Racial wealth disparities in the United States are well documented, and as a primary tool for wealth-building, housing sits at the forefront of both its root causes and most addressable solutions. According to the US Census Bureau, as of Q4 2021, just 43.1% of Black households were homeowners compared to 74.1% of White, non-Hispanic households (Chart 1). The gap between White, non-Hispanic households and other races is smaller but persists. Policies that enabled racial discrimination and de-jure segregation in American cities throughout the 19th and 20th centuries largely have facilitated today’s still prevalent racial disparities in homeownership, wealth, and income. In this analysis, the Research Team at Chandan Economics explores the origins of these inequities and their inter-generational economic consequences. Going further we case study some of the leading ideas capable of positively affecting the racial housing equity gap and related inequities. Racial Inequities in Housing While structural racism was prevalent throughout the United States before the 1930s, racial-exclusionary elements of several New Deal-era programs compounded the effects of segregation. In a 2020 research paper, The American Sociological Review studied the effects of redlining policies laid out by the Home Owner’s Loan Corporation (HOLC), a New Deal-era lending agency aimed at spurring American homeownership in response to the Great Depression. It found that segregation was more prevalent in areas appraised by HOLC, where mortgages in minority-majority neighborhoods were deemed “hazardous” due to the areas’ racial characteristics. The practice of redlining by other federal agencies including the FHA was used across US metropolitan areas to limit real estate financing in minority-majority communities, catalyzing the entrenched racial segregation that continues to be observed in major cities today. Other racial-exclusionary elements in public policy, including those contained in the G.I. Bill, one of the most extensive national fiscal support programs in American history, further exacerbated the homeownership gap. An Inter-Generational Wealth-Gap Housing is a significant component of upward mobility across generations; therefore, the homeownership gap between Whites and Minorities helps explain the pervasive racial inequities in both wealth and income that are seen today. One residual effect of this imbalance is that today, most ethnicities of color are more likely than White, non-Hispanic households to be low-income renters. According to the 2020 American Community Survey, 30% of Black renters and 25% of multiracial and other, non-Asian minority renters are at or below the poverty line. In contrast, just 19% of White renters and 18% of Asian renters fall into this threshold (Chart 2). Due to the parallel histories of housing discrimination and policies that influenced economic inequities—including reduced access to quality education, underinvestment in environmental and public infrastructure, and exclusion from capital markets, housing equity alone cannot level the mobility playing field. Research has increasingly shown that economic barriers for African Americans stretch across neighborhood and class lines. In a 2019 paper, Opportunity Insights studied racial disparities in the US at an inter-generational level, using longitudinal data covering the US population from 1989 to 2015. Their results found that the black-white mobility gap persists in 99% of all census tracts, suggesting that even among children who grow up in the same neighborhood, with similar household makeup and income, white children maintain better outcomes. Utilizing these data, which analyzes the income outcomes of black male children and white male children whose parents are both at the 25th percentile of the income distribution, we find that white male children experience a larger jump in upward mobility compared to blacks, with the gap widening as we go further up the income distribution. (Chart 3). Case Studies for Success in Addressing Racial Inequities There is no single silver bullet for addressing these inequities, but policy changes will require intentionality and creativity to decouple the relationship between race and wealth. Based on case studies conducted across different geographies and time periods, below are five areas of policy that have been shown to help correct both the legacy of structural racism and its economic effects. Enforcement of Fair Housing Laws: During The 1970s, HUD expanded the enforcement of policies under the Fair Housing Act of 1968 as a tool to deter state and local discriminatory practices. HUD’s authority over approving federal grants allowed them to enact stricter standards for water, sewer, and highway project proposals from cities and states. Consequently, in localities that historically overburdened low-income and minority communities with public works’ economic and environmental costs, federal investment was cut, disincentivizing the practices. Such enforcement was heavily controversial and was ended shortly thereafter, resulting in a decades-long standard of relaxed enforcement of the law. A 2010 report by the Government Accountability Office (GAO) called for a need for HUD to enhance requirements and oversight of the Fair Housing Act. The GAO report eventually led to a 2015 HUD rule change that enacted “Assessment of Fair Housing” guidelines for cities; however, in early 2018, the rule was suspended. Revisiting HUD’s use of these oversight tools would give regulators a more direct hand in disincentivizing development that amplifies racial disparities. Investment in Environmental Infrastructure: Historical underinvestment in quality drainage and sewers is a culprit for some climate stress in formally redlined districts. Further, the uneven geographic impact of climate change, the ability of some regions to adapt its effects easier than others, and the consequences of broadly applied policies to address such climate concerns, may all increase economic inequality. Research by staff at the Federal Reserve of New York found that regions of the US that are home to larger shares of low-income and minority groups, particularly in the US South, are likely to suffer the most significant level of damages from climate change. Limited access to credit and insurance affordability may also compound the ability of minority and low-income households to respond to arising crises. The Community Reinvestment Act of 1977 sought to dismantle the practice of redlining and set fairer standards for lending institutions to prevent discriminatory practices. However, some of its criteria have been criticized for its lack of specificity, and additional guidance may help steer market institutions towards more equitable investments and address climate resiliency. In 2021, the State of New York issued guidance to banks and other lenders subject to its Community Reinvestment Act to allow them to receive credit for financing climate-resiliency measures in underserved communities. Replicating a form of this practice in other states and localities would help low-income and minority communities get a step ahead in the fight against climate change. The Growth of Micro-Businesses: The COVID-19 pandemic was the catalyst to seismic changes in both the labor market and service economy. Sizeable fiscal stimulus measures enacted by federal and state governments alongside a shift to a more virtual economy with evolving consumer preferences produced fertile ground for micro-businesses. A recent study by Go-Daddy shows that in 2020, microbusinesses grew fastest in majority-black zip codes, where the impacts of the pandemic from both a health and economic standpoint were felt on a grander scale. The circular flow of money, goods, and services enabled by such environments stimulates wealth building and fosters a more dynamic neighborhood use. Capital availability alongside thoughtful applications of multi-use zoning could help scale the benefits of minority entrepreneurship. Promoting Housing Supply Growth Through Zoning Reform: Exclusionary zoning laws restrict the types of homes that can be built in a particular neighborhood. While local zoning regulations are used to promote public interest in many cases, they have often been used to preserve property values and prevent neighborhood integration— entrenching concentrated poverty. The impact is not exclusive to low-income households. There is evidence of a relationship between restrictive land-use regulations and housing unaffordability as supply is constrained, driving up shelter costs. Such cost burdens eventually spread to middle-income households as well. Enacting federal zoning standards would be a complex and sensitive undertaking, given its link to existing land values and the systemic risk that upending such values may pose to the nation’s economy. However, doing so does not need to be one-size-fits-all and is certainly not the end-all-be-all to easing housing unaffordability. Incentivizing the market to create more housing will naturally push investment towards areas with the highest returns, which may siphon away human capital from lagging regions into already wealthy urban centers. To prevent this, reforms must have a national scope and be adaptable to the needs of different regional economies. Deconcentrating Use of Housing Choice Vouchers: Housing choice vouchers have produced significant results in the form of increased housing stability and reduced childhood poverty. However, landlord participation in the program is mainly voluntary. A survey of voucher acceptance in Dallas shows that only 4% of apartment complexes in majority-white zip codes accept vouchers, while 46% of complexes in majority Black zip codes accept vouchers. Such barriers make access to more affluent neighborhoods and wealth opportunities out of reach by low-income and minority households. In some states and municipalities, laws prohibiting discrimination based on the source of household income encourage the use of the voucher program. An analysis by HUD shows that in three of the five sites observed, the landlord denial rate was 67 percent or higher. In the two sites with lower levels of landlord denial (less than 31 percent), source-of-income antidiscrimination laws require landlords to accept vouchers. Conclusion These case studies offer a range of ideas that, while imperfect, could serve as a framework for addressing long-standing racial inequities in housing and wealth if studied and tested further. Economic downturns such as the Great Financial Crisis and the COVID-19 pandemic have only magnified these issues, furthering the urgency of policymakers to address them. The research team at Chandan Economics will continue the discussion and analysis of the above case studies in further detail, with hopes of highlighting their pros and cons and strengthening progress towards societal equitability.

Inflation accelerated unevenly according to metro-level Consumer Price Index (CPI) data. Prices increased 7.5% nationwide between January 2021 and 2022 in the latest CPI data released by the Bureau of Labor Statistics. However, prices in Sun Belt boomtowns grew 7.8% year-over-year (YoY) while the rest of the country grew by 6.3% [1], according to the latest available data. Most metros are experiencing growth at or above their previous peaks stretching back to 2002. The exceptions to this are the New York and San Francisco metro areas, but they are still experiencing inflation growth rates near their twenty-year peaks. Inflation growth in the Sun Belt has largely been driven by economic fundamentals as the region’s labor market recovery has outperformed other areas of the country. The spread in metro-level inflation readings seems to be a feature of the labor market’s uneven recovery. The correlation (r=69%) between a metro area’s latest inflation reading and their December job growth is a moderately strong and positive. Sun Belt metros included in the analysis have recovered an average of 87% of jobs lost at the beginning of the pandemic while non-Sun Belt metros have only recovered about 73% as of December 2021, the latest data available. Prices are increasing over 2 percentage points faster than the national average in the Phoenix metro area, where a sweltering labor market has pushed employment 1.3% above its pre-pandemic peak. The Sun Belt’s inflationary pressures are intensified by its housing supply crunch. Housing costs play a significant role in how the Bureau of Labor Statistics’ measures inflation. In a recent blog post, we highlighted how the Sun Belt’s strong increase in rental costs can be affecting affordability for existing residents and contributing to a reduction of on-time rent payments throughout 2021 and into 2022. Our analysis found that average rents have grown 16.8% across all property sizes in the Sun Belt, while only increasing 5.1% for other areas of the country between January 2021 and January 2022. The region’s labor market fundamentals are likely to remain strong as the nation’s labor force migrates south to adjust to emerging population centers, furthering the housing supply gap and raising housing costs if housing needs are not met. Given the outlook for the labor market, we expect that there will still be a noticeable difference in inflation between the Sun Belt and non-Sun Belt metros as inflation moderates nationally as is forecast to happen later this year. [1] These data are population weighted using vintage 2020 metropolitan and micropolitan statistical area population estimate totals.

The Sun Belt was already benefitting from a strong labor market, low tax rates, and lower overall cost of living relative to other parts of the country before the pandemic. However, the region's popularity has only increased during the past two years as workers became more mobile and able to take advantage of the lower cost of living in cheaper metros. Increases in home prices amid strong household balance sheets and constrained home-for-sale inventories have converged to create an influx of rental housing demand in the Sun Belt. A Chandan Economics analysis of properties managed by independent landlords using data from RentRedi*, a property management software, adds to a growing body of evidence that the region’s strong migratory patterns are increasing rental costs. Average rents have grown 16.8% across all property sizes in the Sun Belt, while only increasing 5.1% for other areas of the country between January 2021 and January 2022. Rent increases for single-family rentals (SFRs) are particularly acute for properties nationally. Average rent charges in SFRs rose to $1,400 in January 2022 up from $1,200 in 2021. The Sun Belt's 16.7% increase in SFR rent charges is notable, but so is the rapid 7.5% growth outside of it. Rising rental charges are part of a larger story of price increases within the Sun Belt. The Bureau of Labor Statistics’ January 2022 release showed year-over-year inflation as high as almost 10% in Sun Belt metros Atlanta and Phoenix. St. Louis had the fastest year-over-year inflation among non-Sun Belt metro at 8.3% – over a percentage point less than the two leading Sun Belt metros but a still shocking rate compared to pre-pandemic trends. Increases in rental costs and the overall cost of living within the Sun Belt is likely straining affordability and has contributed to a reduction of on-time rent payments throughout 2021 and into 2022. On-time payments in Sun Belt metros underperformed other areas of the country in 8 of the last 13 months. Chandan Economics’ first estimate of January 2022 on-time payment rates showed 79% of units in the Sun Belt paid on time as opposed to almost 81% in non-Sun Belt areas. Given the long-term housing supply shortage and strong demographic fundamentals, Chandan Economics expects rents to continue to climb through 2022 – furthering affordability issues. *RentRedi, a property management software, partnered with Chandan Economics to provide valuable rental performance data for individual landlords not previously available in the real estate market industry. For landlords, RentRedi provides all-in-one web and mobile apps to collect rent, list & market vacancies, find & screen tenants, sign leases, and manage maintenance & accounting. RentRedi has partnered with platforms including TransUnion, REI Hub, Plaid, Latchel,TSYS, Sure Insurance, and Realtor.com, and Doorsteps to create the best experience possible. For tenants, RentRedi’s easy-to-use mobile app allows them to pay rent, set up auto-pay, report rent payments to credit bureaus, prequalify & sign leases, and submit maintenance requests.

Key Findings Build-to-rent (BTR) and BFR accounted for 4.4% and 3.4% of single-family construction starts in 2019, respectively, according to new Chandan Economics estimates. Based on our findings, single-family construction starts totaled 86,000 (47,000 BTR and 39,000 BFR units) as of the year ending in the third quarter of 2021. In recent years, the single-family rental (SFR) sector has catapulted into an institutionally viable asset class due to strong investor appetites, a growing need for affordable suburban housing options and improvements in property management software. With the SFR sector evolving so quickly, there are some gaps in data availability compared to other sectors, namely multifamily. This data gap is most apparent when tracking the supply of new single-family rental construction, a market-standard metric. In this research brief, the Chandan Economics and Arbor Realty Trust teams offer a new framework to estimate the volume of new SFR housing units under development. Our findings below suggest as many as 86,000 SFR housing units have started construction in the year ending in third quarter of 2021. For the full analysis, visit Arbor Chatter at the Arbor Realty Trust website.

As the U.S. economy shifted into a full reopening earlier this year, it did not take long for reports of staffing shortages to quickly fill the airwaves. From construction and supply chain logistics to food services and Uber drivers, it is hard to find an industry that is not competing for talent. However, just because the water is now boiling over the pot, it doesn’t mean the stove was not burning for quite some time. According to the National Federation of Independent Business monthly economic trends survey, small businesses have increasingly reported challenges finding qualified labor over the decade leading up to the pandemic. Coming out of the Great Recession, hiring firms were in a position of competitive strength as there was an oversupply of qualified workers relative to hiring demand. In 2010, just 24% of small businesses reported receiving few or no qualified applicants for available job openings. Fast forward to late-2019, and this percent share of firms reporting a skilled labor shortage was up above 54%. Through September, the share is up near 60% and continues pressing new all-time highs. While current shortages are often framed in a COVID-context, the role of structural trends should not be ignored. Cyclical and pandemic-era policy forces are, of course, at play, including the impact of extended unemployment benefits. At the same time, these data suggest that the skills of workers have not evolved as quickly as business models and the demands of employers— a diverging trend that has only accelerated over the past year and a half.

Supply chain bottlenecks and labor shortages have taken center stage in recent weeks. However, an analysis of commentary from the Federal Reserve’s Beige Book survey indicates that firms have been increasingly sounding the alarm since earlier this year. Signs of trouble on the horizon started to appear in March when the phrases “supply chain” and “shortage” were mentioned a combined total of 65 times— more than 3X the average number of mentions throughout 2020. Concerns have only ratcheted up since, increasing in each successive Beige Book release. In yesterday’s release (October 20th), the two phrases were referenced 111 times.

An often-overlooked part of the inflation story is the role of consumer choices to substitute one type of spending for another and the ability of pandemic-constrained firms to adjust to new spending patterns. From 2015 through the onset of the pandemic, spending on services as a share of total consumption held consistent— ranging between 67.6% and 69.2%. However, the services share of consumption then cratered through the pandemic, reaching a low of 64.0% in March of this year. In nominal terms, spending on services is up 2.3% over January 2020 levels, while spending on goods is up an impressive 20.2%. Services spending was constrained over the summer, with the Delta variant throwing a wrench into many people’s travel plans. However, spending on services is expected to recover as case counts drop. Key questions going forward are centered around the labor market's wage requirements relative to rising inflation and the length of time it takes for supply chains to get back on track with structurally higher levels of goods spending.

Dr. Sam Chandan is joined by Ed Pinto, Director of the Housing Center at the American Enterprise Institute, to discuss his recent testimony in front of the US Senate about the State of the Housing Market. In a recent hearing hosted by the US Senate Committee on Banking, Housing, and Urban Affairs, visiting panelists were prompted with a straightforward set of questions: What is the state of the housing market? Why is it the way it is? How might one address it? “You might say ‘well, isn’t that what normally they would do?’”, says Ed Pinto, Director of the Housing Center at the American Enterprise Institute (AEI), who was a panelist at the hearing and joined a recent episode of The Urban Lab podcast to recap the day. “Well, I actually haven’t been at a hearing that was positioned quite like that.” Pinto, who formerly served as Executive Vice President and Chief Credit Officer at Fannie Mae, was invited to the hearing to present his expertise on bringing housing back within reach, a topic that has gained renewed attention from policymakers of late. The Housing market’s resiliency during the pandemic has proven an encouraging economic outlier from otherwise challenging 2020. The residential bull run, which started in 2012 as the economy recovered from the Great Financial Crisis, has turned into one of the longest stretches of growth in the sector’s history. "That's a very long time for a boom," says Pinto, noting that prices have only accelerated further in the twelve months since the pandemic began. The latter development— which has challenged assumptions about how the Housing market performs during a recession, “is the result of extremely low interest rates, the lowest rates in our history… combined with the tightest supply in history,” Pinto claims. While a bullish market strengthens home values for existing homeowners and should encourage investment in new housing supply, new supply is not arriving on the market fast enough. According to recent data published by the AEI, housing inventory in February 2021 was down 47% from two years ago despite persistently strong demand. “The problem, of course, is that if you have that tight of supply, supply and demand kicks in, and you get these very rapid home price increases,” Pinto explains. “So, we have a market very far from equilibrium.” The trend of rapid home price inflation and stagnant supply heightens the barriers for those at the lower end of the income spectrum, straining affordability and reinforcing wealth inequality. According to the National Low Income Housing Coalition, the US has a 6.8M housing unit supply gap, with no State meeting the adequate number of affordable homes needed for its lowest-income renters. While the metric focuses on the supply of rentals, from a practical standpoint, the estimate encompasses the totality of the Affordable Housing needs gap. The impact is amplified for minority households— an analysis by Redfin in June 2020 estimates that just 44% of Black families own the home they live in compared to 73.7% for White families. As home-equity values chart record highs across the nation, a majority of Black households are being left out, with many forced to face accelerating rent prices or depressed wage growth in most metros. "When we compare home prices to fundamentals of construction costs, wages, rents, etc., we find that since 2012, home prices are going up 2-to-3 times faster than those fundamentals, and they're going up the fastest at the lower end of the market," Pinto explains. "The bigger that gap gets, the more painful will be the correction, and that correction will really hit low and minority income homeowners the most.” Underneath these realities lie the local zoning and land-use rules that govern the housing market throughout the United States. The regulations, which allow for communities and local governments to exercise discretion over land-use priorities, are inextricably tied to the supply levels and, therefore, housing costs. In a case study produced by the AEI, a team of researchers analyzed the Housing market in the Portland, OR metropolitan area, which has its population split across State lines, where two-thirds of the population lives on the Oregon side, while the other third resides across the river in Washington. The team found that the lumber and labor markets were generally consistent across State lines, but results began to diverge when observing land costs and the land use laws that govern each side. “Ironically, the land use laws in Oregon and Washington are almost identical. They both have urban boundaries; they both describe the urban growth boundaries the same way— the goal of urban growth boundaries is not to stop growth, it’s to keep it within a boundary.” Explains Pinto. “But the boundary should always have enough land for the next 20 years.” According to Pinto's analysis, the problem is that Washington has taken this to heart, while Oregon has taken a less direct approach. "[Washington] changes the urban growth boundary maybe every five years…. [but] Oregon said, 'oh, we are going to assume [that] the amount of land that's available within the boundary is fine; it just needs to be denser. But up to very recently, there hasn't been anything that's allowed for that densification, so every time that they do this, it basically doesn't lead to an increase in supply." As a result, Washington is better equipped to provide an adequate supply of new housing as its population grows. While in some cases, restrictive land-use laws are born from community input or environmental concerns, many local codes throughout the US originate from discriminatory housing policies put in place during the early 20th century that sought to prevent Black and other ethnic minorities from homeownership in particular areas. By 1935, one year after the establishment of the FHA, federal underwriting standards deliberately sought to prevent inter-racial mixing in neighborhoods via lending rules, leading to a codification of restrictive zoning laws throughout the nation. “That, in my estimation, has prohibited the construction of an estimated 8M units that would have been built if we had just been building at the same rate [today] that the housing stock had in 1940.” Turning to potential solutions, Pinto relayed to the Senate Committee a series of policies to consider moving forward, emphasizing one that is sure to raise a few eyebrows—eliminating the 30-year mortgage in favor of 20-year loans. He points out that the origin of the 30-year mortgage stems from when the Federal Reserve started to raise interest rates in the 1950s, and the Treasury Department sought an offsetting mechanism to limit the Housing market impact. Naturally, with the longer-term came lower monthly debt servicing costs. Proponents, at the time, argued the 30-year mortgage would make housing more affordable by introducing leverage, where borrowers could lower their initial costs of entry into the market in exchange for longer payment terms. However, according to Pinto, the intended outcome of increasing affordable entry points over the long-term abjectly failed. When market prices stabilized at affordable levels, the marketplace incentivized the construction of larger units which maintained constraints on buyers at the lower tier. “We made it more expensive, and we made it available to buy not the $1000, 1,500 sq ft starter home —but the 2,500 sq ft starter home." Says Pinto. "During periods of boom, the price went up a lot, and we had to add a lot more leverage, and during periods not so much a boom—the size of the house expanded. So, it was always getting to be more expensive relative to incomes in general," he explains. Reexamining the rules and incentives that govern lending in the housing market will help policymakers more comprehensively address the affordability issue. The 20-year mortgage, Pinto says, "seems to be the natural spot to do this.” While the renewed focus on affordability is encouraging to housing advocates, to achieve a sustainable solution, it will be vital to reflect on where past policies went wrong. "We have to make sure we get the answers right this time because we haven't gotten it right over the past 70 years.” For more information about the Urban Lab podcast and Dr. Sam Chandan, please visit samchandan.com/urbanlab. Follow Dr. Chandan and the Urban Lab on Twitter at SamChandan and UrbanLabPodcast.

As the economy heats up, inflation jitters rise. These days, the most significant disagreement between economists isn’t your age-old tax and spending dinner table debates, at least not directly. Instead, it’s a widely known but hardly intuitive concept that’s existed for the last thirty years as more of an urban legend than a reality: high inflation. In a macroeconomic sense, inflation occurs when the price of goods and services rise, resulting in a decrease in the value of the currencies we use to purchase them. As the items that we buy become more expensive, the purchasing power of each dollar falls. The debate around inflation is far from new. Still, it has reignited in recent months as the pandemic produced an economic environment that in many ways starkly contrasts with previous downturns. In a typical recession, endogenous (i.e., internal) shocks cause a short-term strain on credit availability, depressing savings and investment, which triggers a decrease in aggerate demand. When COVID reached US shores in early-2020, the US economy was in full stride with few signs of slowing. The government-mandated shutdown that followed served as an exogenous (i.e., external) shock to what had been a normally functioning economy. With the shutdown came the unattainability of goods and, especially, services, that would otherwise be in high demand. That said, a combination of federal stimulus as a stopgap for lost household income, along with adaptative economic creativity from service providers, have allowed a sizable portion of demand to bounce back quickly, prompting a rebound in GDP during the latter half of the year. While a total return to pre-COVID normalcy is still more than armlength away, a steady increase in vaccinations and the reopening of pandemic-constrained businesses are buoying prospects for a strong 2021. As of the March WSJ Economic Forecasting Survey, on average, leading economists expect the US economy to grow by 6.0%—higher than any annual increase since 1984. Despite the otherwise great news, the injection of more than $6T of fiscal stimulus, alongside a monetary policy regime committed to holding interest rates low, has raised concerns of increased pressure on prices. Echoing these sentiments, former National Economic Council director Larry Summers recently opined, “I know the bathtub has been too empty,” metaphorizing the steep fall in output that the economy has experienced during the pandemic. “But one has to think about what the capacity of the bathtub is and how much water we’re trying to flow into it.” Summers, who has recently emerged as a bullhorn for inflation concerns, was once a leading proponent for higher government spending to stimulate aggregate demand. His view on the potential unintended consequences of an enormous spending binge may differ from many of his contemporaries. Still, his warnings do not have the mark of an ideologically convenient argument. The fears aren’t unfounded. In the March release of the Manufacturing Business Outlook Survey, an indexed review of manufacturing activity produced by the Federal Reserve Bank of Philadelphia, 77% of firms reported higher input prices in the past month—pushing its “Prices Paid Index” to its highest level since 1980. Another 35% of firms reported an increase in the price of goods sold, up from 18% in the previous month. While the monthly survey focuses on firms in the Mid-Atlantic region of the US, it is often used as a bellwether forecast for manufacturing activity nationwide, as sector conditions tend to be similar across different regions. Adding fuel to the fire are signals in the labor market that point to higher demand on the horizon. The four-week average of initial unemployment claims sits at 724k through the week ending April 3rd, within 3k of the lowest total since the pandemic began. The corresponding uptick in job growth and moderate rebound of the civilian labor force during February and March reflects a labor market is entering a Spring thaw. Meanwhile, according to the March release of the University of Michigan’s Survey of Consumers, consumer sentiment during the month climbed to its highest level since March of last year. Taken as a whole, the economy appears to be gearing up for a high-speed joyride— so it’s understandable that some worry it may crash while rounding the curve. Still, not all are convinced. “We expect that as the economy reopens and hopefully picks up, we will see inflation move up through base effects,” stated Fed Chair Jerome Powell during a press conference on March 4th. “But I do think it’s more likely that what happens in the next year or so is going to amount to prices moving up but not staying up and certainly not staying up to the point where they would move inflation expectations materially above 2%.” Powell and economists who share his viewpoint note that the US has experienced persistently low inflation for decades. The lack of significant price increases, many believe, is mainly due to tepid investment and consumer demand, and technological advances that have lowered the real costs of starting a business or learning a new skill. Since January of 2000, Core-PCE inflation, a measure of prices for a basket of consumer goods that excludes food and energy prices and is the Federal Reserve’s preferred inflation metric, has averaged 1.7% year-over-year, 30 bps below the Fed’s current 2% target. For perspective, in the 20-year period that ended in December of 1999, core-PCE averaged 3.8% year-over-year. Even if the market fundamentals that have held down inflation for years now start to change, some experts note that because of this long saga of low inflation, the US economy and its consumers are in a unique position to absorb modest increases in prices, shall they occur. A similar school of thought has led the Fed to commit to allowing inflation to run above its 2% target for a short period once it reaches it. Though the debate is likely far from finished, developments over the next few months should give clues as to which school of thought best aligns with the monetary paradigm in a post-COVID era. Market-based inflations expectations (measured by the spread between TIPS and Treasury Bills) have risen in recent weeks, bolstering Larry Summers and others’ claims. However, whether prices continue to accelerate after the impact of reopening and stimulus fades remains to be seen. For now, back to dinner table debates we go.

Dr. Sam Chandan sits down with Arthanais Williams, Managing Director for Affordable Housing at Arbor Realty Trust. Dr. Chandan and Director Williams discuss the current landscape and history of affordable housing finance, distinctions between the formal Affordable housing sector and naturally occurring affordable housing, and the persistent challenges facing the industry. Affordable housing has long played a key role in underpinning dynamic local economies, and its importance has only grown during a uniquely challenging year. The pandemic has exhausted income-constrained household finances, only deepening a housing needs gap felt across US cities, both big and small. In a recent episode of The Urban Lab, Arthanais Williams, Managing Director of Affordable Housing at Arbor Realty Trust, one of the nation’s leading multifamily mortgage lenders, details the differences across the sector and the role lenders play in bridging supply and demand. In its most basic form, the federal government defines housing as affordable when a dwelling can be obtained for 30% or less of a household’s income. However, for decades, housing costs (including market rents) have accelerated more quickly than average incomes. For renters on the lower end of the income distribution, and especially those in high-cost markets, the supply availability of market-rate units that meet the affordability guidelines ranges from limited to nonexistent. Thus, programs that oversee the formal capital-A Affordable housing sector set restrictions based on local area median-incomes. According to Williams, the formal sector is "any housing that has an affordability restriction, either taking the form of a rent restriction or an income restriction—which limits the amount of income that a household living in a particular unit can earn in order to qualify for that unit." While local governments and stakeholders often dictate land-use policies within a given locality, the regulations that define Affordable Housing finance arrive from the IRS tax code. "We are limited by incomes at 60% of area-median-income (AMI)," says Williams. "Those restrictions are put in place in order to incentivize developers to create this housing." Meanwhile, "naturally occurring" affordable housing arises when normal market rents are at levels low enough that the formal definition is met without policy intervention. Despite incentive structures, the federally established 60% AMI threshold has an imbalanced impact across metros. In a high-income area such as Manhattan, rents that are priced based on 60% of the local median income may still be unattainable for many income-constrained renters, while the high fixed prices of other day-to-day necessities strain wallets at the bottom to a higher degree. Area-by-area discrepancies complicate policy-effectiveness and leave many of the nation's most vulnerable households left behind. Beyond the governing structure, there is often an incorrect perception that housing affordability is strictly an urban problem. Initially, housing policies established in the 1940s provided local governments the resources to build Affordable housing where they saw fit. The result was a concentration of these properties in urban centers. “When the federal government built and managed housing, that’s where the bulk of the Affordable housing was built," says Williams. However, over time, rising land costs and migration patterns rerouted the concentration of new construction. “Most people when they think of affordable housing, they think of urban cores—, but actually Affordable housing is everywhere… The suburbs, the exurbs, and even rural, you will find Affordable housing with restrictions in order to address a housing need within that particular jurisdiction.” As housing demand grew in the second half of the 20th century, addressing supply primarily through the public sector became increasingly complex and inefficient. Thus, beginning in the 1970s, the Department of Housing and Urban Development (HUD) began to pivot away from its role on the supply-side of housing and towards addressing demand-side concerns, using vouchers and other forms of subsidies to spur development. This manifested in the 1986 tax-code, which established formal rules and incentives for the sector federally, opening the door to a future where private financing was the new norm. That shift became the catalyst for Affordable housing’s growth into the suburbs and beyond, where developers could find cheaper land and lower input costs, thereby raising profits. The new paradigm has yielded uneven results. In the nearly four decades since the introduction of private-finance into the sector, the pace of construction has accelerated; however, a significant supply-gap in affordable housing still persists today. "There are definitely positives… in that, you've seen more efficiencies in the marketplace in terms of construction of more than what the federal government could provide on its own. But overall, the incentives that are created [are] still not meeting the overall need," says Williams. "We're still at a deficit of about 7M units needed in the affordable housing space to meet overall demand". The forces constraining this supply are complex, according to Williams. “It’s all of the above” when asked which factors are primarily responsible for the shortfall. “It’s a combination of factors. Population growth overall; economically, wage growth has been outstripped by cost-of-living increases. We’ve had recessions, [the move] away from a manufacturing-based to a service economy—all of those factors play into why we are at a deficit”. Williams and his team at Arbor Realty Trust are familiar with both the challenges and opportunities present in today’s Affordable housing market. With licenses to underwrite mortgages backed by Fannie and Freddie, Arbor and its market-peers lenders help locate these projects and serve as a lynchpin between agencies and developers. “For Arbor, it’s just a natural outgrowth of the platforms we’ve already built here… it’s also consistent with our mission," he says. "We believe that everyone in America deserves a clean, safe, affordable housing unit, and so this is just a natural outgrowth of our business platform, but also our mission." Still, he recognizes the shortfalls of the market's current model and acknowledges that additional policy considerations may need to be made by the federal government to address them. "If we can establish a baseline value for the tax credits, I think that would go a long way in helping move a lot of transactions forward," noting that developers are often left with less to invest in renovations when acquisition prices are so high, as they are in the current environment. Traditionally, municipalities have stepped in to help provide such soft financing to developers, but in light of the pandemic, such funding is simply out of reach for most local governments. Other policies to consider helping the deficit, says Williams, are inclusionary housing requirements for development projects and up-zoning, which would allow for more density in areas with constrained land availability. "It makes sense… Market efficiency says that you should build up to what the market can support, but when we do that, people on the lower end of the spectrum are normally left out from an affordability standpoint," he explains. "So, if we are going to grant the approvals for a market-rate development, having an inclusion of affordable units interspersed— it just makes good policy in my perspective." For more information about the Urban Lab podcast and Dr. Sam Chandan, please visit samchandan.com/urbanlab. Follow Dr. Chandan and the Urban Lab on Twitter at SamChandan and UrbanLabPodcast.

After months of gridlock, Washington approved and passed a new $900B COVID-relief bill in law in December. Despite its delay, the new relief funding reaches many of the most burdened cross-sections of the national economy. The new Biden Administration recently announced its own $1.9T Coronavirus Relief Package—which among other items includes a proposal for an additional $1,400 payment to qualifying individuals, along with an enhanced test and tracing regime. Analysis After months of gridlock and little substantive momentum, the clock winding down on 116th Congress proved the impetus needed to pass the compromise-heavy 2021 Consolidated Appropriations Act. As part of its passage, Congress approved $900B of new COVID-relief stimulus. Before the ink even had the chance to dry, attention quickly shifted to whether the second round of stimulus is too little too late. Following an unsuccessful 11th-hour push to raise the individual payment amounts to $2,000, President Trump signed the legislation into law on December 29th. While much of the political and media focus has remained on the individual payments, the package also includes: Assistance for Small Businesses COVID-safety Funding for Schools Partially Restored Supplemental Unemployment Benefits An Extended Moratorium on Evictions through January 31st, 2021 Funding for Renter Assistance Funding for Vaccine Distribution The infusion of new federal assistance comes as the United States is fighting through a challenging and deadly winter. On New Year's Day alone, the nation recorded 147,000 new COVID-19 cases and 2,373 deaths. In Los Angeles County, hospital ICU capacity has sat at 0% for weeks, while national vaccine distribution lags CDC targets. In the labor market, the job growth recovery slowed through late-Summer and Fall and has now started to reverse as of the BLS’s latest release. While markets remain bullish as we move into 2021, observers stretching from the Federal Reserve to Main Street have joined in chorus, citing fiscal stimulus as the bellwether-ingredient needed to get the economy back on track. Seen as late by many, this spending package remains significant in its breadth. Just as it was in last year's CARES Act, this package targets Americans under an income threshold of $99,000 per year for direct relief.[1] Every adult taxpayer at or below that income level is eligible for the $600 payment, with an additional $600 payment per dependent child. This form of blanketed stimulus based on income, regardless of employment status, helps offset wage cuts and assists households in covering unexpected expenses related to the pandemic. For some, the stimulus will merely be extra cash in the bank to spend— a boost to consumption that many businesses will welcome. Though for many, the $600 payment represents some desperately needed relief in hopes of getting through to the next billing cycle. Beyond the direct payments, the new package revives supplemental jobless benefits for the unemployed, with eligible recipients receiving up to $300 per week— half of the maximum amount provided in the CARES Act. A separate program assisting independent contractors or "gig-economy" workers during the pandemic that was set to expire on December 31st was also extended. In addition to these more pointed relief provisions, Congress injected $284B into the Paycheck Protection Program to assist small businesses while earmarking $25B towards an emergency renter assistance program. Despite its less-than-ideal timing, the new stimulus measure is impressive in scope, with its funding reaching many of the most burdened cross-sections of the national economy. The healthcare and education sectors, both of which saw dramatic upheaval and drastic adjustments through the crisis, are receiving a much-needed credit line. However, missing in the package was any aid directed to State and Local governments, a political football punted down the road along with another partisan wedge, corporate liability protections. Though the political outcome was unsurprising, the consequences are considerable. According to the NY State Comptroller, New York City faces a deficit of $3.8 Billion in its upcoming budget year, with the potential to grow if expected funding from the State dries up. Transit agencies are on track to take the brunt of cuts in many cities, with the DC Metro Board advancing a plan to cut one-quarter of its $2B budget for 2021. Cities across the nation, both large and small, are facing similarly tough choices, from Fire Department cuts in Oakland to potential reductions in school funding across Texas. With a new administration now in the White House, with a Democratic majority in both the House and the Senate, the likelihood of an additional stimulus package containing State and Local aid is elevated. In the interim, municipal resources across the country will remain limited, likely impeding the capacity of cities to rebound from the crisis. Another potential consequence of a smaller and delayed bill is the likelihood of a protracted recession. The CARES Act passed within a month of the nation's first stay-at-home orders and totaled $2.2 trillion, dwarfing the $900 billion included in the latest bill. This swift and ambitious policy response provided a higher floor for economic growth as the pandemic ensued. While during a typical economic downturn, it may make sense for a follow-up relief package to be both smaller and deferred, the pandemic has presented unique challenges in reigniting the engines of the economy. In addition to the 2nd and now 3rd COVID-case waves, consumer demand remains tepid, and job growth has turned negative. Even as some States adopted laissez-faire containment strategies in the name of local economic success, they have since learned that uncontrolled viral spread and lasting economic growth are two incompatible concepts. Pressing ahead, both policymakers and the private sector will have to manage multiple priorities to pursue renewed normalcy. As stimulus relief gets distributed throughout the country, effectively administering the vaccine will require an equal amount of effort and attention. The Biden administration has signaled its intention to address the ongoing logistical backlog facing distribution efforts as one of its earliest priorities, with a “100 million vaccinations in 100 days” echoing as a signature pledge. To do so, it is considering releasing all of its remaining vaccine supply to the States. Though the merits, efficacy, and achievability of this approach are current topics of debate, if successful, it would provide the foundation for alleviating public safety concerns and boosting economic activity. As the vaccine becomes widely distributed through 2021, the legislative focus will shift to designing a sustained economic recovery. On Thursday, January 14th, the then-incoming Biden Administration announced its Coronavirus Relief Package. Among other items, the plan proposes an additional $1,400 payment to qualifying individuals, along with an enhanced test and tracing regime aimed at establishing a more robust federal management of the pandemic response. Biden's initial plan is unlikely to pass as is— even with his party in control of both congressional chambers. Still, the framework suggests that a more comprehensive package is likely on its way. As administrative talking points give way to bills debated in Congress, the Chandan Research team will follow this synopsis with a similar breakdown and analysis of the total Federal response. [1] Based on 2019 Tax Returns

Long-term unemployment in the U.S. is skyrocketing, even as job growth rebounds. As the number of workers on temporary layoff falls, permanent layoffs rise. Consumer sentiment remains well-below pre-COVID highs. Curb the Enthusiasm As the U.S. enters a troubling new phase in the battle against COVID, the road to getting life and the economy back to normal feels just as bumpy as it started. While commerce has found creative and resilient ways to adjust, new data released by the Bureau of Labor Statistics indicates that the Spring's massive wave of layoffs has had a lasting impact. Despite employment levels recovering from their April-nadir, the number of workers who have been unemployed for 27 weeks or longer continues to climb. After steadily decreasing since the late days of the Great Financial Crisis, long-term joblessness has risen by 2.6 million people since April and currently sits at its highest level since 2015. In the most recent jobs report alone, the number of workers classified as long-term unemployed jumped 1.1 million from the month prior, reaching 3.6 million through October. The Long Game Rising long-term unemployment has the potential to exacerbate already deep-rooted inequities. From both a public health and economic perspective, COVID has disproportionately impacted minority and low-income households. Longer-term unemployed workers overwhelmingly come from low-wage jobs, with 54% of workers having made less than $30,000 per year before being laid off. Once workers find new jobs, they often earn less than they did before. Compounding these challenges, there is increasing evidence that groups who face long-term joblessness are more likely to put off health care and other primary needs. In some cases, this has even worsened the academic performance of children whose parents have experienced extended joblessness. So far, improving labor market conditions haven't bucked the trend. In recent months as hiring activity ramped up and initial unemployment claims fell, the persistence of previous job losses has created a pool of unemployed workers that are disproportionately long-term. The share of unemployed workers who are jobless for 27 weeks or longer jumped from only 4.1% in April to a substantial 32.5% in October. Meanwhile, the share that has been jobless for less than five weeks dropped from 61.9% to just 22.8% over the same period. On the one hand, this signals a slowdown in labor turnover, which is good news. However, the inability of unemployed workers to transition back into their previous or new jobs, even after the removal of many State-level restrictions over the Summer, is a concern for a post-COVID recovery pace. *Slack Notification* Once COVID exploded into an imminent public health crisis, a labor market shock and eventual rise in long-term unemployment was a certainty. Between February and April, U.S. employers laid-off more than 22 million workers, and the unemployment rate skyrocketed to 14.7%, its highest level since the Great Depression. However, there was hope that this would broadly translate into temporary unemployment for many who would quickly get rehired as the pandemic waned. Provisions in the Federal CARES Act aimed at helping businesses had initially kept some workers in that temporary status and even created jobs for others. Unfortunately, eight months into the crisis and the pandemic has neither waned nor have job losses proven short-lived. Much of the initial federal stimulus has run out with little progress by Congress to inject more. After reaching a high of 18.0 million people in April, temporary unemployment fell to 3.2 million people in October. Over the same period, permanent job losses have risen from just 2.0 million to 3.6 million. While most workers who have transitioned out of temporary unemployment did so by returning to their jobs, the acceleration of permeant joblessness reveals that labor-market slack is likely to remain post-pandemic. Recent job gains are mostly in areas that suffered the steepest losses in the Spring: Leisure & Hospitality, Professional & Business Services, Retail, and Construction stand out in both regards. On balance, total employment remains well below pre-pandemic levels across all industries. Forward Guidance A build-up of indefinitely jobless workers does not only affect the well-being of directly impacted households; it also puts a speed limit on the pace of potential economic growth. As earnings fall, so does household consumption, pulling down demand levels for goods and services. Consumer sentiment in the U.S. dropped rapidly after stay-at-home measures took effect in March, and as of September, it has only recovered 29% of its losses. In an economy where household consumption represents roughly seven-tenths of all economic activity, consumers' capacity and willingness to spend will dictate whether or not we can sustain a robust recovery. As the nation deals with another spike in infections, last Spring’s combination of extreme headwinds may be picking up steam yet again. Both rising cases and the absence of new federal stimulus relief are fueling economic anxiety. In just the last few days, several States, including California, Michigan, and New Jersey, have renewed limits on economic activity. Even States that were previously hesitant to introduce restrictions, such as Iowa and West Virginia, have reversed course and started to roll them out. With a vaccine potentially on the horizon, future expectations should trend more positively. Still, while containing the virus is the necessary first step in rebuilding our workforce and economy, it won’t be our last.