Ed Pinto reviews first-time homebuyer bills

Below is the transcription of the interview. These transcriptions, powered by Speechpad, have been lightly edited and may contain small errors from reproduction:

Sarah Wheeler: Welcome, everyone. This is Sarah Wheeler, editor-in-chief at HousingWire, with the latest episode of our “Housing News” podcast. I’m so excited to introduce our guest today, Ed Pinto. Today, Ed is the resident fellow and director of the American Enterprise Institute Housing Center, but he’s been a leader in our industry for decades. He was executive vice president/chief credit officer at Fannie Mae, and he’s also served as senior legal counsel for MGIC. Ed, welcome to Housing News.”

Ed Pinto: Thank you, Sarah. It’s a pleasure to participate in this podcast.

Sarah Wheeler: We’re excited. So, you know, the first question we always ask our guests, who are all distinguished, all of those executive-level guests, we really want to ask, how did you get into housing? Because it’s not usually a straight path.

Ed Pinto: In my case, it was a straight path. I actually started in college and I ran for student body treasurer at the University of Illinois, and I was elected, and I got to meet another person that had been elected to the Graduate Student Association, Bruce Morrison, who is also well-known in the housing industry. He’s retired now, but he was chairman of the Federal Housing Finance Agency back in the Clinton years.

And so I met Bruce as a fellow student and he had been working on some landlord-tenant issues with the Graduate Student Association. And I got introduced to that and got interested in it. And then I started law school in 1971 and got involved with Student Legal Services at Indiana University and got involved in a landlord-tenant law that I drafted for the City of Bloomington. It was passed by the Bloomington City Council in 1972 or ’73. And so my first job then when I started looking for jobs after graduating was with the Michigan State Housing Development Authority, which dealt with affordable housing, single-family, and multifamily. And I was an attorney there and I became general counsel after a couple of years. And then, the rest is history, as they say, I just went on from there.

But I’ve been involved in housing for, not only my entire career, but it started five years before I even graduated from law school.

Sarah Wheeler: That’s amazing. And just, you know, a variety of experiences in different parts of it, so that’s pretty interesting.

Ed Pinto: Yes, it’s been a tremendous variety. I started with the Michigan State Housing Development Authority. I was there for eight years. I then went to MGIC for a couple of years. Then I was in Fannie Mae, both head of marketing and product management for a couple years. Then I was executive vice-president and chief credit officer for a few years. And then I left and set up my own consultancy.

I worked with a lot of large financial institutions, banks like Mellon, excuse me, Mellon Bank was later, but Dime Savings Bank and GE Mortgage Capital, which owned Gemaco [SP] and which is now Genworth. And I also later got connected with Mellon Bank and developed the first automated valuation model that was used in actual production of loans with Mellon Bank back in about 1993. It was called Fast Value that I developed and they used it straight up as a replacement for an appraisal in home equity loans. Another name, Jackie Dodi, who was at Freddie Mac and at CoreLogic, she was at Mellon at the time that we started using the Fast Value. So paths with many people have crossed and I’ve kept in contact with many people over the years.

After this consulting career for about 20 years, I then started doing research at American Enterprise Institute about 10 or 12 years ago, and decided that, after viewing what had happened with the financial crisis, given all the experience I had going back decades, and I knew credit, and I knew data, that what we really needed to do is track what was going on much better. And so a colleague, Steve Oliner, and I decided to create the Housing Center and create the data sets that we’re now well known for, which basically take lots of data that’s never been put together before in one place and assemble that data. And our motto is we turn data into knowledge, knowledge into information, and information into action.

And so what we’ll be talking about today, in terms of some of the product innovation that we’ll be talking about, is really how to get from data to action.

Sarah Wheeler: Love that. Well, thank you for giving us that overview. There’s so much there, and we could spend a whole podcast just on different parts of that, but, you know, one of the things that’s very of the moment, very timely right now in the news is, you know, we have several bills proposed in Congress that address first-time homebuyers. One of the bills targets first-generation homebuyers with a grant given at closing, you know, for down payment assistance. And so I would love for you to catch us up on that bill and whether you think it could be effective at what it’s trying to do.

Ed Pinto: So certainly, we have a big problem in this country. It’s getting worse, literally by the day. And I blame… There’s lots of blame to go around. The latest entity that I would put the heavy blame on would be the Fed. The Fed is focusing on the wrong inflation numbers. They’re focusing on inflation numbers that, since 2012, the PCE, which is their preferred measure, has gone up 16% cumulatively. House prices at the low end, since 2012, have gone up 100%. Incomes have gone up 20%, whatever, you know, very small portion of that. And so you can’t possibly keep up if that’s what’s going on. And so first-time homebuyers, at the lower-income, get squeezed out of the market as these house prices go up faster and faster.

The answer is not credit easing. That’s been the answer we’ve been using literally, and I’ve documented this in my research. Two things that I’m known for are, A, data, and I’ve already talked about that, but the other is going back in history. How did this happen? What was it like before some changes were made? And I’ve actually gone back and found that the 30-year mortgage was not commonplace in existing housing finance in the United States until after 1954. It was used in FHA to some extent for new construction, but for existing homes, Congress didn’t even authorize its use by FHA until 1954. And it wasn’t used at all by the private sector until quite a bit later.

And so other changes were taking place over the decades. They all had the same theme. We’re going to use additional leverage to make housing affordable. Well, the problem is if you have a shortage of housing, and we’ve known this for decades, I’ve found research from 1951 that says, “If you try to do credit easing during a period of a sellers’ market, then the credit easing will get capitalized into higher prices.” It will not make the housing more affordable. And ironically, it will actually reduce housing standards because lower-income people will be able to buy less house. Because when I said house prices were up 100%, that’s on a constant quality basis. So the house that costs $100,000 in 2012 costs $200,000 in 2021, it’s the same house. So it’s a constant quality of house. So clearly, if you can’t afford that…what was $100,000-house, you can only afford $150,000 house today, you have to settle for lower quality. And this is exactly what this research from 1951 stated.

And so we can see this today when the Fed lowered interest rates through…during the pandemic, last March, a year ago, and all of a sudden, interest rates dropped by 150 basis points, whatever, 100 basis points, but house prices, which already were increasing quite rapidly, maybe 8% or 9% year over year, started increasing 10%, 12%, 15%. Last July, we said that we’re seeing data, in our early warning data, that says, by the end of the year, we’re going to have double-digit inflation in house prices, and lo and behold, that’s exactly what happened. But we said that last July. And we believe that by May, we’re going to be seeing 15%, 16%, year over year, price increases on an average nationwide. And we don’t see that ending anytime soon at these interest rates that the Fed has engineered. So that’s making the problem worse.

So any solution that would increase demand would literally, that assistance would get capitalized and even higher prices. It’s hard to believe the prices could go up even faster, but we believe they can. It’s just a supply and demand issue. And right now, we have the lowest supply that we’ve had, we believe, in our history. Now, we can’t go back more than 30 years with data. We can’t go back more than 50 or 60 years with anecdotal information. But based on my research, I believe the supply today, which is down in the one to two-month range nationwide is the lowest it’s ever been in history, housing finance history in the United States.

And when you get demand out of whack so much, you get these rapid increases in house prices, very rapid increases in house prices. So if you go back to the idea that you’re going to provide down payment assistance, even if it’s limited to first-generation homebuyers, which is a much smaller group than first-time home buyers, it’s still a bunch of people, a fair number of households. And if they take advantage of it and wouldn’t have tried to get a home otherwise, you’ve brought more people, more demand to the table, and that can do nothing but drive prices even higher.

So we’ve been saying that any attempt to provide down payment assistance, either to first-time buyers or to first-generation buyers, to pay for a down payment would end up being counterproductive. And there’s been a fair amount of pushback by industry leaders that that might happen, might be the result. And so we’ve taken that position and we’ve tried to figure out an alternative that could be provided to first-generation homebuyers that would not suffer from the defect of driving prices higher.

Sarah Wheeler: Yeah, really interesting. There’s definitely been a lot of talk about the fact that why would we be stoking demand when there’s so little supply, but at the same time, you think if you’re one of those first-generation homebuyers and this is the way most people build wealth in the country, you know, is it fair to them just not have that? So it’s an interesting debate going on. I’m not even sure if it’s gonna go through, but yeah, go ahead and say something. I think you were gonna answer that.

Ed Pinto: So that’s why we’ve come up with an alternative. And this is an alternative that I actually developed back about five or six years ago. The first rendition of it was the Wealth Building Home Loan, which basically said instead of a 30-year loan, let’s go with a 20-year loan. And the reason is that a 30-year loan, which is viewed as being a safe instrument, it’s safe because it’s a fixed-rate instrument, but it’s not safe because it amortizes incredibly slowly. And if you combine it, you risk layer with other risk characteristics like very low down payments, high debt ratios, and low credit scores, those risks pile up. And if they’re done on a 30-year loan, they get to be quite substantial. And most people don’t realize this, but during the financial crisis, there were huge numbers of just traditional 30-year loans made with lots of risk layering that had extraordinarily high default levels. Were they as high as some of the other crazy loans that were being done? No, but they’re FHA, which didn’t do any of the crazy loans, it didn’t do any neg am, it didn’t do any low doc, no, doc, it didn’t do any ARMs. It didn’t do any investor loans. Yet, it had incredibly high default rates, as did Fannie Mae and Freddie Mac, if you just look at the loans that they did that were this 30-year fixed rate with these characteristics that we consider safe.

The difference is if you made the exact same loan, the exact same credit characteristics in terms of DTI, FICO score, down payment, on a 20-year basis, the default level drops in half. You make one change, and it drops in half. Ironically, you could actually do away with the down payment and it still drops roughly in half because the difference between a 97 LTV and 100 LTV is not very much, given the 50% drop, it doesn’t change the 50% drop very much.

And the reason is is that it advertises so quickly. On a 20-year term, you’re getting so much more amortization in the early years, particularly given these very low-interest rates, you get it no matter what, but it accelerates with these low-interest rates. And FHA, back in the 1930s, when it was established, put out a pamphlet. And they said… They had no concept of a 30-year loan at that point. They said, “If you were to take out a 10 or 15 or 20-year loan,” which was the norm under FHA in the ’30s and ’40s, up through the ’50s, as I mentioned, “if you take out a loan like that, it’s like buying a house and paying yourself rent.” And the reason is that a substantial chunk of the monthly payment, and let me look at an example here…

If we were to look at a loan that, today, at 3.25% interest on a $200,000 property, and the principal and interest, including a mortgage insurance premium, would be just under a thousand dollars. If you did the exact same loan as 20-year, you bought down the rate, which we’ll get to in a moment, you bought down the rate so that the monthly payment is still roughly about a thousand dollars. That thousand dollars, in the case of the 30-year loan, 68% of it goes to interest, or about $680 and about $320 goes to principal. Now, do the 20-year loan with the bogged down rate, you now have $260 going to interest, $740 going to principal. That is a huge difference between $320 a month, or about $3,800 a year, and $740, which is $10,000 a year. And that makes a huge difference in the amount of amortization. And it’s that feature that actually builds wealth, which is why we call it the Wealth Building Home Loan.

Where we get into the assistance part is if you’re going to spend money on down payment assistance, that’s going to have the effect of driving up house prices by increasing demand. You’d be better off using the same dollars, or even potentially fewer dollars, to buy down the interest rate by this 1.75% to get the payments to be the same. You get all of this wealth-building, but you’re not increasing demand. Well, why aren’t you increasing demand? Because you’re in effect soaking up that subsidy to speed up the amortization. It’s going from the tenants’ monthly payment into their equity position or wealth in the house. It’s not being used, they can’t use it to bid up the price of the house. And it’s that simple difference that makes, we think, makes what we call LIFT Home, and for first-generation homebuyers, we think that makes LIFT Home a much better alternative than a down payment assistance or other types of assistance that would increase demand.

One last thing, how do we know… I already gave one example where the Fed lowered interest rates tremendously, we got a big boost in house prices. How do we know that when you do this, besides this research that was done 70 years ago, that that’s what happens? Well, FHA lowered its premium back in 2014, I think it was, by 50 basis points. And at the time, we had a pretty strong sellers’ market. Nothing as strong as it is today. A sellers’ market is defined as less than six months’ inventory. Back in 2014, we might’ve had four months’ inventory, which is a decent sellers’ market. Now, we’re at one to two months, this is a rip-roaring sellers’ market like we’ve never seen before.

Well, what happened when FHA lowered its premium? We knew, we predicted what was going to happen, but we actually did what’s called a natural experiment. You have FHA made a change, Fannie, Freddie, VA, and Rural Housing didn’t change anything. Interest rates were the same for everyone. So the only difference was a 50-basis point drop in the cost of the credit enhancement for FHA. And we did a lot of research and did a lot of analysis, and what we found is that when the percentage of FHA borrowers in a census track got to be a certain percentage, and it turned out to be about 20%, they basically become the marginal buyer setting the price. Think about it. If a house sells in your neighborhood, all of a sudden, it was selling…your house was selling… You might’ve bought it for $100,000 and other houses started selling, and then all of a sudden, a couple of years later, houses are selling for $120,000, and then another house sells for $125,000, then all of a sudden, your house just goes up by that $5,000, because all the houses in the neighborhood are marked to market to the last batch of sales. So the marginal buyer, indeed, is setting the price for everyone, and everyone calculates their wealth based on those last sales.

And so if the FHA buyer, who’s maybe 20% or 25% of the buyers in a neighborhood, has got this extra jingle in their pocket, this extra 50 basis points, with translated at about 7% more buying power, if they have that extra jingle in their pocket, they can drive the prices up for everyone, not only for FHA buyers, but all the buyers in that neighborhood, at that price point, end up paying more. And we said, “This is crazy. FHA is doing the exact opposite of what it should be doing, yet it’s taking all kinds of credit for having done a great thing.”

It also said it was going to create all kinds of additions to demand. Well, what we found was that they stole demand from other government guarantors. The Rural Housing, which was doing, I think, about 4% of the market before FHA lowered its premium, they took 40% of Rural Housing’s business. So you have one government agency doing something that ends up poaching 40% of another government agency’s business, and FHA calls that progress. That’s like the Buick taking business from Cadillac, both owned by GM, and calling that a success. Well, I don’t know if the GM shareholders would view it that way. Well, I’m not sure the taxpayers and homeowners should view it that way either.

Sarah Wheeler:Really, thanks for that deep, deep dive. I love that. When it comes to LIFT Home then, that’s a low-income first-time homebuyer tax credit. So where are you with that? Where is that?

Ed Pinto: We’ve retooled it to be the same first-generation lower-income first-generation, which by definition becomes a first-time buyer, but a first-generation homebuyer. And Senator Warner has been socializing this both among other colleagues in the Senate, on both sides of the aisle, and among some of the housing groups in the housing sphere. And it’s also been out for some comment, technical comments from various departments in the federal government. And so that’s all moving forward. And we expect that there may be some progress on this in the next weeks and months to come. There’ve been two hearings in the banking committee on other topics, but both cases, Senator Warner asked questions of the witnesses. I was one of the five witnesses a month and a half ago. And Tobias Peter, a colleague at the American Enterprise Institute Housing Center was a witness about three weeks ago with a couple of other witnesses. And everyone was uniform that this is a good idea and they support it from both…from the complete spectrum of people that were in the witness group.

So we took a lot of comfort in that support across a broad range of people. I know you may be familiar with Professor Richard Green. He was interviewed on a podcast a couple of weeks ago, might’ve been released this past week, and he happened to bring up that he’s heard about LIFT Home and he thinks it’s a great idea, notwithstanding that he laughed when he said it, that I had suggested it. But he did think it was a great idea. And I actually have a podcast coming up on this topic in a couple of weeks. And so we’re getting some good traction. We’re getting some good support. We’ve had some support from some of the housing association groups, I don’t want to say which ones they are, but we have some very enthusiastic support by some national groups. And we’re hopeful that this will get bipartisan support and then can move in the House and Senate.

Sarah Wheeler: Interesting. You know, when we reported on the Maxine Waters bill, that’s in there for first-gen homebuyers, we were calling it the Biden tax credit they talked about, and then the White House was like, “Yeah, no, that’s not ours.” And so I don’t think they wanted to be disassociated with it, they’re just like, “That’s really not the same thing.” So then when we encountered the first-time homebuyer, you know, the real first-time homebuyer, not first-gen, the tax grant, we’re like, “Okay, well, this must be the Biden’s thing.” And they’re like, “Yeah, no, that’s not it either.” So, you know, maybe yours is going to be the Biden tax credit. I don’t know, but I still think…

Ed Pinto: We don’t know yet.

Sarah Wheeler: That there’s, you know, there’s not one that’s been included with the infrastructure bill. 

Ed Pinto: That’s correct.

Sarah Wheeler: If that’s what the Biden White House is waiting to kind of throw their…you know, if there’s another one waiting in the wings, we don’t know. But I just think that that’s interesting. There’s definitely an appetite for addressing the problems that first-time homebuyers are having.

Ed Pinto: There is an appetite, but this really then gets to the bigger problem, which is a lack of supply. And the United States has a massive problem with lack of supply. And that problem is only going to get worse over the next number of years. What we’re experiencing today, I believe, in terms of these outsized house price increases can continue for quite some time and they will squeeze out the lower end of the market more and more. Let me give you an example of why that happens.

How high can house prices go? And so there’s a lot of discussion going on about are we in a bubble and I don’t tend to use the term “bubble.” I tend to use the term “boom.” We are clearly in a house price boom. But again, I go back in history and say, what can we learn from the economists that wrote about this in the past? And this is actually a businessman that wrote, in 1903. He wrote the first treatise on valuing urban properties, or city properties, as I recall. Well, why was that news? Well, the reason was that up until then, virtually everyone lived on a farm. Even in the United States, in 1890, we were still basically an agrarian country. And so you didn’t need to value city properties. And all city then was non-farm. Everything that was not on a farm, a house was called non-farm or city. And therefore, it included everything that wasn’t a farm.

And he basically…he worked for a title company. He was a subsidiary that was a mortgage insurance company, believe it or not, in 1903. Oh really? There were mortgage insurance companies in 1903? Yes. And he was the president of one. And as I said, it was the subsidiary of a title insurance company. So he had lots of data, because he had all the trick D transactions that were done by paper back then, but he had them all and they kept track of them and they had the prices and they had the size of the lots and they had all this information, the date and everything. And he was able to track all of that.

And he basically came out with a series of treatise, but in the front of the treatises are a number of principles. And one of…many of the principles are worth taking to heart. But one that is particularly apropos today is house prices can go up or go down. Those are market prices. They can go up and they can go down. Whether they stay up or stay down is dependent on intrinsic value. And what is intrinsic value dependent on? The utility of the property. He wrote this in 1903. Let’s take an example recently of this playing out at warp speed.

Amazon announces they’re going to put the headquarters in Long Island City. The price of land and office buildings, and you name it in that area around Long Island City soars for four weeks. And then they changed their mind because of political opposition, and the prices go right back to where they were. Well, that’s taking what, in the case of the financial crisis, started in the late ’90s and ended in 2007 with the end of the boom, and then unfolded through 2011. That compressed all of that into four weeks.

But now, let’s look at Arlington, Virginia. They got the other co-headquarters, and that’s still going to pace. And so Arlington and the town next to it or the city next to it, Alexandria, they’ve got all kinds of stuff going on, including Virginia Technical University is building a new campus there. There’s all kinds of infrastructure going in. There’s all kinds of… You know, Amazon itself and all kinds of office buildings, it’s housing, you name it, it’s a boomtown. And so that has now been incorporated in that new utility, it’s been incorporated into the prices. And those prices will stay up as long as that utility is still there, but the utility disappeared in the case of Long Island City.

So what does that have to do with today? Well, I already mentioned that the boom that we had back, that started in ’98 and ended in 2007, didn’t have a change in utility. Not only did we have lots of really bad underwriting and very risky loans, but we really had what’s known in United States as drive until you qualify. And drive until you qualify means that your DTIs are too high. You can’t raise your income easily, but you can lower the price of the house. How do you lower the price of the house? You drive further out. And things further out tend to have lower prices. Why? Because the lower land costs. But you end up, in some cases, getting more house further out, on a somewhat larger lot, but it is lower-priced because you have to drive much further. And that was really the safety valve for lower-income individuals, to drive till they qualify. That’s a well-known expression in housing underwriting.

So the question today is, is this boom we’re experiencing, is there a change in utility? Is it sustainable? And I’m not one that’s fond of saying, “This time is different.” I’ve disparaged that term many times, particularly in the housing finance arena. But I do believe this time may well be different. And the reason this time is different is because of the confluence of two events, the legacy of zoning restrictions, overly restrictive zoning and land use should acquirements combined with nimbyism, which has been festering for decades in the United States, with the freedom provided by work from home that was first really unleashed… It was going on in the background. I’ve been working from home, by and large, in many cases, more or less, since 1989. The technology has been there for a long time, but the ability to do it wasn’t there in terms of the willingness of the employer. But the pandemic basically made it a requirement. We entered into a great national experiment. Nobody in their right mind would have sent everyone home en masse, in March of last year, but that’s what happened. And so we actually found out whether it could work and it worked amazingly well.

And so I’m not saying that the people, you know, that a lot of people aren’t gonna return to the office, but a lot of people aren’t going to return to the office. And a lot of people aren’t gonna return to the office full time. Well, if you start putting those numbers together, one of the statistics that we came up with and reported on just on our briefing earlier this week is that if you look at the country and you ride up into metropolitan areas, roughly 25% of the metropolitan areas have very high house prices. You can guess where they are. They’re Boston, New York, Chicago, Seattle, Portland, but the vast majority of them are in California. and then some other places near that border, California, all the way to Denver. That’s a quarter of the population of the country. The other three-quarters of the population of the country live in areas that are much, much lower priced. Ironically, when you compute the median home price to median home income in the area, yes, the home prices we know are very high in those places, that 25%, but their incomes are higher also. So you’re actually dividing a large number by a large number, and you still get a very large.

So when you talk about a place like Phoenix versus a place like San Jose, let’s look at some very simple numbers. In March, a home, a median-priced home in San Jose sold for $1.3 million, the median-priced home, $1.3 million. What’s the median income a year or two ago, that’s the most recent data we have, for the San Jose metropolitan area? $130,000. It’s probably the highest, maybe San Francisco might be a bit higher, of any metro area in the country, $130,000. So that gives you about a 10 to 1 ratio.

Let’s go to Phoenix. Phoenix, the median-priced house sold in March of this year, $350,000, about quarter as much as San Jose. But you get a bigger house, in terms of gross living, you get a bigger lot, you get a newer house, and it has more amenities at a much lower price than the house you could have gotten in San Jose. And the person from San Jose is bringing, potentially, if they’re the median person in San Jose, they’re bringing $130,000 income to Phoenix, which the median income in Phoenix is $68,000. So you could see where you can have house prices really going up for a long time as people bleed out of San Jose to Sacramento, and they bleed into Phoenix, and they leave Sacramento to go to Boise. And they leave Sacramento to go to Phoenix, and LA to go to Phoenix. You can see how this game of [inaudible 00:33:36.592] leapfrog happens. And this can go on for quite some time.

And then you say, “Well, how do you know it can go on for quite some time?” We just have to look at California. San Jose has house prices that are 10 times median income. One would have thought that was impossible, but yet it is. Well, how does that happen? Well, it happens because the homeownership rate goes down. Where’s the homeownership rate the lowest in the United States? San Francisco, San Jose, Seattle, Portland, New York. Those are the places that have the highest prices to income. Those are the places with the lowest homeownership rate.

And so I can confidently say that, A, I think this process will continue, and, B, the result of this process if we don’t deal with supply in a way that actually will work, that’s important because we’ve tried it at the federal level many times and it hasn’t worked. If we don’t do it in a way that will work, we will end up with a homeownership rate that’s going to be declining. And remember, our homeownership rate today is not much different than it was in the early 1960s. And the homeownership rates for black households is not much different than it was in the 1960s. And so we actually will be starting from a point that’s not a great point to be at given all the trillions and trillions and trillions of financing and all the subsidies we provided. As a country, we provide an immense amount of subsidies to housing. We have the tax deduction for the interest. We have tax deduction for property taxes. We have Fannie, Freddie, FHA, all those implicit guarantees and government guarantees, explicit guarantees, subsidies, cross-subsidies. We have all of these things. Second homes, Fannie, Freddie doing second homes, investor homes. We have all these things going on, and yet, our homeownership rate is barely…is not any different than most of the other developed countries in the world. And so we haven’t gotten a whole lot for our money, but now we have a crisis phase facing us. This could really get bad because of this arbitrage effect that’s going on from the high-cost areas, the people bleeding out, they can now move, and the companies can move too, but they can now move and get more house in these other places. They’re taking advantage of the arbitrage. That’s the problem.

Sarah Wheeler: Absolutely. We’ve been talking about the surprising hot home markets, you know, San Jose, San Francisco, that’s not surprising, but, you know, those five places in Idaho that are showing up as on the top 25 MSAs. Why? It’s because people from San Jose and San Francisco can work remotely from Idaho, it’s the same, you know… And we just see it all over and we’ve been covering it. It’s crazy.

Ed Pinto: And again, like that FHA example I gave, where once you get to 20%, it doesn’t take very many people moving from San Jose to move the market into Boise, or a [inaudible 00:36:48.106], or even a metro as large as Phoenix, because Phoenix is getting people from up and down the West Coast, flowing into Phoenix, plus retirees coming from different places. So Phoenix has people coming from lots of places. It really drives the market. Again, the marginal buyer sets the price. And the problem is when that person comes from California, with having sold a house, but even if they were renting at $4,000 a month and they moved to somewhere else, all of a sudden, it looks like it’s a fire sale of properties. I can’t pass this up. This is a bargain. And the reason… Oh, do I need to bid it up $50,000 to get it? So what? That’s rounding, if you sold the house for $1.3 million in San Jose, buying a $650,000 versus a $700,000 house in Phoenix is literally rounding.

Sarah Wheeler: That’s exactly what we’re seeing. So interesting. You know, for my last question, I have an interesting thing. You know our lead analyst, Logan Mohtashami…

Ed Pinto: I read him all the time. I love him.

Sarah Wheeler: Oh yeah. Well, you know, we do too. One of the things that he posits is that there are two things at odds here, and it’s like the one is the desire of people in housing on every side to have your house become a wealth management tool. And there’s the other desire to have affordable housing. But things that are an investment, they’re only an investment if they go up. They’re only a good investment if they go up. So how do you balance the fact that yes, you could totally make more supply. We could fix that if we really wanted to, but it would bring down everybody else’s house price. And so all the people who currently own are not going to be interested in that.

Ed Pinto: That’s not exactly the way I think it would…

Sarah Wheeler: Love to get your take on that.

Ed Pinto: So, first of all, we’ve gone back and tried to assemble, and it’s difficult to do because, A, computers that there were computers, but they didn’t have personal computers and Excel spreadsheets and stuff. So there’s a lot of paper that exists from the first half, even the first 70 years of the 20th century that never got put into electronic documents, particularly searchable documents. And so we’ve made, as a goal, to go back and find those archival documents that shed light on what actually was going on in the ’50s, ’60s, ’70s, in the 20th century. And what we’ve found is that new construction was going great guns after World War II, starting in the late ’40s, new construction really got going, and population was growing. But new construction and population were in sync with each other. As population grew, or as households grew, new construction units, housing units grew along with it. And we actually had that desirable point where real house prices from about 1950 to 1973 or ’74 were going up, were flat, or going down slightly. And since incomes were actually going up a bit faster than inflation, we actually had house prices relative to incomes going down, you know, a reasonable amount. And so we had a 25-year period, a golden period of house price supply and demand being in sync and prices stayed in sync.

We know that…I mentioned those 25% of the country that live in metros that have very high prices. And we know the 75% that are much lower prices to income ratios. We know that when you focus on the metros that have a lot of job growth, let’s not talk about Pittsburgh or Cleveland. You know, it hasn’t had a lot of job growth. Bridgeport. Let’s talk about how to compare a place like Raleigh or Austin to a place like Reno or Las Vegas or San Jose that have had a lot of job growth, or Seattle. And what we find distinguishes them from each other, those groups, is the amount of new construction as a percent of home sales. You could also do it as a percent of households in additions, but we look at it as percent of home sales. And uniformly, when the percent of new construction as a percent of home sales is higher, like 30%, 25%, you end up with not price declines, as was suggested, but tamped down price inflation or appreciation, you don’t get negative appreciation. You end up…

So there’s two [inaudible 00:41:35.427]: deflation and disinflation.: You were referencing deflation, you get disinflation. Disinflation is a slowing of the rate of inflation or the slowing of the rate of appreciation. That is not deflation. And so what we get is rampant inflation in places like Reno and Las Vegas and Seattle, and we get much slower house price appreciation, but still enough. I mean, 4% is still a pretty good number in places like Raleigh and Austin. Right now, because, again, of these effects that I mentioned earlier and the arbitrage effect and the work from home, it’s going to be more difficult for places like Raleigh and Charlotte and Boston to keep up. I think what we found is that Austin today is building new housing at an immense rate. And it’s still not enough to keep the prices from soaring. I think the latest numbers we show is something like 40% of all the home sales in Austin are new. I mean, that’s an incredible percentage. That’s off the charts in what it was a couple of years ago. Yet, house prices are still going up like gangbusters. There’s so much demand, pent-up demand from this move, moving into Austin. But eventually, you do catch up.

And again, that’s what we learned from land economists from the ’30s, ’40s, ’50s, and ’60s. In fact, I mentioned this on our briefing call on Monday. There’s a Fed chairman named Marriner Eccles, who was Fed chairman from the ’30s to the early 1950s. He was appointed by Franklin Roosevelt and he was there for a very long time. And there was rampant house price inflation in 1947. House prices had gone up 25% in two years, 25% in two years. That sounds very familiar. Ours has gone up roughly, by the time we get to the end of this year, it will have gone up 25% in two years.

And let me just find this quote because it’s worth noting, because what I said is you don’t have to change a word in this quote. And it applies today. What Marriner Eccles said in 1947 was, “If the easy credit situation,” and easy credit includes low-interest rates, “if the easy credit situation were producing a substantial additional volume of housing at supportable values in the long run, it would be justified, but because of the limitations of labor and materials, it produces instead a dangerously inflated market, which cannot be sustained for both new and old houses. I believe that by curtailment of credit for housing and closer relationship to the supply of labor materials, the price trend would be reversed and the market for housing assured over the long period of years. Good, low-cost housing cannot be built with high-cost materials and high-cost labor. Neither the government nor private industry can produce this miracle.” That’s a direct quote. That was his testimony before Congress on the issue of house price inflation. I consider that to be a very cogent description and analysis and solution of what was going on.

I read what our current chairman, Jerome Powell, said last week, and I’m left with literally my jaw dropping. I don’t believe he understands housing economics at all. And therefore, doesn’t… He says, “Oh, this inflation is fleeting.” Well, land economists know that once house prices go up, they form the base for the next increase. So if we’re right, that there isn’t going to be a big collapse here, even if house price inflation goes back to 4%, 5%, hasn’t been at 4% for quite a while, even if we go to 4%, it’s on a base that’s up by 25%. By the end, you know, the end of this year, it will be up by 25%. Then property taxes have to go up. Those haven’t even hit yet. Jerome Powell has basically given a gift of hundreds of billions of dollars, probably in property taxes, to cities around the country, just through inflated values. Those property taxes get adjusted year, or two or three from now. And all of a sudden, people that bought houses, you know, last year, two years ago, were going to find that their monthly payments go up quite a bit. Now, yeah, they have the comfort of knowing their house also went up, but if their incomes didn’t go up very much, they then really run into a problem. And these are things that I don’t think our leaders at the Fed understand at all.

Sarah Wheeler: Wow. Well, thank you so much. Appreciate that. Especially the historical perspective that you are bringing on these issues. And then interesting to hear what you guys are doing with your tax credit. Please keep us up to date on that and let us know.

Ed Pinto: We will.

Sarah Wheeler: And also, I’m sure we’ll have you back this summer because things are changing rapidly and we’d love to have you back to talk some more about this.

Ed Pinto: Perfect. Thank you, Sarah. It’s always a pleasure.

Sarah Wheeler: Thank you so much, Ed.