A brief introduction to some of the evidence.

1. A Radical New Understanding
of the Housing Bubble
and the Financial Crisis
Presented by Kevin Erdmann

2. The Housing Bubble
So obvious, the premise didn’t need to be confirmed.

3. There were never too many homes.

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. The housing bubble was
an American refugee
crisis.
Americans were
building new homes in
order to reduce their
housing expenses.
-2.0%
-1.0%
0.0%
1.0%
2.0%
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Rate of Net Domestic Migration
Closed Access Cities Contagion Cities

6. 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

7. The rise of low-tier home prices in high priced cities had little
to do with lending to households with low incomes.
It was more likely a product of our highly regressive income
tax subsidies to homeownership, which cause price/rent ratios
to rise as home prices rise, up to a given price level, where they
level off.

8. 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

9. Before 2008: Rates of homeownership were within long-term
norms, when adjusted demographically.
After 2008: Homeownership among young and less affluent
households has declined. Homeownership in 2018 is much
more sensitive to age and income than it was in 1995 or 2005,
and homeownership rates are well below any modern norms.
Family income quintiles and deciles

10. 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

11. Implications for Wealth Management and Asset Allocation
Housing, especially at the low end, is greatly undervalued.

12. 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.
Investor Returns
vs Owner Returns

13. Implications for Wealth Management and Asset Allocation
Monetary inflation is perpetually overestimated, creating overly hawkish
monetary policy.

14. 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.