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Inflation is staying high because we're not taming housing costs: https://www.marketplace.org/2023/03/14/housing-costs-are-a-main-reason-inflation-is-still-hig

Inflation is staying high because we're not taming housing costs: https://www.marketplace.org/2023/03/14/housing-costs-are-a-main-reason-inflation-is-still-high/ https://www.marketplace.org/2023/03/14/housing-costs-are-a-m... Higher borrowing costs have slowed the meteoric rise of a bunch of markets, there's some sign of sale prices dropping, but monthly costs stayed the same or increased with mortgage rates; they're apparently not a tool that can pop that side of the bubble. This is usually where the chorus of "just let people build" comes in, and decreasing barriers to adding new stock is a good start, but I've come to believe it's simply unlikely that market incentives will ever make housing more affordable. As far as I can tell, housing costs do not drop unless demand significantly drops. And even theoretically from a pure incentives POV you can see why developers would prefer to chase markets with rising prices and watch production/building to avoid the point of diminishing marginal returns and maximize income. I don't know exactly what the solution is. Maybe it's something like Singapore Housing and Development Board (probably untenable in the US). Maybe it's using an array of higher taxes against supply-constricting or price-inflating behavior (vacancy taxes, short-term rental taxes, property taxes that increase with regional ownership volume or rental prices above standard deviation) to fund development grants. Maybe it's something else. But the market is not going to lead the way out alone.

Workaccount2 3y ago
If the government wanted to set off some fireworks they could tax homeowners with <4% mortgages such that it makes their "effective mortgage" somewhere around 4% (2019 rates). This would effectively undue the "gift" of the magical 2% mortgage and crush those who chased the low rates during 2021. If they really wanted to rub salt in the wound, they could use the proceeds to fund a home builder subsidy program, giving home builders access to special low interest loans. And if they went full masochist, they could use eminent domain to seize vacant commercial proprieties and build high density housing on it, regardless of local zoning. All this would never happen though. So rest easy homeowner. Just a mental exercise in how the government could use the tools it has to unstick the housing market.
- mdorazio 3y ago
  The "easy" way to do this would be to drop the mortgage interest tax deduction for mortgages under a certain % rate. It'll never happen, though, the US has been artificially incentivizing single family home ownership since the 1910s. A better, and equally unpopular, way would be a land value tax at a rate high enough to discourage single family home ownership in high COL areas.
- whimsicalism 3y ago
  Your proposal around taxing people because they got a lower interest rate will undermine interest rate price discovery & the future effectiveness of interest rate policy. Every policy action you take impacts peoples expectations. Taxing people with low rates will not "unstick the housing market."
  - Workaccount2 3y ago
    Oh it would, because many people would lose their home. And price discovery is already completely fucked, banks would never give out 30 year fixed rate loans if the fed wasn't buying them all up. If we had all ARM loans then the problem would be unfucking itself right now as the fed raised rates. Instead past mortgages are insulated from the market....unless the market is in the mortgagee's favor, in which they refinance. This is why things are so bad right now. Especially when you factor in the rise of remote work for white collar workers (read: homeowners). There is no reason for them to ever give up their 2% rate. Hence inventory is in the dirt.
- wwweston 3y ago
  Generally the philosophy I think works best is to tax activity you might well allow but want less of to close incentive gaps for things you want more of. So, I'm pretty interested in vacancy taxes, because that's something we definitely want less of. I can't think of how that would apply to people who got <4% mortgage rates. If you want fewer low-interest mortgages, you can just raise mortgage rates, which has happened. And I can't think of any behavior associated with past low-interest mortgages that is a problem that wouldn't be better addressed directly, especially without hitting people who are just living in their home they were lucky enough to get a good rate on. Punitive and unfocused stuff like that probably would never happen. But I think vacancy taxes are politically viable, along with things like property taxes that increase with regional volume of ownership or rent prices above a standard deviation from median.
whimsicalism 3y ago
> I've come to believe it's simply unlikely that market incentives will ever make housing more affordable. As far as I can tell, housing costs do not drop unless demand significantly drops Just based on vibes yeah? Because the evidence, theory, and practice all suggest otherwise - Southern cities are building more and growing rent at much lower rates, numerous studies have confirmed the impact on rents from building new housing, and of course - there's just basic microeconomics. > property taxes that increase with regional ownership volume or rental prices above standard deviation These policies just raise rents.
- wwweston 3y ago
  > Just based on vibes yeah? Not even remotely. > Because the evidence I've looked at evidence on and off for over 20 years. I've asked for disconfirming evidence. I've never seen it. Housing costs do not fall from market-driven buildouts. They may rise more slowly but even the evidence there is inconsistent (no surprise given supply is never the only factor). They don't fall except with at least regional macroeconomic changes of fortune. If you believe you're in possession of evidence to the contrary, by all means, surprise me. If you merely expect the evidence to be there because supply-and-demand, by all means, attempt to surprise me. > theory You may want to re-read my comment and note that I articulated a basis in economic theory regarding why market incentives alone don't cause housing costs to fall. Feel free to criticize that specifically if you're sure my position isn't substantiated theoretically. > Southern cities are building more and growing rent at much lower rates Yes, if you have substantial underutilized and geographically convenient land due to historical timing and HVAC advances, it turns out additional supply is cheap enough to build out (out being a key word) that developers aren't as strongly incentivized to maximize returns by chasing the higher end (and if they try, they face more competition from individuals or smaller hungrier teams). Once you've left easy mode where building out is difficult (or has diminishing returns of its own) and are left with building up & redevelopment and regional demand is still sustained, the incentives change and so does how/what developers build & price. > These policies just raise rents. Even if they did raise rents, they would certainly not just do that, they'd provide a revenue stream and reshape incentives. But I'm not sure they do. Explain how diversified vs consolidated ownership changes rent prices and why the latter might leave rents lower. Or hey, don't, and ask why I'd think the reverse is true. High-rent taxes might get passed on to the market, but the owner keeps less and depending on how you construct them may also make the point of diminishing marginal returns lower, making increasing unit count on a property a better strategy.
scoofy 3y ago
>I've come to believe it's simply unlikely that market incentives will ever make housing more affordable It isn't market incentives here, it's lack of market incentives. The issue here is that much of this new housing will be turned into rental units. The ideas is to change the paradigm so that people know full well that we will never stop building. So much so that a rental unit will likely not be profitable because so much more housing will come online in future years that income will likely decline over the life of the mortgage. We don't do this because that really makes existing stakeholders scared for their current property values (and they should be), and try and stop that type of legislation at every corner. This creates an effective cartel of stakeholders (property owners), which maintain it's control over housing availability because people who don't live in a city can't vote there. This is coming to a tipping point now in CA (where I live) because home-ownership has dropped so precipitously in the last 20 years, that homeowners will soon be a minority demographic, and the ability to control land use on a political level as starting to crumble. Californians are not living through a housing re-balancing. We are living through the beginning of a housing cascade. As more housing comes online, more people supporting more housing will move to the area. The reason why it doesn't look like market incentives are working is that much of America is on a demographic tipping point. When Prop 13 in CA has already started to crack in elections, you know something serious is happening.
- wwweston 3y ago
  > We don't do this because that really makes existing stakeholders scared for their current property values As far as I can tell, opposition that comes from concern for housing values tends to be hyperlocal rather than systemic -- most people don't oppose building substantial volumes of housing somewhere, it's mostly when it's not somewhere else. But the other thing is that the market doesn't like building housing above certain volumes either. Developers have limited capital and capacity and for any given outlay they'd like the highest return possible. Overproduce and you get diminishing marginal returns or maybe even unpurchased/unleased housing stock. Lagging demand some amount is probably the easiest way to optimize this.
  - scoofy 3y ago
dahwolf 3y ago
You're right. Housing costs can never really drop steeply because you depend on sellers. Most don't need to sell so they will just sit it out and wait for better times. The second effect is as you say, builders simply stop building in unfavorable conditions. There will not ever be adequate supply.

Workaccount2 3y ago

If the government wanted to set off some fireworks they could tax homeowners with <4% mortgages such that it makes their "effective mortgage" somewhere around 4% (2019 rates). This would effectively undue the "gift" of the magical 2% mortgage and crush those who chased the low rates during 2021. If they really wanted to rub salt in the wound, they could use the proceeds to fund a home builder subsidy program, giving home builders access to special low interest loans. And if they went full masochist, they could use eminent domain to seize vacant commercial proprieties and build high density housing on it, regardless of local zoning. All this would never happen though. So rest easy homeowner. Just a mental exercise in how the government could use the tools it has to unstick the housing market.

mdorazio 3y ago
The "easy" way to do this would be to drop the mortgage interest tax deduction for mortgages under a certain % rate. It'll never happen, though, the US has been artificially incentivizing single family home ownership since the 1910s. A better, and equally unpopular, way would be a land value tax at a rate high enough to discourage single family home ownership in high COL areas.
whimsicalism 3y ago
Your proposal around taxing people because they got a lower interest rate will undermine interest rate price discovery & the future effectiveness of interest rate policy. Every policy action you take impacts peoples expectations. Taxing people with low rates will not "unstick the housing market."
- Workaccount2 3y ago
  Oh it would, because many people would lose their home. And price discovery is already completely fucked, banks would never give out 30 year fixed rate loans if the fed wasn't buying them all up. If we had all ARM loans then the problem would be unfucking itself right now as the fed raised rates. Instead past mortgages are insulated from the market....unless the market is in the mortgagee's favor, in which they refinance. This is why things are so bad right now. Especially when you factor in the rise of remote work for white collar workers (read: homeowners). There is no reason for them to ever give up their 2% rate. Hence inventory is in the dirt.
wwweston 3y ago
Generally the philosophy I think works best is to tax activity you might well allow but want less of to close incentive gaps for things you want more of. So, I'm pretty interested in vacancy taxes, because that's something we definitely want less of. I can't think of how that would apply to people who got <4% mortgage rates. If you want fewer low-interest mortgages, you can just raise mortgage rates, which has happened. And I can't think of any behavior associated with past low-interest mortgages that is a problem that wouldn't be better addressed directly, especially without hitting people who are just living in their home they were lucky enough to get a good rate on. Punitive and unfocused stuff like that probably would never happen. But I think vacancy taxes are politically viable, along with things like property taxes that increase with regional volume of ownership or rent prices above a standard deviation from median.

whimsicalism 3y ago

> I've come to believe it's simply unlikely that market incentives will ever make housing more affordable. As far as I can tell, housing costs do not drop unless demand significantly drops Just based on vibes yeah? Because the evidence, theory, and practice all suggest otherwise - Southern cities are building more and growing rent at much lower rates, numerous studies have confirmed the impact on rents from building new housing, and of course - there's just basic microeconomics. > property taxes that increase with regional ownership volume or rental prices above standard deviation These policies just raise rents.

wwweston 3y ago
> Just based on vibes yeah? Not even remotely. > Because the evidence I've looked at evidence on and off for over 20 years. I've asked for disconfirming evidence. I've never seen it. Housing costs do not fall from market-driven buildouts. They may rise more slowly but even the evidence there is inconsistent (no surprise given supply is never the only factor). They don't fall except with at least regional macroeconomic changes of fortune. If you believe you're in possession of evidence to the contrary, by all means, surprise me. If you merely expect the evidence to be there because supply-and-demand, by all means, attempt to surprise me. > theory You may want to re-read my comment and note that I articulated a basis in economic theory regarding why market incentives alone don't cause housing costs to fall. Feel free to criticize that specifically if you're sure my position isn't substantiated theoretically. > Southern cities are building more and growing rent at much lower rates Yes, if you have substantial underutilized and geographically convenient land due to historical timing and HVAC advances, it turns out additional supply is cheap enough to build out (out being a key word) that developers aren't as strongly incentivized to maximize returns by chasing the higher end (and if they try, they face more competition from individuals or smaller hungrier teams). Once you've left easy mode where building out is difficult (or has diminishing returns of its own) and are left with building up & redevelopment and regional demand is still sustained, the incentives change and so does how/what developers build & price. > These policies just raise rents. Even if they did raise rents, they would certainly not just do that, they'd provide a revenue stream and reshape incentives. But I'm not sure they do. Explain how diversified vs consolidated ownership changes rent prices and why the latter might leave rents lower. Or hey, don't, and ask why I'd think the reverse is true. High-rent taxes might get passed on to the market, but the owner keeps less and depending on how you construct them may also make the point of diminishing marginal returns lower, making increasing unit count on a property a better strategy.

scoofy 3y ago

>I've come to believe it's simply unlikely that market incentives will ever make housing more affordable It isn't market incentives here, it's lack of market incentives. The issue here is that much of this new housing will be turned into rental units. The ideas is to change the paradigm so that people know full well that we will never stop building. So much so that a rental unit will likely not be profitable because so much more housing will come online in future years that income will likely decline over the life of the mortgage. We don't do this because that really makes existing stakeholders scared for their current property values (and they should be), and try and stop that type of legislation at every corner. This creates an effective cartel of stakeholders (property owners), which maintain it's control over housing availability because people who don't live in a city can't vote there. This is coming to a tipping point now in CA (where I live) because home-ownership has dropped so precipitously in the last 20 years, that homeowners will soon be a minority demographic, and the ability to control land use on a political level as starting to crumble. Californians are not living through a housing re-balancing. We are living through the beginning of a housing cascade. As more housing comes online, more people supporting more housing will move to the area. The reason why it doesn't look like market incentives are working is that much of America is on a demographic tipping point. When Prop 13 in CA has already started to crack in elections, you know something serious is happening.

wwweston 3y ago
> We don't do this because that really makes existing stakeholders scared for their current property values As far as I can tell, opposition that comes from concern for housing values tends to be hyperlocal rather than systemic -- most people don't oppose building substantial volumes of housing somewhere, it's mostly when it's not somewhere else. But the other thing is that the market doesn't like building housing above certain volumes either. Developers have limited capital and capacity and for any given outlay they'd like the highest return possible. Overproduce and you get diminishing marginal returns or maybe even unpurchased/unleased housing stock. Lagging demand some amount is probably the easiest way to optimize this.
- scoofy 3y ago

dahwolf 3y ago

You're right. Housing costs can never really drop steeply because you depend on sellers. Most don't need to sell so they will just sit it out and wait for better times. The second effect is as you say, builders simply stop building in unfavorable conditions. There will not ever be adequate supply.