Will Lower Rates Remove America’s “Golden Handcuffs”?

Dave:
Mortgage rates are starting to come down, which is of course encouraging, but affordability actually isn’t starting to budge yet, and that’s creating this massive, massive log jam in the American housing market. One estimate actually says that as many as 800,000 moves didn’t happen last year because of this golden handcuffs effects that’s going on, it’s affecting everyone from homeowners to renters to real estate investors like us. So what can we do about this huge problem? There is unfortunately no perfect solution, but there are some interesting options that we’re going to be digging into to Happy Friday everyone. It’s Dave here, and I’m back for another bigger news episode, and today we’re talking with New York Times real estate correspondent Rui Kalama, and she spends a lot of her time talking to some of the foremost economists and experts on the real estate market and choose some amazing takeaways about what’s going on with affordability, its root causes, the lack of supply that’s going on, and what some potential solutions are. In today’s episode, we’re going to talk about the relationship between interest rates, home sales, and affordability, how we even got to this point in the first place, which is spoiler lack of housing supply. And we’ll talk about some of the more creative solutions to the supply side of the housing crisis. If you want the latest on modular housing and a DU zoning, stick around for that conversation, which we’ll be having at the end as well. Alright, let’s get to Rick Meany. Rick Bini, thank you so much for joining us today.

Rukmini:
It’s my pleasure to be here, Dave. Thank you.

Dave:
Let’s start by having you just tell us a little bit about yourself and the topics you cover for the New York Times.

Rukmini:
Yes. I cover real estate for the New York Times. I’ve been a journalist for 25 years, and I spent the bulk of that overseas in Africa, in West Africa as a correspondent and later a bureau chief for the Associated Press. From there, I got into terrorism reporting, so for about seven years I was covering ISIS and Al-Qaeda for the Times, and I now cover real estate and housing.

Dave:
Wow, that’s quite a career and hopefully a little less stressful covering real estate than some of your previous positions.

Rukmini:
You’ll be amazed at how many opinions people have about real estate.

Dave:
Oh, I’m very familiar with that.

Rukmini:
They’ll feel strongly about it.

Dave:
They do. Yeah, it’s a big part of American culture of real estate, and so I think people do have strong opinions and for good reason, and that’s why I have a job, so I’m very grateful for it.

Rukmini:
Yes.

Dave:
So let’s just talk a little bit about one of your more recent pieces where you’re talking about the relationship between mortgage rates and home prices, and this might be familiar to some of our audience, but we always have new people joining this. So can you just tell us briefly how those trends have evolved over the last few years?

Rukmini:
Well, I think the biggest takeaway right now is that according data from federal sources, six out of 10 American homeowners who have a mortgage have rates that are under 4%. If you’re like me, you have rates in the 2%, right?

Dave:
Ooh, twos. Those are rare. That’s

Rukmini:
Impressive. I think a lot of people refinanced in the twos in lead up to the pandemic. What that means is that there’s what economists are now calling a rate lock effect or a golden handcuff effect where people do not want or cannot afford to sell their home because they would be hit with, I was just checking the rates on Freddie Mac, and as of this morning we’re down to 6.09% for the mortgage rate, which is lower than it was in the fall where it was close to 8%. But if you are one of the majority of homeowners who has rates under 4%, why would you want to give up that rate? The second thing that’s happened is that there’s been such a dramatic increase in home prices that if all things were equal and I was just to move across the street, put the rate aside, my home here, I bought it for roughly half the cost of what a very similar looking home across the street would cost. So people are being hit by these two forces, both the very high cost of homes and the fact that they would now be entering a rate that is for the majority of people, several points higher than they currently have, and that’s created a gridlock where people don’t want to sell. And because there’s no churn in the market, it’s created all sorts of secondary effects where people can’t move, people can’t buy, and affordability is at an all time low.

Dave:
Thank you for providing that context. And I just want to provide one other point that this is a major reason, not just why transaction volumes down, which it is a gridlock. We’ve actually seen total number of homes sold. It’s dropped 50% since the peak of the pandemic. It’s well below what it normally is. And so in addition, this is really impacting the whole industry, especially people like agents and lenders, property managers, people who live off transaction volume are obviously feeling this, but it’s also a major reason why prices are not moving so much. Is that correct, Rukmini?

Rukmini:
I think that’s right. And a couple of data points that I collected recently when I was writing the most recent piece in the period of fall 2022 to sort of third quarter of 2023, 800,000 moves were deferred. 800,000 families households basically put off moving. So this movement that you tend to have in the industry is just not occurring. People are deferring the move up that you traditionally go through when you get married, have a kid, have a second kid. That family that pre pandemic had maybe a 1-year-old now has a five-year-old and maybe a second, and they still have only a single bathroom. They would perhaps have liked to move into something bigger and they just can’t. Another data point, since we’re on track in 2024 to have the least home sales since 1995, but the country has 70 million more people since then.

Dave:
Wow.

Rukmini:
So it’s just we’re really scraping the bottom of the barrel as a result of these conflicting forces.

Dave:
That’s a stat I had never heard before. Of that, the 800,000 moves had been deferred.

Rukmini:
Yes.

Dave:
What is the source for that, just out of personal curiosity?

Rukmini:
Oh, it’s a paper published last month actually by the National Bureau of Economic Research.

Dave:
Oh, okay.

Rukmini:
It was Lance Lambert at Resi Club who I think does a really good job of amassing some of this data, pointed it out to me and it’s concordant with everything that we are seeing anecdotally.

Dave:
Well, the reason I’m asking, it’s a really interesting stat because there’s ways to measure demand that’s on the sideline, but that’s a new one for me because as an investor or an economist, I’m just curious if their demand is just permanently lost or are people just waiting until conditions change? And at least the wording you use that it’s deferred, means that all these people still intend to move, that they still want to. And is the idea then that they’re just waiting till affordability gets restored and then they’ll move?

Rukmini:
So the economist that I serve, and I spoke to seven for this one piece, they seem to all agree that rates need to get into the mid to low fives for things to start to move in some shape or form. And that’s still a long ways away. That’s 2025 if predictions are on point. And what we don’t know is even if rates come down, will the prices of homes continue to rise? There’s this kind of sisyphean battle that’s happening for people who are sitting on the sidelines right now. Imagine first time buyers, they may be waiting for the rate to come down, but every month that they wait, the home price index is going up. I was speaking to an expert at Harvard at their housing center, and who calculated the numbers for me? Who said that back when I published this piece, which was a few weeks ago? Yes, the rate had dropped more than a point since it’s high back then, but he said that in order to get back to where the home prices were, you’d have to rewind the clock to around January of 2024.

Dave:
So yeah, you have these sort of conflicting forces and just want to define this for everyone because talking a lot about affordability basically means how easy is it for the average American to buy the average price home?
And it’s sort of this three-legged stool. There’s three components that go into affordability, home prices, pretty obvious. Mortgage rates also pretty obvious. Most people use debt. And then the third one is real wage growth. So that’s basically how quickly wages or income are growing. And so basically how easily someone can afford the price point at a given interest rate. And so what Edia is saying and makes sense is that unfortunately, it’s sort of like this whack-a-mole situation where even though we’re having mortgage rates start to come down, which would help affordability, it would improve affordability, but at the same time, home prices have been going up depending on who you ask, like four or 5% year over year, which is pretty considerable. If you think about 5% on the average home, that’s $420,000, it’s another $20,000 that you’re paying even though mortgage rates go down. So unfortunately, it sounds like affordability, although it’s probably trending in a decent direction, I would imagine, hasn’t really improved all that much.

Rukmini:
It really hasn’t. And I think it’s getting to the point where the federal government may need to step in a more robust way. We’re seeing now that this is the first election in my lifetime when housing has actually become an issue that is being debated in front of millions of viewers on television that speaks to the fact that this is a real stressor. I think for people first time want to be home, buyers are not able to buy. And then on the flip side, you’re seeing people can’t move. And then beyond all that, you’re seeing seniors who are on a fixed income, who are being squeezed by every force from rising taxes to rising insurance. The shelter and the roof of our heads has just become unmanageable, expensive for a lot of the country, put aside the homelessness crisis, but just for I think the average American, it’s become something that is really shrinking people’s wallets.

Dave:
And that extends beyond home ownership too, because home ownership is expensive, but rent is expensive too. Actually, previously this year, the first time I think at least that I’ve seen data that the nation as a whole was unquote rent burdened, which means that more than the average American was spending more than 30%. That’s the line that personal finance experts, economists say, should spend 30% or less if your disposable income on housing. And we were over that. It’s actually since come down, which is a positive sign, but this is obviously happening across the whole country and the spectrum of homeownership to renters. And Rick said, you’ve talked to a lot of people. Does anyone have a solution for this?

Rukmini:
Look, a lot of people seem to be falling down on the same thing, which is of course, rates have to, rates have to come down. That’s one thing. But beyond all that, this is really a supply problem. There’s just not enough housing. Our country has not built enough housing stock going all the way back to 2008. The housing crash, I’m sure you know this very well, Dave, but on that front, you have so many forces that are getting in the way, excessive zoning in so many places where people want to live. I was talking to an affordable I housing project coordinator on a planning commission, and this is in California where there’s been emergency mandates that this has to be built. And there are now such excessive rules about parking at an affordable housing development where, for example, for every studio in this building that has maybe 60 units for every studio, you have to have one spot for every one bedroom.
You have to have 1.5 spots for every two bedrooms, this huge amount of parking, which makes the project that is already so expensive, that much more expensive and makes it very hard to pencil out. But variations of that are happening all over major metro areas where people want to live. It’s difficult, it’s onerous to get new projects built. And so builders, they’re going for what makes sense financially and what makes sense is going for the higher price point, making a bigger house rather than making those small ranches, you imagine from the 1970s, which would be a good starter home for somebody.

Dave:
Yeah, I see solutions coming up, at least ones that seem more credible or are actually getting enacted on a local level or even on a state level. And some of those things can work. I mean, the parking thing is totally true. There’s these crazy ratios that you have to form, and it is total digression here, but there’s all this data that shows that adding parking doesn’t actually increase the availability of parking.

Rukmini:
I see.

Dave:
That’s interesting. Yeah, there’s this thing called in economics called induced demand where it’s kind of like if you build it, they will come. If you build more parking, more people will buy cars. And so it doesn’t actually help. Same thing why a widening a freeway doesn’t work because it just gets more people to drive. So anyway, that’s a whole other topic. It’s time for a break, and afterward we’ll have more of my conversation with Rini Kalama from the New York Times. Welcome back to Bigger News with Rini Kalama. You alluded to before that the federal government might step in, and I was curious, are there proposals, because we’ve heard some things from the presidential campaigns, but I was just curious from less of a political standpoint, when you’re talking to these economists, does anyone have ideas that could work on a national level?

Rukmini:
I mean, I don’t know if these will work or not, but what I’m hearing from economists is that what happens is you have all of these valorous recommendations from reducing zoning around transit to building more, et cetera, and then what happens is that they get clogged down at the level of the q and a session at open mic fight in some little zip code somewhere, and that’s where it gets killed, right?

Dave:
It’s the nimbyism, right? Yeah.

Rukmini:
And it’s been watching some of these public comments for a different story that I’m working on, and it’s so funny how many people stand up at the open mic and begin. I am not against affordable housing. This list of things they’re not against, but they just don’t want another building, another development, anything in their backyard. Nobody wants anything to be built anywhere where they live. And so some of the economists that I’ve been speaking to, including at Freddie Mac, et cetera, are saying that there may need to be a larger mandate where the state and the federal government steps in and goes, you know what? That’s it. This you have to build.
You’re seeing that in California where you have this emergency measure that’s going on, but even there, I was looking at this one affordable project in Southern California, and immediately the neighbors file a lawsuit claiming that it’s going to create more traffic, and then the lawsuit has to work its way through the legal system. By the way, it’s worked its way through the legal system. The price of the two by four has gone up, so the price of the project is no longer accurate. And anyway, it’s this endless loop where it seems that communities are just not able to solve it on their own own. But Dave, I’m actually curious to know what you think are some solutions still myself learning about this.

Dave:
I don’t have any sort of silver bullet, but I do think some of the common things that I’ve heard about are upzoning, which is increasing the density that is allowed for our listeners. A lot of what you hear, especially in big cities all over the country, so much of the physical land in area is zoned for just single family homes. And if you could just zone it for multifamily, people would build on that property. You also see in states, like I know in Washington state, but I think in Michigan and Colorado it’s getting popular, this idea that you could adding ADUs where you can build secondary units, but personally, I think that’s nice. It’s kind of a stop gap. The quantity of homes that need to be built not going to be fixed by a ds, right? So I think those types of things, and personally, this is a pie in the sky idea. So here’s my

Rukmini:
Proposal. I’d love to hear Jason pie in the

Dave:
Sky. Actually, I have two pie in the sky proposals for you. One is having municipalities make it easier to build modular and prefabricated homes. And technology has really improved a lot around prefab homes. They’re nice. It’s not old school kind of trailer looking homes. They could be really, really nice homes, but the permitting process is the same in most places for a prefab home that it is for a custom built home. Whereas why can’t, and I think there are examples of this. I think in Seattle, there’s some examples of this where the city will just say, we’re going to work with the manufacturer and pre-approve everything or deny, but whatever. We’re going to prepec all of these different plans, and then people could just build them. And I know it doesn’t sound like a lot, but permanent costs are very high. Interesting. And even more importantly, when you are planning to build something, if the permits take 3, 6, 9 months, which they can, those are holding costs. You’re paying your mortgage, you’re paying insurance, you’re paying taxes, that’s tens of thousands of dollars that gets added to the price of construction. And so that’s either going to get tacked onto the project or people are going to choose not to develop because it’s too expensive.

Rukmini:
Right. That’s so interesting, Dave. There was a recent study out of the Harvard Joint Center on housing a couple months ago, and I might be misquoting this data point, but if I remember it correctly, they said that 11% of municipalities around the country have only single family zoning. Only. What? Yes. So you’re thinking of the Westchester Counties, these very fancy bedroom communities outside of New York where that is the only type of housing that is allowed. You can’t even build an apartment building with nice condos. And I’m starting to look at the history of zoning to try to understand how we got here. This is just a little bit of homework I’ve done, but I was told that the very first zoning ordinance that was passed was actually in New York City at the turn of the century or so, and it involved a building complaining about the fact that another building was being built in front of it, so therefore blocking the view. Okay. So that’s one type of thing. You then fast forward some years, and then in the middle of the country, you had a big decision that ended up going to the Supreme Court, which involved the separation of areas. So this is an area where people reside, and this is an area where industry is done, factories, et cetera. Well, that seems to make sense, but from there, you have this proliferation of rules where you end up with communities that can only build

Dave:
Single

Rukmini:
Family homes on a one acre plot.

Dave:
On a one acre, you could have dozens of people living in one acre.

Rukmini:
That’s right.

Dave:
You could have hundreds of people living in one acre if you were serious about affordable housing.

Rukmini:
So among the interesting things I’ve been reading about, so on ADUs, I’ll give my community here another bedroom community of Manhattan, an A DU ordinance was passed. Great. So you can build ADUs, but they didn’t change the parking rules. And so for example, in my house, I have a driveway, both my husband and I drive to work. We have two cars and there’s no room for a third car. So I can build an A DU allegedly on my lot. I have a deep lot, but then where’s that person going to park? They’re going to Uber everywhere, right?

Dave:
Yeah.

Rukmini:
I mean, it hasn’t been thought through,

Dave:
Right? Yeah. I think that’s a good example though. We hear that those types of things all the time where the intention is good, but the practicality either for the homeowner or from who I talk to developers, it just becomes impractical. It’s like these rules and the layers of bureaucracy, it just makes it, the risk reward profile for real estate developers is really tough in these types of market. It is so risky, and there’s so many hurdles to go through. A lot of people are just saying it’s not worth it, and I don’t blame.

Rukmini:
Yeah. Another interesting example, I think in Austin where they’re doing something called, they call it a B units. So imagine a house and then something that looks like an in-law or an A DU, but the two houses they basically created zigzag down the middle of the property and they create two deeds. So you’re literally, it’s not just that one is kind of grandfathered into the other is that you have two deeds with two water meters, two addresses, and they’re allowing that kind of subdivision. This is to your point of upzoning, where you’re allowing the actual lot to be cleaved into and creating basically something smaller out of it. This is for Buttonin in so many communities because you’re really creating density there, but they’re allowing it in Austin. And some real estate agents there told me that this seems to be helping in terms of creating a little bit more supply than before.

Dave:
And for everyone listening, a lot of our audience is real estate investors. And just to be candid, real estate investors often benefit from a lack of supply because if you’re an existing investor who owns a lot of property that pushes and there’s a lack of supply and excess demand, it pushes up prices and that can help investors, but at least my personal belief is the best thing for investors and homeowners is to get back to a state where we have a predictable housing market where
Prices go up at three or 4% a year. That’s what it was for most of American history and what investing in real estate was still good then. And that was a period where people could choose housing, they could afford a home if they wanted to, they could afford rent, and it made the whole economy go better. We had more transaction volume. And I think that part is really important for our audience to remember is that we’re sitting right now, even if prices are going up a little bit at half the normal transaction volume, and that hurts the entire industry and it hurts the broader American economy. And so I think that’s why it’s so important to figure out long-term solution to this where we get reliable, affordable housing back into the American housing market.

Rukmini:
Yes, and on the very flip side of this, what’s happening with homelessness is just, it is actually quite shocking. Some months ago, I did a story about working Americans who are living in their cars. I discovered that there are now dozens of parking lots all over the country that have been set aside for what they call the mobile homeless. So basically somebody who’s homeless, but who still has a car. So there’s parking lots that are being set aside, a community college in Santa Clara, California for homeless students. These are students. The dean was telling me that some of these students are straight A students, they just don’t have anywhere to live.

Dave:
It’s terrible.

Rukmini:
Yeah, it’s really kind of shocking, especially to me as somebody who is an immigrant. We came here because America is the dream, and it’s a little bit striking how bad things have gotten, and it’s not happening as badly in other places,

Dave:
Like in other states or in other

Rukmini:
Countries. In other countries. In my native Romania where a doctor in a village can make a salary of $500 a month, it’s a very low income place. You don’t see homelessness.

Dave:
You don’t.

Rukmini:
So what has gone wrong here that we’re ending up with so many people in these real dire straits and then just a notch above and a notch above middle income, middle class people that are so cost burdened as a result of their shelter.

Dave:
Yeah, it’s clearly a real problem, and hopefully we can start working on some long-term solutions here because unfortunately, at least my belief is a lot of the things that are being proposed are like maybe it’ll help in the short run, but it’s basic economics. You just need more supply. That’s the answer. Everyone agrees both sides of the aisle, everyone agrees, more supply, more

Rukmini:
Supply. It’s just nobody wants it facing their house. And so at that point, it becomes for the greater good, and it seems like a greater force needs to step in and make it happen.

Dave:
All right. Time for a quick break. Stick with us. Thanks for staying with us. We’re back with more from Brooke. Meaty. Do you want to hear my last hair brain idea for how to improve supply?

Rukmini:
I’d love to, yes. And I’m still a student of the speed, so I’m actually interested in learning about it.

Dave:
So there’s not a real suggestion in here. It’s just sort of a rant. But I gave this rant on our sister podcast on the market the other day, but here’s the fundamental problem with housing supply is that construction has fundamentally not changed for literally centuries. If you went back in time and looked at someone building a house in the 17 hundreds, there’d be a guy up on a ladder hammering wood with

Rukmini:
Nails

Dave:
Putting on a roof. And it’s the same thing today. I don’t know how you fix it. I don’t know how you have robots or whatever, but someone needs to solve this problem. And I am half joking, but I also think there are examples of this that have worked in the United States. The government passed a bipartisan, yes, it’s possible bill to bring chip manufacturing to the United States because it’s an important national priority. We fund research on construction technology the same way the Trump administration put together operation warp speed, and they were able to accelerate a vaccine. Why can’t we, if this is a national crisis and it seems like everyone agrees to it, how do we invest in technology that’s going to make this better for the future and create an American advantage in our economy? If the American economy can come up with the solution, it’s going to be incredible for the economy, for generations to come. I have no idea how to do this, but that’s my rant about it.

Rukmini:
It’s a good rant. But what I would point out is that I get press releases, and I’ve spoken to various experts who have sent me to the websites and to speak to people who are doing really innovative things. The modular construction that you mentioned, a colleague of mine is just now reporting on 3D printers where entire houses are being made with 3D printers. I think the technology is actually there. The problems, they don’t have anywhere to put it, right? You go back to, you have to have a piece of land to put this down on, and that’s where suddenly the entire system gets fried, program permits, regulations, parking, streaming, neighbors, open mic night, and then nobody wants to get involved, and then another project falls apart.

Dave:
Yes. I also, I love how you call community meetings, open mic night. I’m going to start calling it that. That’s a great way to term it. But I’ve actually, on our other podcasts, I interviewed a 3D printing company, and it’s super cool. The technology’s pretty amazing and it’s still emerging, but even the early signs are pretty incredible. But they were describing the same thing, that to get a 3D printer in an urban infill lot, which for everyone just means if you bought a random plot in the middle of a city, it’s super expensive. What you need is tracked sort of the way big developers, big subdivisions, but those require huge investments. Those are nationally, publicly traded company that can buy 10 acres and sit on it for 15 years. Startups can’t do that. So it’ll be interesting. Maybe these toll brothers, these types of huge companies start buying up these technologies. I don’t know. But they were also saying a lot of the places where they’re permitted to build are places that no one wants to live. So I’m hoping that will change, but there are encouraging things. But yeah, let’s just, I don’t know. Someone needs to spend a lot of time on this, and it feels like within a few years we could really have a better construction industry. But maybe I’m just overly optimistic about this.

Rukmini:
An economist pointed out to me that the most iconic neighborhoods in America think of the village in Manhattan. Think of Chinatown and San Francisco. Just think of the most beautiful places in America in terms of neighborhoods. The French border in New Orleans, they’re all dense. It’s people living on top of each other, and yet in the regulation landscape that we’ve ended up in, it’s very, very hard to build anything like that anywhere in America anymore. So I really do think there’s a regulation arm, a zoning arm of this that has become unhelpful, that has become a source of problems as opposed to a source of solutions.

Dave:
Yeah, that’s definitely true. There needs to be some reduction of bureaucracy and red tape to make this happen.

Rukmini:
You’re seeing it with the lack of the ability to have workers in a lot of, think of all of the resorts in America. I’ve seen stories here and there about in the beach communities near New York, in Florida, the workers can’t live there, and therefore they’re having a hard time staffing the coffee shop, changing the linens. Basically, if you’re not able to have multiple income levels live together, then you end up in a situation where the system can’t run at all.

Dave:
Yeah. It’s not a sustainable economy.

Rukmini:
Yeah.

Dave:
Yeah. I mean, I just noticed, I used to live in Denver and I ski a lot, and you see that in ski towns too. People who work at the resorts and who they are, the heart of that economy. If you don’t have people working at the ski resort, you don’t have that town and they can’t afford to live there.

Rukmini:
If you don’t have this ski instructor in Aspen, it’s no fun to go to Aspen.

Dave:
Right, exactly. So I know that there’s a couple of ski resorts that are building workforce housing, which I think is an interesting idea. I don’t know enough about it, but they’re building units that they rent to their employees at a subsidized pretty cheap rate. So I think it was a test. It was just like 60 units, which is not nothing, but I assume these resorts have hundreds of employees.

Rukmini:
One real estate source told me that in Arizona, in the Sedona area, that the hotel chains, the Hyatts, the Hiltons, those guys that they were getting involved in lobbying for affordable housing because they can’t change the linens in their hotels if their workers can’t live nearby.

Dave:
Yeah. Well, I mean hopefully that continues for whatever their motivations, but when big businesses like that start lobbying, maybe people will start.

Rukmini:
Right.

Dave:
Well, Ricki, thank you so much for joining us today. Is there anything else from your reporting and research that you think our audience should know?

Rukmini:
I think we’ve covered it. Dave, thank you so much for having me on.

Dave:
Well, thank you to Ricki. We’ll put her contact information and links to all of her reporting below, and thank you all so much for listening. We appreciate you, and we’ll see you soon for another episode of the BiggerPockets podcast.