Want to rent a place in Manhattan? Buy a house in the Sun Belt? Live virtually anywhere in the U.S.? That’ll cost you more than ever before.

It’s easy to suppose that the reason is another Wall Street movie moment where Gordon Gekko argues for the beneficence of greed. And, yes, that’s part. But the dynamics of the housing market are far more complicated and subtle. A lack of effective national housing policy combined with an easy monetary strategy turned into a major aggravating factor.

Too Much Money

Plenty of money would keep people happy, you’d think. And it does, except when it comes to money pouring into investment areas.

For almost 14 years, ever since the Great Recession that started in 2008, the Federal Reserve has kept interest rates historically low to encourage companies to invest and expand their businesses. The Fed also bought an enormous number of Treasury securities to keep credit markets from freezing up by injecting massive amounts of capital through these purchases. As of Feb. 2, the Fed had a total of $5.7 trillion of securities, as the graph from the Federal Reserve Bank of St. Louis shows below.

The Fed has vastly increased its holdings of Treasury bonds and notes.

The institution opened the financial flood gates and left them that way for years, releasing a torrent of cash. Those selling bonds to the Fed were already typically well-off. They did what they had been taught to do, which was invest that extra money to make even more.

That started a financial feedback loop. Assets like stocks and real estate shot up in value because investors bid up the price. As the apparent values rose, more money went in to get some of that gain because low interest rates meant bonds and other so-called fixed-income vehicles didn’t pull their weight.

But with barrels of bucks floating into the real estate market, prices of properties, including apartment buildings and single-family homes being turned into rentals, kept rising.

Sky-High Construction Costs

One other part of the investment aspect is the cost of building. A sound investment means that if the owner ever needs to make improvements or, heaven forbid, rebuild after an accident, the cost would not be prohibitive. But if you think inflation is high for you, it’s much worse for construction. Prices of basic materials in December 2021 were up 13.5% over the same month in 2020, and that wasn’t counting scarcity of getting materials or labor.

When property gets more expensive, owners want to ensure they’re making enough to warrant the cost. And so, rents go up. There’s a secondary smack on the housing front. As more investors seek not just apartment buildings but houses to rent out, prices rise.

The St. Louis Fed also has data from the Census Bureau and the Department of Housing and Urban Development. The median sales price of houses in the fourth quarter of 2021 was $408,100. Five years before at the end of 2017, that number was $337,900. It’s almost a 21% increase in five years. Most people can’t keep up with this rate.

House prices (blue line) are far outpacing income.

Too Little Building

A reason investment dollars have such an impact is a lack of available housing. After the Great Recession, developers, banks and others got spooked. Property values had tumbled. Those who normally would buy land to build new homes weren’t interested in doing so until they knew prices had stabilized so the projects wouldn’t be money-losers. Lenders didn’t want to take the chance that more loans would go underwater.

The result was such a drop in building that the nation has a major shortage of houses, according to a report by real estate economics consultancy Rosen Consulting Group and the National Association of Realtors. “While the total stock of U.S. housing grew at an average annual rate of 1.7% from 1968 through 2000, the U.S. housing stock grew by an annual average rate of 1% in the last two decades, and only 0.7% in the last decade,” the report notes.

Combined with the loss of existing units through obsolescence or demolition and the gap between availability and need is 6.8 million houses.

There’s a parallel problem for apartments according to the National Multifamily Housing Council. To meet demand, the country needs “an average of 328,000 new apartments per year at a variety of price points,” and that’s happened only three times since 1989.

It’s not so much a lack of interest on the part of developers, because they are busy building housing in the Sun Belt for significant population migration from other parts of the country.

However, in older metropolis in regions land is scarce and frequently zoning regulations discourage new development because many existing residents—often those with money and political influence—don’t want more people moving into their neighborhoods.

Too Little Income

Most of the country knows this viscerally. Housing takes up an increasingly large portion of their income, as the graph below, which DCReport generated from data the St. Louis Fed collects, shows.

The graph shows indexes that represent how quickly something grows over time by comparing it with an initial value. The blue line, starting in December 2012, is growth in rents. The red line is growth in per capita income after inflation. For most people, pay doesn’t come close to keeping up, so renting an apartment or house races ahead…which most everyone who has to pay rent at the beginning of the month knows.

If you were buying a house, here’s a similar graph that shows how much faster prices grow than personal real income.

How do you get ahead if you aren’t toward the upper end of the income spectrum or lack family who can help you gather the down payment?

And greed

Developers and property owners are in this for the money, and they want to keep making more. With all the other reasons, there’s a focus on increasing house prices and rents because it’s a way to keep investments ahead of inflation. They aren’t typically focused on trying to control an important cost of living.

Governmental and Societal Inaction

In one sense, what caps it all is the lack of action on the part of governments and society. The more the nation trusts in pure market solutions, the greater a chance that things spiral out of control.

Not that smart and effective government action is easy. For instance, most rental properties are owned by smaller companies and individuals. Say that there should be a cap on rents, and you could drive those owners out of business, or at least see them give up on maintenance and repair because it becomes a losing proposition.

And yet, government could push for different zoning, offer more financing to see more housing constructed and so on. Make it easier to get people into places they rent or even own. But given the financial forces at work in politics, that doesn’t seem so likely.

Finally, there's something 52 senators can agree on: If a legal money lender is charging you Tony Soprano-level interest rates, you're at least entitled to know who they are.

The Senate voted 52 to 47 to repeal the so-called "true lender rule" that consumer advocates and plaintiff lawyers threatened consumers. It was a last-minute banking rule under the Trump administration that covers up who's really behind triple-digit interest rate loans.

If the House follows suit, which it's expected to do, many consumers will get a break they badly need.

The controversy is about non-banks using complex arrangements with banks to offer loans at stratospheric interest rates, and whether consumers were losing legal protections.

Non-bank lenders, like those in fintech (tech companies working in the financial services space), face limits by states on how much interest they can charge.

For banks, it's different. "Every state but New Jersey repealed their interest rate limits on banks," says Lauren Saunders, associate director of the National Consumer Law Center (NCLC). Any officially chartered bank can charge whatever it wants.

By partnering with what are called rent-a-banks in the industry, the non-bank lenders can enable triple-digit interest rates on loans. The actual lenders funnel the money, and the profits, through a rent-a-bank, which puts its name on the document. But critics note that it's still the non-bank company that is really making the loan, which a court might find illegal if challenged by the borrower.

'Rogue Banks'

Most banks have a degree of self-control because it's bad for their image. "You don't see 200% APR [annual percentage rate] bank credit cards out there," Saunders says. But there are a "few rogue banks," she says.

"In recent years, new fintechs have emerged that partner with banks to offer responsible small-dollar loans at affordable rates," said Sen. Sherrod Brown (D-Ohio) in an April 28 Senate hearing on the subject. But, as he noted, partnerships with rent-a-banks are at unaffordable rates.

In an NCLC-hosted webinar, Shane Heskin, a partner in the law firm of White and Williams, discussed a client: a desperate restaurant that supposedly had taken a $67,000 loan at an annual rate of 268% from non-bank World Business Lenders. Heskin said that WBL gets 95% of the payments although rent-a-bank Axos Bank is listed on the paperwork. WBL did not respond to requests for comments. Axos said that it no longer had has a relationship with WBL, that the claim of keeping only 5% of profits "is not accurate," and that "[to] the degree Axos Bank has or had third-party relationships that follow this model, and in order to ensure full compliance with applicable law, we have exercised continuous oversight over third-party service providers pursuant to a rigorous compliance program specifically designed to meet the standards" developed by the OCC.

300% Rates

NCLC says there are non-bank lenders getting upwards of 300% rates.

Some people challenge the arrangements, saying that the non-banks are the real lenders and, so, should be far more limited in rates. That's where the rule passed in late 2020 by the Office of the Comptroller of the Currency (OCC), a federal agency that regulates banks, comes into play.

The "true lender" rule—which opponents deridingly call the "fake lender" rule—says that the bank listed on the loan agreement is always the true lender.

"The predatory lender creates the program, finds the customers, processes the applications, decides who they want to approve, the bank rubber stamps the approval, and then the bank sells the loan or almost all the rights to the non-bank lender," Saunders says. "The non-bank lender is doing almost all the work and making almost all the profits." But because the bank is listed on the original loan agreement, under the recent rule, it would be the lender to a court.

In Heskin's restaurant case, the defendants are already trying to use the OCC rule to argue that claims of a rent-a-bank arrangement are "completely misguided," according to a court filing. If Heskin was able to show that WBL was the actual lender, he could argue that state limits on interest rates would apply.

"This rule eliminated confusion, uncertainty and legal risk for banks and their counterparties to enter into the small-dollar lending space, and increased financial inclusion as well as expanded nationwide availability of credit on reasonable terms," read a statement from non-bank lender Opportunity Financial, commonly called OppFi. "This is crucial for the 150 million everyday consumers who need access to credit but are unable to get it through traditional lenders. Third-party partnerships between banking institutions and fintech providers are critical to expanding access to credit and provide best-in-class marketing acquisition, customer service and technology to assess risk beyond mere credit scores to facilitate broader small-dollar lending access."

But, as the statement also says, "it's important to note that we built a strong and thriving business over the course of many years prior to the rule being finalized just a few months ago, and we will continue to do so now." Perhaps rejection of the rule won't hurt OppFi, or other non-bank lenders, that much.

Those in the industry point to the cost of low-dollar loans, and losses from loans that are never repaid, as the reason for very high rates.

"Their default rates are high and that's the problem," Saunders says. "That's not an excuse for predatory lending. That's the reason it should be illegal. If people can't handle their current debts, high-cost debt is not the answer."

As for losses, the lenders "figured someone needed to pay 13 months on a 42-month period to break even, then it was profit," says Saunders. "Their goal was to find people to make enough payments to make a profit."

The Federal Reserve in a 2015 study noted that the break-even annual percentage rate, including writing off defaulted loans, for a $594 amount was, indeed, 103.54%. But when the borrowed amount rose to $2,000, the break-even was about 40%. At $13,057, the break-even APR was 16.25%.

In its financial report on 2020 operations, OppFi annual revenue of $291 million and net income of $77.5 million. That's an extremely healthy before-tax profit rate of 26.6%. Profits between 2019 and 2020 were up more than a third.

If for larger amounts a lender charges 50%, 70%, 100%, 200%, or more, on the whole, they're making good money. If a lender ensures a minimum amount of loan, the losses may not be as overbearing as they are often portrayed.