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- [00:00]
A
What if you could have more wins, more support, more sound effects? At LPL Financial, we like the sound of that because LPL offers more advisors. What if you could have more ways to help your clients ready to invest? What if you could find an advisor that really understands you when it comes to your finances, your business, your future? At lpl, we ask what if you could Paid Advertisement Investing involves risk, including potential loss of principal. LPL Financial LLC Member FINRA SIPC Being a small business owner isn't just a career, it's a calling. Chase for Business knows how much heart and effort go into building something of your own. Manage all your business finances, from banking to payments to credit cards, all in one place with Chase's digital tools. Plus access online resources designed to help your business thrive. Learn more@chase.com business chase for business make more of what's yours. The Chase Mobile app is available for select mobile devices. Message and data rates may apply. JPMorgan Chase Bank Naomi Member FDIC Copyright 2026 JPMorgan Chase Co.
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B
So there's a lot of noise about AI, but time's too tight for more promises. So let's talk about results. At IBM, we work with our employees to integrate technology right into the systems they need. Now a global workforce of 300,000 can use AI to fill their HR questions, resolving 94% of common questions, not noise. Proof of how we can help companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business. IBM. The president other day said maybe he would support a 50 year mortgage. Is that going to be the policy of the administration or where does that stand? I do know that we've been having meetings with principals in the White House to talk about what we can do about housing. And there's a whole list of possible things that haven't been fully vetted and haven't been decided on yet. But a 50 year mortgage? You could argue in favor of it that it wouldn't necessarily but could reduce the monthly payment, which would make it easier for people to get into a home. And then the flip side is that the equity that people would acquire over time would be spread out over a longer time period.
- [02:33]
C
That was President Trump's chief economic adviser Kevin Hassett, in December mentioning 50 year mortgages as one possible solution to the nation's housing crisis. That idea has since fallen flat, but other ideas are very much on the table. Hello and welcome to the Votes and Verdicts podcast hosted by the Litigation and Policy team at Bloomberg Intelligence the investment research platform of Bloomberg LP on the Bloomberg Terminal. Bloomberg Intelligence has 500 analysts and strategists working across the globe and focused on all major markets. Our coverage includes over 2,000 equities and credits and we have outlooks on more than 90 industries and 100 market indices, currencies and commodities. This podcast series examines the intersection of business policy and law. My name is Mike Sasso. I'm an editor with Bloomberg Intelligence and guest hosting this episode with the second of three episodes comprising a miniseries on the crisis in housing affordability. Today we're talking about why mortgages are stuck above 6%, how to get them unstuck, and whether the real problem is with housing is a lack of homes and, and not high mortgages. My guests today are Erica Adelberg, Bloomberg Intelligence senior analyst covering mortgage backed securities, and Philip Millman, founder of the consulting firm Bell Boulevard Consulting, focusing on regulatory and financial matters and a recently retired government relations executive for the Federal Housing Finance Agency. And with that, Philip, I guess a longtime former executive with the federal government, which I guess being retired you're either in recovery or in therapy or something, or both. And literally a day or so into your retirement, is that correct?
- [04:32]
B
That's correct.
- [04:33]
C
Welcome and thanks, thanks for your service.
- [04:35]
B
Thank you.
- [04:36]
C
Let's dig into the discussion. Start with you, Philip, just kind of a very broad basis. We've got this really unpleasant situation in housing that marries very high mortgage rates along with very high prices, even, even if they've come down just a little bit. You've been in housing finance for a very long time generally. Have you ever seen a market quite like this?
- [04:58]
B
So in the United States, no, and I'm going to take an exception to this, is very high rates. Because, you know, my, my background goes back in housing and housing finance, especially when I was in capital markets, back to the late 80s, early 90s when mortgage rates were far, far higher than 6%. But there is a parallel here. History very rarely repeats itself, but it very often rhymes. If you looked at Japan in the late 80s leading up to the lost decade, which started roughly in 1991, you saw the Japanese having an acid bubble. You saw them having a lot of problems getting people into homes. They were having a relatively high birth rate at that time and they were trying to find solutions as well. Now ultimately what happened was in 1991 the acid bubble burst and then it started to have sort of these knock on effects. And during that time Japan was very much trying to come up with the same solutions, to come up to solutions with the same type of problems we do now. They're a smaller country, know their economics, the things that drive them are very different than what we have now. But it caused quite a bit of consternation for politicians during that time.
- [06:16]
C
So you're saying this is not entirely unique, but it certainly, it does seem like it's, it, it feels, it feels, at least in recent history we've not seen this mix of. Is that fair to say?
- [06:28]
B
No, no, that's fair to say. I mean, I think the way to think about it a little bit more is, you know, we have this recent history when rates were, you know, sub 4%. People really remember that. They don't remember like I do, the 17% interest rates. And so from a psychological point of view, it's oh, how do we get rates down to what frankly are abnormally low rates? But on the second part, and I'm sure we're going to talk about this later, is we have this kind of stuck housing supply that's not moving because we've had this 4 or 5% rate increase over what people currently have. And so there's also a psychological aspect of it, there is a demographic aspect to it, but yeah, it's something that we've kind of seen in Japan and that might provide some warnings for us as we think through this.
- [07:25]
C
Yeah. Following up just on rates, Philip, I've seen estimates from the Mortgage Bankers Association. Their forecast is for like 6.3% or something through end of next year. So it doesn't seem like we're going to get any real relief for an extended period. Can you sum up what's, what's got rates so high, at least on a relative basis and why aren't they coming down?
- [07:54]
B
Sure. I mean, rates are really made of three components and the biggest component of it is the treasury, the ten year treasury, where that is. And then the rest of the rate is built on top of that based on the risk to the investor for that mortgage. So if you really want to move mortgage rates in a meaningful way in a significant amount of way, you have to be able to get the 10 year treasury down. And the 10 year treasury and mortgage rates, people, you know, people of my vintage like to say, well, it's based off the average of the yields between the five and the ten year. Different people have slightly different opinions, but let's just say the 10 year for right now, you know, for that to come down, investors have to, there has to be, you know, enough of a bid for it to drive, you know, the Federal Reserve, the Federal Reserve Market Open Committee, you know, they just announced they're not going to move the rate. But what a lot of people don't realize is that the only rate that they can move is the overnight rate and they can't really affect 100% the tenure rate. That has a lot of other market issues. And some of the things that, you know, that I hear from some of my treasury trading friends is, look, there's an expectation of a lot more supply given the budget and the deficit. Right. The US has to fund its debt. So far they've been staying away from the longer end the 10 year bonds, but at some point they're going to have to. And so there's this expectation of additional supply. We've lost some buyers over the last couple of years. So until we get a real strong demand for these Treasuries to bring down rates, and that's going to be based on where people expect the US Economy to go. So I think the biggest driver for rates for me anyway, in my experience has been Treasuries.
- [09:55]
C
Yeah. And turning Philip, turning some of the policy, you know, even though these are kind of some large macro things tied to treasury rates and whatnot, that hasn't dissuaded the President from trying to, you know, dabble in the mortgage markets and try to get some things unstuck. We saw President Trump launch really, really just a flurry of housing initiatives really seemed to come to a head back in January. There was talk of a 50 year mortgage that seemed to die as quickly as it came up. We heard talk about portable mortgages. We heard about directing Fannie and Fannie Mae and Freddie Mac to purchase $200 billion in mortgage bonds. And it really just seemed like, like the administration was throwing stuff against the wall just in a broad base. What did you make of it? Was it, was it desperation? Was it, what did you make of it? From a long time policy and, and congressional liaison standpoint.
- [11:04]
B
Yeah. So from, you know, so from a market perspective, you know, we were all kind of like, what, what's going on here? But from a policy perspective, or if, if you want to think from a political perspective, which I think is probably the better way to think about it, is the President has constituents just like any other politician and he listens to those constituents and he's trying to find solutions. And the 50 year mortgage, the portable mortgage, the 200 billion, those were things that addressed what his constituents are saying. We need to do something about housing affordability. The issue, of course, is that what can the federal government actually affect as it relates to housing affordability. And with everything, whether it's a house, a car or gas at the pump, it's supply and demand. If there's not a lot of supply, there's a lot of demand. The best thing to do to bring down prices is supply. So unfortunately, the federal government for the vast majority of what they can affect administratively is the demand side. And so these were things that they were coming up with that they thought might prove to improve housing affordability. But these were all demand side. I mean, one of the things that sort of got lost in the news cycle was something that did happen that actually was very helpful both on the supply side and the demand side. A few years back, Fannie Mae and Freddie Mac updated their underwriting guidelines in Fannie and Freddie, for those that don't know are the basic function why we have a 30 year fixed rate mortgage. And that's a whole other podcast to explain why. But the short was, is they changed their underwriting guidelines where they required replacement cost value for people's roofs. And before that there was flexibility depending on what happened to the house. If a house got destroyed, there was, there's other things that they could do, but by enforcing that strict insurance guideline that actually stopped builders from building because they were going to have trouble selling, especially in states like California, Florida and coastal Texas and coastal North Carolina. And they recently reverted the guidelines back to the old insurance policies so that they could at least get that part fixed. But the reality is is that the federal government administratively, not legislatively administratively, has very little ability to change the supply side.
- [13:46]
C
Wow, that's an issue for sure. Eric, I want to bring you into the conversation. I've read where something like it's a moving number, but something like 75% of homeowners have rates below 6%.
- [14:03]
B
So.
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C
So they're essentially locked into their homes through their mortgages. I believe they call it the lock in effect. And I know that's keeping supply of homes down since they're not hitting the market said abroad. Is, is that the biggest issue you see facing housing finance right now? Or is there something, how big is that and is there something even larger than that on the financial side of things?
- [14:27]
D
Hi. Yeah, Michael, thank, thanks for inviting me to participate in this. You got that right on for now, that's it's almost exactly 75% of borrowers right now have mortgages that are below 6%. But I think more striking and more to Philip's point earlier, because we did have this period of such low rates recently, about 50% of borrowers are still paying rates below 4%. And it's those borrowers who are creating the lock in effect because those borrowers don't want to go from the 2, 3, 4% rate that they're paying now to taking out a rate above 6%. So they really don't want to put their homes on the market unless they kind of have to for life, for lifestyle reasons. So that's what's keeping the listings of existing homes down. Now keep in mind, trading of existing homes is a zero sum game. You know, the same home is coming on and off the market. So that, that's not really fixing supply issues, but it is constraining borrower choice and some degree it's what's keeping home prices propped up at this point. So that gets to the second part of the issue and that is the housing price issue, the affordability issue. So it's a combination of current rates, where they are and affordability. And the last time we saw a housing market this unaffordable relative to median incomes was sometime the late 1980s when mortgage rates were a lot higher, but home prices weren't quite as high. And so what that's doing is that's creating the counterpart to lock in, which is lock out, where a lot of borrowers continue to be locked out. Not as many as in like 23 to 2023 to 2025, when housing affordability by those types of metrics was even worse. But those borrowers are locked out of the market because they can't really qualify for a mortgage, at least not a traditional mortgage. But on top of that you have other, you know, along with higher home prices comes higher down payment costs, for instance. So part of the problem is that a lot of these people can't afford to put the money down. Now there are some down payment assistance programs that are available here and there, but some of those have even been rolled back by the government sponsored enterprises, the GSEs, Fannie and Freddie. So some of those aren't as available as they used to be. And then on top of that you just have household costs like insurance premiums. With climate change and higher home prices and tariffs, insurance premiums for homes have gone up a lot. So even if you can get into a home sometimes, you know, you're pretty trapped in what your debt to income is going to be. Property taxes, again, home prices go up less money in some ways is flowing to local governments as well. So property taxes have actually gone up even faster than home prices. So those are adding to affordability constraints.
- [17:14]
C
Well, let me jump in. Just to add there was an amazing stat. It was the median or the average new home buyer age has hit 40 was striking. I think that news came out about maybe six or eight months ago or something.
- [17:27]
D
Yeah, from Redfin. I mean, to some degree that was clickbait. It's always a matter of how you measure things, but certainly it does seem like people are having to save more money now. You know, I like to, I like to buy. I, you know, been in the mortgage market about the same amount of time as, as Philip, I suspect back to the late 80s and when mortgage rates were a lot higher. And I will say as somebody who does own a home now, I didn't buy my first home till I was almost 40. You know, I, it took me a long time to say, but for those down payments, etc. As well. But I think again, we're pretty biased by the easy money environment that we had for the past few years and even before that the financial crisis where before the financial crisis where there are all sorts of really affordable types of loans that are being made at taxpayers peril and homeowners peril, because a lot of those ended up not being as affordable as they seemed at first time, which is part of the reason that we had the housing crisis that we had back then. So. So this is a more rational market. The third part of whatever, the next part of what I was going to add is that credit availability, which is a measure of lenders willingness to make mortgages for just a regular conforming balance conventional Virginia mortgage is pretty low right now. It's come off dramatically, especially as rates have risen and lender risk constraints have increased. So that's part of it is that to be honest, lenders aren't quite as willing to make free money, easy money available as they were at other times in our history. Which isn't necessarily a bad thing, but it is making it a little harder for some borrowers to get mortgages to buy a home.
- [19:03]
C
Yeah, Philip, you wanted to jump in?
- [19:06]
B
Yeah, just for a second. And this is a yes. And I agree with everything that Erica says. The other thing just to note, which also complicates matters, not even I, outside of the mortgage rate side is according to the most recent Census bureau survey, almost 40% of owner occupied homes do not have a mortgage. Okay, it's like 32.9, 39.2%. So that's also a large chunk of homes that are just not available, you know, because their effective interest rate is 0.
- [19:42]
C
Interesting. I want to turn to some of the proposals that have been floated around there. Erica, I wanted to ask you about the bond purchase. As I understand it from our earlier discussion, while the amount that Fannie and Freddie were going to purchase was at 200 billion, that's not like it all happened at once. And in fact it's not necessarily, they've not necessarily hit that target. Right. Where are they at and more importantly, what has it done, what has it done to rates and why is it not move rates more than maybe some people had hoped?
- [20:18]
D
Yeah, so. So harkening back to Philip's comment about, you know, trying to stimulate the demand side of the housing market by lowering mortgage rates, the GSEs did start buying mortgages into their retained portfolios last summer kind of under the wire and then had a big announcement about a directive for them to collectively add about 200 billion dol billion more in mortgage backed securities in January. There's immediate tightening of rates and it's not because they came in and bought a massive amount of 200 billion of mortgages, but because I think there was some reassurance for other types of investors that they would provide something of a backstop bid for mortgage backed securities to the extent that they did face widening pressure here or there. And it's also in part we think significant to offset runoff from the Fed. Now what happened during COVID is that the Fed came in and bought upwards of over a trillion dollars of mortgages all at once. That really had a significant impact materially on the amount of supply in the mortgage market, in the mortgage backed securities market specifically, which are where the secondary trading happened so that these loans can be made at the rate that they can make be made. You know, so, so relative to that, the announcement was relatively small. But the idea is that to the extent that mortgages may widen in response to various economic inputs, maybe the GSE is going to offset some of that widening, reassure more investors who are willing to come in and invest along with the GSEs. So we think that was more of an add on buying that actually tightened spreads by about 15 basis points that day, which is pretty significant for a one day move. You know, after that actually spreads have been gradually widening out because I think the realization is that the GSEs are going to be relatively methodical and opportunity based. And when they add. So for instance in March when the round of war happened, volatility increased, market spreads widened out. Fannie Mae in particular came in and added at least 18 billion all at once of agency mortgage backed securities. And that probably did help mortgages from widening even more.
- [22:31]
C
Let me just stop in. When you talk about spreads, you're talking about the premium that mortgage investors want above treasury yields, right?
- [22:41]
D
Right.
- [22:41]
C
That's the spread that you're talking about.
- [22:43]
D
Exactly. So mortgage rates, mortgage spreads are a very important component of mortgage rates because they're the amount above Treasuries that investors require to be compensated for various mortgage related risks, whether it's default risk or in this case mostly refinancing risk. Cause that's an option that the homeowner has that can impede the value of a bond. I'm not going to. Again, that's a whole nother podcast to go into. But bottom line is it's the risk premium required above Treasuries. And to the extent that you can reduce the spread between mortgage rates and Treasuries, you can bring down mortgage rates even if Treasuries don't fall.
- [23:24]
C
And how much maybe I lost it. How much do you, do you estimate that the $200 or whatever, the total 200 billion. 200 billion. $200 billion purchase, how much has it affected mortgage rates thus far? And do you think that it has, it had the effect that maybe proponents have wanted?
- [23:45]
D
I would say probably on net, I would estimate about 10 basis points of tightening, which is about a tenth of a percent, not very much. And to be honest with you, that doesn't move the needle for a lot of borrowers by itself. So it kind of has limited capacity and at the same time, you know, with any demand side approach, you have to have supply to offset that demand, demand side. So to the extent that it does improve affordability from the mortgage rate side by just a little bit, it could well just be completely offset by increasing home demand, pushing up home prices just a little bit. So it doesn't take a very big increase in home prices to offset every bit, every bit of that mortgage rate savings. So probably on that it's not helping the housing market a tremendous amount. It may be helping some MBS investors more than it's helping the housing market.
- [24:38]
C
But it, but it, but it's not, but it's not a crazy idea. It sounds like, I mean, it's helped maybe to a small extent. Do you, do you think that, that the President will try to push for more and that Fannie and Freddie might keep doing this, or do you think this is kind of a one and done thing?
- [24:55]
D
Yeah, I mean that's a good question. As I, as I mentioned, like when this happened, when the Fed bought mortgages back in 2020. In two months alone, they added about 500 billion of mortgages in two months in March and April. And by the end of the buying program in early 2022, they'd added well over a trillion. So 200 billion is a pretty small potatoes relative to that size. And the problem is that at this point they're really restricted. After the global financial crisis, one of the things that kind of drove some of the housing market and some of the financial stress in the markets was the fact that before that, the GSEs did own collectively about a trillion in of mortgage backed securities in their team portfolios. Now those aren't all agency mortgage backed securities. Some of those were subprime. But bottom line is it was the investments that the GSEs were making in mortgages, which was part of the reason that they kind of blew up and had to be bailed out by the government in 2008 and they were taken into conservatorship. So since then their retained portfolios were required to shrink, shrink, shrinking way down. And they hadn't actually started adding again until about July of this year. So that's why it's really striking. They're beginning to add mortgage backed securities again. Their limited retained portfolio size at this point by Mandate is about 450 billion, which the 200 billion purchase program would take them right up to the, the limit of. So some of the regulations would actually have to be undone for them to add even more. And I'm not sure how willing the Congress and taxpayers are going to be to let the GSEs basically effectively look a little bit more like big hedge funds again, since that's part of what brought on the crisis in the first place.
- [26:48]
B
Yeah.
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C
And Eric, one last question for you before I turn to Philip. You've written it about, you've written a little bit about non qualified mortgages and apparently they're at a fairly high level lately, probably because fewer people are qualifying or there's less money available. Explain what a non qualified mortgage is and is this something that can really shore up, at least do something to the affordability problem? And what, what, what is this and how much promise does it have?
- [27:22]
D
So, so one of the other restrictions that came out of the global financial crisis was that the types of mortgages the GSEs were allowed to guarantee and chose to guarantee was restricted to a very tight set of guidelines of safe mortgages. Those are partly to protect the GSEs, that was partly to protect the, the bar, the borrower themselves. I'm not going to go into all the details of that, but those were called qualified mortgages. So the flip side of that is there's been a recent growth in what is now called non qualified mortgages for borrowers that kind of get locked out by a lot of those qualifications. That includes self employed borrowers who don't have a regular W2 or owners of investment properties where they want to rely on the debt service or the rental income to cover the payments for the mortgage payments. Those are, you know, by all intents and purposes generally considered to be riskier mortgages, even though these people often have high credit scores. So as a result, you know, it's. And they're not necessarily core mandates for the GSEs as a way to promote homeownership. So as a result, there's been a rise in demand by lenders, borrowers and investors for these types of mortgages. Why is that? Because they come with higher yields. Generally speaking, higher mortgage rates is what it translates into. So it doesn't truly help the affordability picture per se because a lot of times these borrowers have to pay higher rates. So it's actually at least less affordable mortgage.
- [29:00]
C
At least.
- [29:00]
D
But it allows exactly its access that allows them to get into the housing market whereas they may not have been able to before. So yeah, so it's grown significantly, I think. You know, I was just checking my notes. It looks like maybe, you know, on a per month basis there's maybe 12,000 of these loans that are being securitized a month. So you know, we're not talking millions of people, but it's certainly helping these borrowers at the margin. And there's. It's gotten to a size in terms of outstanding balance and issuance that it seems like it's really garnering a decent amount of liquidity in itself. So I think it looks sustainable at this point. We are seeing in certain sectors of that market, delinquencies pick up more than you would for let's say government, the GSC mortgages. So they're not riskless. But at this point there seems to be a solid investor base, lender base and borrower base willing to get involved. I don't know how much larger the market can get. I don't think it's going to rival the GSE market anytime soon like it did prior to the global financial crisis.
- [30:05]
C
Okay, interesting. Okay, so. So on the margins it, it could help. Philip, turn it back to you. I know you, you really believe that the issue here is. Is supply. I do want to ask you prior
- [30:15]
B
that there is a.
- [30:16]
C
This interesting for the uninformed don't realize there's something called a portable mortgage, which I understand is, is allowing a person, if he has is or he or she has a low, let's 3 or 4% rate and wants to move and can port or take that mortgage that low rate with him or her. I know that's been talked about. That, that's one of the issues that's come up recently. You're somewhat, if, if I read you, you're somewhat skeptical about that. That has, is really practical and, and talk about, about portable mortgages and why are we may. Why or why not they might be practical at the moment.
- [30:58]
B
Sure. And, and thanks for the question. Portable mortgages is a great idea in the sense of it. It really appeals to the way folks think. And, and the problem is, is how the mortgage market works in the United States. And part of the problem is that unlike other countries, there are certain European countries that have a, something like a portable mortgage. It's not really a mortgage. But I won't go into that, is that they have one set of laws, right? If you have a country like France or Denmark or the Netherlands, they have one set of laws in the United States. The mortgage contract is written under the laws of that state. So you know, Mike, you're in Georgia. Your mortgage, should you have one, is going to be underwritten to, it's going to be written to the laws of Georgia. Erica lives in New York. Her mortgage is going to be written to New York law. I live in the great state of Maryland with the best flag and my mortgage is underwritten to Maryland law. And so if you're trying to port a mortgage and there's an issue, right? So let's say just as a general idea or just as an example, I have a palace in Dallas, right? It's a million dollar home. I have a half a million dollar loan on it. Well, I realize I'm about to lose my job. I sell my house, I take that million dollars, I got $500,000 in the bank. I take that $500,000 mortgage and I go to Massachusetts in some rural area that's currently economically depressed, like maybe northwest Massachusetts, and I buy a rundown piece of property for $250,000 and then I default on it. So now I have that extra $250,000 from that $500,000 loan, plus the $500,000 that I got from the property and I make off with $750,000. And the foreclosure laws in the state of Massachusetts are very Very different than the foreclosure laws of Texas. And so it creates a great deal of risk. And so as Erica said about non qualified mortgages, the investor is going to want to have a higher mortgage rate to be compensated for the risk. Not only the risk for, for that type of shenanigans, but also that mortgage is going to stay around a lot longer. And if the rate is low and rates go up, as an investor, I don't want to have a mortgage, you know, I don't want to be invested in 4% mortgages. When I can take that money and turn it around and get an 8% mortgage or a 7% mortgage, that creates a whole bunch of problems. So I don't really see it happening. And the other thing is that it could only happen on new mortgages. Right? That's the other thing that people say, oh, you know, I'm, I, yeah, I am a mortgage professional as well as, you know, I do the government relations things too. But you know, my mortgage that I'm sitting on is two and a half percent. Yes, I'm bragging but hopefully you guys will let me have it. I would love to take my mortgage to wherever I move. I'm an empty nester. All of my kids live in the Philadelphia area. It would be great if I could pick up my mortgage and move it to a very nice mainline location in the Philadelphia suburb. But I can't do that because my mortgage is due on sale, right on the sale of the property. And so that language exists in all of the mortgages that currently exist. So even if portable were to somehow work across state lines which would require all 50 states to agree on a set of policies, which is not unheard of because we have that with blue sky laws in the securities world, it would be just wholly impractical and would take time. And then what's the point of having a portable mortgage as like if I'm buying a house, I'm a first time homebuyer or even a more seasoned homebuyer. Why would I get a mortgage at 7% when the prevailing due on sale rate is 6%? Because I'm going to have to have a higher rate to have that ability to move that mortgage. And I just don't see that happening. And look, Erica also touched on there are rules about what loans can go into Fannie Mae and Freddie Mac insured securities and a portable mortgage A does not fit that rule. And those are the securities that get the best mortgage rate for borrowers. So those mortgages might have to go into the non Fannie and Freddie mortgage securitizations, which would even drive up the rate higher. So between the legal, the credit risk, the interest rate risk, I just don't see it happening anytime soon and certainly not in my lifetime.
- [35:49]
C
Philip, you're depressing me.
- [35:53]
B
Okay, sorry. I'll try to be more uplifting in the next question.
- [35:56]
C
Let me see, Turning to Philip again, turning to the supply issue, which I know you've been very passionate about, that being the real sticking point. The administration, the Trump administration kind of floored me. I've recently been in sort of a job swap with Bloomberg Intelligence, but in my regular job as a reporter with Bloomberg and, and I recall the, the estimates of the shortage of houses was some was around anywhere from a low of 2 million up to a high of 5 million. So when the government came out with an estimate of 10 million, I would, I didn't know what to make of it. A few weeks ago, one Phil, what do you, what do you, what did you make of that $10 million? 10 not ask God. 10 million home shortage estimates. And do you have a guesstimate estimate about the real size of America's housing shortage?
- [36:55]
B
Sure. And the short answer is. Now, Eric and I both went to the same university and I'm an economics major. And from my perspective as an economist, my first question is what are the assumptions that you built into that number? Because it's a generalized number. And I have not been able to find the detail where the White House Economic Council had said, this is how we came up with this 10 million figure. That figure does seem high to me. Again, until I can see their research, I really can't opine whether it's a legitimate number or not. I mean, I'm a facts guy. I actually read economic studies for fun, which shows that I probably need a better social life. But the other piece of it is that I also think we're asking the wrong questions. Now, the 2 million is for single family homes. The 5 million depending on which of those. It's not exactly clear if that's homes or units. But I think the better question to be asking, and this is kind of my soapbox, is how many bedrooms do we need? It's not so much about single family or multifamily, it's how many bedrooms do we need? And then from there, how many of them should be single family? How many should be multifamily? And so when you start talking about housing supply, the first thought most people have, and this is certainly something that, you know, the national association of Realtors and the NBA kind of, that's kind of their focus. Not, you know, look, they have their constituents, they, they need to do what they need to do. But the fact is we have a shortage of bedrooms. Right. Whether it's multifamily or, or, or single family houses. And the mix between the two of that shortages is going to be very much regional dependent. Right. The issues that, you know, I'm going to be using New York, Georgia and Maryland. Sorry, I'm staying on the east coast here. But you know, the issues that are facing housing in Georgia are different than the issues that are facing that New Yorkers are facing. And you've seen, you know, the current New York City mayor trying all sorts of things, which as a free market economist, I don't think are going to work well. And then there's, you know, there's issues here in Maryland that are very different because of the different economics.
- [39:12]
C
Yeah, well, let's turn to that. You told me earlier that you think there, there needs to be some kind of very localized approach as you what might work in Maryland or Washington might not work in Atlanta, where I am. Anything that comes to mind. I think you told me something about a project. Senator Cortez Masto, I believe she's in. Is she Nevada? Favorite favorite. A program where the government would somehow fund infrastructure. It was very talk about just whether it's that or whether is there an example of a localized program that you think could actually do something?
- [39:52]
B
Sure. And there have been some legislative attempts to see if there were things that could be done. So Cortes Massa, who's the senator from Nevada, she wants to use federal home loan bank funding, which is sort of the shadow banking. And it's not shadow in like the evil espionage world type of shadow banking. This is letting small banks get access to better rates so that they can lend money at a good rate to their customers to allow them to fund projects to help build infrastructure. Because if you're going to build a house, right. People say, oh, why don't we just build more houses? Well, with houses come other things that the communities have to worry about. Roads, water, sewage, electrical, schools, so forth. And a lot of localities are also facing budget crunches because they're not getting as much money from the federal government as they used to. Plus, depending if you in the area, like my area in the D.C. area, we've had a lot of job loss recently. And so that's putting strain on local budgets. When you think about housing, there's also this local component. But on Top of that, and this is very much something that they're trying to address in Congress is the local zoning laws. Right. New York has a certain set of zoning laws that are very different than Georgia's and very different than where I am in Maryland. So that also plays effect. So one of the things that Senate was road to housing, House of Representatives was the housing for the 21st century. But there were things in it that got added on later that are trying. But there's things in there that are trying to address the supply issues. But realistically it needs to be all three. I mean you saw back in the day where Fannie and Freddie were investors in mortgage revenue bonds which helped states used that money. There were general obligation bonds and helped let those states fund specific growth areas. And those were moderately successful but without the GSE bids. And when they stopped buying these mortgage revenue bonds, the rates became too high for it to be effective. There are some small wins that you do see, but it's in locations that have the room to build and the ability to change the laws locally very quickly. And now one other thing I just before I think one other thing that's really being bantered about and I think probably has more traction but it's probably going to take a few congresses to get through is there's a congressman out of San Jose called Sam Locardo. He's a freshman congressman and he's been very vocal about increasing the number of bedrooms by doing accessory dwelling units or ADUs as they like to say in the business. That has real possibility. You know, the one problem is in that case you don't really need to build more roads, more infrastructure. These are reasonable add ons. It does increase density and that's going to be something I think we're going to hear more and more as we go on. But he's looking to find ways to finance ADUs to make it easier for more people to have bedrooms.
- [43:11]
C
Throwing this one in there in Florida. I spent most of my career and a lot of my life in Florida. They have a few year old pro program they call the Live Local Act. This is a basically state, an entire state regulation that basically restricts local governments from blocking developments. Basically it's, I don't know all the per, you know, all the different vagaries of it or whatever. But basically if a developer meets the requirements, the local government can't come in and block it. It's supposed to. And I believe California has some new thing. They've got kind of some trouble for many years there, but they've done some things to kind of open up and try to restrict excessive regulation. Are any of these things, I mean, have you spotted these? Are these things. Is there some good things going on at the state level now?
- [44:07]
B
You know, first we can argue whether they're good or not. Where the state overrides local voter interests, there is an overburden of regulation. But, you know, you also have to be wary of where that local, you know, what that location has. And look, Florida, you know, my mom lives in Florida and there's issues in Florida that, okay, great, we can now build, but then you lead to the overcrowding of roads and then that's going to have a backfire. One of the most powerful driving effects to politicals is their constituents. Right? Because if their constituents are unhappy, they're not going to stay in power. And constituents very often have a very strong belief in not in my backyard or as we like to say in the business, NIMBYism. And when you start having that kind of overdevelopment, crowding of streets, electrical grid issues like they have in Texas, you know, people start to make a lot of noise and then, you know, you're going to have a whipsaw effect when the next person comes into power. So when we say about states, the state that I live in is fairly small, but it is actually fairly diverse. Right. In fact, what they say is Maryland represents the entire United States. I mean, we have, we think of the Washington, D.C. area as being part of it. But then we have Baltimore, which is a different economy. We have the Eastern Shore, which is a different economy. And then of course, we have the Panhandle, which is basically a version of West Virginia, because basically the same landscape and the same type of economy there. And they're all going to have different housing issues. And if you start to do it from a state level, you're going to start running into problems. You're going to start to run into problems. So you just have to be careful. Is it helping? Yes. But at the end of the day, the other side of it is, okay, we have this development. Now we need to make sure that we have enough development, enough infrastructure that people actually want to move into that home. One last thing is Columbus, Ohio got a lot of money for the CHIPS act and they were going to build a Intel chip center there, right? Production center. And it's still delayed. Why? Because they can't get people to move there. And they just thought, oh, lower taxes. Ohio has much lower taxes to California. We're going to move there. Well, people Pay higher taxes in California because they like the services that it offers. They like the topography, which is much nicer in California than Columbus, Ohio. And don't get me wrong, I love Columbus, Ohio. It's a great town. But they don't have mountains, they don't have beaches. So there has to be not only the draw of the locality so that you can have the housing, but, you know, it also has to be something where people want to move there and so forth. It's not just a tax situation. So you really have to balance all these factors out. And that has to be done at what makes sense economically for that area, whether it's Columbus, Ohio, San Francisco, Atlanta, New York City or the Washington, D.C. area.
- [47:17]
C
Eric, I want to wrap it up with you. President Trump really seems to be walking this fine or impossible line. He wants to, on one hand, make homes more affordable. At the same time, he wants people to be able to enjoy and keep their price appreciation and their home equity. It really seems like an impossible line to walk. Is it possible to do both in your mind?
- [47:42]
D
Well, it's certainly not easy, but it's also the kind of typical political play that politicians will have where they'll try to play both sides. You know, we want to improve affordability, we want everybody to make tons of money on their houses. But on the other hand, you know, to be, to be perfectly fair and honest, actively trying to reduce prices on existing homes actually does introduce a lot of risk to the economy. I mean, you look at what happened in the global financial crisis when borrowers owe more on their mortgage than their home is worth, they're more likely to walk away from their homes, which all of a sudden you have a lot of for selling, which then can reduce home prices even more. And obviously all of a sudden you have even financial institutions and others that are seriously at risk, like we saw with Fannie Mae and Freddie Mac and you know, Lehman Brothers and Bear Stewart. So you don't want this, you know, cascading effect that could actually happen from trying to seriously reduce home prices. Not to mention the fact that the wealth effect that people feel from the built up home equity in their homes actually does promote economic well being. It does support the gdp, it does support spending, you know, perhaps too much. So we can argue both sides of that equation as well. And there's actually some risk now that there's a trend going on with builders as they try to pull more people into the housing market off the fence, especially first time home buyers, that they're offering these very attractive mortgage Rates, it's called a builder buy down loan, so that they don't have to reduce the price of the homes they're offering in order to get buyers to be able to afford their homes. And there's been, you know, some writing about, and I don't totally disagree that in reality this home should be selling for less given the amount of demand out there in current mortgage rates. So as a result, these borrowers who get into these new homes, in some ways their home's not even worth what they paid for it. So they're already, if they had an appraised value kind of underwater. So that, that could actually create something of a risk going forward. Let's hope not. But ultimately, you know, what we really need, I think is, you know, a stable economy. As Philip actually you know, referred to earlier, people earning a sustainable and you know, not a guarantee, but you know, they're confident in their earning power, they're confident in their, their raises, they're confident their employment, you know, all these types of things. Economic uncertainty does a lot to kind of reduce demand for housing as it is. And over a period of time with the new issue supply we are seeing, granted it can be local and gradual increase in income, gradual stabilization of the supply demand picture overall. And in fact, we have a generation that's coming up that isn't quite as big as the millennials. So, you know, we have, we probably are, you know, over time having a little less housing demand. I think all of these things do normalize over time. Now, none of these are popular with people who are running for the midterms because none of these are a short term fix. But all of them will create a more sustainable housing economy over time. But in the meantime, with midterms coming up, get ready for a lot more housing spaghetti to get thrown against the wall.
- [50:55]
C
All right, it all comes back to politics always. Well, this has been wonderful. I really appreciate your time and hopefully been instructive for the audience and you all have a have a great week.
- [51:08]
B
Thank you for having me.
- [51:09]
A
Thanks.
- [51:10]
C
Bloomberg Intelligence is the investment research platform on the Bloomberg terminal, which with 500 analysts and strategists working across the globe and focused on all major markets. Our coverage includes over 2,000 equities and credits and we have outlooks on more than 90 industries and 100 market indices, currencies and commodities. Thank you and see you next time on this special edition of votes and Verdicts.
- [52:00]
B
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