We should all be worried that the housing market is so bad while the economy is so 'good'

 Amen. (s.h.a.r.p.)

Amen. (s.h.a.r.p.)


Last week, The Join Center for Housing Studies at Harvard released their 30th annual report on the state of housing in the US. With a few exceptions, the picture is bleak. At every corner there are major red flags about the present and future of housing in the US for owners and renters alike. What is clear, a full decade after the foreclosure crisis, is that the housing market is at best exacerbating wealth inequality and at worst sowing the seeds for an even more destructive economic downturn. This is all happening while the national economy is allegedly roaring along. And that should scare all of us.

Let’s start with the most important point: for a lot of Americans, there is simply no evidence that the economy is doing well. Sure, the stock market is up and unemployment continues to fall.

These data points have long been two popular shorthands for talking about our economy’s health, but it’s hard to believe that it is healthy when 40% of adults don’t have $400 on hand to cover an emergency. The ‘millennial’ generation is already 34% poorer than previous generations at the same age. Clearly, if we think this is a good economy, how we measure it and how we talk about it are deeply flawed.

Who cares about the stock market when half of Americans don’t own stock and the richest 10% of Americans own 84% of them? Who cares about a low unemployment rate when wages aren’t increasing and most job creation is in low-wage, high-insecurity positions? Who cares about how well the economy is doing if the richest 1% captured 82% of wealth created last year while the bottom 50% captured none?

The crooked nature of our housing market is making this all worse, perhaps for generations to come. The JCHS report reflects this widening wealth gap and its impact on housing in the US with some startling stats. It breaks down into troubling dichotomies between renters vs owners, wealthy vs everyone else, old vs young, white vs not-white. It’s worth picking out some quick ones and related stats:

  • 38 million American households (owners and renters) are cost burdened
  • Half of all renters are cost burdened (which has doubled over the last 50 years) and a quarter are severely burdened
  • Rents and home prices have risen 20% and 41% respectively over inflation in the last 30 years
  • Homeowners have on average 46 times the net wealth of renters
  • Overall, since 1960, wages have gone up 5% while rent payments have gone up 61%
  • Minority homeowners have half the net wealth as white homeowners and their homeownership rate is falling
  • Since 2000, the number of Americans living in poverty has increased by 28%t to 12.8 million
  • During the same period, the number of high-poverty census tracks grew by 53%
  • 51% of blacks and 44% of latinos live in areas of concentrated poverty, compared to just 17% of whites.
  • In 2016, 1.4 million people (including 175,000 families with children) were homeless at some point during the year
  • 56% of homeless live in the highest cost metros
  • 83% of homeless families experience it acutely as a product of eviction

This is during 9 years of continued growth that has little historic precedent.

The report highlights a couple of under-appreciated factors causing these stresses: the aging population of the country, the decrease in immigration, and the concentration of economic opportunity in fewer geographies, industries, and individuals. These all represent “new normals” that so far have failed to be acknowledged at the national policy level.

One factor that the report covers in great detail is obvious: we aren’t building enough homes, anywhere. Most urban centers, and virtually all of them in coastal regions, are not building enough housing to meet the economic growth (and concentration, relative to other regions) they are experiencing. That’s partly why mobility, an actual sign of economic and social health, has collapsed in the US.

Some of this is the problematic regulatory regimes of individual cities, but largely its the cost of land, labor, and materials, which has gone up across the country. The lack of productivity gains in the construction industry, whether for single-family or multi-family, is a major problem and doesn’t get nearly enough attention from the media, academics, or policy makers. While many industries are slowly starting to see gains from the IT revolution (while others are shrinking), construction hasn’t.

That’s not hard to understand. The industry was built on cheap labor and cheap land — those are not inputs that demand innovation. Add in 80 plus years of massive government subsidies either from financial guarantees or infrastructure spending, and what you get is a cartel of mostly local/small groups of very profitable players that have never needed a culture of innovation. Instead, they have formed a culture of protection that has largely manifested in spending millions to support their local political status quo.

Today cheap land and cheap labor are harder to come by, but, for the most part, public subsidies are still available. So we have in place a perverse system where an already-outdated industry has little ability or incentive to adapt that is matched with an equally outdated and inflexible policy regime. That’s a recipe for a disaster, which is what we are living through.

This is all to say that, of course our housing market isn’t providing enough housing (except at the top, where it is producing too much). But it is operating in a state that our policy makers can’t seem to recognize reflects a larger political failure. None of these problem are going away. They are, in fact, going to get worse.

That’s because, inevitably, the economy will sputter again. So what happens when it does? 10 years ago it meant the greatest economic crisis since the great depression. I’m not suggesting we are due for another foreclosure crisis, but at the same time, we haven’t fixed the underlying problems people have that caused it. Primarily, those problems include people not making enough money, having too much debt, and not having a lot of flexibility if the economy tightens suddenly. That has gotten worse since the great recession. Remember, 40% of Americans don’t have $400 on hand for an emergency.

People are barely getting by right now during a ‘good’ climate, but what about the government?

You can make a lot of complaints about how President Bush and President Obama handled the crisis ten years ago. (It is clear that both administrations focused on the financial system at the expense of the individual household. There were more options on the table than that and we’ve been suffering from what ended up being a blanket immunity for the financial industry ever since.) But they both worked together during the transition and both drew from a deep well of experts with steady hands and public trust. It could have gotten a lot worse, but it didn’t. As flawed as the process ultimately was, that’s what we expect of our government.

Nobody in their right mind can say that the current administration has steady hands or public trust. Obviously, the President clearly doesn’t understand economics and doesn’t know what he is doing other than exploiting racial animus. But look across the cabinet — HUD Secretary Carson thinks poor people should have a harder time and doesn’t know what he’s doing. Commerce Secretary Ross is spewing conspiracy theories about soybeans and doesn’t know what he is doing. Treasury Secretary Mnunchin either doesn’t understand the tax cut or is still lying about it and doesn’t know what he is doing.

Does anyone expect the Trump administration to handle a downturn well or honestly? Have they shown any ability to think strategically on policy? Or to even execute a policy well? The inevitable downturn will cause pressure on this administration that we have no reason to believe it can handle.

Even if we had a more predictable political landscape than we do today, we have fewer policy tools available to deal with a significant downturn. The government is starved for revenue and will get worse over the life of the tax cut. Republicans plan to come for the safety net next. Even the Fed, though in steady hands for the most part, has fewer policy tricks up its sleeves than last time even if it somehow remains insulated from political pressure or partisan erosion that has crippled other institutions in the Trump Era. Will it still be immune when a crisis hits?

It’s not hard to see what has to change. Fundamentally, the public needs to claw back a large portion of that 82% of wealth created in the last year (and over the previous decades) in order to raise our collective standard of living. We need to reject the money-fueled political status quo at the federal and local levels that have killed long-term planning and prevented big ideas from entering the public discussion. And we need to reboot our social and economic contract that currently makes education, healthcare, and childcare/elderly care prohibitively expensive.

Fixing the housing market can go along way to starting this process. Housing is a right and should be the baseline for any public or private policy goals. We need a robust private sector to support housing, but we need to incentivize innovation by shaking up the tired regulatory and subsidy process. Public goals for the private sector should move towards equitable access, community ownership, and sustainable affordability. Public ownership of housing (which was not even covered in the JCHS report) must be expanded with direct ownership of housing and direct ownership of land.

It’s not hard to see what has to change, but it is hard right now to see how or where that change begins. The last great opportunity to have this conversation occurred during the great recession and it was ultimately squandered. It is hard to see how we even weather the next downturn in whatever form it comes let alone how we begin a massive reboot in housing. That might be the best we can hope for, but it is not what we need.