Takeaways from Charles Marohn's "Escaping the Housing Trap"

Last week, I stumbled upon a reddit post announcing that the author, Charles Marohn, was giving a free talk near my town the next morning. Marohn is the author of Strong Towns, one of my favorite books of the last few years. So, my wife and I attended the talk and enjoyed it.

The talk is based on ideas from Marohn’s new book, Escaping the Housing Trap, which I haven’t read yet, so these notes are from memory.

Takeaways 🔗︎

There’s broad agreement that there’s a housing crisis in the US 🔗︎

• Most people agree that there is a housing crisis.
  • Housing has become so expensive that most middle class Americans have trouble affording housing.
• People disagree about how to solve the crisis.

Contradictory solutions to housing crisis 🔗︎

Solution 1: Housing prices should fall 🔗︎

• Pro: Housing becomes affordable for more Americans.
• Con: Falls in housing prices historically have had catastrophic effects on the economy.
  • Mortgages go underwater, so people stop paying.
  • Banks fold because they can’t collect mortgage payments.

Solution 2: Housing prices should increase 🔗︎

• Pro: Increased home values is associated with neighborhood prosperity.
• Con: As prices increase, fewer Americans can afford homes.

History of mortgages 🔗︎

• Pre-1920, home mortgages used to be hyper-local.
  • You’d get a mortgage from a local community bank.
  • The community bank has all your neighbors’ money, so it makes extremely conservative loans to minimize risk of insolvency (50% down payment, 3-5 year mortgages).
• After the Great Depression, the federal government made changes to help banks stay solvent and reduce home foreclosures.
  • They created the FDIC, which guaranteed bank balances for account holders.
  • They created Fannie Mae, which acted as a secondary market for mortgages (i.e., banks could sell off mortgage debt for cash).
• Housing prices have gone through multiple bubbles and bursts since 1920s.
• After every bubble burst, one of the primary tools the federal government uses to spur recovery is to make it easier for Americans to obtain mortgages.
  • e.g., government guarantees loans, government agrees to buy bad loans, government pushes banks to offer longer-term loans (15-year, then 30-year, now 40-year).

Case-Shiller home price index 🔗︎

• The Case-Shiller home price index is an index of home prices in the US.
• Marohn showed a graph of the index going back to the early 1900s, but I can’t find it anywhere online.
• In Marohn’s graph, you can see clear cycles where home prices peak, then crash as a recession hits, then rise to new highs in response to government intervention.

The problem with accessible mortgages 🔗︎

• The more the government intervenes to make loans accessible, the more mortgages become an instrument for banks and investors to profit off of homeowners.
  • Mortgages now serve investors’ profits rather than helping Americans afford homes.
• Offering 30- or 40-year mortgages encourages homeowners to make irresponsible choices.
  • If someone can’t afford a house with a 15-year mortgage, they shouldn’t buy with a 30-year mortgage, either.
• Financing is available for high-end and mid-range home construction but very little at the low end.
  • It’s difficult to obtain financing to build a 400 square foot house or to turn a single-family home into a duplex.
• Higher and higher loans are not sustainable.
  • They put Americans deeper in debt and encourage irresponsible purchases.

Marohn’s proposed solutions 🔗︎

• Reduce friction in permitting.
  • Someone should be able to walk into city hall with building plans at 9 AM and walk out with an approval to start building.
  • It’s fine if big box stores still go through months of approvals, but single family homes should be near instant.
• Encourage starter homes.
  • Offer financing for building small homes.
  • Offer financing to let people build backyard cottages (aka in-law apartments / ADUs) if they have excess yard space.
• Make duplex to single conversions simpler.
  • A retiree living in a 4 bedroom house by themselves should be allowed to add a kitchenette and extra entrance and rent it out with minimal regulatory friction.