Slides with Audio
- 1. A Radical New Understanding of the Housing Bubble and the Financial Crisis Presented by Kevin Erdmann
- 2. The Housing Bubble So obvious, the premise didn’t need to be confirmed.
- 3. There were never too many homes.
- 4. NYC LA Boston San Fran. San Diego San Jose $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 Median Home Rent and Price 50 Largest MSAs 1Q 1991 1Q 2007 1Q 2015 MedianHomePrice Median Annual Rent A handful of cities have become very expensive to live in – for both renters and owners.
- 5. Before 2008: Housing markets were driven by supply. All prices increased. After 2008: Housing markets were driven by a credit shock. Low tier prices collapsed. 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 Seattle Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Zip codes, in quintiles by median home price. Jan. 2000 = 1 Supply Driven Migration Event Credit Shock 0.75 1.00 1.25 1.50 1.75 2.00 2.25 2.50 Atlanta Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Zip codes, in quintiles by median home price. Jan. 2000 = 1 Credit ShockSupply Driven Migration Event
- 6. Before 2008: Housing markets were driven by aspirational households buying into expensive cities and other households moving to cheaper cities to reduce costs. After 2008: Public focused on preventing households with lower incomes from over-buying. This had little to do with the bubble and left the core problems unaddressed. Family income quintiles and deciles
- 7. In 2008, Federal regulators acted as if there was a credit problem when we had a supply problem. This cut home prices significantly, devastated homeowners’ equity, and locked young, first-time, and working class buyers out of the market. For those families, today, homeownership is a free lunch, if they can find a way to do it. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 1979-03 1981-03 1983-03 1985-03 1987-03 1989-03 1991-03 1993-03 1995-03 1997-03 1999-03 2001-03 2003-03 2005-03 2007-03 2009-03 2011-03 2013-03 2015-03 2017-03 Mortgage Affordability vs. Rent Affordability Mortgage Affordability Rent Affordability Inflation & Cost Adjusted Mortgage Affordability Credit Shock = Unprecedented Affordability
- 8. Implications for Wealth Management and Asset Allocation Housing, especially at the low end, is greatly undervalued...And obstacles to real investment – through local building codes and national lending policies – are pushing down real long term interest rates. Building more homes would solve the “safe asset shortage” problem.
- 9. Implications for Wealth Management and Asset Allocation • We are in a boom-bust economic regime. This is blamed on demand (credit and money), but it is the result of structural obstacles to supply – most notably residence in economically dynamic cities. • This leads to hawkish monetary policy that is creating cyclical risk. • Real estate, and especially low-end real estate, appears to be more volatile and risky than previously thought. But, real estate volatility was due to a one-time negative demand shock that cannot be repeated. In that case, past volatility points to future stability and reversion to the mean. • Carefully chosen positions in real estate, lending, and homebuilding markets can provide both speculative and defensive opportunities for asset management, even though cyclical risks remain.