Where Are Home Prices Headed Next After a Tumultuous Year?

WSJ hosted a one-sided interview with a rent control advocate

Daniella Cheslow: It's Wednesday, December 28th. I'm Daniella Cheslow for the Wall Street Journal, and this is What's News. All this week we're taking a look at some of the biggest changes this past year brought to our lives and our livelihoods, the business community, and geopolitics. We're hearing from a range of experts in their fields, who've got a perspective on what's driving change, and where things could go from here. Today we're going to talk about the cost of housing, why it's become so high, and whether the Federal Reserve's policies are enough to bring prices down.

Paul Williams: The Federal Reserve hiking interest rates is indeed having an impact on the housing market. There's a number of analysts who are predicting pretty significant declines in housing prices and for sale prices over 2023. The major risk with them doing that, though, is that in the process they're really hurting housing construction.

Daniella Cheslow: That's Paul Williams, the founder and director of the Center for Public Enterprise. It's a think tank that aims to lower the cost of housing and other goods by growing the role of the public sector. Coming up, we'll talk about what we might expect for housing afforfability next year. That's after the break. A recent survey from the Pew Research Center showed that one in every two people see the availability of affordable housing in their area as a serious problem. Paul Williams is the founder and director of the Center for Public Enterprise, a think tank that aims to bring government solutions to problems, including housing. He says the rising cost of housing is a challenge with a long history, and it will require a profound change to solve it. Hello, Paul.

Paul Williams: Hi. Thanks for having me today.

Daniella Cheslow: Thanks for being here. It's gotten harder for middle-class Americans to buy homes they can afford. Earlier this year than National Association of Realtors said Housing afforfability was at its lowest level in the US since 1989. How did we get here?

Paul Williams: I think to really describe where we're at today, we have to look back to the early 2000s and the housing boom that was happening then. And then when we had the housing recession, construction employment basically got cut in half over a period from 2006 to 2009. It fell by something like 48%. And it really took us all of the 2010s, that whole decade, to get residential construction employment and residential investment back up to the levels where they were pre-recession. And over that same period we also had a lot of jobs being added in our core economic hubs, San Francisco, Los Angeles, New York, Seattle, Boston. All of these cities were adding tremendous numbers of jobs over that period, but they weren't building the housing that was needed for those people. And so we got ourselves into this supply crisis.

Daniella Cheslow: The pandemic had some pretty significant impacts on where people live and work, right?

Paul Williams: Yeah, absolutely. When the pandemic happened, work from home became a really viable option for employers and for workers, and a lot of people used the opportunity that work from home afforded them to move to new places. If you don't longer have to live in Manhattan, maybe you want to live in upstate New York, maybe you want to move to Boise, maybe you want to move to Dallas, Austin. But when you have this giant and rapid influx of demand, prices then start to skyrocket.

Daniella Cheslow: Are we talking about the cost of buying a home, or is this also the cost of rentals?

Paul Williams: Both for sale and rental homes saw similar trends in price increases over the period, yeah.

Daniella Cheslow: I'm a little surprised that over two years of pandemic-driven moving patterns, the market hasn't increased supply to match demand.

Paul Williams: Housing, especially multifamily buildings, but also for single-family buildings, you can't do that in a matter of months. And especially during the pandemic, when you have some supply chain disruptions and difficulties with lumber availability, it takes 6, 12, 18, 24 months to go from permitting a house to having it actually come online. Especially in these cities where a lot of people moved to, like Dallas, Austin, Atlanta, there were a lot of housing permits that were issued in response to all of these new people moving in. But not all of those units that have been started have actually come online yet.

Daniella Cheslow: We're closing out a year where the Federal Reserve has taken unprecedented steps to bring down inflation. Seven consecutive rate hikes this year. How is that affecting the price of homes, the pace of new construction, and do you think that's the best solution to housing afforfability?

Paul Williams: The Federal Reserve hiking interest rates is indeed having an impact on the housing market. There's a number of analysts who are predicting pretty significant declines in for sale prices over 2023. The major risk with them doing that is that in the process they're really hurting housing construction. Jerome Powell has said that he doesn't think that this is going to hurt long-term construction. But we've seen housing permits fall basically every month since May when the hiking cycle really got started.

Daniella Cheslow: I'm hearing from you that maybe the Fed's rate hikes are not the best way, or the only tool that's needed, to get out of this housing afforfability crunch. What is the solution here?

Paul Williams: In the US the housing cycle is really intimately tied to the business cycle. There's a number of programs that operate around the world that we could be looking at here in the United States, to have public agencies who are more risk-loving, naturally, to do housing construction when we do have economic downturns. Because when we have a downturn or the Fed is hiking rates, we don't want our housing construction to fall. And there's actually a number of states and cities around the country that are starting to explore these countercyclical public development programs that I'm really optimistic about.

Daniella Cheslow: You worked in Chicago in housing policy. Is it happening there?

Paul Williams: It is not happening in Chicago, but there are a few states like Maryland and Rhode Island and California that are exploring legislation that could create programs to do this kind of thing. Another thing that I think policymakers should take a second look at is in a lot of European and Asian countries, basic rent stabilization programs are very common. And I think what we saw during the pandemic, with all these migrations, where you have a whole bunch of people all moving to, say, Dallas at once, and rental vacancy rates fall to 1%, which means prices go up, the people who are currently living in apartments should not bear the brunt of the fact that it takes a long time for housing to be built.

Daniella Cheslow: New York City, San Francisco, they have rent control. How does it work out there?

Paul Williams: New York has a rent stabilization law that applies to New York City, but it doesn't cover all buildings and all lease renewals. It applies to buildings built before 1974, and has all these rules around which properties get it. But there's been a lot of movement in a few states toward programs that are called good cause or just cause. They're essentially anti gouging measures, that prevent increases over 7%, 10%, things like that. Oregon recently passed something like that at the state level. Looking at what's happened in these places that saw really high in migration during the pandemic, like Dallas, Austin, places like that, when all these people moved in the supply response happened. All of these new homes got permitted. It's just it takes sometimes one or two or even three years for that new supply to actually come online. And in the interim period, people who aren't responsible for any of those economic factors are bearing the full cost.

Daniella Cheslow: I was wondering how you got interested in this topic. Was there a particular story that caught your eye?

Paul Williams: During the pandemic I actually moved to New York City, in December of 2020. There was this big trend of people moving out of the city, moving to upstate New York, moving to other places. And prices really fell. I was like, "This is a great deal. I'm happy to have this lease." But it's an example of this much larger story that's happening, which is that people are now moving all around the country. And this migration story really stuck out to me as something that was not being covered so much, that I think was underappreciated in terms of how housing markets work.

Daniella Cheslow: You got a great deal in New York. What a shock. Are you still getting a great deal? And what do you think your experience in the New York Housing market tells us about the broader question of housing afforfability in the US?

Paul Williams: My rent has gone up about 4% the past two years, which I think is a level of stability that should be afforded to everyone. I think we need public development programs, I think we need basic rent stabilization programs, and I think that all of these things can help to blunt the negative impact of what the Federal Reserve is doing right now.

Daniella Cheslow: What other steps do you think would help to make it more affordable to own or rent a home in the States?

Paul Williams: One big one that a lot of cities and states are looking at lately is changing zoning laws that were largely designed and written in the 1950s and 1960s, because in many of these places it's illegal to build apartment buildings. And especially illegal to build tall apartment buildings. And they're real limiters on the ability of regions to add the amount of housing they need for all the jobs that they're adding. There's been a number of laws that have been passed in California over the past few years that do these kind of things, increasing the maximum height along commercial corridors, and near bus and train stations. In order to grow in a kind of elastic way, we have to change these laws that are just keeping a clamp down on housing supply. We need to relieve that pressure.

Daniella Cheslow: Looking out to 2023, do you think people will have an easier time finding homes they can afford?

Paul Williams: I hope so. And I think there are a couple of things working in that direction. We are going to see a lot of new homes come online that are being built currently. We still do see pretty high mortgage rates, though, and those are making it more difficult for new households to purchase homes. And there are also things working in the opposite direction. If the Federal Reserve continues hiking rates, we may start to see unemployment rise, we may start to see wages fall. And that's something that's going to make it more difficult for households to afford housing. It remains to be seen, but there are a lot of things that policymakers can do over 2023 that can set us on a much better path for this decade.

Daniella Cheslow: That was Paul Williams, director of the Center for Public Enterprise. Thanks for your time.

Paul Williams: Thank you. Glad to be here.

Daniella Cheslow: And check in tomorrow when we continue our conversations about the big issues that shape the world this year, when we'll be talking about markets and investing with John Rogers Jr. of Ariel Investments in Chicago.

John Rogers Jr.: We're seeing the gas prices declining dramatically, week by week. You're starting to see many green shoots when it comes to grocery prices, and positive things happening there. So I just think that once you broke the back of inflation, it's going to surprise people as it goes lower than people have anticipated. And it will help us be able to move toward a soft landing. And I think the Fed is doing all the right things at the right time.

Daniella Cheslow: And we've got a lot of other reflections on 2022 from many leading voices in their fields, on our website. Check out our Year in Review special report at wsj.com/year-in-review. I'm Daniella Cheslow for the Wall Street Journal. Thanks for listening.