"All Real Estate Is Local"

With apologies to Tip O'Neill, there's been some talk about housing costs finally trending down. Regular followers know I've been ranting about how the cost of housing is accounted for in our inflation statistics, and given the way our news media works and the attention span of the voters, the picture presented is quite distorted.

It was gratifying to hear a commentator on Bloomberg this morning stating that Fed policy really wasn't that effective this go round since most people own their homes with fixed rate terms at low rates and, he noted, so too is most corporate debt.

It only took three years for people to come around to my way of thinking.

Which leads us to the housing issue. More than CPI or the price of eggs, the cost of housing is THE debilitating factor in the American economy. The lack of available housing for the young (and to some extent, the old) has caused some deep seated cultural fissures that will never heal for certain age cohorts. And the cost of purchasing a home matters more than the price of gasoline.

A record number of adult children live with their parents. Family formation has stalled. Those are serious tears in the social fabric we've created, and since most zoning and permitting is controlled by local boards made up of people who can't see beyond their own town lines, little is being addressed. This structure of absolute local control has had devastating consequences for the country.

And what makes it more difficult is that it's not one village zoning board, it's tens of thousands of them across the country blocking the way. That makes it intractable to deal with unless the state or the Federal government takes control of decision making.

New York took a stab at state control and the opposition was intense. But some communities are getting the message, and it's heartening to see some projects getting approved. You can't freeze your population in amber if you want your local economy to grow. It's not just family formation. It's also business formation that's at stake.

Which brings us back to housing costs. There HAS been some softening in prices over the past few months, and that will manifest itself in the data going forward, especially since shelter has a 12 month lag in the CPI. If we used CURRENT data, the Fed is well within, if not below, it's 2% target.

But what we're seeing here is little more than post pandemic backwash. Some areas that benefited from the Great Pandemic Relocation Mania are now showing signs of price weakness now that the tide has gone out. Reason? They added supply to handle the influx. This is bringing the numbers down, and "analysts" who have booking agents are cheering the news.

But in my old neighborhood in suburban New York, there's quite a different story. There is almost nothing for sale. In my previous school district, which services over 4400 students, there are precisely two (2) open listings. Over the years, the local authorities have simply refused to add more housing. Indeed, checking US Census numbers, the population of some of these towns and villages that make up the district have not increased by even a dozen souls over the course of the past decade. And because of their proximity to Manhattan, and available public transit, prices keep rising as demand increases. People are holding on to their homes as if they were zero coupon municipal bonds. As long as supply is constrained, the price simply keeps accreting.

Whenever a proposal to add apartment units is made, the villagers respond with a rage comparable to an invasion by a foreign power. Recently, in one of the neighboring towns, a plan submitted for a simple 15 unit apartment dwelling was met by an outpouring of anger. You would think they were installing a sewage treatment facility in Central Park.

So no matter what the headline numbers say going forward, and they will more than likely improve just by virtue of this one single shelter metric softening up, we will still be living with a generational trauma that has altered the course of our society. You just can't lump the nation's housing stock from Maine to California in one pile and draw a conclusion on affordability. And prices softening in areas where people don't want to live isn't a policy victory.

But I will break my own oath and make a prediction: absent another unforeseen calamity, headline CPI will decline to a level that will allow the Fed to cut. How can I be so sure?

We're already there.

February 5, 2025