It's kind of like the "perfect storm" of factors, which is why I think it is hard to solve. Among these:
1. The increased cost of adding to housing stock relative to earlier eras (mostly due to regulation, but also NIMBY-type blocking), which tends to make the new housing disproportionately higher-end;
2. The increased importance of living in one of the "bubble" metropolises that took place during the period from 2000-2020;
3. The spread of some of the bubble population to other, smaller, cities throughout the country in the wake of the COVID lockdowns, which had the effect of "spreading" the increased cost of "bubble" housing to a wider number of markets than previously;
4. A very long period of historically low interest rates, which tended to drive up housing sale prices (more affordable than at higher rates);
5. The rise of widespread real estate investment in the residential housing market, which has tended to reduce supply of house for sale, and therefore pushing up prices; and
6. The short-term issues created by the sudden, sharp rise in interest rates (near doubling for mortgages in many places), which has created strong disincentives for existing owners to sell (they currently have low rate mortgages and do not want to replace them with high rate mortgages), which constrains supply and drives up prices.
Overall, there are a lot of factors that have worked to reduce the supply of "starter" housing, which has tended to increase the purchase cost of the existing housing stock. This has benefited existing owners at the expense of new entrants, and the effect is substantial, when you look at the cost of purchasing a home even over the past ten years (and the trend is longer than that). This has been turbo-charged by the sharp increase in mortgage rates since 2022, which has, in many places, effectively frozen the housing sales market (other than for people who are literally forced to move) -- another severe constraint on supply which places even more upward pressure on prices.
It's really just a perfect storm of factors weighing on supply that has sent the housing purchase market into a very dysfunctional place.
Rents have stopped increasing as much, it's true. It's not clear why, as you write. My own guess is that it may have something to do with how the residential sales market has gummed up. Fewer people are moving, more people are sitting still, including renters. That may mean less steep rental increases, because the demand overall for rentals isn't increasing that quickly as compared with a normal market where a lot of people are moving all the time and there is a brisk demand for rental units. Immigration should be creating upward pressure on rents, but it hasn't done so ... perhaps because the housing stock involved for that segment of the market is very low end, and therefore has a lesser impact on the prices at the mid and higher ranges of the market? I suppose it's also the case that, at least when it comes to rentals of single family homes, the increased supply of rental houses available, relative to purchasable houses, as a result of number "5" above, has tended to increase the supply, which tends to weigh on rents, at least for that segment of the rental market.
People are also more acutely aware of the status of others due to social media. One of the most socially kind things wealthy people can do is tone it down on social so you don't make other people feel like crap for not being able to afford the same things and experiences.
Great piece. I'll note that the Federal Reserve owned $0 in Mortgage-backed securities. By April 2022, they had monetized over $2.7 TRILLION worth. They still hold $2.25 trillion. I'd argue this had some effect on the housing market (along with ZIRP, QE, and the resultant epic Cantillon Effect.)
There's a great Bastiat quote that says, "Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil."
ZIRP, QE, the 2008 and 2020 bailouts, the Obama Admin creating the hedge-fund/private-equity ownership of single-family homes industry (after which Geithner ascended to head of Warburg Pincus) - all of these Bernanke, Yellen, Powell "quick fixes" had terrible long-term consequences (for most) that we are only now beginning to deal with.
You comment about marrying an engineer reminded me of a guy on my soccer team. His 21st bd he got heroically drunk like choke on you vomit drunk. And his girlfriend showed up and nursed his ass like her life depended on it. When I asked her why she looked me dead in the eye and said "I want to homeschool my kids and that means James (not his name) needs to get that job at Lockheed, so don't you let him die on me." Lucky bastard definitely found a good one.
The increasing urbanization of the world is an underappreciated factor. When I graduated from university I looked at moving from my 300,000+ city to Toronto or Vancouver. I ruled these out as they were much higher priced than home, and world status cities like Paris or New York even more unaffordable.
Now my city has grown to 1.3 million, and costs of everything have gone up too. But if I look at cities that are still smaller, in the 300-500 population [and aren't just commuter sub-cities] then the prices are waaay lower. Yes, the economic and cultural attractiveness may be less than glam cities, but get a job, grow a business and your community and those attractive elements come by time the kids are leaving home and you have time and wealth to enjoy them.
Meantime I am the sole occupant of a large-ish house and cannot afford to downsize yet in part because "smart growth" and development fees make smaller places less affordable.
I agree that people generally overvalue top-line compensation and undervalue quality of life, or value the wrong things. There's a lot of vanity in people wanting to live in hip cities at salaries that don't allow them to afford the nice things all around them.
Good discussion. I also went back and read your piece on demographical reversal, which I enjoyed. I'm trying to think more about the economic and investing implications of our demographic situation, so this is all good food for thought. But I won't pretend to have any definitive answers just yet.
Let me remark on this point:
>A particularly impressive young man I know managed to earn his bachelor’s in two years with zero debt
I graduated college in 3 years in the early 00s. I sort of screwed up my time in college by not having very good internships, mainly because I didn't have any earthly idea what I wanted to do. And I didn't have a good job at the time I graduated college, as I still mulled over my future options.
But I noticed that putting on my resume "graduated in 3 years, summa cum laude" was a calling card in itself that got employers curious and generated positive reactions in every interview. They weren't sure exactly how I did it, but they figured it could only be a good indicator about me.
All that to say, graduating early can actually pay dividends twice: it reduces your cost AND increases expected returns from your degree by serving as a positive signal to employers. Though if you're targeting an industry where there is an expected sequence of internships that results in a very strong starting point out of college (in IB, for example, which is the world I know), that 4th year is probably going to pay for itself.
Loved this. And some of the best parts were footnotes.
Loved "the cheat code to life is to just marry an engineer". My mother-in-law did. My wife did. My daughter-in-law did.
I would paraphrase your article like this:
If housing is an investment, then within a few generations, the rising generation is priced out. We are there now.
Got your post from Aaron Renn, btw. Just subscribed.
Housing is the real bugbear here.
It's kind of like the "perfect storm" of factors, which is why I think it is hard to solve. Among these:
1. The increased cost of adding to housing stock relative to earlier eras (mostly due to regulation, but also NIMBY-type blocking), which tends to make the new housing disproportionately higher-end;
2. The increased importance of living in one of the "bubble" metropolises that took place during the period from 2000-2020;
3. The spread of some of the bubble population to other, smaller, cities throughout the country in the wake of the COVID lockdowns, which had the effect of "spreading" the increased cost of "bubble" housing to a wider number of markets than previously;
4. A very long period of historically low interest rates, which tended to drive up housing sale prices (more affordable than at higher rates);
5. The rise of widespread real estate investment in the residential housing market, which has tended to reduce supply of house for sale, and therefore pushing up prices; and
6. The short-term issues created by the sudden, sharp rise in interest rates (near doubling for mortgages in many places), which has created strong disincentives for existing owners to sell (they currently have low rate mortgages and do not want to replace them with high rate mortgages), which constrains supply and drives up prices.
Overall, there are a lot of factors that have worked to reduce the supply of "starter" housing, which has tended to increase the purchase cost of the existing housing stock. This has benefited existing owners at the expense of new entrants, and the effect is substantial, when you look at the cost of purchasing a home even over the past ten years (and the trend is longer than that). This has been turbo-charged by the sharp increase in mortgage rates since 2022, which has, in many places, effectively frozen the housing sales market (other than for people who are literally forced to move) -- another severe constraint on supply which places even more upward pressure on prices.
It's really just a perfect storm of factors weighing on supply that has sent the housing purchase market into a very dysfunctional place.
Rents have stopped increasing as much, it's true. It's not clear why, as you write. My own guess is that it may have something to do with how the residential sales market has gummed up. Fewer people are moving, more people are sitting still, including renters. That may mean less steep rental increases, because the demand overall for rentals isn't increasing that quickly as compared with a normal market where a lot of people are moving all the time and there is a brisk demand for rental units. Immigration should be creating upward pressure on rents, but it hasn't done so ... perhaps because the housing stock involved for that segment of the market is very low end, and therefore has a lesser impact on the prices at the mid and higher ranges of the market? I suppose it's also the case that, at least when it comes to rentals of single family homes, the increased supply of rental houses available, relative to purchasable houses, as a result of number "5" above, has tended to increase the supply, which tends to weigh on rents, at least for that segment of the rental market.
Measure inflation by "labor hours per unit of status". Could status monopolies and status printing distort incentives as much as weak currencies.
People are also more acutely aware of the status of others due to social media. One of the most socially kind things wealthy people can do is tone it down on social so you don't make other people feel like crap for not being able to afford the same things and experiences.
All I want for Christmas is the housing market to crash
Great piece. I'll note that the Federal Reserve owned $0 in Mortgage-backed securities. By April 2022, they had monetized over $2.7 TRILLION worth. They still hold $2.25 trillion. I'd argue this had some effect on the housing market (along with ZIRP, QE, and the resultant epic Cantillon Effect.)
Interesting, so mortgage rates would be even higher without Fed support, and thus would be more likely to catalyze a needed housing crash.
100%.
There's a great Bastiat quote that says, "Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favorable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil."
ZIRP, QE, the 2008 and 2020 bailouts, the Obama Admin creating the hedge-fund/private-equity ownership of single-family homes industry (after which Geithner ascended to head of Warburg Pincus) - all of these Bernanke, Yellen, Powell "quick fixes" had terrible long-term consequences (for most) that we are only now beginning to deal with.
You comment about marrying an engineer reminded me of a guy on my soccer team. His 21st bd he got heroically drunk like choke on you vomit drunk. And his girlfriend showed up and nursed his ass like her life depended on it. When I asked her why she looked me dead in the eye and said "I want to homeschool my kids and that means James (not his name) needs to get that job at Lockheed, so don't you let him die on me." Lucky bastard definitely found a good one.
The increasing urbanization of the world is an underappreciated factor. When I graduated from university I looked at moving from my 300,000+ city to Toronto or Vancouver. I ruled these out as they were much higher priced than home, and world status cities like Paris or New York even more unaffordable.
Now my city has grown to 1.3 million, and costs of everything have gone up too. But if I look at cities that are still smaller, in the 300-500 population [and aren't just commuter sub-cities] then the prices are waaay lower. Yes, the economic and cultural attractiveness may be less than glam cities, but get a job, grow a business and your community and those attractive elements come by time the kids are leaving home and you have time and wealth to enjoy them.
Meantime I am the sole occupant of a large-ish house and cannot afford to downsize yet in part because "smart growth" and development fees make smaller places less affordable.
I recently wrote a piece touching on this:
https://tomowens.substack.com/p/secession-of-the-successful
I agree that people generally overvalue top-line compensation and undervalue quality of life, or value the wrong things. There's a lot of vanity in people wanting to live in hip cities at salaries that don't allow them to afford the nice things all around them.
Good discussion. I also went back and read your piece on demographical reversal, which I enjoyed. I'm trying to think more about the economic and investing implications of our demographic situation, so this is all good food for thought. But I won't pretend to have any definitive answers just yet.
Let me remark on this point:
>A particularly impressive young man I know managed to earn his bachelor’s in two years with zero debt
I graduated college in 3 years in the early 00s. I sort of screwed up my time in college by not having very good internships, mainly because I didn't have any earthly idea what I wanted to do. And I didn't have a good job at the time I graduated college, as I still mulled over my future options.
But I noticed that putting on my resume "graduated in 3 years, summa cum laude" was a calling card in itself that got employers curious and generated positive reactions in every interview. They weren't sure exactly how I did it, but they figured it could only be a good indicator about me.
All that to say, graduating early can actually pay dividends twice: it reduces your cost AND increases expected returns from your degree by serving as a positive signal to employers. Though if you're targeting an industry where there is an expected sequence of internships that results in a very strong starting point out of college (in IB, for example, which is the world I know), that 4th year is probably going to pay for itself.