Thursday, July 16, 2015

Housing Tax Policy, A Series: Part 44 - The explanation for rising costs which cannot be named.

Here's a Bloomberg article about rising rents in the major metro areas.  From the article:
A couple of forces are making major cities increasingly unaffordable for millennials at the outset of their working lives. Stagnant wages in many cities have made rental and for-sale housing harder for workers to afford. 
Demand for leases has also outweighed supply in many places. In the nine cities shown on the map below, the number of renters is growing faster than the number of rental units, according to a report published in May by the Furman Center for Real Estate and Urban Policy at New York University. That trend is likely to continue if predictions for falling homeownership rates are realized. 
For many cities, the affordability gap hasn't been a growth-killer; in many, it's a consequence of their sustained popularity. People continue to flock to San Francisco for opportunities in its technology industry, despite median rents that were unaffordable to young workers for the first time in 1982. Looming rental affordability problems in Dallas and Houston are probably the result of booming local economies that have attracted workers faster than builders can erect new housing.
Not unexpectedly, the poor have suffered most from the dearth of reasonably priced housing. 

Hm.  "The demand for leases has outweighed supply."  Because falling homeownership is increasing demand for rental units.  And, remember how in the 2000s, it was increasing demand from all those new homeowners enticed by predatory lenders that was pushing up housing costs then?  And, notice that the lack of affordable housing is a result of both (1) stagnant wages  and (2) booming local economies that people flock to for their opportunities.  Those are an awful lot of hoops to jump through to avoid saying "These cities have a supply problem."

Here is a chart with earnings growth of production and non-supervisory workers and with housing starts as a proportion of population growth.

Guess what we did before 1990.  We built houses!  What a concept!  I think the 1995-2000 dip in rent affordability is a false flag.  It is a product of strong income growth, not of falling rent.  In the following two graphs, we can see that growth in real housing consumption has been falling for decades.  Until the 1990s, it was a fairly stable portion of incomes in both nominal and real terms, but since the mid-1990s, real expansion of the housing stock has been so low that households have simply been chasing a dwindling relative stock of homes with the a stable portion of their incomes.

There was a short improvement in rent affordability around 2004-2007, according to the Bloomberg chart.  You might notice that this is roughly the same period where home building briefly recovered to pre-1990 levels and earnings adjusted with rent grew as quickly as earnings before rent expenses.  Do you want to guess how our Bloomberg writer feels about the 2003-2007 housing market?  He refers to this period as "the run-up to the housing market crash of 2008", "marked by iffy tactics to wring profits out of a hot market."  (Not that he is unusual in this regard.)

And, let's talk about those stagnant wages.  You know what one of the largest factors is in adjusting wages for cost of living?  Rent!  In the graph, I include weekly earnings growth, first adjusted with Core CPI inflation (blue line), then adjusted with inflation that doesn't include rent (red line).  Real wages are stagnant because the extra earnings are going to rent.  This is based on national numbers.  The problem is worse in the major cities.  And this is the first reason given by Bloomberg for rising rents: "Stagnant wages in many cities have made rental and for-sale housing harder for workers to afford. "

I didn't want to call out this author.  His viewpoint here isn't unusual.  But, then I searched his articles, and came upon this gem of economic reasoning:
Here's the vicious circle that's sending rents spiraling higher:
  1. People paying high rents have a harder time saving for a down payment, preventing tenants from exiting the rental market.
  2. Low vacancy rates let landlords raise rents still higher.
  3. Developers who know they can command high rents (and sales prices) are spurred to spend more to acquire developable land.
  4. Higher land costs can force builders to target the higher end of the market. 
Elsewhere, he has this article with several ideas for creating affordable housing, including tax credits to developers and Wall Street firms for developing affordable rentals and vouchers for low income homebuyers.  No mention in the article about, you know, just building more houses. And this article from late 2014 complaining about a new rise in mortgage fraud, but seeming to be fine with the current level of lending standards which basically excludes households below the median.  This is the Bloomberg writer on the real estate beat.

History before 1995 does not exist in this rhetorical framework.  There are only 3 types of people in this world.  (1) Profiteers, who only prey on the middle and lower income households, but never serve them.  (2) Lower income families, who can't provide for themselves.  and (3) the advocates, who arrange for the government to pay off group 1 to serve group 2.

If my memory serves, the world that created that affordable housing before the year 1990 happened because group (1) served group (2), and group (3) was mostly engaged in facilitating that activity, not in preventing supply while subsidizing demand.  But, that 4 step vicious cycle must not have been in place yet.  Maybe developers just weren't as greedy back then.  So, you're the median family and you want to go to the bank and get a mortgage?  Like your parents and your grandparents did?  That would be predatory!  We can't let that happen.  But, enlightened folks who care about you are fighting to arrange for handouts and subsidies and corporate welfare so that we can help you move into the houses that we aren't letting developers build.

PS: While reading one of the articles titled "The Rise of the $50,000 rental" about how developers (the ones, I presume, that use his tried-and-true 4 step method for profit) are gutting middle class housing to turn it into high rent housing, a light bulb went off over my head.  I've seen a lot of articles bemoaning the fact that metropolitan developers are targeting the high end of the market, and I've always just assumed that that was an outgrowth of the housing shortage, in general.  Less available space means that higher prices will fetch households with higher incomes.  But, it occurs to me, if you're a metropolitan real estate developer, whose main source of risk is populist regulatory hassles, you would have to be demanding a higher capitalization rate on middle class housing developments.  Think about it.  Ten years down the line, if you fill that building with $2,000 apartments, what are the odds that you'll be battling some neighborhood advocacy group about raising rents?  But, you put $10,000 apartments in there, no advocacy group is going to hassle you about rent.  If you decide to do some sort of renovation in 30 years, nobody is going to be complaining about how you're ruining the neighborhood, and if they do, there will be an acrid article in the New York Times sarcastically pointing at the spoiled rich folks who are mad about losing their $10,000 apartments.  They may not say it in such stark terms, but I wouldn't be surprised if developers make risk adjustments to their expected cash flows for these problems.  They would be kidding themselves if they don't.

PPS.  The solution in San Francisco is to tax developers who have the temerity to build "market rate" housing.  (In this article, the $2 million tax on a 27 unit development amounts to $74,000 per unit.) The taxes are supposed to be used by the city to build below-market housing.  So, the city's solution to rising rents is to increase costs for builders (moves the supply curve to the left) and decrease costs for some renters (moves the demand curve to the right).  And, locals are infuriated that market rents keep rising, and demand that the policy be ratcheted up!

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