Housing Market Trends: Home Price Appreciation, Interest Rates & Government Policies, Tobias Peter
In episode 2035 of the podcast, host Jason Hartman welcomes back AEI senior fellow Tobias Peter to discuss the current state and outlook of the U.S. housing market. The conversation opens with a myth‑busting segment on millennial homeownership, emphasizing the need to adjust for a six‑year life‑stage lag when comparing millennials to baby‑boomers. The core of the interview focuses on the persistent inventory shortage caused by a “lock‑in” effect: many resale homeowners hold ultra‑low‑rate mortgages (≈2‑3% with 28‑year terms) and therefore have little incentive to sell, keeping supply tight despite declining purchase volume. Tobias presents data on year‑over‑year home‑price appreciation (peaking at ~18% post‑pandemic, now around 2‑3% and projected to rise to 4% by August) and on months‑of‑supply metrics, highlighting regional divergence—mid‑west and southern “linear” markets still posting strong appreciation, while western “cyclical” markets are cooling. The duo examines builders’ use of permanent mortgage buy‑downs to offset rising rates and to price‑discriminate among credit‑constrained borrowers, noting a shift toward temporary buy‑downs as well. They critique recent policy proposals that would institutionalize forbearance and effectively eliminate foreclosures, arguing such demand‑side measures ignore the fundamental supply constraint and risk inflating prices further. Tobias labels this approach “modern finance theory,” likening it to modern monetary theory, and warns it could exacerbate inequality. Discussion then turns to structural barriers: restrictive zoning, high‑cost building codes, and the lack of density that hinder affordable‑housing production. Modular and manufactured housing is identified as a potentially efficient solution, but industry consolidation limits its national impact. The conversation links housing costs to homelessness, citing a strong correlation between price‑to‑income ratios and homelessness rates. Finally, they touch on the broader macro picture—persistent employment resilience, modest inflation expectations (around 3% long‑term), and a generally bullish view of the housing market despite higher rates. The episode concludes with Tobias directing listeners to AEI’s housing briefings and website.
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Greetings from beautiful Park City, Utah. Welcome to episode 2035. Today we have a returning guest back, Tobias Peter with the American Enterprise Institute to talk about some very important news on the housing market and the economy overall. But before we do that, I just wanted to bust a myth for you, a quick myth. You know, we're here hosting our Collective Mastermind event this weekend. Just had a fantastic time. We had a couple of Olympian, so silver and gold medalists speak at the event. I spoke on the first day up on stage with George Gammon and Ken McElroy, my partners in the Collective Mastermind. And one of the myths that I busted, Myth Busters, is about millennials. And they are the largest demographic cohort in American history, of course, slightly larger than the baby boomers, as you know. But we always hear all of these complaints that they are so disadvantaged and so far and all of this stuff. And it's. They're not completely untrue. They definitely have a few gripes, for sure. But the other thing we have to adjust for and realize is that a lot of them are just starting later than their baby boomer parents. You know, millennials are forming households a lot later. They are getting married later. They are doing everything at a much slower pace than their predecessors. And that lag is causing a lot of really misleading statistics in terms of where they are in life at a certain point. So what we have to do is adjust for that lag. When we look at where millennials are versus their baby boomer parents, and we have to adjust by approximately six years, that's a six year lag because millennials are so six years behind their parents in terms of what they're doing with their life. So when we do that and we talk about the homeownership rate, for example, we really do bust the myth that millennials are so far behind. I saw the CEO of a big home builder on CNBC this morning. They build in 10 states. And just pure optimism in terms of the outlook and the market. And I agree with that because the CEO talked about how usually their biggest competition, of course, is the resale market. And whereas we would look at a typical percentage of sales for new home builders at about somewhere hovering around 13% of the overall housing sales, but now it's about 30%. So they just don't have the competition from the resale market that they're used to because, of course, of the lock, in effect, with all of those resale homeowners, you know, they've got these incredibly cheap mortgages, they've got 28 years left on them. Why should they ever sell? Their mortgage is too good a deal and they're just not selling. One of the other myths I want to bust is the concern about, well, you know, people say, okay, that's fine, but these people will eventually peel off and sell when they get laid off from their jobs. You know, all these doom and gloomers think the unemployment rate's going to skyrocket. Hey, maybe they're right. I don't know. I'm not here to partner talk about that today. I don't really think that's going to happen anytime soon. But of course, we will have bouts of higher unemployment and lower unemployment. That's just the way things go. But what's interesting to look at when people worry about the future of the economy or especially the housing market, and they say, well, you know, all of these homeowners are locked in with their incredibly cheap mortgages. They've got 28 years left. I finally agree with Jason Hartman that he's right about that. So we have this lock in effect. We have all of these homeowners, these resale homeowners that simply won't sell because their mortgages are too good a deal. And so people have finally come to agree with me after years of me saying this, that these people won't sell. And that's why there will be a continuing inventory shortage. So an additional 700,000 homes for sale would just put us into a normal market, not a soft market, not a buyer's market. That would just be a neutral, normal market, okay? And so all the doom and gloomers, all the Chicken Little sky is falling. People, the people that are always wrong, they've just been wrong forever, okay? And they continue to miss opportunities and be jealous of those who have the confidence and the courage to make decisions. Because there's always uncertainty. Nothing is ever just right. Right. There's always uncertainty. And so they say, well, Jason, you're going to be wrong when the unemployment rates skyrockets because everything is going to hell in a hand basket and we're going to see unemployment skyrocket. And then all of these people with these extremely cheap mortgages will have to sell. They will have to put their houses on the market, even though they have these incredibly low payments at 2.6% and they have 28 years left on those payments. They have mortgages at 3%, three and a half percent. Well, guess what? One person, thankfully, is actually doing a study on that, and that is yours truly. Yes, just look to Jason Hartman for the answers so calculate the unemployment insurance that would cover these people under the current rules for 26 weeks, half a year. Right. And then calculate their mortgage payments. And what you're going to find, yeah, you're going to find that their mortgages are actually quite affordable even with unemployment insurance. Now let me add one more thing to that. Is anybody really ever unemployed nowadays? I mean, you'd have to be just a complete lazy sloth. Okay. You know, look at all the other things people can do to make money that they couldn't do in the past. Right? They can drive for Lyft or Uber, they can go on Fiverr or Upwork and they can sell their skills and their expertise on all of these marketplaces so easily nowadays. So is there really any reason anyone would be truly unemployed anymore? Is that even a thing? Right. Yeah, maybe they're not going to replace their, their big time job, but they're going to have basic money and with their incredibly cheap mortgages, or the 40% or so of people that have no mortgage at all, their houses are surprisingly affordable even with simple unemployment insurance. We didn't have that situation before. That's a new one that hasn't happened before. So there's a lot of reasons to see that the housing market is going to remain pretty tight and inventory is going to remain pretty low for a long time. The clouds are not on the horizon yet. They will come someday. And when that comes, I'll be reporting on it. But until then, things are looking pretty strong. Anyway, let's get to our guest, Tobias Peter with the American Enterprise Institute, back for some new insights. And here we go. It is my pleasure to welcome a returning guest. Back to the show. We have Tobias Peter with the American Enterprise Institute. Tobias, welcome back. How are you?
Hey, Jason. I'm good. Glad to be back.
And you're coming to us from Washington D.C. right?
Washing D.C. exactly.
Fantastic. Well, I know you had some great insights on the economy as a whole, the macro outlook and the housing market specifically last time we met. So let's go into it again. For those of you listening on audio only, Tobias is showing some great visual aids. You can find them on YouTube or any other video platform where we are and we will try and make those understandable to you if you're listening on audio only as well. So Tobias, what is your general overview outlook on. On the market and the economy?
Yeah. Hey, Jason. Yeah. So the outlook on the market is fairly. We are fairly here at the housing center, we're fairly bullish and you can see that from this slide Here where we look at the year over year, home price appreciation which has begun to accelerate again. And this happened of course, if you look at this for going back almost 10 years, we had fairly stable home price appreciation in the 4 to 8% range starting January 2013. Kind of coming out of the slump of the great financial crisis. Housing market has been chugging along at about 6% year over year until really the start of the pandemic. And then with the Fed lowering interest rates and pumping money into system the same, the federal government stepping in and providing all these fiscal assistance, home price appreciation really accelerated in the, in the aftermath of the pandemic and started to top out at about 18% year over year. Stayed there for quite a bit of while. But then once the Fed started to realize that oh, we've made a mistake and we've kept interest rate for too low for too long and home price appreciation and general inflation really was running away from them, where they started hitting the brakes and started increasing. The Fed fundraise and mortgage rates in a relatively quick, quick, quick couple months starting at the end of 2021, beginning of 2022 started going up almost 300 basis points to. That's when we've seen that home price appreciation really started to decelerate. And a year ago home prices were still going up 14.3%. Today we have them coming in at about 2.9%. But as you can also see from this chart here, the rate of home price appreciation has really bottomed out starting two months ago in April and May at about 2% year over year. And now we are predicting that home prices have turned a corner. And as I said, they're now coming in at 2.9%. But also we're expecting them based on data that's already in the books. So looking at rate lock data, which you lock in, the rate today becomes a sale six weeks, eight weeks down the road. We already know what home price appreciation going to be looking like in July and August. And we are predicting 4% by August. Home price appreciation.
Wow. You know, I got to ask you Tobias, what do you say to all of the doom and gloomer fear mongers who just have been predicting a real estate crash Now I knew it wasn't going to happen because of the simple supply and demand issue. I mean, it's just unbelievable. And the other thing is people are comparing it to the wrong thing. They're comparing it to the lowest interest rates we've ever seen, ever. And that's not the benchmark. You know, you should compare it to 2019, 2018, 2017, and that's a more accurate kind of zoom out perspective. And when you look at, you know, like inflation adjusted home prices, you look at home prices versus income by some metrics, you know, still more affordable than many people might think, although affordability has definitely declined. No one would deny that. But you know, what do you say to all of these like bearish people who tripled the interest rates basically? And how is it that we haven't seen a market crash? And I have my own opinions, but I want to know yours.
Yeah, no, I mean, I think you've hit the nail here. I mean, kind of going over to my next slide. I mean, it really comes down to the relationship between supply and demand. And on the one hand it's absolutely true that demand has taken a, you know, has taken a beating. And purchase volume, last time I was on the show, I showed that purchase volume really started to decline once mortgage rates jumped above five and a half percent. That was in the spring of 2022. And we really seen the wheels come off on the demand side. You know, kind of volume has consistently between 30 to 40% below the 2019 levels. And that's been going on for the last couple of months. But at the same time, supply is also way down. And inventory today is only at about two thirds of the level that it was between 2017 and 2019. And so you really need to consider the relationship between supply and demand.
And that's really the other interesting thing about that point about inventory is 2018, 2019 inventory was not high enough to be in a quote unquote normal market that we had low inventory then. So buyers just can't get any relief here, it seems like.
Yeah, that's true. I mean, if you look at this slide here for plotting the month supply by price tier, and if you focus on the overall line, generally six months is considered a break even point between a buyer's and the seller's market. And if you look back at this chart here for the overall line, we were always below six months supply going back to January 2013 before the pandemic, we were running at about three and a half, four months. Pandemic hit goes down to two months, but now we're back at about three, 3.1 months. And that's still a very unhealthy market and that really helps.
Unhealthy, meaning lack of supply, buyers can't find a home.
Exactly. Unhealthy market in terms of lack of supply. And if you look at the low price tier there we have supply as low as two months and that's even lower than it was in 2018, 2019 and before the pandemic. And that's why in the low priced year, we're actually seeing already home prices going up at 6,7% year over year for the last six months, which is quite astonishing. But now that you know, we're kind of coming a little bit out of the doldrums here, this in the low price tier, home price appreciation is probably going to be even stronger. It's not just 6%, 7%, it's going to be 8, 9% as it was before the pandemic. And hence consumers that are trying, first time home buyers are trying to get, desperately trying to get in this, in this market. They're going to be either having to pay up a lot more money, take out a huge loan, or they're going to be, you know, stuck on the sidelines for the foreseeable future because we just have such a low supply environment.
Okay, I want to argue that there's actually one more choice. You said they would either have to pay a lot more and then the answer to that is well, they can't pay a lot more, they just don't have the money. Right. Or they can't qualify for the higher loan amount or they'll have to sit on the sidelines. But I would argue that there's one more option and that, well, of course they can continue to rent. Right. But the other option I meant to talk about is that they can just accept less, they can capitulate. That's the thing that people don't understand everybody in really, in every interaction, I would argue in the marketplace of anything, we're always making compromises and trade offs. Right. As market actors, we, we, we kind of never get exactly what we want. Right. You know, we always feel like we're paying too much and not getting enough. That's just the human condition. I'd argue most of the time they just accept less. Right. They just don't get as much house as they expected. If they buy or rent.
Yeah, I mean it's everyone, you know, kind of goes, who goes grocery shopping is familiar with these trade offs.
Right.
If the price of steak goes up, you probably want to switch to chicken.
That's the CPI substitution.
Exactly. Is familiar with this. But at the low end of the market, where, you know, generally this would, this should happen too. But because the government is providing additional buying power in the form of, you know, additional leverage by for example, moving out debt to income ratios or reducing down payment. So Instead of having 3% down payment, you can get down payment assistance. And that's now, you know, that's now acceptable. And so there are all these ways for the government, for the, at the low end of the market to stimulate demand so that borrowers don't necessarily have to make these trade offs. But at the same time, because you have very limited supply, even if you wanted to trade down to a lower priced house, it's going to get equally as hard finding one because so few homes on the market. It's really, this lack of supply is obviously we've been under building for the last 40, 50 years and that's clearly been going on goes back to a lot of the efforts of the federal government a hundred years ago. Implementing single family detached zoning, goes back to the rise of the NIMBY movement and the environmental regulations which made it much harder to build and find land to build. But at the same time you really need to be kind of these trade offs that you just mentioned, it's just not really happening. And that's really another problem is the Fed's low interest rate policy. Because by keeping the rates so low and allowing people to refinance into these 3% mortgages, everyone is now locked in, into their 3% mortgage. And even if you wanted to sell and buy a new home, the monthly payment shock that you would have going from a 3% to 7% mortgage, that's, that's quite massive. So people are just deciding to stay put. They maybe want to remodel their housing or you know, kind of, they, even if they move the, if they have the financial wherewithal, they're going to decide to, well, maybe I can rent my house out if I can somehow hang onto it because someone else is going to pay the mortgage for me and I can just, you know, kind of reap the benefits of the equity accumulation. That doesn't apply to everyone but for the, for the more wealthy individuals. That's certainly, that's certainly true.
What's, what's counterintuitive here that I think people really need to understand is they need to compare the housing market to the bond market. And what I mean by that is that, you know, when you see interest rates go up, the value of bonds goes down. Right. It's kind of like the flip of that idea, meaning that the higher the Fed raises rates, the more valuable all of the existing mortgages become to the people that have them because they're irreplaceable. That money is so cheap and they've got 28 years left on it. They're just never going to part with those loans. And then people say well you know, what if they can't afford it? What if they get laid off from their job? Well, I would argue that their payments are so low and so comfortable that even if they do get laid off, many of them can probably just afford to keep their house based on their unemployment check and their severance package. And no matter what, they will fight to keep those mortgages because they are so cheap. Do you agree with that thesis?
I agree with that thesis. And then the other thing is too, I mean if you're following mortgage policy, what's happening And I had an op ed out there with my colleague at Pinto in the Wall Street Journal in end of May where we talked about the absurdities in the federal housing policies where now a new policy that has been proposed is for the borrowers that get in trouble. It's really to do away with foreclosures and completely foreclosures. And hence the solution is not equipping people with more financial wherewithal and staying power so they can with those market shocks or if they, if they had unemployment. But the solution is, well, we're going to make forbearance. We're going to institutionalize forbearance. So wow, you know, you can just claim hardship and FHFA came up as a proposal, it didn't define hardship. So that's the first thing. It's not defined what it was hard to. So anyone can just claim hardship and not get a forbearance for six months of their loan.
Okay, but, but, but Tobias, look, that's just a proposal. I mean what are the chances? We're really going to see that.
No, no, this is, this has happened, this has happened. O this is taking effect September 1st for select vendors and then end of the year this is going to get rolled out. This is going to get rolled out across the entire market. And now fha, the Federal Housing Agents Administration for which is for lower, geared towards lower income borrowers, they are now also have a proposal letter for comment out where they are wanting to make a similar program where they want to implement a similar program going forward. The idea is the same that you would basically keep your low interest rates so you would reduce your monthly payment and then whatever you don't make it tacked onto the end or you know, when you sell your home you pay it back. But I mean it's basically an interest free loan that you're giving people so.
In other words, with this new plan that is actually happening, foreclosures will go away, there will be no price discovery, there will be no additional inventory coming onto the market. I'm curious, since the investor share of the market is so large, would this apply to investment owned property, non owner occupied properties?
I don't, I'm not, I'm not sure about that one. I'm not sure about that one.
But I think it's an interesting question.
It's an interesting question. Yeah.
But it would apply to owner occupied properties. So literally these people would just never have to give up their properties.
Yeah, exactly. And of course the flip side of this is a, you know, kind of, it's going to become an entitlement program similar to what's, what happened with student loans where on the one hand the government, government is, you know, kind of underwriting all these mortgages or student loans and at the same time the treasury is, is in the hook for all these, all these student loans. It's very easy for policy makers to say, well, you know, we're just gonna, you know, not require you making your payments or even then at the end, you know, it's going to be all forgiven. And it's really a slippery slope that we're going down here. You know, once, once a program is implemented, we know how hard it is to take away, but it's really, it's really troublesome that the steps that the administration is taking.
Wow, that is just shocking. We're basically taking the COVID era and making it permanent. Unbelievable.
Next slide here. Just looking at home price appreciation by Metro. You know, we have basically a tale of two markets. The Midwest and the southern part of the country is going still very, very strong in terms of year over year home price appreciation. Milwaukee, for example, is coming in at 8.7% appreciation. Kansas, 6.9. St. Louis 6.7. Cleveland 6.1, and then Miami south at 5.9. So that's all very, very strong home price appreciation. On the other hand, out in the western part of the country, it's still, the market is still recovering. Their Phoenix is currently down about 8%. Austin down seven and a half. Vegas down 6.9%. Of course, those were also markets that were going up, you know, 20%.
These are, these are the linear versus the cyclical markets, folks. Just like I predicted the linear, the linear markets would do well through any storm pretty much compared to the cyclical markets that get hit really hard. Yeah, okay.
Yep. And you know, kind of now with work from home and people Move out of high tax states and places with more attractive climates, and particularly areas that still have low home prices. That should bode well for the future.
We're seeing kind of a redistribution of talent, knowledge and prosperity around the country. It's no longer congregating into those main hubs that it used to be in. You know, when the first set of lockdowns lifted in the COVID era, I mean, everybody just moved. It was shocking to see how quickly the country had just repositioned themselves. But yeah, let's move on more quickly. I know we've got a lot to cover.
One last point. I mean, it's all victim, right? Capital is treated poorly, leaves no longer applies to just financial capital, so applies to human capital.
Sure, absolutely. It goes where it's treated best.
So here this is now shifting gears and looking at buy downs and in particular permanent mortgage rate buy downs. And we were asked by one of our friends in New York who follows the building industry quite closely, but he was like, he was, geez, I wish someone could quantify the use of permanent buydowns for me. So we looked into this and compared the note rates for existing home sales to new construction home sales. And to the extent that permanent buy downs are being used by these new construction companies, we were expecting to find a gap opening up as interest rates started rising. And sure enough, here in this chart you can see the average note rate for FHA loans. And going back to January 2021 and when the market was chugging along, you can see at 3% mortgage rates, there was no difference between existing home sales and new construction. But then as rates started rising at the beginning of 2022 in particular, inventory started to build for these larger. We are seeing how they started to aggressively use buy downs. And of course it helped offset these rising interest rates and also it helped to qualify more credit constrained borrowers. And of course that also helped the builders that they didn't have to have to cut prices, but they could really use price discrimination and offer larger buy downs to the borrowers that needed more to qualify for the mortgage and they're using less buy downs for people that are in good shape and that don't necessarily need them. All right, and what's also interesting is that these buy downs, I mean when you look at the distribution of mortgage rates, it kind of ranges from anywhere to five, five and a half, 6%, 6.5%. But what we found interesting that was. Debt to income ratio at all these breakpoints is about 50 for Dr. Horton FHA borrowers, which really suggests that there is price discrimination going on. And the builders who are running their businesses as businesses are really finding creative ways of dealing with these higher interest rates. And we're expecting that the use of buy downs is going to be also going to be particularly permanent buy down. It's going to be shifting more into the existing housing, existing home sale market. And we're kind of currently looking into that to figure out if we can quantify that.
Well, the problem is the existing home for sale market has so little inventory that, that when anything goes on the market it'll pretty, it'll move pretty easily even with reduced demand that we have. But, but let's move on a little more quickly if we can because I know you've got some other really good stuff to cover. So we've got the buy down thing.
Temporary buy downs are also increasing, you know, kind of starting mid, mid this year. They're now on the, on the new construction front, about 7% existing homes is a little bit less. We don't unfortunately know how big these temporary buy downs are.
But yeah, you know, but they're buy.
Downs happening and then yeah, I mean if you want to get a little bit into the policy where he talked a little bit about the policy aspect, but this is really becoming what we've kind of dubbed modern finance theory.
It's not modern monetary theory, it's modern finance theory. Tell us about this. What is this?
It's a housing finance equivalent to modern monetary theory. Of course, you know, government can spend as much money as it wants and it can always print more and it's not going to generate any inflation. Well, you know, that didn't work out so well. But now we seeing modern finance theory coming into the forefront. Which particular the student loan and the mortgage sphere. And the idea is that the government can always stimulate more demand, particularly for lower income disadvantaged groups. And the idea is to close the homeownership gap, the wealth gap. And of course because the government guarantees most of the homes and they also have the higher lending institutions, but at the same time, all the agencies that regulate the finance and the monetary systems, they can basically course correct relatively quickly. And if there are even any problems arising by whatever means, the government just can easily correct that because all bureaucrats and politicians are very knowledgeable, all knowing and they can easily fix that.
You know, that's the mistake so many people made during COVID and they keep making it. People just keep thinking that we live in a free market and you can interpret things based on that. But the fact is we have a centrally planned market market and the central planners, you know, they're going to step in. We know how reliable. I'm not giving them credit by saying this, by the way, but we really know how reliable they are because they've been that way for decades. They'll step in and correct. It was really the only one that I guess, well, I guess it depends. You know, if you thought inflation was a huge problem in the late 70s, early 80s, then you know, Paul Volcker stepped in. Right. But if you didn't like his high interest rates and the pain and breaking the back of inflation, then you know, you didn't. But the fact is we can rely on interference and market distortions caused by central planners. No question about it.
Yeah, I mean, it's a dangerous logic. I mean, if you look at history, it really hasn't worked all that well. But at the same time, the progressives keep thinking that they have better insights. But then the second thing is, second line of thinking with this modern finance theory is, well, we've done away with foreclosures, now we can expand a credit box and we can qualify people that are of lower means. We can easily bring them into the market. But of course, course the first thing is like, where's the supply coming from? We don't have any supply in the market. What are they going to buy? And all it's going to end up doing is drive up home prices higher, making housing more unaffordable. And it's going to create inequality because the people that currently own housing, well, they are going to be benefiting from these.
They can trade equity, the others can't catch up.
Likewise, when the Fed pushes interest rates down, they're the ones that benefit from these policies. But the ones that are kind of on the low end of the spectrum that are trying to buy housing, they are the ones that get frozen out. And that's inherently unfair. We should let the market work the way it does.
Absolutely.
It hasn't worked. What we should be focusing on instead of this modern finance theory is we should be building more housing. And building more housing should be done by the free enterprise system. We should allow light touch density, so allowing moderately higher density. I think we've talked last time on the show a little bit about this. So allow duplexes, triplexes, fourplexes, townhomes.
So what is the possibility of that really happening? I think we've got to relax zoning codes, of course, which you're alluding to, but also building codes in general. We've got to allow Builders to build cheaper properties. You know, I get it that all these new features and I live in Florida, you know, that basically bulletproof glass on my house, you know, the impact glass. It's so expensive to build that way. Yes, it's great, but it just means more homeless people. They've got to just loosen up on the building standards. They're just too strict. You know, if you want to build low income housing, that's the only way you're going to do it is to just build lower quality housing. You know, in the real estate market we have this thing we talk about A, B, C and D class properties. Right. No one can build anything anymore that's not an A class property. Property. How are you going to ever provide affordable housing with that kind of regulation?
Yeah, I mean we shouldn't, you know, obviously we shouldn't compromise health and safety of these, of these buildings.
You're always, you're always compromising health, Health and safety. That's always a compromise. I mean saying that is like saying, okay, every car should just be a giant, you know, Chevy Suburban, a tank. Right. No, that some people drive little tiny cars. Right. And they're less safe. We know that they're cheaper. We're always making those compromises, aren't we? I mean, to some degree, to some extent, yes.
But I mean, you know, kind of, you know, kind of we should ensure a minimum. Let's put it this way, you should ensure a minimum of safety and health. But I don't think requiring, you know, as you said, bulletproof glass or solar cells on the roof is going to, you know, it's going to do anything for, for that. So I think there's, there's plenty of opportunity to, you know, not do anything crazy. But at the same time, if we allow, if we allow, if we make zoning changes and we allow, allow homes to be built on smaller parcels, we're going to be using less land and land is very expensive, obviously, particularly in many places of the country. But then also because we have smaller lots, we're going to end up building smaller homes on those lots. If you have large lot, you have to put a large lot, a large house on it. It's a smaller lot, you have to put a smaller house on it. So that's the way of making housing more affordable.
The infrastructure costs go down a lot too with higher density. So.
Exactly. You know, I mean we've, there's some studies out there that found that if you're doing infill development, it's cost about 20 of doing greenfield development just because the garbage trucks, the roads, everything is already there and the police is already there.
The fire, sewers and yeah, all of.
That, sewers, you name it, you can go down the list. So we think that that needs to happen at the same time kind of doing something on the loan product front here, just giving, equipping people with more financial wherewithal and staying power so they can actually weather a job loss rather than having the government step in if they get in trouble.
Yeah.
So I mean I can go through recent examples of modern finance theory but there was a, you know, there was a huge outcry a couple months ago, particularly in conservative circles where the fhfa, the Federal Housing Finance Agency allow announced changes to its loan level pricing adjusters where they basically started shifting the money around a little bit differently and would have raised, would it would increase borrowing costs for higher, higher credit score.
That's never going to work. That's the silliest idea I've ever heard of in my life.
I mean, yeah, I mean, I mean this has been, I mean this has been going on for quite some time already. There's actually 6 billion annually distributed between higher and lower credit score borrowers. That's already happening. But this was just the cherry on top and that's what people got people interested in this topic. And there's, you know, there's, there's many such examples like now FHA is cutting its mortgage insurance premium premium which of course is the same as an interest rate reduction. You don't have any supply, you increase.
Let's just remember. Yeah, so you increase the demand. They never work on the supply side of the equation. They're always working on the demand side, which is absolutely stupid. They're doing the same thing with colleges. It's the same problem. But let's keep in mind that FHA loans in some places are a million dollars. This is not for poor people. This is the government assistance program for a million dollar home. I mean it's just crazy.
Yeah, exactly. And I mean that's basically all I have here for you. I mean you mentioned an interesting topic earlier where we've done a lot of research that's homelessness and we've looked at homelessness across the whole country and what we found was the further home prices get away from income, so measured by the median price, median home price to median income ratio, the more homelessness you're going to get. And we have a very strong R square the basically explanatory power just by looking at price to income ratio. We can explain, I think 70% of the variation in homelessness across the country. So it really comes down, it, a lot comes down to housing costs. And we need to do something to bring down housing costs to ultimately then help with this, with homelessness. Because a lot of people just fall into homelessness. They get, you know, they don't necessarily live on the streets, but they go into shelters or they double up.
They live in their cars.
Live in their cars. And by having lower housing costs, lower rents, we could do a lot to help these people. And then of course, for the people that have very severe mental health issues, we could really focus 100% of the resources on treating those. But right now, out in California, there are now proposals out there to spend $100 billion a year to build new housing to solve this homeless problem. And it's just preposterous. I mean, it's never going to work.
Well, I'm sure if California is managing it, it will become a crony capitalist boondoggle, Just a complete scam, as it always does, as it's done with their, you know, their, their new train tracks and everything else they do. You know, I, I remember reading one study as they were trying to solve the homelessness problem. They, they calculated that the cost of each home was like $780,000 basically, you know, that they've provided when they could have just, they could have just gone want to purchase those from a developer. You know, like, I mean, it's just, it's just sick the, the way these, everything just becomes a scam. You know, if you, you read the.
Newspaper stories in the New York Times, had one in there a couple months ago, but it kind of looked at the same issue and it's like, well, if you are, you know, affordable housing provider, you have to cobble together all these subsidies from here, there, this group, that group, and then it still ends up more expensive than being, than the private sector providing a home. It's just, you know, that, that you shouldn tell you something. Shouldn't we try to private sector a little bit more than relying on government?
We should, and what we should do is we should ease up on the developers. Zoning is one, but also just construction quality. You know, I know that sounds just counterintuitive, but you've got to do it if you want to solve the, You've got to make affordable homes. I mean, these homes, just the quality of them is too high. They have quartz countertops, you know, they have beautiful cabinetry, they have state of the art window framing. This is not the type of house I grew up, up in, you know, I grew up in C class housing and it worked okay. I didn't love it, but it was better than being on the street. And that, that's what we've got to do. We've got to be able to build lower cost housing. You know one other thing, and I don't know if you've studied this at all Tobias, but modular housing and just pre manufactured housing, you know, it seems like Americans just have such a complete disdain for that whole idea. But it is a lot more efficient to build a house in a factory and assemble it on site rather than assembling every little piece nail by nail. Are we going to get any relief there? That seems like where maybe it needs to come from.
Yeah, I mean that's always, I mean I have not done much research and I've read papers by my, by my former colleague Lynne Fisher on this where she said this modular manufactured housing that always been for 100 years basically since CS Robot came into existence has always been hailed as, as our savior. And it's just going to be, the breakthrough is going to be just around the corner, but it just hasn't happened. And the other thing is there has been a lot of consolidation in this industry. So for this product to really work, you need to be relatively dispersed. You have your factories dispersed across the whole country because the shipping costs are actually quite high. But because you had so much consolidation, so much factory closing, it actually works only in certain parts of the country now. So I mean the other, the other thing I want to point out is even if you build, I mean we need to build more housing, but we need to build housing I think at the middle of the price spectrum. And if you build at the middle of the price spectrum, someone else who is living in a less, you know, yeah, it's going to move up and that's going to free up a housing that's, you know, less nice.
I would argue that it's really lower middle. Exactly. I mean the average price of a new home right now is 475 thousand. You know, we've got to build houses cheaper than that. And then, you know, maybe it goes from an old C class house that people move out of and they buy that new home, that's 300,000. Okay. And that kind of works. Right? So that makes a lot of sense to me. I just want to ask your opinion before you go on the, just the macro picture, not housing per se, you know, the future, inflation, deflation, stagflation, Employment has been kind of amazingly resilient, just as the real estate market has been amazingly resilient in the face of the Fed's tightening. What are your thoughts on those things?
Yeah, those are good question. I mean I don't, you know, I don't really have a really expert view on this. But my, I mean I'd be kind of similar to the housing market. I'd be fairly, you know, I'd be somewhat more, more, more bullish on that too. Just because you have all this money that is pumped into the system, in particular on the, on the mortgage front. I mean there were, you know, millions of people that refied and did refi into 3% mortgages and able to lower their mortgage payments from, let's say, you know, $1,500 to $1,200.
So you have or less than that. You kidding me? I mean some are paying 800.
Yes, yes, you're right. But those, you know, they certainly can't.
Move out and rent they can't buy, it's just a total lock in effect. I mean they're stuck, you know, but the sort of a good way.
Yeah, but the savings that you get, right? I mean you were picking me, you were making fifteen hundred dollars a month. Now you're making eight hundred. So the seven hundred dollars that you get that saving every month, months going forward for the rest of your mortgage, that's actually a lot of money that's sloshing around. And you know, that could, that could keep powering the economy, keep powering spending and certainly that seems to be happening. So that's why, you know, I'd be, I'd be rather bullish than bearish at this point.
Okay, so inflation or deflation future, you're probably inflationary like me because of that and the deficit.
Yeah, yeah, yeah, exactly.
Any ideas as to how much inflation we'll see over, you know, say the next five years or so?
I think it's probably going to be a little bit less than what we currently are, but it's not going to go down to 2% anytime soon. And I think the Fed has made that point that it's fine with averaging it out to 2% over longer time periods. I would expect it to be in the 3% range.
Okay. Tobias, Peter, thank you again for joining us. It's always great to talk with you. Give out your website and tell people where they can learn more about. Yes.
So we are@the www.aei.org housing and also we have kind of briefings like the one that I just did. We have monthly briefings at the. We actually have one tomorrow. So if you'd like to sign up, go on our website and sign up. It's free, open to the public, and, yeah, great content.
Okay. American Enterprise Institute. Tobias, Peter, thank you for joining us.
Thanks, Jason. Good to be back.
Sam.
