Bloomberg Audio Studios, Podcasts, radio News.

Bloomberg Audio Studios, Podcasts, radio News.

Hello and welcome to another episode of The Odd Lots Podcast.

Hello and welcome to another episode of The Odd Lots Podcast.

I'm Joe Wisenthal and I'm Tracy Alloway.

I'm Joe Wisenthal and I'm Tracy Alloway.

You know, obviously, obviously we're a little distracted these days because there is so much news all the time. It doesn't feel like we have much time for sort of classic episodes where we talk about some big idea. But one thing that we had heard a lot over the years really is that for the public, you know, when they think about inflation or they think about the cost of living, housing costs are really central to their view.

You know, obviously, obviously we're a little distracted these days because there is so much news all the time. It doesn't feel like we have much time for sort of classic episodes where we talk about some big idea. But one thing that we had heard a lot over the years really is that for the public, you know, when they think about inflation or they think about the cost of living, housing costs are really central to their view.

Right, And you see this not just in house prices but also in rents. Right, everything has gone up since the pandemic, and people people don't like it. People don't like it when the cost of housing shelter goes up.

Right, And you see this not just in house prices but also in rents. Right, everything has gone up since the pandemic, and people people don't like it. People don't like it when the cost of housing shelter goes up.

People don't like when the cause of gasoline goes up. People don't like the cost of eggs for certain But I feel like when it comes to the cost of living, everybody must have shelter. Basically, it's also.

People don't like when the cause of gasoline goes up. People don't like the cost of eggs for certain But I feel like when it comes to the cost of living, everybody must have shelter. Basically, it's also.

A big chunk, it's a huge chunk of.

A big chunk, it's a huge chunk of.

The consumption basket, the consumption of shelter. And we've had prices going up for like I don't know, fifteen years or something like that. Even the raid hikes didn't do much to slow house prices. They slowed other housing activity. But it is a real problem and it gets to the center of like what people call the American dream. And we've talked to people over the years with different ideas, you know, yimbi types. They talk about zoning, or people say there should be some sort of more public investment, et cetera. I don't think like we've fully cracked it, and certainly policy makers have yet to solve the problem.

The consumption basket, the consumption of shelter. And we've had prices going up for like I don't know, fifteen years or something like that. Even the raid hikes didn't do much to slow house prices. They slowed other housing activity. But it is a real problem and it gets to the center of like what people call the American dream. And we've talked to people over the years with different ideas, you know, yimbi types. They talk about zoning, or people say there should be some sort of more public investment, et cetera. I don't think like we've fully cracked it, and certainly policy makers have yet to solve the problem.

Right, although it is interesting. It's like one of the few, by part of in areas where both sides of the aisle will say that housing supply is an issue and they want to do something to rectify it.

Right, although it is interesting. It's like one of the few, by part of in areas where both sides of the aisle will say that housing supply is an issue and they want to do something to rectify it.

So go back to the Great Financial Crisis. Do you remember in like twenty ten or something, or maybe middle of two thousand and nine, there were actually some people that proposed raising like destroying empty houses just to get the supply demand imbalanced.

So go back to the Great Financial Crisis. Do you remember in like twenty ten or something, or maybe middle of two thousand and nine, there were actually some people that proposed raising like destroying empty houses just to get the supply demand imbalanced.

Just I don't remember that.

Just I don't remember that.

Yeah, this was.

Yeah, this was.

Absolutely a thing. So we were like, well, why don't we just like pave over a bunch of existing houses and then we won't have this glut and then the prices will keep falling that we can This was a I'm going to google this while we're talking, but hopefully no one never took that seriously. We'll be absurd because now we're in an era of housing scarcity. But that was a crazy time.

Absolutely a thing. So we were like, well, why don't we just like pave over a bunch of existing houses and then we won't have this glut and then the prices will keep falling that we can This was a I'm going to google this while we're talking, but hopefully no one never took that seriously. We'll be absurd because now we're in an era of housing scarcity. But that was a crazy time.

M hm. There is a lot of craziness in these sort of two thousand and eight to twenty twelve era.

M hm. There is a lot of craziness in these sort of two thousand and eight to twenty twelve era.

And one of the things that we know about crises, you know, look, there's all this subprime lending, all that stuff. So afterwards there was this big impulse to say, like, we're never going to allow things to get that crazy again. We're never going to allow people to buy a home with no down payment, no documentation, and terrible credit scores again. Anyway, we're going to be talking to someone whose argument is that we may have overshot.

And one of the things that we know about crises, you know, look, there's all this subprime lending, all that stuff. So afterwards there was this big impulse to say, like, we're never going to allow things to get that crazy again. We're never going to allow people to buy a home with no down payment, no documentation, and terrible credit scores again. Anyway, we're going to be talking to someone whose argument is that we may have overshot.

Great, I'm excited, all right, I'm really psyched.

Great, I'm excited, all right, I'm really psyched.

We do have the perfect guest, someone who's writing I've followed for a long time, and the gist of his argument is that we overshot that various post greadte financial crisis policy changes in pursuit of bubble avoidance are the cause of our housing shortage. Today, we're going to be speaking with Kevin Erdman. He is an affiliated scholar at the Mercadis Institute and he's the author of the book Building from the ground Up. He's a great newsletter. Uh, Kevin, thank you so much for coming on O lots.

We do have the perfect guest, someone who's writing I've followed for a long time, and the gist of his argument is that we overshot that various post greadte financial crisis policy changes in pursuit of bubble avoidance are the cause of our housing shortage. Today, we're going to be speaking with Kevin Erdman. He is an affiliated scholar at the Mercadis Institute and he's the author of the book Building from the ground Up. He's a great newsletter. Uh, Kevin, thank you so much for coming on O lots.

Yeah, thanks for having me.

Yeah, thanks for having me.

That's true, right where't there's some headlines about bulldozing over houses. I mean, it was like a weird time because like there were three things. There was like the home price appreciation. There was the amount of housing that was being built, and then there was the sort of liberal lending standards mortgages to people couldn't afford them. And then there was all the also the financial engineering around it. Like there was st a lot going on in those days.

That's true, right where't there's some headlines about bulldozing over houses. I mean, it was like a weird time because like there were three things. There was like the home price appreciation. There was the amount of housing that was being built, and then there was the sort of liberal lending standards mortgages to people couldn't afford them. And then there was all the also the financial engineering around it. Like there was st a lot going on in those days.

Yeah. Yeah, and there were people that proposed that green span, even I think in Hank Paulson's book he mentions that green span sort of half jokingly mentioned it. But the idea that you would even think of it is crazy. In fact, I actually wrote a post on my substock recently that Tyler Collen interviewed Joe Stiglitz very recently, and Joe Stiglitz was still sort of basing his ideas of you know what happened in the recession on this idea of overbuilding, and he talked about like there were all these low quality houses built in Las Vegas that basically were built where nobody would want them. Yeah, and made some quip that like the best thing about them was they were so poorly built that they wouldn't last long or something. And the crazy thing about that is that they're actual. If you look back at the data, there wasn't actually a building boom in Vegas. There was a price bubble, but the rate of home building never actually increased in Vegas during that time.

Yeah. Yeah, and there were people that proposed that green span, even I think in Hank Paulson's book he mentions that green span sort of half jokingly mentioned it. But the idea that you would even think of it is crazy. In fact, I actually wrote a post on my substock recently that Tyler Collen interviewed Joe Stiglitz very recently, and Joe Stiglitz was still sort of basing his ideas of you know what happened in the recession on this idea of overbuilding, and he talked about like there were all these low quality houses built in Las Vegas that basically were built where nobody would want them. Yeah, and made some quip that like the best thing about them was they were so poorly built that they wouldn't last long or something. And the crazy thing about that is that they're actual. If you look back at the data, there wasn't actually a building boom in Vegas. There was a price bubble, but the rate of home building never actually increased in Vegas during that time.

Why don't you go ahead and give us the sort of two minute elevator pitch of your argument just so we fully understand it.

Why don't you go ahead and give us the sort of two minute elevator pitch of your argument just so we fully understand it.

Yeah. I think basically we have had a regional supply problem going back into the eighties and nineties, where the coastal metros like New York City in Boston and LA and San Francisco have clamped down on housing construction and so they basically can't grow as cities anymore in total. And so when the economy is doing well, when incomes are growing, population is growing, people just having babies and people growing up and wanting to form households. When that sort of all gets moving, those cities actually have to depopulate at this point because you know, if per capita, we're sort of demanding one or two percent more housing per person and they're only willing to build a half a percent of housing per year, that means a person and a half has to leave the city. So we actually have this weird countercyclical migration pattern into and out of those cities now. So like, for instance, the last several years, even pre dating covid LA has been for instance, has been losing population every year. It's down probably three or four percent now from its peak population in twenty seventeen. So basically that happened during the housing bubble. This counterintuitive thing was happening because when we're in good times or when people are demanding more housing, people actually have to move out of those cities. And the process for doing that is the rents go high enough until somebody's cries uncle and decides to leave town. And so the cities we think of as bubble cities Florida, Nevada, and Arizona in inland California were really just the landing places for those housing refugees. So those cities truly had a bubble, but it was a bubble in fundamentals, so it's actually a bunch of families moving there, and ironically those families were moving there to lower their housing costs. But all that got interpreted just as a bubble period and it was blamed on excess lending and speculation and all those things that it was really at its core, it was a lack of housing that drove all these migration patterns that then overwhelmed the cities where prices sort of temporarily rose and fell. And so basically what we did is we solved all the wrong problems. We blamed it on lending, and we cut off lending, and that basically closed down home building across the country. And so now the housing shortage that was just a a half a dozen coastal cities now is countrywide.

Yeah. I think basically we have had a regional supply problem going back into the eighties and nineties, where the coastal metros like New York City in Boston and LA and San Francisco have clamped down on housing construction and so they basically can't grow as cities anymore in total. And so when the economy is doing well, when incomes are growing, population is growing, people just having babies and people growing up and wanting to form households. When that sort of all gets moving, those cities actually have to depopulate at this point because you know, if per capita, we're sort of demanding one or two percent more housing per person and they're only willing to build a half a percent of housing per year, that means a person and a half has to leave the city. So we actually have this weird countercyclical migration pattern into and out of those cities now. So like, for instance, the last several years, even pre dating covid LA has been for instance, has been losing population every year. It's down probably three or four percent now from its peak population in twenty seventeen. So basically that happened during the housing bubble. This counterintuitive thing was happening because when we're in good times or when people are demanding more housing, people actually have to move out of those cities. And the process for doing that is the rents go high enough until somebody's cries uncle and decides to leave town. And so the cities we think of as bubble cities Florida, Nevada, and Arizona in inland California were really just the landing places for those housing refugees. So those cities truly had a bubble, but it was a bubble in fundamentals, so it's actually a bunch of families moving there, and ironically those families were moving there to lower their housing costs. But all that got interpreted just as a bubble period and it was blamed on excess lending and speculation and all those things that it was really at its core, it was a lack of housing that drove all these migration patterns that then overwhelmed the cities where prices sort of temporarily rose and fell. And so basically what we did is we solved all the wrong problems. We blamed it on lending, and we cut off lending, and that basically closed down home building across the country. And so now the housing shortage that was just a a half a dozen coastal cities now is countrywide.

This is very interesting. So I remember the Inland Empire, they called them the Sand States, like Arizona and Nevada, And the way it was certainly portrayed was that it was a speculative bubble, that there was all this like household speculation, and you know, there probably was some of that and people buying more house than they need because they thought they could flip it and flip this house. It was a popular TV show. But you're saying the fundamental were very sound, that basically it was like spillover population, the fundamentals of demand for shelter. What did we do after the Great Financial Crisis that, as you see it massively slashed lending.

This is very interesting. So I remember the Inland Empire, they called them the Sand States, like Arizona and Nevada, And the way it was certainly portrayed was that it was a speculative bubble, that there was all this like household speculation, and you know, there probably was some of that and people buying more house than they need because they thought they could flip it and flip this house. It was a popular TV show. But you're saying the fundamental were very sound, that basically it was like spillover population, the fundamentals of demand for shelter. What did we do after the Great Financial Crisis that, as you see it massively slashed lending.

You know, it's tough to pin it down to one thing. You know, there are a series of sort of official and unofficial, sort of just pressures that were put on lenders. So you know, there was the subprime boom and bus that really heated up in sort of late two thousand and three, early two thousand and four and then was really dead by mid two thousand and seven. And you can see sort of the effects of that. And again, you know, I assert that the effects of that on home prices and everything have been greatly overstated because it's basically been inflated to explain everything that actually is explained by the supply shortage. But it caused a few percentage point increase in home prices on average, and that reversed then when that market died, And then then there's this second event that happens that sort of just got lost in the chaos a because it was popular, be because this idea that lending had been so outrageous that there was sort of no amounts of pulling back that seemed like it was satisfying enough. And so over the course of two thousand and eight, there were just formal and informal pressures on the federal agencies, the FHJA, Fannie Maine, Freddie Mack to you know, be careful and tighten up lending. And you can see it in the numbers. They report in their books that over the course of two thousand and eight, any year up to that, even back into the late nineties, the typical Fanny and Freddie borrower had a credit score of say seven to ten and which is about average. And then by the end of two thousand and eight, mid two thousand and nine, it's more like seven sixty, which is you know, sort of top quarter credit score. And so basically, over the course of a year, year and a half, the average score on an approved mortgage goes up by forty or fifty points and stays there. It's really still there today. So basically, you know, I would say probably ten or twenty million five family's three two thousand and eight to post two thousand and eight have lost access to mortgage funding.

You know, it's tough to pin it down to one thing. You know, there are a series of sort of official and unofficial, sort of just pressures that were put on lenders. So you know, there was the subprime boom and bus that really heated up in sort of late two thousand and three, early two thousand and four and then was really dead by mid two thousand and seven. And you can see sort of the effects of that. And again, you know, I assert that the effects of that on home prices and everything have been greatly overstated because it's basically been inflated to explain everything that actually is explained by the supply shortage. But it caused a few percentage point increase in home prices on average, and that reversed then when that market died, And then then there's this second event that happens that sort of just got lost in the chaos a because it was popular, be because this idea that lending had been so outrageous that there was sort of no amounts of pulling back that seemed like it was satisfying enough. And so over the course of two thousand and eight, there were just formal and informal pressures on the federal agencies, the FHJA, Fannie Maine, Freddie Mack to you know, be careful and tighten up lending. And you can see it in the numbers. They report in their books that over the course of two thousand and eight, any year up to that, even back into the late nineties, the typical Fanny and Freddie borrower had a credit score of say seven to ten and which is about average. And then by the end of two thousand and eight, mid two thousand and nine, it's more like seven sixty, which is you know, sort of top quarter credit score. And so basically, over the course of a year, year and a half, the average score on an approved mortgage goes up by forty or fifty points and stays there. It's really still there today. So basically, you know, I would say probably ten or twenty million five family's three two thousand and eight to post two thousand and eight have lost access to mortgage funding.

But just on this point, I mean, I can go get a loan at Fannie May with a six to twenty credit score or something like that. I think it's a little higher over at Freddie Mac. And there's minimum down payments. I think it's three percent. But overall those haven't moved that much from the early two thousands. Like back in two thousand and six, at the height of the housing bubble, the minimum down payment was still three percent, and I think the FICO scores were generally lower. Is there perhaps just a lack of viable home buyers out there? I mean, credit card debt is at a record, wages have been kind of sluggish. Maybe those people people who are asset light, as Chimoth would say, maybe they just they're not thinking about buying houses.

But just on this point, I mean, I can go get a loan at Fannie May with a six to twenty credit score or something like that. I think it's a little higher over at Freddie Mac. And there's minimum down payments. I think it's three percent. But overall those haven't moved that much from the early two thousands. Like back in two thousand and six, at the height of the housing bubble, the minimum down payment was still three percent, and I think the FICO scores were generally lower. Is there perhaps just a lack of viable home buyers out there? I mean, credit card debt is at a record, wages have been kind of sluggish. Maybe those people people who are asset light, as Chimoth would say, maybe they just they're not thinking about buying houses.

No, it's definitely so. I mean those products exist, but the quantity of loans being originated to borrowers with those credit scores is really negligible. So like if you look at Fannie May, for any year two thousand and seven or before, about two thirds of their book of business was to borrowers with seven forty scores or less, and then immediately then by two thousand and nine it's only one third, and then it's stayed basically one third of their new business to the point where now their book of business is basically flip flopped. So the thing is that you know they have products, but there's the ability to repay standards that have been put in place and tightened, and there's just you know, there's just a black box of underwriting boxes that have to be ticked off that in theory, there's a product that goes to people with six twenty credit scores, but in practice, very few of those families can run the gauntlet to actually get the yes at the end of the approval process.

No, it's definitely so. I mean those products exist, but the quantity of loans being originated to borrowers with those credit scores is really negligible. So like if you look at Fannie May, for any year two thousand and seven or before, about two thirds of their book of business was to borrowers with seven forty scores or less, and then immediately then by two thousand and nine it's only one third, and then it's stayed basically one third of their new business to the point where now their book of business is basically flip flopped. So the thing is that you know they have products, but there's the ability to repay standards that have been put in place and tightened, and there's just you know, there's just a black box of underwriting boxes that have to be ticked off that in theory, there's a product that goes to people with six twenty credit scores, but in practice, very few of those families can run the gauntlet to actually get the yes at the end of the approval process.

Well, speaking of black boxes, I was trying to find like the average approval rate for Fannie and Freddy for mortgages, and ideally you could break down approval rates by FICO scores or something like that, and I couldn't find anything. Do you have a sense of a are there official numbers out there that I just couldn't find and be do you have a sense of what the approval rates might actually be?

Well, speaking of black boxes, I was trying to find like the average approval rate for Fannie and Freddy for mortgages, and ideally you could break down approval rates by FICO scores or something like that, and I couldn't find anything. Do you have a sense of a are there official numbers out there that I just couldn't find and be do you have a sense of what the approval rates might actually be?

Yeah, I don't have like an index that I tracked you months to month, and in a way that gets difficult that that number gets less informative over time. I have seen claims that there's this very specific period over the course of two thousand and eight and early two thousand and nine where those standards change, and soon after that, you know, two thousand and nine or ten. I know one of the mortgage I cite it in one of the books that one of the mortgage tracking institutions noted that the average score on denied mortgages at that point in two thousand and nine or ten had a higher average score than approved mortgages had had before two thousand and eight. And one of the oddities about the subprime boom and bust is that the subprime boom really wasn't associated with much of a change in the average It was mostly about terms getting reckless, but the average borrower quality, surprisingly enough, didn't really change that much in total during those boom times. So you know, as you get farther away from two thousand and eight, the denial rate becomes less informative because at some point families know who can qualify and who can't, And you know, somebody that has a seven to ten credit score and something wrong with their income that they know is going to be a prevent one of the boxes from getting checked off. They're not going to keep going back to the bank year after year after year to show up on the denial rates. But you can see sort of the effects of this in a lot of ways, Like if you go back to pre COVID when interest rates were really low, before home prices took off, there were houses across the country that would have previously been owner occupied where you go to Zello and they would estimate the rent on that house to be like fifteen hundred and a mortgage, you know, for what it was selling for the mortgage might only be five or six hundred a month, like it was. The mismatch after these families were cut out of the market is you know, pretty extreme during those post two thousand and eight years.

Yeah, I don't have like an index that I tracked you months to month, and in a way that gets difficult that that number gets less informative over time. I have seen claims that there's this very specific period over the course of two thousand and eight and early two thousand and nine where those standards change, and soon after that, you know, two thousand and nine or ten. I know one of the mortgage I cite it in one of the books that one of the mortgage tracking institutions noted that the average score on denied mortgages at that point in two thousand and nine or ten had a higher average score than approved mortgages had had before two thousand and eight. And one of the oddities about the subprime boom and bust is that the subprime boom really wasn't associated with much of a change in the average It was mostly about terms getting reckless, but the average borrower quality, surprisingly enough, didn't really change that much in total during those boom times. So you know, as you get farther away from two thousand and eight, the denial rate becomes less informative because at some point families know who can qualify and who can't, And you know, somebody that has a seven to ten credit score and something wrong with their income that they know is going to be a prevent one of the boxes from getting checked off. They're not going to keep going back to the bank year after year after year to show up on the denial rates. But you can see sort of the effects of this in a lot of ways, Like if you go back to pre COVID when interest rates were really low, before home prices took off, there were houses across the country that would have previously been owner occupied where you go to Zello and they would estimate the rent on that house to be like fifteen hundred and a mortgage, you know, for what it was selling for the mortgage might only be five or six hundred a month, like it was. The mismatch after these families were cut out of the market is you know, pretty extreme during those post two thousand and eight years.

Let's stipulate that there is a cohort out there that you know has some sort of stable income, potentially able to buy a home, wants to buy a home, and can't get a mortgage for all of the reasons that you laid out, How does that actually feed through to lack of supply out there? Talk to us about the link between the pressures that you described to constrain the supply of credit and just the lack of abundance, the lack of building.

Let's stipulate that there is a cohort out there that you know has some sort of stable income, potentially able to buy a home, wants to buy a home, and can't get a mortgage for all of the reasons that you laid out, How does that actually feed through to lack of supply out there? Talk to us about the link between the pressures that you described to constrain the supply of credit and just the lack of abundance, the lack of building.

Yeah, so you can see a real effect. Credit scores are highly correlated with incomes, okay, and they're correlated with age, which correlates with savings. So you can sort of use like neighborhood income or zip code income as a proxy for you know, the average credit score in that zip code, and you can just see how zip codes after two thousand and eight, the majority of the country had actually not really had a boom and bust, like you had the coastal cities and the sand state cities where prices had gone way up and then sort of, you know, come back down. But you know, cities like Atlanta or Chicago, or Indianapolis or Saint Louis, you know, they had all sort of been just moving along with regular building rates and prices that were sort of staying about where they had been in terms of price to income ratios. And then once this tight happens, you can see in all those cities, whether they had abubble or not, the price to income ratios and the poorer zip codes, you know, go down by twenty thirty forty fifty percent, while the high end neighborhoods sort of stayed flat. And so you know, you get this drop in the market price of existing homes that's very income correlated, and so it basically just dropped the price of existing homes below the cost of building new homes, but very regressively. So at the high end they could still build new ones, they were still selling for basically the same price they had been, but at the low end, you know nothing.

Yeah, so you can see a real effect. Credit scores are highly correlated with incomes, okay, and they're correlated with age, which correlates with savings. So you can sort of use like neighborhood income or zip code income as a proxy for you know, the average credit score in that zip code, and you can just see how zip codes after two thousand and eight, the majority of the country had actually not really had a boom and bust, like you had the coastal cities and the sand state cities where prices had gone way up and then sort of, you know, come back down. But you know, cities like Atlanta or Chicago, or Indianapolis or Saint Louis, you know, they had all sort of been just moving along with regular building rates and prices that were sort of staying about where they had been in terms of price to income ratios. And then once this tight happens, you can see in all those cities, whether they had abubble or not, the price to income ratios and the poorer zip codes, you know, go down by twenty thirty forty fifty percent, while the high end neighborhoods sort of stayed flat. And so you know, you get this drop in the market price of existing homes that's very income correlated, and so it basically just dropped the price of existing homes below the cost of building new homes, but very regressively. So at the high end they could still build new ones, they were still selling for basically the same price they had been, but at the low end, you know nothing.

So this gets into the economics of the home builder, the home builder economics, which is that because you have this bifurcation in basically price relative to income, is just no longer made sense for them to build what we call a starter home.

So this gets into the economics of the home builder, the home builder economics, which is that because you have this bifurcation in basically price relative to income, is just no longer made sense for them to build what we call a starter home.

Yeah, and I would say that's totally results of the crackdown in lending. The rents didn't really go down on those units, it was just the prices. And the prices went down because we basically made it illegal for those traditional home owner occupiers to be buyers. So basically the prices fell. One way you could look at it is that landlords require a higher yield than owner occupiers do, and so the price first there was sort of just a chaotic drop and then by say twenty fifteen, they sort of leveled out at basically the lower price point that a landlord would be willing to invest in those houses.

Yeah, and I would say that's totally results of the crackdown in lending. The rents didn't really go down on those units, it was just the prices. And the prices went down because we basically made it illegal for those traditional home owner occupiers to be buyers. So basically the prices fell. One way you could look at it is that landlords require a higher yield than owner occupiers do, and so the price first there was sort of just a chaotic drop and then by say twenty fifteen, they sort of leveled out at basically the lower price point that a landlord would be willing to invest in those houses.

You mentioned mortgage rates earlier, and I'm wondering how big a factor those are in your analysis. So, say, if mortgage rates dropped to three percent again, would there be more supply because there's more demand, And also presumably the cost of building of financing for the home builders would also go down in that scenario, so maybe they would build more as well.

You mentioned mortgage rates earlier, and I'm wondering how big a factor those are in your analysis. So, say, if mortgage rates dropped to three percent again, would there be more supply because there's more demand, And also presumably the cost of building of financing for the home builders would also go down in that scenario, so maybe they would build more as well.

Now I used to put weight on that, just analytically, over the last decade that I've been studying this, I just keep lowering my estimation of how important the actual mortgage rate is. And you know, one example, which is the example I give earlier, is that there were tons of houses across the country where families could have cut their housing costs by more than half in the late twenty tens that they weren't able to just because there isn't a government agency that's telling if they're qualified to be a renter. There's only agencies telling them they're unqualified to be buyers. So just that economic decision isn't available to them, and for families they can get a mortgage. The economics I think were unusually positive before twenty twenty one, but at this point there's still positive on the margin. So basically, anyone who can qualify for mortgages in general is probably willing to be a buyer at today's prices and rates, and I'm not sure that that changes much more than marginally if raids go back down.

Now I used to put weight on that, just analytically, over the last decade that I've been studying this, I just keep lowering my estimation of how important the actual mortgage rate is. And you know, one example, which is the example I give earlier, is that there were tons of houses across the country where families could have cut their housing costs by more than half in the late twenty tens that they weren't able to just because there isn't a government agency that's telling if they're qualified to be a renter. There's only agencies telling them they're unqualified to be buyers. So just that economic decision isn't available to them, and for families they can get a mortgage. The economics I think were unusually positive before twenty twenty one, but at this point there's still positive on the margin. So basically, anyone who can qualify for mortgages in general is probably willing to be a buyer at today's prices and rates, and I'm not sure that that changes much more than marginally if raids go back down.

You said that the government agencies de facto telling people that they are not allowed to be a borrower, and that's not strictly true. There's not allowed to be a borrower from a mortgage that's backed by Fanny and Freddy. If there is a substantial population of theoretically starter home would be starter home owners with low on the income ladder, lower on the FCO score scale. Why couldn't there be a private sector solution, because when you talk about the math, you don't have to have a mortgage backed by Fanny and Freddy. Why not a private sector solution to sound like what in your case seems like a fairly big arbitrage, It would.

You said that the government agencies de facto telling people that they are not allowed to be a borrower, and that's not strictly true. There's not allowed to be a borrower from a mortgage that's backed by Fanny and Freddy. If there is a substantial population of theoretically starter home would be starter home owners with low on the income ladder, lower on the FCO score scale. Why couldn't there be a private sector solution, because when you talk about the math, you don't have to have a mortgage backed by Fanny and Freddy. Why not a private sector solution to sound like what in your case seems like a fairly big arbitrage, It would.

Be the regulatory liabilities on the banks and the mortgage riginators are even tighter than they are on Fanny and Freddy. So it's again it's tough to quantify. There's a lot of just sort of potential backward looking penalty potential. You know, if we have another recession and a bank has a bunch of defaults, the regulators could come in and say, oh, you know, those were mortgages that shouldn't have been made. In an addition to the cost of foreclosure, we're going to give you a bunch of penalties. And you know, there's just a lot of limits on how big of a spread they can use, plus limits on what they can count as income, plus you know, mandates on things they have to do in underwriting. That just all add up to low dollar mortgages being very hard to make. And if you make them, then you've got these sort of vague liabilities that you're carrying, so to the point that just lenders haven't been willing to make them. And so you know, for most of the past ten or fifteen years, there's been this qualified mortgage patch where if you could get Fanny and Freddy and the FAHA to buy your mortgages and put into their system, then it would give you a liability waiver on all those regulations. And it was called the QM patch, and so basically, if you could get the q impatch, you made the loan. And very few bankers have been willing to make any mortgages with any default risk at all that couldn't get the q impact. So really, I would say pre two thousand and eight, you could say that the agencies were sort of a subsidy that they lowered the average mortgage rate by probably a quarter of a percent or something. Since two thousand and eight, really, they're just running a monopoly on default risk, where the government imposes a bunch of liabilities on private lenders for default risk, and so the agencies actually can overcharge for taking that risk and just keep their very tight standards right.

Be the regulatory liabilities on the banks and the mortgage riginators are even tighter than they are on Fanny and Freddy. So it's again it's tough to quantify. There's a lot of just sort of potential backward looking penalty potential. You know, if we have another recession and a bank has a bunch of defaults, the regulators could come in and say, oh, you know, those were mortgages that shouldn't have been made. In an addition to the cost of foreclosure, we're going to give you a bunch of penalties. And you know, there's just a lot of limits on how big of a spread they can use, plus limits on what they can count as income, plus you know, mandates on things they have to do in underwriting. That just all add up to low dollar mortgages being very hard to make. And if you make them, then you've got these sort of vague liabilities that you're carrying, so to the point that just lenders haven't been willing to make them. And so you know, for most of the past ten or fifteen years, there's been this qualified mortgage patch where if you could get Fanny and Freddy and the FAHA to buy your mortgages and put into their system, then it would give you a liability waiver on all those regulations. And it was called the QM patch, and so basically, if you could get the q impatch, you made the loan. And very few bankers have been willing to make any mortgages with any default risk at all that couldn't get the q impact. So really, I would say pre two thousand and eight, you could say that the agencies were sort of a subsidy that they lowered the average mortgage rate by probably a quarter of a percent or something. Since two thousand and eight, really, they're just running a monopoly on default risk, where the government imposes a bunch of liabilities on private lenders for default risk, and so the agencies actually can overcharge for taking that risk and just keep their very tight standards right.

And the agencies, i mean, GSE guaranteed mortgages absolutely dominate the market nowadays.

And the agencies, i mean, GSE guaranteed mortgages absolutely dominate the market nowadays.

Yeah, and the government's pulling in billions in profits every year.

Yeah, and the government's pulling in billions in profits every year.

On well, on that note, this is kind of exactly what I wanted to ask you. There is a lot of buzz at the moment about the possibility of Fanny and Freddie getting privatized, and we've seen, you know, some of their stock move in response to that. Bill Ackman seems to be very excited about that passable stability. What would you expect to happen to credit standards if the gsees were actually privatized, Because I can kind of argue it both ways. I guess, like, on the one hand, I imagine they would want to increase their capital cushion, and in fact, they've been doing that. If investors are going to invest, they have to feel that this is a safe investment, so maybe they keep tightening. On the other hand, they're in the business of making loans, maybe the volume of loans, the absolute volume of loans, is more important than the profit margin. But then again, I don't know. I can see it both ways.

On well, on that note, this is kind of exactly what I wanted to ask you. There is a lot of buzz at the moment about the possibility of Fanny and Freddie getting privatized, and we've seen, you know, some of their stock move in response to that. Bill Ackman seems to be very excited about that passable stability. What would you expect to happen to credit standards if the gsees were actually privatized, Because I can kind of argue it both ways. I guess, like, on the one hand, I imagine they would want to increase their capital cushion, and in fact, they've been doing that. If investors are going to invest, they have to feel that this is a safe investment, so maybe they keep tightening. On the other hand, they're in the business of making loans, maybe the volume of loans, the absolute volume of loans, is more important than the profit margin. But then again, I don't know. I can see it both ways.

Yeah, you know, to be honest, I don't understand how this is supposed to work. Like these institutions were created by a public charter that sort of had you're going to have this mission, and for taking this mission, you know, will sort of give you this protection, right, I mean, originally they were just public, and then when they were made private the first time, you know, everybody assumed that they would be backed by the federal government if they needed to be, and of course they were. And if they didn't have that charter, that agreement, nobody would go do an IPO for a new bank and say, hey, we've got this great business model. We're only going to do securitized mortgages and we're going to be totally undiversified, and now we're going to collect capital for this new bank. If we get rid of the federal support behind it, I don't see how it's viable as a private institution. To me, the value that they have is that as public institutions, they don't need capital, and that's where the sort of what lies at the base of what makes them function as institutions. So the only way I could see them operating as they are is to still have government backing. And if they're privatized but still with government backing, that just seems like privatizing and name only. I actually think they have value as a public utility, not because of the subsidy, but because stain mex Cyclical risk is like the one thing that basically you have to be paid for in capital markets because you can't diversify away from it. And these institutions basically are able to isolate systemic risk, and there's no really better place for that than in the federal government, and the federal government can sort of take that risk with really out. One of the little known trivia points about two thousand and eight is those that Fanny and Freddy never actually needed cash the big you know, two hundred billion dollar injection that they supposedly got, but they never used any of that cash. They actually just bought treasuries with it.

Yeah, you know, to be honest, I don't understand how this is supposed to work. Like these institutions were created by a public charter that sort of had you're going to have this mission, and for taking this mission, you know, will sort of give you this protection, right, I mean, originally they were just public, and then when they were made private the first time, you know, everybody assumed that they would be backed by the federal government if they needed to be, and of course they were. And if they didn't have that charter, that agreement, nobody would go do an IPO for a new bank and say, hey, we've got this great business model. We're only going to do securitized mortgages and we're going to be totally undiversified, and now we're going to collect capital for this new bank. If we get rid of the federal support behind it, I don't see how it's viable as a private institution. To me, the value that they have is that as public institutions, they don't need capital, and that's where the sort of what lies at the base of what makes them function as institutions. So the only way I could see them operating as they are is to still have government backing. And if they're privatized but still with government backing, that just seems like privatizing and name only. I actually think they have value as a public utility, not because of the subsidy, but because stain mex Cyclical risk is like the one thing that basically you have to be paid for in capital markets because you can't diversify away from it. And these institutions basically are able to isolate systemic risk, and there's no really better place for that than in the federal government, and the federal government can sort of take that risk with really out. One of the little known trivia points about two thousand and eight is those that Fanny and Freddy never actually needed cash the big you know, two hundred billion dollar injection that they supposedly got, but they never used any of that cash. They actually just bought treasuries with it.

You can understand why investors would like access to all those profits that Fanny and Freddie are getting. It does seem hard to imagine how the government could credibly commit to never backstopping again. It seems like it would always want Well.

You can understand why investors would like access to all those profits that Fanny and Freddie are getting. It does seem hard to imagine how the government could credibly commit to never backstopping again. It seems like it would always want Well.

I don't think they would like I think what investors want is both is both?

I don't think they would like I think what investors want is both is both?

Yeah? No.

Yeah? No.

Obviously today in twenty twenty five, you know, there are reasons why building a new home, a new starter home would be more expensive. Labor costs more, especially if we have lumber terraffs. Everything costs more, et cetera. So there's going to be some increase. But tell us a what could we do in your view to safely reverse some of the excess tightening that we did post GFC and how much can it move the dial in terms of incentivizing homebuilders to get re enthused about the starter market.

Obviously today in twenty twenty five, you know, there are reasons why building a new home, a new starter home would be more expensive. Labor costs more, especially if we have lumber terraffs. Everything costs more, et cetera. So there's going to be some increase. But tell us a what could we do in your view to safely reverse some of the excess tightening that we did post GFC and how much can it move the dial in terms of incentivizing homebuilders to get re enthused about the starter market.

I'll say you know, obviously underlying all of this, if at the local level, if cities allowed enough apartment construction, then it wouldn't necessarily have mattered that much that lending standards were tightened effectively. You know, home buyers prefer single family homes and landlords prefer apartments, and there typically has been very little overlap. And historically the single family rental market was just old, depreciated units owned by little mom and pop landlords. So if we didn't have all of the zoning regulations at the local level that prevent apartments from being built at a higher scale, we probably would have just switched to a market where we were building a million apartments a year instead of three or four hundred thousand like we've been doing for the last fifteen years.

I'll say you know, obviously underlying all of this, if at the local level, if cities allowed enough apartment construction, then it wouldn't necessarily have mattered that much that lending standards were tightened effectively. You know, home buyers prefer single family homes and landlords prefer apartments, and there typically has been very little overlap. And historically the single family rental market was just old, depreciated units owned by little mom and pop landlords. So if we didn't have all of the zoning regulations at the local level that prevent apartments from being built at a higher scale, we probably would have just switched to a market where we were building a million apartments a year instead of three or four hundred thousand like we've been doing for the last fifteen years.

All Right, but it's hard, youmbie. Politics are hard. So let's say we let's assume this, let's assume the spillover.

All Right, but it's hard, youmbie. Politics are hard. So let's say we let's assume this, let's assume the spillover.

Yeah, so that you know, that's the long term project. But I do want to mention it because I tend to harp on the mortgage issue for exactly the reason you're saying. It's like, it seems like the attainable solution, but it does sort of work in concert with the zoning problem. But yeah, I mean, in practical terms, it's easy just go back to pick a stand hundred from before two thousand and eight and go with that. If everyone's too afraid to call it the two thousand and five standard, use the nineteen ninety eight to any standard that the agencies used or that was applied to private lenders in the last forty years would be good enough to change the marketplace. And yeah, I mean, I think it would be astounding the effect. One thing that I've done, I'd compared. So the Census Bureau publishes sales data on new homes by price point, and if you compare two thousand and six, which is before the crackdown to twenty seventeen. And the reason I use those two years is because the average home price in those two years was about the same, you know, the prices had collapsed, and then by twenty seventeen the average price was about up to where it had been in two thousand and six. If you look at new home sales by price point, basically every category, every bin, like three hundred thousand and higher new homes were being built that those prices at exactly the same rate. They had been building in two thousand and six, but four two thousand and eight it had been like a half million units a year at those price levels, and now it was basically negligible, and it's still negligible. So basically, you know, you can add up the builders stopped building homes, you know, those price points at a you know, a half million a year for now more than a decade. And basically how that plays out in the marketplace is the mortgage crackdown had you know, lowered the prices of existing homes in a way that correlated with incomes and with home values, and so just systematically in every city there's some price point where below that price point, existing homes were so cheap that if you could get one, you would just go by an existing one. And it's just taken us like twenty years to sort of get back to where I think in most cities now where we're hitting a tipping point where those houses can be built again. But again they can't be built for the occupier because they can't get the mortgage. So I think we're going to see build a rent market in the single family segment really take It has taken off, and I think it's going to continue to take off. And actually that's the one thing that I'm afraid of in terms of, you know, thinking offense versus defense. There's a defensive thing that has to happen here with policymakers, and that there's already a push to ban corporate ownership of single family homes. And that's literally the last form of housing on the margin that can grow above the rate that we're building now. So if we ban that, then we really are legislating homelessness and effect.

Yeah, so that you know, that's the long term project. But I do want to mention it because I tend to harp on the mortgage issue for exactly the reason you're saying. It's like, it seems like the attainable solution, but it does sort of work in concert with the zoning problem. But yeah, I mean, in practical terms, it's easy just go back to pick a stand hundred from before two thousand and eight and go with that. If everyone's too afraid to call it the two thousand and five standard, use the nineteen ninety eight to any standard that the agencies used or that was applied to private lenders in the last forty years would be good enough to change the marketplace. And yeah, I mean, I think it would be astounding the effect. One thing that I've done, I'd compared. So the Census Bureau publishes sales data on new homes by price point, and if you compare two thousand and six, which is before the crackdown to twenty seventeen. And the reason I use those two years is because the average home price in those two years was about the same, you know, the prices had collapsed, and then by twenty seventeen the average price was about up to where it had been in two thousand and six. If you look at new home sales by price point, basically every category, every bin, like three hundred thousand and higher new homes were being built that those prices at exactly the same rate. They had been building in two thousand and six, but four two thousand and eight it had been like a half million units a year at those price levels, and now it was basically negligible, and it's still negligible. So basically, you know, you can add up the builders stopped building homes, you know, those price points at a you know, a half million a year for now more than a decade. And basically how that plays out in the marketplace is the mortgage crackdown had you know, lowered the prices of existing homes in a way that correlated with incomes and with home values, and so just systematically in every city there's some price point where below that price point, existing homes were so cheap that if you could get one, you would just go by an existing one. And it's just taken us like twenty years to sort of get back to where I think in most cities now where we're hitting a tipping point where those houses can be built again. But again they can't be built for the occupier because they can't get the mortgage. So I think we're going to see build a rent market in the single family segment really take It has taken off, and I think it's going to continue to take off. And actually that's the one thing that I'm afraid of in terms of, you know, thinking offense versus defense. There's a defensive thing that has to happen here with policymakers, and that there's already a push to ban corporate ownership of single family homes. And that's literally the last form of housing on the margin that can grow above the rate that we're building now. So if we ban that, then we really are legislating homelessness and effect.

One of the things I remember from the post crash period, I don't remember proposals to bulldoze empty houses, but one thing I remember is adjustable rate mortgages. And there were a lot of them, and we used to write headlines like option armageddon as they blew up. That was a fun time. No, it wasn't fun. It was fun for headline writers, not for actual borrowers. But those adjustable rate mortgages actually all but disappeared after the Financial crisis. I think they dropped to like single digits a proportion of total mortgage originations? Is that a factor here? The idea that once upon a time, you could get an arm you could get a really cheap teaser rate going in and then eventually it went up as interest rates were raised. Maybe that would suggest that the structure of the loan is more of a factor.

One of the things I remember from the post crash period, I don't remember proposals to bulldoze empty houses, but one thing I remember is adjustable rate mortgages. And there were a lot of them, and we used to write headlines like option armageddon as they blew up. That was a fun time. No, it wasn't fun. It was fun for headline writers, not for actual borrowers. But those adjustable rate mortgages actually all but disappeared after the Financial crisis. I think they dropped to like single digits a proportion of total mortgage originations? Is that a factor here? The idea that once upon a time, you could get an arm you could get a really cheap teaser rate going in and then eventually it went up as interest rates were raised. Maybe that would suggest that the structure of the loan is more of a factor.

Yeah, I don't, you know, I don't think so. Just going back to that sort of pre COVID you know, market, it just doesn't seem that the marginal affordability of mortgages is the fact here. In fact, I would love to see, you know, there's people making documentaries about all sorts of different aspects of the housing market and housing shortage. I'd love to see somebody do a documentary where they go to one of these new build to rent neighborhoods and find ten families and say would you have liked to have bought instead of rented? And they'll find plenty of them, and then go to the bank with them and see what happens, because you know, I think what's happening is it's just become your cratic and there's no discretion left for the bankers. And I think for the typical potential borrow where I think we would be shocked at the reasoning sometimes that's being used to deny them. You know, just you know, forms of income that you know, maybe aren't you know, strict W two that just count for zero, you know, you know, just a bunch of things like that that really just make it a hard no. And there's no marginal tinkering you can do with a mortgage to get that to.

Yeah, I don't, you know, I don't think so. Just going back to that sort of pre COVID you know, market, it just doesn't seem that the marginal affordability of mortgages is the fact here. In fact, I would love to see, you know, there's people making documentaries about all sorts of different aspects of the housing market and housing shortage. I'd love to see somebody do a documentary where they go to one of these new build to rent neighborhoods and find ten families and say would you have liked to have bought instead of rented? And they'll find plenty of them, and then go to the bank with them and see what happens, because you know, I think what's happening is it's just become your cratic and there's no discretion left for the bankers. And I think for the typical potential borrow where I think we would be shocked at the reasoning sometimes that's being used to deny them. You know, just you know, forms of income that you know, maybe aren't you know, strict W two that just count for zero, you know, you know, just a bunch of things like that that really just make it a hard no. And there's no marginal tinkering you can do with a mortgage to get that to.

A yes, big picture question. It feels like in the US, part of the problem is perhaps that America has never decided what it wants housing to be. So does it want housing to be a wealth generator, in which case prices need to keep going up. Does it want housing to be actually affordable so that people can live places? And it is true that housing has been one of the biggest wealth effects over time. And I'm thinking specifically, you know, there are people in New York that bought a dilapidated building in Soho and they're now multimillionaires just because they bought at that particular time. How should America actually think of housing?

A yes, big picture question. It feels like in the US, part of the problem is perhaps that America has never decided what it wants housing to be. So does it want housing to be a wealth generator, in which case prices need to keep going up. Does it want housing to be actually affordable so that people can live places? And it is true that housing has been one of the biggest wealth effects over time. And I'm thinking specifically, you know, there are people in New York that bought a dilapidated building in Soho and they're now multimillionaires just because they bought at that particular time. How should America actually think of housing?

You know, I think there's a temptation to benchmark to the peculiarities that we're living in and sort of consider them to be a state of nature. And you think of that, you know, the famous you know, case Schiller housing chart that shows that home prices were flat, you know, adjusted for inflation. Home prices were flat for one hundred years and then they shot up. You know, there's a deep, deep history of home ownership in this country where the house is not expected to appreciate value. And in fact, even up till two thousand and eight, in two thirds of the country, nobody had experienced any unusual increase in the value of their houses. So I don't think that's actually a necessary part of how we should think about Housing can be a very good investment for an owner occupier without ever really increasing in real market value. It comes from the shelter that it's providing you.

You know, I think there's a temptation to benchmark to the peculiarities that we're living in and sort of consider them to be a state of nature. And you think of that, you know, the famous you know, case Schiller housing chart that shows that home prices were flat, you know, adjusted for inflation. Home prices were flat for one hundred years and then they shot up. You know, there's a deep, deep history of home ownership in this country where the house is not expected to appreciate value. And in fact, even up till two thousand and eight, in two thirds of the country, nobody had experienced any unusual increase in the value of their houses. So I don't think that's actually a necessary part of how we should think about Housing can be a very good investment for an owner occupier without ever really increasing in real market value. It comes from the shelter that it's providing you.

But there is a peculiar American thing here, which is the dream of home ownership, right like the American dream, and that doesn't exist as much in other countries. So if you look at Europe Germany, people tend to be happy being renters for the most part. I'm sure costs went up recently, but it's a totally different model.

But there is a peculiar American thing here, which is the dream of home ownership, right like the American dream, and that doesn't exist as much in other countries. So if you look at Europe Germany, people tend to be happy being renters for the most part. I'm sure costs went up recently, but it's a totally different model.

Yeah, But I just don't think that it requires this ongoing battle between price appreciation and affordability. I think housing done right. Up until two thousand and two in Phoenix, houses across Phoenix were selling for about three times their tenants' incomes, and they had been for decades, and they're you know, people were moving to Phoenix by the tens of thousands to become homeowners all through that time. So I think the benefits of home ownership come more from, you know, just getting rid of the principal ancient issue you have between the landlord and a tenant that you know has value for you know, being your own landlord or your own tenant is a value that a landlord or a tenant on their own can't capture. And just you know, the sense of ownership and the sense of neighborhood that you can get from that. You know, all those things are sources of value that make home ownership valuable even if the home doesn't give you excess profits.

Yeah, But I just don't think that it requires this ongoing battle between price appreciation and affordability. I think housing done right. Up until two thousand and two in Phoenix, houses across Phoenix were selling for about three times their tenants' incomes, and they had been for decades, and they're you know, people were moving to Phoenix by the tens of thousands to become homeowners all through that time. So I think the benefits of home ownership come more from, you know, just getting rid of the principal ancient issue you have between the landlord and a tenant that you know has value for you know, being your own landlord or your own tenant is a value that a landlord or a tenant on their own can't capture. And just you know, the sense of ownership and the sense of neighborhood that you can get from that. You know, all those things are sources of value that make home ownership valuable even if the home doesn't give you excess profits.

Right, even without the profits, you've at least covered your housing short Every person in the world is born with a short position on housing that they have to theoretically cover at some point, and so once you own your house, you never have to worry about that again. I have to say I want to do more actually on the existence of the build to rent market, because I knew that was one of the areas of home building that actually has grown rapidly, and it hadn't clicked to me sort of before that. Perhaps a big part of it is who has access to that credit and is able to own the house. Is an institution which can obviously borrow easily, or someone with low income and likely low FICO and likely low ability to make a down payment is a very interesting phenomenon. Kevin Erdman, thank you so much for coming on Odd Lots. Really really appreciate you joining us.

Right, even without the profits, you've at least covered your housing short Every person in the world is born with a short position on housing that they have to theoretically cover at some point, and so once you own your house, you never have to worry about that again. I have to say I want to do more actually on the existence of the build to rent market, because I knew that was one of the areas of home building that actually has grown rapidly, and it hadn't clicked to me sort of before that. Perhaps a big part of it is who has access to that credit and is able to own the house. Is an institution which can obviously borrow easily, or someone with low income and likely low FICO and likely low ability to make a down payment is a very interesting phenomenon. Kevin Erdman, thank you so much for coming on Odd Lots. Really really appreciate you joining us.

Yeah, it's been a pleasure.

Yeah, it's been a pleasure.

Chrissy, I love that in twenty twenty five and like, we're not done trying to figure out what happened in the housing bubble, Well.

Chrissy, I love that in twenty twenty five and like, we're not done trying to figure out what happened in the housing bubble, Well.

This is exactly it, right, Memories are long, and so I'm not sure if you waive to magic wand and loosen credit standards at the GSS that all of a sudden home builders would be like, true, yes, we're going to build a lot, because they all remember what happened in the early two thousands. And then the other thing I would say is one of the big themes of the post two thousand and eight period has been bifurcation entails in the economy, so the rich get richer, the poor get poorer, and I think In that scenario, lower income people just aren't thinking about buying houses and they're not trying either, And so that's one reason why you've seen the average FICO score for GSE approved loans actually go up.

This is exactly it, right, Memories are long, and so I'm not sure if you waive to magic wand and loosen credit standards at the GSS that all of a sudden home builders would be like, true, yes, we're going to build a lot, because they all remember what happened in the early two thousands. And then the other thing I would say is one of the big themes of the post two thousand and eight period has been bifurcation entails in the economy, so the rich get richer, the poor get poorer, and I think In that scenario, lower income people just aren't thinking about buying houses and they're not trying either, And so that's one reason why you've seen the average FICO score for GSE approved loans actually go up.

It would be interesting, to Kevin's point at the end, way, we should actually do something more on the build to rent market, because that, to me, what you just said is sort of the key question here is does there exist a significant block of Americans who are a little bit lower on the FCO score spectrum, lower on the income spectrum, but otherwise stayle enough and sort of confident enough that they want this is where they want to own and build a family. Yeah, And that's sort of like the big question, because right, you can loosen it all you want, but to the like, how many of those people are there? Is that would the homebuilders then, you know, like start building for them. Will it be a meaningful part of the market given the bifurcation and the sort of barbell nature of the economy where like, because to my mind, it certainly seems plausible that the home builder is like, yeah, that's great, we still want to serve the really rich people.

It would be interesting, to Kevin's point at the end, way, we should actually do something more on the build to rent market, because that, to me, what you just said is sort of the key question here is does there exist a significant block of Americans who are a little bit lower on the FCO score spectrum, lower on the income spectrum, but otherwise stayle enough and sort of confident enough that they want this is where they want to own and build a family. Yeah, And that's sort of like the big question, because right, you can loosen it all you want, but to the like, how many of those people are there? Is that would the homebuilders then, you know, like start building for them. Will it be a meaningful part of the market given the bifurcation and the sort of barbell nature of the economy where like, because to my mind, it certainly seems plausible that the home builder is like, yeah, that's great, we still want to serve the really rich people.

Yeah, exactly, and the margins on those houses tend to be fatter. And the other thing I would say is the question isn't whether people want to buy homes. I think in America almost everyone really wants to buy a home, although there are some people who find renting more convenient. The question is can they actually afford a home?

Yeah, exactly, and the margins on those houses tend to be fatter. And the other thing I would say is the question isn't whether people want to buy homes. I think in America almost everyone really wants to buy a home, although there are some people who find renting more convenient. The question is can they actually afford a home?

Yeah?

Yeah?

And will they apply? And I think that pool of potential home buyers has gone down.

And will they apply? And I think that pool of potential home buyers has gone down.

I do remember that in like pre twenty twenty, people posting Zillow links and showing the gap between what you can rent them out for and what they would cost together on them, and man, I really regret not getting a pool of capital together, and they're all like in the Midwest, like you know, random houses in Indiana or something. I really regret not getting a pool of capital together and buying a bunch of those houses and renting them out.

I do remember that in like pre twenty twenty, people posting Zillow links and showing the gap between what you can rent them out for and what they would cost together on them, and man, I really regret not getting a pool of capital together, and they're all like in the Midwest, like you know, random houses in Indiana or something. I really regret not getting a pool of capital together and buying a bunch of those houses and renting them out.

As in Austin.

As in Austin.

Yeah.

Yeah.

No, not, you know, just some like normal house and you know, the suburbs of Indianapolis or whatever.

No, not, you know, just some like normal house and you know, the suburbs of Indianapolis or whatever.

You're going to become one of the financial institutions and snapping up all the single homes. It's too family homes.

You're going to become one of the financial institutions and snapping up all the single homes. It's too family homes.

It's too late.

It's too late.

But this is the this is the interesting thing he pointed out, which is like that financial institution, you know, people to his point, you know, the reason that they're able to make a spread is this idea that they could get access to credit to buy those homes and then an individual can't. So it does seem like if you want to tilt the dial between whether a financial institution or a family can own a home, you at least have to, like probably start by making the credit available.

But this is the this is the interesting thing he pointed out, which is like that financial institution, you know, people to his point, you know, the reason that they're able to make a spread is this idea that they could get access to credit to buy those homes and then an individual can't. So it does seem like if you want to tilt the dial between whether a financial institution or a family can own a home, you at least have to, like probably start by making the credit available.

Yeah. Absolutely, Uh, shall we leave it there?

Yeah. Absolutely, Uh, shall we leave it there?

Let's leave it there.

Let's leave it there.

This has been another episode of the Oudlots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

This has been another episode of the Oudlots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

And I'm Joe Wisenthal. You can follow me at the Stalwart. Follow Kevin Erdman, He's at ka Erdman and check out his newsletter Erdman Housing Tracker. It's over on Substack. Follow our producers Carmen Rodriguez at Carmen armand Dash'll Bennett at Dashbot and Kelbrooks at Kelbrooks. For more Oddlows content, go to bloomberg dot com slash odd Lots, where you can find all of our episodes and a daily newsletter and you can chat about all of these topics. Twenty four to seven in our discord, we have a real Estate channel on there. We even have an HGTV channel where Tracy shows off her new tractor. Go check it out Discord dot gg, slash out Lots.

And I'm Joe Wisenthal. You can follow me at the Stalwart. Follow Kevin Erdman, He's at ka Erdman and check out his newsletter Erdman Housing Tracker. It's over on Substack. Follow our producers Carmen Rodriguez at Carmen armand Dash'll Bennett at Dashbot and Kelbrooks at Kelbrooks. For more Oddlows content, go to bloomberg dot com slash odd Lots, where you can find all of our episodes and a daily newsletter and you can chat about all of these topics. Twenty four to seven in our discord, we have a real Estate channel on there. We even have an HGTV channel where Tracy shows off her new tractor. Go check it out Discord dot gg, slash out Lots.

And if you enjoy odlots. If you like it when we talk about affordability in the housing market, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

And if you enjoy odlots. If you like it when we talk about affordability in the housing market, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.