Since the financial crisis has been caused by falling housing prices, some people (including John McCain) have argued that the government should take steps to prop up housing prices. Harvard economist Edward Glaeser and Wharton economist Joseph Gyourko think this is a bad idea.
“Housing affordability has long been a stated goal of the Federal government,” observe G&G in the Economists’ Voice, an on-line journal edited by Joseph Stiglitz. “Why should it now try to make it more difficult for people to buy, or rent, a home by supporting prices?”
(Note: downloading articles from the Economists’ Voice is free but you have to fill out a form each time unless you are lucky enough to be associated with a university or other institution that subscribes.)
Policy proposals to prop up housing markets “combine uncertain benefits with high costs,” add G&G. “This is a bad combination.”
“Artificially boosting housing prices is redistribution from the people who buy homes to the people who sell homes. This may be more popular than subsidizing corn production, since the majority of Americans own a home, but that doesn’t make the redistribution any more justifiable. After all, home owners are substantially wealthier than renters.”
The real problem, say G&G, “is not the price decline but the previous price explosion.” Surprisingly, considering their previous work in this area, they fail to point out the cause of that explosion.
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While they note that “supply is tightly constrained” by land-use regulation in San Francisco and New York City, they confess to find it a “puzzle” that prices exploded in Las Vegas, “since there is plenty of land in Las Vegas.” In fact, this puzzle is easily explained: most of the land surrounding Las Vegas is federal, and federal land sales slowed after 2001, leading land prices to dramatically increase.
G&G also confess puzzlement over the growth of housing prices in Phoenix. But the Arizona legislature passed a “Growing Smarter Act” in 1998 and a “Growing Smarter Plus Act” in 2000. These laws required all cities in the state to write comprehensive plans, enforce those plans through zoning, and required that people be allowed to vote on those plans. Cities were also authorized to create urban-service boundaries and promote infill development rather than expand the urban-service areas. All of these things have led to higher housing prices in California, Oregon, and other states, so it is easy to see why prices grew so rapidly in Arizona after 2000.
Otherwise, G&G’s analysis is excellent. They reject plans for the federal government to lend money to homeowners as well as direct federal ownership of housing, noting that “government has a bad track record at real estate management.”
“It may be politically attractive to try to bail out those homeowners who have lost money in the current downturn,” they conclude, but it “makes no economic sense.”
G&G leave open the question of what state and local governments should do. Should states and regions that have growth-management plans that boosted prices in the first place get rid of those plans? Doing so will help future homebuyers but hurt current homeowners. This is hard to balance both politically and economically.
What is more clear is that, under the “first, do no harm” principle, states and regions that do not have growth-management plans should avoid writing such plans at all costs. This will at least provide Americans with a choice between high-cost regions and affordable regions and reduce the likelihood that the next housing bubble will do even more damage to our economy than this one.
Attempting to support prices on a peramanently high plateau appears to be a case of a mania and a symptom of group think. It ignores capitalisims strength of creative distruction. For some entertaining reading on manias see “Extraordinary Popular Delusions and the Madness of Crowds”. Where would we be if the peak prices of tulip bulbs were supported through government intervention?
I don’t understand the Antiplanner’s consistent choice to focus only on the actual cost of purchasing a house, rather than on a broader notion of “lifestyle costs”. A very basic principle in economics is that, in the traditional monocentric city, housing costs increase as one gets closer to the town center, and decrease as one gets further from the town center. The basic rationale for this relationship between housing costs and distance to city center is that people must pay for both housing and transportation (to the city center, where people work), such that housing costs increase and transportation costs decrease as one moves in, and vice versa as one moves out. Consumers are willing to pay more for housing close in because they pay less for transportation, and consumers are willing to pay more for transportation for housing far out because they pay less for housing.
While modern cities are not necessarily monocentric, this basic principle is not irrelevant. The cost of housing is only one cost that is affected by a consumer’s choice of where to live, and only one cost that is affected by “growth management”. Yet, the cost of housing is the only cost the Antiplanner ever seems to talk about. Why does the Antiplanner assume that all other costs are either (1) equivalent across locales (e.g. San Francisco, Houston, etc.) or (2) irrelevant?
Well, for one thing, not only is housing more expensive in San Francisco, but a lot of other things are as well. The high costs of housing in the San Francisco area drives up the cost of labor which, in turn, drives up a host of other costs. There is no question that an equivalent life style is far more expensive in San Francisco than Houston.
There is no question that an equivalent life style is far more expensive in San Francisco than Houston
First, I don’t recall the Antiplanner ever showing evidence in support of these types of claims. He typically ignores them.
Second, doesn’t economic theory tell us that wages will adjust to living costs, such that high-cost areas will have high wages, and low-cost areas will have low wages? If so, what’s the problem?
Third, why do you believe that people are willing to pay more to live in San Francisco than in Houston?
First, I never said the antiplanner had shown this. I make the statement, on my own, based upon my observations in areas with both high and low housing costs.
Second, No economic theory does not show this. High costs may keep lower income people out of area because they cannot afford it and wages may rise some as employers try to keeps workers in their area, but high housing costs mostly just hurt workers and business.
Third, San Francisco has a nicer climate and other natural advantages over Houston. However, Houston is growing and San Francisco isn’t so mostly people aren’t will to bear the higher cost to live in the San Franscisco area.
One element not focused on here is the large increase in average house size. This alone raises average home costs.
DS
Good point, Dan. That’s an example of why it’s important to distinguish (as the Antiplanner does not do) between different types of “growth management”. Large-lot zoning that reduces the number of dwelling units allowed (as a growth control method) leads to larger homes (and thus, higher housing costs) than high-density zoning that can be used to preserve farm/forest lands and open space.
Both are forms of growth management, but both have different implications for housing costs. The Antiplanner doesn’t make such distinctions.
Sure, ultimately, if you regulate things so that the only option is for most people to live in dwellings that are the size of a Tokyo hotel room, housing would be cheap.
Alternatively, as many (if not most) US cities have done, you can regulate things so that the only option is for most people to live in single-family dwellings located on large lots, so housing is expensive.
Contrast the cost (and what you get) as a dwelling in a high density European vs. US urban sprawl city.
Contrast the cost of a large single-family dwelling in the US vs. Europe.
Or the cost of a small flat in the US vs. Europe.
Why is housing more expensive in Europe?
I fully agree with Randall to let prices fall. Having said that though, why are prices falling at all? I thought that zoning and planning fees were resulting in increased demand, and higher prices, as a natural consequence to market conditions. Are values now falling because demand is falling? Were the zoning laws removed and the constraints on construction diminished? This is where the Wharton/O’Toole causation chain breaks down. If it were zoning that drove prices up, and the zoning hasn’t changed…
Sure, ultimately, if you regulate things so that the only option is for most people to live in dwellings that are the size of a Tokyo hotel room, housing would be cheap.
Housing is cheap in Tokyo? Who knew?
Youda thunk they’d be building more houses on hillsides (earthquakes be damned, we need more housin’), on farms (th’ val-yew of th’ land means we need housin’) , in wetlands (tie-foon? There ain’t been no tie-foon for a couplea years here! we need housin ta be cheeeep), infill, blah blah blah.
DS
Some places may have houses that refuse to devalue, so letting prices fall may be problematic:
Light-rail can turn into money train
Homes near light-rail lines tend to increase in value
By Margaret Jackson
The Denver Post
Article Last Updated: 10/29/2008 11:25:37 PM MDT
Durn redistributioningists…redisri…socialists. Messing up the market for single-fam like that.
DS
The problem is vacant houses destroying the value of other homes in the area. Lets keep someone in the home.
One solution
1. Lender and owner agree that lender will take title to home with out foreclosure.
2. Owner becomes a renter with a two year lease at market rate.
3. Owner has a first right to repurchase the home at a price the lender has agreed to sell for, at anytime in the future.
We now have a tenant taking care of the home, hoping to purchase again in the future, thus protecting the area and investments of others. Lender hopes to get a better price in the future.
I just don’t see how housing prices can be supported indefinitely by financial means. Trying to bolster housing prices by financial means (such as direct or indirect infusion of money in the housing market) will only shift housing appreciation from the future to the present – and is likely to create another bubble in between.
Even regulation cannot set housing prices in a permanent upward spiral unless regulations become ever more stringent. If regulations remain the same the home price differential (and/or house/lot shrinkage) that develops between regulated and unregulated areas acts as enough of a disincentive that growth in the regulated area stops.
Most likely, this is exactly what happened in California and other restricted growth states. Aggregate housing prices in these areas adjusted upwards to the current aggregate level of growth restrictions. Then the resulting differential in housing prices between growth restricted areas and unregulated areas, in the rest of the country, acted as enough of a disincentive that prices in the regulated could rise no more – and that is when the bubble burst.
The larger the regulation differential the larger the price differential and, most likely, the larger the bubbles.
Housing is cheap in Tokyo? Who knew?
No. Tokyo size appartments are cheap all over the US, even in California.
t g: “This is where the Wharton/O’Toole causation chain breaks down. If it were zoning that drove prices up, and the zoning hasn’t changed…â€Â
Fast rising prices are a cause of volatility and bubbles in almost any market. But, one has to put prices in perspective…
Even after the current bubble burst home prices in California have still gone up 110% in the last 10 years. That is an 8% average yearly increase. On top of that, renting the house yields approx. another 4% for a total 12% return on investment. Bubble or no bubble, when you contrast 12% yearly appreciation with 2.8% average yearly inflation for the past 10 years that is a an excellent return on, passive, investment – and an ominous figure for children who will one day aspire to buy a house in California.
So, there is the effect of not allowing supply to meet demand.
I reject the notion that (what appear to be) “high” housing prices indicate that supply does not meet demand. There is no theoretical reason that the supply and demands curves cannot cross at a level that constitutes “high” housing prices, especially in places where demand is high.
🙂
Though sprawl and zoning can be one in the same.
Ettinger: home prices are regionaly bound. If you find evidence (American Housing Survey, American Community Survey) that demonstrates that households are choosing between regions based on the degree of regulation, then you have an argument. In the meantime, let us presume more accurately that one will be forced to choose a house within a thirty minute commute from where one is employed.
Prices plateaued when no one within these markets was willing to pay the asking price for a home: that is, when the monthly mortgage payment increased beyond an acceptable fraction of one’s income.
Progressively lower interest rates for the past 25 years have increased the purchasing power of that acceptable fraction. Add to this speculation (see Steven Malanga’s work here and here) and you have a cause for the bubble and subsequent decline.
The tendency to claim homes are overvalued as a consequence to regulation is like trying to adjust the ellipse of venus to justify geocentricity. If you begin with the obvious premise that home prices are based in real markets which require real incomes, then that supernatural theory of supply and demand (where an invisible hand adjusts a price) takes its place where it should: as a minor adjustment factor, likely less than that given to a house having a pool and being in a good school district.
Look at what Real Estate agents are concerned with (the actual hands which contribute the most to the markets’ setting of home prices). There list of pricing features does not go: walk-in closet, garage, deck, development fee on the new subdivision across town.
Ettinger wrote “an ominous figure for children who will one day aspire to buy a house in California.”
There is no right to affordable ownership. Hell, in this country there is no right to shelter at all. Are you suggesting there should be, Ettinger?
Most likely, this is exactly what happened in California and other restricted growth states. Aggregate housing prices in these areas adjusted upwards to the current aggregate level of growth restrictions.
Last time you made this claim, you weren’t able to provide evidence for this assertion. Yet here you are making it again, although it is modified into a logical fallacy of conflation.
Cough up some evidence, plz.
DS
There is no right to affordable ownership. Hell, in this country there is no right to shelter at all. Are you suggesting there should be, Ettinger?
Exactly.
The housing market in CA is working exactly as intended. There is also no right to have rooftops as far as the eye can see to have “enough” housing.
DS
Oops. Sorry for the multiple comments.
Glaeser makes a non-paywalled argument here, in his new blog., where he lauds the decline in housing starts (off the reservation, surely).
DS
D.S: “Cough up some evidence, plz. [for the connection between growth restrictions and inflated housing prices]â€Â
Apart from basic principles of economics, the evidence for me is right here: in my wallet. 12% annual return (more if you jump out of the bursting bubbles – which as an investor, you can do quickly) from investing in real estate in “zoned†California.
The fact that I’m making almost as much money by passively moonlighting-investing in real estate in the Zoned-Zone than actively participating in the much harder task of supporting my cancer research company, is plenty of evidence for me. Of course, those who refuse the connection between building restrictions and housing prices can keep looking for evidence while I cash in. Better yet, why not seek out places that have imposed new growth restrictions and short REITs that invest in those areas?
Well people got greedy. Buy a house for use as a residence, not as a financial vehicle. Any ways now it’s a buyers market and remember location, location, location.
DS,
Seems like Glaeser is talking about overbuilding at the national level. Not in the Zoned-Zone. I’d like to see him claim that there’s a glut of new houses in Silicon Valley! But how can one say there’s overbuilding when there are 100 something million Americans who do not own a home?
I’m a little disappointed that he does not seem to recognize that, most likely, lower housing prices will significantly affect the very rate of new household formation: Some Silicon Valley engineers who were just short of being able to afford a house and thus ended up living with roommates may now be able to finally afford a house – children that will, finally, move away from their parent’s house because now they can afford their own – immigrants that perhaps can now escape living 3 families to a house – people who can (finally?) afford to house their in laws elsewhere…
If the above factors, paired with the new increased affordability, boost the number of new households by a mere 1-2%, then, the extra inventory could evaporate pretty quickly.
So you still don’t have evidence like I asked. No one ever does at this site.
DS
Light-rail can turn into money train
Homes near light-rail lines tend to increase in value
By Margaret Jackson
The Denver Post
Article Last Updated: 10/29/2008 11:25:37 PM MDT
…the value of her home has increased over the past two years as much of the metro Denver housing market has declined.
Homes near light-rail stations along the southeast line, which opened in November 2006, have increased by an average of nearly 4 percent over the past two years, according to an analysis by Your Castle Real Estate. But the rest of the Denver market declined an average of 7.5 percent.
“I know that it’s always been a good neighborhood, but I didn’t think it was like that,†said Humphrey, who doesn’t drive and frequently uses public transportation.
The closer a home is to the station, the more its value increases, according to the Your Castle analysis. Homes less than a half-mile from a station increased an average of 17.6 percent, while those 1 1/2 to 2 miles away increased just 0.1 percent on average. The data varied widely among stations, however.
Under its FasTracks program, the Regional Transportation District plans to create six new commuter-rail and light-rail corridors and extend three existing corridors by 2017, potentially creating other pockets where values are driven by proximity to rail.
In other markets with rail lines, single-family home values have increased anywhere from 2 percent in San Diego to 32 percent in St. Louis, according to data gathered by the Regional Transit District. [emphases added]
============
Well yes, that’s to be expected right? You tend to see that most any place. They’re measuring a very small area versus a very large area. One could just as well hold up Franktown as an example that sprawl is good because it increases housing values by pointing out how much higher housing prices are in Franktown than the rest of metro Denver.
The fact that the data varied widely among stations makes me suspect that this is more due to the values in places like Baker Neighborhood or Platte Valley than LRT. For example, I would speculate that values around the Louisiana / Pearl station saw big increases largely because new development there helped push up avg and/or median sale prices. Also it’s a nice neighborhood that like many nice neighborhoods in Denver proper have seen increasing prices despite the overall trend in drops. Yes, proximity to the station would help but if that was the major driving factor, we should see increases along all stations even if just in Denver. In fact, if it was LRT that was driving the lion share of this we should’ve already seen this occur years ago. The SW lines been open for what, 8-10 years now? Surely by now the area in Lincoln Park around the station there should’ve gentrified by now if light rail was a major factor in housing prices.
And again it’s a case of how things are measured and by whom. This recent article says Denver as a whole was only off 5.1%. Another says the metro is only down 2.9%.
============
None of the 20 cities recorded any increases in the year-over-year period. Home prices in Denver are off 5.1 percent, but down 16.6 percent for the 20-city composite index since August 2007. (http://www.bizjournals.com/denver/stories/2008/10/27/daily11.html)
============
Denver-Aurora home prices were down 2.9 percent in August compared with the same month a year ago, a relatively slight decline compared with some other major metro areas, according to data released Wednesday by First American CoreLogic. (http://www.bizjournals.com/denver/stories/2008/10/20/daily25.html)
============
And, sorry to not find better numbers, but we’ve been hearing about housing prices in the city of Denver as a whole going up for years. For example
In Denver, housing prices in the urban core rose steadily from 2003 until late last year compared with previous years, before dipping nearly 5 percent in the last three months of last year, according to Economy.com. (http://www.nytimes.com/2008/06/25/business/25exurbs.html). What were prices increases in these areas mentioned in the Denver Post article before the SE line was opened?
Anyway, time to drive to catch the train and get to work.
A.P: Doing so [bolstering home prices] will help future homebuyers but hurt current homeowners.
…and most people are more future buyers than current owners…
Only current homeowners, with no children, that plan to sell and move forever into an unregulated area and investors benefit from rising home prices. Everybody else, i.e. other homeowners (the majority who at some point plan to buy a better house or those who have children that will soon seek their own housing) as well as renters, they all loose from increasing home prices.
When one happily exclaims: to his children: “Hey kids, our home equity just went up by 200K!â€Â. What he’s really saying is: “The price of our next home just went up 400K†and “the price of the homes each of you children will buy, also went up another 200Kâ€Â. “And it is unlikely that we will ever have any money to invest in much else†( I guess Uncle Ettinger is the one performing that function – so keep NIMBYing people! – gather at town hall meetings and see what you can do about confining all this development that is destroying your community – just tell me which town it isâ€Â).
Dan,
The fact that restricting supply increases prices is such a universal principle that insisting on proving the relationship individually for every single market is, for practical purposes, a waste of time. It is those who deny that limiting supply has no effect on prices that must prove why, in the housing market alone amongst other markets, this interdependence of supply, demand and price does not hold.
One plus one equals two. One orange plus one orange equals two oranges, one apple plus another apple equals two apples etc. Denying that housing restrictions are the root of housing price increases is like asking: “but what about persimmons? Does one persimmon plus another persimmon equal two persimmons? Show me a scientific paper that demonstrates that.†Even if no such explicit paper exists it would be a waste of time to seek such proof and it would be foolish to postpone personal financial decisions until one plus one equals two is also proven true for persimmons.
…[Light rail increases home values for those adjacent to it]…
So what is the ratio? 1 million increase in aggregate house values for every 4 million in taxpayer money spent on light rail?
But it is not only a taxpayer subsidized increase in home values. It is also a mandated transfer of wealth from the very restrictively zoned people just outside town to the much more liberally zoned people adjacent to the transit corridor.
The biggest potential benefit to an owner adjacent to a transit corridor comes from the potential lifting of restrictive zoning – if he can win (or sway) the people’s zoning roulette, of course.
Ettinger:
Please show how much th’ regalyshun’ has contributed to overall costs – that is: what is the contribution of equilibrium rents, wage increases, hedonic valuation, etc.
That is the point.
Prices rise in regulatory environments for numerous reasons.
Everyone here conflates th’ growth regalayshuns. They are different (I have the literature, I’m waiting for anyone to speak to it, quote from it, argue from it. No one ever does.).
Everyone here conflates price increases only to th’ growth regalayshun**. As I’ve pointed out here dozens of times, this is false. (I have the literature, I’m waiting for anyone to speak to it, quote from it, argue from it. No one ever does.)
So. Cough up the data to back your baseless claim.
DS
** And who is to say that residents can’t set growth boundaries? Who are these outsiders that want to degrade a place’s quality of life? Why do they get a say?
Glaeser’s studies compare new home construction costs to median home values for existing homes (values which were an obscene chase to find the source of: on page 2 of Why have housing prices gone up? we’re referred to Table 1 in the Appendix, which has a note referring us to Superstar Cities, where on page 13 we are finally told these are derived from the decennial census, that is, self reported values, not NAR prices).
Back to Ettinger’s persimmons: not only do new home sales only account for 15% of the market (in 2005; its share has declined since), but new home construction costs are irrelevant to existing home value. And yet all of Glaeser’s studies (and O’Toole’s reliance on them) fall back on this comparison. Where is the link?
But wait, there’s more…
Glaeser writes: there are several explanations for why we observe so many metropolitan areas with average housing prices below construction costs. These estimates are not adjusted for the depreciation of existing homes.
If that is an acceptable strategy for the correction of home prices down, why is it not equally acceptable for the correction of home prices up, the appreciation of homes? Why? Because, like explaining something by the invisble hand of the market, it tells us nothing.
The data must make sense.
I’d expand upon t g’s nice comment a bit and state that the built environment is remarkably semi-permanent in America. The turnover in the built environment is 2% a year.
Now, taking the 15% figure (haven’t checked, sorta passes the smell test, but our population growth r is much lower so what does this mean for resources) and knowing that, say, in CA the far-flung ‘burbs are the ones getting the foreclosure hammer, we consider existing housing supply and cost.
If convenient housing is at a premium (per my Denver Post arty excerpt above), and the market is demanding more convenient housing, why can’t we provide it (that is, why is convenient housing so expensive?)? The built environment is durable. It is hard to go in and infill single-fam (see Seattle).
This means that if market and demographic and economic trends continue, our ability to provide convenient housing will be problematic – do we extend conveniences to existing? Do we let the market pressure NIMBYs into moving so we can have their land for convenient housing?
Chuck Nelson says we’ll be converting more malls and bigboxugliness into housing for many reasons, among them their convenient locations. Something to think about.
DS
â€Â…If convenient housing is at a premium (per my Denver Post arty excerpt above), and the market is demanding more convenient housing, why can’t we provide it (that is, why is convenient housing so expensive?)?
The fact that if taxpayers subsidize a few billion worth of transit then housing prices close to the transit corridor rise a bit, does not mean that the market demands convenient housing. It only means that it demands it so long as it does not have to pay for it. Who does not demand something they can have for free?
The Denver Post article only means that if we divert a few billon worth of taxpayer money into a housing market then, of course, the market will take it. Any market will absorb any free money it is thrown at it, just like the housing market absorbed the money that the fed threw at it starting in 2001.
Your point would be more valid if the aggregate increase in house values matched or exceeded the transit costs… and if that turns out to be the case then it is owners next to the transit corridor that should be asked to pay for the transit not the entire area or, worse, the entire nation.
Any evidence for your assertion, E?
DS
No. Not really. Haven’t made any money that way yet (buy a house next to which taxpayers will build me a light rail line) – but I’m keeping it into consideration.
Well the other side of the coin is having income taxpayers build you a freeway using eminent domain?
It’s a different coin…
The highway next to my house is built(paid) by those who use, either it, or similar highways – in pretty much the same proportion as their usage (gas taxes).
However…(continued on APs 10/31 post)
Ettinger, so in other words. “Four lanes good, two tracks bad.”
“If convenient housing is at a premium (per my Denver Post arty excerpt above), and the market is demanding more convenient housing, why can’t we provide it (that is, why is convenient housing so expensive?)?”
There is a small, wealthy part of the market that has put a premium on certain inner city neighborhoods. I think it’s a huge leap to claim that most folks want to let alone could afford to spend $650,000 plus HOA fees for one 2200 sq ft unit in a duplex. Maybe I’m wrong but I’d think that if this demand was so high a place like Watermark, despite having HOA fees that give my monthly rent competition, would be sold out by now.
I’m not sure why that is “convenient” housing. Most jobs – and more so new jobs created – are not in the city of Denver. For example, if one worked in tech corridor, Lone Tree would be just as convenient as Denver. If one worked around I-70 / Pena Blvd / DIA, where 30% of metro job growth is expected to occur by 2020, living in Aurora or Commerce City or Denver’s suburban Green Valley neighborhood would all be much more convenient than Platte Valley or Baker. And of course some folks even if they work in LoDo or downtown and work a 9 – 5 job may not actually think of it to be all too convenient to get on at the University of Denver and have to stand all the way downtown…… and do the same in reverse in the afternoon. Ah…. the joys of commuting, you can dink around in rushour in your car and listen to the radio for 30 minutes or dink around on a train car sized for short, skinny people for 20 minutes (plus another 5 waiting and another 7 walking to work). Convience just depends on your perspective.
Though one could read or listen to their MP3 player, etc. Perspective and context is always important. Which is some thing that quite often gets overlooked on this blog.
Also if one wants to get technical, the term commuting, can’t really be applied to some one who drives, since nothing is being commuted.
Convenient to goods and services without being ‘free’ to have to jump in your car, rather than an alternative mode of freedom.
DS
Well transport policy in North America has been distorted for almost the past 100 years and is no where near being any thing market based.
It’s not as if let’s say you drive 535 miles in a given month and then you get a bill from the DOT for $535. Gas taxes are just that, a tax on gas, not a road user fee.