The Daily - How the Cost of Housing Became So Crushing

Episode Date: September 24, 2024

Over the past year, frustration over the cost of housing in the United States has become a centerpiece of the presidential race, a focus of government policy and an agonizing nationwide problem.Conor Dougherty, who covers housing for The Times, explains why the origin of the housing crisis is what makes it so hard to solve.Guest: Conor Dougherty, who covers housing for The New York Times.Background reading: Why too few homes get built in the United States.A decade ago, Kalamazoo — and all of Michigan — had too many houses. Now it has a shortage.For more information on today’s episode, visit nytimes.com/thedaily. Transcripts of each episode will be made available by the next workday.

From New York Times, I'm Michael Bobauro. This is The Daily. Home prices on a tear again. Over the past year, take a look at this. Starter homes hit the $1 million mark in 241 cities across the country. Frustration over the cost of housing in the United States. We need to build more housing in America. Young people will once again be able to afford a mortgage and a home.

Has become a centerpiece of the presidential race. The Federal Reserve today delivering a jolt to the U.S. economy. The focus of government policy. We'll be home buyers now looking for more cuts from the central bank to potentially ease the cost of borrowing even more. And an agonizing nationwide dilemma from San Francisco to Kalamazoo. But as my colleague, Connor Doherty, explains, the true origin of the housing crisis is what now makes it so hard to solve.

It's Tuesday September 24th. Tuesday, September 24th. So Connor, this story begins with you and me sitting across a table at a bar, which sounds like set up to a punchline, but it's true. That's where the story begins. Yes, that is where the story begins. So I live in Los Angeles and I was in New York visiting and maybe this is a good argument for working in an office more often. But I had all these meetings with all our bosses about ways in which we could cover

this really kind of grinding and metastasizing housing crisis we have in America. And then I serendipitously ran into you at a bar below our office. And you said something to me, and I can't pretend to remember everything word for word, obviously. And I too don't remember every word.

I had a martini in me. But my question to you, yeah, was basically, why is it that we talk about a housing crisis, but we never talk about how we got to a housing crisis? How can it be that we're living through something so big and so widespread? And it's in a presidential campaign, and it's in our lives,

and it's affecting our bank accounts, but I really can't tell you how it started. Yeah, so I really took that to heart. I loved that framing. And so I actually, pretty much from that moment forward, was trying to think of how I could get all of that into one story. So, Condor, now that you have gone off

on this assignment that I had no authorization to give you, tell us the story of what you found about how this housing crisis actually started. So the way I like to think about it, the sort of metaphor I use is that the housing market caught a disease. And the disease we caught is the 2008 financial crisis. So you think back to that time, it was another nervous week for the world's financial markets and on Wall Street. Banks are being bailed out, stock market is falling apart. In the last six months, Americans have

seen their investment shrink, their property values plummet, and the country edge closer towards a recession. We're hearing, you know, all these complicated things about mortgage-backed securities and all these things we don't understand. But at the heart of all that is the housing market. Home prices keep falling and foreclosures keep soaring. All these mortgage-backed securities were going to buy and ultimately build tons of new homes all across America.

Once beautiful homes, now an ugly reminder of the economic crisis facing many homeowners. Right, and the images I remember from this period are these photographs of winding Las Vegas suburban subdivisions filled with houses that were sitting empty. And it seemed, in the middle of this crisis, like there was suddenly a glut of housing in the United States, which is why I've never quite understood how we wound up with a shortage of housing.

Right, well, we were building a lot of housing and probably a little bit more than necessary, but then it just all stopped. So what people don't think about as much is what this crisis did to home builders. A ton of smaller home builders just went out of business completely. The larger home builders are laying people off, way ratcheting back how many homes they build a year. A lot of the land that they've earmarked for future home building is essentially worthless now

and they're selling it for pennies. So what in the end happens is we go from building about 2.2 million housing units a year before the crisis to 600,000 in the depths of the crisis. And if it had gone 2.2 million, 600,000 and then 2.2 million next year, wouldn't have been a problem. Right. Bounce right back.

Right. Yes. But that's not what happened. Instead, every single year, we are hundreds of thousands, in some cases a million, units under what sort of the normal pace is. And these are units we need to build every single year to keep up with population growth, plus just kind of housing falling apart, it decaying, et cetera. And so once builders are in this hole, it's really hard to dig out of

because the whole industry has been redesigned around this kind of weakened market, their labor forces, the amount of two by fours they buy, amount of land they have on hold. We have this new, smaller home building industry that is just not equipped. They're simply no longer capable of building homes a smaller home building industry that is just not equipped. They're simply no longer capable of building homes

on the scale we need because they've never really recovered. And so the disease we caught, the 2008 financial crisis becomes a pre-existing condition and it makes the housing market sick. It has left our patient weakened and in a very hobbled state and therefore much less capable of dealing with anything else that might come its way. So the pre-existing condition at the heart

of our current housing problem in the US is the financial crisis inflicting tremendous trauma on the homebuilding industry in such a widespread way that basically it stops functioning in any normal sense and we start to get into a hole that over the past two decades means we're not just short some housing, but based on the math I'm putting together from what you just said, perhaps millions of units of housing that should have been and would have been built if the financial crisis hadn't occurred. Yes, that's exactly the problem. And it is indeed millions of units.

The estimates of this say that we are short at least two, three million units. So there are many more people who want housing, then there are housing for them, and the industry is not responding to that, is not building enough. And so each new thing that comes is just going to make the housing market more and more and more and more expensive.

Got it. So let's talk about some of those things. Millennials. Millennials are now the largest generational group. Starting in the 2010s. They're going to make the housing market boom. We see millennials entering the housing market in a big way. Millennials are finally moving out of mom and dad's basement. Cities are the cool place to live and builders have yet to catch up with demand. And apartment rents are just exploding because there's this huge demand to live in kind of cool urban neighborhoods

with bars that sort of thing. Vacant apartments are getting multiple offers these days. It's a good time to be a landlord. So they're bidding up apartments. It's crowded and it's getting nasty. As they start to move into home buying they are bidding up entry-level homes. More and more people are living alone. Over a longer period. We are studying more, particularly women. We are marrying later. We are also, unfortunately, divorcing more. We have seen growth in smaller households.

Atlanta, Seattle, Denver, Minneapolis, all 40% or more of the households have just one person. You know, these are... It's just like a larger period of people's lives in which they want to live alone, which like millennials entering the market, makes it more expensive. It increases the demand for housing.

Bidding wars are back with a vengeance. Then we have the pandemic. 2020 is expected to outpace 2019 when it comes to the number of homes sold. And all these people able to work remotely. Everybody used to want an open floor plan. Now you need multiple zoom rooms. They some cases want bigger homes and some cases want to live in these

smaller, more remote areas. This is what we're like desperate for, is just some outdoor space. On top of that, you start to have inflation. The era of cheap money and easy money is over. Then you have a rise in interest rates. Housing has never been more unaffordable because of where interest rates are at, because of elevated.

And we're not even talking about zoning, which restricts how many units can be built in a certain parcel, or Airbnbs that basically turn homes into hotel rooms. So all these other things are out there. But they're hitting a housing market that has been under building for almost 20 years. [♪ music playing, no lyrics, just the guitar playing. It sounds like any of these individual factors that you're ticking through here would be

enough to shake any normal housing market, but what you're saying is that because the US housing market is already so sick from this original pre-existing condition of the financial crisis, each one of these new factors hits it harder and harder and makes it basically impossible to recover from. Yeah, when I first started covering this, it was most obvious in places that were already expensive. But then it just spreads year by year across the country. It goes to smaller cities, even rural areas are starting to have a huge housing shortage.

Each new place starts to contract the disease, to take our metaphor. And so there's this big game of musical chairs happening where people are moving all around the country in search of the next cheap housing market. And eventually, it gets to the point where there's nowhere you can run anymore. We'll be right back. So, Connor, this crisis is spreading. Affordable places are now becoming rare and attractive to those with money, and in turn, they're becoming endangered. That's the state of play.

That's right. And what we start seeing is cities in middle America, smaller, regular cities, places that aren't finance hubs, places that aren't tech hubs, places that have been trying to actually attract more residents and businesses for a long time. Suddenly, this precious resource they have, affordable housing, is exposed and vulnerable

because everyone's discovered it. This is Kalamazoo, Michigan. A diverse city of over 70,000 neighbors. And it even comes to cities like Kalamazoo, Michigan, which is a place no one expected the housing crisis to strike. Kalamazoo has a lot of the amenities of a large town, but yet retains the small town charm.

We've got affordable housing, few traffic headaches, and very friendly people. It's sort of between Detroit and Chicago, but it is absolutely not either of those places. It's urban, but then it's natural. It's a small town with really big town attractions. It's got so much to offer for a town its size. It's a pretty blue-collar town. You know, if you make $100,000 or even less, you could have a very comfortable life there.

And Kalamazoo is getting some great attention. It was ranked the coolest place to live with the lowest cost of living in the entire country. How about that? Go Kalamazoo. Yeah, quite the honor. It's a place where money goes a lot further and so it's much more comfortable to be a middle-income family there. You can have a bigger house, you can do more things. People discover our community and they might think, me, this would be a great place to live. This would be a great place to work. This would be a great place to work. This would be a great place to raise a family. A lot of the people there think of that affordability as almost like a condition of the place.

It's like winter. It's something that Kalamazoo has. Right, fact of life. Yeah, it's a fact of life. Until everything we're talking about comes to Kalamazoo. And Connor, I'm familiar with what the housing shortage and its impact look like in coastal cities because I live in one of them. But what does it look like when all of this arrives at the doorstep of a place like Kalamazoo? Well, I mean, the most obvious first thing you see is prices exploding.

Home prices go up about 40% since the pandemic, rents go up about 50%. So all of a sudden, anybody looking for housing finds that it's way more expensive. And of course, at first, that affects people with the least money. They've got the least room in their budget. So you start to see homelessness or people living out of hotels, that sort of thing. But it moves up the income ladder because the shortage gets worse and worse and worse and the competition gets more and more fierce.

And people who were having no problem affording housing are all of a sudden getting overwhelmed by this problem. Record her on if that's okay. Sure. I'm Connor, what's your name? I'm Barb Tuckett Denny. And I met a that's okay. Sure. I'm Connor, what's your name? I'm Barb Tackett Denny. And I met a woman going through exactly this. Her name's Barbara Tackett Denny, she goes by Barb.

And Barb, how old are you? I'm 67. Okay. And are you retired or what do you do? I do home health. So I take care of somebody older than me. Mm-hmm. She works as a home health aide,

and her husband works in a factory. Together they make about $65,000 a year, which in Kalamazoo is solidly middle class. And the reason it's solidly middle class is that they can find an affordable place. So for 10 years, they lived in a duplex. It was two bedrooms, one bathroom, living room, dining room.

The house is about a hundred years old. And their rent was only $630 a month. We used to go out to eat. Barb told me that, you know, she felt generally fine. They even saved a little bit. Now, this was not a fancy place. In the 10 years that we've been there he's done no major overhauls nothing. I ask him for carpet every year. The carpet was sort of

ratty not very nice it had knob and tube electrical. If I run my microwave and he happens to plug in something upstairs it'll blow the fuse. She had to sort of coordinate with the neighbor over who was going to use the microwave or other appliances when because the fuses would blow if they both used them. But it was affordable for them and it made it so that their income went a long way. So economists and housing wonks refer to this as naturally occurring affordable housing, which is the euphemism for kind of a crappy place.

Down on its heels, old. It's a place that's affordable for an obvious reason. That is a huge piece of our affordable housing puzzle in America, sort of older housing that gives people a way to make their money go a little bit further. Right? So they're living there and everything's pretty good. That's their situation until their landlord decides to sell. And that's something that happens in a hot market.

The landlord has had this place where the price of it hasn't changed much in a long time and all of a sudden he can get all this money for this kind of ratty duplex, right? Much more than he ever thought. So they all of a sudden have to go looking for a new place and they are just now in this market that they almost didn't know existed. And lots of other landlords have sold their ratiduplexes, and investors have moved in, and families have moved in, and they're fixing them up, and the home prices are going up, the rents are going up, and just everything is becoming more expensive. They eventually land in a manufactured home, but it costs about $1,600 a month. And their whole entire budget has just been nuked.

What has been your lifestyle adjustment? I mean, that's $1,000 more a month. Well, we had to cut back on everything. They were never wealthy, right? But money has gone from something they didn't stress out about over every single bill to all we think about is every penny. It just kind of sucks. You know, as much money as what he makes

and as hard as what we both work, and to think, can we really afford this? You know, it's like, why am I working so hard? And if you just zoom out, you can find someone like Barb basically anywhere in America right now. You know, the census just put out a report that said about half of all renters are cost burdened right now, which means they spend more than a third of their income on rent.

And a good amount of that group spends more than half. So there are people all over this country now who they basically worked or survived. They work to pay for rent, they work to pay for housing. And I think what people need to realize is that at a moment when people are really mad about inflation, when the presidential campaign is all about how can we reduce prices on middle class Americans, yeah, grocery bills are up and the cost of milk and cheese and bacon and all these things are up, but really at the heart of that inflation pain

is the cost of housing. Hmm. So given just how widespread this problem has become, how much financial pain it's causing to people like Barb, just a sweep of it, you know, from San Francisco to Kalamazoo, how does the U.S. really start to pull itself out of a situation? How does it treat this sick patient? What feels very clear to me here is that any kind of a half measure isn't gonna cut it. For example, lowering the interest rate, as the Federal Reserve did a few days ago,

something anxiously awaited by anyone trying to buy a house, that seems like a nice thing to do, but it's not gonna solve our housing shortage. No, absolutely it will not. And it could even make things worse because things like lowering the interest rates might increase the demand, but they don't really increase the supply. Right.

So it would seem like the answer has to require us to go back to that original problem and basically just go on a massive building spree. And how do you even start to undertake that? Yes. So you hit the nail on the head, which is I guess a good building metaphor, right? So we need a building boom and some outside force is going to have to push the industry to build way more housing

that it is currently capable of or even wants to, right? And that outside force is almost certainly going to be the public sector, state, local, and ultimately the federal governments. And the reason is, is that the entire model is now so upside down that it's often more expensive to build a house that costs too much in land, too much in two by fours, too much in labor,

that a builder can't even make money for a price that a middle class person could afford to buy it for. So what do they do? They build much higher end homes. And what happens is this kind of idea of the middle class starter home essentially starts to go extinct.

Right, builders can more easily make a profit catering to the rich, and that's what a lot of them do. You just said that it's gonna take the government to push builders to build what we actually need them to build, which is a whole lot of affordable and middle income housing. So what kind of tools does the government have at its disposal to accomplish that?

Everywhere you go in America, you're gonna hear a lot of different programs, but they're really gonna only do one of two things. You're either gonna make it way easier to build, or you're gonna spend money doing it. So the first one is reducing regulatory barriers, like zoning restrictions to say how many units can be on an acre, or environmental rules

that kind of stretch out the timeline for how long it takes to get building. There are design rules. There's a million little rules for how you build and you can either get rid of them or reduce them. And that makes building easier, faster, and less expensive. The second thing you could do is put money into it. The government could build the housing on its own

in some cases, or it can just give subsidies in the form of tax breaks or even direct subsidies to developers who typically then are asked to make the housing more affordable in some way. And I actually saw a really interesting version of that in Kalamazoo. So one thing the state of Michigan is doing is trying to incentivize builders to just do more.

And they've done this by expanding subsidies to developers for pretty much any housing that's built. And they've added additional subsidies for housing that's really targeted at the middle class. Kalamazoo though, went even further. People in the county recently voted to create a housing fund that allows them to subsidize all kinds of different housing projects, everything from basically homeless

shelters to middle class housing. They even raised the level of what income is eligible now for subsidized housing. And Kalamazoo, it used to be that you had to have a household income of under $80,000. Now you can make all the way up to about $120,000 a year to qualify for housing aid or subsidized housing. And so what's happening is they're really changing how they think about housing aid. It's gone from something we think of

as traditionally being aimed at lower income families and households to basically most people can qualify for housing subsidies now. Hmm. But what you're describing so far feels mostly like useful, but ultimately local and scattershot efforts here. And so some communities are going to get their act together, come up with these subsidies, others perhaps are not. Is there any compelling national

program underway to address this housing shortage? I know that both Kamala Harris and Donald Trump do make housing a pretty big focus of their policy proposals. So there's no plan I have heard that sounds like it's really compelling or is some panacea, right? But what I have heard is what you just said presidential candidates Repeatedly talking about this Kamala Harris for instance has a plan that aims to subsidize builders who build

Entry level homes starter homes as they're called and also to subsidize the buyers who would buy homes like that Donald Trump has talked about reducing regulations on housing, but really if you cut through it, they both sort of describe this as a crisis of too little. And I think that is a sign of progress. I know that their solutions, such as they are, are radically different, but they recognize that there is some problem

of not enough housing. And I think that in a polarized society, anytime you see an area of agreement, even if all the agreement is what the problem is, that is, I would say, a positive sign. But a positive sign is not a bricks and mortar plan to build millions of new housing units. So in your mind, how

long is it going to take for the United States to solve this problem? And how optimistic are you that the US is going to get its act together and actually figure this out? Tough question. You know, we began this conversation by saying took us almost 20 years to get here, right? So it's kind of foolhardy to think you're gonna get out of it right away. I don't know that it'll take us another 20 to get out of it, but you need to have many years, probably 10 years of sustained, focused effort.

But look, we've done this before. of sustained focused effort. But look, we've done this before. After the Great Depression, there was a huge housing crunch. There were ads for people to live in chicken coops. There was even famously an ad for someone selling an icebox as a sort of studio apartment. But after World War II ended, there was a massive building boom. Single-family housing starts in this country went from about 100,000 in 1944 to about 1.7

million just six years later. So this can be done. What's happening in the middle there is this massive increase in investment from the government, things like the GI Bill, things like lending programs. There is a full on national effort to build housing, to create really the modern middle class in the modern suburbs. I'm not saying it's gonna happen exactly like that this time, it's just worth noting that

when you put your focus on an issue, really, really, really big things can happen. But then again, we are not the United States of 1950 anymore. There is no political consensus on almost anything. And there's always, when it comes to the government intervening and spending money, suspicion and sometimes anger over why is somebody else getting something, a handout that I'm not getting.

And so how do you think about that? So I think that the weakest argument against the government doing this is that it's pushing us in a new direction, a newly subsidized housing market, because this has always been how it has been. Pretty much the entire housing market is subsidized in some way.

From the 30 year fixed mortgage that you think banks give you out of the goodness of their heart, to huge tax breaks that people get for their mortgage interest, et cetera. The federal government has its financial heft and power into pretty much the entire housing market. And really on a more abstract level, you could argue that pretty much all of land

is to some extent subsidized. I mean, think about homes that are near public transit, homes that are near- Our schools. Yes, homes that are near a really great public school system, some of the most expensive homes in America. So the idea that people work really hard and acquire homes through their own grid,

I mean, yes, people do work hard, and yes, you do have to save up for a down payment, but the entire real estate market is subsidized to some degree. And really the question is, who do we subsidize and to what extent? Fair question. And to bring us back to where we started this conversation,

from what you're saying, this sick patient of a US housing market now needs the government's help and the government has been subsidizing the housing market when it wasn't sick in all kinds of ways for a very long time. And so there's a reasonably compelling case for the government to intervene now meaningfully and broadly when the crisis, the patient, is in a very acute situation. Yes. But it's going to require the kind of concentration and focus that governments, frankly, aren't that used to putting in. But the reason I think that they can and ultimately will solve this is that it's not going away.

There are certain problems like say the federal deficit or a natural disaster that rear their head and seem really acute, but then they kind of fade away from memory. This is not going to fade away. The housing crisis we have right now is going to be worse next year. I don't care what happens with interest rates,

it's gonna be worse next year. It will probably be worse the year after that. And so at some point, the size of the problem and the fact that it is not going away is going to create the conditions for that focused effort. O'Connor, thank you very much. You're welcome. We'll be right back.

Here's what else you need to knitter day. On Monday, Israel inched toward all-out war with Hezbollah, launching airstrikes on more than 1,300 targets inside Lebanon that killed nearly 500 people, according to Lebanese health officials. It was the deadliest day in Lebanon since 2006 when Israel last fought a war with Hezbollah, the Iranian-backed group that the United States has classified as a terrorist organization. In response, Hezbollah launched its own barrage of about 165 rockets into Israeli territory,

according to Israel. Hezbollah has been firing rockets and drones from Lebanon into Israel since last October in support of Hamas, prompting Israeli counterattacks. I have a message for the people of Lebanon. Israel's war is not with you. It's with Hezbollah. For too long, Hezbollah has been using you as human shields. On Monday, amid its airstrikes,

Israel explicitly warned the people of Lebanon to evacuate areas where Hezbollah stores its weapons. Don't let Hezbollah endanger your lives and the lives of your loved ones. Don't let Hezbollah endanger Lebanon. lives and the lives of your loved ones. Don't let Hezbollah endanger Lebanon. Today's episode was produced by Alex Stern, Olivia Nat, and Claire Tennesgetter. It was edited by Liz O'Balin and Lisa Chow. Contains original music by Pat McCusker, Marion Lozano, Rowan Niemesto, Will Reed, Dan Powell, and Diane Wong, and was engineered

by Chris Wood. Our theme music is by Jim Brunberg and Van Landefork of Wonderly. That's it for The Daily. I'm Michael Bobararo. See you tomorrow.