Further Thoughts on Affordable Housing

No solutions, only tradeoffs...

One of my favorite follows on Twitter (who isn’t all that fond of me I think, but I am of her) is Melissa Savenko, a real estate agent who is also a recovering attorney, out of Virginia. She recently posted a lengthy thread on Twitter about affordable housing that got me thinking about the topic once again.

You can start here:

What she goes on to argue is that “affordable housing” is often a shorthand for “subsidized rentals.” It should be “smaller single family residences (SFR) that first-time home buyers (FTHB) can afford to buy.”

She argues that these smaller houses were not “cheap” — I think in the sense of lack of quality to cut every corner possible — but “efficient and safe” and were the kinds of homes where previous generations raised families. Therefore, she argues for government action to drive affordable housing:

She finishes by saying:

The reality is homeownership is also the first rung on the wealth ladder for most people. We cannot have a system in this country where entire generations are shut out of homeownership. It is not good for us as a country. We have always been a land of opportunity.

We must find a way to make homeownership attainable again. I believe we can do it. We are a country founded on hard work and ingenuity. People must work together. Housing must become a political priority. Let's all work together to fix the housing market.

Of course I agree 110% with Melissa on the goals and the sentiments. I have written countless posts and articles about the lack of affordable housing, about the danger facing us as a society and as a country when younger generations simply cannot afford the American Dream, and so on. Greg Robertson and I interviewed Bryan Caplan who argues for deregulation as the way forward for housing affordability.

And I reviewed his excellent book.

I have even put forth a proposal named MADRE that continues to be ignored.

I return to this topic, spurred on by Melissa’s thread as well as all of the replies on it, because it is important. And also because far too many people appear to think there is a solution to the housing affordability crisis. There is not.

As per Thomas Sowell, there are no solutions. There are only tradeoffs.

Until we as a society are willing to both understand the tradeoffs and willing to choose between them, I’m afraid nothing can or will change.

So let’s be honest about the tradeoffs, shall we?

The Tradeoff That Got Us Here

One of my favorite charts that I reuse over and over again is this one:

Case-Shiller vs. US M2 Money Supply

What that shows is that other than the Bubble years, home prices track M2 money supply pretty closely. The skyrocketing during COVID is almost proof of the assertion.

And then there is this chart I also love:

Turns out, homes did not get more expensive. Turns out, the Dollars that we use to buy homes got less valuable. If we price homes in gold, it’s actually around what it was in the 1970s.

Along with this chart that I hate, but it does reveal the truth:

The truth is that for the past… 50 years or so… and definitely since 2000, the government (including the Fed) has systematically devalued the dollar. Housing has not gotten more expensive; the dollar has become worth less. And in the meantime, wages and salaries have not only stagnated, but actually fallen in real terms for five decades. Given the inflation since COVID, it has become far worse for workers and far better for asset owners.

The tradeoff that we made as a country is we “agreed” to suppress wages in order to benefit asset owners in dollar terms. If you owned assets — stocks, bonds, REAL ESTATE — over the past five decades, you benefited from our fiscal and monetary policies. If you did not, you got screwed. Granted, none of us actually “agreed” to that but our ruling class did… kinda sorta in our name.

So when Melissa (and many others) talk about “homeownership is also the first rung on the wealth ladder for most people” we have to recognize that is true and has been true because we chose to advantage asset owners while penalizing wage earners.

The result is that today, according to Moody’s Analytics economist Matthew Walsh, either home prices must fall by 40% or wages increase by 70%. Median home prices would need to go from $430K to $258K. Or… the median income in America needs to go from $60K to over $100K.

Let’s think through that.

The Tradeoff for Affordable Housing, #1 — Lower Prices

Say we all decide — or at least, say the government decides — to lower the price of housing by 40%.

It doesn’t really matter the method that the government decides to use to lower the price of housing. It could be taxes, it could be encouraging building, it could be through price caps, whatever. But let’s say the government follows Melissa’s advice and encourages building small starter homes with tax incentives and whatnot.

If a flood of these small FTHB houses hit the market, what will be the impact on the price of entry-level homes? It goes down, of course. That’s the whole point.

Prices on these entry-level homes must fall to $258K from $430K, which is the definition of “affordable” according to Moody’s. What does that do to the next level up segment of the market? Let’s say the homes in the $600K to $1m range? What happens to the price of those homes? Do they go up? Stay the same? Or fall?

Maybe I’m wrong about the move-up buyer, but if I’m in a nice, efficient and safe 3BR/2BA starter home making $70K a year, even with the equity built up in my starter home, can I actually afford to move up to a $800K 4BR/3BA home? Or do I just stay in my efficient and safe starter home and raise my family there, as my grandparents did?

It seems obvious to me that prices in that next tier up also drop. Which means those homeowners no longer have the proceeds from their sale to buy up to the tier above that. So like dominos, prices fall tier after tier, until perhaps we get to the ultra-high end where it’s about uniqueness or rarity, and ultra-wealthy buyers are simply not price sensitive. They’re not looking to tap the equity in their current homes to buy the next one, after all.

In short, if the market gets enough entry level “small efficient and safe” homes to drive prices down to affordable (40% below today), then the price of all homes will fall dramatically as well. Maybe not 40%, but significantly, as demand across the entire spectrum will fall to be absorbed by the now-affordable entry-level homes.

Which means that current homeowners will see the single largest asset they own fall in value by 40%.

That’s the tradeoff.

The entirely foreseeable consequences are:

1. Elderly people will find their retirement nest egg reduced by 40%. According to this paper by Vanguard, 80% of Americans age 60 and over are homeowners, and that house is about 48% of their net worth. If half of your net worth declined by 40%, how would you be feeling?

2. Most municipalities are funded by property taxes, which are based on the value of residential property. A 40% decline in local tax base is… an interesting situation.

3. Is there a scenario where entry level starter homes fall by 40% in price but rents stay the same or go up? I can’t see one. Which means rents also fall as home prices fall, which means residential investors take it in the shorts… which affects those elderly people who have rental properties… and makes the math on whether to buy that affordable starter home at $258K or keep renting a similar place for like $1,000 a month interesting.

Of course, there are consequences we can’t foresee today. I don’t know what they are, because I can’t foresee them. But they exist. We know that.

The Tradeoff for Affordable Housing, #2 — Higher Wages

It is unclear how in the world the American worker will get 70% more in wages, but let’s just say they do. Some kind of economic miracle happens, and Americans will see a 70% increase in income.

Under our current monetary and fiscal system, if incomes go up by 70% without productivity also going up by 70% (and I mean productivity in the real physical world because food, lumber, houses, and land cannot be printed or created inside computers), then hyperinflation is all but inevitable. Particularly those goods that are real, physical and necessary for life. Think food, energy (gas prices), and housing.

Even if we isolate to the housing market, if every potential buyer has 70% more income, the only way to not have home prices skyrocket by 70% is if enough houses are built to prevent that rise.

Which means.. see #1 above… except with food and energy inflation as well.

The Tradeoff for Affordable Housing, #3 — Crush the Landlords

The third tradeoff — which is kind of at the heart of my MADRE proposal — is to unlock supply by crushing landlords. Not just the big corporate landlords who are a convenient bogeyman, except that they comprise like 2-3% of all landlords, but all real estate investors, including the elderly couple with a condo they rent out.

If you make it economically unfeasible to rent out housing — at least single family homes like Melissa wants — then you do unlock a flood of supply of such starter homes. It might be enough to drive prices down. We’re back to #1 above.

In addition, crushing rentals ruins the fortunes of quite a few wealthier families, and we create the foreseeable problem of… if you sell your investment property, where do you put the money?

I argue that the reason why so many people put their savings into real estate is because they know (or at least feel in their gut) that real estate cannot be printed by the government or created out of nothing in a computer system somewhere. It is in the name: real.

Until there are other investments, other store of value, that cannot be created out of thin air, or devalued at the stroke of a pen, which also generate some kind of cash flows… real estate remains supreme. So a tradeoff like this requires a total rethink of our debt-based monetary system.

Fundamental Tradeoff: Housing as Consumable Good

There are other tradeoffs we can consider, of course. But all of those are, in a sense, detail.

Above all else, what occurs to me is that however we get to affordable housing — defined as small, safe, efficient single family houses that first time homebuyers can purchase to raise their families in — the ultimate tradeoff is that such a house cannot then be an asset that constantly appreciates over time. The same thing cannot be the first step on the wealth ladder and also be an affordable roof over heads generation after generation.

Sure, you can benefit from the lower cost starter home. But for it to build wealth for you, it has to be worth more tomorrow than it is today in real, inflation-adjusted terms. That benefits you, but it does mean your grandchildren will be struggling with housing affordability in precisely the same way you are struggling while your grandparents did not.

Either houses are investments that build wealth, or they are durable consumer goods, like cars or refrigerators. No one anywhere has ever bought a car thinking, “This is the first step on the ladder to wealth.” That must be the case with starter homes going forward, if we are to have affordable housing.

I’m for it, personally, and I’m a Gen-Xer who has benefited from asset value inflation from our money-printing ways. I think my house should be consumption rather than investment; I live here and enjoy my life here, just like I drive my car and enjoy it for what it does for me today. My investments are things I do not get to enjoy today, so I can sell them later and use the money to enjoy things at that future date.

But I am fully aware of the tradeoff. How many others are?

And if they are, how many are willing to accept the tradeoff where their house is no longer appreciating, but depreciating? Where the most expensive “thing” they own will not ever be worth what they paid for it?

When we talk of having enough “political will” to fix housing affordability, do we really know what that means? If we did, do we actually have the will?

Let me wrap up with a saying I’ve been fond of:

Fix the money, and fix housing. Fix housing, and fix everything else.

Are you in?

-rsh