Skyrocketing mortgage rates. Rent prices falling by their fastest pace in years (from their highest inflation rate in decades). Buyers and sellers are freaked out. What the hell is going on with American real estate?
Today is a very special crossover event, featuring one of my favorite finance podcasts: Odd Lots hosted by Tracy Alloway and Joe Weisenthal. Most of what I think I know about the housing market is a river that flows from the headwater that is Odd Lots and the online commentary of Tracy and Joe. So, this is a thrill for me. I hope it’s a thrill for you.
In the following excerpt, Tracy Alloway and Joe Weisenthal discuss the great financial crisis and how its aftereffects are still being felt in the U.S. housing market today.
Derek Thompson: It is really fantastic to have both of you. You are two of the most expert financial and economic guides that I know of in the entire podscape, and what I—
Tracy Alloway: Uh-oh, no pressure.
Thompson: No pressure. Yes. Sorry. I don’t want to damn you with that praise. What I would like to do, narrowly, is to use our time together to understand what the hell is going on with the U.S. housing market. But since you’ve both been following this story for years, I thought what we might try to do is pull together a brief history of housing in the 21st century to understand how we got here and then where we might go next. So, Tracy, if I could, I’d like to start with you. Let’s go back to 2007, 2008. How did the global financial crisis set the stage for the next decade-plus of the real estate industry?
Alloway: Yeah, I think one thing we seem to be learning right now is that people have short memories, and the assumption always seems to be, “Well, why aren’t people reacting to this exact economic moment in time?” So people look around at the situation after the pandemic in 2020, 2021, and they say, “Well, house prices were soaring and people were clamoring for homes, and we were all talking about a housing shortage. So why didn’t home builders just build more houses?” And the answer is because they definitely remember what happened in 2007 and 2008. For anyone that survived, it was a near-death experience. They remember the capacity issues that marked pre-2008. They remember the mortgage issues, people taking out lots of credit to buy numerous houses, subpar-quality mortgages, things like that, and no one wants to rush into the market for fear of basically repeating that mistake. Now, I should caveat that the housing market has changed a lot since 2008, but ultimately, home builders are run by people. These are people who, if they were around pre-’08, they definitely remember the risks of that time, and they’re not that eager to ramp up capacity.
Thompson: Housing prices didn’t just fall for a few months as they have this year after the 2007, 2008 crisis. Housing prices fell between 2006 and 2012, according to Case-Shiller. Six years of housing price declines, including basically President Barack Obama’s entire first term. And Tracy, as you just said, to put some numbers on that theory: annual housing starts per 1,000 Americans, the previous low in the last 50 years was 3.9 in 1991. After the global financial crisis in 2010, it fell to 1.8. So housing starts per capita didn’t just fall to the lowest on record, it fell 50 percent lower than the previous low on record. We didn’t get back to 3.9 until 2019. So by that measure, at least, it took a full decade to essentially dig out from underneath this absolute crash that we saw to housing in 2007, 2008. Joe, what do you want to add to this picture in terms of understanding the aftershocks we’re still living with post-GFC?
Joe Weisenthal: We’ll talk about it more, but obviously mortgage rates are a really important driver of housing activity, as everyone knows. But I think an important thing to remember is that mortgage rates aren’t everything and that mortgage rates can’t mechanically move the housing market in one direction or another. Going back to the pre–great financial crisis peak, the Fed was raising rates for several years leading up to the financial crisis partly because they looked at what everyone saw was going on in housing and perhaps they were getting anxious about that. But a lot of the worst housing lending activity that Tracy mentioned came even with the Fed attempting to tighten financial conditions, so I think that’s an important place to start, that there is this behavioral element in finance, in home buying, where you can’t just turn the economy like a dial—like a little hot, little cool. Of course, the Fed is discovering that right now. But pre-GFC there was a lot of rate hiking going on, and yet still some of the worst loans of the financial crisis, some of the worst, frothiest activity occurred well into the hiking cycle.
And you mentioned too that there were years of negative housing prices, so it really took several years even after the great financial crisis for things to get going. Again, they dropped rates to zero at the end of 2008, so if you want to take a purely rate-centric view of the housing market, you’re going to miss so much because it’s not like cutting rates to zero at the end of 2008, early 2009 created this big bounce. We’re seeing now in 2022 that the surge in mortgage rates really is putting a freeze on housing activity. It’s putting a freeze on home sales. We’re seeing this crash in housing starts and so forth. But again, it’s not totally mechanical. And to this point about the number of houses that are being built, it’s this overused cliché, perfect storm, but we did see this big boom, and housing demand started the middle of 2020, et cetera, with the drop of mortgage rates, but the supply chain issues were a big part of it.
I mean, there were a lot of homes that there was demand for, there were home builders willing to sell them, they just couldn’t get them built, and so you just see this brutal aftereffects of the great financial crisis simply in the ability of the industry to ramp up and create more housing in line with demand.
Host: Derek Thompson
Guests: Tracy Alloway and Joe Weisenthal
Producer: Devon Manze