I was sitting here peacefully, weeping, when I received the strangest email from Tyrone:
Tyler, cheer up! The decline in housing prices is a godsend. Isn’t it a standard line — from both left and right — that we are spending too much on the elderly and not enough on the young? Isn’t lack of upward mobility, for the generation on its way into the world, the new problem? Aren’t the American poor to expect an even greater squeeze in the future? There’s a simple remedy for all of these problems at once — lower housing prices! Lower stock prices too! You don’t even have to get a bill passed through Congress, or overcome AARP, and we all know how hard that is these days. The housing stock is still there, the relatively established homeowners are a bit poorer, and those poor strugglers on the way up can now buy their dreams at lower prices. Even better, lots of the laid-off construction workers are Mexican immigrants, who for years have been keeping wages down for low-skilled American workers. This is an economic nationalist’s wish list, no?
Poor, poor, deranged Tyrone. Isn’t this what you would expect from an abject failure who has never managed to buy a home? Tyrone isn’t even subprime.
I have to agree with Tyrone regarding housing – low prices are a good thing. And I say this having bought my first home in July 2007.
I agree. The town I live in still has many nice, large houses in the $100,000 to $200,000 range. During the run-up people were complaining that we weren’t making the easy real estate money that everyone else was, but I always insisted that it was a good thing that our junior professors could afford to buy houses in town. Prices haven’t declined here, and our first and second year profs are still buying houses.
Recall the desire for lower priced housing over recent years? Looks like prices are lower!!!
“Prices haven’t declined here, and our first and second year profs are still buying houses.”
It’s always fascinated me that something a handful of highschool dropouts and ex-cons can throw up in a few months gets paid for by PhDs over 30 years. In the grand scheme, housing still costs way too much.
And to make matters worse oil prices may be about to come down too!
Think of all those irresponsible Arabs and Boomers who will see their
unearned wealth vanish! Maybe we need a Federal Home Stabilization Administration to
buy houses from wealthy people for exorbinate prices and then tear them
down to keep house prices high. Then pay carpenters not to work and
forbid people from doing their own construction work.
Andrew, I have no idea what the price of housing should be, but I spent enough summers doing construction to realize how much skill and capital goes into a house. Yes, there is a fair bit of grunt labor, but the work of the lead carpenters, electricians, plumbers, etc. gives lie to the idea that house and “thrown-up.”
As a 25 year old, I’ll certainly benefit when I buy my first house in 5 years or so… of course I’ll probably be burned by the neo-biotech bubble 40 years from now so it balances out in the end.
Also, haha, stay classy Andrew.
Tyrone is right — and meter’s comment is on the mark as well.
Affordable housing is good for the country — especially for the young.
The older folks who don’t have big mortgages (like me) often aren’t horribly hurt because either (a) we’ll die in our houses, which makes it somebody else’s problem, or (b) we’ll sell cheaper, but minimize the pain by buying cheaper as well.
Andrew, most of the price of an urban house is land value, maybe combined with permit scarcity, not construction costs. There are plenty of large and spacious houses available at prices affordable to PhD’s in cities where demand is low. It’s not the construction workers’ fault if some categories of employers insist on packing into the coastal metro’s…
“an abject failure who has never managed to buy a home?” Whoa! That’s kind of sounding like you think those two things are related. In my job I earn more than 91% of the population in this S.Cal city. However, since 2005 my net worth has been affected more than my take home salary by my home buying strategy. For example, assuming I bought a median priced home one year ago, and sold it at today’s median price, the income stream from my job would have been 40% of total expenditures and incomes. The problem, and the reason my decision was *not* to buy is that the 60% would have been expenditures spent on an over valued house. In other words going to my normal albeit well-paying job has a relatively minor impact on my financial situation in S.Cal. Renting makes me much wealthier than going to work! So don’t be so quick to call us renters idiots.House prices should come down to utilitarian levels and then people won’t have to play this game and can just get on with life.(BTW, I bought a house when I was 23, thanks.)
“people buy houses at the beach for $500,000 just to tear down the house and build anew”
Not many Ph.D.s are in the above market. Also, low demand small towns, such as mine have a much lower percentage of new construction, so the houses that I am talking about were built 75 or 100 or more years ago. And the key is that we can buy these houses for mortgage payments of less than $1000 a month, including insurance and taxes. In such a market, the idea of housing as a dominant form of savings doesn’t really work, because it is really more of a consumption. Does anyone know how the imputed housing rents figure into CPI? Will falling home values help buffer the CPI against rising gas prices? Most people are focused on the asset nature of housing, but it also generates a stream of housing consumption.
Andrew,
The total amount of work that goes into a house is mind-boggling. Not just construction labor, but mining/chopping down all the materials and turning the material into something useful. Ready to use lumber, sheetrock, wiring and carpet do not just fall out of the sky. It’s amazing, really, that most of us could get a 3/2 modern house with equivalent of about 5 years income.
I agree with Tyrone, though, about housing prices. I remember reading an article in the Palm Beach Post about six months before the peak of the bubble exclaiming how Palm Beach’s housing costs have appreciated but then wondered where “teachers, firemen and police officers would live.” I scratched my head then about how it’s a good thing that home owners got a bunch of free money while others suffered for it. I should have known then that these housing prices were not sustainable.
“Not many Ph.D.s are in the above market.”
Maybe more than average. But, PhDs maybe not so much for economic reasons than they have to love working and not too interested in getting away from it all.
Being a home owner requires you to be a quasi-expert in gardening, maintenance, etc. Anyone with an appreciation for specialization will understand innefficiencies of ownership. But, there are non-economic benefits. If I could stand having noisy neighbors and unannounced searches, I’d much prefer renting. We don’t need this mystique that success=homeownership. I’m all for lower home prices to kill the idea (at least for a decade) that a home is an investment, not because it makes it temporarily more affordable before the next rocket launch.
Btw, I’m a libertarian semi-anonymous poster on an economics blog, where would I feel less concerned about feigning class? I don’t need an alter ego
A lot of work goes into making a pencil, but that’s already been explained. It’s division of labor provided by the free market that gets the credit in my book, nothing else. But you are right, the stuff is so much a better value than most of the “services” involved.
Actually, it’s engineers and water treatment that saved lives. Piping sewage into the home wouldn’t make anyone happy. And, my feelings about the (lack of) cancer treatment (effectiveness) community have been made clear in previous posts. But, again, we are talking shoulds. The reason the old saw about clean water is an old saw is because it’s underappreciated.
‘Round here, land costs about $15%, parts probably the same, labor and management the rest. The realtor makes +6%, then there’s fees, taxes, etc. The bank makes about 3X over the course of the loan. There are a lot of leeches that get rolled into a 30 year payment.
If we said that the new standard loan period was 1000 years, would prices rise? If we said that the head plumbers needed even more credentials because they save more lives than cancer patients, would their cost rise? If we need more legal guarantees for the transaction (how much do we pay lawyers to “guarantee” there aren’t how much in potential liens?) might the fees rise?
I never said that the workers aren’t getting the flip side of same shaft that the buyers are.
Tell me about it. I’m a composer – slightly more difficult on the ‘harder to be’ scale than an econ hack.
But I’m a composer who realizes he’s lucky to live in a world in which someone who provides very little in the way of tangible goods can make a living – or even be highly paid to do so.
“But I’m a composer who realizes he’s lucky to live in a world in which someone who provides very little in the way of tangible goods can make a living”
Warren Buffett said he’s lucky to have been born in America, because somewhere else he’d be some animal’s lunch. But he’s wrong. It isn’t luck. It is due to his predecessors and the degree to which they were allowed to be much like him over time.
It’s true, we are economically climbing Maslow’s hierarchy. When housing costs even less, people will be able to climb higher. It’s not luck. To the degree that “the trades,” in the words of George Bernard Shaw, conspire against the laity, they aren’t being helpful, and are worthy of indignation. Okay, I’ll get off before I start reciting John Galt.
The single biggest enabler of the housing bubble was buyers thinking primarily in terms of their monthly payment. That’s a renter’s mentality. And so the monthly payment tail wagged the house price dog. Prices rose to the sky as exotic mortgages were invented to keep monthly payments artificially and unsustainably low.
There are three kinds of people in the world: those who suck at math and those who don’t.
My point on the monthly payment example was that housing is so cheap outside of metro areas that it does not represent a financially exhausting commitment. It is the low purchase price that drives the low monthly payment. By the way, I find terms like “renter’s mentality” to usually be associated with cloudy thinking. Buying a home is not a get rich scheme. It is only a superior wealth builder for people who can’t budget their income and need a forced payment to save. My wife and I waste tons of cash on our house and would be much wealthier people if we rented an apartment.
I’m so tired of this meme:
“wondered where teachers, firemen and police officers would live.”
Teachers, fireman, and policeman in almost all of the United States are paid relatively well and usually have outstanding medical and retirement benefits.
Both of my parents were teachers.
“…the relatively established homeowners are a bit poorer, and those poor strugglers on the way up can now buy their dreams at lower prices…”
Geez, classic broken window fallacy. And what took so long for someone to point it out. What about those who lost their life’s savings/retirement benefits/insolvent pension funds/…
I’ve never seen a straw man beat its creator up so badly.
“v” call this “classic broken window fallacy”.
Hardly. Nobody seems to be saying “thank God there was a housing bubble so we could have all this creative chaos”. At least, I don’t hear anybody saying that.
Some people will benefit from the collapse of the bubble (young people who may now be able to afford housing). Some people won’t be hurt (people who die before selling) or won’t be hurt that much.
If there had been no bubble at all, these people would have likely been at least as well off, so it doesn’t seem to me to fit the broken window fallacy.
Ahh, It should read “…how few people are able to do it in a free market without artificial barriers to entry.”
That’s important, since I think a lot of the housing cost pricing problem is these artificial barriers to entry.
Of course, PhDs have a lot of artificial barriers to entry, too. Unfortunate choice of comparison, I admit. Both for the economics and the idea that it makes it look elitist. For me, this insinuation is laughable, but you don’t know me.
Housing prices are way too high, and even the declining prices are still up there. I’m with Tyrone!
I think that when you talk about the price of housing, you should also talk about how well the plumber did his job. That and other improvement can raise the price and maybe you get more money for the house.
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