Ryan Avent writes

I HAVE been mulling over a paper presented at the University of Chicago’s Monetary Policy Forum called, descriptively,Housing, Monetary Policy, and the Recovery. It’s a nice analysis that proceeds in three main steps: defining the role of housing in most recoveries and comparing that to the present rebound, examining the interaction between monetary policy and housing markets, and testing whether monetary policy seems to have been more potent in places where the bust was less severe.

. . .

A large physical overhang might be to blame. If the economy is saddled with many more homes than it actually needs, then even with a mortgage rate of zero new residential investments might be unattractive. The longer the recovery has gone on, however, the less binding this constraint is likely to have been. The authors reckon there is still a physical overhang in America. I’m not so sure. Even if the economy as a whole is glutted, many individual metropolitan markets look close to clearing.

What this paper estimates, however, is not so much whether there are too many housing units in America but whether or not America is house poor.

It compares how much Americans are spending on services and non-durables to the carrying cost of a house. And, depending on whether or not you consider the liquidity loss from locking up some of your assets in the house and the wealth changes from house price appreciation, you can get one of these three measures of how house poor America is.


The blue line is the most inclusive definition of house poor. Here we care about all those things: how much other consumption you have, how much of your wealth is locked up in the house, is your house going up in value.

According to blue line America was house rich in late 2005 – we would have wanted 20% more house if we could have gotten it. And, America is house poor today, we would like 20% less house if we could shed it.

That seems exactly the opposite of the units-per-adult consideration and it is. The contention would be that this is what drove the housing stock out of equilibrium before and what is driving it to the other side of out of equilibrium now.

However, once you separate those consideration the paper is utterly consistent with the analysis we have been pushing here.

Indeed, they make the following observation

Ongoing foreclosures could push as many as another 7.5 million
families out of their home, which could create another 5 of 6 million additional renters, (assuming some
―doubling up‖ of households and some of the homes are owned as vacation properties or by investors). 
The housing stock is not prepared for this flow of renters, suggesting potentially severe rental shortage.
Currently there are 43.7 million rental units and 9.4% or 4.1 million are vacant. Multifamily construction is
running at about 200,000 apartment completions per year, and cannot possibly meet this shift in demand
at current prices. The vacancy rate has never fallen below about 7% in the last 20 years. If 7% is the
―NAIRU‖ equivalent for rental housing, there is only 2.4pp or about a million units of spare capacity.

While I am on this I will say that what I don’t completely understand is the seeming concern over the how rents are raising core inflation measures. They not correctly that the majority over the last three months is rent and that this will only accelerate going into 2012.

This is what I noted in my 2011 post series “There Will Be Inflation.” It was clear that higher rents were coming.

Yet, my baseline response is: Let them come.

You need them to rebalance the stock. If you don’t you are going to set up a potential oscillation problem where single family homes swing back and forth along the house-rich/house-poor axis.

Building up a larger stock of multi-family should stabilize those swings.