Stocks are lower this morning as the tech sell-off continues. Bonds and MBS are up.
The Senate passed the ROAD act yesterday, which hopes to help address the housing affordability issue. The vote was 85-5, which is about as bipartisan as it gets these days. The bill limits institutional investors which hold 350 properties from increasing their portfolios, but does not require them to divest. Build-to-rent investors will have to offer the properties to the public after 7 years. There are also carve-outs for new construction.
The bill also aims to reduce red tape by streamlining environmental reviews. It also includes incentives to make small-dollar mortgages a breakeven proposition for lenders. It expands the box for manufactured housing and allows community banks to increase their portfolios of public welfare investments.
FWIW, the institutional investor limit is more messaging than anything, but companies like Blackrock have few friends these days and are probably better sellers than buyers of single-family properties anyway. Which means there isn’t much pushback.
Alan Greenspan (the Maestro) died yesterday a 100. Greenspan was considered a god by the business press during the late 1990s as the stock market rallied to new highs. Greenspan has a complicated legacy – he was best known for committing to provide liquidity in the aftermath of the Crash of 1987, which was considered a good move at the time. Unfortunately, he went to the well many times after that, cutting rates every time Wall Street hiccupped, from the Asian crisis to the Long Term Capital Management collapse. He even injected massive amounts of liquidity into the market ahead of Y2K.
This behavior became known as the Greenspan Put, which represented the idea that the Fed would come to the rescue any time markets struggled. Greenspan was credited with aiding and abetting the late 1990s stock market bubble and the 2006 residential real estate bubble. Greenspan’s exit was propitious, slipping out the door just as the 2006 residential real estate bubble peaked, leaving Ben Bernanke to deal with the fallout when it all blew up two years later.
Of course Greenspan’s bubbles were primarily the result of the dual mandate, which tells the Fed to manage inflation while also ensuring full employment. It was well-intentioned and was a product of its time, when the Fed was fighting double-digit inflation during a period 7.5% unemployment. The unintended consequences reared their ugly head in the 1990s. As the Fed attacked unemployment, goods and services inflation remained in check courtesy of imported deflation from Japan. Low rates, the Greenspan Put, and the promise of the Internet was the perfect storm for a stock market bubble.
After the stock market bubble burst, Greenspan cut rates again, which helped fuel the residential real estate bubble of 2005 and 2006. The problem with the dual mandate was that it considered goods and services inflation (too much money chasing too few goods) as a problem, but didn’t contemplate asset inflation (too much money chasing too few assets). Greenspan’s commitment in the aftermath of the 1987 stock market crash may have been helpful, but the behavior it encouraged was anything but.
This behavior was not limited to Greenspan – Jerome Powell pulled out the Ben Bernanke playbook during COVID, treating a temporary pandemic shutdown like a burst residential real estate bubble, buying trillions of dollars of MBS and sending house prices up 20% in 2022. This is directly responsible for the affordability crisis we see today.
