Results for “housing”

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Just in time for the apparent top of the housing market, the Chicago Mercantile Exchange is introducing futures and options on housing prices in 10 cities for the second quarter of 2006. (Here’s an overview of the products, and CME’s White Paper on the topic.)

Here is the Slate article.

Addendum: Here is further analysis, from a new blog on risk markets.

The NYTimes Magazine has an excellent article on the housing market based around a discussion of the development firm Toll Brothers.  Bob Toll the president of the firm is predicting that US housing prices will converge with those in Europe.

"In Britain you pay seven times your annual income for a home; in the
U.S. you pay three and a half." The British get 330 square feet, per
person, in their homes; in the U.S., we get 750 square feet. Not only
does Toll say he believes the next generation of buyers will be paying
twice as much of their annual incomes; in terms of space, he also seems
to think they’re going to get only half as much. "And that average,
million-dollar insane home in the burbs? It’s going to be $4 million."

Toll agrees with Glaeser et al. that the key force driving up prices is zoning and growth regulations.  In New Jersey it now takes Toll Brothers up to two million dollars in legal fees and ten years in time to get the permits necessary to build. 

Susan Wachter, a housing economist at the Wharton School at the University of Pennsylvania, has an interesting public choice insight about why zoning is worse in Europe.

European towns also have less incentive to encourage development,
Wachter says, because they generally do not, unlike their American
equivalents, depend on their local tax base to pay for education and
services, which tend to be federalized.

This implies that towns in states that reduce their reliance on the property tax – often done, as in CA, in order to "equalize" school funding or other expenditure – will soon restrict development.  Go to it graduate students.

Lots of other interesting material on the organization of the industry.

From the WSJ Storm News Tracker:

2:32
p.m.: U.S. Homeland Security Secretary Michael Chertoff and Housing
Secretary Alphonso Jackson announced a program to pay for three-month
rental costs anywhere in the country for homeowners or renters whose
residences were destroyed by Katrina.

I agree with John Palmer, who sent me the clip, "This Is So Sensible, I Can Hardly Believe It!"

Congratulations to Ed Olsen!

Robert Shiller has put together the first, long, true index of home prices.  By true I mean that as much as possible it looks at repeated sales of the same or very similar houses over time.  Conventional indices confuse changes in size and quality with changes in the price of housing per se.

What the index shows is that real house prices have remained stable over the past 100 years.  The contrary impression is driven by inflation and as noted above, changes in what is being measured.  Stability, however, is what we should expect.  The United States remains a relatively unpopulated country.  When house prices in current population centers increase, suburbs and smaller cities expand.  People move to less populated areas and in so doing alleviate the press on house prices.  In the long run, the supply of housing is very elastic.

The glaring exception to stability is the last 6 or 7 years when house prices have skyrocketed far beyond where they have ever been before.  Can you hear the pop coming?

Graphic from the NYTimes (click to open in new window).

[Australia] kept on raising [interest] rates the next year, and officials talked loudly about the threat of housing prices getting too high.  The most populous Australian state even imposed a special tax on investment properties to discourage real-estate speculation.  By 2004, the market peaked after more than two years of 14% or greater annual growth.  The most recent data suggest Australia’s home prices have changed little over the past year, and have fallen slightly in the two biggest cities, Sydney and Melbourne.

…on the whole the nation’s economy is healthy.  Unemployment is close to a 30-year low and incomes continue to rise.  The Australian Stock Exchange hit a high in mid-June.  Many economists and home buyers alike believe a reservoir of demand will help avoid a sudden crash in home prices.

That is from The Wall Street Journal, 14 July 2005.  I have noticed that even a middling quality home, an hour outside of Sydney, can be listed at U.S. $600,000 or higher.

At least 70,800 apartment units were sold to condominium developers nationwide in 2004, up from 7,800 in 2002, according to Real Capital Analytics, a New York consulting firm.

As of June 1, at least 43,900 units have been sold to developers this year, says Dan Fasulo, director of market analysis for the firm. There are about 19 million rental apartments in the USA.

The conversions are occurring most rapidly in Southern California, Northern Virginia and the Miami and Las Vegas areas.

Here is the full story.  Might this suggest that rentals are underpriced relative to ownership?  Well…many of these condos end up back on the rental market.  What are the belief options? 

1. The condo market (does it have more fools?) is more bubbly than the market for rentable real estate, and entrepreneurs are arbitraging this difference.  Stupid people are holding condos and renting them out, rather than flipping them, under the belief that prices will rise for the indefinite future. 

2. The tax benefits of owning are higher in the condo market, but there is a fixed cost to conversion.  As real estate prices rise, it becomes more worthwhile to pursue these tax benefits, and thus we see more conversions.

Stay tuned…

Glaeser, Gyourko, and Saks cite regulatory obstacles as a primary reason why housing prices have risen so much since the 1970s.  I am not convinced that this explains the possibly bubble-like run-up of the last few years, but here is the paper.  Here are Glaeser’s other writings on the topic.  Thanks to an anonymous reader for the tip.

Housing can be lived in, most buyers have only one home, transaction costs are relatively high, and rarely are homes sold and resold in a matter of days.  All those features militate against a housing bubble.  Yet it is scary to see how high prices have risen in the Washington D.C. area.  Prices in my overall region are up 73 percent in the last four years, can houses be worth so much more?  Plus rent-buy ratios have reached apparently unsustainble levels, inconsistent with traditional assumptions about discount rates.

Let’s say you think there is no bubble, what are your options?

1. It has quickly become much better to live in good areas.  I can go to Wegman’s now.  Prices reflect this fact.

2. Traffic is getting much worse, and very rapidly.  People are paying more to be close to the action.  The price movement is lasting, though it does not reflect a true increase in real value, all things considered.

3. When you are trying to decide how much a house in worth, you also care how much other people think the house is worth.  Yet the entire slope of the demand curve is hard to observe.  The real estate market goes through a groping process.  Only as prices and quantities move does everyone realize what the market demand curve looks like.  Suddenly, over the last four years, many people have realized that many other people are willing to pay lots for a quality home.  Price has moved upward rapidly accordingly, but this need not be a bubble.

4. The higher housing price indices are a trick.  In reality some homes are worth a lot more and others are worth a lot less.  But prices move quickly in the upwards direction; in the downwards direction, housing quantity first adjusts and stays slow for a long time.  That is, if you can’t sell your family hearth in Kansas for a decent price, you simply wait for now.  So overall indices appear high but much of this move is a sectoral shift within the housing market from low quality to high.

I put the least stock in #1 and the most stock in #3 and then #4. 

I am not yet convinced there is a housing bubble.  But since I bought close to the peak — had to buy close to the peak — perhaps I am deluding myself.

Addendum: Here is my earlier post on the topic.  Here is Alex.  Here is Brad DeLong.  Here is some Austrian economics.

Robert Shiller has a new edition of Irrational Exuberance coming out, this one will feature a chapter on real estate.  Shiller, of course, predicted the stock market collapse and now believes that we are near the peak of housing prices. He is also involved in establishing a futures market that would allow people to hedge against movements in housing prices (see also my post on The New Financial Order). Here is a short interview with him on these subjects.

I too think that housing prices are inflated.  It is certain that prices cannot continue to rise as they have in recent years and when interest rates increase, as they surely will as budget deficits continue to balloon and Asian central banks grow weary of taking losses on their portfolios, prices will fall both because of the rise in interest rates per se and because the increase will prick the bubble.  Yes, Tyler has outed me as well as Brad De Long and Brad Setser.

Macro Securities Research, a company affiliated with Robert J. Shiller,
the Yale economist, has reached an agreement with the Chicago
Mercantile Exchange to list pairs of derivative instruments that are
essentially index funds linked to home prices in certain markets. One
instrument in each pair will rise as its market index rises; the other
will rise as the same index falls. That will let investors bet on the
direction of housing prices. Similar, but less sensitive, vehicles are
being offered by HedgeStreet, a firm in San Mateo, Calif., that offers
small-scale derivatives speculation online.

Here is the full story; note that economists still lack a good explanation why such markets are not more common or met with greater enthusiasm.

Ed Leamer says yes, Brad DeLong takes issue. Here is a wide array of writings on the topic.

Housing has never, to me, seemed like an especially bubbly asset. You use it every day, most of the market is not driven by speculation, and the transactions costs of asset churning are high. Furthermore the rental alternative would appear to keep prices somewhat in line with fundamentals.

A deeper question is what makes for a bubble, ex ante. The “cheap” definition of a bubble is to wait for the price to fall, and then declare that the earlier, higher price was a bubble. We can throw out this cheap definition, but then we are stuck in the vagaries of modal logic. “Hey, I just knew that price had to fall…” Not very convincing. I am convinced that bubbles are real, I am simply unable to define them.

One reader asked for investment advice about the real estate market; this is hardly my forte. Nonetheless I will offer the following: If you are investing in multiple real estate purchases, as opposed to just buying a home, ask yourself the following question? If a “dirty bomb” went off in my area, would I still be a wealthy man?

Regulation appears to be part of the answer, as suggested by Arnold Kling, drawing upon research by Edward L. Glaeser, Joseph Gyourko, and Raven Saks, here is the original paper. The authors estimate that one-half the cost of constructing a Manhattan apartment is due to regulatory barriers and related inefficiencies.

And how much does a Manhattan apartment cost? Well, one estimate says the mean value is now $916,959, and the median value is $575,000, caveat emptor on these numbers but we all know it isn’t cheap.

As an aside, both the authors of the study and Steven Landsburg pose an interesting question. Why are not all buildings in a city block of the same height, given that their owners presumably face common costs and returns? The study authors cite regulatory factors, Landsburg cites non-convex building costs and diversity of demand.