The New York Times say the economic boom of the past eight years really wasn’t much of a boom, as American median incomes in 2007 were actually lower than they had been in 2000. So how was it a boom?
The Times implies that the rich got richer while the middle and lower classes got poorer. “We’ve never had an expansion in which the middle of income distribution had no wage growth,” it quotes a Harvard economist as saying.
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And the artificial increases in home values that fueled that borrowing, in turn, were the result of growth-management planning. So should we thank growth-management planners for postponing the effects of a recession? Or should we blame them for making the inevitable recession worse?
Naturally, the Antiplanner is not going to take a charitable view of the planners. But you may have other opinions.
If what you’re saying is correct, your home town of Portland must not have mirrored national trends and lagged behind every economic cycle since they began adopting urban growth boundaries in 1979. If that has been the case, your argument has merit. If it has not been the case, your analysis is incomplete and other impacts need to be looked at in addition to smart growth policies.
P.S. Welcome back to States. I hope your trip to NZ/AUS was enjoyable.
I was wondering something similar. It seems like different areas enforce their urban growth boundaries in different ways. Boulder’s tight boundary can be leapfrogged relatively easily by moving to places like Longmont or Superior (which I’d argue is a better spot to live since you you can easily commute to jobs in Denver’s north metro).
I don’t believe Minneapolis / St. Paul has an urban growth boundary, not in name at least. They do have the Met Council which wields quite a bit of control over planning via it’s control of metro sewer and water. That’s been demonstrated over the years with fights it’s had with cities such as Lake Elmo to force them to add more density.
Surely certain UGB’s have more of an impact as others. How do we rate the differences?
And the artificial increases in home values that fueled that borrowing, in turn, were the result of growth-management planning.
No they weren’t.
If they were, you’d have presented evidence by now to show they were.
You cannot, despite my repeated requests for you to show your analysis, teasing out equilibrium rents and speculation from supply constraints (which you can’t provide an analysis that shows a model estimating supply constraint).
DS
I’m starting to feel like a troller here, but after doing a paper in my Money and Banking Economics class, I realized that the antiplanner is basing his assertion on NO evidence or research.
For example, these two articles do support his theory:
The Consequences of Mortgage Credit Expansion: Evidence from the 2007 Mortgage Default Crisis
And this one Did Securitization Lead to Lax Screening? Evidence from Subprime Loans 2001-2006
Yet AP keeps yaddering about his theory without any evidence research, papers, etc.
Subprime Loans.
The less than wealthy got to the Gambling Table and played in a high stake game with no equity, no credit, no job. The Smarter Ones refinanced in a year or less and got a 120% loan and took out $20,000 to $50,000 in cash. It was a NO lose game. Most are receiving free rent as they wait for evictions. Now the government may become a lender and give then a new low interest rate and new loan amount at substantially less than the original. Only in America. The Builders won, The Realtors won, The Mortgage Brokers won. The misinformed holders of the paper are going to take a bath with the taxpayers.
ooooops. typo.
I meant these two articles do [not] support his theory
I do not understand what special knowledge, or evidence is needed to conclude that restricting supply increases prices.
What may be less obvious to people, is that, unlike productive economic activity, increases in home prices are indeed a zero sum game.
Between two otherwise identical societies, the one that has the higher home prices also has a lower standard of living. The funds that would be spent on other goods and services are spent in uneccessary price competition for the limited pool of housing available. One does not need a PhD in economics to arrive to these simple conclusions.
Between two otherwise identical societies, the one that has the higher home prices also has a lower standard of living.
Sure. The neighborhood with the $1.5M median value is a ghetto compared with the neighborhood two miles over with a median value of $350K.
Good one.
Comical pretzeling and tap-dancing aside, ask yourself why Randal can’t produce what I’ve asked for a half-dozen times. He can’t back his claim. Hint: it has to do with equilibrium rents, Ricardian rent, and amenity-seeking.
DS
Regarding the link between smart growth regulation and the current housing bubble:
Smart growth did not appear overnight or in synchrony with this or any other recession. It is more or less a constant trend which applies a constant upward inflationary pressure to housing prices. Superimposed on this constant upward trend are the shorter term boom and (rarely) bust cycles of real estate. When all is combined, housing prices appear to rise sometimes fast, sometimes slower but the mid and long term trend is up. Always up!
It takes a greater fraction of income to buy even a 1960’s building technology house today than it did for your parents in the 60’s.
The current short term downward trend is, to a large extent, a result of fed intervention. The aggressive response of the fed during the recession of the early 2000s set the stage for above normal housing appreciation, since the artificially created low interest rates made it artificially easy for people to buy houses (at the expense of future economic activity and future taxpayers).
Likewise, the new aggressive fed intervention (government must appear to be doing something in an election year) is contributing to the next bubble. Again, the artificially low interest rates will provide some support to housing prices and thus will not let prices fall as much as undistorted economic reality would have them fall. However, sooner or later, this economic reality will be dealt with.
But no matter how many bubbles pop, the housing price trend will always be up, so long as regulation restricts supply. Once housing prices hit bottom in the current cycle, they will still be much higher than they were at the beginning of the decade.
Bottom line is that housing prices are subject to short term mega booms, small booms and moderate busts but because the underlying forces (smart growth supply restrictions and other regulation) continuously limit supply, the general macro-trend is always up and up, and more up.
I’ve used that principle in my real estate investing for 15 years now with spectacular returns. Also, as an investor, I can avoid riding down the bust cycle. Because as an investor as soon as I see the bubble bursting I can get out of the market quickly and let the residents ride down the bubble. Similarly when the boom cycle starts I can jump in quickly.
Unlike the stock market, the housing market does not exhibit the fractal behavior that other equity markets exhibit, because people (the residents) are slower to react to changes in the housing market (they have to wait until their kids finish school to move, find new jobs, leave relatives and friends etc.).
I know it sounds wicked but, it is useless to blame the investor for this. As I said in the past, it is residents themselves who bring this upon themselves by imposing housing growth restrictions on themselves.
Smart growth is essentially what enables us real estate investors to make profits that, I believe, are difficult to make in any other equity market. Absent the artificial smart growth restrictions, which distort economic reality, we would be making returns that are more comparable with returns in other equity markets.
In that sense, real estate investors are largely “regulation surfersâ€Â. They ride the wave of smart growth and other supply limiting regulation that people impose on themselves.
Actually, I like this term “REGULATION SURFERâ€Â! Perhaps I’ll change my name to that.
Dan said: “Sure. The neighborhood with the $1.5M median value is a ghetto compared with the neighborhood two miles over with a median value of $350K.â€Â
These are not “otherwise identical societiesâ€Â. For starters, if they are in close proximity, one surely has more talented residents than the other.
Looked another way, the $1.5M median value Tokyo neighborhood could easily have a lower standard of living than the $350K neighborhood in Huston.
prk,
There are qualitative differences between the administration of growth boundaries in places like Oregon and California, and those in Minnesota. It is difficult to disentangle the effect of the Metropolitan Urban Service Area (MUSA) that essentially serves to direct growth in the Twin Cities.
Because the MUSA does not provide strongly binding limits on the supply of land, and because it is limited to the core 7 counties of the region, its effect on land prices is less pronounced. Growth can occur in areas that are not directly served by the regional sewer system, such as Lake Elmo and Afton, but require on-site wastewater treatment (septic systems). At the same time, these types of cities typically also have minimum lot size requirements, which artifically inflate the price of land. This also needs to be accounted for.
Fortunately, this lesser regulatory effect somewhat limited the run-up in house prices here relative to, say, Los Angeles. People still complain about their home prices declining but, after all, it was just paper wealth.
As for rating the different regulatory regimes, I think there has been some progress on this. I believe Joseph Gyourko and some folks at the Wharton School were working on developing an index of regulation that could address issues like this. I’ll try to post this if I can find it.
MJ said: “People still complain about their home prices declining but, after all, it was just paper wealth.â€Â
Indeed, within the context of a whine-happy public, it seems to be commonly accepted fact that falling housing prices are bad.
While I understand that for some people in special situations declining house prices may be bad, overall, it is a rather positive thing. For the average person, a house is still primarily a place to live rather than an investment. And to the extend that you will always need a place to live in, falling house prices would ultimately benefit you.
Are all these people who complain predominantly palnning to move to ever smaller and/or cheaper houses? Or are they planning to move into less and less desirable areas?
I undestand that if you are a Californian about to cash in on your house and move to Idaho, declining house prices may possibly be bad (I say possibly because even in that case you are probably planning to buy a house of the same value, except that you would be trading your California cottage for an Idaho mansion). OK, perhaps if you plan to abandon California to move to the Philippines then indeed perhaps falling house prices may be bad for you.
Unless your house or your neighborhood is the only one that is loosing value, falling housing prices are an overall good thing for consumers. Even if housing prices are falling more in your neighborhood, if you plan to stay in that same area, you still benefit overall from falling housing prices.
I understand that housing is not exactly the same as many other commodities, but nonetheless, if computer prices are falling should I be sad that my current PC is loosing value?
“…for some people in special situations declining house prices may be bad…”
Indeed. Sadly, the local example of this has been North Minneapolis, a place that really does not need any more misfortune. The downward spiral there will probably be accelerated by this mess.
This has prompted calls by some state legislators and the Minneapolis mayor for a state-level housing bailout. Of course, Minneapolis is a city that has stridently attempted to promote an agenda of affordable housing. It’s hard to imagine a time when housing will be more affordable than in the next couple of years.
MJ said: “As for rating the different regulatory regimes, I think there has been some progress on this. I believe Joseph Gyourko and some folks at the Wharton School were working on developing an index of regulation that could address issues like this. I’ll try to post this if I can find it.â€Â
Please do post any such information. I am very, very interested in this type of information.
Such a study would be an excellent investment guide as to where one could profit from regulation through real estate investments. The bigger the “regulation wave†the greater the profits that can be made riding it. That would have to be coupled with some data as to which areas have had their regulation recently enacted or which areas plan to intensify their regulation, as these places would yield the greatest housing inflation/appreciation rates and thus the largest investment profits.
Don’t keep such information to yourselves. After all, the more the people who invest to extract the profits of regulation, the faster regulation will yield its ultimate profits for all who invest.
Even in the absence of planning regulations their will still be legal and other restrictions on development that create steadily increasing house prices.
As development moves out from the original municipal core the lot sizes increase. The first sep in developing the larger lots is to get the legal title subdivided which involves a new survey at the expense of the developer. Then of course new infrastructure has to be provided, notably access roads without which the new lots have no real market value. The developer will naturally sell the new lots at cost-plus. This increase in the value of the now subdivided land generally has a halo effect, nudging up the value of neighbouring land.
Building freeways to reduce travel time also raises the value of nearby land. Building new employment or commercial centres can also raise the value of nearby land.
These price increases have nothing to do with supply and demand. It is simply that the value or perceived value has increased. I think this is known as amenity value, but don’t quote me on that. The value of the land has increased because something has been added to it. Covenants and other restrictions on land use changes can also have that effect.
Separating these value effects from supply and demand effects and subsidy/rebate effects is what is really needed to make any progress on this debate.
Separating these value effects from supply and demand effects and subsidy/rebate effects is what is really needed to make any progress on this debate.
Indeed, but this will negate Randal’s argument, thus it can’t happen here.
DS
Kevin,
The separation of factors that you talk about occurs exactly when one compares places like, say, San Jose, California (or say Rome Italy for that matter) vs., say, Houston, Texas.
All the factors that you describe exist as much in Houston as they do in San Jose or any city for that matter. The main difference is to what extent regulation limits the supply of new housing.
In San Jose, the majority of residents just don’t want to see new housing built anywhere in their area. While politicians may be responsible for adding additional layers of bureaucracy, the politicians are essentially implementers of this diffuse public desire of “I don’t want more new houses in my area, especially close to my current houseâ€Â. What few only residents realize (if ever) is how expensive this mindset is, not only for newcomers (for whom they actually do not care and want to limit their influx) but also for themselves. Some residents do temporarily bring the issue into their focus when they start desiring to move into a newer house with one extra bedroom, at which point they squarely face the fact that the price differential between the house they live in and the one they want to move to is 400K or more.
In Huston, there is both less demand from newcomers to move there, and also Houston residents do not seem that adamant about restricting new housing construction. Perhaps, since it is flat there, they are less immediately aware of the new houses that are built.
The result however is 750K in San Jose vs. 200K in Houston for the same home (actually less home in SJ than Houston). That is about 15 years of extra work over a lifetime for the average family. This is how much the “no more new houses in my area†mindset costs.
Dan, It probably will weaken Randall’s argument but it is unlikely to negate it.
Ettinger, By and large I agree with your comments.
Except for “That is about 15 years of extra work over a lifetime for the average family.” Is that the average Houston family or the average SJ family? In New Zealand regional house prices are closely related to median regional household incomes. I use household rather than family because there does seem to be huge differences between DINKs and the nuclear families when it comes to disposable income or discretionary spending. Both of these factors are assigned a high weighting when lenders assess mortgage applications. That can definitely affect the affordability for individual households but I don’t think it actually causes house price increases.
Dan, It probably will weaken Randall’s argument but it is unlikely to negate it.
Kevyn, the argument is
And the artificial increases in home values that fueled that borrowing, in turn, were the result of growth-management planning.
We can parse semantically, but the statement as it is written can’t stand.
DS
Well,
Does anyone here think, realistically, that there will ever be a time when the amount of oil produced in the world will be reduced because there are not enough users who could use (read burn) the oil that is extracted?
The very fact that billions of users are lining up to buy oil at $100 a barrell tells me that this point will never come.
So, in that respect, any attempt to mastermind a top down reduction of transportation CO2 seems a futile waste of human energy in terms of reducing total CO2 production from all sources. The only final effect of any eventual oil savings in transportation, would be to reduce the price of oil until the oil starts getting used somewhere else. So, in the end, the equation:
Total Oil Burned = Total oil that comes out of the earth.
Will always hold.
So, essentially, I just can never see a point coming where the Saudis, or any other oil producing nation says “Geez! we better reduce oil production because we just don’t seem to be able to find anybody that wants it anymoreâ€Â.
If treaties like, say, the famous Kyoto protocol ever reduced oil consumption, then the oil saved is now burned in other uses since total oil production remains the same (actually keeps increasing slightly seems). As I said:
Total Oil Burned = Total oil that comes out of the earth.
No matter how you shuffle the deck.
Sorry, the above comment was ment for the 4/14 post.
Kevyn Miller,
I believe affordability is much lower in SJ compared to Houston even if you account for differences in income. My point was that, all else being equal, the person in San Jose could probably retire at 50 rather than 65 if his house did cost as much as in Houston. So I’m not sure if he realizes how expensive the green hills that he looks at from his SJ office are.
If one asked him: “NIMBY and retire at 65 or no NIMBY and retire at 50?†What would he choose, I wonder.