The Housing Market Can’t Tolerate Lower Prices. Now What?

The Housing Market Can’t Tolerate Lower Prices. Now What?

No matter how easy we make it to build, the existing housing system is based on a financial model that cannot tolerate lower prices. If falling prices is the goal, then we need to build a system that can deliver on it. In this episode of the Strong Towns Podcast, Chuck explains how our current system prevents prices from falling and how we can build a better one.

• Click here for the transcript. (Lightly edited for readability.)

  Chuck Marohn 0:00

  Hey, everybody. This is Chuck Marohn. Welcome back to the Strong Towns podcast. There's a theory about housing that has almost like a religious dimension to it, right? The idea is, "If you want to make housing more affordable, the thing we need to do is just build more of it. This is simple supply and demand. Simple economics, Chuck! Housing is in short supply. We need to build lots and lots more of it. And if we do that, prices will go down." This is such a dominant narrative in housing policy discussions that you really don't hear a lot else right now today. "Let's go deregulate housing. Let's up zone properties. Let's speed up approvals. Let the market work. Zoning is a big issue here. We need to get out there and build a lot of housing, and if we build enough homes, prices will become more affordable."

  Chuck Marohn 1:09

  I don't want to caricature that whole set of assertions, but I do want to just point out that, as I've had this conversation with many people, there's a range of what affordable means. To some people -- and I can assert to most people -- it means housing that you can actually afford. Prices that would be in people's price range, where they can get into a house without having to super stretch themselves beyond their means in order to do that. That would be what most people would consider affordable. I think a lot of housing advocates would also say that is the goal. There's a group of housing advocates who say, "No, we've never said that's the goal. The goal is to stop home price appreciation, or to bring home price appreciation in line with inflation" or some other kind of semantics of that. The idea is that, through supply and demand, through building more homes, we can change the price curve around housing so that housing is broadly more affordable to people. Here's the question, and I've been asking this question in a way, but it's now relevant because it's starting to happen. How does this fervor, how does this devotion to simple economics, how does this all kind of play out when housing prices actually start to fall? What happens when housing prices actually go down?

  Chuck Marohn 2:47

  I'm going to point out that this is not a hypothetical question, because we see housing prices starting to fall. Right? Housing prices are widely falling across Florida, right? There's reports in markets like Phoenix and Atlanta and Miami and Dallas, where we've got statistics that show prices are way, way, way down. They're moving in a different direction. What happens when we see broad price declines? Let me tell you, it's not looked at as a positive thing. We don't declare victory and say, "Yes, this approach is working so well. Let's do more of it." In fact, what we've seen is the opposite. A certain level of panic is creeping in. Builders are walking away. Lenders are tightening their standards. Policy makers are rushing back in and trying to find ways to backstop this system, to stop the decline. If we were really devoted to this religious notion, this quasi religious idea that housing is all about supply, and all we need to do is increase supply, make it easier to build, and things will become more affordable. If that is what we are truly dedicated to, we should be celebrating now because prices are becoming more affordable. In fact, I would say we should be accelerating the approach, right? We should accelerate home production, make housing even more affordable. If we were truly vested in that, that's what we would be doing. The reality is the opposite. And for those of you out there who are dedicated to the idea of affordable housing, there should be a bit of a wake up call. A bit of a wake up call that things don't exactly work the way this simplistic model suggests it should work.

  Chuck Marohn 4:52

  There's been a lot of content coming out of housing advocacy world that talk about prices going up and things being squeezed. In the Atlantic, there was an article about rising prices in Dallas and Phoenix. You know, places considered easy to build in. This came from a report put out by Ed Glaeser. In Slate, there was a article by Henry Graber that talked about places that used to be easy to grow in, and now they're getting backlash because of all of the things that we see with that style of development. Like gridlock, school overcrowding, this kind of stuff. Growth fatigue. This is coming out of housing space. But if you flip the channel or go to the financial news, you see a completely different set of stories. Forbes is reporting on rising mortgage delinquencies. AP is saying that 15% of home sales fell through in May. There are other reports about housing starts dropping 10% over the last month, permits falling even further. Builder sentiment is reported to be the lowest that it's been in years. These two different conversations, a conversation about housing as shelter and a conversation as housing as a financial instrument. Not only is this the core insight of our book, "Escaping the Housing Trap," but it permeates this whole kind of cultural feedback loop.

  Chuck Marohn 6:27

  I talked about a religious fervor at the beginning about supply and demand. I feel like we have pulled from economics world a simple lesson, brought it into housing advocacy world and put it as some kind of totem, some type of deity that we worship without fully understanding its implications. If supply were the issue period, as is described in housing world, then why is everybody in financial world who deals with housing starting to lose their freaking minds? If it was simple supply and demand, as the theory suggests, why when housing prices start to go down, is that not looked at as victory? Why is that not looked at as things going the way that they should? And the answer is pretty simple. Because the system that we have built, the one that actually sets prices, the one that actually is sensitive to the things that determine what price is in this country, that system is a financial system. And it's not designed to survive housing prices coming down. Theoretically, yes, we can build our way to affordability. We can keep building homes until prices start to slow down. Prices start to drop and prices become affordable so Americans can get into homes at prices that they themselves can afford to pay. In theory, we can do that. In reality, the way we go about financing housing is never going to allow us to do that.

  Chuck Marohn 8:09

  These two conversations we're having, they rarely overlap. You have housing conversation over here, right? Housing is shelter. It's a basic human need. This is the conversation that advocates and reformers and public policy people are having in regards to housing. There's a whole other conversation about housing, and that is housing as a financial product. It's an asset, it's an investment, it's a lever for wealth creation. This is the language that lenders are using. This is the language of underwriters. This is the language of developers. This is the language of Wall Street. This is the language of money movers. When advocates call for lower prices, they're thinking in terms of shelter. And for them, when they think about what that would look like, it would actually be the price of housing being lower than what it is today. But in finance world, when they get that feedback signal that prices are slowing, let alone stagnating, let alone dropping, that's a warning sign. That is a trigger to pull back, not expand. This is why price drops don't actually lead to more supply. It actually leads to less supply.

  Chuck Marohn 9:32

  Case in point, I want to share with you something I got from an earnings conference call last month. KB Homes, a pretty large home builder, their CEO got on as part of their quarterly earnings report and said that they have canceled 9700 option lots. They had options on lots to go out and purchase them. When you do an option on a lot, you pay an up-front price to, in a sense, secure exclusive access to those lots. It can't be sold to anybody else. We have the option on them. The option will expire after a certain period of time, and they cancel their options. They said, "We're not going to build on those lots." 9700, almost 10,000 units. The CEO said, quote, "We just determined that the market movement in these sub markets wasn't something we felt comfortable would hit our returns." We don't want to take that risk. The market's softening. We're not going to have the profit margins we otherwise would have. And so what are we going to do? We're going to pull back. We're not going to bring as many units to market as we otherwise would have. We are going to build less.

  Chuck Marohn 10:44

  This is the part of the housing market that you don't get much of on the advocacy side, right? It's the part that few people talk about. If we want more supply, that is going to depend on rising prices. Prices have to be going up for us to accelerate supply. The financial side of the system, the part that actually dominates housing construction, housing prices, the side that matters most of all, that side of the equation. It's so tightly wound, it's so over leveraged. The prices have to rise not just so that these firms can have a profit, but just so they have stability. If the idea is that we are going to build and build and build and prices go down, that is overlooking a fundamental truth, which is you're not going to build all that much unless prices are going up. Our theory, our simple supply and demand, says, "Build more and prices will go down." Yes, I get that. I understand. I see how that works. But that's not how things work in reality. When prices go down, builders get nervous. Lenders get nervous. People pull back. Financing dries up. Projects disappear. We let options expire. We don't put homes out into the marketplace as we otherwise would. We pull back.

  Chuck Marohn 12:14

  New construction appears to be collapsing across a broad spectrum of the country. It's not happening because a lack of permits, a lack of land, not even a lack of demand, really, but because the underlying financial risk has become unmanageable. High interest rates, shrinking margins, labor shortages, volatile materials. All of these things are things that builders have to navigate to make a home work, but you have data from Fannie Mae now showing that builder sentiment is at its lowest point in the last 14 years. There's no confidence that housing prices are going to continue to climb. There's no confidence that things are going to continue to go up. And so what happens? We get a pullback. Confidence in the housing market depends on continual price appreciation. So when demand softens, prices flatten, things start to slow down, the system doesn't go and accelerate supply. We're like, "Yeah, there's still a ton of demand out there. Let's build, build, build." No. What happens is we slam on the brakes.

  Chuck Marohn 13:33

  We think that we're dealing in a marketplace with supply and demand of housing, but we are not. We are dealing with a supply and demand of investment capital. That's the limiting factor. And the investment capital is going to go away as soon as prices start to soften. So if you think in this current model, in the current system, that we are going to somehow build our way to housing affordability, you are missing how the market fundamentally works.

  Chuck Marohn 14:09

  Now, I want you to step back and look at what happens when housing prices do start to soften. And we're seeing this now, and we're actually seeing it play out in front of our eyes in very real and measurable and notable ways. But I first want you to go back and look at what we have done for the last 80 years when prices soften, because it's a pattern. We do this over and over and over again. I wrote three chapters about this in "Escaping the Housing Trap", starting with the Great Depression, then looking at the post World War II expansion, and then looking at the Subprime Crisis to today. What do we do every time things soften up? We make it easier for people to borrow more money. We make it easier for people to pay more for housing. We stretch out their mortgage terms, we lower credit standards, we bail out and backstop lenders. We find, in a sense, new ways to get buyers into overpriced homes without actually lowering the price. This is the essence of the housing trap, and we see it everywhere around us.

  Chuck Marohn 12:14

  There's a lot of controversy right now in financial world that spill out a little bit into politics world, right? Where you have the President of the United States, but you also have the head of the Federal Housing Finance Agency, the head of the Treasury to some extent, and other really high officials within the executive branch calling for the chair of the Federal Reserve to either A) step aside, B) be let go, or C) do the right thing and lower interest rates. Let's translate this. And I quote the head of the Federal Housing Finance Agency saying he wants interest rates to come down so that they can, quote, "help more Americans qualify for mortgages." Understand what's being said. Lower rates so people can borrow more for the same payment and housing prices can continue to be high. Despite the marketing, despite what they're saying, this is this is not a call to get more people into homes. This is a call to keep housing prices elevated.

  Chuck Marohn 12:14

  The same agency, the FHFA, the Federal Housing Finance Agency, recently ordered Fannie Mae and Freddie Mac -- which, by the way, are still in government conservatorship, so they are wholly owned government corporations. It ordered them to accept crypto holdings as a way to determine mortgage eligibility. We can go back and forth on crypto and its value in the marketplace. I really don't want to do that. What I just want to point out in this case, is that the only reason to expand the use of derivative products -- not US dollars, but other things -- as a way to determine mortgage eligibility is just to make more people eligible for more money, right? It's to, again, allow people to borrow more to pay more for housing. There's a new credit scoring model that is being used now. It allows rent and utility payments to count towards credit history. This has not been done in the past. This is a story, again, of inclusion. You know, "We should include renters. If you've been paying rent for years and been paying utility payments for years, that should count towards your credit history." Okay, I get it Again, I understand. But what is prompting this reform? It's not an attempt to lower prices. It's an attempt to make financing easier for more people. Again, to make it easier for more people to borrow more money and keep housing prices up.

  Chuck Marohn 12:14

  There's a title insurance -- I was just gonna use the word scam. I'll use the word experiment -- that we are trying now. If you look at mortgage insurance, mortgage insurance is insurance that you have to pay if you don't have sufficient equity in your home. I've experienced it at 20% equity. I think that it actually is less now in some places that require you to have mortgage insurance. But let's just say it's 20% equity. So if you get lent more than 80% of your home value, you're required to have mortgage insurance. And mortgage insurance is the way that banks theoretically ensure that, if prices drop more than 20%, you're not just going to walk away from the home. You're actually going to stay there, and if you don't stay there, there's insurance to back that up. Well, the federal government created this insurance product back during the Great Depression. Federal government was writing this insurance policy. And we have migrated that system over time. You have private entities writing these policies now. These entities actually look at things like your credit history, your underwriting, et cetera, et cetera. In other words, "I'm writing you an insurance policy. How much of a risk are you?"

  Chuck Marohn 19:42

  The great innovation of the 90s was that, instead of actually looking at your credit risk, instead of actually looking at the underwriting and trying to determine what kind of insurance you would actually pay here. Or, let's get real, instead of requiring real down payments, because real down payments would, again, lower the price of housing. Instead of doing that, we pooled the risk. We said "We're just going to take all you borrowers. All of you buy mortgage insurance, and we're going to issue policies to so many people that the bell curve of risk will be adjusted and will kind of bury it in the big number." This was sold in the 90s as a way to cut costs. But the effect is to just hide the fragility. This was experienced in the housing crisis, where all of these mortgage insurance had to be paid off and credit default swaps on derivatives, and all these things came due. And you had bailouts of organizations like AIG and others to try to help make good on these promises and shore up the system. Well, guess what? The new financial innovation is that we're going to do the same thing with title insurance. What is title insurance? Title insurance is an insurance policy you get to cover any kind of unearthed things that might exist in your title. We transfer properties, and we do due diligence, and we come up with title things. But there are things buried in county court records, and there's things in people's basements, and there's documents here and there, and if anything of that surfaces, we will have an insurance policy that allows us to figure out ownership and deal with that issue when it comes up. The bank wants to make sure that they're not writing a loan or issuing a mortgage on a property where there isn't clear title. This used to be, I'm not going to say hyper local, but pretty local in terms of its underwriting. You go to a place and they're going to know what part of town has good titles, what plan has more iffy titles. Generally, if you're in a newer subdivision, you especially if you've gone through a certain process, it's pretty easy to verify. You're going to have a pretty clean title, at least to the property that's been created. Maybe not the underlying property. But you can adjust risk based on your knowledge of the local market. Or you can do what we're going to do now, and this is Fannie Mae piling in a new program to bundle title risk in the same way that Wall Street bundles mortgage risk. Again, this is being sold as a way to cut costs. If we cut costs for housing, then people will A) get into housing cheaper, or B) be able to put more money towards a payment. The answer is, B) they'll be able to pay more for housing. This is, yes, streamlining the buying process. But it treats risk like something that, if you just pool it all together, somehow disappears. And what we have actually seen and experienced is that when you pool risk, risk hides and is magnified.

  Chuck Marohn 23:21

  I'm going through this litany of things that we're doing because this is what financial world conversations are like. And for those of you that don't get into financial world at all. I'm not going to pretend that I am deep in it, or that I deal with this every day, but I have taken the time to try to understand it, at least at a level where I can communicate with people in that world. If you spend any amount of time in that world, the whole conversation about housing affordability is, "How do we make the terms of our loans, the terms of our transaction so that more of your wealth, more of your income, more of your day to day earnings can go towards making a larger payment on a more expensive home?" This is not about affordability in the way housing advocates like to talk about affordability. This is affordability in terms of, "How do we stretch your earnings further?" Now, because they interact with housing world, which has the policy people in it, a lot of the finance people will use the language of housing world. "We're making things more affordable. We're solving for affordability. Trying to get more people into homes." Yet, if we step back and have an honest assessment of what we're doing, it's pretty clear we're just helping people borrow more money in order to pay more for housing. The goal is to keep housing prices elevated while offering a token level of affordability for some through this financial alchemy. Let's be very clear, this is what a fully financialized market looks like. You're not the home buyer in this market, you're the mortgage payer. The product that matters isn't the home. The product that matters is the decades of payments that you've promised to make through a mortgage note. You like to think that you're purchasing the product, and the reality is is, in the market we've created, you are the product.

  Chuck Marohn 25:44

  What's missing in our housing conversation today isn't some kind of debate over whether we should build more homes. We absolutely need to build more homes, and I don't want to obscure that fact in any way, but building more homes is insufficient, like the idea that we just change zoning and deregulate and make it easier to build more homes. That is insufficient. It lacks an understanding of how the system actually works.

  Chuck Marohn 26:13

  And I think even more importantly, it's missing a key understanding about how the scale at which we work directly impacts the way our markets function, and ultimately, the price that we pay for housing. The current system of housing finance operates on a truly global level. Mortgages are created at a local bank. They're sold on to a secondary market, purchased up by bundlers. Bundlers take them, bundle them with other similar mortgages, cut them up into securities. The securities are sold onto markets. They are purchased by banks who use them as their reserves. They are purchased by pension funds who use them as their investment. They are purchased by investors and all kinds of people who are trying to hold these things as part of their reserves, in a sense, in lieu of cash. All this is designed to pool risk. We have federal backing of these, right? We have a system of propping up these securities, propping up these tools. The Federal Reserve, at one point, owned almost every mortgage backed security being issued in the United States. We have a national commitment to backing up our housing market.

  Chuck Marohn 27:30

  But here's the thing: These are global markets, but we don't actually build housing in a global market. We build it block by block. We build it lot by lot. We build it home by home. We are taking a finance tool that is completely out of scale to the scale we're actually working at to deliver housing. And because of that, the housing we're delivering, the way we deliver it, the process we go about building it, the styles we build, the places we build, all of this reacts to and is more sensitive to this macro capital market than it is to actual local supply and demand. Let me be blunt with you for a sec, because at Strong Towns, we don't pretend that we can change global capital markets. We don't pretend that we have any influence, or that any of you listening have any influence over the nature of these systems. Even if you did, it is highly unlikely that these things can be changed. They are, in a sense, the institutions that dominate today. They're the water we swim in, right? And we could go back centuries and talk about how these things evolved and how they're set up.

  Chuck Marohn 28:46

  I'm not under any illusions that we are going to change this. I'm sure there's things I don't understand in capital markets. There may be parts of it that good, decent, honorable people would like to reform and change. I'm not going to pretend that I know what those things are, or that I know the magic button that you could press that would fix some of these things. And, by the way, I suspect when people come to you with those magic buttons, they're either a fool or disingenuous. I really think that the system we've created is more complicated -- more complex, really -- than we can possibly comprehend. I think that was true in 2006 when Ben Bernanke, who I think was being honest with us, said "We've looked at this and there's no subprime problem, there's no crisis, there's no big deal. Just chill, things will work themselves out." And then, less than a year and a half later, we're seeing major banks fail and things fall apart. And Bernanke and others close to power saying "We misunderstood the nature of these markets." I think today, the markets are vastly more complex, way more opaque, less understandable by even the most brilliant among us. So we're not calling for, in any way, reform of these markets. It's beyond our call, it's beyond our mandate. It's beyond what we can do as a movement, as people trying to actually get affordable housing.

  Chuck Marohn 30:27

  Let me be clear, though, we also can't ignore it and pretend it doesn't exist. My critique of a lot of housing advocacy today is that we just ignore this aspect of the market. We kind of assume that capital works and capital flow works, and we just have to work within the system. We just accept that as a given, and then we focus on the things we can do, like, getting zoning codes reformed or some type of state level preemption passed. I mean, I see why people think these are big wins. We cannot change this and reform this market, but we can't ignore it and pretend it's not there.

  Chuck Marohn 31:02

  The key to understanding the Strong Towns approach to housing is to recognize where the gap in the marketplace is. And this really became apparent to me a few years ago, and maybe it was a decade or more ago, in chatting with people in Detroit. You had houses that were in tax foreclosure that could be purchased for $15,000, $20,000. Basically, what would be less than a new car today, right? Something you could finance at a local bank over five years cheaper than you could a car. And the people living in those houses could not get financing. They were being forced to rent from slumlords, people who would not pay their taxes, who would let things go in tax foreclosure and just a really bad, predatory system because they could not get financing. And why could you not get financing for a $15,000 home? Because your origination fee would add another, what, 25% to the mortgage. Your equity would be gone on day one. It just did not work. There is no way to process such a small note, and then have it sold up and, what, bundled with a half million dollar home in California or a three quarter million dollar home in New York? I mean, this doesn't make no sense. It's out of scale. And so what happened is that people could not get financing, and their homes were bought by largely land speculators, slumlords and other people who were doing extractive kind of things and then rented back to people at monthly rental payments. Which, by the way, they were making payments that would have been way higher than if they had financed it with a five year mortgage. The gap in the marketplace is in small projects. The gap in the marketplace is at the starter level of home.

  Chuck Marohn 33:13

  Let's make sure that we're on the same page here. And I know I've said this before on the podcast, but let me talk about what a starter home looks like, because we all have our own version of what a starter home looks like. A lot of the demographic listening to this podcast tend to be college educated, tend to be somewhat affluent, and your version of a starter home is different than a lot of versions of a starter home. I will tell you that I lived in a garage for a couple of years because my parents were building a home, and we couldn't afford the home all at once. We had to build it ourselves, and so we built a garage, and we moved into that. And we lived in that one big room. It was a two car garage, put a wall down the middle, put cardboard up for the walls. And that's where we lived for a year. I had a uncle, and I guess an aunt and cousins, who lived in a basement for a couple years. InMinnesota, because of the freeze thaw cycle, when you put your foundation in, everybody puts in a basement. You just put an extra three courses of a block down once you get below the frost line, and then you got a full basement. So basically, he built a basement, capped the basement, and then they lived in that while they slowly built the rest of the house. Even that is luxurious compared to a lot of starter houses.

  Chuck Marohn 34:35

  A lot of starter houses are the backyard cottage. A lot of starter houses are the small home, 600 square feet, 700 square foot home that's tucked in between two other buildings. A lot of starter houses look like the family whose kids have all moved out, and they're a little bit older, and they only use one bedroom. But they've got a four bedroom house, and so they put a door on one of them, put a little kitchenette in there, and then close up the door and allow the extra bedroom to be rented out. These are often really simple to build. They're often really affordable to build. They can be built at scale in our existing neighborhoods without altering the character of the neighborhood in any significant or meaningful way. They often add a lot of housing units really quickly, but there's just no market for the financing of them. The core argument in "Escaping the Housing Trap," and the thesis behind the first toolkit that we put together and the second toolkit that we're working on right now, the implementation guides to the book, is that, in order to build a healthy housing market in a place, we need the city -- again, in a Strong Towns context, the highest level of coordination for people living together in a place. We need cities to step up and actually fill this market niche.

  Chuck Marohn 36:03

  To build a more localized supply and demand responsive market, cities need to focus on three things. The first one, and this is really the first housing toolkit that we put out. Strong towns.org/housingready to get that toolkit. The first thing is reform our regulations to make building that entry level unit just ridiculously easy to build, to get all your permissions and get out there and build it. The sixth thing in the Housing-Ready Toolkit is a 24 hour permit approval. And we have a lot of places that have done one through five, and they've been amazing. They're not able to do number six. And the reason they're not able to do number six is because they are encumbered with a system that treats these entry level units the same way it treats a new subdivision or a big McMansion, or name your other complicated thing. We actually need permitting of these things to be super easy. Second, we need to support and grow an ecosystem of incremental developers, the kind of people who go out and build one unit here and one unit there, and convert one thing here and have a couple projects going at any one time, but are never going to build hundreds of units. We need hundreds of people building one or two units apiece all the time. This is what communities need. They're there. These people exist. They're sitting on the sidelines. We have a toolkit that's going to come out later this year that's going to walk you through how your city can set this up and make this happen. And then the third -- and this is going to be the toolkit that's going to come out early in 2026 -- we need local governments to help finance these entry level housing units. Let me just say, local governments can do this at scale. And when I say at scale, what I mean is they can do it without risking anything and without losing money. Most times, when we ask local government to get involved with housing, it's as an appendage of a state or a federal program where the local government is asked to be the dumbest of dumb money at the card table. "We want you to take all the risk. We want you to lose all the money, we want you to have all the downside, and all the upside will go to the private sector." This is a recipe for, if not disaster, at least futility in the face of overwhelming demand. If local governments are going to be the difference maker, they have to be able to do this at scale. They have to be able to do it in a way where they don't lose money and they're not risking the city's future. We can do that. We wrote about it in the book. We're going to have a lot more details in the toolkit that will come out early next year.

  Chuck Marohn 38:51

  Let me point out, none of this requires federal permission. None of what we're calling for cities to do requires reform of the financial system. None of this requires state preemption or any type of other work. It just requires cities to decide that they want a housing market that is locally responsive, that they want abundant, affordable housing, and that they want a housing market that works locally. Now, "Chuck, how can we do this if we don't reform the big system?" I'm telling you. The reason that the mega financialization works today, the reason why that dominates everything, is because it's the only player in town. It doesn't have to be responsive to you because you don't have any other option. Go to a local bank and say, "You know what, I want to do a 30 year mortgage that resets every seven years that you hold locally as a bank, and we're going to roll it over so that you don't have interest rate risk of 20% down payment, and we'll run it that way." That was a very common product in the 1970s and 1980s. That is gone. Good luck doing that. You can't do that today. The only people who can do that today are super wealthy people, people who get jumbo loans, and are going to go to a bank and say, "Hey, do this kind of financing for me. This is what I would like. I don't want to deal with the second bundling and secondary market and making my payments at some weird place. I want to make my payments here, but in exchange, I will park X million in your bank." Can't do those products today.

  Chuck Marohn 40:34

  But if you have ample options in the marketplace at the entry level, the next time you want to get into one of those standardized products, the next time you want to get that 30 year mortgage, or the first time, for most people, that they want to move up from that entry level home into something else, look at the position that you're in. Are you without shelter? No. Are you paying absurd rates? No. Are you having your rates go up every year because some corporation that owns your home from 1000 miles away and never sees you and never talks to you just has an algorithm that raises your rates? No. You're buying this from Ma and Pa people in your neighborhoods. So all of a sudden, as a future, potential home buyer, you're not sitting in a position of desperation. You're sitting in a position of stability. And your desire to move up in the marketplace is not out of desperation, but out of aspiration. And when we put home buyers in that position, it gives them a lot more leverage, gives them a lot more market position. And it will make this big outside market not perfectly responsive to you, but more responsive to you than it is today.

  Chuck Marohn 41:55

  I'm going to add in another little component to this, and I'm going to call this like a side benefit. If cities focus on starter homes, if they focus on these small units, backyard cottages, not only can we create a market where there's massive demand today but no financing. Not only can we give people stability in their housing where they can start to accumulate wealth and buy a house someday from a position of strength. But most of the units that we built are not even going to be noticed by anyone. They're going to fit right into the neighborhood in a way that is not jarring, is not disruptive, goes largely unnoticed, and if there is any tension about it, the one thing that you're going to have that we don't have today is true local buy in. Maybe not from everybody. I'm not going to pretend that there won't be NIMBYs who want to fight the backyard cottage and the house up the street. But you know what you're going to have there that you're not going to have with the big corporate builder? You're going to have a local person who stands to benefit from the construction of that backyard cottage. You're going to have the local person who would love to have a renter in that fourth bedroom of theirs, someone who can maybe help shovel the sidewalks in the winter and mow the yard in the summer in exchange for a little bit of rent, because they're getting a little old and can't do that but don't actually want to move out of the neighborhood. These are human dimensions to these transactions that is difficult to put a price on. When we actually recognize that "NIMBYs" have struggles, they have burdens, they have legitimate concerns, an approach that focuses on entry level units, building them at scale, can not only scale to meet the demand that we have, but it will do it in a way that benefits more people, that benefits the community, more broadly. I'm not saying you will have perfect buy in. I'm not saying this won't be hard. But I'm saying it will be a lot easier than a lot of the things we try to cram through today under the umbrella of adding units, when the reality is it will never scale to the size of our problem.

  Chuck Marohn 44:32

  I want everybody listening to step back and try to become more in tune to or in sync with the housing finance conversation. Because once you plug into it, even in a periphery kind of way, even in a superficial kind of way, you will start to hear a language that you don't hear in housing advocacy space. And in the housing finance conversation right now, you're starting to hear the first kind of inklings of panic. Prices are softening, delinquencies are rising, builders are walking away from plans that they once had to build more homes. I think when we come in tune with this side of the market, it forces us to get beyond the dogmatic notions or the simple theories that we have been told on the housing advocacy side, and ask a more sophisticated question. If falling prices is the goal, then when will we start to build a system that can deliver on that? When will we actually have a system where falling prices doesn't destroy the system, but actually accelerates? That's a different model than what we have today. For all our housing advocates out there, I love you, I really do, and I keep trying to remind myself that your heart is in the right place, even if I think sometimes your rhetoric is overly simplistic, and kind of driven by intellectual policy dogma, often in ways that I find very out of touch with reality and very unhelpful.

  Chuck Marohn 46:38

  I think that, for the housing advocacy people, we need to wrestle with the question of, "Are we actually trying to deliver affordability, or are we trying to deliver something else?" And if that something else is just one more unit, one more building, one more subdivision- I get how we get stuck in that paradigm. I'm not even going to criticize it because I understand how the desperation to get someone without shelter, someone without affordable place to live, a place to live. I get why that is a good thing. But I'm asking you to step back and recognize that the current approach is not a path that will ever provide us with housing affordability. It might provide us with more efficient supply chains, which now I've had a bunch of people come back to me and say, "Hey, Chuck, you know, we knew prices would never go down, but supply chains will become more efficient, and that savings can be passed on to buyers." Which I'm like, okay, yeah. Your iPhone has profit margins of like 40%. When are those supply chain savings going to be passed on to you? They're not. They're passed on to shareholders. That's how that works. But you know, nonetheless, "Oh, Chuck, it's not about lowering costs. It's about lowering price appreciation. If we can just bring price growth into line with inflation, everything will be good." Really? That's the new goal post? That's not my goal post. I don't think it should be our goal post.

  Chuck Marohn 48:26

  If we're truly about lowering prices, if we're truly about making housing more affordable to average people, let alone to poorer people -- which I think we should make housing more affordable for all of them -- we have to wrestle with the idea that the current system is never going to do that. No matter how easy we make it to build, no matter if we remove every zoning code and building regulation there is, the existing system is based on a financial model that cannot tolerate lower prices. It can't even tolerate slowing price appreciation, at least not rapid slowing price appreciation, which is the kind of volatility we get today. If we are truly serious about affordability, and we are truly committed the idea of lowering prices, we need to break out of this housing trap. We need to actually recognize the role that scale plays in the outcomes that we're getting. We need to recognize the role that finance plays in the outcomes that we're getting. We can't be willfully blind to those or push them aside and say "That's the free market," or "That's someone else working," or "That's not something I have to worry about." I'm not suggesting we're going to fix it, but we have to find a workaround. We have to find a way to make this work. I don't want us to be part of an illusion. I don't want us to buy into some dogma that may come up with a nice slogan and a few actionable things that can get some people elected, but doesn't actually result in affordable housing.

  Chuck Marohn 50:15

  If you are with me, if you're done pretending as well, then come join us at Strong Towns. Be part of this movement. Be part of this conversation. Sign up to become a member. Sign up to join a Local Conversation, strongtowns.org/local. Become part of the group that's trying to fix this problem. We're not going to solve it by fixing the macroeconomic system. We're not going to solve it by fixing the Federal Reserve or Wall Street, reforming Fannie Freddie, getting some state preemption on something. Do you know we're going to fix this thing? We're going to fix this thing one block, one neighborhood, one city at a time. And just like a housing crisis itself, you come up with a plan to build one unit and two units and three units, and do it over and over and over again. And deliver it and create a method to scale it and copy it and put these ideas out in the world. And all of a sudden, we found that we change everything. That's what it means to have a Strong Town strategy around housing. That's what it means to have a Strong Town strategy around change. That's what it means to respect the fact the cities are complex, adaptive systems occupied by messy, complex humans that do weird things, that do irrational things, that do beautiful things. Let's embrace that, and let's use that to create a nation where housing is responsive to you and your needs and your ability to pay. If we do that, we can change everything. Thanks everybody for listening. Keep doing what you can to build a strong town. Take care my friends.

ADDITIONAL SHOW NOTES

• Learn how to actually make housing affordable with the Housing-Ready Toolkit.

• Chuck Marohn (Substack)

• Want to bring the conversation to your city? Book Chuck Marohn as a speaker.

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