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Kevin Erdmann

Articles by Kevin Erdmann

Get Cash to More Families That Need It Now: Give Banks More Discretion to Make Home Equity Loans and Refinance Mortgages

March 20, 2020

The economic dislocations caused by the coronavirus pandemic will almost certainly result in economic contraction. There have been calls for bold actions to attenuate the effects of this contraction and also to provide cash for struggling Americans whose incomes may be temporarily disrupted. But these actions, including direct cash payments to American households, will add to the federal deficit, and recent large fiscal deficits have tempered enthusiasm for immediate large federal outlays.
The pandemic will lead to a deep contraction that hopefully will be short. The more that national consumption can be smoothed during this time, especially for households that experience the largest temporary hits to their incomes, the quicker the recovery will be. There may be a way to allow American

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Fewer Restrictions on Lending Can Make Housing More Affordable

January 22, 2020

I appreciate the opportunity to submit a comment to the Department of Housing and Urban Development (HUD) regarding the elimination of regulatory barriers to affordable housing. I am a visiting fellow at the Mercatus Center at George Mason University, and this public interest comment reflects my own views based on my research. The Mercatus Center is dedicated to bridging the gap between academic ideas and real-world problems and to advancing knowledge about the effects of regulation on society. This comment, therefore, does not represent the views of any particular affected party or special interest group. Rather, it is designed to help HUD as it considers how to improve housing affordability for all Americans.
The mission of HUD regarding housing affordability can be divided into two

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What Are Homeownership Rates Telling Us?

November 5, 2019

The recent update of the Census Bureau estimates of homeownership for the third quarter of 2019 seems to confirm the continued recovery of the rate of homeownership. For the past three years, on net, all of the approximately four million new housing units added to the American housing stock have been owned homes, rather than rented homes. The homeownership rate appears to be solidly back above 64 percent, heading to 65 percent.
The aggregate homeownership rate appears to confirm the widely held belief that before the financial crisis, there was a frenzy of homebuying which suddenly lifted homeownership rates far above the long-term norm. According to this common view, these new homeowners weren’t generally households that could manage or afford the costs and responsibilities of

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Policymakers Should Reevaluate the Premises That Led to an Overhaul of Regulation Z

October 10, 2019

I appreciate the opportunity to submit a comment to the Consumer Financial Protection Bureau (Bureau) in response to possible amendments to the Ability-to-Repay and Qualified Mortgage (ATR/QM) Rule. Specifically, my comments here support an extension and even an expansion of a provision in this rule, called the GSE Patch, which is applicable to certain mortgage loans eligible for purchase by the government-sponsored enterprises (GSEs).
I am a visiting fellow at the Mercatus Center at George Mason University, and this public interest comment reflects my views based on my research. The Mercatus Center is dedicated to bridging the gap between academic ideas and real-world problems and to advancing knowledge about the effects of regulation on society. This comment, therefore, does not

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A Conceptual Starting Point for Housing Affordability and Public Policy

September 9, 2019

The old saying goes: “all real estate is local.” This is as true as it ever was. However, one could say the same thing about, say, corporate investments: “all investment returns are local.” This could be just as true in theory. And at some point in history, it would have been true in practice.
Before ETFs, passive mutual funds, and ultra-liquid stock markets, investing was about picking the right individual investments. Today, because all of those options exist, investment returns don’t have to be “local.” A prudent investor owns a diversified basket of corporate equities, and their investment portfolio is not local at all.
Diversification is possible because of liquid markets for diversified securities. But a prerequisite for those markets is having a language. And a prerequisite for that

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Does Homeownership Really Increase Household Liabilities?

September 2, 2019

The way we think about various assets, costs, and sources of income can be greatly influenced by how we mentally frame them, even when our reactions seem purely empirical.
For instance, because of how they are bought and sold, bonds are usually described in terms of their yields and homes are described in terms of their prices. When market yields decline, the effect on both types of assets will be similar. Yet, that difference in framing leads to a tendency to complain that low bond yields are reducing the incomes of savers while high home prices are providing those same savers with windfall gains. We could just as easily reverse those descriptions.
The way we think about debt and household liabilities also influences the way we frame various economic activities. To illustrate, let’s

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Income Tax Benefits to Homeowners Are Regressive

August 19, 2019

Two of the most important changes to the tax code made by the Tax Cuts and Jobs Act of 2017 (TCJA) relate to housing: a reduction in the deductibility of state and local taxes and a reduction in the mortgage interest deduction. 
Figure 1 is a summary of the major tax effects on housing, and the estimated scale of those effects before and after TCJA.  The table reflects White House estimates of the scale of each of these tax deductions from before and after the passage of the bill.  The TCJA was not the only factor at work here, but we can presume that the large changes in the mortgage interest deduction and state and local property tax deduction are largely related to TCJA.
The reduction in tax benefits to homeowners of over $50 billion dollars from the mortgage interest deduction and the

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Are Property Taxes Regressive?

August 13, 2019

In parts nine, ten, and eleven of this series, I presented evidence that higher property taxes can have several beneficial effects.  They can reduce volatility in home prices, and they can be a relatively painless way to extract monopoly profits for public revenue.  Higher property taxes may also plausibly reduce the incentives that lead to political obstructions to housing supply that turn local housing markets into exercises in “rent-seeking,” or political behavior intended to bring profits to asset owners by restricting access to competition.
Yet an important question to ponder is: are property taxes regressive?  That is, do they hit households with low incomes harder than they hit households with higher incomes?
Households with lower incomes spend a much larger portion of their incomes

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Low Property Taxes and Obstructed Housing Supply Are a Bad Mix

August 5, 2019

In parts nine and ten of this essay series, I used this basic accounting identity to think about property taxes as a way for the state to be a sort of silent partner in the ownership of residential property and to claim monopoly profits as taxes:
Net rental value after maintenance and expenses = Rate of return on investment × Price
Where housing is politically constrained so that property values are inflated, property taxes can be a relatively pure claim of monopoly profits.  So, one could argue that a beneficial policy goal may be to raise property taxes in cities where property values are high.
Since property taxes tend to be associated with local jurisdictions, there is a great deal of variation across the country, and even across cities.  As a portion of home values, average property

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Property Taxes Can Be a Tax on Monopoly Power

July 29, 2019

In my previous essay, I used this basic accounting identity to show how the state can use property taxes to silently partner in the ownership of residential property.
Net rental value after maintenance and expenses = Rate of return on investment × Price
As described in the essay, property taxes can be seen as a change in the rate of return. So, something else in this equation has to change when property taxes change. The question is, when property taxes change the rate of return, does that cause a change in the rent or the price?  A higher tax will either cause rents to rise to cover the tax or cause prices to decline if the owner can’t pass on the cost through higher rents.
The answer depends on what the rent is paying for. In 2014, Byron Lutz, an economist with the Federal Reserve,

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Property Taxes Are Rent to a Public Landlord

July 22, 2019

In the previous essay of this series, I used this basic accounting identity to think about how rent, price, and rate of return to investors are related.
Net Rental Value after maintenance and expenses = Rate of return on investment × Price
Property taxes are commonly used in the United States to fund local public services, and since they are imposed as a percentage of assessed price, we can think of property taxes as part of the rate of return on investment.
For instance, the rate of return (after costs and depreciation) that a wealthy homeowner would expect in a market with no taxes could be about four percent. If that market has a property tax rate of two percent, then the homeowner would require a rate of return of six percent. They would retain four percent as a return on their

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Tight Lending Regulations are a Wealth Subsidy

July 15, 2019

In my last essay of this series, I explored how tight lending standards have removed options for middle- and lower-income households to be homeowners and cut off conduits for supply of new homes.  This appears to have improved housing affordability in terms of price, but the important measure of housing affordability is rent. This lending crackdown caused rents to rise, especially for households locked out of the option of ownership.
How do lending regulations affect homeowners?  Regulations that limit lending act as a wealth subsidy by reducing the cost of housing for more financially secure buyers.
Loose lending standards or low interest rates are broadly recognized as an important factor in the housing bubble that preceded the financial crisis.  On some level, the connection is

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Squeezing Unqualified Borrowers

July 8, 2019

In previous posts, I outlined how a lack of adequate homebuilding has driven up rent inflation and made housing less affordable, even in cities that were oases for affordable housing during the housing boom.
There is a widespread belief that before the financial crisis, too many homes were built, and that many of them were built for unqualified buyers with low incomes. In an attempt to remedy this perceived problem, regulators in charge of Fannie Mae and Freddie Mac and other mortgage originators have pressured banks to limit their lending to borrowers with less pristine credit.
In cities and neighborhoods where incomes are low or entry-level homes are common, this clampdown coincided with substantial declines in local property values. The difficulty of making smaller loans and loans to

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The Myth about Bubble Buyers

July 1, 2019

In previous posts, I have outlined some ways in which supply and demand play out in housing markets. Since home buyers are both suppliers and consumers of housing, it is useful to think clearly about these different roles that they play.
During the housing boom, there was an increase in homeownership which seemed to happen at the margin. Looking only at price, and only at housing expenses through a lens of ownership, it appeared as if households were “keeping up with the Joneses.” It seemed like new mortgages were enticing Americans into overbuilding and overspending on housing.
Although widely and passionately believed,  the ”housing overconsumption theory” is not supported by the data. Even though mortgages were more widely available, they weren’t systematically used by households with

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Rising Prices, Lower Rents; Rising Rents, Rising Prices

June 21, 2019

To understand the importance of supply for housing affordability, and to understand why home prices and rents became so disconnected before the crisis, one must view the US housing market as the combination of two very different markets.
There is the Closed Access market, where political obstructions prevent supply from responding to price. And there is the rest of the country, where price increases can generally trigger new supply. Where supply is blocked, rising demand just keeps pushing prices higher. Where supply can come on line, it presents options for buyers, and keeps prices near the cost of new building.
During the pre-crisis housing boom, focusing on home prices in a national market, Americans concluded that healthy rates of building led to rising housing costs. But, focusing on

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Real Estate Investment Doesn’t Increase Spending

June 17, 2019

Home prices have been famously high and erratic over the past 20 years. Home prices had generally risen with inflation for many decades, as they should. As shown in Figure 1, total real estate value scaled with national incomes and spending. Then in the first decade of this century, prices shot up outside the norm briefly, before falling back to the norm. Focusing on price, this suggests that the housing market is a dangerous beast and various public regulators must be managed to keep it in its place, to prevent another bubble. Much of the focus of the past decade has been about watching for and preventing that bubble.
Source: Real estate value from Z.1 Financial Accounts of the United States, Households and nonprofit organizations; real estate at market value, Level, Billions of Dollars,

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Homeowners Make the Best Landlords

June 10, 2019

My previous post outlined how landlords add value to the service of shelter.  But if landlords presented no downsides, then no one would own their own homes. This post explains why people prefer to be to homeowners, and why our price-focused policies have frustrated affordable housing access for all tenants.
The core problem is that landlords face agency costs.  When the funder, the manager, and the tenant of a property are the same person, it’s easy to make decisions about how to use and develop the property.  But when they are different people, each individual must deal with a lack of information. They may not trust each other, and need to negotiate plans, expectations, and constraints. 
It is often more expensive to be a landlord than an owner-occupier. Landlords must deal with bad

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What Are Landlords Good For?

June 3, 2019

Housing affordability policies in the US generally focus on price as the measure of access. In this series, I argue that this is a mistake. Rent, not price, is the key factor in housing affordability.
To understand why housing affordability policies should primarily consider rent, and why the US focus on price has proven disastrous, we need to understand the roles and incentives of three key parties: landlords, financiers, and tenants.
In this post, I will discuss the needs that landlords fulfill.
In financial terms, landlords provide three services: transactional services, capital services, and diversification. I will briefly describe each before diving more into the details below.
First, landlords bear the transactions costs of homeownership. Buying and selling a home is difficult and

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Thinking Clearly About Housing Affordability

May 27, 2019

The issue of housing affordability is one of increasing urgency. In the United States and much of the world, the transition to post-industrial economic development has stimulated a surge of demand for urban residency.
However, the US is somewhat unusual among these countries: unlike in other developed nations, US home prices declined sharply after 2007. The average home-price-to-income (“price/income”) ratio fell back to pre-boom levels before slowly beginning to recover again.  In other countries–like Canada, Australia, and the UK–home prices have remained elevated. This might seem like good news for the US, but, in fact, we have uniquely made our housing affordability problem worse.
Housing policies in the US focused on lowering home prices instead of rents. This is the incorrect measure

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The Danger in Using Monetary Policy to Address Housing Affordability

March 19, 2019

One of the factors that played a role in the Great Recession was the excessive amount of debt-fueled consumption that led up to it. Lending terms were generous at the time, and home prices were far above historical norms. Homeowners were able to tap into that growing home equity. According to conventional wisdom, consumers who were spending borrowed money would have to pay that money back in the future. When home prices inevitably moved back to historical norms, not only would Americans have debt to pay off, but they would have fewer assets also. The bubble felt so good, but when the bubble eventually burst, Americans would be doubly poor because of their profligacy.
It seems like this is what came to pass. But in the book Shut Out and elsewhere, I have presented evidence that high home

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Was the Financial Crisis Actually Caused by a Housing Shortage?

January 28, 2019

Economists and pundits have told us repeatedly that the financial crisis was all about excess: too much credit, too much money, too many homes. You’re saying that they have it exactly backward, that it was really caused by a shortage. What evidence is there that the conventional wisdom is off-base? And why did so many people get it wrong for so long?
There are three keys to recognizing the central role of supply in the financial crisis:
There are five metropolitan areas that differ from the rest of the country–New York City, Los Angeles, Boston, San Francisco and Silicon Valley, and (though smaller than the others) San Diego. I call them the Closed Access cities. In those cities, housing supply is politically obstructed so that the growth of new housing units is much more limited than in

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Shut Out

January 7, 2019

The United States suffers from a shortage of well-placed homes. This was true even at the peak of the housing boom in 2005. Using a broad array of evidence on housing inflation, income, migration, homeownership trends, and international comparisons, Shut Out demonstrates that high home prices have been largely caused by the constrained housing supply in a handful of magnet cities leading the new economy.
The same phenomenon is occurring in leading countries across the globe. Gentrifying cities have become exclusionary bastions in the new postindustrial economy. The US housing bubble that peaked in 2005 is more accurately described as a refugee crisis than a credit bubble. Surging demand for limited urban housing triggered a spike of migration away from the magnet cities among households

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Amazon HQ2 Decision Shines Light on Urban Housing Issues

November 20, 2018

As American cities continue to grapple with rising rents, the Amazon “HQ2” decision is bound to lead to concerns about its effect on local housing costs. It is likely that a development the size of a new Amazon headquarters (even when split in half between the New York and Virginia locations) will cause local housing costs to rise, but it is useful to think carefully about why that’s the case.
In a world without constraints and tradeoffs, rents would not rise. The Amazon headquarters would create new local opportunities and workers would move into the area to take advantage of those opportunities.
In the real world, there are tradeoffs, and even in the best of circumstances, increased demand for living in an area will increase the cost of living and create stresses. Infrastructure will

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Response to the Federal Housing Finance Agency Request for Comment on How Its Regulations May Be Made More Effective and Less Burdensome

June 4, 2018

I appreciate the chance to respond to the Federal Housing Finance Agency’s (FHFA) request for comments on how its regulations may be made more effective and less burdensome. This comment relates to continuing efforts to maintain safe and sound access to credit for creditworthy borrowers, as referenced in the annual report to Congress.
This comment is submitted with the assistance of the Mercatus Center at George Mason University, which is dedicated to advancing knowledge about the effects of regulation on society. As part of its mission, the Mercatus Center conducts careful and independent analyses that employ contemporary economic scholarship to assess rulemaking proposals and their effects on the economic opportunities and the social well-being available to all members of American

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Was Housing Undersupplied During the Housing Bubble?

April 12, 2018

The lack of a strong recovery since the 2007–08 financial crisis has been a central theme of many economic discussions over the past decade. We might normally expect an especially deep economic contraction to be followed by an especially strong recovery. Why was this recovery different? One of the more widely cited causes of the slow recovery has been a surplus of homes left over from the boom.
In his memoir, former Federal Reserve Chairman Ben Bernanke wrote, “Normally, a rapid rebound in home construction and related industries such as realty and home improvement helps fuel growth after a recession. Not this time. Builders would start construction on only about 600,000 private homes in 2011, compared with more than 2 million in 2005. To some extent, that drop represented the flip side of

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