How to fix the housing market – a wealth of common sense

The first idea is to ban institutional ownership of houses:

The idea here is that if you remove demand from professional investors, it frees up supply for households.

This makes sense in theory, but this feels like pressing a string. Institutional investors simply aren’t a big part of the housing market.

Johannes Brands shows that they currently make up about 1% of all home purchases:

Most real estate investors are still the mom-and-pop type. Furthermore, it is possible that removing this cohort could actually reduce supply, as fewer houses would be built.

The other idea is to buy mortgage bonds to lower mortgage rates:

This one seems more logical to me.

When the Fed cuts short-term interest rates, it is no guarantee that mortgage rates will fall. When they cut rates for the first time in this cycle, mortgage rates actually rose.

Buying mortgage-backed securities can help narrow the difference between mortgage rates and 10-year Treasury bond yields. These spreads disappeared after mortgage rates rushed from below 3% to 8%.

If we want to get really creative, I have some other ideas.

Why don’t we offer all starters on the housing market a one-off mortgage interest rate of 3%? Did you miss the generations of low interest rates in the early 1920s? Now you get another chance.

Or how about this: let’s make mortgages portable. All those people holding on to a 3% mortgage for life have slowed down housing activity. What if you had the option to keep the same low interest rate on a new loan for a new home?

That would certainly free up some of the housing supply.

But here’s the problem with all these ideas: they don’t address the real problem. While these solutions would stimulate demand, they would likely also increase prices.

The real problem is the housing supply.

We need to build more houses!

I can’t believe there aren’t more politicians making this a policy priority.

Frankly, this is a much more difficult solution to implement. Each municipality has its own rules and regulations for building codes and the like. Cutting through the red tape to enable more buildings may not be easy, but we know it works.

In Austin they built more multi-family housing and rents plummeted:

Guess what else happened when they built more apartments? House prices have also fallen!

The same thing happened in Minneapolis:

To make a big enough difference across the country, you would probably have to incentivize homebuilders somehow to build more.

Some people don’t like the government interfering in these types of markets. They would rather leave it to the market. Maybe that works, but in other countries things have only become more unaffordable because they did nothing to address the problems.

It is worth noting that the government played an important role in building the middle class after World War II. They backed all the loans so that home builders would go crazy and build enough houses in the suburbs for all the soldiers coming back from the war.

There were enough homes and it was affordable.

If you want more affordable housing, the government must stimulate more supply.

Michael and I talked about the housing market and much more in this week’s Animal Spirits video:



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Further reading:
Why don’t we build more homes?

Here’s what I’ve been reading lately:

Books: