If you want to understand the ups and downs of housing over the past 20 years, it’s a good idea to start with government policy, says Cortland’s Chief Economist Brad Dillman.
It started in the late 90’s and 2000’s with the Federal government’s push to raise the home ownership rate, coupled financial deregulation and low interest rates coming out of the dot com recession. “We were off to the races with the housing boom and the housing bubble,” Dillman says.
Once the bubble burst, Dillman says the government helped artificially inflate home prices through monetary policy to solve the issues in the housing market.
“But when you inflate home prices in a way that doesn’t comport with underlying fundamentals, and we actually did it while the market was still oversupplied by about a million units, then you end up with a situation where the builders can’t even deliver more supply,” Dillman says. “The market price is set artificially high and activity becomes muted due to divergence between prevailing prices and the true market clearing price, absent incremental stimulus.”
Dillman has watched this play out on both the single-family and apartment side. “I worked with a home builder and you could build all day at $800,000, but the market was something like $500,000,” he says. With these production difficulties, Dillman estimates that the US is undersupplied by 1.3 million housing units.
“Part of the reason builders have had challenges delivering supply in scale, is because of the distortions imposed on prices by monetary and fiscal policy earlier in the cycle and in the name of recovery,” he says.
Dillman says that during and after the recession, policymakers spent several years doing everything they could to inflate home prices. “Then people stepped back and somehow it was a shock that underemployed millennials couldn’t afford to buy homes that had skyrocketed in price,” Dillman says. “Fortunately, a renaissance in multifamily has provided much needed housing.”