The Pomp Podcast - #1283 Kevin Erdmann | National Emergency for Affordable Housing Is Here

Episode Date: December 13, 2023

Kevin Erdmann is one of the most interesting analysts when it comes to the US housing market. He writes on Substack at kevinerdmann.substack.com. He also has 2 books, called “Shut Out” and “Building from the Ground Up: Reclaiming the American Housing Boom.” In this conversation, we go through ideas on how to make housing more affordable, how we get here, Federal Reserve, who is responsible, and solutions. ======================= Base is making it their mission to bring a billion people onchain. But what exactly is Base? It's an Ethereum L2 offering a seamless experience for both builders and users. With near-zero gas fees and rapid transaction speeds, Base is shaping the future of the onchain world. Base is a canvas for everyone, with hundreds of apps in the Base ecosystem, whether you're an emerging creator, a seasoned developer, or someone exploring the onchain space for the first time, Base is designed to bring your ideas to life. So, if you're looking for a platform where the future of onchain is being built daily, Base is your destination. Join in and make onchain the next online. Learn more at ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠base.org⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ and follow along on Twitter at @BuildOnBase to see cool things to do onchain, everyday. ======================= Trust and Will has simplified the process of creating and managing your will or trust online. They leverage a data-driven, design-first approach and amazing customer support to help you protect your legacy from the comfort of your home starting at just $159. Sign up today for 10% off using ⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠https://trustandwill.com/pomp⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠⁠ ======================= Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

What's up, everyone? This is Anthony Pompliano. Many of you know me as Pomp. You're listening to the Pomp Podcast, which is my effort to find the most interesting people in the world and sit with them for hours while I ask questions in an effort to learn. So it would mean the world to me if you would subscribe to the show on your favorite audio platform, watch episodes on YouTube, and tell your friends and family about the podcast. My goal is to help millions learn from the world's most interesting people. So let's get into today's episode. Kevin Erdman is one of the most interesting analysts when it comes to the U.S. housing market. He writes on Substack at kevinerdman.substack.com and he has two books, the first called Shutout and the second called Building from the Ground Up,

Reclaiming the American Housing Boom. In all of his writing and his analysis, Kevin breaks down a new framework for understanding the housing bubble, the financial crisis, and the costly housing markets. He understands why is housing so unaffordable in America, and he's got a couple of ideas on how we could solve it. This conversation, we go through many of his ideas, including how we got here, who's responsible, and how we move forward with more affordable housing in the United States. Here is my conversation with Kevin Erdman. Anthony Pompliano runs Pomp Investments. All views of him and the guests on his podcast are solely their opinions and do not reflect the opinions of Pomp Investments. You should

not treat any opinion expressed by Pomp or his guests as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his personal opinion. This podcast is for informational purposes only. Today's episode is brought to you by BASE. BASE is making it their mission to bring a billion people on chain. What exactly is BASE? It's a layer two offering a seamless experience for both builders and users. With near zero gas fees and rapid transaction speeds, BASE is shaping the future of the on-chain world. BASE is a canvas for everyone with hundreds of apps in the ecosystem, whether you're an emerging creator, a seasoned developer, or someone exploring the on-chain space for the

first time. BASE is designed to bring your ideas to life. So if you're looking for a platform where the future of on-chain is being built daily, BASE is your destination. Join in and make on-chain the next online. Learn more at BASE.org or follow along on Twitter at BuildOnBASE. Again, that's at BuildOnBase to see cool things to do on-chain every single day. Today's episode is brought to you by Trust and Will.

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being taken care of and someone not. Go check them out today at trustandwill.com slash POM. All right, guys. Bang, bang. I've got Kevin here with me. Kevin, we are in probably the single worst housing affordability in the last 40 years or so. How did we get here? We got here by not building enough houses for about 30 years straight. And so, yeah, I think one of the things that people tend to do is they think of home prices sort of as this idea that's unrelated to, you know, the fundamental. If we're talking about stocks, we'd be talking about earnings. And for some reason, rent just sort of gets forgotten in the estimate of what's happening

in housing. Housing is unaffordable because the rents are high, and the rents are high because we haven't been building enough houses. It really is just supply and demand equation. It's determining it. Yeah. Yeah. Completely. To first approximation, 100% of it is rent. Now, in the first book that you wrote called Shutout, you described something called closed access cities and then contagion cities. And I thought maybe that'd be a good place to understand, okay, why is where the houses are being built so important as well?

yeah um yeah so i you know this goes back to the to the 2000s bubble and bust and you know one of the major sort of touchstones of my work that that leads off to a different path of analysis is there was a very there's a very strong presumption that there was an over you know a period of excess and over building uh by 2008 we had this like excess of housing inventory that we had to work off and And so that was really the first thing that brought me into this space to study this space and end up writing two books and everything else is discovering that really what was happening back then was these localized places. It's a very distinct list. It's Boston, New York City, San Francisco, L.A., San Diego. I call those those are the close access cities that just build far fewer you know permit far fewer homes than in the other major metropolitan area including the Rust Belt cities and so really

what happens is anytime you get any sort of economic expansion or just anything that would naturally sort of increase people's demand for things including housing there is no extra housing those cities if you think of it in terms of a sort of a units per capita if you can't add units and if demand is sort of um or think of it as people per unit maybe if if demand is um sort of well no units per sorry this is for capsules if demand is sort of increasing the units per capita if everyone's sort of consuming a little more housing a little more square footage and you know uh young adults moving out sooner etc etc etc if units is fixed then your capita has to go down and literally that's what happens is these cities have them have a counter cyclical

migration pattern which was on steroids back then uh tens of thousands hundreds of thousands of residents moving out of those five cities into what you mentioned as the contagion cities which then was you know phoenix and las vegas and the florida cities uh so really at a space that the conventional wisdom was upside down it was treated as this period of excess and overbuilding when really it was localized areas of under building like very distressed under building that actually created sort of a refugee event um and the places that looked like they were building in excess were just trying to keep up with this migration event and they couldn't and so they had what you would conventionally call a bubble but it's a bubble driven by demand that's

coming out of the places that have an undersupply now since then what we've done is sort of spread this shortage nationwide um and so we sort of have a we've been under building everywhere for 15 years now uh but you know you got a little bit of that again with covet of people moving out of certain cities and it was a sort of the contagion cities were a slightly different set this time it was the boise's and austin's and phoenix is still part of that but um yeah it's all driven by a lack of housing which is creating these my these these cyclical migration events so it makes sense to me in terms of going into global uh financial crisis and coming out of it uh this idea of the closed access cities not enough uh supply therefore people got to go somewhere else if they want to

live they move into the contagion cities people are like oh here they come let's build a bunch wait not as many of them showed up because there's other kind of cyclical events and now we've got oversupply and under supply in the two different types of cities you just said that for 15 years we've been under building nationally so not just closed access not just contagion cities but across the country why has that been happening i mean very simply i mean you can think of it in terms of sort of categories of housing and we've sort of just been making different categories illegal a step at a time over the last 50 years so first it was just generally in those closed access cities uh you know there's sort of a metropolitan area-wide obstruction to really all kinds of

housing um but you know at the core is sort of this uh you know over the course of the 20th century we sort of um uh sort of put a put a an obstacle in front of just the natural historical way that cities developed you know you go to you go to the the few places we have that are true cities like downtown chicago or manhattan um the building on the corner is like the fifth thing that's been there right it was a sheet metal then it was a then it was a a cottage then it was a a large home then it was a duplex and now it's uh you know a brownstone or something right or a high rise um we basically over the course of 20th century but a punch put a bunch of zoning rules in place that said cities can't develop anymore like they used to uh once when somebody's there that

has enough political power they can say okay this is what the city is going to look like forever and it's an affront to me if anything happens from now on um and that you know that became binding in those five cities but it's but it was in the background of every city and most of the other cities were making up for it by building entry-level uh single-family housing out in the excerpts uh and effectively what we did in 2008 is killed the entry-level single-family home market through mortgage over regulation um the uh the in fact that's really the first thing that brought me into this topic was realizing back in 2000 that that the market back in 2005 all that supposed excess and mortgage lending is a little bit it's greatly overstated and sort of misstated that

that there wasn't really a surge of low-income owner-occupiers at the time. But that's the problem we tried to solve. We thought that was the problem. We basically regulated entry-level owner-occupiers out of the mortgage system. The median credit score on a new mortgage had been 720-ish for years up until 2008, and then it went up to 760, and it's just been there ever since. So effectively, this Band-Aid that every other city had on its housing supply, which is it's very hard to build duplexes and apartment complexes downtown and all that. We ripped off that Band-Aid by saying, you know, anybody that would be buying a $250,000 new home out on the outskirts of town can't get a mortgage anymore.

And we just killed it. That was that was more than a half million units a year going into the crisis. and it just dissipated. Just that market went away. So it really took a decade for, effectively we took the owner occupiers out of that market. They had to eventually be replaced by institutional buyers, landlords and renters. And now you've got these institutions

buying built-in neighborhoods that are finally triggering new supply. And really to trigger that supply, it really took a decade of rents rising enough to get the price points back up where landlords want to build those houses because it's still a condition where the owner-occupiers can't get the mortgages for them. And so that's basically where we are today is we had this, basically this 30% shock to rents to get the price to rent ratio, to get these lower price

to rent ratios up to where the price will trigger new building for this new landlord-tenant situation. Now, as a first step, those families should just be owners. They should be able to get the mortgage and own those houses and they'd be willing to pay a little more than the landlords are because it's easier to be a landlord to yourself um but also a lot of those families would just be living in duplexes and and apartment complexes and high rises downtown if we could build those so and they'd be living one in one in la instead of phoenix if la you know got off its um uh trends of over regulation so there's sort of several steps of housing that that we've been just regulating out of existence to the point now where the only thing left that that's that's

that we're capable of allowing is on the margin is uh is uh institutionally owned single-family homes so this excess uh building like the the fear of excess building really and i think this is kind of a key component to the second book that you wrote uh building from the ground um why are people so fearful? What are they scared of for us to build more homes? Is it like an aesthetic thing? Like in San Francisco, they don't want to go above a certain level. Is it an overpopulation?

What is the thing that is driving the fear? I mean, as far as the regulatory, I mean, there's sort of an investor macroeconomic fear of thinking that overbuilding was the cause of 2008 2008 and being afraid of of like the market doing that again but in terms of the locals that are actually creating these regulations I mean I think it really does just come down to that band-aid that that um you know nobody ever likes change there was always some discomfort with with the with the the uh you know fluctuations of development within a city there were always um people that didn't what was going down at the corner um and i think just you know the automobiles sort of allowed us

to avoid that discomfort for a century because you know it's just a lot less trouble to to build the place that you know the developers can get approved to build that neighborhood out in the exurbs and so it gets approved and i think we sort of just we spent a a century sort of uh having these political um the sort of the the skill the political skills to let a city change sort of atrophied because we had this band-aid and the excerpts and the automobiles that allowed us to get from those houses to where we wanted to get uh and and this just sort of built up over a century and now all of a sudden especially then when we pulled the band-aid off in 2008 it's like oh we need a way to build houses well we've spent a century putting rules in place um that we sort

could avoid dealing with uh and of course there's now the yimby movement you know there's a lot of movement sort of to erase some of those um uh developments and i think that'll continue um but you know i just think it's it's a it's a matter of there being a slight discomfort that sort of all of us share when something's happening around us and it was easy to sort of let the political power the sort of the petty local political power to to stop those discomforts from happening to sort of just billow up and build up within our political processes so now i think that the political power sort of is a mismatch of really the true um discomfort but of course in that negotiating process in the local politics those discomforts

get yelled, you know, yelled at and, and, um, uh, exaggerated and, you know, and so it seems like a big deal, right. But for the most part, you know, having the, the, the, the, the four flex down the road is really, it's not actually going to ruin the neighborhood. You know, you mentioned the institutional ownership of single family homes kind of being like the end game here. Uh, if you listen to the peanut gallery on the internet, they will tell you that like big, bad, you know, a large financial institution is going to buy up all the homes and you will rent everything, you will own nothing, you will be happy type mantra. Maybe there is some truth to that. Obviously, they do own a lot of homes. What are the pros and cons of

institutional ownership of single family homes in America? I mean, I think it's, I mean, if you compare it to say a small scale landlord, it's the traditional sort of pros and cons, you know, there's some ways that they're better they're more you know that they really need to have some reputation if they own thousands of units and they and they don't want to get a reputation as a as a landlord to avoid um you know you have a lot more variability and a lot less ability to understand whether a small scale landlord is a good person that's going to give you your deposit back or not you know um so there's pluses and minuses either way and there's all sorts of studies about you oh, the large institutions evict people more and that sort of stuff, but I think those differences

are all really on the margin and probably don't matter that much in the big picture. I do think for the most part, it's a big con to be, especially if you're a long-term resident, you should own the place you live in. It doesn't make sense to have a landlord relationship in that mix um but i think the mistake people make is thinking that it's the institutions coming in that that's really more of an effect than a cause the cause is that we took 10 or 20 or 30 million households and decided in 2008 they weren't qualified to get a mortgage anymore even though they had been for decades and they really didn't have that much to do with what happened in 2008 so um you know what i find um uh a little bit frustrating is that uh that you know there's

it's sort of a misidentification to say that these these institutions are say driving up the prices and whatnot the core issue is that those families can't get mortgages and the people that complain about the private equity in the big institutions are generally just totally uh in curious about about this probably the biggest political um uh act to take place in generations which was dry you know locking those families out of the mortgage market no nobody really seems to have no care or really have noticed that it happened because it happened in the in the chaos of the crisis um but really you know part of my work is sort of pulling the data the the the the evidence from the data that you can really see that closing down those mortgage markets had a

tremendous effect on real estate values after 2008. There was this late collapse in working class neighborhood home values that clearly was a result of this tightening of lending that really matters a lot more than the stuff that was happening in the closed access in the agent cities. Places from Dallas to Atlanta to every city across the country, whether they had above or not the low end loses 10 20 30 compared to the high end after 2008 because we did this policy decision on mortgage regulation uh really was it's just a a nuclear bomb in the middle of working class balance sheets and really just no but nobody even knows that it happened given what you said so far my conclusion is that uh how to solve housing affordability is

is to build more housing. If that is correct, how do we determine what type of housing, where, and who should be building it? Seems to be a big question as well. How do you think about those three things? I mean, I think we just have to make the market work. So, you know, that in theory, in theory, you would like to have municipalities sort of planning out how that's going to develop. there's two problems with that the first problem is that if you know that we're really talking about a metropolitan area like each metropolitan area is sort of an entity you know there's the commuter zone really defines what's going to happen and you can't you when you divide that up into these municipalities that all have their little part of the metro area um there's just

no way that they can govern um that planning process so what happens is they all sort of become little fiefdoms of trying to ensure that they're not the part of town that declines in socioeconomic status. And so what happens is you just get sclerosis throughout the market of everyone making it illegal to build anything that might bring in families that have a slightly different socioeconomic status

than the ones that are there. And I think that problem still would exist even at the metro area level, even if we did fix that government's problem. So, you know, I'd like to think that there is a potential for careful planning, but 100 years of experience says we just aren't capable of doing it well. And actually, at the point we are now, anarchy is an improvement. Anarchy is probably not optimal, but it's better than what we've where we've come to. So, you know, there's a lot of people that work on the politics of it, and that's not really my focus.

but it does sort of help to drive my project to realize that really there's nothing we could do that's worse than what we're doing now. When we think about inside some of these dense cities, one of the areas that I probably have the most familiarity with is in New York City. Maybe in the mid-2010s, there was a lot of foreign buyers that were coming to the market. they were buying up uh apartments but mainly kind of luxury type apartments and in talking to people in the market they were like oh here comes all this money we need to build right and we need to be able to satisfy that demand similar to your idea of closed access cities and contagion cities um and people never kind of showing up in full force to the contagion cities uh there was capital

controls in some of these foreign countries including places like china and so when the buildings finally got built and the inventory came online it almost feels like there's a bifurcation in the luxury market there is much more supply available and some of these units will sit for very long periods of time but new york city rents are at all-time highs because the kind of lower part of the market is actually uh the opposite imbalance right there's way more demand than there is uh supply and so how do you think about maybe the bifurcation of luxury versus non-luxury in some of these cities yeah really that's at the heart of the model that i use at the substack is that i have a series of papers that i put out through the mercatus center um and if you if you

go to my sub stack the little uh menus across the top of the research button is where you can see links to those papers and really what the the model i developed just by sort of looking at the um trends and home prices and seeing what was different about the closed access cities versus other cities is that um when you when you have an endemic shortage of housing uh i think sort of the the basic understanding of what's happening within the metropolitan area can be thought of as just that the natural um elasticity of demand for low-income uh families versus high-income families and um you know you can think of it in terms at the low end housing is a necessity and you know that what we call housing is a basket of all sorts of things that actually are a part of what you're

buying with housing there's the actual walls and the ceilings you know they're staying dry in a rainstorm having a place to sleep a place to make your meals there's you know neighborhood character people like to live around people that are wealthier than they are in a nice school district with a park nearby um uh you know uh access to amenities you know there's all these sorts of things that are a part of that basket and so you start with staying dry and cooking your meals but all that other stuff is sort of you know that's a necessity and everything else that you're adding is sort of a luxury but it's all part of a basket of what is housing right and so at the high end it's it's mostly luxury that that foreigner buying the penthouse suite in manhattan

um and demand for luxuries is is elastic if you if you have less money you're just going to go without it it's not a big deal right and as you move down to the low end where it's a necessity then demand becomes inelastic you know i'm trying to to hang on to the job and the family i have in la and if rents go up another you know i'm sort of at the at the location that's the least i can put up with and the rents go up another 10 what am i going to do but pay pay the 10 right so you get this natural gradient of demand behavior from top to bottom and so what happens is when you have an endemic lack of supply, at the top, it's almost not noticeable. Like, I have X amount of dollars. It's normal for a person with my amount of dollars to spend this amount on housing. And in this city,

that gets you a 2,000 square foot condo on Fifth Avenue or something, right? And so that's what you get. And it's not like you're gnashing your teeth and rending your garments that you didn't an extra thousand square feet right so you naturally would actually compromise on the real housing the amount of housing you get right and as you move down market um you don't change how much housing you get you just pay the extra price and so what happens is you get this systematic uh sort of substitutions that all go downward where you start at the top and and there's not the 3 000 square foot condo that you would have available in atlanta or dallas and so you literally like trade down neighborhoods right you trade into it you buy into a neighborhood that's

a lower socioeconomic status than you would have been in atlanta or dallas that means there's less units available in that neighborhood for the people that would normally live there right so they have to trade down and that trading down like builds up as you move down the the you know the stock of housing within the metropolitan area and it really creates this distinctive systematic picture where in cities where you don't have enough housing, the rents and the prices go up the most at the low end. And then related to that is you always have more out migration from that city from the low end. Eventually it gets to the point where they don't have options left and some family on the margin moves away from the city entirely. So where you have a supply problem,

it's like a cantilever, you know, at the top end, the prices really don't change that much because everyone's just changing their, their consumption and the prices and rents systematically go up at the low end. So a lot of times what people do is they do analysis where they look at the median price of homes in a city. And what's, what I have found is that really the median doesn't mean anything except that it's halfway to the bottom, right? So the median house in LA or New York City is expensive, but it's only expensive because it's a part, it's halfway in this process to, you know, the price down here that it takes to get somebody to move out of the city entirely. And so that's really a way you can tell the difference between an LA and an Austin

is in Austin, they don't have this endemic supply problem. And, but Austin was a contagion city, you know, in this, in the post COVID period. So in Austin prices went like this, right they went up and down everywhere because it was just this migration surge and it wasn't this systematic behavior that comes from the lack of supply so you can you can really tell the difference between a housing a temporary housing boom and an endemic shortage because in a city you know if you're looking at zip code incomes here in prices in a in a city that's just having a boom and bust like phoenix in 2005 or austin in 2020 it goes like this but in a city like la or new york city it goes like this actually it's just in those cities now it's

just stuck like this and actually it's just a process of people moving into neighborhoods and people getting kicked out the bottom moving to the other places and so they're just stuck at this level uh where it's it's more it's almost more of a flow issue when you're looking at home prices in the housing market in those cities of just households basically flowing out uh getting priced out through rising rates and prices. So yeah, that's fundamentally at the core of how I analyze cities to know what's going on there. Now, when we see the home builders, especially the ones that are publicly traded, I think that gives us the best sense in terms of where are they going? What are they doing? Do you glean any data from them in terms of

potentially are we solving the problem? Are they going to just ramp up building? And we talk in five years, and we're like, all right, we recognize that we underbuilt, now we're building enough, and we get out of the problem? Or is the message maybe a little bit more dire, and it's like, look, there really isn't any sort of data point or sign that we're headed in the right direction now? You know, there's sort of multifamily and there's single family. And multifamily is a lot more, you know, private equity and REITs and, you know, these sort of distributed institutions that, you know, build a project at a time. And I would say that part of the market is just, has just been hitting its regulatory peak in terms of just, you know,

I think we've been hitting 400,000 units a year or so that basically just, that's because they're all waiting at the permit office to get permission for that next unit. And that's basically just happening in cities across the country. So I think that will slowly loosen up as the YIMBY the political movement gains ground, but it's really a political question. Now, as far as the public home builders that are building single family home neighborhoods, I think that's a really interesting space

because they have really been supply constrained in the COVID era. And so if you look at completions since 2019, single family home completions, it's basically a straight line. Now, what happened is COVID hit and everyone didn't know what was gonna happen at first. And then all of a sudden there was this housing boom

and sales went way up. And when sales went way up, basically all the buyers, you know, they bought up all the finished units that were sitting, you know, the sort of normal amount of inventory that was sitting there, they bought all that up. They bought up all the units under construction. And then for a year, year and a half,

the supply, the COVID related supply issue really prevented us from actually meeting demand. So really for about a year and a half, what was happening is the buyers were sort of paying a premium to be put in the queue at the back of the line for a house that wasn't going to be built any faster than if they weren't buying it. Because there was no inventory, the builders were going to build it. But if you're willing to pay us an extra 10%, we'll put your name on it. It's still to take an extra three months to build compared to what it used to but your name's in the queue and that really was what was happening during the inflationary period and so what happened is eventually when the inflationary period stopped and everything leveled out sales declined quite

a bit and people tend to view that as like a normal cyclical um uh you know ups and downs but really uh the reduction in sales was just the end of this uh you know negotiation to put you in the queue the sales really never declined past you know below the point where we can complete houses anyway we the the home builders are still at capacity and they're going to be at capacity in a year and they're not they they haven't had any trouble selling finished homes and they're not going to have any trouble selling finished homes um so we're not really at the like the bottom of a sales uh collapse we're at the end of this very unique period and as far as i can tell it's never happened before in american housing markets where home builders literally

just didn't have uh units to sell um and weren't going to so i think it looks bearish if you look at that trend that downtrend in um sales but really the home builders are basically at the top end of a normal mark of what would normally be a normal market and i think from here we're just going to see actually a very boring as those covid supply constraints get worked out and they can get transformers into the to the electrical um infrastructure to open the neighborhood and get the windows in and everything else that's been uh delaying uh construction um then we're just going to glide into back into a growth growth and completions and sales are just going to follow along with that i think

now there's two other topics i want to talk about before i let you go uh the first is politics second is the federal reserve federal reserve is not a political organization uh unless you talk to some people and they may think so so maybe we'll start there um the federal reserve loose monetary policy i think a lot of people say uh you know drove immense rises in prices uh of both real estate but also you know higher inflation etc and uh that's the cause of some of this how much credence do you put to the federal reserve's kind of contribution to housing affordability um or the lack thereof uh or is that maybe an easy lazy excuse and it's really not as uh intense of an involvement yeah i i am definitely a uh have a i suppose you'd call

a heterodox view on that um i don't think the fed really has had anything to do with housing affordability and price trends over the last year three years five years 40 years um so as a uh i'll start saying the two in the in the 2010s there's you know desert the zero interest rate policy that um gets um a lot of gruff um and um what i say is uh zur wasn't a p it wasn't a policy the natural interest rate was uh was low uh mortgage rates are what mortgage rates are because the market has put them there partly because we locked 20 million families out of the mortgage market. So there's no demand for mortgages. And so, you know, in building from the ground up, I go that that's the book that's really about sort of the timeline of

the of the of the financial crisis. And initially, when when the Fed started QE, it was actually because they were trying to keep the target interest rate at 2%. And it was so far above neutral that in Ben Bernanke's memoir, he says if they hadn't started doing QE, where effectively initially what QE was, was basically borrowing cash back from the banks instead of printing it because they were trying to maintain their 2% target, which they never could actually hit.

um uh the the fed went to zero percent screaming and kicking they actually created a crisis trying not to um so the initial drop to zero percent interest rates was certainly not a fed policy and in fact had they dropped uh rates to zero percent when they should have we might not have had a crisis um and it's not the the period since then isn't that different like the the low rates are the rates are low because the pet is as Milton Friedman used to say low interest rates aren't a sign of current loose policy they're a sign of past tight policy and that's basically where we've been for 15 years um so I just wouldn't I wouldn't attribute any of the stuff that was happening in housing pre-COVID to the Fed the the the Fed was we were at zero because zero is the market rate

um and uh home prices weren't high because mortgages were low because you can explain high home prices with high rents and if we were overstimulating housing for the last 40 years surely you'd expect to get a little bit of rent relief from that but we've seen the opposite for 40 years so um so i just don't attribute anything to to fed policy and in terms of the post-covid period, I'm fully on team transitory. The inflation was international. It was due to these supply constraints. You know, I suppose we could have sucked every dollar out of the economy and, you know, use gold bars and clamshells to buy things with, but I don't think that would have made us any better off. I don't think the Fed should have tried to lower, you know, it was

inflation that came about from other reasons, not really from them overstimulating and they had no business trying to reverse it. And in fact, that inflation reversed before any significant interest rate increases happened. So as of, you know, the last real above excess month of inflation was June 2022, where I like to look at CPI inflation without the shelter component for a number of reasons. And it's actually much higher in the summer of 2022 without the shelter, because the shelter component has this lag because of the way they measure it through survey data. So if you take this shelter component out, June 22, it's like 14% inflation And in July, it's back to basically 2% and it's been 2% since, you know, for 18 months since then.

In June 2022, the Fed target rate is like a percent and a quarter. And there's just, there's no, it's implausible that you could reverse 14% inflation with a one and a quarter percent target rate. you know, nobody back in Volcker's day, nobody would have said that, oh, he's increased the target rate to a percent and a quarter. The 70s are over now, right? If it's truly monetary inflation, they would have needed to raise rates to 10 or 15%. Inflation dropped because it was transitory. It had nothing to do with them. And actually, they did a great thing by not trying to reverse it, which actually ended up raising long-term rates. And so really what I think the Fed mostly did is chase those long-term rates up, which is great. The long-term rates rose because

sentiment improved and there's a lot of pent-up production potential because of all these COVID supply constraints that we've been dealing with. So I think the Fed was actually pretty loose in mid-2022, which was exactly what we want them to be because now we didn't get a deflation when that transitory inflation dropped. Because the Fed's been loose, I think that probably helped keep inflation above zero right now. And so I do think they need to lower rates a little bit going forward. And of course, we've seen a shift in the last month or so of expectations moving that way. So eventually they'll get back to three or 4% and we'll have a nice upward sloping yield curve. And yeah, I think J-PAL has been fantastic. The last question I have is around politics.

Many of the cities that you described in terms of these closed access cities, I think the narrative online is they're Democrat controlled. They have very kind of destructive policies. Whether that is true or not um on those specific cities uh how do you think politics plays into this and is one political party maybe more to blame or their policies tend to create or help the situation uh yeah you know the housing issue is sort of funny because it's very it it doesn't it doesn't map to the normal left right um uh you know um map that we use there There's yimbies and nimbies both into the extreme. I think, you know, I used to be sort of more of a, like,

oh, the progressives are, you know, hypocrites and they're ruining the cities. But, you know, there are natural stresses that come from urban living that, you know, when we're all in close quarters, a city is a hard thing to manage. And I think it tends to lend itself to more blue politics than a small city or rural area does

because you end up with all these, relational things that you have to deal with between classes and between neighborhoods and because everyone's in close quarters And a lot of, you know, problems with public benefits or crime, you know, sort of lend themselves to a communal politics. So I'm not sure that I think sort of cities are where this problem is, the problem we have to deal with. And it just so happens that cities tend to be more blue. And so the blue politicians are there

where the problem is difficult. But certainly it's irritating to see some of the sort of hypocritical anti-market rhetoric that you see in the cities, sort of pretending to be for the poor families when really the policies just, the de facto policies are to just make it impossible build housing at all that at the end of the day leads to this migration within the city that

basically leads to all the poor families moving out so um it's certainly the the progressives in those cities certainly um uh are good at playing that sort of hypocritical pat yourself on the back game while they make sure nobody of lower socioeconomic status is ever going to move there where can we send people to find your books or find you online if they want to learn more about this or engage uh further with these ideas um at twitter uh i'm at k a erdman it's k-a-e-r-d-m-a-n-n uh is my uh is my handle there uh the substack is kevinerdman.substack.com um and it's called the erdman housing tracker uh and then uh um the two books are shut shut out which shut out is sort of a sort of sets the background like uh you know here's what here's

all the ways that a shortage of housing uh is affecting our economy and sort of a big part of that is that it created this boom and bust cycle in the 2000s uh and then i sort of tease that and shut out and then building from the ground up is more of the timeline of walking through the those events with this with these different uh you know colored glasses on in terms of thinking of it as being a housing shortage instead of a housing uh bubble um and so yeah both of those are and i i would say the shutout's probably a little more academic whereas building from the ground up i think a little more accessible in terms of the writing um and you could think of shutout as uh sort of it's sort of the microeconomics and and um building from the ground up is sort of

sort of macroeconomics of housing and the economy over the last 20 years. So yeah, that's where people can find me. I highly suggest people go read the books and subscribe to your sub stack. You do a fantastic job talking about the housing market and I've learned a lot. So thank you so much for all the time, energy, effort that goes into all the work and we definitely do this again in the future. Great. Yeah, I'd love to. Thanks.