Holiday Sales and Housing Supply

Episode Summary

Executive Summary: The episode centers on housing and housing finance with guest Ed Golding, covering why home prices and rents are rising, why the market doesn’t look like a bubble, and how supply constraints, zoning, labor, and policy failures keep affordable housing scarce. The discussion also touches on Fed policy, inflation expectations, FHA premiums, homelessness, and whether public policy should better target supply and vulnerable households.

Main Topics: Housing supply constraints and price growth (Priority: 5/5): The hosts and Golding agree that the dominant housing issue is a shortage of supply, driven by zoning, permitting, labor, land, and infrastructure constraints. This scarcity, not speculative excess, is the main reason house prices have surged. Why the housing market is not (yet) a bubble (Priority: 5/5): Golding argues today’s price gains are supported by fundamentals like strong rent growth, low mortgage rates, and underbuilding, while classic bubble features such as widespread flipping and leverage are muted. Homeownership gaps by race and income (Priority: 5/5): The conversation highlights persistent and large homeownership gaps across racial and ethnic groups, and argues the main barriers are lower incomes, unequal wealth accumulation, and limited affordable supply rather than mortgage finance alone. FHA policy and mortgage pricing (Priority: 4/5): Golding criticizes FHA insurance premiums as too high relative to long-run risk and argues they effectively tax first-time and lower-income borrowers, though he cautions that FHA is too small to be used as a countercyclical housing tool. Inflation, rates, and market expectations (Priority: 4/5): The group debates the Fed’s long-run rate outlook, the distortionary effects of QE on Treasury yields and TIPS, and whether current market pricing implies slower growth and persistent low rates. Homelessness and housing as a public right (Priority: 4/5): Golding emphasizes that homelessness rises with rents and that policy should provide more vouchers and basic services, framing housing as part of broader economic rights and human dignity. Data-driven holiday spending and consumer sentiment (Priority: 3/5): The hosts use recent retail and sentiment data to contrast strong hard data with weak soft data, noting that inflation, gasoline prices, and pandemic experiences may be depressing consumer confidence.

Key Arguments: The housing shortage is structural and long-running; the nation has underbuilt by millions of units over the past decade. Today’s house price surge is better explained by supply-demand imbalance and rising rents than by classic speculative bubble behavior. Mortgage rates near historical lows increased demand, but if rates rise materially, affordability could weaken; modest increases alone likely won’t trigger big price declines. Homeownership gaps persist because incomes and wealth at the bottom of the distribution have not kept pace, and supply of affordable homes is inadequate. Local zoning, permitting, transportation, school-funding structures, and labor/material constraints are the biggest barriers to new supply. FHA premiums are set too conservatively and function like a tax on mostly first-time, often lower-income borrowers. Using FHA pricing to cool house prices would be a poor policy lever because FHA is too small and the impact would fall disproportionately on vulnerable households. Rents and housing costs are key drivers of inflation anxiety and weak consumer sentiment, especially for households with limited savings. Homelessness deserves more vouchers and public services while broader supply constraints are addressed. Public policy should focus more on building affordable supply and less on assuming markets alone will fix housing access.

Data Points: Fed terminal federal funds rate projection: 2.5% - Participant cited as the Fed’s long-run projection for the policy rate. Market-implied long-run rate: 1.6% - Approximate market expectation referenced via long-term Treasury decomposition. 10-year Treasury yield: about 1.45% - Mentioned as the prevailing long-term yield around the time of discussion. QE effect on long-term rates: ~4 basis points per 1% of GDP in balance-sheet expansion - Rule of thumb discussed for the Fed’s balance sheet impact on yields. Post-Great Recession QE impact: ~100 basis points reduction - Estimate that multiple QE rounds plus Operation Twist lowered the 10-year Treasury yield by about 1 percentage point. Homes under construction (single-family): 752,000 - Housing starts-related statistic highlighted as the highest since March 2007. Homes authorized but not started: 152,000 - Backlog of permitted homes not yet started, at the highest since 2006. Year-over-year increase in homes authorized but not started: 41% - Used to emphasize supply-chain and labor bottlenecks. Homeownership rate, White households: 74.0% - November homeownership rate by race/ethnicity. Homeownership rate, Asian American households: 60.2% - November homeownership rate by race/ethnicity. Homeownership rate, Hispanic households: 48.3% - November homeownership rate by race/ethnicity. Homeownership rate, Black households: 44.0% - November homeownership rate by race/ethnicity. Additional Black households at White homeownership rate: 5.2 million - Estimated potential additional Black owner households if homeownership matched White rates. Additional Hispanic households at White homeownership rate: 4.7 million - Estimated potential additional Hispanic owner households if homeownership matched White rates. Additional Asian American households at White homeownership rate: 1.0 million - Estimated potential additional Asian American owner households if homeownership matched White rates. Retail sales ex autos and gas, year over year: 16.5% - Used as a proxy for holiday-season spending strength through November. Rent growth for new leases: 15% to 20% - Referenced as the increase seen for new move-ins versus the prior year. CPI inflation: almost 7% year over year - Used to explain strong nominal retail sales and consumer anxiety. House price appreciation: about 15% to 20% year over year - Nationwide house price growth cited repeatedly as evidence of a hot market. FHA insurance fund reserve: about 8% of mortgage balance outstanding - Actuarial discussion of FHA’s financial position. FHA reserve already in the bank: about 6% - Described as accumulated receipts/overcharges from prior periods. FHA shortfall target gap: $50 billion - Estimated capital improvement needs for public housing mentioned by Golding. Housing vouchers in Build Back Better: 200,000 to 300,000 additional vouchers - Approximate scale of voucher expansion discussed. Affordable housing spending in Build Back Better: $150 billion over 10 years - Referenced as the scaled-down housing component of the legislation. Earlier housing proposal size: $500 billion over 10 years - Initial Biden housing-related proposal before being reduced. Eligible households receiving vouchers: 1 in 5 - Golding noted only about 20% of eligible households can get a voucher. Overbuilding/underbuilding estimate: 3 million to 5 million units - Estimated cumulative shortage from the last decade.

Pivotal Quotes: "the mission is to try to get financial policy to be better, better informed" — Ed Golding: Golding explains the purpose of the MIT center where he works. "these are difficult social policies. Don't look to the market ... you need to look at democratic consensus as much as you can look at a market" — Ed Golding: He discusses social discounting and climate policy, arguing market prices are not sufficient for such decisions. "we've underbuilt" — Ed Golding: Core explanation for housing price pressure and lack of affordability in the market.

Implications: Housing affordability will remain strained unless supply expands meaningfully and local policy barriers ease. Expect continued pressure on rents, home prices, and homelessness, with finance policy alone unable to solve the problem.