4. NYC
LA
Boston
San Fran.
San Diego
San Jose
$0
$200,000
$400,000
$600,000
$800,000
$1,000,000
Median Home Rent and Price
50 Largest MSAs
1Q 1991 1Q 2007 1Q 2015
MedianHomePrice
Median Annual Rent
A handful of cities have
become very expensive
to live in – for both
renters and owners.
5. Before 2008: Housing markets were driven by supply.
All prices increased.
After 2008: Housing markets were driven by a credit shock.
Low tier prices collapsed.
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
Seattle
Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5
Zip codes, in quintiles by median home price. Jan. 2000 = 1
Supply Driven Migration Event Credit Shock
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
Atlanta
Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5
Zip codes, in quintiles by median home price. Jan. 2000 = 1
Credit ShockSupply Driven Migration Event
6. Before 2008: Housing markets were driven by aspirational
households buying into expensive cities and other households
moving to cheaper cities to reduce costs.
After 2008: Public focused on preventing households with
lower incomes from over-buying. This had little to do with the
bubble and left the core problems unaddressed.
Family income quintiles and deciles
7. In 2008, Federal regulators
acted as if there was a credit
problem when we had a supply
problem.
This cut home prices
significantly, devastated
homeowners’ equity, and
locked young, first-time, and
working class buyers out of the
market.
For those families, today,
homeownership is a free lunch,
if they can find a way to do it.
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1979-03
1981-03
1983-03
1985-03
1987-03
1989-03
1991-03
1993-03
1995-03
1997-03
1999-03
2001-03
2003-03
2005-03
2007-03
2009-03
2011-03
2013-03
2015-03
2017-03
Mortgage Affordability vs. Rent Affordability
Mortgage Affordability
Rent Affordability
Inflation & Cost Adjusted Mortgage Affordability
Credit Shock = Unprecedented Affordability
8. Implications for Wealth Management and Asset Allocation
Housing, especially at the low end, is greatly undervalued...And obstacles to
real investment – through local building codes and national lending policies –
are pushing down real long term interest rates.
Building more homes would solve the “safe asset shortage” problem.
9. Implications for Wealth Management and Asset Allocation
• We are in a boom-bust economic regime. This is blamed on demand (credit
and money), but it is the result of structural obstacles to supply – most
notably residence in economically dynamic cities.
• This leads to hawkish monetary policy that is creating cyclical risk.
• Real estate, and especially low-end real estate, appears to be more volatile
and risky than previously thought. But, real estate volatility was due to a
one-time negative demand shock that cannot be repeated. In that case, past
volatility points to future stability and reversion to the mean.
• Carefully chosen positions in real estate, lending, and homebuilding markets
can provide both speculative and defensive opportunities for asset
management, even though cyclical risks remain.