Friday, March 23, 2018

Housing: Part 290 - Migration and credit markets

After making yesterday's post, I saw this tweet from Jed Kolko: "America's dense urban counties grew in 2017 at their slowest rate since 2007." with the following chart:

This is one of many recent sources that have been noting developing migration patterns.  Here is another (HT: Jason Schrock)

Earlier, I had developed the opinion that if you have Closed Access cities, then a housing "bubble" would develop regardless of the condition of credit markets.  The bubble was just a product of Closed Access and economic growth.

But, much of the surge of Closed Access out-migration in 2002-2006 was from homeowners tactically selling their properties.  So, I have come around to the idea that the "bubble" was triggered, to a certain extent, by flexible lending markets, which allowed households with high incomes to buy Closed Access homes at prices that were high enough to induce that selling and accelerate the inevitable Closed Access segregation process.

I still think that was the case.  But, it is interesting that as the new economic expansion ages and strengthens, that migration pattern is developing again without the help of an active mortgage market.

Closed Access means that economic opportunity is associated with stress - fighting over a fixed pie.  The high housing costs of the Closed Access cities aren't the product of frenzy and speculation.  They are signs of a painful and unsatisfying battle for access.  People don't like that.  And, when the economy is strong enough to substitute away from that, people choose to substitute.  Closed Access means that households tend to make trade-offs so that they are less productive in order to avoid that stress.

Here is an article (HT: ChargerCarl) that takes a fairly productive stance on supply from a progressive point of view.  From the article:
There’s a “multiplier effect”: Every tech job creates 1.3 other jobs. There are 105,000 low-income households in San Francisco, and despite how expensive it is to live here, they somehow persist. Asked why they stay, even when it would be far more affordable not to, Egan gives a one-word answer: “Jobs.”
Surely, in a safe, growing, stable economy, that answer becomes a less persuasive reason to stay.

So, even without an active mortgage market, the national segregation continues, where workers that can leverage the productive value of those cities push in and the bulk of workers must avoid those cities or move away from them.  Since flexible mortgages aren't as available now, this works through rental markets instead of homeowner markets.

The 2000s mortgage market is widely described as predatory, but really, it was just providing one more tool for households to deal with Closed Access.  That's why it led to a disruptive migration event, because Closed Access has created a lot of pent up stress, and those tools were accelerating the methods households were using to deal with that stress.  So, rent inflation in 2004-2005 was moderate, but today rent inflation is high, because rent inflation is a key indicator of that stress, and mortgage markets in 2004-2005 were relieving it.  In 2005, highly skilled workers could hedge their rent risk by buying Closed Access homes and Closed Access home owners could capture their ill-gotten gains and move on.

Now, since we have limited the availability of credit to many households, this process operates more like a pre-capitalist society or banana republic.  The class of owners can't capitalize their monopoly rents as easily, so they must earn them over time, by using or renting the property.  So, the new investment banker or tech wiz moving into town has to bid up the rent of a service sector worker until they move away rather than bidding up the price of some retired couple's home who then move to Boulder or Phoenix or something.

The mortgage boom did end up creating stress in places like Phoenix because it accelerated that transition, but at its base, it was relieving stress by creating new alternatives for dealing with these latent monopolistic markets and providing means for ownership of those assets to shift.  It just relieved those stresses so effectively that it created new stresses from the high rate of change.

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