Thinking about housing in terms of affordability causes a lot of confusion, I think. There is confusion about the difference between the affordability of using a home (rent) and the affordability of owning a home. There is confusion about the difference between real housing consumption (size, location, etc.) and nominal housing consumption (the rent check). And, I think there are two big reasons why affordability is not a coherent way to think about housing expenses, anyway.
1) Housing is largely a sunk cost. The homes we have were built in the past and they are what they are. Since the 1960s, Americans have spent about 18% of our personal consumption expenditures on housing with surprising regularity. Lacking a major shift in a number of political and cultural factors, we will continue to spend about 18% of our budgets on housing. It doesn't matter if those houses are 500 sq. ft., 2,000 sq. ft., with or without air conditioning, with thatched roofs or tile. We will spend 18% of our budgets on it. It is that affordable. The affordability, in the aggregate, is the one thing that doesn't change. Everything else changes to keep affordability where it is.
And, we certainly won't suddenly discover that we can't afford the homes we have built and have to leave some of them empty until we can afford to fill them. They are here, they are ours to use, and we will pay about 18% of our personal household spending for them.
2) Affordability is not what is keeping people from moving to cities with employment opportunities. It looks like affordability is the problem. If you lost your manufacturing job in Buffalo, and you're thinking of moving to New York City because there are more jobs there, you might decide not to move because it is too expensive. It is the affordability that is keeping you out. But, even here, the affordability problem is just the messenger. It is the rationing mechanism for a housing stock that is relatively fixed for political reasons.
In a market with free flowing capital, labor, and money, price has more meaning. But, in the Closed Access cities, there are limits to the flow of capital and labor. If you decide to move to New York City, the shift in demand isn't going to move across an upward sloping supply curve. Supply has a pretty hard cap on it.
So, it doesn't matter if Brooklyn apartments rent for $500, or $1,000, or $2,000, or $4,000. There isn't one for you. Fixing this by fixing affordability isn't going to move the supply curve. It's simply substituting non-monetary rationing mechanisms for the monetary one.
The housing bubble was a huge neon sign blinking to the country that this is the core problem of our time - that there is a structural problem here that is eating us alive. And, the consensus error of seeing the bubble as a demand or credit phenomenon has delayed the progress on this problem for a decade while we impose self-inflicted wounds on ourselves.
Great post.
ReplyDelete"It is the rationing mechanism for a housing stock that is relatively fixed for political reasons."
Egads, say it out loud. It is property zoning.
But I am tilting at windmills, so maybe you are right to muffle your words a bit. People believe in property zoning, and worse if any lone city along the SoCal coast should eliminate property zoning, they would be immediately bulldozed by developers.
A new Supreme Court ruling on property zoning is needed.
And American "conservatives" believe in free enterprise and tell they don't, and liberals don't.
BTW I have an interesting post at NGDP advisers on a Richmond Fed paper.
Great post.
ReplyDelete"It is the rationing mechanism for a housing stock that is relatively fixed for political reasons."
Egads, say it out loud. It is property zoning.
But I am tilting at windmills, so maybe you are right to muffle your words a bit. People believe in property zoning, and worse if any lone city along the SoCal coast should eliminate property zoning, they would be immediately bulldozed by developers.
A new Supreme Court ruling on property zoning is needed.
And American "conservatives" believe in free enterprise and tell they don't, and liberals don't.
BTW I have an interesting post at NGDP advisers on a Richmond Fed paper.
Interesting. Good post. Since there isn't much inflation to speak of, we have this ad hoc theory that the money all goes into asset markets.
DeleteYes, the asset bubbles. Forget EMH.
ReplyDeleteNo one (except you) ever mentions why property is inflating.
Stocks are priced a bit richly, but then in a world of abundant capital, maybe this is the new norm. I am so old-fashioned I think stocks should pay dividends, and paying more than 10-12 earnings (for a portfolio or index fund) is risky.
Bonds have appreciated as --duh--interest rates came down.
Interest rates came down as the Fed and other central banks have beaten inflation.
Gold is actually cheaper than in 1980 and central banks have been buying gold. Gold might be in an artificial plateau, held up by the Peoples Bank of China. For some reason, gold is never in a bubble according to bubble-mongers, although it was in 1980 and then again in 2012.
Gold and art can be in bubbles, I contend, as the value is 95% emotional.
Now that I think about it, the glut of capital should actually be usefully poured into unzoned real estate markets, so people could enjoy higher living standards and the capital could be put to use.
I wonder if some u.S. cities could be convinced to create "no zone" districts. Just wide open, free-enterprise zones.
Maybe the federal government could offer an X million per acre prize for unzoned parcels in densely populated areas.
So if the City of L.A. unzoned 20 acres on the Westside, it would get a cash prize of $200 million.
Well, it is an idea.
"Now that I think about it, the glut of capital should actually be usefully poured into unzoned real estate markets, so people could enjoy higher living standards and the capital could be put to use."
ReplyDeleteThis is why I think the global savings glut explanation for low interest rates and high housing prices fails. If the causation was coming from too much savings searching for safe outlets, why would that capital flow to places where capital can't be utilized? Capital would have flowed to countries that wouldn't have housing bubbles, not countries that would. The reason there is a correlation between flows of capital and countries that had housing bubbles is because the limited access to those cities is the cause of the capital flows. The excess earnings of the workers and firms based in those cities, from global revenue sources, means that foreign savers must fund a trade surplus with the housing constrained countries in order to maintain net international capital income. If that capital didn't flow back to countries like the US as savings, the net foreign capital income of our Closed Access firms would be extremely high.
Yes, but what about my idea to bribe cities with cash to unzone acreage in dense areas?
ReplyDeleteI like it. I'm not sure zoning solves it though. There are a lot of other obstructions, fees, and taxes that cities use to prevent building. If they get rid of zoning but still impose development fees that are more than the cost of construction, there would still be a problem.
DeleteIt would be interesting to see what would happen if we just paid them to build. Some huge figure - Washington sends their city governments $300,000 for every unit built over the next 2 years, or something. If it worked, it would destroy billions in real estate values as their costs would decline, so the cities would have some economic struggles, even with the subsidies. But economic inequality would have a regime shift. Costs would be lower and people would move to where opportunities are available. And maybe it would break them out of their bad equilibrium where developers and cities have to make sure the market remains undersupplied to justify new projects.
DeleteYes--that's why I say "free enterprise zones"---no stipulations on construction except bona fide safety concerns. See Oakland.
ReplyDeleteWide open otherwise, and the bribe escalates the denser the area that is unzoned.
Yes--that's why I say "free enterprise zones"---no stipulations on construction except bona fide safety concerns. See Oakland.
ReplyDeleteWide open otherwise, and the bribe escalates the denser the area that is unzoned.
But Benjamin, there are physical limitations on packing people into housing. You could force them to take public transportation but do we want to take away their cars? Really? I sympathize with your position. But I also sympathize with the guy who already takes an hour to drive 10 miles to work.
ReplyDelete