Will the Senate Finally Fix the Housing Crisis?

Dear Reader,

This is Dylan Jovine with Behind the Markets.

Happy Monday. Today is Monday, March 16th.

Today I'd like to talk about the housing market. Specifically, I want to give a shout out to the Senate, which has shown — in a genuinely bipartisan way — that they're serious about tackling affordability.

Both Democrats and Republicans want to address this before the midterms. And honestly, when I read through the bill, I had to wonder if someone up there read our special report on the housing crisis, because it addresses the exact three problems we laid out over a year ago.

Maybe they did. Maybe we just identified the right problems before everyone else. Either way, it's a feather in our cap.

Here's the crux of the issue.

Ten years ago, the average home in America cost $200,000. Today it's $400,000. That's great if you already own a home. But incomes have only gone up about 14% over that same period. That's the problem.

When you go to buy a home, the bank will lend you money based on roughly 30% of your income. If your income hasn't moved much, 30% doesn't get you anywhere near a home that costs twice what it did a decade ago.

In stocks, we talk about the PE ratio — price to earnings. In housing, there's an equivalent called the PI ratio — home price to income. Historically, that ratio sits around 3.4 times. A home should cost about 3.4 times your annual income. Right now, the national PI ratio is 5.8. That's almost 80% above normal. And we see it here at Behind the Markets — we have young people on our team making good money who still can't afford to buy a home. It's crazy.

So what does the bill actually do?

It tackles three things. The first is the lack of new construction. Local opposition, red tape at the city and state level — these drag out building timelines for months, even years, and drive up costs to the point where builders just stop building. This legislation would allow communities to use existing federal development grants to build new housing and reauthorize programs to spur more affordable construction.

The second is modular homes. Think about older homes — 1,700 to 2,200 square feet. Practical. Livable. Then somewhere along the way we got obsessed with McMansions. Three thousand square feet, five thousand square feet, rooms you never even walk into. Building costs have gotten so high that it's worth asking whether we need to go back to smaller, smarter homes. This legislation pushes for more factory-built modular housing under a federal umbrella, which would let builders standardize designs and deliver entire communities faster and cheaper.

The third, and this is the one I feel most strongly about, is limiting big institutional investors from owning single-family homes. You have entire neighborhoods in some towns that have been bought up by funds — BlackRock and others — and converted into rentals. And the consequences of that go way beyond real estate.

Here's the thing people don't think about. 

Home ownership is the single greatest wealth-building tool for most Americans. If you have a whole generation that never gets to own a home, in 30 or 40 years you have a whole generation that can't fund its own retirement. 

That cost falls on everybody else.

But there's an even more immediate problem. 

Homeowners, by definition, tend to be more conservative. The system is working for them. They have something to protect. But if you're just sending a rent check every month to some faceless Wall Street fund, you're not building anything. You're just angry. And people who are angry and have nothing to lose are more prone to populism — the kind that threatens the political fabric of a society.

Look, the difference between the haves and the have-nots has started almost every revolution in history. The American Revolution is really the one exception. Home ownership has been one of the great equalizers in this country. Our democracy depends on keeping more people invested in the upside of the system. When that breaks down, history tells us what comes next.

I'm glad to see this bill moving through the Senate. I'm glad it's bipartisan. And I look forward to seeing it become law.

Anyway, that's all I have. Have a wonderful day. I'll see you tomorrow.

“The Buck Stops Here,”