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Notes -
The Economist doesn't seem to know economics.
I was presented this article by Reddit as an ad. Though the ad used the subtitle about Trump as the title. This article packs more "wrong" in a coherently-written article than I've seen in a long time. The actual title is "America’s huge mortgage market is slowly dying".
Right out of the gate, we're told mortgage debt has dropped over 30 points as a percentage of the GDP since the housing crisis, and now is at its lowest level since 1999, before the bubble. Wait a minute? Isn't that a good thing? We've finally returned to normalcy after the bubble? In fact, the graph appears to show just that. Mortgage debt is still higher as a percent of GDP than any time other than the bubble.
We're then told "mortgage debt has shrunk to just 27% of the value of American household property—a 65-year low". Uh, yes, but those of us who are paying attention realize that this isn't because mortgage debt has shrunk, it's because the value of American property has increased. Which doesn't have much to do with any dying of the mortgage market.
Then we get this howler:
Uh, how exactly is lenders' appetite for risk a measure of mortgage availability?
The article then goes on to call this a "collapse in credit", because in 2003 (peak bubble), 35% of American mortgages went to people with credit scores below 720, whereas now that number is 22%. But the attached chart shows total originations are fairly close to immediately pre-COVID numbers. There's no real drying up in credit since the end of the bubble, just extension of the same credit to more creditworthy borrowers. Note that more than half of Americans with a credit score have one over 720. American's credit scores have increased, and lending less to people who are higher risk just makes sense. The bubble lending DIDN'T make sense, that's how we got the bubble!
Did I call the previous one a howler? No, that wasn't a howler. THIS is a howler:
Uh, bitch, prices are high. Time on market is low. There's LOTS of buyers. It's a seller's market. If developers aren't building (and indeed they aren't) it's not a lack of prospective buyers causing it.
This is heart of the problem with the article: if there is indeed a mortgage drought preventing people from buying houses, house prices should be falling, not rising. Basic Econ 101 stuff. The article completely ignores this right up until the very end, when it notes
I don't know what G-S means by that, but "any policies meant to make mortgages more widely available will only push house prices higher" makes more sense than anything else in the article, and it contradicts the whole thesis of the article.
The housing market has plenty of problems. Unavailability of credit is definitely not one of them.
Outside of a crash, the one avenue I don't see discussed very often for how this can end is for contractors to start building smaller.
Where I live there are two main problems hindering this natural market development: Regulations and lot allocation. Smaller contractors can easily build small in theory. But due to lot allocation, high lot price and regulations, it's not economically viable. This leaves small contractors unable to meet market conditions since a lot of prospective home buyers are priced out of single family homes. Which places the ball in the hands of larger contractor operations that can deal with the situation more easily via multi story housing. So problem solved. Smaller contractors fade out of business.
The 'small' problem with this, and why I think this is the future, is that we are looking at a pretty obvious lowering of living standards. Your future is less idyllic and smaller in scale.
On a certain time scale there is nothing wrong with this. People should start small, build capital in their small home, sell it later and expand into something bigger that can more easily house a larger family. The real issue is more clear when you look at this in a modern context.
Most people don't have families until they are in their 30's. Of those that do, there will be many who had not entered the real estate market until their late 20's. Depending on income, your children will be raised in a small home for the majority of their lives. Any dreams of green grass, a white picket fence and children playing with a puppy will stay as dreams. You will not be giving your children the childhood your parents gave you.
This development, at least where I live in Scandinavia, is already underway. Being marketed as a conversation about how we should orient our lives and a challenge to critically confront our values. Forget about owning a car, a big dog or raising your children. You will see your family 4 hours a day in a mass produced concrete box, stacked on other concrete boxes. Everything will be shrinking. Everything is being outsourced. It may not be the future anyone wanted, but it's the future everyone has been voting for. The migrant who is delivering your half eaten UberEats order has to live somewhere, after all.
I'd be curious how this aligns with populations that are starting to decline: it seems at some point you'd have a housing surplus unless everyone takes up second homes. I'd look to Japan, but their housing market is weird by Western standards. I know in the US it's often a location issue: there are cheap ghost towns but no employment prospects near them.
The short answer is that housing markets have a failure mode where all the family homes have pensioner couples living in them, and all the two-bed flats have families with children living them.
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