Tuesday, February 23, 2016

Housing: Part 120 - We are the austerity counterfactual

The other Anglosphere countries generally had a housing boom, like us, but without the bust.  We are the outlier because of the bust, not because of the boom.

Here are graphs from the Economist.  The first is for Home Prices in real terms.  The second is for Home Prices / Rents.  In both cases, the figures are just indexed, and if you look closely, you can see that they understate the price movement of the other countries, relative to the US, in the Price/Rent graph, because they are at lower levels in the earlier years.  This is especially interesting in the case of Canada and Australia.  These are countries known for having nothing but space.  Yet, they have managed to create a supply problem in their housing markets.  The value of dense cities and the seemingly universal refusal to build in them in the Anglosphere countries has led to land, land everywhere, and not a spot to live on.

Before the crisis, we were the winner of the bunch, because we still have Texas, Arizona, etc.  We have some economic opportunity in places willing to build houses.  But, America, of all places, needlessly lost faith in our financial sector, and imposed austerity on ourselves.  Isn't it weird that, in America of all places, even the pundits and economists who rail against austerity seem to only want public debt.  There is near unanimous agreement in this country that we just can't handle debt privately.  No.  With regard to the private sector, we're all in the austerity camp.

Here is a graph comparing household debt, as a percentage of GDP, for Canada, Australia, and the US.  I have used Federal Reserve measures for the US to get a longer time series, but the measure is the same as the one for the other two countries.

The US breaks from the trend of the others after the bust.  This suggests that US household debt levels are about 30% below where they would have been if we had followed the other countries.  I actually think that debt has accumulated everywhere since the bust because the bust has exacerbated the savings glut problem which has pushed interest rates down.  So, maybe if the bust hadn't happened, the other countries would have seen debt levels slightly lower than they are.

But, in any case, US mortgage leverage is about back to the comfortable range it was in before the bust.  We probably need about 30% growth in home values and in mortgage levels to get back to equilibrium values in housing.  It could be that more than 10% is from a real decline in available housing stock because of our decade long homebuilding depression.  But, as we see with the metropolitan area data, since housing demand becomes inelastic in the face of supply constraints, if anything, the housing shortage has inflated the equilibrium value of the existing housing stock.  I think it is possible that we need to see prices move up by that much in order to trigger enough new homebuilding to reverse course and create a housing stock that is affordable again.

That probably also means well over 1.5 million units per year for a while.  I doubt we will allow either those prices or those quantities to develop.  But, I think, ironically, that is the only way, in the long run, along with urban development reform, to reduce the absolute level of household debt.  The irony is that if San Francisco and Manhattan were filled with high rise condo buildings and Phoenix and Dallas had thousands of new 3,000 square foot homes for median income households, debt levels would be much lower.  The only sustainable macroprudential policy is abundance.  There is no political faction currently in favor of true macroprudence.  But, boy are we all excited about "getting tough" on people.  Wall Street would just love to make us more like Canada.  They see billions in profits from moving that green line up.  Just let 'em try.  We're gonna "get tough" on 'em if they do.  We're no chumps.


  1. http://openscholarship.wustl.edu/cgi/viewcontent.cgi?article=1255&context=law_urbanlaw&sei-redir=1&referer=http%3A%2F%2Fwww.google.co.th%2Fsearch%3Fhl%3Den-TH%26source%3Dhp%26biw%3D%26bih%3D%26q%3Dzoning%2Bagainst%2Bmanufactured%2Bhousing%26gbv%3D2%26oq%3Dzoning%2Bagainst%2Bmanufactured%2Bhousing%26gs_l%3Dheirloom-hp.3...1351670.1364366.0.1364877.

    Pardon the gibberish, but it a link to a paper on manufactured housing

    1. The only things longer than that URL are the footnotes on every page of that paper!

      It's interesting, isn't it, that at their base, concerns about manufactured homes or predatory lenders are based in pragmatic reality, yet there is something unavoidably elitist about them, too. Debt is, after all, aspirational above all else, and being "protected" from it means being held back from that.

      I was thinking about some of this while driving through an aesthetically unpleasant part of town today. There is a sort of uncanny valley effect with class. The infrastructure in very poor places seems quaint and noble because it is distant enough from us, culturally, to move from Robin Hanson's near mode to far mode, where we view it more idealistically. But, the infrastructure in poor areas more near to us suffer aesthetically because they are near enough to us to share some of our aspirations, but not so near that they have succeeded. So, even though those neighborhoods are much better off than the extremely poor communities of, say, a developing country, they seem tacky to us.

      Peasants are like Pixar characters to us while less-well-off residents in our cities are like the characters in Polar Express. And, this effect causes people who see themselves as empathetic to block things like affordable manufactured homes or access to credit that reflects the risk profile of a life not quite as comfortable as their own, because of aesthetics.

  2. Yes an old-fashioned footnoted paper--probably actually printed on paper at the time published.

    Though the paper is dated, given the American zeal for zoning I assume the barriers against manufactured housing are worse than ever.

    It is interesting to ponder what American residential architecture would look like in an era of no zoning. You might get the walled compound look. The better off would live inside a courtyard with a house behind ivy-brick walls so they would not look at the "crappy" housing and street vendors outside.

    It is interesting to note that of your limited access cities, not one has proposed a 10-year moratorium on zoning.

    In this particular case, the states and municipalities are not laboratories of democracy.