Posted Tuesday, May 8, 2012, at 11:03 AM
With the population growing, rents high and rising, household credit impaired, and building trades unemployment high, the reasonable thing for the economy to be doing would be to build lots of rental housing. And indeed there's a certain perception out there of a multifamily construction boom. But compared to where we were in the 1980s, it's actually incredibly tepid.
What's more, rather than rents falling in response to all this construction they actually continue to rise. The risk is that if we can't build enough new houses quicklly enough, the Fed is going to call in the inflation police and bring rent hikes to a halt by increasing unemployment. So the question of why aren't we building more apartments is crucial.
Karl Smith, citing me, blames anti-density land use rules. Naturally I would like everyone to buy my book and it would certainly be convenient if my pet long-term issue were also the solution to our short-term problems. But I'm actually not sure it's true. My reason for doubting it is that the construction undershooting doesn't seem notably concentrated in the supply-constrained markets. What's more, every time I speak to people who are involved in the development game, they assure me that the short-term constraint on big developments is financing. People have more or less shovel-ready infill projects and they need a loan. Some evidence for this is provided by the fact that there've been a curious volume of large 100% equity projects undertaken recently. What people say is that there's too much liquidity risk to go into big things. Why exactly that should be the case isn't quite clear to me. But on some level, I think it does come back to monetary policy.
Specifically, we're still stuck with the Fed's ambiguous communications strategy. What they ought to be saying is that interest rates will stay low for a while come hell or high water. But what they are saying is that they're very sure hell or high water won't occur, so interest rates will almost certainly stay low for a while.
That's confusing. The sub rosa messaging through the press says it's supposed to be a strategy for getting us out of depression, but the above the line statement reads like a promise that the depression will continue. It's confusing, and the more you discuss it with the relevant people the more confused you get. Resolving the land use and permitting issues would help short-term and it's very important for the long-term, but on a national basis we really need a better FOMC statement. Confusion promotes a high preference for liquidity which makes it difficult to finance anything large. Alternatively, in the magical dreamworld where Congress actually does things it could pass a loan guarantee program.