The Future of U.S. Housing Policy with Dr. Edward J. Pinto of AEI
April 04, 2018
The conversation touched on the dynamics between costs, access and quality; the legacy of the housing crisis of 2008; the potential effects of the new tax code on housing policy; and the path to ownership in high cost markets.
Dr. Reina kicked off the talk by asking Dr. Pinto what undergraduate students can expect in the next couple of years as they enter the housing market. “Depending on where you live, you’ll face a short supply of rentals at a very high cost as a result of policies, mostly local,” Pinto began. He mentioned cities like San Francisco and New York, and soon to be Philadelphia, where inclusionary zoning may make it more expensive for young people. “I’m not a fan of inclusionary zoning at all,” he continued, referencing his Wall Street Journal Op-Ed for more information.
“On the single family side, we currently have the strongest seller’s market in recorded history, meaning as far back as the National Association of Realtors goes, which is the early 90’s,” Pinto said. A seller’s market is when there is less than six months of inventory at the current selling rate. In the housing market six months is considered an equilibrium of supply and demand, and the current inventory rate of four months is a historic low, and it’s even lower at the entry level where undergrads would likely be looking.
Using data from Zillow, Pinto’s research shows that today’s market is imbalanced, with short supply and high demand pushed strongly by government policy. His research into credit has also shown that down payments are relatively modest with most first time buyers experiencing down payments of 5% or less, debt ratios are high, and credit is quite plentiful. “My guess is as you start renting, try to save something for a down payment, but more importantly, have good credit and a job that will allow you to qualify for a loan.” Pinto added, “the most important part of real estate is location, location, location, so you should try to get the best location you can for your dollar.”
Reina then asked about the rising prices of housing and its impacts on people and communities in the US. Pinto agreed that the problem was severe, “but is largely a self-inflicted wound by government policy.” He then went on to explain how California’s housing prices became so high despite matching national averages in the 1970s. Restrictive land use planning policies made it illegal to build, or only legal to build very expensive housing, thus reducing supply and driving up prices. “It’s not a market failure, it’s a regulatory failure. And it’s a regulatory [failure] at the federal, state and local level.”
Pinto explained an analogy involving the car market. A car costs roughly half of household incomes and this ratio has stayed steady for years; anyone who wants a car can buy one since the market is so large; filtering occurs so that those with more disposable income can buy newer, more expensive cars while those with less money to spend can go to the used car market. Also, the cars are serviceable for a reasonable price. “Now imagine,” Pinto prompted, “that only cars the price of a Mercedes were available for purchase. In this scenario, it would take a very long time for a car to become available to the consumer who has very little to spend, and effectively creates a shortage in the market since nothing more affordable is available.” In order to solve the problem in housing, we need to get it back to a [free] market, instead of what Pinto refers to as an “economics free zone” with a broken relationship between supply and demand.
Reina then moved to ask about whether or not a focus on local or federal housing policy will be most impactful to solve the problem. Pinto said in terms of multifamily housing, the federal government does not have the best history. Over the last 80 years, Pinto counted 41 federal statutes on multifamily housing – this means that there is a new statute promising to solve the problem every two years, “yet the problem gets worse every year,” he said.” The federal government has a habit of setting out grandiose, utopian visions and then things don’t work out that way – it’s called the law of independent consequences,” Pinto finished, emphasizing that the federal government has not historically pursued effective housing policies.
At the local level, Pinto has researched how to best house individuals working in service jobs – the roughly 38% of the population at lower income levels who earn between $5 and $20 per hour of their labor. “The question is, how do you make it legal again to build housing without subsidies?” he asked, considering subsidies tend to drive up the price of housing. Pinto spoke about meeting with local officials in Southwest Florida to “peel the onion back” and since the costs driving the prices of subsidized housing up are results of old policies. For example, parking and zoning requirements restricting land use, building codes which are not economical, increased taxes, the cost of utilities which is not adjusted per apartment size, and more costs all add up. This is a local issue, Pinto asserted, and the state and federal government have a minor role, if any.
The final issue to consider is fees that renters pay which may not be applicable to their current lifestyle. For a 600 sq foot, 1 bedroom apartment, it is likely that very few children will live there, yet there are significant fees to pay for schools, many of which are embedded in property taxes. This drives up the cost for residents seeking affordable housing. Pinto encourages “right sizing” the fees to make them more relevant for the resident.
Reina probed further on the issue of subsidized housing increasing costs, and potential interventions, namely the organized deregulation of local housing markets and how these approaches should be taken at the local level. “Albert Einstein said doing something over and over and expecting a different result is the definition of insanity,” Pinto said, “HUD has been trying this and its predecessors going back to the 1930s and 1940s have been trying various things and haven’t gotten a great track record.” He further commented on Ben Carson’s HUD and encouraged them to do no harm, emphasizing the need for the organization to better research how its actions may be harmful. In the single family area, HUD is promoting a house price boom that is “rip-roaring, increasing in intensity every month which we see in the housing data.” The organizations loose lending policies show that the mortgage risk index is increasing, and evidence shows that the current trajectory of this policy could severely affect residents. Pinto suggested HUD should crowd out 30 year loans and crowd in 20 year loans before it starts to take any other action.
Reina acknowledged Pinto’s concern about affordability and the loosening of credit, asking what solutions should be undertaken to combat these problems. Pinto first suggested eliminating Government Sponsored Enterprises (GSEs). These organizations include Fannie Mae, Freddie Mac, and the Federal Home Loan Banks (FHLBs) and serve to provide liquidity and stability to the mortgage market. Pinto recalled his time in the 1980s when he used to serve as Executive Vice president and chief credit officer to Fannie May before the organization changed, but today they serve no purpose. Research shows that very little of Fannie Mae’s business goes to purchase homes for owners, but half of their business goes towards refinancing second homes and investors. “What’s the public purpose in all of that?” Pinto asked, “Why are we saddling taxpayers with $5 trillion of debt that the government is guaranteeing through Fannie and Freddie when half of that debt has nothing to do with buying a home you are going to live in?”
The loans that Fannie and Freddie offer are at higher rates than the private sector, and are much riskier credit profiles, these factors speed the price movement we are in today in addition to driving up interest rates. In a process Pinto explained as “reverse quantitative easing”, he showed the audience that putting trillions of dollars of debt on the public market will raise rates, as the Fed’s reduction of debt on its balance sheet tends to lower them. Trillions of dollars of debt are currently guaranteed by taxpayers and the federal government, and the best solution to this issue is to eliminate Fannie and Freddie altogether.
“There’s only one reason the government should get involved, and that’s to help first time homeowners buy a home that can sustainably help them build wealth over time,” he concluded.