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1/11 What is Housing? Affordable shelter or path to retirement? It cannot be both. We tried to make it both in the early 2000s and almost wrecked the financial system. 🧵 https://t.co/ZvScYsClPh 2/11 The average home price is $417K (above), an all-time high. This means around 43% of a median household income (~$84K) goes to housing. For the last three years, this has been comparable to the (unsustainable) housing peak in 2006. https://t.co/c3s9b0bcBT 3/11 For 50 years, from the end of World War II through 1997 (red box), housing was affordable. Prices rose by the inflation rate. In other words, it held its value but remained within reach of most renters/first-time homebuyers. https://t.co/yKM9tTTrpD 4/11 This change in the late 1990s, as shown above, led housing into a boom-and-bust cycle (above) unlike anything before. The Taxpayer Relief Act of 1997 Exclude up to $500,000 ($250k for singles) of capital gains on their primary residence, tax-free, every two years. 5/11 Starting in the late 1990s, the mortgage market underwent a securitization revolution. MBS was packaged as a safer alternative to individual mortgages and sold to Wall Street. This allowed for looser lending standards as mortgages were immediately bought by investors. 6/11 Yale's Bob Shiller argued that a feedback loop took hold in the late 90s. When the stock bubble burst in 2000, investors fled to real estate, viewing it as safe. Once people believed prices would rise 10% forever, they were willing to pay any price, creating a boom. 7/11 Are we going back to the early 2000s solutions? So far we have ... * 50-year mortgages *portable mortgages * GSE-retained-portfolio purchases ($200 billion in MBS purchases), * 401(k) withdrawals without a penalty for down payments. 8/11 The risk is that these gimmicks are starting to look like those to address the affordability crisis 20 years ago. Back then, the goal was to find ways to help renters/first-time home buyers afford homes they could not. This ended very badly from 2007 to 2009. 9/11 The next chart is from Redfin. They calculate the price per square foot across all active real estate multiple listing services. They show it for both the sale price (red) and the list price (green). https://t.co/MqtqXxa1Gz 10/11 List prices (green above) keep rising and are at their all-time high. Home sellers are still aggressive about raising prices. Opening up homebuyers to more down payment assistance via 401(k) withdrawals will incentivize home sellers to raise prices even further. 11/11 Housing cannot be both an affordable shelter and a path to increasing net worth. U.S. policy tried to encourage policies it thought would accomplish both 20 years ago, and it nearly destroyed the entire financial system. We are not at the point where to worry about repeating the events prior to the 2007 to 2009 financial crisis, but we do worry that we are continuing down a tenuous road.