Podcast Summary: "Is There an Extremely Simple Fix for Affordable Housing?" Odd Lots | Bloomberg | Released March 13, 2025

Hosts:

• Joe Weisenthal
• Tracy Alloway

Guest:

• Kevin Erdman, Affiliated Scholar at the Mercatus Institute and author of Building from the Ground Up

Introduction

In this episode of Bloomberg's Odd Lots, hosts Joe Weisenthal and Tracy Alloway delve into the persistent and pressing issue of affordable housing in the United States. Amidst a backdrop of rising living costs and stagnant wages, the conversation centers on understanding the root causes of the housing shortage and exploring potential solutions. The hosts are joined by Kevin Erdman, whose expertise provides a fresh perspective on the housing crisis.

The Centrality of Housing Costs

Tracy Alloway opens the discussion by emphasizing the central role that housing costs play in the broader context of inflation and the cost of living. She states:

“When it comes to the cost of living, everybody must have shelter basically.”
(02:23)

Joe Weisenthal concurs, highlighting that shelter is a significant portion of household expenses and noting the prolonged increase in housing prices over the past 15 years. He remarks:

“It's a huge chunk of the consumption basket, the consumption of shelter.”
(03:18)

Both hosts agree that despite various policy measures, affordable housing remains unsolved, affecting the American Dream of homeownership.

Historical Context: The Great Financial Crisis and Its Aftermath

The conversation transitions to the aftermath of the Great Financial Crisis (GFC) of 2008. Joe Weisenthal recalls extreme proposals from that era, such as:

“Why don't we just pave over a bunch of existing houses and then we won't have this glut...”
(04:25)

Kevin Erdman provides context, explaining that uprooting existing housing stock was never a serious proposal but reflects the desperation and confusion during the crisis period. He contrasts this with the current era of housing scarcity, underscoring how the policies post-GFC inadvertently exacerbated the housing shortage.

Kevin Erdman’s Core Argument: Overshooting Policy Responses Caused the Housing Shortage

Kevin Erdman presents his central thesis: the stringent post-GFC policies aimed at preventing another housing bubble inadvertently led to the current affordable housing crisis. He argues that these policies excessively tightened lending standards, reducing access to mortgage funding for millions of families.

Key Points:

1. Regional Supply Constraints:

   • Restrictive zoning in coastal cities like New York, Los Angeles, and San Francisco limited housing construction, exacerbating supply-demand imbalances.
   • Kevin explains how these restrictions led to countercyclical migration patterns, forcing population out of high-demand areas when housing costs surged.

2. Tightened Lending Standards:

   • Post-GFC, institutions like Fannie Mae and Freddie Mac increased average credit scores for approved mortgages, making it harder for lower-income families to qualify.
   • Kevin states:

     “We solved all the wrong problems. We blamed it on lending, and we cut off lending, and that basically closed down homebuilding across the country.”
     (07:15)

3. Impact on Homebuilding:

   • The crackdown on lending standards discouraged builders from constructing starter homes, as the low end of the market became financially untenable.
   • Kevin illustrates:

     “The margins on those houses tend to be fatter... it's just a hard no.”
     (21:55)

4. Consequences of Reduced Mortgage Accessibility:

   • Millions of families pre-2008 lost access to mortgage funding, which has not been adequately restored, thus perpetuating the housing shortage nationwide.

The Role of Government-Sponsored Enterprises (GSEs)

A significant portion of the episode examines the role of GSEs like Fannie Mae and Freddie Mac in the housing market.

Tracy Alloway raises a critical question about the potential privatization of GSEs:

“What would you expect to happen to credit standards if the GSEs were actually privatized?”
(26:36)

Kevin Erdman responds by expressing skepticism about the viability of privatized GSEs without continued government backing. He argues that:

“These institutions were created by a public charter... I don't see how it's viable as a private institution.”
(27:36)

He emphasizes that the structured support from the government is essential for GSEs to manage systemic risks and maintain their role in the housing market effectively.

Potential Solutions and Policy Recommendations

The episode explores possible avenues to address the housing shortage, focusing primarily on loosening mortgage lending standards.

Kevin Erdman suggests reverting to pre-2008 lending standards to reopen access to mortgages for millions:

“If you could get the QM patch, you made the loan. And very few bankers have been willing to make any mortgages with any default risk at all that couldn't get the QM patch.”
(14:12)

He argues that restoring more lenient credit standards could reignite homebuilding, particularly in the starter home segment, thereby increasing supply and alleviating affordability issues.

Tracy Alloway counters by questioning the practicality of such a reversal, considering factors like current labor costs, building regulations, and the bifurcated economy where the rich continue to thrive while the poor struggle—further reducing the pool of potential homebuyers.

Kevin Erdman acknowledges these challenges but remains optimistic that strategic policy adjustments, coupled with zoning reforms, could significantly improve the housing market landscape.

The Build-to-Rent Market: A Double-Edged Sword

A critical topic discussed is the rise of the build-to-rent market. Kevin Erdman highlights how institutional investors have capitalized on mortgage restrictions to acquire and rent out homes traditionally targeted at owner-occupiers.

He warns:

“There's already a push to ban corporate ownership of single-family homes... we're really legislating homelessness in effect.”
(37:20)

This trend poses a threat to housing affordability, as institutional ownership can drive up rental prices and limit access to homeownership for lower and middle-income families.

Defining America's Housing Paradigm

Closing the discussion, Tracy Alloway raises a fundamental question about America's approach to housing:

“Does it want housing to be a wealth generator in which case prices need to keep going up? Does it want housing to be actually affordable so that people can live places?”
(39:23)

Kevin Erdman responds by advocating for a balanced view where housing provides essential shelter without necessarily being a significant wealth generator. He emphasizes:

“Housing can be a very good investment for an owner-occupier without ever really increasing in real market value.”
(40:10)

He suggests that redefining the value of homeownership beyond mere appreciation could help stabilize the housing market and make it more accessible.

Conclusion

The episode concludes with a consensus that while the housing crisis is complex, addressing the over-tightening of mortgage lending standards and reforming zoning laws are crucial steps toward increasing affordable housing. Kevin Erdman underscores the urgency of policy realignment to prevent further exacerbation of the housing shortage.

Joe Weisenthal and Tracy Alloway express hope that ongoing dialogues and expert insights like those from Kevin will pave the way for effective solutions to make housing affordable and accessible for all Americans.

Notable Quotes:

• Tracy Alloway: “When it comes to the cost of living, everybody must have shelter basically.” (02:23)
• Joe Weisenthal: “We solved all the wrong problems. We blamed it on lending, and we cut off lending, and that basically closed down homebuilding across the country.” (07:15)
• Kevin Erdman: “These institutions were created by a public charter... I don't see how it's viable as a private institution.” (27:36)
• Kevin Erdman: “Housing can be a very good investment for an owner-occupier without ever really increasing in real market value.” (40:10)

For those interested in exploring more about the housing market and affordable housing solutions, consider following Kevin Erdman’s Erdman Housing Tracker on Substack and staying updated with future episodes of Odd Lots.