A Memory Hole in Our Lawn: The Housing Market

[Hypatia]

What triggered this was a headline on Fox Business this morning: “Mortgage interest rates SOARING to 5%! “
And, the hot housing market is not a matter of speculation: people are “desperate” to buy a “nice” “home”, a place to live, not a place to flip.

When I was practicing in the early 80s, mortgage interest rates were always about 9%. Doesnt anybody else remember that? If so, how can 5% be “soaring”?

You wanna talk “soaring”? Howzabout 16-18%? That’s what happened in the mid 80s, but it wouldnta been so bad if, right before that, a buncha people with 9% first mortgages hadnt taken out second mortgages at adjustable rates:( ARMs: adjustable rate mortgages.). “We’ll never see 9% again”, people used to opine, as rates rose, then doubled, at the same time as we were having a divorce extravaganza AND unemployment was high. In Pa, some representatives actually proposed giving people a “right” to their jobs::in addition to unemployment comp, a new tribunal would be created to determine whether any firing was …idk, “legal”? While in the meantime I reckon the employer wouldn’t be hiring any replacement…it was madness, but people were desperate.yeah, things really weren’t SO great during the first few years of Reagan’s first term.

The second point I wanted to note is that people seem to want to pay just about anything for a nice single family house. And I’ll betcha a lot of those homes, both existing and new, are located in deed-restricted planned communities; it’s very difficult nationwide to but a home independent of such plats. How does that tie in with Bygone-Hapless’ plan to federalize zoning and eliminate single-family residential districts? Is that over, now that Build Back Better didn’t pass? They were gonna condition housing and even transportation federal grants to a municipality’s willingness to eliminate single family zoning, which OlJo[k]e referred to as “exclusionary zoning” regardless of lot size. My article “Deed Men Walkin’” which will be in the next issue of “The Pennsylvania Lawyer” magazine, is about whether or not the deed-restricted residential communities can save single family residential areas.
I wasn’t able to reach a conclusion as to that; maybe the short term lure of making more intensive and lucrative use of their large lots will be so attractive to landowners that nobody sues to enjoin the incursions.
But that brings me back to the question of what the people paying exorbitant prices for “homes” at the present time really want: do they envision an orderly Euclidean community of family dwellings, or are they offering these exorbitant prices even though they contemplate high-rises being erected right next door?

John Updike, who wrote about US life in the 70s and beyond, referred to himself as a “time traveler”. I now know what he meant—-except that, although Ive been awake and aware during the entire journey, I’m still mystified as to exactly how we got to the world were in now—and how easily and abruptly our collective memory seems to have been erased.

[johnwalker]

@Hypatia

But that brings me back to the question of what the people paying exorbitant prices for “homes” at the present time really want

My guess is that the dynamic is much the same as when I bought my first house in California in 1974. Prospective house buyers today are looking at this chart,

which is about as perfect an exponential growth curve as you’ll find, except for the big speed bump in 2008 when the financial innovations concocted by the string theorist manqués on Wall Street blew up in their faces.

Now remember, an exponential curve is self-similar, so what I was looking at in 1974 was just like the curve today but rescaled: just as scary. And while US$ 60,000 was more money than I’d ever seen in one place at one time and way beyond anything I’d ever imagined spending, what seemed to be a sure bet was that it was only going to increase with every passing year, and even at what were considered outrageous mortgage rates at the time, it was a matter of get on the merry-go-round or be priced out forever. And that’s pretty much what happened. I never made enough to afford a similar house in California until 1985 when my company went public, and if I had simply been progressing along an engineering career, I would have been permanently priced out of the Bay Area real estate market.

Now, to my eyes, the underlying financial situation today is far more dire than in the 1970s, and when you look at that chart, remember that what you’re seeing is mostly depreciation of the dollar combined with restrictive land use policies, and neither of those seems likely to abate any time soon. So, it’s buy in now, somehow, some way, or be shut out when the price of entry is higher and supply has been further constrained by the “live in pods and eat bugs” crowd.

[Hypatia]

If that’s the case, then they don’t wanna eliminate single family zoning, I would think…

[Gavin]

@Hypatia

But that brings me back to the question of what the people paying exorbitant prices for “homes” at the present time really want:

A realtor once commented that most buyers do not care about the price – they care about the monthly payment. When interest rates go down, that same monthly payment translates to a higher mortgage and thus a higher (even exorbitant) price which the buyer is prepared to pay. So what will happen as interest rates go up?

What I hear from younger people is … frustration. They have scrimped and saved to pay off student loans, and so do not have the down payment on a house – any house! Zoning is far from their minds.

Media tells us that the big recent change in the housing market is the entry of large corporations buying single family homes which they rent out. Your will own nothing and be happy, as Our Rulers say. Presumably such corporations are looking at homes merely as houses, investments. From their perspective, the question would be – Can they make more money from renting a single family home in a deed-restricted area, or from ignoring the deed restrictions & building additional houses on the large lot?

[Hypatia]

That’s not what I heard ( corporations buying up homes to resell at exorbitant prices) although I’m open to being convinced.
Stewart Varney said realtors are carefully pre-qualifying individual buyers before they make an offer, to see whether they will be able to go even higher in a bidding war which will almost certainly ensue. (That’s a nice change from favoring clearly UNqualified buyers, which led to the last mortgage default crisis!) AND, he said, a lot of these sales are even for cash.
As for young people wanting to set foot on the property ladder: yeah, the bottom rung has kinda been knocked out….we need more “affordable tract housing”, more “little boxes on the hillside, little boxes made of tricky-tacky”.
S’funny, the suburbs used to be scorned as hopelessly bourgeois and déclassé; now, they’re regarded as bastions of wealth and privilege.

[gms]

The missing drive in @johnwalker’s list is rapidly increasing population numbers (source - the title mistakenly calls out the range starting in 1980, the data actually goes back to 1950).

So the three interrelated forces are increased population driving demand, inflationary trends pushing down on purchasing power, and stagnant wage growth.

Here is a chart from the US Congressional Research Service (source) illustrating lack of wage growth. There are many more other sources, predominantly from the Federal Reserve.

[Gavin]

@Hypatia

That’s not what I heard ( corporations buying up homes to resell at exorbitant prices)

That is not what I have heard either. What the media is telling us is that corporations are buying up houses which they then rent out to people who do not want to own or (apparently more often) cannot qualify for a mortgage loan. I have heard people complain that the rent they are paying is higher than the mortgage would be – if they could qualify for a loan.

One of the drivers is that corporations have access to very low interest rate money – which they can borrow and use to buy houses. As long as the rent income exceeds the corporation’s interest costs on its borrowed money, the corporation is in deep clover.

[johnwalker]

@gms

The missing drive in johnwalker’s list is rapidly increasing population numbers

Why should an increase in population cause housing prices to increase unless there is a limited supply of land and materials to build housing? During the 1940s through 1950s, with automobiles becoming common, cities expanded into suburbs, which converted relatively inexpensive agricultural land into residential property. The dramatic increase in agricultural productivity of the period kept the price of agricultural land down, especially in areas not suited for mechanised farming.

Certainly, cities and regions which adopted restrictive zoning and “green belt” policies drove up the price of land, but in places that didn’t do this, prices remained pretty much stable. In The Housing Boom and Bust (link is to my review), Thomas Sowell contrasted housing prices in areas such as San Francisco, Los Angeles, and Boston, which highly regulate land use and housing construction, with markets like Dallas and Houston, which have little regulation or constraints on expansion, and notes that of the 26 urban areas rated as “severely unaffordable”, 23 had adopted “smart growth” policies.

Here is a table, courtesy of the U.S. Census Bureau’s “Historical Census of Housing Tables: Home Values” of median home prices both in nominal (then-year) and 2000 dollars for the period from 1940 through 2000. I have added total U.S. population from each decadal census.

Year	Nominal $	2000 $	Population
1940	2,938	30,600	132,164,569
1950	7,354	44,600	150,697,361
1960	11,900	58,600	179,323,175
1970	17,000	65,300	203,302,031
1980	47,200	93,400	226,545,805
1990	79,100	101,100	248,709,873
2000	119,600	119,600	281,421,906

So while in nominal terms the median price of a single-family house (more precisely, “owner-occupied single-family housing units on less than 10 acres without a business or medical office on the property”) grew by a factor of 40.7 between 1940 and 1960, the “real” value, deflated by the Consumer Price Index, rose only by a factor of 3.9. Population, however, rose only by a factor of 2.13.

So, it appears to me that the largest influence in rising housing prices is the depreciation of the dollar, the second largest a combination (which differs by region) of land use restrictions and size and construction expense of dwellings, and the third most significant population, where population alone accounts for around 1/20 the nominal increase in median house price between 1940 and 2000.

[Mettelus]

Supposedly corporations own 1 in 4 single family homes.

[gms]

What is different now from the so-called Reagan years? Well, a few things: the US in the 1980s still had a world leading manufacturing industrial base. And a relatively well educated population with strong family formation and more or less uniform demographics.

We had a much smaller share of the GDP taken by so-called healthcare expenses than today (source), but on balance a larger share of the same driven by military spending (source)

On the demographics front, median age in the population has increased 30 in 1980 to 38.6 in 2020 (source). With the rapid increase in immigration, the US total fertility rate is marginally higher in 2020 compared to 1980, but the trend is towards continued decreases (source).

To net it out, the data support the hypothesis of a rapid - by historical standards - shift from a productive manufacturing driven economy, to a financialized economy that is arguably weaker and less well positioned to support wage growth, Particularly in the current environment, where the long supply chains we built as manufacturing left the US are much more vulnerable to all kind of disruptions.

To go back to @Hypatia 's initial post, it’s likely the high mortgage rates of the 1980s will return, but not at all clear that we will be able to again pull a “Volker” and stop the runaway inflation rates. An alternative disheartening hypothesis is the current federal reserve board is very happy to let inflation devalue the drastically increased deficit, even if it further impoverishes the population.

[gms]

Thank you for a comprehensive analysis.

“Smart growth” is often another way of saying NIMBY.

Separately, the variance on median house prices, even historically, reflects geography and technology (water and air conditioning) For instance, outside of a relatively thin coastal band in California, most of the rest of the state is a desert or a mountain. Most of LA would not be viable absent water access granted following the real events depicted in the Chinatown movie plot.

Population density in the US is not uniformly distributed geographically - two maps (source) show this. The first one is population density by county, and the second one illustrates the claim that 2/3 of the overall population is centered within a so-called 100mi border zone.

[Hypatia]

I was making 2 points: I can’t believe everybody has such amnesia about interest rates. 5% is low, fu’cryin out loud—
And the other is, what about land use planning, which sets aside certain regions, determined at the municipal level, for single family residential use?
Do people still want that, or do they want “economic diversity”imposed on them by federal legislation? Are they really willing to pay a huge price for a detached home which has a high-rise next door?

“Economic diversity” occurs briefly in certain urban areas which people with means suddenly decide is cool, “edgy”. They buy in at very low prices, they fix up, they paint their doors oxbllod or sage, they revel in living amongst the hoi polloi. And there goes the neighborhood: in this case upward economically. Soon lower income buyers can’t afford homes there any more.

There is only one way to prevent a situation wherein economic diversity briefly prevails , from becoming, at one extreme, a slum, with low property values, and at the other extreme, “gentrified”, with steeply increasing property values.
And last year, Pittsburgh chose that way, in the Lawrenceville district: it will control prices at which homes can be sold, AND require that the units be sold only to low income people, for a period of 30 years.
In other words, it will not allow the free market to function.
That is WAAAAY too high a price to pay, at the expense or everything I ever learned about free alienability of property , about payment of just compensation if the government appropriates or damages fair market value of one’s land.
But I reckon maybe my legal opinion on this is outmoded, just like my opinion that a business corporation has NO duty EXCEPT to make money for its shareholders…”stakeholders” be damned.

[gms]

@Hypatia

And last year, Pittsburgh chose that way, in the Lawrenceville district: it will control prices at which homes can be sold, AND require that the units be sold only to low income people, for a period of 30 years.

I am not familiar with the Lawrenceville district, but I view this kind of development as the natural (perhaps necessary) consequence of the marriage between neo-marxists and so-called social justice. My hypothesis is the quality of life in the neighborhood will take a dive, crime will increase, and it will become a much more “vibrant” community.

[gms]

@Hypatia

But I reckon maybe my legal opinion on this is outmoded, just like my opinion that a business corporation has NO duty EXCEPT to make money for its shareholders…”stakeholders” be damned.

“Stakeholders” are the latest ESG fad, and in principle fads come and go, just like bellbottom jeans, lava lamps, leisure suits, and blacklight posters. Pre-ESG, corporate social responsibility (CSR) was the main outgrowth of the so-called corporate governance mania that began 20+ years ago. CSR is not so hot anymore, the con has now shifted to ESG.

So what’s different this time, if anything? My take is the emergence of tech corporation power and their influence through social media means these fads can take a lot longer to fade away. We are coming off the COVID-19 major social experiment, which went on for much longer than most people would have anticipated.

I think the recent 24 month unpleasantness would not have been possible pre-Twitter, because saner minds would prevail. Or rather the insane thinking process of mass lockdowns would have had a far harder job of taking over the minds of our betters. So it’s possible that we are now at a point where fads like ESG, zero COVID, and other insane ideas would take off an find a shot at reaching a stable equilibrium point.

I sure hope that’s not the case and ESG will go the way of CSR with shareholders pushing back. And I remain hopeful that biology can still prevail over ideology in the short term

[Mettelus]

@gms

I sure hope that’s not the case and ESG will go the way of CSR with shareholders pushing back. And I remain hopeful that biology can still prevail over ideology in the short term

I have an ongoing debate with my brother. He thinks that when corporations lose money, the shine on ESG will falter.

I don’t. Yes ESG is a bit scam for the likes of Blackrock who charge a half percent more in mgmt fees for their ESG funds. But power is also involved. Twitter is a perfect example. I think it is already evident that the power is more important than the money. Besides the 20 to 50 percent a shareholder would gain is not the same as a change in the management fee. If the approximately 50 billion offer represents a 20 billion gain to the fund investors, it is only 0.5 percent of that for the fund manager who actually makes the decision. 100 million. CNN pissed that away for CNN plus.

This is my premise and explanation of why companies can make decisions that are terrible with no consequences. It used to be a big deal to gain or lose 1 percent market share. Now companies like Disney will destroy multi-billion dollar franchises and not a word is said much less an executive losing their job.

[Gavin]

@gms

with shareholders pushing back.

Hmmm! My guess is that “shareholders” are not what they used to be. Once upon a time, individuals bought & held shares in companies they assessed had a great future. Those shareholders were investors, interested in the long-term success of the companies which they owned.

Nowadays, it seems the markets are dominated by traders, buy this morning - sell this afternoon, and pocket the difference. Most traders have no interest in the long-term future of the companies whose shares they buy & sell quickly. The other big force in the market is managed funds, where professional managers make the decisions (mostly short-term focused) and the individual who invests in the fund has little knowledge or involvement with the companies in the portfolio – not an investor.

An interesting debate would be whether communism or financialization is worse for the health of an economy in the longer term.

[Mettelus]

@Hypatia

In other words, it will not allow the free market to function.
That is WAAAAY too high a price to pay, at the expense or everything I ever learned about free alienability of property , about payment of just compensation if the government appropriates or damages fair market value of one’s land.

The frog has been boiled. I blame this mainly on conservatives including my old self. We thought it was ok to take peoples property if the government simply accused them of being a drug dealer. We thought Bushkin’s Patriot Act that set up secret courts and allowed spying on citizens was ok. We supported a party that was supposedly pro business, but turned out to be pro cronies and thought nothing of property rights when Walmart needed a spot.

[Mettelus]

@Gavin

The other big force in the market is managed funds, where professional managers make the decisions

I don’t know if this is the best link. But Mike Green has been sounding the alarm on passive investing for several years. He estimates over 50 percent of stock market activity is passive. He mainly points out the risk. It is a really simple thesis. Assume that 99 percent of the market is passive. It is just a pass through buy or sell. Now assume that the sellers outnumber the buyers by more than 1 percent? Who buys? Major volatility or even no bid on the entire S&p. I have not heard him talk about the bigger risk that is my premise. That a very few number of people have voting control over all corporations. Want all the companies to pull out of Russia? Just make the calls. Want all the media to sell a narrative? Just call the handful of CEOs you installed. Want the corporations to pressure the politicians? Just make the call. I would say this is the big threat, but I think that water passed under the bridge.

Mike Green on passive investing.

[gms]

@Gavin

An interesting debate would be whether communism or financialization is worse for the health of an economy in the longer term.

My take is sadly or fortunately, that experiment was completed in the 20th century and it show won communism won hands down in terms of creating maximum misery for the societies upon which it was imposed.

UK, as the poster child for financialization, did not do as well as other countries that maintained or grew their manufacturing industrial base. The amount of misery in aggregate seems quite a bit smaller, especially when you consider it did not result in anything near communism offered in terms of pain, suffering, and deaths.

Thank you for a thoughtful perspective on how shareholder incentives are evolving. Everyone is “seeking alpha” which seems to boil down to finding and exploiting some sort of informational asymmetry. It gets progressively harder as data volumes increase and access to the information is more widely available.

[gms]

Yes, this + unabashed market propping by the Fed have essentially transformed the market.

Put differently, if Warren Buffet was 30 years old today starting fresh with his investment thesis (or any other thesis), absent his existing capital advantage, he would probaly be “wbuff” on reddit/WSB and that would be that.