Friday, January 26, 2018

Housing: Part 280 - Mood, priors, conclusions, and epistemic closure

Here is a new NBER working paper from  Edward Wolf:
The inequality of net worth, after almost two decades of little movement, went up sharply from 2007 to 2010, and relative indebtedness for the middle class expanded. The sharp fall in median net worth and the rise in overall wealth inequality over these years are largely traceable to the high leverage of middle class families and the high share of homes in their portfolio. There are also significant racial components here.  Net worth generally moved in tandem until 2007. Then after the financial crisis, young families and minorities took a hit, largely because leveraged homeownership was a larger portion of their portfolios.

Wolf is commendably restrained, mostly sticking to the facts.  But overwhelmingly this paper will be treated as yet another in the endless pieces of evidence that leverage was the problem, that they did this to us, that the bankers in 2005 pushed loans onto Hispanic and black households that inevitably led to this, and that access to credit is the problem to be avoided.

This is a good example of how decent, factual work, now filtered through the wrong presumptions, serves to give a false sense of factual depth to the wrong conclusions.  The reason young and minority households took a hit to net worth is because we made a severe public policy choice to stop lending to potential buyers in neighborhoods where young and minority households would buy, and, after 2008, quite apart from any of the initial collapse of the subprime market, etc., those homes lost 15-30% of their value, across the board, relative to homes in neighborhoods purchased by older, wealthier households.

But, the wrong presumptions have created a decade of boiling anger.  People are committed to that anger, and if they see evidence that changes the cause of this dislocation from bankers to popular public policy, it will feel like the anger must be redirected at uncomfortable targets.  It would be more appropriate to have avoided the sense of anger all along, but here we are.  And, I suspect, as this sort of evidence mounts in the social consciousness, it will require a more complete set of evidence to overcome the sense of opposition to redirecting that anger.  It will take more evidence than a person can handle easily in a single exposure.  And, I suspect for many who see my evidence, it will be like attending a well-performed magic show.  They will see something unbelievable.  They will have no explanation for it.  And, they will have the intuition that a sophisticated observer will leave it at that.  A respectable person doesn't stand up at a magic show and yell, "Oh my God!  He's cutting her in half! Arrest this man!"

I have been fortunate to have patient and curious readers, but this blog sort of attracts a peculiar audience.  I will be interested to see the reactions this story elicits as it reaches a broader audience.


On a semi-related note, I was pleased to see, on a recent visit, ample building in the DC metro area, although MSA level data shows there is much room for more.  In an Uber car this morning in DC, I said to the driver, "Wow.  There are a lot of new buildings going up around here."  She shook her head in despair.  "A bunch of expensive condos.  Rents are going up.  It's making the whole place unaffordable.  They tear down affordable homes to put up these expensive high rise condo buildings."

She wasn't misstating what she saw.   She was missing the broader picture in a common way.  The problem remains that the broad solution, even as it is implemented, is routinely misunderstood and opposed.  Note, displacement of existing tenants is challenging, but she wasn't complaining about being displaced.  She was complaining about this at the macro level.  She saw a few places with lower rents taken down and replaced with a lot of places with high rents, and she concluded, analytically, that this meant rents were higher in her town.  She was one of the beneficiaries of this building.  Her rents have likely been stabilized by the addition of new units.  But, that benefit was outweighed, in her estimation, by simply seeing new buildings going up that had high rent levels.  This is a powerful and common reaction, pushing back against the solution.  It is understandable.  You can see where it comes from even while realizing it is wrong.  The challenges on this issue are difficult.


Here is a graph of housing permit rates and rent inflation.  Washington is basically tracking with the US average on new housing units, and has been for some time, which is why it isn't a basket case like the Closed Access cities.  Rent inflation in Washington has been below the US average for four years.

Here is a business article on the Washington housing market:
But analysts, brokers and lenders in the region are starting to see unwanted side effects—specifically, too much supply. As  new properties come online in previously untapped markets, oversupply is causing lenders to scale back on construction financing.... Going forward, developers are scaling back and waiting for the market to absorb the new supply glut.
The developers are afraid rents are going down.  But, they agree with my Uber driver that there are too many new units.  Everyone always agrees there are too many units; the less units there are, the more they all agree on that.  We're the anti-Lake Wobegon.  All of our housing markets are below average.


  1. Great post.
    Yes, gentrification displaces residents. Tough sell to public.
    In L.A. you also have an overwhelmed transportation infrastructure.

    But there may be early signs of prices topping out in closed access cities. If so the CPI will flatten even more...

  2. Add on: the anti-developers do have one point: Dense luxury housing is rarely proposed to supplant single-family detached luxury housing. Somehow it is always the middle-class housing that must be obliterated.

    1. If building anything requires so much effort and cutting red tape, we'll only see condos going up when they replace something much cheaper. No one will be more incremental upgrades in land usage.

      That would explain part of your observation. But I don't know if it's enough.

  3. Matthias:

    I dunno.

    If you could get permitted to build a 50-story condo tower in Beverly Hills, you could sell for maybe $3 mil a pop. Call it four units per floor, and you are talking $600 million in sales. If you think my prices sound high, see this:,CA/CONDO_type/

    So, whose four to six homes will be flattened to make way for the condo tower, and in whose neighborhood? Mr BH Manse Owner wants a 50-story condo across the street?

    So, in this regard, the Erdmann's taxi driver is correct. It is only the middle-class housing that gets bulldozed, and expensive housing supplants it. It is still a positive, but the optics are horrible, and there is ton of class bias going on.

    Let's face it, the people who control property zoning in most cities are not going to bulldoze luxury neighborhoods, and treat middle-class neighborhoods sacred and off-limits.

    Once again, I say the solution is a Supreme Court ruling that property zoning is not constitutional. Let it rip. In every neighborhood.

    Yeah, free markets in property development. Not a polite topic of discussion, btw.

    Here is a story, not sure what it means.

  4. Why,in a city of two many units, are rents stable when they should be declining if you believe in supply and demand? Obvously these new condos in DC are not in the rental market. But take Las Vegas, with pages and pages of rentals on Craigslist. They remain stubbornly high or are dropping only for very unreal rental prices that speculators overpaid for. It is like rent defies supply and demand.

    1. I don't think vacancies are particularly high in Vegas, are they?

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