Friday, April 28, 2017

Housing: Part 222 - Plausible problems that aren't binding

I have seen many claims since the housing bust of rising costs and rising regulations.  I don't doubt that these are problems.  In fact, really, a core feature of Closed Access housing policy has to be the imposition of artificial costs on new development.  If they didn't impose artificial costs on new development, Closed Access planning departments would be overrun by developers with potential projects.  In fact, this is, in practice, the main function of "affordable housing" demands in Closed Access cities.  Forcing these units on developers imposes a cost on the "market-rate" units they are building, which is an important factor keeping "market rates" above....well...above market rates.

Scott Sumner has recently been discussing the problem of rising labor costs, and the apparent problem builders are having finding qualified workers.  We are, after all, well into an economic expansion, unemployment is low, and immigration from the south has been weak since the recession, so it certainly is plausible that this is a real problem for builders.

On the other hand, total construction employment is still weak and relative construction earnings aren't exactly jumping through the roof.


In any case, I think this issue has the same problem as the other issues.  If rising costs were the problem, what we would see is prices at the low end of the market rising, especially regarding the regulatory costs, because those would fall more sharply on low tier building.  But, since 2008, low tier prices have lagged behind high tier prices.  If cost was the binding constraint, we might see units built in the low tier lagging, but prices would be rising.  Both units and prices are lagging in the low tier, because the problem is demand, not supply.  Specifically, repressive regulatory limits preventing middle class buyers from getting mortgages.

Considering how repressed that market is, it is implausible that capacity utilization and cost are the problem.  It looks like a cost problem, because since there is no funding in that market, builders have to try to build to the lower price point.  In a non-repressed market, prices would be much higher, especially in the lower tier - at least 20%.  But, builders are price takers.  They are competing against existing homes.  So, to them it looks like a cost problem, because they can't pay higher wages and make a profit, either way.  There would not be a labor constraint problem if mortgage credit was flowing and home prices were 20% higher.

Further, I think there is a lack of appreciation for just how bad housing still is.  Much of the building is happening in the Closed Access cities.  Building is so constrained there that there isn't much of a cycle regarding housing permits and housing starts.  So, in those cities - the expensive cities - housing starts are where they were in 2005.  But, in the cities where much of the building would normally take place, housing permits are still 1/3 to 1/2 their normal levels (The Texas cities are doing a little better.)  and construction employment is still near the recession lows as a percentage of total local employment.

My permit chart is only updated through late 2015, but housing starts have basically been flat since then.  Considering all of this, it is astounding how many people I see talking about the next "bubble" or talking about how tight monetary policy is reasonable because of these cost pressures.  And, it looks like the Fed is set to tighten again in June.  Ironically, this obsession with bubbles is the most glaring example of herding behavior we have today.  Of course, when this bubble obsession leads regulators and the Fed toward cyclically damaging policies, this only bolsters the bubble-mongers' self-opinion, because they think the bust proves the bubble.

In hindsight, Fed policy was disastrous in the summer of 2008.  How could they be worried about inflation a week after the Treasury informed the GSEs that they would be so overwhelmed with future foreclosures that they would never realize their tax assets?  I agree with Scott Sumner that they were basically following the zeitgeist.  Clearly, the Fed was actually more loose than consensus would have had them.  How many complaints are there about the various "bailout" programs after the September 2008 meeting?  How many complaints, on the other hand, are there about the fact that the Fed Funds Rate was sitting at 2% while the nominal economy was collapsing?

Many today would have the Fed at 2% already.  Of course there is no way we will ever get to 2% because the yield curve will crash long before that.  The idea that people are talking about bubbles now as if Fed policy is somehow causing speculative money to flow into real estate markets or the stock market just blows my mind.  Real estate lending and commercial and industrial lending haven't grown by a single dollar in six months, rents and prices at the top end of the real estate market are flattening out, non-shelter core inflation is tumbling back to 1%, and the Fed is being pressed to raise rates.

1 comment:

  1. It is deeply disappointing that some bloggers, who should know better, are subscribing to the "$98,000 construction worker" anecdote, it if is even a true anecdote.

    BLS came out Friday with their employment cost index figures and the cost of hiring a constriction worker is up 1% YOY March. Yes, less than the rate of inflation.

    Okay, Texas then.

    This is job ads from Collin County, land of the $98,000 construction worker.

    Concrete Worker
    Trillium-Dallas, TX-Est. salary: $18 – $20 an hour
    Workers will be building foundations for power lines across the United States. Trillium Construction is now hiring Concrete Laborers for work around the United…
    2 days agoRelated
    Skilled Laborer (Plano TX)
    American Technologies Inc-Plano, TX-Est. salary: $24,000 – $33,000 a year
    Is a national leader in construction restoration. American Technologies, Inc….


    Construction Worker Salaries in Texas

    Salary estimated from 1,914 employees, users, and past and present job advertisements on Indeed in the past 12 months. Last updated: April 27, 2017

    Average in Texas
    $12.69 per hour
    ▼9% Below national average
    Most Reported

    I suspect the $98,000 construction workers, if one even exists, is a skilled electrician putting lots of OT on a high-rise, or other complex setting. It is less than $50 an hour, btw, if one does a 50 weeks times 40 hours run.

    Okay, so Q1 GDP comes in at 0.7% real, though I concede it seems like Q1 has been weak for several years now and may need some seasonal adjustment.

    So we have real GDP at 0.7%, inflation below target, real estate dead in the water, and the Fed plotting a year of rate hikes.

    Just to scare you, these guys (considered non-whackos) think the Fed's interest rate should be negative.