The Housing Crisis Is More Than Just a Supply Problem

In this episode, Chuck dives into the root causes of the housing crisis. Using clips from interviews with housing experts and reporters, he explores the popular theory that the housing crisis is caused by a lack of supply. He shows how this belief relates to the Strong Towns approach.

• Click here for a computer-generated transcript.

  Chuck Marohn 0:00

  Hey, everybody, this Chuck Marohn and welcome back to the strong towns podcast. I've not been shy about saying that I have apprehensions, let's say, with the broader yimby conversation, the yes in my backyard conversation. Apprehensions, is, I think, the right word certainly. And I've said this many times on this podcast, let alone write it, the yimby conversation and the strong towns conversation, the Venn diagram there has a lot of overlap, but the areas where there are not overlap are not small areas. They are significant places where really the underlying set of insights lead us to broadly different conclusions, not only about what's going on, but about what needs to be done. I want to start by just affirming what I think is the base yimby argument, which is, there's not enough housing. We agree. Strong towns agrees. I agree. I want a lot more housing. We need a lot more housing units. We need a lot more housing built. I take that really, really, seriously. I am dedicated to the idea, and have been for a long, long time, that we need a lot more housing built in this country. I think where we fall short and where the conversation diverges is this idea that that's really enough. Now there's gonna be some people out there who identify as yimbys, who are listening to this saying, I we've never said that's enough. Yeah, yeah. I know there's a just like in the strong towns conversation, just like in every conversation, there's a lot of divergence of viewpoint. There's a lot of diversity of opinion. I can respect that, and I'm not trying to paint with a broad brush, but there is an emphasis in the dialog. In fact, to the extent that I've been told, Hey, why are you messing around with this financial stuff? It's a side show compared to the underlying issue that there's just not enough supply. The yimby logic is really designed for the political realm, for winning federal offices, for winning state offices, for getting state legislation passed. And because of that, it has to be really simple. There's not a supply. If we build supply, prices will moderate or go down. The problem is simple. There's not enough supply. Period. End of story. Everything else is a distraction to that. We're not doing that kind of work in the sense that we don't need our message to be dumbed down or oversimplified for a political audience. We're not trying to get state legislation passed. We're not trying to have some slogan that gets, you know, someone elected to some higher office. It's just not the project that we're undertaking. So we can actually address the nuance and the complexity in a really thoughtful way here. And I'm going to say the problem of supply, yes, is there, but there's also this problem of how we actually deliver housing. Who gets to build that housing, and the kind of systems that we create around housing production, I spent the last few weeks interviewing people on this podcast to talk about housing, and they brought different viewpoints, viewpoints that I am not sure I totally agreed with but I wanted to give those viewpoints voice. I wanted people to hear them. And you know, right away, when I started talking to Conor Dougherty, I'm like, All right, there's got to be a follow up that I do here to tie all of these conversations together, because they all do tie together. They all are related. And there are points that I want to emphasize outside of, you know, the back and forth that I was having in these interviews on this show. I started this by interviewing Conor Dougherty. Conor wrote why America should sprawl in the New York Times. His argument was that to address the housing crisis -- which, again, I'm going to say he takes seriously -- we need more sprawl. We need to build more suburban tract housing out on the edge of cities. We need to build it fast. We need to build it at scale. There was a lot of anger at Conor when the article came out. I wrote a rebuttal article. There were a lot of places that I heard from a lot of people, I heard from a lot of people you would all know, who got a hold of me and said, you know, this can't stand. There was a lot of outrage about this. To me, what Conor was arguing for was pretty logical and simple, right? If you believe that the crisis of our time is housing, you believe that is the most important issue, and you also believe that the only real problem around housing is a supply and demand problem, and that anything that impairs supply is undercutting the goal of making housing affordable. If that's your kind of simple message and you believe that, then the logical conclusion is that we need to go out and build housing. We need to build it wherever we can, however fast we can. I've made this point before. I mean, I did a podcast a couple years ago when escaping the housing trap came out and said, you know, there's a logical conclusion to the yimby arguments of just build, build, build. You know, we need yes, big tower apartment buildings, et cetera. And then we need more housing out on the edge, because that's where it can be built really quickly. If you take the yimby argument seriously, that we're in a massive housing crisis, that this is the challenge of our time, and that supply is the problem, everything else is a side show to that problem. Then you look at the tools we have and the tools we have, say, go build this way. I found his arguments wrong in the article, but I found them logical internally. This is essentially the same argument that Cullum Clark made. Cullum was from the Bush Institute. I interviewed him on the podcast and his new report on housing. He argued, essentially, we need more housing. He's agreeing with the argument that there's a supply shortage. He had then argued in the report that, hey, we know how to build housing. We know how to build it quickly. We know how to build it at scale. We've got the tools to do it. Let's go. Like, if we're going to take this argument seriously, if we're going to actually buy into the idea that the problem is a lack of supply, that everything else is a side show to that, then let's go. We know how to do this. The third interview I did in this housing series was with Steve Nygren, the developer at Serenby. And I think it's interesting when you listen to Steve, because he's not trying to solve the housing crisis. I mean, he may agree that there's a shortage of housing. He may agree that we should build more housing. He may agree in a bunch of ways, with that underlying thing, but the thing that motivates him is not to get enough housing built to solve a crisis. You know, I'll point out he's the only one of the three that's actually building housing. But, you know, that's not what motivates him. He's trying to do something else. He calls that something else, common sense. If you listen to him, he also makes allusions to, you know, the quote the way we built cities 100 years ago. So, you know, there is an emphasis on how we build and how we build being as important as what we build or the volume that we build in. I want to, in this podcast, tie these three things together, and I'm doing this in a weird way. I'm sitting in my office at a different desk than I usually record at. I'm using a different system because I'm going to splice in a bunch of quotes from these three podcasts. I've tried to record this like four times. One time they decided that now is the best time to mow the lawn, literally right outside the window the office here. So if this podcast sounds a little different, you're getting a little different, and you're getting a little ambient noise in the background, because I'm using a different microphone in a different spot. But hang with me, because what I want to do is I want to go through each of these arguments, and I want to help you hear them in a strong town's way. I want to help you hear what Conor said and what Cullum said and what Steve said, and I want to help you hear them, because they're all describing an underlying problem that we are also trying to describe in escaping the housing trap on this podcast and the writing that we've done on housing and all the stuff that we do now, The first clip I'm going to play here is from Cullum Clark. And you know, this really gets to the question of, why are you recommending that we build in this style? Why are you recommending, essentially, that we double down, triple down, on the North American development pattern. This development pattern that you know him and I both agree, has lots of problems, lots of deficiencies, lots of downsides. Here's Cullum on this.

  Cullum Clark 9:27

  Yeah. I mean, there's no question that I am primarily in this report talking about doubling down, tripling down on what we know how to do, as opposed to developing entirely new muscles that have not been ever really exercised in this country, or no time in my lifetime, and yours to any meaningful degree. But I think, you know, I'm a friend and a fan of yours, and I think you have, in some cases, talked about developing some new muscles. So I'm influenced by that. I go out and preach about it when I can. I guess I would say I'm enough of an empirical economist. To want to say there is evidence that what I am suggesting can, in fact, be done at large scale, that we proved it can be done.

  Chuck Marohn 10:08

  I think what you're hearing here is the practical insights of an economist. Again, I'm going to say there's a financial conversation about housing, and there's an advocacy conversation about housing, and the one thing that I think ties the three people I interviewed together is that all three of them are versed in both sides of that conversation. Most people, and I'm going to say this is going to sound a little bit ungenerous, but most people that I hear talking about housing, particularly from the advocacy yimby esque side, consider the finance part to be an afterthought, because they really don't grasp it. They really don't understand they really don't deal with it. It is an afterthought, because, in a sense, out of mind, right? But what you hear from the three people I interviewed, from Conor, from Cullum, from Steve, are people who deal with the financial part all the time. Cullum is saying, and I think he's right, Hey, we got the muscle memory to do this, like we know how to do this. And I'm stepping back, and I'm agreeing with people that prices are being spiked. Prices are out of control. Prices are going up and and we need to, as part of dealing with that, build a lot more units. Here's what we know how to build. And, you know, he said it in a kind way. I'm going to say it in an unkind way. Here's the unkind way to say this. Oh, Chuck, you're so cute. The things you want to build, I agree with you. Wouldn't it be nice? And in a fantasy world, we would do that. But, you know, I'm a practical economist, and I live in the real world, and I look around and I say, who can actually deliver on this? And here's the people who are delivering on it. And so if we're going to take this yimby argument seriously, if we're going to take seriously the idea that there's not enough housing, I can solve that problem. And I can solve that problem by saying, We've been here before we know how to do it. Let's get out and build Conor takes the next step, and I think here I'm going to play his quote talks about why we build, what we build, and I think explains why someone, from an economist standpoint, like Cullum, would have the insight that he has.

  Conor Dougherty 12:19

  There are two things in America that people really hate. One is, like, massive, suburban kind of subdivisions, which are obviously popular with buyers, but, but generally speaking, people don't like how they operate. And then the other is these, like, block long, you know, giant, like, five to eight story, like-

  Chuck Marohn 12:42

  Yep, big complexes.

  Conor Dougherty 12:44

  Complexes in the middle of a block, like the things you see in Denver and Dallas and places like that, right? And so yep, and he goes. But those are the only two things we're basically allowed to build on this country. And so what's interesting to me is, if you look at the like manufacturing slash capital side of housing, it is almost all. There is not some like Toll Brothers of triplexes. And to the extent there is, it's Toll Brothers in more Toll Brothers kind of, I mean, I'm not specifically talking about Toll Brothers, but-

  Chuck Marohn 13:15

  In some Greenfield they're doing where they add that, yeah.

  Conor Dougherty 13:19

  And so for the California kind of more zoning oriented type stuff to eventually happen, you almost need to, like, build a separate industry, like, and I think that can happen, but it's something that has to happen. Just it has to sort of happen, basically, gradually, you have to build the industry like changing the regulations is not itself going to just lead to some explosion. It is not the bottleneck.

  Chuck Marohn 13:48

  Regulations are not the bottleneck. And I think that, in and of itself, as an assertion, is just heretical to the yimby thinking, the idea that, you know, the big thing we need to do is fix zoning regulations, and that will solve almost all of our problems. I've disagreed with that from day one. Conor disagrees with that as well. It's interesting, when you hear him talk, you know, the only things we're allowed to build are these suburban subdivisions and the big towers, the big complexes in the middle of neighborhoods. But he goes on to say, you know, we've made that argument for a long time, like those are the only two products that the market is financing. He goes on to say that, you know, this is what the builders are set up to build, and this is what the financers are set up to finance. And if you want something different, you actually need an entirely different industry. This is what the industry of building we have created delivers. And you can get rid of the regulations, you can get rid of the zoning. You can change that and hear me clearly. We need to change that. We need to get rid of that. We put out a toolkit earlier this year about how to do it. We wrote a book saying this needs to happen, but that alone is not enough. That alone is not enough because, as Conor says, like, there's no Toll Brothers of building triplexes, like there's nobody out doing these at scale, and the only way you can work in our current system today is at this monster scale, the scale that can be financed by the financial products that we have set up. Let me go back to Cullum here who says a similar type of argument.

  Cullum Clark 15:34

  If we're talking about single family homes on kind of existing lots, I think that that? I mean, that's probably the area that the rules restrict, least, you know, like the local the local rules in general. I mean, we have a, I mean, here in Texas, you know, seeing the single family home demolished and another one, typically bigger, going up in its place. That's the most ubiquitous side around that's that's happening on almost every block I can think of, or at least it has done in the last handful of years. So we're good at that too, but we're not good once you get below a certain, you know, price point, we got to develop some new muscles. I agree.

  Chuck Marohn 16:13

  I really like call him a lot. He's a he's a good guy, and he's agreeing with me here that we need different ways of financing these things. We need to develop new muscles. But he makes clear, and I think he's right, and I thought he's right for a long time, that the muscle we do have, the muscle memory we do have in place, is to build these single family homes, to build from Dallas all the way the Oklahoma City border, as as Conor talked about in his New York Times article, these are the tools that we have. They're the tools that are scalable, that the tools that we can use. And if we focus on the idea solely that the only thing that really is the problem here is supply, how do you not reach the conclusion that we use the tools that we have to accomplish this as quickly as possible. How do you not reach that conclusion? I think that's what we hear these two saying, and we hear them saying clearly. I included the little clip about from Cullum about developing other tools, because it's an important part of this overall conversation. It's important part of where I want to be. He said, develop different muscles when you stretch different muscles. Conor talked a little bit about this, and I want to use a clip from him to kind of make this transition to what a different set of muscles might look like. Here's Conor Dougherty again.

  Conor Dougherty 17:40

  But when someone builds an adu, you just talk to them, and you listen to their calculations. They're like, Oh, I could take a home equity loan out build this thing, and then I'll get, you know, but if I rent it out, I make like, $500 a month net of like, I'm adding to my mortgage. I'm getting a rent and I'm making a profit of $500 a month, right? That most homeowners don't think to themselves, Oh, I could take a giant home equity loan out, put it in the S&P, and have an annual compounded right? But investors do, right?

  Chuck Marohn 18:16

  No, investors absolutely do.

  Conor Dougherty 18:18

  Investors, when they are weighing whether or not they are going to invest in a apartment complex, they are weighing it against the risk adjusted returns of like, all the other things they could do in, like, the world you I mean, more or less right, you know, especially right private equity firm and and so they are only going to invest in the kinds of housing developments that can compete with like I had to pay a higher return, right? You know what I mean. And so I think one of the reasons adus have actually been successful is that the people who are building them basically aren't thinking on that scale.

  Chuck Marohn 18:52

  Okay, there's a couple things I want to point out in what Conor just said. The first one is, the way that developers in this system operate. And let's be very clear, he is talking about the big corporate developers. They're the ones delivering this stuff at scale. They're the ones that we're looking to to build lots of units. They're the ones that we're looking to to solve, you know, quote, unquote, solve the housing crisis. And he explains, and I think he explains quite well and quite accurately, that they respond to a different set of incentives than what we do. And by we, I mean you and me, non developers, non people who are not in the corporate development business. He uses the example of, you know, the home equity loan and the adu and how just kind of irrational it is when looked at from this corporate perspective. Nassim Taleb had this great little talk he did years ago, and it stuck with me about fragility. He talked about the human body as being, you know, this inefficient system. We have two lungs. We rarely use all of our lung capacity. We never use all of it. We rarely use even a fraction of it. Why do we have all this excess capacity just sitting around that we have to metabolically sustain? We have two kidneys. We only need one. Yeah, you might, might might need a backup. But it seems kind of silly to spend this much effort and energy sustaining something that is really redundant that you don't need. You may hear me say that, and you're like, Well, Chuck, that's absurd. I might need that kidney. Yeah, that's because you don't think like a corporation. If a corporation were a human body, they would sell the one kidney, or they would borrow against it. They would, they would rent it out and, you know, make money off of it and then buy it back if they needed it in an emergency. Someday, they would rent the rest of their lung capacity, because then you could use that leverage to get higher returns on the rest of your portfolio. So these groups think differently than we do. They act in a markedly different than we do. And I think the most important thing here is that they're responsive to a different set of stimulus than we are. Part of the underlying assumption of the only problem is supply kind of argument is that we can actually build enough supply to satiate demand, or even, I'm going to say, build enough supply to moderate prices. One of the things that we recognize, and I think Conor recognizes it clearly in this quote and throughout his article, is that you know, as prices come down, what do you see the market doing? The market is responding to interest rates, it's responding to returns in the S&P, it's responding to other things, and if really money is better made in other places. In other words, the returns on housing are going down or stagnating or stalling, let alone housing prices start to drop. You take your money and invest it somewhere else. You don't continue to build. And so the housing trap that we talk about in our book, the housing trap that we talk about over and over again on this podcast and in the writing that I've done on this is is a recognition that when we have a system that is more sensitive to other inputs, particularly the financial situation of how they're financing things, how they're selling things, how their cash flow works. When you have a program that is more sensitive to that than anything else, they are not going to fulfill the thing that you are sensitive to, aka supply. In fact, there is a benefit to having a short supply when you're more sensitive to the financial side of things. We hear financial markets right now talking about softening in housing markets across the country, whether it be in Florida or Texas or California, you don't hear that much in the advocacy space. You don't hear that in housing, non financial housing news, you hear the continued mantra of shortage, shortage, shortage. But if you listen to the financial news, you know it's the middle of July right now. If you listen to financial news over the last 3456, months, you hear all this stuff about softening in the market. The market's starting to soften. The market's starting to go down. People are starting to pull back. Housing is a bad investment. Now, what Conor lays out here is what in investment world would be considered irrational, the family who has a little bit of savings, or the family who has a little bit of equity, taking that money and turning it around and using it to build an adu. Not an adu they can maximize in rent or value will go up 3% a month that they can, you know, get some more equity out of in a few years, not an adu that they can continue to raise rent so that they can maximize their return, something that they can make work on their property with their lifestyle that will add to their lives a different set of motivations, a different set of understandings. Conor's talking about this and saying, you know, this is a different system. This is a different approach. And if you think that you're going to get the outcome that you want by merely removing the zoning code or merely changing the rules and regulations, yes, part of the prerequisite is doing that, but if you think that that is it, you're missing 80% of what's going on. You're missing the vast majority of what's actually driving housing prices. Let me give you a little bit of Steve. Now, I really like Steve Nygren. He is kind of the oddball in this group. I'll point out that he is the only person actually out building housing in this group of three people that I interviewed. But he's also amongst developers, a bit of a oddball or outlier as well. I say oddball, Steve, if you're listening. I say that in a most affectionate kind of way. Here's Steve Nygren.

  Steve Nygren 25:17

  As we start planning and permitting. I discovered that over 50% of them were not allowed for one or another. And so here's where common sense, this is like. This is all pretty simple. I'm not I'm not discovering something new. In fact, the best place to look is, how did we live and develop 100 years ago? But through these decades, we have so many unintended consequences to the rules and regulations and systems we've set up that we've really changed how we develop where people live. And so it's just kind of clear all that, you know, most of our people coming out of planning architecture, they have that naive mind, and gradually they're beaten down by rules, regulations and and so that's hey, let's look at this common sense thing.

  Chuck Marohn 26:14

  When I do the escaping the housing trap talk, I spend the first maybe third of the conversation, maybe a little bit more, going over the history of how we financed housing. If you read escaping the housing trap, the book, we've got three chapters on this journey from you know, let's use Steve's language, the way we would have built things 100 years ago, the way we would have financed them, the hyper local way in which the housing economy was built, how that evolved into what we have today, which is a very centralized, very financialized type of market, one with fewer players, one with players who are more sensitive to capital markets than they are to supply and demand, one in which the incentive is to have a steadily increasing amount of shortage in the market so that your investments are, in a sense, more stable, more guaranteed and can be, let's use words I used earlier, leveraged to greater success. When you're going to use debt, when you're going to use leverage, when you're going to borrow that you know, 10% of equity, or 20% of equity you have, and then leverage that you know, to buy more units and do more things, the thing you need more than anything else is price stability in your assets. The thing you would like to have is price appreciation in your assets. The thing you cannot have is price decline in your assets, because price decline in your assets wrecks the entire thing. When I hear Steve talk, he's talking about getting back to a way of building that would be anachronistic. It would be old fashioned in a way that financial people would laugh at today. Oh, isn't that cute, but I'm going to say it's old fashioned in the same way that the person who puts the adu in their backyard so they can have 500 bucks more of income a month, would be cute to someone, right? Why aren't you leveraging your equity for more gain? Why aren't you increasing rents by market rates every month? Why aren't you? Why aren't you, why aren't you? These are the impositions of a market that emphasizes efficiency and emphasizes and rewards scale. Here's Steve one more time.

  Steve Nygren 28:49

  And because we have the regulations, we don't change the regulations. We're not educating our financial institutions that there's a different way, a better way and a more profitable way. And so 20, 25, years ago, when I talked about doing an environmental community, I quickly stopped talking about an environmental community. They already thought I was some sort of hippie. And so they imagined, 25 years ago that I was talking about, you know, mud, straw bale houses, right?

  Chuck Marohn 29:19

  The Eco village, compost toilets.

  Steve Nygren 29:21

  Yeah, all those things ecovillage and in Ithaca, you know. And so I said, Okay, this is the biggest thing we can do, is change the financial and government's attitude about the need for big lots, or, you know, small lots. And so I said, when I really started to understand I was going to be developed, developer to save the backyard, but if we were going to do it, we needed to change attitudes about environmental communities, because we were at the forefront of that. And so it's like, okay, how can I sell the most expensive piece? A property that's the smallest lot that faces a farm or a forest. And if I can do that, I'm going to get the attention of the financial community, because we're going to change that trend of what you think of small lots and saving the forest or the farm.

  Chuck Marohn 30:18

  Here you have Steve talking about a financial model that is more profitable than the current financial model for housing. It's fascinating because I heard Andres Duany make this point numerous times, and almost to the point of being like exasperated, like, I don't get it. Why would you spend more to build something that is not only inferior as a product? I mean, not only, you know, do people not like it and have lower satisfaction, but people pay less for it. Why don't you build things? And you know, he famously has built many of them, but they wind up to be in many ways, like, you know, museum pieces or works of art that you go look at instead of places people live in. Why wouldn't we build more places like this? Because people will pay more for them. We actually spend less money building them, and people pay more for them. Like, why would more developers not do this. And the answer is really clear. The answer is really, really simple. The market is set up to do what we're doing today. The financial system, created by and backed by the federal government, is set up to build single family homes at scale is set up to build five and six story tower condo units at scale. There is, in a sense, unlimited amounts of financing to build this stuff. It's really simple. It's really easy to do, and even where it can be done more profitably, in a different way, even at greater scale, those ways are not easily financeable. Those ways are not being done because there's no financial market for those things. Let me switch back to Conor Dougherty, because Conor said something that I hope you caugh. To me it was a big part of the answer, but also a deep insight to why we're stuck in this housing trap. Here's Conor Dougherty.

  Conor Dougherty 32:29

  Many of the predominantly Latino builders that I met who were doing those legal units, they are the Microsoft of their time. Like, they understand the housing market in Los Angeles better than any quote, big developer I've ever met. Like, what are the specific needs of people? What can they specifically pay? How do we create housing? You know, whatever, right. But because of the way capital and regulation works. They're not able to just- If they were in tech, they would have just wiped out the industry at this point. All these people building luxury apartments, I mean, essentially they're doing what they're doing because that's what the people who are financing them want them to do, they're absolutely not doing that because that's what the market wants.

  Chuck Marohn 33:20

  We are building what we build because that's what people will finance, not because that's what the market wants. And I want to reiterate this because I spent a fair amount of time in Southern California. I really have an affinity for the city of Santa Ana, I like Costa Mesa too, but Santa, Ana, I really kind of extra, like, I've just gotten to spend some intimate moments there in some neighborhoods. This is a city that is largely immigrants, a very high Latino population, and it's a place foreign to me, like I'm a central Minnesotan, but I found it to be absolutely invigorating and absolutely beautiful. One of the things that Conor talked about his podcast, and we talked about outside of the podcast, was the fact that there's a lot of what would otherwise be illegal or unregulated construction going on in places like Santa Ana, in places like Los Angeles, done by these communities serving people within their community, and meeting their demands, taking that garage and turning it into a rental property, putting a backyard cottage in, taking the single family house and making it into a duplex. These things are all done outside of the rules and outside of traditional financing because they need houses, and that's what they do. It's fascinating to me. I was in New Zealand a couple of weeks ago, you know, I met with their Minister of Transportation and Infrastructure and housing. Basically they're like Secretary of Transportation for. Fella, and he was great. But, you know, I'm in a room with what Chris Arnade would call front row people, and they're interested in front row solutions. He was coming to the US with a delegation that was going to visit New York City, was going to visit I think Nashville, was going to visit Houston, wanted to know about the municipal utility districts in Texas, you know, very front row kind of things. And I made my standard recommendation, hey, if you come in the US and you want to see the best stuff, you want to see stuff that's really interesting, go to Memphis, go to Buffalo, go to Shreveport, go to Detroit. These are the cities that people are doing interesting things in. And I would add, go to Santa Ana. What you have in these places that are, in a sense, not privileged to be front row, right, a little bit disadvantaged, a little bit underserved, a little bit outside of the, you know, 30 year mortgage market is you have systems that have arisen to actually accomplish the same kind of things, but in a way that's far more dynamic than, hey, you know, let's force the city of San Francisco to allow a six story tower near A transit stop, and, you know, at the same time, let's force the city of Brainerd, Minnesota, where I'm from, to put in a six story like, highly subsidized unit in the middle of downtown, where the tallest building is two and a half stories, right? Like, let's, let's do that. These are places and people doing things that, to me, are the model for what we need to do everywhere. When Conor started talking about this, I felt like what he was getting at, and what he was revealing is, you know, what Steve would just say, is that common sense development, right? People need houses. Let's go build houses. Let's not turn to Wall Street and say, Hey, Wall Street, can you scale this up for us? I mean, there's a reason why Wall Street isn't meeting the demand. Wall Street has a different version of efficiency, a different version of rationality. That person putting in the backyard cottage, again, is not getting two or three tranches of loans against it and using it to leverage other side bets, where they can buy, you know, other instruments to increase the size of their portfolio. They're trying to make a couple extra bucks so they can pay their mortgage off and maybe send their kid to college, and, boy, if they're really lucky, take a nice vacation. It's a different set of motivations, and it's a set of motivations. I'm not I feel like there's a little bit of, like a moralistic dimension to this that I'm dancing around. Let me just say clearly I'm not trying to make a moral argument. I think you could make a moral argument around here. I'm not trying to make that argument for the sake of this podcast. What I'm trying to make is a market argument, the idea that these systems we have set up are not responsive to you. They're not responsive to what you need. They're not responsive to what your market is asking for. They're not responsive to what people need in your place. They are responsive to what can be financed and what can be financed at scale. We're using lots and lots of leverage. If your definition of efficiency is market leverage, you are going to be short of building the types of units that people want, demand can pay for, can get into if your idea of efficiency is actually creating a localized market where supply and demand deliver the units to people at cost they can afford. You have to actually step back and acknowledge that the current system will not do that, cannot do that is not set up to do that is not ever going to be responsive in a way that will deliver that. Here's Cullum Clark one more time.

  Cullum Clark 39:04

  The people who do that work today are almost heroes, because it is such an uphill battle and a hard way to make a living, Chuck. Hard way to make a living. If this is what you want to do with your life, and you develop some talent at it, I mean, that's that's just not a way to get rich? Yeah, I'm sorry to say, because absolutely that would be for cities. It's probably not actually a great career path unless someone, as you say, has got a certain amount of the heroic in them.

  Chuck Marohn 39:28

  I'm sick of asking our incremental developers to be heroic. I'm sick of asking them to be irrational. I'm really sick of trying to find the Monte Andersons of the world, the Steve Nygrens of the world, the crazy people on the outskirts, the outliers, who have bucked the system, who have said, you know, I know this is not the way to make the most money. I know this is not the easiest way to make money, but this is how I'm going to sleep at night. This is how. I'm going to do what's in my heart and make a living doing it. I'm sick of having to find, inspire, raise up heroes to do this work. It should not be this hard. And let me say to all you yimbys out there, if we actually want to build enough housing units. It can't be this hard. We actually have to change how we finance things. We actually have to change the interaction between the things we want to have built and the way we go about financing them and building them. Now I know cities can't set up their own mortgage market, their own set of collateralized debt obligations, their own set of mortgage backed securities. I know the 30 year loan is not going away anytime soon, even though it's one of the dumbest financial instruments out there. In fact, I think that the 30 year loan has more chance of being replaced by the 40 year federally backed loan than anything else. But that doesn't mean that we can't do rational things at the local level to start to shift this market, to start to change this market, to start to address the parts of the market that are non responsive to our needs. When we look at those people out there being heroes, and column says, you know, hey, you've got to be heroic to do this kind of work. You know, it's admirable. It needs to be done. It would be great if people were doing it, but you know, you've got to be a hero to do it. We can make it a lot easier for them in escaping the housing trap. We set out three things that cities need to do. The first one, we need to make the rules easier. This is where us and the yimbys are on the same page. The regulations, particularly to build those entry level units. And I know they get mad at me when I say, like, I don't care about the condo tower. I think if you are living today in San Francisco, if you are living today in New York City, if you are living today in Chicago, you're two blocks from a billion dollar transit stop, and you've got single family homes around you. You know, to me, I would say you've done some really dumb things to get to this point. But I'm not going to argue that you shouldn't have massive amounts of investment there. Go build it. I think it's ludicrous the way you got here, but I'm with you, like, go out and build it. But if you're in most neighborhoods in America, if you're in the vast parts of Spokane or Kansas City or Phoenix Mesa, or, you know, Brainerd, Minnesota, if you're in those kind of places, you just need a different kind of marketplace. You need an infusion of what is lacking in your market, and that is entry level units. Those are the units that we are going to be able to easily, bring online, quickly bring online. These are the kind of units that look like a backyard cottage. It looks like someone with four bedrooms that they're not using anymore, converting one of them into a rental unit. It looks like someone taking their big McMansion and, you know, changing it into a duplex or a triplex, just by adding some walls and some, you know, firewalls and maybe a different meter on the outside. These are things that are doable at scale, really, really quickly. At low budgets, we need to make them ridiculously easy to do in our codes. At strong towns, we released a guide, a toolkit, housing ready toolkit, earlier this year. If you go to strong towns.org/housing, ready, you can download that toolkit for free. It's got the six things that every city should do to make the regulatory part of the process easier. The second part is that we need to make it easier to be an incremental developer. It should not take a heroic person to do this work. It should just take a normal person who cares, someone who just has a passion, has a desire to do something, sees the market demand and wants to meet it. That's how a free market should work. We want to help support those people. We have a toolkit that's going to come out later this year. It's the middle of July right now, say, like two months to three months. Somewhere in that timeframe, we're going to release the second toolkit in this series to give cities the tools they need, the steps they need, to help nurture that ecosystem of incremental developers. How do we get them together? How do we stand them up? How do we get them off the sidelines? How do we get them active in our community? How do we get them out solving the problems? The third part, though, is the finance part. And again, I said, cities are not going to have their own mortgage backed securities. They're not going to finance their own 30 year loans. They would be dumb at doing that. They would lose money, they would wreck the market. They would be horrible at it. But you know what cities can do? Cities can put capital where there's no capital today. Right? Where is there no capital today in an entry level market? You heard from Conor earlier, who said, there's no money to do this. You heard from column earlier, who's like, hey, you know this is what we know how to finance. When you start to get lower than the price point, it becomes cost prohibitive. Cities actually have the ability to do this at scale. They have to be ability to do this at a profit, in other words, without losing money. Notice, I didn't say maximizing profit, but I said scalable in a way. There, they can do it over and over and over again. In order for the city to do something over and over and over again, they can't lose money doing it. Cities can actually finance the kind of housing we need, the entry level housing. That's stuff that has huge demand in the market, but nobody financing today and nobody building cities can do that at scale. We're going to release a toolkit early 2026 we talk about this in the book. I talk about this in the housing trap presentation. People still have questions. We're going to try to simplify it down. So we're going to have a toolkit that comes out early 2026 that's going to six, that's gonna go through step by step by step. Exactly how you do this? Let me end with Steve here, because I think his thoughts are maybe a good way to take us out.

  Steve Nygren 39:30

  So we really have to educate both the regulatory community and the financial community that that poo poo, and think it's, Hey, this is Nygren on his crazy idea. We have moved past that, and the market showing it, and we're showing how this can happen.

  Chuck Marohn 39:30

  I would argue that Steve Nygren is a hero, right? Like I would argue that he's out there doing heroic things. He's he's out there doing crazy things, right? And he even called himself a little crazy there. I want to move past heroes. I want to move past the heroic. I want to make this like the rational thing you would do. I want to make that family that's in the house where they have a little bit too much backyard and not quite enough savings. They want to make ends meet, and the way they do it is to get the backyard cottage built, financed through the city, put on their taxes, improve their cash flow, improve their income and provide someone a place to live. I want the hero to be out of the equation and have them just to do it because it makes sense for them and it's easy. I want the widow who lives in the house with three extra bedrooms, who doesn't want to move out because she has memories in that place. She has friends. She goes to church up the street. She's part of the community, but she doesn't have enough money to fix the roof, and she doesn't have enough money to replace the heater, and she doesn't have enough money to maintain her sidewalks in the winter when it snows. I want that person to be able to easily and quickly hire someone to convert one of those spare bedrooms into a rental unit, to have that be easily permittable, to have that be acceptable by everybody, to have that be financed by the city in a very cheap and easy way that doesn't impact her life, that actually helps her cash flow, maybe gives her a little bit of cash and allows her to avoid going to the big financial system and, you know, mortgaging her house and doing things that she's just not in a position to do. I want to make this not heroic. I want to make this very, very easy for people to do. I want someone who has a house across the street from them that goes into disrepair that comes up for sale for whatever reason. I want them to be able to compete with the slumlord, who would just buy it and let it continue to decline. I want them to be able to buy that house and be able to go in and make it into a duplex and sell or rent those two units, and actually get added value for that property, to flip it in a way that makes the neighborhood a better place to live, makes the neighborhood thicken up, adds underlying land value to the properties by making the property itself more valuable in the marketplace, as opposed to just riding that long slope of decline that we so often see slumlords do. These are easily financeable products, but they're products that are not easily financeable in our current system, in our current system, they require heroics in a system that makes sense, in a strong towns system, they don't require those kind of heroics. They just require the desire to meet market demand. Embs, I'm not your enemy. I really am not. I'm here with you when you say supply is a problem. And like Conor Dougherty, like Cullum Clark, I take it seriously. I really do. I think we do. Need to build way more. But where, you know, Conor Dougherty, a reporter, right? Cullum Clark, an economist, where they, I think, step back and do the rational thing, which is to say, Hey, I've seen this problem. I agree with you on the problem. I want to use the tools we have at hand to solve this problem, because that's how we're going to do it, quickly and efficiently, they reach for the tools at hand, the tools, the very tools that are actually underlying the problem. Here's where I need you to move with me yimbys. I'm willing to meet you on the supply problem. It's very much there, but you gotta open your eyes and recognize that we do not have a quote, free market in housing, and that the burden of the free market is not local regulations. Yes, reform local regulations, but you can get rid of all zoning, and you're not going to get a different set of products, because it's not what we finance, and because of what we finance, you are going to be delivered the same thing at scale over and over, the way that Conor describes the way that Cullum describes, both of them sympathetic to your cause, but neither of them in a position to either think, you know, delve deeply or think radically enough that we can inject a different kind of financial structure into the system. We're not some crazy burn the house down group either, right? I'm not trying to take on the Federal Reserve, the US Treasury, Fannie Freddie, the mortgage market, mortgage backed securities, hypothecated CDOs. I'm taking all of that as a given. I can't affect that, I can't change that. I can't do anything about that. But what I'm saying is, I'm not powerless. You're not powerless. We are not powerless to actually fill the market void. The market void is not for single family homes out on the edge. The market void is not for new condo units. The market void is the stuff that's not financeable, but where there's a huge demand entry level units throughout our communities, in every neighborhood, a constant thickening up and maturing of places adding dozens and hundreds and 1000s of units in cities after city after city in ways that won't scale and won't finance for the Toll Brothers of the world and the Dr Hortons of the world and the other who are out building these homes at scale. They won't scale for them. They won't finance for them, but they will scale and they will benefit the people who are operating in a different framework. That's the missing market link. That's where I need you and bees to come to that's where I need us all to be on the same page and to recognize that, yes, let's fix the zoning, but let's also fix who builds it and how they're financed, because we won't actually create abundant housing until we do all three of those things. That's the essence of the housing trap. It's the essence of the argument we've been making for years here. And I'm really grateful for Conor and Cullum and Steve for coming on the podcast and sharing these thoughts and allowing me to kind of dissect them here and hopefully put the strong town spin that you were looking for in those three conversations. I'm not a combative person. I don't want to sit and fight with people. I actually feel like there's more to be learned by allowing people to tell their story and their words, present their view and their words. And I, I think in all three of those conversations, we actually got to a place where they were able to do that. And it was instructive. Thanks everybody for being here. I'm doing a bit of traveling this summer, but I think I'm going to say current with you. I know I missed a week there because I was in New Zealand. I plan to talk about my New Zealand trip next week. So if you're interested in that, hang on, and one week from now, we'll be back with that. Thanks everybody for listening. Keep doing what you can to build a strong town. Take care.

ADDITIONAL SHOW NOTES

• Learn how to unlock housing in your city: The Housing-Ready City: A Toolkit for Local Code Reform

• Hear more from…

  • Cullum Clark

  • Conor Dougherty

  • Steve Nygren

• Chuck Marohn (Substack)

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