Judge Glock joins Jordan McGillis to discuss the history of 30-year mortgages and the future of the housing market in America.
Audio Transcript
Jordan McGillis: Welcome to 10 Blocks. I’m Jordan McGillis, economics editor of City Journal. In 2024, with average mortgage rates hovering around 7 percent and the average home price rising to over $400,000, US home sales fell to their lowest level, around four million, since 1995, and that’s despite the national population having risen by 70 million people in that time. To discuss the housing market, I’m joined today by Judge Glock. Judge is the Manhattan Institute’s director of research and he’s the author of The Dead Pledge, a 2021 book published by Columbia University Press on the origins of the mortgage market. Judge, welcome to the show.
Judge Glock: Thanks so much for having me, Jordan.
Jordan McGillis: So what do you make of these numbers? Do you buy in to the argument that homeownership is increasingly out of reach? And if so, is that meaningful?
Judge Glock: Well, it’s not necessarily out of reach in that if you look at the national homeownership rate, it’s around 66 percent. So two-thirds of households in America own their own homes, and that’s not too far from the historical average. We had a bump up to almost 70 percent during the housing boom. But the 66 percent is pretty normal. Now, that means-
Jordan McGillis: Pause for a second. When you say boom, the boom pre-housing bubble burst in ‘08?
Judge Glock: Yes, and we can get into that, how much of that was a bubble, because one of my long-term cases, or arguments has been that it was not a bubble, and I think the increase in housing prices since 2006 actually has shown that that was, if anything, just a forerunner of what we’ve seen in recent years, which is a continual increase in price. But yes, I’m talking about the boom in home construction and home purchases in about 1995 to 2006 period where you did see homeownership rates go up. So Americans are owning their homes about a pretty typical rate that they did historically. Some of that has to do with an aging population and so forth, but they’re able to get into these homes.
Now, the problem is that you point out, it’s just much, much more expensive than it was historically, and it’s harder to find those actual homes. So the home sales is an interesting number because for those statistics wonks out there, selling a home, an existing home to another person doesn’t show up like in the gross domestic product statistics or indications of how good the economy is going because you’re just trading the same good back and forth. But allowing people to trade more goods and most especially their most important purchase of their life most likely, a house, is good for everybody. It’s now difficult for people to move around. There are fewer people moving around. And it’s hard for a lot of people who want to take that first step into homeownership. So that reduced rate of home sales is a very worrying indicator and indicative of lot of other problems we’ve seen in the housing market in recent years.
Jordan McGillis: Without having the graph in front of me, I wonder how much of this drop in the last couple of years is a result of the exceptionally low rates in the years right around the pandemic that led to a lot of home sales, if I understand correctly, in 2021 and early ‘22.
Judge Glock: Yeah, so no, that’s exactly what happened. We’ve never quite recovered from the rate of existing home sales we had pre-pandemic. So yes, a lot of people, and I know some of them, and you probably do too, and if you didn’t buy during that period, you might be angry at those people, but they bought a house at a pretty reasonable price and they bought it at an under 3 percent mortgage, which is kind of mind-blowing pretty much at any time in American history. We really never saw a period in American history where you could get a 30-year mortgage for under 3 percent, but that was the norm during that period. So if you were smart and you had the opportunity, you bought a house in that period.
But that exactly means because mortgages aren’t transferable, and I would note that there were some periods in the US where you could transfer your mortgage to your new house, but because that’s not transferable, yes, you have to have a bit of masochism to want to switch out that 3 percent mortgage for a new 7 percent mortgage right now and more than double your interest payments, often more than more than double because prices have gone up so substantially since that 2020 period. The existing home sale price is now well over $400,000, which is getting pretty difficult for people. It’s gotten well above our growth in income. And with those mortgage rates, it just makes it much, much more difficult for people to buy.
Jordan McGillis: Can you explain the relationship between public policy and the very existence of our standard 30-year mortgage?
Judge Glock: Yeah. So the 30-year mortgage is a weird product and it is kind of strange. And if not quite singular to America, we’re pretty distinct in the prevalence of these 30-year mortgage products. So basically, somewhat in the Woodrow Wilson administration, so the 19-teens and then especially in the 1930s, the federal government said, “We’re really sick of all of these people who have to get a mortgage and then renew the mortgage every five years at a different interest rate with a lot of costs. This is creating a lot of supposed volatility in the housing market, and we, the federal government, can stop that. We can give someone a long-term mortgage.” And even kind of more surprising when you think about it, a mortgage without a prepayment penalty in which at any point during that 30 years, you as the buyer have a put option to say, “I’ll pay off some more of it, some less of it, or however much I feel like above the minimum interest payment.”
So that sort of market is really hard to exist without a government backstop because a lot of people have to take the risk already of the house price dropping, of the individual defaulting, and now they have to take this long-term risk that includes everything from changes in interest rates, we’ve seen changes in inflation, and the individual just prepaying a big chunk of the mortgage if rates go in their direction, like we saw in the lead up to the pandemic and immediately afterwards. So the government created a whole panoply of these new mortgage institutions from Fannie Mae and Freddie Mac, the Federal Housing Administration, a couple of these farm mortgage institutes, and so forth. For a while, there were specific federal corporations to bail out previous mortgage owners and give them new ones like the Homeowners Loan Corporation and so forth.
So we’ve kind of surrounded the mortgage market with all of these federal guarantees to elicit that kind of weird 30-year mortgage product and make it pretty much the standard across the United States. But one, the problem with that is, somebody has to pay if these things go down. What we saw in the 1980s in the savings and loan crisis was a lot of mortgages that weren’t worthwhile anymore after the interest rates and inflation had changed drastically, and the federal government ended up having to pay about $200 billion in today’s money to bail that out. And then obviously we saw that again in 2008 where the federal government had to pony up a lot of money for Fannie Mae, Freddie Mac, and the rest of the banks making mortgages. So it does make this 30-year product a little more available, but it also has a lot of costs for taxpayers and I would say the general economies.
Jordan McGillis: Is there a country that you can point to that has a more sensible market approach to mortgages?
Judge Glock: On one level, I would say almost any, it might be the short answer. That would be a little strong, but not entirely incorrect in that the US has a very peculiar system in that it is a classic publicly subsidized, and the gains are privately held, and the public takes the losses. So you have this very unfortunate situation where banks or Fannie Mae or Freddie Mac can give a lot of money to their stockholders, and if things go down, that the taxpayers rescue them. I don’t know enough about the other countries to really say with confidence. A lot of people point to the Danish market as something that does pretty well. They have these things, these covered mortgage bonds that kind of distribute general mortgages into the general investor pool, somewhat like what we tried to do with the mortgage-backed bonds in the early 2000s, but with more of a concrete backstop behind them. So the Danish market seems to do pretty well, but unfortunately, the United States is, again, if not singular, it’s pretty distinct in the paucity and the failures of its mortgage policy.
Jordan McGillis: Do you have any idea if the Danish model facilitates more mobility among the population to the extent that they want it?
Judge Glock: Well, it’s tough because in general, the US is very, very mobile relative to just about any other country on earth. I forget the exact numbers, but something like in America, the average household’s going to move 10, 11 times in their lifetime, and in Europe, it’s going to be one-third of that roundabouts or slightly less than half of that. So I don’t know if we have the numbers to show that that model creates more mobility. Because one thing with the 30-year mortgage, that prepayment ability is a big deal, so you’re not necessarily stuck in the mortgage most of the time. You can prepay that and jump over to the next house pretty easily. The only downside is, yes, when those interest rates change and they go up very rapidly, that makes that sort of mobility much harder. And that’s exactly what we’re seeing right now. But that itself is a somewhat rare point in American history, the extent and the rapidity of the increased interest rates we’ve seen in recent years.
Jordan McGillis: How do homeowners in places like Britain where their mortgage rates adjust with the rates in the economy, how do they respond to those shocks like they dealt with in the last couple of years?
Judge Glock: Not very well. I mean, that is the downside of having those variable rate mortgages, and it does, one could argue, deter homeownership to some extent to take on that much risk. One of the big benefits I’ve learned is someone who’s unfortunately been writing about this subject for a decade plus, but just bought my first house and got my first mortgage about a year ago. Long after I should have if I was sharp about it. But having that stability is a huge benefit of an American mortgage, not just the exact price of it, but the lack of variability for 30 years.
But in Britain, when you saw the mortgage rates go up drastically in the 2020s, after the pandemic bottom, you saw people’s annual payments could go up by a third or half or more all of a sudden. That can absolutely be devastating for a family. So one way they deal with that is taking out smaller mortgages, paying off more ahead of time, not spending as much on housing in general. And that’s the tradeoff they have. They have those much more variable costs that they have to eat. But in a sense, we’ve just transferred that variability into the banks and the general taxpayers, and they have to deal with it as opposed to consumers. On the whole, I don’t think we’ve shown that to be pretty successful.
Jordan McGillis: At a slightly higher level here, what’s your perspective on homeownership as a cornerstone of the American dream?
Judge Glock: I mean, I think in one respect it’s been exaggerated that US policy has been about encouraging homeownership per se. Part of what I tried to show in my book is that these mortgages were often that the government was subsidizing were occasionally on farms, they were on rental properties. For a while, the government was subsidizing college housing pretty extensively. Now we know there’s, of course, a host of government enterprises that are subsidizing almost everything under the sun, every sort of financing you can imagine, especially since the Inflation Reduction Act on a lot of so-called green projects. So I think that people who claim all of these mortgage subsidies we create were really rooted in a desire for the American dream of homeownership are kind of missing the mark. I think in my mind, the impetus for these subsidies came a lot more from the banks and the construction industry than from some amorphous general American desire to have their own home.
But America as a country that had much less farm tenancy historically and was a much more ownership society than a lot of the Western European ones did have more of a relationship to owning your own block of land than most of these European societies did. We didn’t really have what in the Western Europe they would call a peasant class that was effectively leasing out land from large landholders indefinitely. And then when we moved into an urban society, it’s not surprising we brought that tendency for homeownership with us.
Now, I like the fact that Americans can own their own home, and I like the fact that we have that tendency, but we’ve also seen comparably high homeownership rates in a lot of other countries, including very developed countries across the world without our same sort of mortgage policy. So one, we do have a history with homeownership, certainly. Two, I don’t think it’s been too determinative in terms of our public policy. And three, I don’t think the public policy itself is necessarily increasing homeownership. The last thing I would add on that is precisely because all of these mortgage subsidies do drive up the actual price of the houses we buy insofar as housing supply doesn’t respond to the increased price, which it doesn’t always in America because of regulatory policy, that’s just transferring the gains from the general taxpayers to the landholders who get the benefits of higher prices, not necessarily increasing homeownership.
Jordan McGillis: Let’s talk about those restrictions on supply. The places in our country that have the most productive economies also naturally have really high house prices, but they could be significantly lowered if we had some significant regulatory changes. What could be done on that front to boost supply where we need it in the coastal enclaves and the other industrial hubs cross country?
Judge Glock: Well, there’s certainly a lot of the things that can be done, the so-called YIMBY movement, the Yes In My Backyard movement, and other pro-growth, surprisingly popular movements have taken upon themselves to push at the local and state levels, which is upzoning parcels, allowing more dense development, allowing what’s called accessory dwelling units and removing parking minimums. All of these generally good things that I support and I think would help substantially lower housing costs. But I mean, I think the interesting thing is, America is, if you look at it, most of our country has housing costs that are pretty close to construction costs, or at least they did before the pandemic explosion, which I think there’s been some particular causes for that explosion that we’ve already discussed. But it seems like most of our country has all of these problems that some of the YIMBYs have identified, a lot of land zone only for single family housing, parking minimums, et cetera, and yet they managed to keep housing pretty much close to the cost of construction, which is a decent but imperfect metric of how good your city’s regulatory policy is doing.
So I think I have often been an advocate that one of the things we really need to focus on is how much we can grow out. If you look at places like California, California has some of the densest cities in the country, pretty much the densest cities in the country. Arguably, LA and San Francisco are second and third, or by some measures, first and third in terms of the most dense urban areas in the nation. They just don’t allow themselves to grow out. In San Francisco in particular, there’s urban growth boundaries. There’s general just opposition to moving infrastructure outside of the core urban areas.
If you look at how Dallas or Nashville or Atlanta has met their housing demands, they’ve done it overwhelmingly by allowing growth in these low density areas. Part of that does allow the growth back in the central city core later on as well, but there was a recent study that came out that showed, well, how much of the new housing since 1980 has been in low density areas? And pretty much everywhere in the growing parts of America, it was well over 90 percent. So if we’re going to talk about solving the housing crisis, we need to talk about how we can allow that more outward growth to continue to occur in these areas.
Some of that is just another plea for more upzoning in those areas, not one or five acre minimum lot sizes in Northern New Jersey, very close to the New York metro region. Those sort of things need to be made more dense, but a lot of it’s just, “Hey, how can we get the infrastructure to grow out?” A subject I’ve thought a lot about, how can we make cities want to grow again? Because historically, cities wanted to grow, and right now I’d argue they don’t really have the fiscal or other incentives to grow that we need them to to get again, if we’re going to make them... The term used to be disparagingly called “growth machines,” these cities that were focused exclusively on growing, and now it seems kind of absurd that we would think of cities as these engines of constant growth, because right now most of American cities, or a large part of them, and then the coastal core are not growth machines. They’re the opposite.
Jordan McGillis: I think a common sense pushback you’ll get to that argument though, Judge, is that LA is quintessential sprawl. There’s a conurbation running a hundred miles into the desert to the east. To the north, you’ve got the geographic boundary of the mountains versus Dallas, which is on a flat plane, so it can expand in that way. How would a place like LA grow further out in the sense that it isn’t now?
Judge Glock: Yeah. LA is somewhat a very particular case in that the geography in the mountains would make it difficult to grow out. It is, as I mentioned before, by some measures around seven to 8,000 people per square mile when you look at the whole urban area, which is, again, first, second maybe, most dense urban area in the country. People think of LA as this absurdly sprawling city, but it’s actually the opposite. It’s a lot of very dense areas that just don’t look like New York City, a lot of very tightly packed housing and so forth.
But yes, on the growing in the hills, I think that does pose a dilemma for LA despite existing density, it needs to densify more. But I often say when I used to live in San Francisco and everyone say, “Oh, San Francisco and LA can’t grow outwards because of all the hills,” and I would be standing on, say Nob Hill or something. I was like, “This city is built on nothing but hills.” Clearly, they were able to do this a hundred years ago and have these amazing, beautiful neighborhoods built in these rolling hills across the San Francisco Bay Area.
Frankly, I think a lot of the opposition building on hills today is more from a misplaced environmentalism than from an actual impossibility of building upwards, which I think these cities just have to be a little more willing to do if they’re going to contain housing prices. Now, also, again, LA is a little, some of those hills are very steep, and it could be difficult, so they definitely need to densify too. But it’s not one of America’s sprawling cities. It’s quite the opposite. And it should be looking into how it can take on some of those big hills around.
Jordan McGillis: You bring a good point about LA, which is that it does have some hidden density. Even though it’s low slung, some of the neighborhoods in East LA are very tightly packed with the number of people per unit or per room being higher than you’ll see in any other American city.
Judge Glock: Exactly. I often point out in San Francisco, if your listeners are familiar with these famous sky view pictures of the western part of the city of San Francisco, which shows this kind of miles and miles of low-slung single family housing or just two or three-story single family housing. But if you look at the census on that, a lot of those blocks have more than 20,000 people per square mile on them. We don’t think of this as incredibly dense. Everyone in America thinks, “Well, if you don’t look like Western Brooklyn or Midtown Manhattan, you must be an undense area.”
But some of these parts of LA and San Francisco are really some of the densest parts in America. You can have a lot of density in fairly low-slung places if the minimum lot size, they’re pretty small and so forth, which is why that’s something I’ve advocated a lot as well, that reducing these minimum lot size can still answer that demand for single family housing, but still pack an incredible amount of density inside these neighborhoods. And I think it’s really misplaced for people to only assume the way to answer the housing crisis is big apartments, because that’s always going to be a small part of the housing stock in America.
Jordan McGillis: That west side of San Francisco is kind of the YIMBY holy grail. It’s what everyone focuses on. You see the aerial shots. And it is a weird place. The roads are really wide, but then those buildings are snug up against each other. Do you know much about the subdivision of the existing usually three-story townhouses that are all throughout the west side?
Judge Glock: No, I don’t know too much about that. I mean, it was a development that happened after a lot of the water system by, I forget, the Crystal Spring Water Company, what it was, the future of the municipal water company, spread out there, especially in the late 19th and early 20th century. And then also just the growth of Golden Gate Park and the plotting of that by Frederick Law Olmsted and other great landscape architects. So there were a lot of people who at the time were working class, who were still in what was then a surprisingly construction and blue-collar town that was focused around the shipping industry and transportation and so forth. They didn’t have a lot of money, and they were often going to work in downtown jobs. So they built fairly small houses, fairly close in to the jobs downtown, and they created these beautiful dense neighbors that are strange, within spitting distance often of the very tall downtown around San Francisco and around the Embarcadero.
But it was this historically pretty successful growth movement there that I would agree entirely should continue to densify. The city’s going to reduce housing price. They absolutely need to figure out how to get more apartments and other things in that Western San Francisco, as you said, the holy grail of the housing reformers. But if you look at those areas and your mental image is like, “This is the disaster, why is this so undeveloped?” you’re actually not considering how developed that is relative to most of America.
Jordan McGillis: Okay. So we started out talking about the numbers from 2024 on national home sales. As we move into the second half of the decade here, would you anticipate that this is the new norm? Are we going to be around this higher natural interest rate level? There’s still going to be constraints on supplies. Should we just get used to homes turning over with less frequency?
Judge Glock: Yeah, I think we’re not going to see in our lifetime, if I had to guess, and it’s terrible to make predictions, but we’re probably not going to see in our lifetime anything that looked like the sub-3 percent interest rates in 2020 and ‘21. The two things going forward is that lenders are rightfully concerned about inflation returning. We had basically... Mortgage rates had gone down for decades. They had peaked in the early 1980s. And for all of us complaining about a 7 percent mortgage today, you look at some of those 15 or 17 percent mortgages back then, and you should be rightfully horrified. But those were result of inflation getting out of control and lenders correctly understanding that if they were going to make a loan for 30 years, they needed to control for the possibility of inflation.
Now we were able to bring rates down precisely because we showed the American public, the Federal Reserve frankly showed the American public, that the government could keep inflation under control. And now we know that’s not necessarily the case. We had the greatest inflationary outbreak in 40 years, and lenders have to accommodate that. So that’s going to drive rates up.
And then the other side is, the government shows no indication that it’s going to stop borrowing hundreds of billions of new dollars every single year, and frankly, trillions of dollars in deficit spending every single year, well over a trillion in recent years. And that’s going to drive up mortgage interest rates. That 10-year Treasury bond, which is kind of often people say the basis for the mortgage rate, since people do often prepay loans well before the 30 years are up, lenders look at that 10 years around what they expect the loan to be out for, and they make loans appropriately.
Those Treasury bonds have been going way up because of the inflation concerns and because the government just shows no sign of getting its fiscal house in order. If they want to keep borrowing trillions of dollars, that’s going to have real immediate costs in the economy, especially borrowers. The concern with the budget deficit is not just about some hypothetical fiscal crisis down the road, it’s affecting every family across the United States right now. And unfortunately, I see no signs in the very near term that that’s going to change.
Jordan McGillis: Our guest today has been Judge Glock. Judge, where can listeners keep up with your work?
Judge Glock: Well, they can keep up with it, of course, at the Manhattan Institute, just look at Judge Glock there. And of course, I try to publish as frequently as possible in the wonderful journal that Jordan helps edit, City Journal.
Jordan McGillis: What’s your handle on X, the everything?
Judge Glock: Oh yeah. I’m a moderate X poster, although I’m trying to improve on it, it’s just @JudgeGlock, because thankfully there’s not a lot of Judge Glocks out there, so I didn’t need to throw a bunch of numbers or anything.
Jordan McGillis: Fantastic. Thanks, Judge.
Judge Glock: Thank you.
Jordan McGillis: And listeners, thank you. And as always, please like, comment, and subscribe to 10 Blocks by City Journal.
Photo by: Lindsey Nicholson/UCG/Universal Images Group via Getty Images
