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Moody's Talks - Inside Economics
Holiday Sales and Housing Supply
Ed Golding, Executive Director of the MIT Golub Center for Finance and Policy and a Senior Lecturer at MIT Sloan, joins Mark, Ryan, and Cris to discuss all things related to the U.S. housing market.
Full episode transcript.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics. And we got action-packed podcast for you. Of course, let's do the introductions. We have the two co-hosts, my two co-hosts, Cris deRitis and Ryan Sweet. Hi guys?
Ryan Sweet: Hello.
Cris deRitis: Hello.
Mark Zandi: Seems like we've been doing a lot of these podcasts. I think we've been stockpiling podcasts for next week, Christmas week and New Year's, the week of New Year's because I don't think we're going to record those two weeks. So, we've already done those podcasts. This one's going to be released today though, I think, right? I think this is for today. Yeah, good. Any words of wisdom, guys, before we move on? Anything you want to point out?
Ryan Sweet: Cris always has words.
Cris deRitis: Always words. I don't know about the wisdom, but definitely looking forward to it. If you are feeling a deficit, certainly I think Ryan and I would be happy to come back next week and jump on the line here.
Mark Zandi: I really love these podcast. In fact, I would have no problem coming back next week.
Ryan Sweet: Yeah, they're so much fun. I look forward to it every week.
Cris deRitis: Yeah.
Ed Golding: Well, it is Christmas Eve.
Mark Zandi: I say we're all a little weird though.
Ryan Sweet: That's telling, isn't it?
Cris deRitis: Yeah, we'd probably jump on and do the Christmas Eve.
Mark Zandi: Hey. Well, we have a guest today. Ed. Ed Golding. Ed, welcome. Welcome to Inside Economics.
Ed Golding: Thank you.
Mark Zandi: Good to have you. And where are you speaking to us from, Ed? Where are you? Are you in D.C?
Ed Golding: I'm in D.C area, suburban Virginia, Tysons Corner.
Mark Zandi: Got it. Ed and I go way, way back. But I'll have to say I'm a little embarrassed because I get confused. You were at Freddie, weren't you? You were at Freddie.
Ed Golding: Correct.
Mark Zandi: Freddie Mac. Yeah.
Ed Golding: Yeah.
Mark Zandi: And we got to know each other it must be 20, 25 years ago now.
Ed Golding: Yeah.
Mark Zandi: I don't know. Something like that. And how long were you at Freddie, Ed?
Ed Golding: 23 years.
Mark Zandi: I'm sure you know the number of days and hours too.
Ed Golding: Some seemed longer than others, but yes. The last ones dragged on.
Mark Zandi: Yeah. And then you went from Freddie to where? You didn't go directly to FHA, did you?
Ed Golding: Well, as you know, it takes forever to get cleared. So, I sat at the Urban Institute for a while, my good friend, Laurie Goodman, gave me a seat. So, I sat there waiting for the FBI to talk to my neighbors. And once my neighbors gave me the A-okay, I moved over to HUD first as a senior advisor for secretary Donovan and then for head of FHA for secretary Castro.
Mark Zandi: Right. And you ran FHA for at least a couple of years. Maybe longer.
Ed Golding: Yeah. Well, no, about just shy of two years. Of two years.
Mark Zandi: Just shy of two years?
Ed Golding: Yeah.
Mark Zandi: Yeah. And what were those two years? When was that?
Ed Golding: Well, again, it was basically March of 2015 to basically noon, January 20th, 2017. Something happened at that point.
Mark Zandi: Oh, yeah. Oh, that's right. That happened. Yeah. That which we will not talk about happened.
Ed Golding: We can talk about it. FHA goes on beyond any administration. It's one of its beauties.
Mark Zandi: Yeah. And then you came back over to Urban, the Housing Finance Center and you were there for a bit. And I think we might have worked on a paper or two together, I think.
Ed Golding: Yes.
Mark Zandi: And now you're the executive director of the Golub Center at MIT.
Ed Golding: Correct.
Mark Zandi: Yeah. Yeah. He was the CEO, I'm sure he's still alive. I'm not sure.
Ed Golding: No, Ben Golub is the chief risk officer at BlackRock and has been with BlackRock and Larry Fink from really the beginning of the company. As you know, Larry started off as a mortgage trader many years ago before building BlackRock. So, Ben as being one of the early executives at BlackRock has done quite well and very graciously endowed an existing center about seven years ago at MIT. Ben's a double MIT grad, both undergrad and PhD.
Mark Zandi: Are you an MIT grad too?
Ed Golding: No. No.
Mark Zandi: You're Princeton. You're Princeton, I believe, right?
Ed Golding: Princeton PhD, correct.
Mark Zandi: Yeah.
Ed Golding: Yeah.
Mark Zandi: You act like a Princeton grad, just saying.
Ed Golding: Ooh. Those are, coming from a-
Mark Zandi: No, it's all good. It's all good.
Ed Golding: Coming from a Quaker.
Ryan Sweet: Ooh.
Cris deRitis: Ooh, yeah.
Mark Zandi: I was going to ask something. Oh, can you just tell us a little bit about what the center is up to? What kinds of thing you're doing there?
Ed Golding: Yeah. It's the center for finance and policy. Its mission is to try to get financial policy to be better, better informed. As you know, MIT is the center of a lot of modern finance. Bob Martin's there, he's one of our co-directors. And much of the technology and the tools that are used in the private sector haven't found their way into the public sector.
And so, it's to really inform and to educate both on the regulatory side, but probably more importantly, the government is the largest provider of financial services. Think of social security as a retirement service, think of student loans, and really think of the mortgage market exists because of government policy.
So, it's important for the government to understand discounting options and the like in evaluating how to be more effective in the services that they provide.
We do annual conferences. We did one on retirement, we did one on housing finance. Our most recent one was on the environment and climate change and the role of financial institutions in that. A little bit of, is it better to divest or engage one of the different returns? We had a very good discussion, including one that you're probably familiar with from your graduate studies. What's the right social discount rate? What do we do about, future generations are not in the market to express their preferences and views.
So, how do we struggle as a society to decide how to discount the future on that? So, it was a fascinating conference. We even had a geologist remind us that we economists are a little shortsighted looking at 10 year budgets. He looks at millions of years at a time.
Mark Zandi: Hey, this is a bit of a tangent, we'll come back, but on the discount rate, I've got this pet theory that because interest rates are so low and they've been low, feels like they're going to remain low, that that actually makes it more economically viable to consider these longer term costs like the risks of climate risk. It brings forward the threat here and that we should be thinking about this more deeply at this point in time in particular because of the low rate environment. Does that sound right?
Ed Golding: Well, yes. I mean, although one of the speakers said why stop at zero? I mean, there's just-
Mark Zandi: Oh, interesting.
Ed Golding: ... that's an arbitrary number. I think the other consensus that, I don't know if it's a consensus, but another theme that came out is these are difficult social policies. Don't look to the treasury market to answer them. For better, for worse, you need to look at democratic consensus as much as you can look at a market.
But it was very, very well-established. Economists didn't have any answers. Which is maybe not too surprising for our profession, but it's a tough one on what to do about climate change and how to quantify the future costs.
Mark Zandi: We should definitely have you back for that one perhaps, for another podcast. But this podcast, we are going to focus on housing, housing finance and your expertise. And as I mentioned Cris, Cris is a houser too. Did you guys ever run across each other? I think Cris was at Fanny. You were a modeler at Fanny, weren't you? Did you ever run across Ed, Cris?
Cris deRitis: Only by name. I don't think we ever...
Mark Zandi: Only by name. All good, I assume.
Cris deRitis: Absolutely. Absolutely. But there was quite a bit of a crosspollination between the institutions certainly. So, there were definitely ex-Freddie Mac-ers that I worked with and vice versa.
Ryan Sweet: Is that another Zandism? A Houser?
Cris deRitis: Yeah, that's a new one to me.
Mark Zandi: No-no, wait. No-no, that's-
Ed Golding: No, that goes way, way back.
Mark Zandi: Yeah. Yeah.
Ryan Sweet: Oh, okay. Never heard that.
Mark Zandi: I should have taken credit for it though, but no.
Ryan Sweet: You should have, yeah.
Cris deRitis: You should.
Mark Zandi: Ed would have called me on that one. Yeah. We're the housers. I don't know who coined that term, but that's been around a while. Yeah. For the housing industrial complex. Right? I mean, the folks that are in that world. And I'd say Ed and I've been in that world, right? Wouldn't you say?
Ed Golding: Yeah.
Mark Zandi: Yeah. Yeah.
Ed Golding: Yeah. Well, but don't forget, we'll talk, housing goes way back. There are great quotes from Lincoln and FDR about how housing's important to this nation. So, being a houser is not a bad thing.
Mark Zandi: Oh. Oh, yeah.
Ryan Sweet: Different than a homer.
Mark Zandi: A homer, yeah. Right. Well, let's dive into... We're going to start with the... Ed, as we were discussing earlier, we're going to dive into a bit of the economic statistics. We play a bit of a game. Each of us identify a statistic and the rest of the group tries to figure out what that statistic is. You can questions and clues, that kind of thing.
The best statistic is one that's not too easy so that it's a slam dunk that Ryan will get it, and not too hard that no one gets it. And maybe even one that is relevant to the topic of the day, the big topic, which is housing and housing finance. And you're more than welcome, Ed, to play this game. I know you have many statistics up your sleeve.
Ed Golding: I make them up is my problem.
Mark Zandi: Fair enough.
Ed Golding: They're harder to guess if they're made up.
Mark Zandi: All fair and loving statistics. And Ryan likes to throw in one more rule and that is, it has to be a statistic from the last week, but that doesn't apply to you, Ed. That just applies to the rest of us. So, we're going to begin-
Ed Golding: And housing doesn't change that quickly.
Mark Zandi: That's a good point. That's a good point. So, we're going to begin with Ryan. Ryan, you want to lead the way? What's your statistic for the week?
Ryan Sweet: All right. So, I'll give you two numbers. They're related. 1.6% and 2.5%.
Mark Zandi: And this is a statistic that came out this week, presumably?
Ryan Sweet: Mm-hmm (affirmative). It did.
Mark Zandi: Okay. 1.6. And you said 2.5?
Ryan Sweet: Correct.
Mark Zandi: Okay. And is it in the retail sales numbers?
Ryan Sweet: It is not.
Mark Zandi: Okay. Is it in the industrial -
Cris deRitis: Industrial-
Mark Zandi: ... production numbers?
Ryan Sweet: No.
Cris deRitis: No.
Ryan Sweet: This release you usually don't associate it with numbers, but once in a while it comes out with numbers.
Cris deRitis: Oh.
Mark Zandi: Is it the Beige Book? No, the Beige Book didn't come out this week.
Cris deRitis: And it never has numbers, no.
Mark Zandi: Yeah, I know. No.
Ryan Sweet: You're on the right track.
Mark Zandi: I am on the right track. Something the fed-
Ryan Sweet: That's right.
Mark Zandi: Is it during the FOMC release? Because the fed met this week and they came out with their statement and their forecast-
Ryan Sweet: Getting more and more.
Mark Zandi: I'm getting close, right?
Ryan Sweet: You're getting very close.
Mark Zandi: Okay. Say it again, 1.6 and 2.5.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Is it in their forecasts, one of their forecasts?
Ryan Sweet: It is-
Mark Zandi: It is.
Ryan Sweet: ... a projection, yes.
Mark Zandi: It's a projection. Oh Cris, we got to be... Oh, I know. Oh, wait.
Cris deRitis: Interest rate?
Mark Zandi: 2.5 is the terminal Federal Funds Rate.
Ryan Sweet: Yep.
Cris deRitis: What's the 1.6?
Mark Zandi: Huh?
Ryan Sweet: Okay. Go ahead and explain.
Mark Zandi: Okay. So the terminal Funds Rate is where the Funds Rate should land in the long run consistent with the full employment economy, with inflation at target and the economy growing at its potential. How about that for-
Ryan Sweet: Exactly. That's perfect.
Mark Zandi: 2.5. Okay. Now, 1.6, Cris, help me out on this one, or Ed. What is-
Ryan Sweet: They're related.
Mark Zandi: 1.6. Oh, is it they give us a distribution of-
Ryan Sweet: Oh, I wouldn't send you guys down that rabbit hole.
Mark Zandi: You wouldn't. Okay, [crosstalk 00:13:41].
Ryan Sweet: All right. So, 1.6 is what markets expect the terminal Fed Funds Rate to be. Two and a half percent is what we have and the fed. So, there's a little bit of a disconnect.
Mark Zandi: When you say that, how do you know you're going into a future's markets and teasing out where the long run contracts are landing? Is that-
Ryan Sweet: Yeah. I mean, you look at the five year forward nominal treasure yield.
Mark Zandi: Okay.
Ryan Sweet: And right now that's 1.6%.
Mark Zandi: Oh, okay. Oh, I see what you're saying. Oh, I see what you're saying. You take the 10 year yield, you decompose it, you get the real short term rate. You add in inflation and you're at 1.6?
Ryan Sweet: Correct.
Mark Zandi: Oh, wow.
Ryan Sweet: The whole idea is, I mean, things can change. That can move higher, closer to the Fed's target. But this tightening cycle may start sooner than people anticipate, but it might end faster because markets may push back against how high the Fed Fund Rate can get.
Mark Zandi: Hey Ed, do you have a view on all this? On thinking around where rates should be in the long run. This is a key question for housing, obviously, particularly long-term interest rates.
Ryan Sweet: I mean, that's why it was a beautiful number.
Ed Golding: Yeah. I mean, in the 10 year rate, still sticking it around, I don't think it's broken one, five yet. Has it?
Mark Zandi: Today it's down to one, four or something.
Ed Golding: Yeah. Yeah. So it's interesting. And of course, mortgage rates keep more off of the 10 year rate. In some sense, either the markets think the pandemic's going to last forever, I hope not, or it goes back to the fundamental demographics that there's going to be more savings than investment globally.
Mark Zandi: Right. Right. Hey, one thing though that may also be playing a role is all the QE, right? I mean, the balance sheet, the Fed's balance sheet is so bloated at this point. And it's not only the fed, every central bank on the planet is lorded up on sovereign debt. And that has to be taking a big chunk out of long-term interest rates. Right, Ryan?
Ryan Sweet: Yeah. I mean, when you decompose it, if you look at the term premium, and that's where QE, quantitative easing mostly affects long term rates. It's still negative, and it's actually over the last couple of weeks falling even further.
Mark Zandi: Yeah. Right. So, do you have a rule of thumb translating the size of the Federal Reserve's balance sheet, the amount of quantitative easing they've done and what it means for long term rates? Have you thought about that? I used to have a rule of thumb. I can't quite remember what. I think it was like, for every percentage point of GDP, it was like four basis points, something like that.
Ryan Sweet: Yeah. That sounds right.
Mark Zandi: Okay. So, if you do the arithmetic in a, if you go back before the pandemic and look at the balance sheet as a percent of GDP and look at it today, I think it's up about 15 percentage points, right? Something like that.
Ryan Sweet: Correct.
Mark Zandi: And so, you take 15 times 4, that's 0.6 percentage points. So, instead of let's say 1.4% today, if the fed had not QE'd, had not bought bonds, had not expanded its balance sheet, the long term yield, all else being equal would be 2%.
Ryan Sweet: Two. Right.
Mark Zandi: Yeah. 2%.
Ryan Sweet: I mean, the first few rounds of QE after the financial crisis, when you add it all up reduced long term rates by a hundred basis points.
Mark Zandi: Say that again.
Ryan Sweet: After the great recession, those three, four rounds of QE that the fed did, including operation twist, reduced the 10-year treasury yield by 100 basis points.
Mark Zandi: Or full percentage points for folks who-
Ryan Sweet: Yep.
Mark Zandi: ...don't know basis points. Okay. Okay. So, it's consequential significant. One other quick question about that. I know I'm going down a lot of rabbit holes, but just I'm curious, because it bugs me. Do you think because of the fed's QE and the impact we just articulated for long term rates, that it's messing with our ability to glean inflation expectations from 10-year yields? That maybe what we think we know we don't really know because everything's all messed up by the fed's QE?
Ryan Sweet: Yeah. I mean, it's particularly messing up tips. So, treasury, inflation protective security. So, the fed's been buying a boatload of these things and we use that to calculate market based measures of inflation expectations. So, I do think it's distorting it a little bit, but you can go and look at other measures of inflation expectations that are not being affected by the fed. So, inflation swaps and everything suggests that markets think inflation is transitory, we'll get back to 2% at some point.
Mark Zandi: Okay. So, what you're saying is even though there's these distortions created by the fed's bond buying that's quantitative easing, even abstracting from those biases that investors are still saying inflation is coming back down.
Ryan Sweet: Mm-hmm (affirmative). Yes.
Mark Zandi: All right.
Cris deRitis: Surveys say similar things as well. Right?
Mark Zandi: Which surveys?
Cris deRitis: Consumer surveys, economist surveys, business leader surveys, they all suggest the same.
Mark Zandi: Right. Okay.
Ed Golding: Interesting. They did those surveys by age of the respondent. And us oldies who remember the inflation were much higher than the people who have never seen inflation. It was, I think, a good percentage or point or more difference between broken out by age of respondent.
Mark Zandi: That is really cool. I didn't know. Where did you see that data, Ed?
Cris deRitis: The New York Fed, I believe?
Ryan Sweet: The New York Fed.
Ed Golding: I read it in The Wall Street Journal, but yeah, the source.
Ryan Sweet: Yes, New York Fed.
Mark Zandi: That is really cool. That's interesting. So, people's inflation expectations are conditioned on what they've lived through. I guess that makes sense. Yeah, really. Wow.
Ryan Sweet: And you can probably argue that some people's inflation forecasts are also based on their experiences.
Mark Zandi: Are you referring to me, Mr. Sweet or?
Ryan Sweet: No-no, I'm saying the three of us.
Mark Zandi: Okay.
Ryan Sweet: Maybe we can go back to our inflation forecast. You're higher than I am and Cris is right in the middle.
Mark Zandi: That's right. I'm on the high side of you guys. You're on the low side.
Ryan Sweet: Yeah, because you-
Mark Zandi: I'm the old guy and you're the young guy.
Ryan Sweet: Well, I'm not saying that. I'm just saying you lived through an inflation period-
Mark Zandi: You just implied.
Ed Golding: The regression-
Ryan Sweet: ... and I've never experienced inflation.
Ed Golding: You have the regression of age and good fit with 30 points.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: Interesting. That is interesting. I'm going to have to go take a look at that today. Okay. Mr. deRitis, you're up. What's your statistic?
Cris deRitis: All right. 152,000.
Mark Zandi: I know what it is. Ding, ding, ding, ding, ding, ding, ding, ding, ding, ding.
Cris deRitis: Oh, jeez. Oh, no.
Ryan Sweet: Now where is the cowbell?
Mark Zandi: You know why I know this, Ed? Because he keeps going to the same, well, every single feels like week.
Cris deRitis: No, this is topical.
Ryan Sweet: This is [crosstalk 00:20:47].
Mark Zandi: This is housing. It's a good statistic though.
Cris deRitis: It is.
Mark Zandi: Ryan, you don't know the statistic?
Cris deRitis: All right. Let me give you the corollary. 752,000
Mark Zandi: What corollary?
Cris deRitis: 752,000 related.
Mark Zandi: Ding, ding, ding, ding, ding. You got that? The, that one too.
Ryan Sweet: All right. Go for it.
Mark Zandi: Actually, you know why I know all this? Because those were my statistics, deRitis. You took my number.
Cris deRitis: All right. We were on the same wavelength.
Mark Zandi: All right. Ryan, do you know these numbers? I can't believe-
Ryan Sweet: No.
Mark Zandi: [crosstalk 00:21:18] digging into the bowels a little bit of the housing stats report.
Ryan Sweet: Oh, you're going-
Cris deRitis: Can't just give you the top line.
Mark Zandi: This is important. These are important statistics actually.
Ryan Sweet: Yeah, I agree.
Cris deRitis: Yeah.
Mark Zandi: I give Cris credit for this, because I was going down this road, which makes me now, I got to come up with another statistic. Oh, no. Okay, I can do it. I can do it. All right.
Cris deRitis: [crosstalk 00:21:37].
Ryan Sweet: We know. Yeah, 95.2.
Mark Zandi: 750. That is the number of homes that are under construction.
Cris deRitis: Single family.
Mark Zandi: Is it just single? Yeah, single family homes under construction. And that's the highest level since, I think, March of 2007, I believe. Is that right, Cris? Yeah.
Cris deRitis: Yes, that's right. That's right. Yep.
Mark Zandi: You guys got to be impressed with this. No?
Cris deRitis: Yeah.
Mark Zandi: Ed.
Cris deRitis: No, I am. I'm impressed.
Mark Zandi: Ed is thinking Cris told me this is what he was going to ask. That's how impressed Ed is. I could-
Ed Golding: I am impressed.
Mark Zandi: 152K, that's also interesting. That's the number of homes that have been authorized to build but haven't even started. And that also is, is that a record high or pretty close to a record high, Cris? I don't know.
Cris deRitis: That's the highest since 2006.
Mark Zandi: Oh, it is? Okay. So, you add those two numbers together, that's a lot of housing out there that's going to come to... Partly it's because, well, you explain what's going on here, Cris. That's your statistics. What's the significance of these numbers?
Cris deRitis: Yeah. So, the 152000, other important point about that is up 41% on a year, over year basis. Right? And it points directly to the supply chain issues. Right? So, builders are certainly interested in building. They see plenty of opportunity. They're getting the permits and they are starting where they can, but they have a boatload of homes that, again, have been authorized but not started, they're in reserve. They're for workers or other supply chain issues to resolve themselves. And it just points to the backlog that they're facing. So, they're not able to actually put up all the homes that they actually would want to given this current environment.
Mark Zandi: Yeah. Yeah. Good statistic. Very good.
Ryan Sweet: That was a good one.
Mark Zandi: That was a good one, right?
Ryan Sweet: Yep.
Mark Zandi: A very good one.
Cris deRitis: You see? All right.
Mark Zandi: So, Ed, are you going to play-
Ryan Sweet: You're learning.
Mark Zandi: ... this game? Do you want to play the game?
Ed Golding: Yeah.
Mark Zandi: All right. Fire.
Ed Golding: Mine are not this week, but mine are November since, as I said, a lot of housing data is quarterly if not on that, but 74 point, I'm going to give you four numbers in descending order. 74.0%, 60.2%, 48.3% and 44.0%.
Mark Zandi: I know. I know this. I think I know.
Ryan Sweet: Were you guys emailing?
Mark Zandi: No, no, no. I think I know this.
Ryan Sweet: Because there is no way.
Mark Zandi: Yeah.
Ryan Sweet: Those four numbers just rattle off. No.
Mark Zandi: I know this. I know these numbers. Yeah. Unless I could be wrong.
Ed Golding: They're pretty obvious ones if this is what you follow, but yeah.
Mark Zandi: Yeah.
Ed Golding: Cris, Ryan?
Mark Zandi: Cris should know this. If Cris doesn't... Look, he's looking, he's trying, he's Googling. He's Googling.
Ryan Sweet: No-no.
Mark Zandi: I can see him. He's looking down. He's Googling.
Ryan Sweet: I wrote them down.
Mark Zandi: Oh, yeah. Okay. You want me to go?
Ryan Sweet: What's throwing me off is you said quarterly, so that rules out NAHB. So, quarterly.
Ed Golding: I think they're quaterly.
Mark Zandi: Home ownership rates. I'm going to put you out of your misery.
Ryan Sweet: By age, right?
Mark Zandi: Home ownership rates by racial ethnicity, right?[crosstalk 00:24:52] is like white. 62 is what, Ed? What?
Ed Golding: 60.2 is Asian-American.
Mark Zandi: Oh, Asian, Asian-Americans. And then Hispanic is?
Ed Golding: 8.3, yes.
Mark Zandi: And then the black home ownership rate is obviously very low.
Ed Golding: Right. And then I actually, very quickly I'll add three numbers that were not in the release, but to show that I can multiply. If you turn those into households, what each group would be if they had the same home ownership rate as whites, you would have 5.2 million additional black households, 4.7 million additional Hispanic households and 1.0 million more Asian-American households owning houses. So, you better start building more than 173,000 units if we're to close those gaps.
Mark Zandi: Hey, if we don't make any, as a nation, progress in improving home ownership for minority groups, for black, Hispanic, Asian-Americans, the home ownership rate is going to decline pretty significantly here. Isn't it? Because the share of the population that is minority is rising pretty rapidly, particularly Hispanic share, and that's going to continue to rise. So, home ownership is going to fall pretty dramatically if we don't make some progress, I would think. Or am I thinking about that right?
Ed Golding: Well, I mean, I think that is right. And of course, the Joint Center on Housing Studies up at Harvard has done those types of projections and broken it down by, again, age, vintage and when the households are coming on. But yes, you'll see a drop in the overall home ownership rate if we don't change that mix.
Mark Zandi: Does it surprise you, Ed, that, and I know we're getting a little bit into the big topic, but since we're here, that we, when I say we, the collective we, have not seen any improvement in home ownership? And really since, I think soon after the great depression, there was a big increase in home ownership, obviously, because of all the policy changes.
Fannie was put on the planet, FHA was put on the planet. There was a lot of policy put in place to promote home ownership and it worked. I'm speaking from memory, so I may not have it exactly right. But really since the '60s, '70s, we really haven't made much progress.
Ed Golding: Yeah, that's right. The black home ownership rates went down to what they were in 1968.
Mark Zandi: Right. So, does that go to policy or what is that? I mean Fannie and Freddy were put on the planet to promote home ownership, most fundamentally, right?
Ed Golding: Well, in some sense, even today, it is the FHA and VA programs that are the gateway to first time home ownership. Freddie and Fannie do great things, but it's not their basic product. Where with the FHA, it's 80% of what they do, 80% to 90% are first time home buyers.
FHA has been around a long time. A lot of this comes back to questions of how the bottom quintile and the bottom two quintiles have done in terms of income and growth. And really their wages have not kept up. And that's where you'd expect the margin to be, where if you're going to increase the home ownership rate, it's people in the bottom two Quintiles who have to make the leap to home ownership.
Mark Zandi: So, what you seem to be suggesting is it's not housing policy per se that's failed, it's just broadly the inability of our society and economy to lift up the financial fortunes of folks that are renting that-
Ed Golding: Yeah. I mean, it's one of those things, if you're trying to get those four numbers that I just, the numbers I just gave you represent 10 million households, you have to look at all levers. We can talk about this. The mortgage market can do a few things, but it hasn't done. But it's not financing that is, to a large extent, our questions of income and we need to build more supply of affordable houses on that.
And traditionally, a lot of these cities you would build at the high end and you would see filtering down to the lower end of affordability. There's been some studies to say that filtering process is slowed down considerably. So, it's difficult to find affordable housing in a lot of communities.
Mark Zandi: Got it. Cris, do you have a perspective on this? I mean, in terms of the lack of progress in the last 50 years on home ownership? Do you have any perspective on that?
Cris deRitis: Yeah, I agree. We need to identify the root causes. I don't see that it's financing. Right? And Fanny and Freddy, their mission is liquidity first of all, right? Keep the mortgage market operating. Make sure that there's ample liquidity in all environments. Right? They don't control the levers in terms of supply. Neither does FHA really either. Right?
And that, I view, as the real factor here. And in addition to certainly incomes and the ability of folks to pay the supplies outside the purview of the federal governments, much more in the purview of local governments in terms of zoning and where we choose to locate housing or permit housing to be built.
Mark Zandi: Right. Okay. Well, let's come back to housing. You guys want one more statistic to round this out? I'm going to mix it up a little bit just to mix it up. 16.5%. 16.5%.
Ryan Sweet: Okay. So, I guess this is non-housings related.
Mark Zandi: Yeah. Non-housings related.
Ryan Sweet: Okay. And it is from week?
Mark Zandi: In deed it is.
Ryan Sweet: Probably not. Oh, it is. Oh. Okay.
Mark Zandi: In deed it is.
Ryan Sweet: If you go in retail sales, something in the-
Mark Zandi: It's on retail sales.
Ryan Sweet: Okay.
Cris deRitis: All right. Let me let think about that.
Mark Zandi: Yeah.
Ryan Sweet: Is it year over year number?
Mark Zandi: It is year over year. Yeah, really good.
Ryan Sweet: Building materials.
Mark Zandi: What is it?
Ryan Sweet: Building materials?
Mark Zandi: No, I would consider that to be a little over the top to go that deep in to the belt.
Ryan Sweet: Are you doing control retail sales year over year?
Mark Zandi: Close. Control meaning X auto, X gas, X building materials. Right?
Ryan Sweet: And X restaurants. That's a lot of Xes.
Mark Zandi: [crosstalk 00:31:55] restaurants. Yeah. No, I didn't quite go there, but you're close.
Ryan Sweet: Non-auto?
Mark Zandi: Non-auto, non-gas. So, retail sale. This is year over year percent growth in retail sales, excluding autos and gasoline. So, kind of my proxy for Christmas sales, holiday sales. But this is through November. This is through November. So, we need one more, of course, data point for December, but it could be a disaster in the year over year increase in holiday sales.
So, that would be retail sales, X auto, X gas, November and December. This year compared to last year is going to be well into the double digits. Again, even if December is a wipe out, that a bad year.
Ryan Sweet: It shouldn't be.
Mark Zandi: Huh? It shouldn't be.
Ryan Sweet: It shouldn't be. No.
Mark Zandi: It should not be. Right. Right. We're already halfway through, so hard to imagine that would be. Obviously some of that's inflation. Clearly retail goods' prices are up a lot. And I'd say maybe 7%, 8%, 9% might be retail because CPI is up almost 7% year over year. So, it's probably higher for goods.
So, that still leaves you real growth of close to double digit, right? Right. I mean, this could be the best. If you measure Christmas sales by that measure, this could end up being the best Christmas on record, I think. I think just amazing.
So, all the hand ringing, all the gloom and doom, feels like everyone's so pessimistic. The economy's chugging, right? At least up till now. Now, it could change with Omicron and Delta. Obviously, another wave's coming here pretty fast and we'll see how that plays out. But feels like economy's pretty strong.
Ryan Sweet: Yeah. It's going to be strong in this quarter.
Mark Zandi: Yeah.
Ryan Sweet: I'm worried about early next year as [crosstalk 00:34:01].
Mark Zandi: Early next year.
Ryan Sweet: Yeah. Because if you look at case counts, look at Chester County, we're almost higher than, and that's where we're located is almost higher than it was at any point throughout this entire pandemic. And that's just in a few weeks.
Mark Zandi: Yeah. No, that's true. Hey, are you guys, another thing that confuses me and then we're going to dive into housing is, if you look at the economic statistics, I mentioned the holiday sales but many others as well, the economy feels strong, feels like it's growing strongly yet consumer sentiment surveys are very, very weak.
The University of Michigan survey is at a low point in the entire pandemic. How do you square that circle? What's going on there? Do you have a view on that? Anyone have a view?
Ryan Sweet: Gas prices-
Mark Zandi: Gas prices.
Ryan Sweet: ... the pandemic
Mark Zandi: And the pandemic.
Ryan Sweet: Mm-hmm (affirmative). Especially for U-Mich. That's very sensitive to fluctuations in gasoline prices.
Mark Zandi: The University of Michigan survey. Yeah.
Ryan Sweet: Mm-hmm (affirmative).
Mark Zandi: What do you think, Ed? Has this gotten on your radar screen? Is this something you've thought about?
Ed Golding: Not much. Inflation is at points can be shocking to people who haven't experienced it. And then, of course, as we know, wages sort of keep up, sort of don't. And I think it adds to the volatility for the consumer if they don't expect their wages to climb or if you have savings, right? If you had your money. A senior who had this money or her money in a savings account, all of a sudden has 10% less money than they had a year ago.
Not quite, but I think there's people who are trying to grapple with what inflation might mean to them. So, I wouldn't discount. I mean, gasoline is one of it, but it's not the only element that's experiencing inflation. Rents are way up in many areas. And I think as you know the how we put housing into the CPI is rudimentary at best, especially the owner-occupied stock.
So, what's happening to those numbers, the headline numbers and then the gas pump, the grocery store and the light I think is very concerning to people.
Mark Zandi: Yeah. And what you're referring to on the rent is, if you actually look at the rent increases that people are seeing for new move-ins, for people who are actually starting to rent, it's like, I don't know. It's like 15%, 20% increase over last year. But that's not what's showing up in the consumer price index because of the way the Bureau of Labor Statistics, the keeper there translates the rent increases into what it means for CPI rent.
Ed Golding: Right. It's that owner-occupied two thirds that gets just, it gets in there but it gets in there probably with a lot of noise, a lot of lax.
Mark Zandi: A lot of lax. Yeah. Right. Cris, do you have any view on that, on the seeming-
Cris deRitis: On the sentiment?
Mark Zandi: ... disconnect between sales, what consumers are saying and what they're doing?
Cris deRitis: Yeah, I'm increasingly concerned about measurement errors in the surveys in terms of who responds to the survey and how they respond. If you look at the University of Michigan, they have a breakout by political party. There's such a gap between the Democrats and current economic conditions, let alone your views on future economic conditions.
But it's so closely tied to who's in the White House. It switches like the day after an election. Right? So, I don't know how credible that is in terms of a true measure of sentiment. Right? In terms of the soft data, you look at the hard data, which is how people are actually spending it. I think that's where the rubber hits the road.
Ryan Sweet: Yeah, that's why I always watch what consumers do and not what they say.
Cris deRitis: Yeah.
Mark Zandi: But there are times when what they say is important. Right? Turning points in the economy.
Ryan Sweet: Inflection points, yeah.
Cris deRitis: Sure. Yeah. Yeah. But I don't think we're at an inflection point now.
Mark Zandi: It's not typical. Yeah.
Ryan Sweet: Yeah.
Mark Zandi: Okay. All right. Very good.
Ryan Sweet: Mark, you had a strong showing.
Mark Zandi: I know!
Ryan Sweet: That was good.
Mark Zandi: I was waiting for someone to say that. Yeah, I'll take it. I'll take it. I had a strong showing this week.
Ryan Sweet: That was very strong.
Mark Zandi: Whatever it is.
Ryan Sweet: Cowbell.
Mark Zandi: ... 38 we need to mark it down.
Ryan Sweet: We'll give you your cowbell there.
Mark Zandi: There you go. I got my cowbell ring.
Cris deRitis: Now we have to have an episode next week because we can't let Mark-
Ryan Sweet: End the year.
Cris deRitis: End the year like this, because we're not going to hear the end of it until next year.
Mark Zandi: I have a strong showing, baby. All right. Let's turn to housing more formally. And I think the there's a lot of things to focus on, but I think the thing that is now clearly the most significant pressing issue is supply. Right? The lack of supply. Would you agree with that, Ed? Is that fair in the top of list of things to be worried about in housing? It would be supply?
Ed Golding: Yeah. I mean, apparently there's always the question prices are up almost 20%. The question I always get asked is, is it a bubble?
Mark Zandi: Oh.
Ed Golding: And I go back to our economics 101 days, the alternative to a bubble is just an old cobweb model. I don't know if you remember the cobwebs.
Mark Zandi: Oh, sure. We talk about that all the time on Inside Economics.
Cris deRitis: Yeah.
Ryan Sweet: This is a record because the cowboy model has come up.
Ed Golding: Oh, okay. But in some sense it doesn't feel like a bubble. If you look at prices of houses versus rents, we just talked about rents going way up. So, if rents go up, you would expect the asset value to go up or prices to go up. The amount of flipping, speculation, irrational exuberance, there's some there but not a lot.
And the alternative is we've just under-built, people have estimated, pick your number, 3 to 5 million units over the last decade that should have been built in terms of housing formation and potential housing formation. That we need about 3 million to 5 million more units.
And unfortunately, even the tornadoes that we experienced this last week reminds us that there's a good several hundred thousand units a year get destroyed through fires and natural disasters and just depreciation. So, we've been under-building. And clearly, we expect to see a supply response. It seems like it's going to take a long time for that supply response to be so great as to bring prices way down.
People expect a slowing of prices with that increased supply, but I don't think anyone that I know of is forecasting prices to drop that we still need to work through a good deal of supply.
Mark Zandi: So, what you're saying is, obviously house price has been rising very rapidly depending on the house price index. You look at it's up 15%, 20% year over year nationwide. That's nationwide, but there's good, fundamental reasons for that. Most significantly being, we've got a severe shortage of just homes. There's just more people out there looking for homes than there are actual homes.
And that it's not a bubble. Prices are up, not a bubble because you have this fundamental supply side support, but also you just don't see the kind of traditional characteristics of a bubble flipping you mentioned, which is I buy with the intent of selling quickly at a profit.
Back in the financial bubble, the financial crisis of the housing bubble, which I think we all concur was a bubble yet a lot of flippers and they were using debt, borrowing money to finance the purchase to leverage up. And you don't see that today is what you're saying.
Ed Golding: Yeah.
Mark Zandi: So, it's not a bubble. Cris, do you concur with that view? Is that your perspective too? Do you buy into that?
Cris deRitis: Yeah, I do.
Mark Zandi: Would you push back on any element of that?
Cris deRitis: No, I guess the only caveat I would throw in there is the time horizon. I don't see a bubble, certainly right now. I think the factors are there, a big demographic wave with the millennials coming in. So, it's actually justifying additional building and certainly the additional demand. That's different than the financial crisis where we actually had the reverse. We had that smaller gen X generation coming through, which actually exacerbated the issue.
But I do get worried as I look 5, 10, to 20, 30 and beyond, because that wave will pass through. The next generation is smaller and the baby boomers are going to be downsizing at that point. So, there's going to be more supply, less demand at that point. So, I wonder if that does also factor into the minds of builders as they're thinking about their investment decisions.
Yeah, times are good now, I want to certainly meet the market, but I'd like that wave to continue. I can extend that as long as possible versus a boom and bust type of cycle.
Mark Zandi: Really?
Cris deRitis: Yeah.
Mark Zandi: I think you're giving builders way too much credit. Or maybe I'm wrong.
Cris deRitis: Well, given the experience they went through, right?
Mark Zandi: The publicly-traded builders, which are now a larger share of the home building market, they're probably more disciplined. Yeah, for sure.
Cris deRitis: I think so. Yeah.
Mark Zandi: Huh.
Cris deRitis: I think first order is just their capacity constraints [crosstalk 00:43:55] itself.
Mark Zandi: Capacity.
Cris deRitis: You're right. Yeah, for sure. But maybe in the back of their mind they're also thinking, "I'm not going to overpay. I'm not going to really ramp up the capacity. Do everything I possibly could because better to let the cycle-
Ed Golding: Well, it's also better to have a bigger margin.
Cris deRitis: Yeah, exactly. Yeah, absolutely.
Ed Golding: Yeah. It is the competition that'll eventually come in. And the big immigration policy is always lingering in a variety of ways. First and foremost, household formation is very dependent on immigration. And second, a lot of the skilled labor comes from many of the recent immigrants too. So, lots of uncertainty there.
Mark Zandi: Yeah. We also put together these... Well, recently we've been, because we get the actual housing transactions and we can see who the owner is and how quickly they hold onto the property. And we have seen a significant increase in the investor share, investor defined as a corporate owner of the property.
But it turns out that it's mostly long term institutional investors, the folks that are buying property to rent the property, so buy and rent. And that's become a very popular business model since the financial crisis and that's come onto the fore.
So, the actual flipping, those would be people who buy and then we can see this, sell the property. It's an arm's length transaction, at least within one year of their purchase. That remains low. Right Cris? We haven't seen any-
Cris deRitis: That's right.
Mark Zandi: ... real pick up there.
Cris deRitis: Yeah, that's right.
Mark Zandi: Some markets are starting to pick up, like some of the real juice markets. Like a Phoenix, for example, I think we've seen some increase.
Cris deRitis: There are also some oddball or markets you wouldn't think of as having some of that activity, as people, perhaps, are working remotely and looking for deals in second tier cheaper cities. But yeah, by and large, we don't see speculative behavior across the board.
Mark Zandi: Yeah. Hey Ed, you said one thing I want to probe a little bit more deeply about no price declines, no one's forecasting price declines. One thought I had was that one reason why we're seeing the surge in prices is that mortgage rates have come down in the pandemic. The 30 or fixed is going for 3%-ish, which is about as low as it's ever been in history.
And that that juices up demand, right? Because people can get a home with a low mortgage rate. That bumps up against the lack of supply and that just causes prices to go skyward. So, if you buy into that kind of narrative, then if mortgage rates rise and it feels like they ought to rise at some point, but who the hell knows when? But they ought to rise, that that's going to suck the energy out of the market pretty fast.
That higher mortgage rates conflate with the higher house prices, affordability gets crushed, demand gets nailed, and we actually could see some price declines. Does that resonate with you, that kind of thought?
Ed Golding: Oh, yeah. There's always a question. Some of this goes back to the question of the underlying inflation. Do we see real declines versus [inaudible 00:47:22] declines? So, just put that on the aside for a moment.
Obviously it'll dampen demand. A lot of these decisions are not purely based on interest rates. Future expectations become an important part. And then just people really want to live certain places where they want to buy a house, they want the extra bedrooms that rental won't always support them.
I don't see it happening with the 50 basis points increases or even the 100 basis points being a major effect. When mortgage rates went to, back 1981 when Volcker stepped on the brakes or slammed on the brakes and mortgage rates were at 12%, 13%, of course, that would be a big dampening and could drive prices down. But if mortgage rates are 4%, four and a half percent, instead of 3%, don't see a big effect out there.
Mark Zandi: Let me ask you this. Okay. You come back a year from now, a year from now mortgage rates are still 3%-ish, maybe up a little bit, house prices have risen another 15% to 20% nationwide, would you be saying the same thing, do you think, as you're saying today?
Ed Golding: Well, that's always the... Yeah. At some [crosstalk 00:49:01].
Mark Zandi: All else being equal. All else being equal.
Ed Golding: Yeah, this is always the, I'd worry about it being a bubble at that point, yes.
Mark Zandi: At that point. Okay. All right.
Ed Golding: If you look at the FHFA's capital requirements, they have a long term trend, they adjust LTV for the long term trend. Many of us, I think maybe even you have written on that's not a great way of locking in what you want to accomplish in terms of controlling capital. You just put it on automatic pilot there. The fed and the whole [inaudible 00:49:43] arrangement allows for F-SOC to do capital counter cyclical adjustments. But the FHFA rule puts it in an automatic pilot.
I think last I checked they, and this is a quarter ago in terms of their adjustment. So before the latest increases, they thought we were about 16% above long term real averages. They give you a card or 5%. So they adjust all the LTVs by 11%, I think was the number.
At that point, again, instead of 11% above the corridor, what you hypothesized would be more than 20% outside that corridor of long term trends. We haven't seen that before. That would be worrisome.
Mark Zandi: Yep. You said a boatload. I know Cris you've been using my term boatload. That boatload is my, that's a Zandi-ism. You really said a lot there. There's a lot to unpack. I'm not going to attempt to do that, except to say that what you're saying is FHFA, the regulator of Fannie Mae, Freddie Mac has capital standards for those institutions.
As part of setting those standards, they try to account for whether housing markets are richly valued, overvalued and certainly if they're a bubble. They want to say, "Hey, Fannie, Freddy, these markets feel really hot, sizzling, overvalued, there's froth, we think you need to hold more capital against that."
So, that's the principle here. And what you're saying is, in that calculation, they're coming up with a, at the current point in time, based on the FHFA house price series, which is actually obviously just for Fannie and Freddy loans, not the entire market that it's overvalued by about 15%.
Ed Golding: Right.
Mark Zandi: And by the way, Cris, correct me if I'm wrong, that's based on our modeling that we've recently been doing, that's where we're landing, about 15%.
Cris deRitis: Yeah, that's right.
Mark Zandi: And what that means though, Ed, that's nationwide. That means that you've got a lot of markets out there that are overvalued by a lot more than that, by 25%, 30%, 35%. So, I think the market is actually quite vulnerable if rates rise even a little bit, I suspect.
Not nationwide. Here's the other thing about house prices that people forget is important. It's measured house prices, right? Because what happens is, if markets go weak, people just pull the home off the market, they're not going to sell their home. Everyone's seeing these house prices today. Like I look at Zillow for this home in Pennsylvania and I'm going, "Oh my gosh, that's how much this is worth?" And it's going to take me a lot to sell my home for less than that anytime in the near future. Because that's my so-called reservation price.
So, if I don't have to sell, I'm not going to sell. So, what you see is transactions come off. You don't see actual sales and you don't measure it in prices. So, you might not see the price declines because the so-called shadow price might decline, but not the actual price.
Anyway. So, let's now go back to supply because this is key to a lot of what we just talked about in terms of house pricing, but also in terms of what's going on in terms of people's lives. They're paying more in rent, single family housing is less affordable. They have to move further out from wherever their job, go farther away from their job. It's not good for commutes and the environment. It's not good for the macro economy. Lots of problems with the lack of supply.
And there's a lot of debate and discussion around this, and I'm sure you have a long list of reasons why supply has been so constrained, but what would you put at the top of the list of reasons in your mind, Ed?
Ed Golding: Yeah, it goes back, I think, to local policy. At the end of the day, we don't want the density. We come up with ingenious reasons why density is not good for whatever. And so, I think that's a large part of it. I'll go back to, you go down the list, but just in broad categories, our transportation policy doesn't... We get just more congested, very hard to build a dense subway system the way New York has. And it would be much easier to build density if you had the transportation.
And then, so the other big category is education. The way we fund our schools are very tied to the tax space and the like. We don't tie it to general economic wellbeing of the larger area, we tie it to the house prices of that community and the number of units.
So, it's like a per capita type thing. So, education policy, transportation policy and then just generals, which then shows itself in our zoning policy and permitting policy. Very hard to get the permits on that. So, that's where it is. And then of course, lumber and labor's gotten more expensive in this area.
We don't invest in the building trades the way we used to, so it's just more difficult. There was always the hope that 3D printing was going to drive down costs. I was always a little bit of a skeptical on that, but we're seeing more stuff manufactured, trusses and the likes in factories, but the cost has not come down with technology on that.
So, we haven't seen the technological improvement that you would have hoped to see either. And that's also largely policy driven. I'm up at MIT. They keep on having all sorts of nifty things in their laboratories. Maybe one day we'll find a house that grows itself. Right after we get nuclear fusion and don't have to worry about energy costs.
So, technology may get us there, but so far, outside of TikTok, we really haven't seen things that have affected this market the way it would be nice if we could.
Mark Zandi: Yeah. So, there's a long list of reasons why supply's been lacking. At the top of the list is restrictions on development, zoning issue and other, which I don't know, this seems like that's a pretty tough one to tackle, right? I mean, politically, I don't know how you do that. Because the federal government really doesn't have a whole lot they can do here.
Although they can use sticks, but politically using sticks to change zoning laws would be pretty tough, I think. I wouldn't count on it. Well, this gets to, of course I should ask before I move on, does that list sound right to you?
Ryan Sweet: Yeah.
Cris deRitis: I've been beating the zoning drum-
Mark Zandi: Yeah, exactly. Yeah.
Cris deRitis: ... on this podcast for a long time.
Mark Zandi: Ryan, do you have a view on this? Do you want to push back at all?
Ryan Sweet: Mo, zoning [crosstalk 00:57:15].
Mark Zandi: Ryan is kind of a gadfly, he'll take the other side of almost anything, but I don't know about this one.
Ryan Sweet: No, I agree. Zoning is a big problem. Buildable lots is another one.
Mark Zandi: Which one?
Ryan Sweet: I mean, if you look around, the availability of finding buildable lots.
Mark Zandi: Oh. Land development.
Ryan Sweet: Exactly. I mean, if you look in South Jersey, you think of beach towns where they knock down old homes to build new ones, now they're doing it in suburban Philadelphia. They're going into neighborhoods, buying houses, knocking them down and building new ones.
Ed Golding: Yeah. I would put it more broadly than just zoning. It's clearly zoning. It's the permitting process.
Mark Zandi: It's just intimidating.
Cris deRitis: Yeah.
Ed Golding: And the sewers and everything you need to do to get the shovel into the ground. The estimates about the time cost and monetary cost to get a shovel into the ground is just, if anything, technology should have made that faster in all sorts of ways and it hasn't.
I mean, even going back quickly to the mortgage market, it's still not any cheaper to originate a mortgage and yet we have better technology. And someone needs to step back and wonder why we haven't harnessed the technology to make these things less costly.
Mark Zandi: Yeah, good point. Good point. So, this takes us to policy and what should policy makers be doing? So, I've got two specific policy questions for you. First is around the housing policy in president Biden's Build Back Better legislation. What do you think of that legislation? I mean, it is focused on the supply side of the market. How do you think about it?
Ed Golding: Well, in some sense it's a catch up. It's really not that bold. It's absolutely needed, but it's a catch up if we had had normal policy all along. I think of that as, whether it's public housing that had, when I was there, the estimate was we were short of $50 billion of capital improvements in our public housing. And 2 million of our most vulnerable households absolutely needed.
It shouldn't even be a question. You have to maintain that type of housing and infrastructure. It's also housing vouchers. And again, people have done this very important and I think they build back better, creates about 2 to 300,000 additional vouchers. But even though our population's expanded from when it was 200 million to 330 million, we haven't increased the number of vouchers. Only one in five people who are eligible for those vouchers can actually get them.
This would be a very modest step in closing that. I mean, people throw around big numbers, but these are 10-year numbers, right? The estimate of really to close that gap would be about 50 billion a year. It goes back to, where do we want to spend money? I go often back to FDRs 1944 state of the union address. We were still in the middle of a war. My father was still in Italy in the Air Force at the time and yet he said, "Now's the time to start planning for the future."
And he basically outlined that decent housing should be an economic right. And in many ways, the Biden administration's picking up that mantle and trying to advance it, but they're really modest numbers in terms of the needs, whether it's public housing, whether it's vouchers, down payment assistance is important, some of the construction of affordable housing through Housing Trust and low income housing tax credits. In some sense, we're just scaling it back to where we were in 1970.
Mark Zandi: Yeah. Yeah. I mean, I think when president Biden proposed his Build Back Better agenda soon after he got elected, there was about $500 billion over 10 years for housing-related initiatives. And of course, that got scaled down because the size of the package has been scaled down. And now it's at 150 billion over 10 years.
So, you're right. You divide 150 by 10, you get, I don't know, 15 billion per annum. In a $23 trillion economy, that doesn't take you very far. But it's moving you down the path in the right direction, I suppose, generally speaking, because a large part of it is focused on affordable rental supply, but how far is it going to take you with that kind of funding? That makes a lot of sense.
I did have two other quick policy questions. The other one is around the, and this is a little bit more in the weeds for, I think some of our listeners, but I think important and clearly in the middle of your strike zone and I know that metaphor works for you because there you go. Yeah. Now tell me, where's that baseball coming from? Is that you said it's 1983 World Series?
Ed Golding: 1983 World Series.
Mark Zandi: Okay.
Ed Golding: That's is the Phillies against the Baltimore Orioles. Cal Ripken's only World Series, right? Came from that year.
Mark Zandi: Oh.
Ed Golding: And the Phillies still had Tony Perez. I'm a big Reds fan, as you know, so. No longer had Pete Rose, but they had Tony Perez still on that team.
Mark Zandi: You're a Nats fan now, aren't you?
Ed Golding: Yeah.
Mark Zandi: Yeah, hard not to be. Because they won, when was it? A year or two ago, two/three years ago?
Ed Golding: Two/three years ago, yeah.
Mark Zandi: Two/three years ago now. Of course, Ryan is the shameless Red Sox fan. I find that highly irritating. What about you, Ed? That feels-
Ed Golding: I'm at MIT, so I did get to play my part.
Mark Zandi: Oh, that's right.
Ryan Sweet: Yeah, you got to remember. Yeah.
Ed Golding: So, if I have to root for an American league team, I'll go with the Red Sox now.
Ryan Sweet: It's hard not to root for the Red Sox.
Cris deRitis: Yeah.
Ed Golding: And it's a great stadium too, as you know.
Mark Zandi: It is. It definitely is. Yeah. My uncle lived there and when I was a kid I'd go in the bleachers that are in the, throughout the wall. Yeah, there's lots of them.
Ed Golding: But at least the Boston Braves won the World Series.
Mark Zandi: They won the World Series?
Ed Golding: Boston Braves.
Mark Zandi: The Boston Braves. Yeah. Right. So, talking about in the strike zone, FHA, at least on paper is doing pretty well from a financial perspective. The insurance fund that backstops the FHA is, according to the actuary, pretty fullsome. I think it's 8% kind of...
Ed Golding: Yeah, 8% of mortgage balance is outstanding. 6% of that is already in the bank, if you will. There's already receipts that treasury has gotten. And 2% of that 30-year net present value calculation. So, it's doing quite well.
Mark Zandi: Not to go in the weeds, but that's a capital. That's sort of there to back, if you have losses, then in theory, this money would be set... If this was set up like a private institution-
Ed Golding: It's not a private.
Mark Zandi: ... [crosstalk 01:05:01] the value isn't quite right. Is not exactly.
Ed Golding: Well, I mean there's no backstop, it's a government program just like social security. It has the eagle on it. It's full faith and credit. The insurance is good on the Ginnie Mae securities. So, really that 6% that's already in the bank is the amount, this was a conceived as a mutual type of mortgage product.
That 6% can also be thought of as how much has been overcharged given the actual path of the economy. And we could have gone down a different path, but we, over the last, basically eight years, we've overcharged by about 6%.
Mark Zandi: Yeah. Yeah, I guess there will be points in time when you undercharge then too. Right? Because if you're in the downside of an economic cycle, you'll lose money. So, the idea is that you want to keep the treasury whole, so to speak, through this-
Ed Golding: On average.
Mark Zandi: On average.
Ed Golding: Through the cycle, yeah.
Mark Zandi: That's the idea.
Ed Golding: Yeah, absolutely.
Mark Zandi: In a good time, I want to build that insurance fund so I can draw that down in the bad time.
Ed Golding: Well, yes and no. I mean why not? Why not let it fluctuate and just price what you think the average over the cycle is? The government doesn't need the money. You're pre-funding taxes for bad times and it's the same as a tax.
Mark Zandi: Yeah.
Ed Golding: Mathematically it's absolutely the same as raising taxes on middle class homeowners.
Mark Zandi: Yeah. Just to be clear, I'm not arguing this is the right way to run the railroad. I'm just saying that's kind of sort of the idea behind it. Not a great way of running the railroad. It's kind of sort of the idea.
Ed Golding: I'm going to push back just a little because obviously... In many ways, as you get a lower number, if you're the head of FHA, you get called in front of Congress and you get yelled at more. So, really what we're doing now, if you go back into what I call the physical space, we're charging homeowners.
And most of first time home buyers, many of them communities of color, we're charging them more now so that in five years, the head of FHA is less likely to get yelled at as much by Congress.
Mark Zandi: Okay.
Ed Golding: It seems like that's a silly thing to do.
Mark Zandi: The political economy of it makes it particularly silly. Yeah.
Ed Golding: Yeah. I mean, it's you should charge what you think the long term cost is. That is the vision of the program. It's a mutual program. In the old days, we would have rebated that 6% back to the actual homeowner because it was a rebate program that as your vintage paid down, if it collected more than it paid out, you would get a refund check. They stopped that many years ago.
Mark Zandi: Okay. With this conversation as a backdrop to the question, it sounds like right now the FHA is charging a insurance, a premium that's embedded in the rate that's charged the borrower to set this money aside for the fund.
It feels like what you're arguing is we shouldn't be doing that. We should cut the insurance premium at this point because it's set too high and therefore should be lower.
Ed Golding: Absolutely. I mean, there are some discussions of how it should be targeted and the like upfront versus the overtime premium should. Low balance loans or low income borrowers get a bigger break than others. So, there are some policy questions that need to be discussed, but in aggregate, there's no reason to be charging as much as they do.
Mark Zandi: Let me ask you this question though. In the current context, with the lack of housing supply and given house prices are rising very quickly, a cut in the insurance premium is like effectively cutting the rate. It is cutting the rate.
So, that's going to increase demand even more. Bump up against that lack of supply and Jack up price. So, are you really helping anybody by cutting the premium?
Ed Golding: Well, net, you're helping the people who have the cheaper mortgages. I actually was asked this question the other day. Might you want to make policy to try to slow down house price appreciation? You should consider it. If you had a list of 20 things to do, and I'll go back to Ryan and Cris's list is why are you doing quantitative Easing to basically, that would probably be number one on my list.
Number 20 on my list would be the FHA premium, but why not start, if we want to have this discussion and we should, and this is what F-SOC and the like was intended for the state, the Dodd-Frank Financial Stability Oversight Committee board, whatever.
You would go down that list and see which levers you would want to do. Changing FHA policy might be the 20th on the list. And it has, the biggest impact on low income communities of color. You wouldn't start there. So, that's one observation. Two is, by the time you actually get around to it, some of this is really two, three years out.
We announced the price decrease for two years out if that's what you're worried about, but I would not start... I understand the point and it's a legitimate point, but it should be part of a bigger discussion of should we do things, whether it's LTV, restrictions as other countries do, whether it's ending quantitative easing, whether it's the tax policy of deductibility, there's a host of questions. I wouldn't start with FHA.
Mark Zandi: Yeah.
Ed Golding: My two cents.
Mark Zandi: I guess I wouldn't, just to push back a little bit. I don't think I'd argue that I would use FHA as a countercyclical tool. I wouldn't. You're right. I mean, I wouldn't think of it.
Ed Golding: Well, some sense that's what people are arguing for when they say don't do it.
Mark Zandi: No, but I don't know that it helps anybody because if you buy into the logic of what I'm saying, rates go down, house prices go up. So, the net payment for the borrower is still the same. They're not getting anywhere with that. They're not [crosstalk 01:11:48].
Ed Golding: FHA is only 13% of the mortgage market. So, you're distributing, even if it's dollar for dollar in aggregate gets capitalized, the people who get the lower rate are doing better than the people who don't get the lower rate.
Mark Zandi: Okay. Okay. Fair enough. Yeah, fair enough.
Ed Golding: You have better models and can do the math and I always like your insights, but my gut says you're still helping those people next.
Mark Zandi: Yeah. I just wish there was a way to take that money and help build more homes.
Ed Golding: Well, we should.
Mark Zandi: Please, can't we figure that one out?
Ed Golding: It's interesting. About a quarter of FHA is for new construction. Maybe we should lower it.
Mark Zandi: Yeah.
Ed Golding: Yeah.
Mark Zandi: I like that idea.
Ed Golding: This is the type of discussion we should have. Maybe we should target it towards promoting affordable building. And instead of 25 basis points across the board, maybe if you're doing a $150,000, $250,000 new construction, you get a full point off.
Mark Zandi: I like that. I'm going to send you an email. Let's talk about that, because maybe we can write something on that topic. That would be-
Ed Golding: Yeah, you can target where you put the money.
Mark Zandi: Where you cut the insurance premium.
Ed Golding: Yeah.
Mark Zandi: Hey, I did want to, also, final thing, because I've kept you very long. We've kept you too long, on homelessness. I know you've been thinking about this pretty deeply. And obviously, this is all tied up with all the things we were just talking about. This seems like a really big deal. I mean, it's a big problem in many communities already, but it just feel like it's going to get worse before it gets better or am I just-
Ed Golding: Yeah. Well, it's always been a problem. We made some significant impact of trying to end homelessness, especially among veterans in some cities. There's no doubt as rents go up, homelessness goes up on that. And again, Build Back Better was trying to make sure that the most vulnerable people got additional vouchers.
So, that is of concern. Those are the people who get hit the hardest when rents are increasing. And then the other thing that I think is important that we should reiterate is, I always remind folks, these are our fellow citizens, sometimes very much down on their luck, but we need to provide services for them.
It almost goes to some of the zoning things that Cris talked about. We need to make sure that there are decent outhouse restrooms, showers, bathing facilities for these communities. Right?
In some sense, until you completely get rid of it through a more robust voucher system, I do think you have to worry about providing services. And you can walk around any town, especially compared to Europe, it's very hard to find a restroom when you're walking around. So, I do think it's important that there's a certain human dignity on how we treat people who are homeless for a variety of reasons and not to stigmatize them on that.
So, it's important to think of the housing ladder and to think whether it's homelessness... Senior housing is another big issue. Housing for people who have disabilities. It's a big country out there and it's not just that home ownership margin that you and I have spent a lot of our careers focusing on. You have to think of the entire housing ladder out there.
And I think homelessness needs additional resources. Build Back Better is focused a little bit on that. And it definitely is something we need to focus on.
Mark Zandi: Yeah. Housing is a right. I think that makes...
Ed Golding: That's right. Roosevelt said, and I really encourage people to look at that 1944.
Mark Zandi: Yeah, I didn't know that.
Ed Golding: ... economic rights. He calls it the second bill of rights on that. And he has a great quote that says, "No matter how rich we are, we need to look, whether it's the one third, one quarter or one tenth of the most vulnerable, that's how we should measure our progress, not on GDP. It's a great speech.
Mark Zandi: That is. I'm going to have to go take a look at that. Well, what a great man.
Ed Golding: Yeah.
Mark Zandi: Well, thank you, Ed. I really appreciate you taking the time and giving us your wisdom. Much appreciated and hope we can have you back. I'd love to have that conversation around climate change at some point.
Ed Golding: Yeah.
Mark Zandi: It sounds like a really interesting-
Ed Golding: Be glad to. We can hope one day to do it in person in Philadelphia.
Mark Zandi: Oh. And we go see a game. Right?
Ed Golding: And we can go see the game. Yeah, absolutely.
Mark Zandi: Yeah, absolutely. Good. Well, thanks. Oh, guys, have you noticed I haven't touted.
Ryan Sweet: Yeah. I was going to say I thought we were going to make it all the way through without it.
Cris deRitis: No.
Ryan Sweet: But here it comes.
Mark Zandi: @Markzandy. Ed, are you on Twitter?
Ed Golding: I am not.
Mark Zandi: Ooh.
Ed Golding: I mean, I have a ton, has been on Twitter for the Golub Center when I was at FHA, but not personally. Not on Twitter.
Mark Zandi: I've just gotten active in the last month or so. I got my Twitter handle 10 years ago and never used it. And since we had this podcast and everyone was saying I'm acting old and I got to get caught up on social media and there's no way I'm getting on Facebook or Instagram. I said, "Okay. I'll try the Twitter handle."
Cris deRitis: I'm waiting for TikTok.
Ed Golding: Well, you have to hashtag Pete Rose when you Twitter on this one.
Mark Zandi: Okay.
Ed Golding: I want to know what your vast readership thinks, whether Pete Rose should be in the Hall of Fame. It's the most burning question out there.
Mark Zandi: I didn't realize that was still a question. People are still debating that one, huh?
Ed Golding: That's still a debate, yeah.
Mark Zandi: Okay. What do you think? What is your view on that topic? Should he be?
Ed Golding: I grew up in Cincinnati.
Mark Zandi: Oh, yes. Of course.
Ed Golding: He was an all star in five positions. It's not a character reference. It's a baseball reference. Yeah, it's a baseball.
Mark Zandi: [crosstalk 01:18:37].
Ed Golding: There are others out there too that need to be in the Hall of Fame, but.
Mark Zandi: What do you think, Ryan? Are you on board with us?
Ryan Sweet: Yeah, eventually if Barry Bonds [inaudible 01:18:46] they all get in, and that was the steroid era, Pete Rose should be in the Hall of Fame.
Mark Zandi: Yeah, you're right. Good point. Yeah, good point. All right, Ed. Thanks a lot. Hey, happy holidays.
Ed Golding: Happy holidays.
Mark Zandi: Take care, stay safe and I hope to shake your hand soon. Take care now.
