houston, we have San Antonio, we have El Paso, and then we have a lot of Midwestern cities that have seen their populations

stagnate or decline. So demand isn't particularly as high in those areas, which might explain why the price rent ratio is a little bit lower. Well, you, you know, you've looked at the data more recently than I, but the one thing I do remember, because I am from Philly, I think the price rent ratio in Philly is lower than any other major metropolitan area in the country. So my, I'm feeling pretty good about my home in Philly, just saying. Right. Why does Texas fare so well in terms of the price rent ratio? Like, have they just done the best job of building? Well, you can build forever. I mean, have you You've been down to Texas recently? I have not.

You could build, you can build, there's no, there's no limitations on building. I mean, both in terms of permitting and zoning, less restrictions, but also just physically. I mean, you can just build forever. I mean, the only constraint is going to be increasingly things like water, you know, can I get water to, you know, that's going to be the constraint. But in, you know, places like New York and San Francisco and Philadelphia and Chicago and Chicago, you've got real physical constraints, right? I mean, you've got a body of water sitting right there, right?

And you can't build. So your physically supply constraints. So very different kind of underlying geographies and it affects, as you can imagine, not if you give it three seconds of thought, you know, it has an impact on, you know, these valuations. You know, by the sort of price rate ratio of 18, by that metric, you look at some of these cities where the ratio now is, you know, not just twice as high, but three times as high, almost four times as high. Like, by that metric, when can we say that it will broadly be a quote-unquote good time to buy a house in the country's richest metros?

Is the answer five years, ten years, never? I mean, Annie Lowry, a great writer at the staff writer at the Atlantic, wrote a piece about how, you know, by certain metrics, you have, you know, chief economist at Redfin was saying, you know, you might not have a historically sane housing market in some of the richest American metros until the 2030s at least. I mean, how do you feel about that analysis? Well, I, that sounds reasonable. I mean, I'd say, look, the financial crisis was almost 15 years ago. It took us 15 years to get into this mess. It's going to take us 15 years to get out. And I, and it's not, you know, I think policy makers have options here. I mean, they should help address the affordable housing shortage. You know,

housing is, we got to live in a home. I mean, that's like, you know, you got to eat. You got to live in a home. You got to have health care. These are basic kind of necessities. So it is critical for, you know, lawmakers to, you know, do things that would help here. And they are to some degree. I mean, there's a program called LI-Tech, a low-income housing tax credit to build affordable rental of property, and it works. And, you know, it helps out, and that could be juiced up. Here's an idea from Zandi, and I don't know if it's unique, but how about LI-Tech for homeownership, you know, to help builders bring, remember we went back to builders aren't building because their fixed costs are too high, they're not making enough money? Well, give them a tax

credit if they build the right kind of housing in the right kind of place. We want housing for first-time home buyers, lower-income households in communities where affordability is a real problem, and give a tax credit to those builders, lower their costs, get their profit margins up, and they will build. They will build, and we get more housing. And you can, the other, you know, obvious issue here is the zoning, exclusionary zoning, real, really, really, pernicious problem. The federal government can't do much about that because that's all set at the local level and the federal government can't do it. But if you set up kind of a LI-Tech program, you can give tax credits in a way that incent local governments to change their zoning to allow for

more, you know, more dense building, that kind of thing so that we can get more housing and get people, you know, the homes that they deserve. So I, you know, it's a daunting. It's daunting, but I wouldn't give up. I think there's things we couldn't do and we should be doing to, you know, address this issue. Yeah, especially on the regulation and permitting side. I'm a huge, huge advocate of reforming those local laws. So here's a question that might have us double back and we consider some of what we just said. When I put all this together, the unaffordability of homes, the sort of historic unaffordability of housing today, you know, I would think that there'd be extremely robust evidence that as millennials can't afford to buy houses, as a result, the homeownership rate among millennials

and maybe even reflected more broadly would decline. But it's not clear that that's happening. I've seen private surveys that suggest that millennial homeownership rates are a tick below Gen X and boomers adjusted for age, but not catastrophically behind, maybe a couple percentage points behind. And according to the Fed, the national homeownership rate, the share of all adults who own a home is 66%, which is not an all-time high. It's a few points down from the all-time high, but it's still higher than any year between 1965 and 1997. So how do we square this circle whereby there's a media narrative that millennials can't buy homes? And I think maybe more responsibly we can say there's a narrative that it's unaffordable for young people to buy houses,

especially in highly productive, high-income areas. But also, the home ownership rate hasn't fallen very much. How do you put that together? Yeah, well, actually, the home ownership rate hasn't really gone anywhere in the last 50 years, 40 or 50 years, correct me wrong. You could go look on Fred, putting home ownership rate. And, you know, because it's gone up and down. I think the highest it ever got was 69%.

And that was, you know, in the housing craze, you know, before the bus. The lowest it has gotten in, you know, recent times is, what, 63%? Something like that. And now it's, I think it's on the nose, 66%. Two-thirds of households own their own home. You know, I think it's not rising. And I do think if the most acute affordability issues have happened very recently with this run-up in mortgage rates, which really began a little over a year ago. So I suspect that, you know, that we are going to see that at a ownership rate, you know, start to come down here, you know, pretty quickly. So it's just recent that we've seen this very severe affordability issue, you know, crop up because of the high mortgage. The house prices have been there, but now you mix in these high mortgage rates, people can't afford the mortgage payment. You get that lock in effect. And that's all been very recent, you know, since early, it's been less than two years, you know, like a year and a half, you know, that guy.

By the way, this one point of interest, because it's a peep of mine, the higher inflation and interest rates, in my view, is not related to increase demand for things. I mean, demand picked up coming out of the pandemic. But it's about the pandemic in the Russian war. The pandemic's messed up supply chains and labor markets. And you can see that in the housing market. One reason why we haven't gotten more multifamily supplies is because multifamily builders couldn't get appliances, couldn't get building materials. They couldn't find workers, you know, the immigrant workers that work in these projects weren't coming into the country.

and the Russian war and oil prices and so forth and so on. That's the reason for the high inflation and high interest rates. And good news is as those things get into the rearview mirror and they are, inflation has come back in and I think interest rates are coming back in as well. So it's not about, you know, there's a lot of reasons for the high inflation interest rates. Demand is kind of at the low at the end of the list. It's more about, you know, what the pandemic did to us and what the Russian war in Ukraine did to us. Let's close by talking about the near future or the edge of the present, whatever term is appropriate for helping people try to imagine. I like that. The edge of the present. I mean, that should be a book. I think it is a book. Who did I just plagiarize?

Duncan Watts. The sociologist Duncan Watts, I think, coined the term, the edge of the presence. That's a great, great term. I'm going to use that. Yeah, feel free to steal from me who stole from Duncan. So, basically, want to help people imagine what's coming up for the next few months. and whether or not there is good news for people, because I don't like to leave listeners in a depressive lurch. So mortgage rates, and you mentioned this a few minutes ago, mortgage rates are falling.

We have to say that. And not only that, there's also some evidence that building materials order growth is rising for the first time all year, and that might auger more building. And then third, you mentioned the regulatory side, right? There's permitting that is constricting housing growth. There's city-by-city regulations that constrict housing growth. But there's this movement, the Yimbys, yes, in my backyard, the Yimbys that are notching some nice winds in California, in Colorado, in Utah. I don't think they've necessarily notched wins that have like totally unlocked these markets, especially in places like, you know, San Francisco and SoCal. But they're getting the regulatory wins anyway. What makes you optimistic that things might get unfrozen and that we might jump up from all-time lows when it comes to a

home sales per capita. Well, I mean, the most obvious is that the economy's strong. People have jobs. Unemployment is low. Wages are rising. And now people's wages, you know, if I look across the kind of the entire distribution of workers is rising more quickly than the rate of inflation by a good amount at this point.

I mean, a lot to catch up here to do because, you know, inflation took off and swamped wage growth and people are feeling uncomfortable about that, rightly so. But I think that's changing. Does that dynamic change? The key to everything is jobs in making sure that people's incomes continue to rise. And that will ultimately solve lots of problems. I mean, it'll make, you know, housing much more affordable. And I do think interest rates are, you know, they're elevated for lots of reasons. They'll come in. There's no doubt about it. I think I think you should plan on the fixed mortgage rate settling in somewhere between five and a half and six percent in the long run. kind of, that's kind of where we will be. And we will get more homes. You know, one of the beauties of the

American system is if you can make money at doing something, people do it. And they go at it, you know, pretty aggressively. They solve problems. We solve problems if you can, you know, make some money. And I think the builders are going to solve these problems. So, but, you know, having said all that, of course, I am the economist and maybe I can't end on a high note. I mean, it's going to take some time. It took us time to get into this. this box, it's going to take us a little bit of time to get out of the box. Mark Sandy, thank you very, very much. Oh, my pleasure. Thanks for having me on.

Thank you so much for listening. Plain English is hosted by me, Derek Thompson, and produced by Devin Manzi. Some great news for you all. As you probably know, we are returning, have returned back to our normal schedule of two pods a week. So be on the lookout for new episodes every Tuesday and Friday. If you like our podcast, please rate. Give us five stars, subscribe, wherever you listen, and I'll see you later.