How to fix the housing market

Robert Armstrong (0:09)

Aiden, you're a young man who recently moved to New York City.

Aiden Reiter (0:12)

Indeed.

Robert Armstrong (0:13)

How's it going finding a place to stay?

Aiden Reiter (0:15)

Well, I'm now on my third sublet, essentially hopping around the apartment, the apartment around the city, sleeping in friends' beds who are on vacation. So, can't say it's easy.

Robert Armstrong (0:26)

No, what's your long-term plan? What are you gonna do? I'm not gonna couch-surf forever, I wouldn't think.

Aiden Reiter (0:31)

In a sense, yes, waiting to move in with some family. But, you know, that's not a great solution as a 26-year-old either.

Robert Armstrong (0:37)

Well, Aiden, while your experience is probably different from many Americans in that New York City is a place of its own kind, the general theme here will resonate with a lot of people because we don't have enough houses in this country. House prices are up. Housing starts are down. Ladies and gentlemen, this market is broken.

Today on the show, can we fix it? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I am proud homeowner, Rob Armstrong, coming to you from Unhedged World Headquarters in New York City, joined by couch surfer, Aiden Reiter, who is my partner in crime on the Unhedged newsletter. Aiden, I'm not making fun of you. I was a young couch surfer once myself. I remember those years fondly as it happens.

Aiden Reiter (1:36)

Now live nine months in a row living out of one suitcase. And honestly, there's something lovely and minimal.

Robert Armstrong (1:40)

You will look back on that with nostalgia one day, I promise. Aiden, in a functioning market, if the price of something is extraordinarily historically high, somebody shows up and makes more of it. That in a thumbnail sketch is the genius of capitalism that is not happening with American housing.

Aiden Reiter (2:04)

No, it is not.

Robert Armstrong (2:04)

The median price of an American house is $430,000 or something, which doesn't sound like a lot of money to New Yorker, but sure does to everyone else. I think even inflation adjusted, we're near highs here.

Aiden Reiter (2:19)

Yeah. The Case-Shiller Index, which is a typical index of broad housing affordability, is at its highest ever. Yeah. It's never been more expensive to buy a house in America relative to the amount of money that Americans earn.

Robert Armstrong (2:30)

Exactly. So the Atlanta Fed helps us measure this. They have this measure of the relationship of prices to incomes. And the old rule of thumb, our listeners will remember is 30% of your income going to housing. And the Atlanta Fed has this tracker, a numerical tracker, where 100 stands for the median income. 30% of it is the median cost of owning a house. Right now, we're at 68.5, which is lower than it was even 2007 during the housing bubble. So houses are more expensive relative to incomes, even than during the housing bubble.

Aiden Reiter (3:16)

It's not a pretty picture.

Robert Armstrong (3:17)

No. So what we've talked about this before, but just to review, what has gone wrong in this market?

Aiden Reiter (3:23)

There's a couple of things. Well, there's been a long time building gap.

Robert Armstrong (3:29)

What's the opposite of a glut is a dearth.

Aiden Reiter (3:33)

A dearth, a dearth, that's it. There's been a dearth in home building for the past five to 10 years. American home builders, Americans have not been building enough houses relative to population growth, relative to household formation.

Robert Armstrong (3:46)

Part of that is the whole industry got scared to death in the great financial crisis. There was a huge amount of building very briefly before the financial crisis. Building is a leveraged industry, it got completely wiped out, and the industry's to some degree never gotten over it.

Aiden Reiter (4:01)

Never gotten over it, and also it started looking into new areas to build, right? The high-end condominiums, commercial real estate, there's plenty of things that it had built over the past 15 years, but they're not necessarily what we need to build to actually address the housing shortage.

Robert Armstrong (4:15)

Of course, part of the problem here is high interest rates. If you look at a chart of housing starts, how many new houses are being started every month? It's like a 1.2 million a year or something number now. It was going up, and then the instant the Fed starts in 2022, builders start pulling back.

Aiden Reiter (4:35)

Yeah. Interestingly, over the past, I believe, couple of quarters, there's been a gap between permits and starts, which means builders are actually applying to locals and owning councils, to states to build things and getting the permits to do so, and then not even starting construction.