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Tyrone on the fall in housing and asset prices
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.
Posted by Tyler Cowen on July 18, 2008 at 09:51 AM in Economics | Permalink
Comments
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.
Posted by: Independent George at Jul 18, 2008 10:12:23 AM
Tyler, why on earth should we prefer higher prices for consumption goods such as housing? Lower prices mean they consume smaller portion of people's incomes (in total), which means the society is better off.
It might not be that Tyrone is a failure. Instead he might be a relatively young person who actually saw the bubble for what it was - a bubble.
Posted by: Mikko at Jul 18, 2008 10:17:36 AM
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.
Posted by: liberalarts at Jul 18, 2008 10:37:51 AM
Oh, I get it. Globalism is "good" because we get low-priced Chinese junk on our store shelves, whereas low-priced housing is bad.
Bubbles must be good overall, I guess.
Posted by: meter at Jul 18, 2008 10:41:22 AM
Recall the desire for lower priced housing over recent years? Looks like prices are lower!!!
Posted by: wallywabash at Jul 18, 2008 10:42:59 AM
It certainly let me buy a house for 25% less than the previous owner!
Posted by: Noah Yetter at Jul 18, 2008 10:54:30 AM
"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.
Posted by: Andrew at Jul 18, 2008 11:16:57 AM
There must be something very wrong with me - i find myself agreeing with Tyrone way too often - I think?
Posted by: bruce Humbert at Jul 18, 2008 11:18:39 AM
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.
Posted by: J Random American at Jul 18, 2008 11:22:19 AM
I can see the stupid in the Mexican workers keeping wages down, etc., blah blah blah.
I'm also sensing that he thinks there's some central planner lowering and raising prices and the poor are somehow caught in some imaginary vice of prosperity.
I'm hoping you don't think falling house prices are the stupid in Tyrone's email.
Posted by: Methinks at Jul 18, 2008 11:34:09 AM
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."
Posted by: MH at Jul 18, 2008 11:37:23 AM
Let me guess Tyrone's favorite book: Extraordinary Popular Delusions and the Madness of Crowds?
Posted by: Arthur at Jul 18, 2008 11:52:55 AM
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.
Posted by: Jib at Jul 18, 2008 11:55:11 AM
This week Kevin Drum posted a link to a Money magazine link citing Irvine as the #4 place to live in the country. Here's what Money had to say about Irvine's housing prices:
>>A big drawback: the cost of housing. A typical three-bedroom, two-bath house can run about $700,000, says Cesi Pagano, a realtor with Keller Williams Realty. But prices in Irvine have held up better than those elsewhere in Orange County, and foreclosures aren't nearly as widespread.
Yep. High housing prices are bad, but the fact that housing prices haven't fallen is good.
I agree with most of this thread: low housing prices are a good thing. For me, at least, they definitely are -- I don't own a home. And for most homeowners I know, housing prices in the medium term are more or less irrelevant since they're all planning on staying put or moving to similar housing for the foreseeable future.
Posted by: Alex F at Jul 18, 2008 11:56:05 AM
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.
Posted by: ZBicyclist at Jul 18, 2008 12:02:53 PM
Point taken, and no offense intended, but while we are talking "shoulds" (which is dangerous in economics) should a lead plumber be able to make something in a few days that a world-class economics professor or cancer researcher pays off over 30 years?
I think not. But, that's the way the world works. But, if I can help change it, I'm gonna. Not by coercion.
If it takes so much craftsmanship, why does a whole neighborhood go up in a year? And why do much higher skilled people, engineers, doctors, professors, lawyers, spend a career paying it off? Supply and demand, right? Fair enough, in a free market. But, I suspect the supply is kept artificially low and demand is propped up by the banks. Now we are seeing an unwinding of this when the supply catches up with a bubbling demand fueled by margin that is now evaporating.
Posted by: Andrew at Jul 18, 2008 12:19:36 PM
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...
Posted by: Will at Jul 18, 2008 12:34:16 PM
"Most of the price of an urban house is land value"
This may be true, but it's more true some places than others. Also, people buy houses at the beach for $500,000 just to tear down the house and build anew. I know this. But we aren't talking about just these. We are talking about a systemic housing recession. We might be talking about a situation where everyone started to think they were buying things with the same fundamentals as urban and vacation homes.
Posted by: Andrew at Jul 18, 2008 12:42:55 PM
"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.)
Posted by: Chris X Edwards at Jul 18, 2008 12:47:42 PM
Regarding poor immigrants, Tyrone's alter ego, Tyler, probably is aware that
the group that probably took the worst hit and were the worst suckers in terms
of being foreclosed out of housing bought at the bubble's peak with sub-prime
mortgages in Northern Virginia were none other than Hispanic immigrants, especially
those in Manassas and surrounding Prince William County.
Well, low housing prices do have the benefit described. But when I gave a lecture
on speculative bubbles a few years ago in Germany, someone in the audience whined
at the end about how they would really like to have a nice housing bubble in Germany.
Posted by: Barkley Rosser at Jul 18, 2008 12:49:57 PM
"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.
Posted by: liberalarts at Jul 18, 2008 12:57:11 PM
A further advantage of lower housing prices, beyond simply freeing up capital for more constructive endeavors, is that tax receipts from the initial sale and property taxes will be lower as well.
Posted by: Mercutio.Mont at Jul 18, 2008 1:15:32 PM
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.
Posted by: MW at Jul 18, 2008 1:16:14 PM
Andrew, while we are on "shoulds", I would like to remind you that plumbing has saved more lives than all cancer treatment combined.
Your Ph.D. guy may be paying 30 years for something that was built in a few months, but your Ph.D. guy is usually being paid more than anybody doing actual work at home site. In addition to the cost of land, which has been covered above, you need to consider that most of the work in constructing a house is not done at the site. The reason a house can be built quickly is because a very high percentage of the work is done in distant factories. This is true for even custom houses, but it is especially true when you have big developments of similar houses.
Posted by: MH at Jul 18, 2008 1:19:04 PM
"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 ;)
Posted by: Andrew at Jul 18, 2008 1:23:07 PM
