More Multifamily Housing Needed to Combat Affordability Crisis, Bernanke Tells Marcus & Millichap CEO
The affordability of housing in the United States is currently under extreme duress as a result of the COVID-19 pandemic and subsequent economic recession. Since March, approximately 53 percent of all households earning $25,000 to $49,999 reported lost income, according to a recent report by the Joint Center for Housing Studies of Harvard University entitled “The State of the Nation’s Housing 2020.”
One net effect of less discretionary income is that monthly rent is becoming a heavier burden for a large number of Americans, especially in gateway markets such as San Francisco and New York City where apartment rents have been unattainable for a large swath of the working class for years.
For the lowest earning renters, affordability of rent is even more acute as a result of the pandemic. According to the Harvard report, one in five renters earning less than $25,000 annually was behind on rent payments.
Dr. Ben Bernanke, a veteran economist and former chair of the Federal Reserve, said that the solution to the U.S. affordable housing situation may be overly simple: add more supply.
“You learn on the first day of economics that if you increase the supply of something, the price is going to come down,” said Bernanke. “Then you won’t need [rent] controls, and people can afford to come in, and there are more spaces for them to live.”
Bernanke’s comments came during “A Conversation with Dr. Ben S. Bernanke,” an hour-long webcast hosted by Marcus & Millichap, Institutional Property Advisors and TruAmerica Multifamily. Hessam Nadji, president and CEO of Marcus & Millichap, and Robert Hart, president and CEO of TruAmerica Multifamily, moderated the discussion.
Now a distinguished fellow in residence with the Economic Studies Program at the Brookings Institution, Bernanke served as chairman of the Board of Governors of the Federal Reserve System from February 2006 through January 2014. Both Presidents George W. Bush and Barack Obama appointed Bernanke to fill that role.
Bernanke acknowledged during the webinar that he doesn’t have the “magic sauce” to solve the longstanding affordability issue, but he made clear that in order increase the supply of housing, state and local governments need to be involved. These entities can help private developers build more housing by easing restrictions on zoning and land-use requirements while also ensuring that developers build responsibly and with meaningful density.
On the single-family side of the housing continuum, Bernanke also said there’s a shortage and pent-up demand as the sector has fully recovered from the housing bust in 2007 and 2008.
“I feel bad for people who graduated in 2008. They’ve been through the Great Recession and the pandemic crisis, and their homebuying plans have gotten delayed,” said Bernanke. “As the economy is getting better and stronger, they should be more open to buying. That near-term demographic is a positive factor.”
Although the U.S. economy has improved since bottoming out in the second quarter, it is still hampered by the effects of the COVID-19 pandemic. Approximately 11.1 million Americans are currently unemployed compared to 5.8 million in October 2019, according to the U.S. Bureau of Labor Statistics.
Unfortunately, COVID-19 cases, hospitalizations and deaths are mounting heading into the winter months. Since mid-March, approximately 12.5 million COVID-19 cases have been confirmed in the United States, according to John Hopkins University & Medicine. The tally of coronavirus-related deaths totals 256,798.
Bernanke said that he expects near-term pain for the U.S. economy, at least through the first half of 2021.
“I’m afraid that for the next six to eight months, it’s going to be a very slow and painful recovery — we may even see some contraction,” said Bernanke. “This recession has been like going down on an elevator and up on the stairs. The stairs are getting somewhat steeper at this point. We’re hopeful that improvements in the health situation — vaccines and better treatment — will give people more confidence and will help us come into a more normal situation in 2022.”
What follows are Bernanke’s edited remarks on a variety of economic- and real estate-oriented topics addressed during the webinar.
Bernanke on the state of housing
The biggest long-term factor affecting housing is interest rates. Even when monetary policy gets back to normal, interest rates are still going to be low. Since the 1980s, interest rates have been coming down steadily because inflation has come down and there’s a global savings glut in developing countries. People are saving for retirement and living longer, and that money is looking for a return. That’s a positive tailwind for housing going forward for a considerable time.
There is an interest [among Americans] in moving to the suburbs, homeowners looking to downsize and a lot of special things that will affect the mix and composition of housing. In the very long run, our population is not growing as quickly. That’s a bit of a headwind in the longer term. We’re getting older, immigration has dropped somewhat and birth rates are decreasing. In the short term, for the next few years the combination of low interest rates, pent-up demand and inadequate supply is going to make housing a pretty good sector.
Bernanke on the U.S. economy
Instead of the shock coming from inside, it’s coming from outside. In a normal recession, sectors that are interest-sensitive like housing, automobiles, consumer durables and capital investment are the ones that decline the most, while services tend to be relatively stable.
In this case, because the virus is hurting those sectors that depend on close personal contact, we’ve seen pain in the service sectors like travel, dining, leisure and entertainment. It makes this recession more difficult for the Fed to handle because the Fed cutting interest rates would affect the interest-sensitive sectors and would lead the economy out of the recession. The Fed can’t do too much about the fact that people won’t go to restaurants.
While all recessions are highly unequal in their impact — hurting people at the bottom of the ladder much more than at the top — this has been a particularly bad episode because the service industries are where a lot of the people who are lower paid or less skilled are most concentrated, and they’ve taken the biggest hit from this recession.
Bernanke on prospects for a full recovery
The recovery is going to be much slower than it was over the summer for a number of reasons. The virus is not under control; we saw another wave this fall and [heading] into the winter. We’re all hopeful that the vaccines will make a big difference, but that won’t be effective until well into next year. That’s probably going to slow recovery substantially as people decline to go out to shops and restaurants.
The low-hanging fruit has been picked. People have gone back to work in manufacturing and housing. Those of us who were lucky enough to work from home are doing so now, but those service industries are still operating at very low levels. It’s going to take a while to get people back to work in those sectors.
The fiscal policy has been less powerful recently for political and other reasons. Without that support for families and small businesses, and especially for state and local governments that have been particularly hard hit, that’s going to be a negative factor going forward.
Bernanke on stimulus
The early stimulus was very powerful and effective. But as we come to end of the year, a lot of the programs are coming to an end. Without that support, the Fed can help and has helped, but it’s not going to be enough by itself. The areas that are important (i.e. unemployment insurance, rent assistance and food stamps) are providing help to those who are most hurt by the recession.
There is a lot of discussion about extending the Paycheck Protection Program and improving the public health situation, such as COVID-19 testing and contact tracing, making sure there are enough hospital beds and, of course, a vaccine. In the near term, the interest-sensitive sectors that are benefitting like housing, capital investment and consumer durables are going to be the biggest leaders.
Going forward, the assumption is the virus will eventually come under control. It won’t be completely eradicated, but we should be able to see some recovery in some of these service sectors with modifications, like more takeout [at restaurants] and less inside dining.
There will be some changes in the shape of that industry, but I’m hopeful that we’ll get back those services as the virus comes under control and the economy strengthens again. What the Fed is concerned about is scarring — [instances] where people leave the labor force for a protracted period, and it takes time for them to find new jobs and make the adjustments like moving to get back into the labor force.
Bernanke on Fannie Mae, Freddie Mac
I don’t see full privatization being likely as either a political or economic matter. There is strong political support for what Fannie Mae and Freddie Mac do, which is to make 30-year mortgages [and] allow access to credit to a fairly large swath of the population. It provides stability in the market. Some government involvement in Fannie Mae and Freddie Mac is very likely.
At the same time, there was a strong presumption that the government would come in and help Fannie and Freddie like they did in 2008. (The agencies have been in conservatorship under the Federal Housing Finance Agency since 2008.)
There ought to be some oversight and premiums that Fannie Mae and Freddie Mac pay for the protection that they get.
The Democratic Party coming in [to the White House] is not supportive of full privatization, so something close to the status quo is probably the best guess for the next four years.
Bernanke on rent control
Like most economists, I think that rent control has some serious drawbacks. There is a problem that housing is not affordable in these major cities. You’ve got people who commute for several hours every day just to get to downtown because they can’t afford to live in town or even close to town. Rent control doesn’t increase the supply of housing, which is the problem.
It goes beyond people suffering from the high prices. [High rents] prevent talented people from coming and living in these fast-growing cities and participating in the economies of these cities. That slows economic growth for everyone.
Bernanke on commercial real estate
Over the six- to 12-month horizon, let’s suppose that the virus is mostly taken care of. People’s habits will have changed, they may be inclined to order more takeout or work from home. On the other hand, we’re hopeful that the economy will return to something more normal with sustained growth.
Over 100 years ago, we had the Spanish flu that killed 50 million people around the world. Then it disappeared. Then we had the 1920s, which was a period of substantial growth. That’s encouraging.
Overall, if the economy comes back and grows as we expect, that will be good for commercial real estate.
— John Nelson