Appreciation Expectations

 My experience with the Great Recession in the US suggests that one of the things that makes unwinding a property boom difficult is that an expectation of appreciation (due to limited supply) has become baked into housing prices. So even if house prices don't fall, even a reduction in the rate of appreciation is hurtful a wide variety of owners, from long-term householders to brand new purchasers.

You just have to think about a house as a financial instrument, like a stock or a bond. It provides a dividend (in terms of rental income, or owners equivalent rent), is a security is costs money to acquire. But like a 'growth stock', there is an expectation that the value will increase over time. 

There used to be a lot of debate over whether housing was a good investment or not. That's died down, largely because I think the empirical data is clear--it's not. The difference is largely due to dividends--you can reinvest the dividends from money you put in the market in the market. But you cannot reinvest the  benefits of having been provided housing. 

Birth Rate

Let's play a facts game: Half the birth rate decline is the elimination of teen pregnancy. The other half is the decline in women under 30 having kids. Generally agreed, the first is a good thing, the second a bad thing. Increasing age of first natality is tied to housing. Adding a kid requires adding a bedroom. If you can't afford the bedroom, you don't add the kid. So until houses with 2+ bedrooms are affordable to single-income households ages 20-30, the birth rate will continue to decline. As evidence, I adduce the fact that Provo, Utah (crazy natality) is also stacked with two bedroom apartments. It's the densest part of Utah, because people are totally clear that married studies have kids, and that requires appropriate housing.  Other interesting sub-populations with high birth rates (military families, the church-going) enjoy subsidies--either directly for housing, and indirectly, through care-taking.  

Musings on housing and financing

 Always startles me to realize how much of the American economy is based on housing. And thereby how much places that don't build housing are knee-capping themselves.

Housing is real estate, finance, construction, banking, furnishings, decor. Any new household has to replace all the things they were sharing at their old household. Kids kind of the same way - all their things. And then all the 'personal services' for everyone. 

Partially it's population growth, but household formation is a multiplier effect on that. But one that relies on the availability of (affordable) housing. When parents start doubling up with their parents, something is going wrong. A certain amount of 'boomerang' can be expected; children saving for a house downpayment being the most innocent. 

20% down on $250k would be $50k. (Who the heck has $50k sitting in a bank account?). If I'm making $50/hour, thats $100k/year. Bookings never match that, so it's more like $81k/year. Knock of 25% of that for taxes, 54k net. My rent runs $1600, about 19k a year (35% of my net income, 24% of the gross. A central city location costs more, but keeps my transport costs low, as I can convert most of my trips into walk/bike trips). Regardless, to get to a $50k downpayment, that would be $5k a year for 10 years or 10k for 5 years. If I want a $500k house, those times double: $5k for 20 years, $10k for 10 years. 

But 'boomeranging' home for a year would be $19k in rent. Assuming extreme frugality, putting away $30k in a year still not possible. Say $15k is (out of $51k disposible). Put away $6k, boomerang for $19k, save $15k...not enough. So have to start with $16k in the bank. 

Regardless, start with a bunch of money in the bank. Most folks worse off, simply because of student debt. Assumes that eats 10% of 'disposible' income. Knocks another $5k off income. 

Design approval is state control of the market. And in the service of a very narrow goal -- the neighbors aesthetic preferences. Development review panels in Europe are recurring, a beauty project between developers to provide the best outcome for a given price. Design review panels in the US are like classroom architectural critiques--architect favor them because they are familiar, and hence comfortable. They don't give a shit whether something gets built or not--no skin off their nose if housing doesn't get built because their standards were too high. In a way, it's an adverserial process in America, like a courtroom inquiry. 

Most economic impact statements are such bullshit. Assuming that places that lease on airport couldnt lease elsewhere, or that the economic impact wouldn't be the same. As if the airport caused to be what would not otherwise be. Hokum. As much a psuedo-science as parking minima. And administration--like counting the cost of doing business as a benefit of doing business. Just adding up all the flows of money that pass through the airport and pretending the airport caused them.

The point of economic impact isn't to make reasonable assessments. It's to build a big "Benefits" number for benefit-cost ratio analysis. It's like the government sucked up the most 'modern' practices from 1970's business schools and institutionalized them. 

But a job is not a job. Some jobs are better from an economic impact standpoint. Higher wage jobs are generally better, because the money recirculates more through the economy, downward. (Why this matters, I do not know). Same for industries. I guess the longer the chain of purchases, the greater the impact. Abe buying from Bill for $5 inferior to Abe buying from Bill buying from Charlie and Damien is a $5 flow vs. a $10 flow. But I suppose it's no a direct transfer--at each step, each actor takes a slice of the pie. But it's not like Bill isn't going to spend that $5 anyway, someplace else--it's not like the money disappears. Hmm. I guess the only time money disappears is when banks do--then the 'fractional reserve multipler' vanishes. If a bank is destroyed, a very large amount of money vanishes. Money is always being destroyed, as people fail to repay loans. The trouble isn't even when all the loans aren't repaid. The crisis doesn't come until the bank run, when depositor try to get their money out of the bank, and there isn't any. 

Clearly, when a bank is 'broke', and can't deliver on withdrawals, it's done. All the equity-holders are wiped out, and the Fed pays the depositors. Question becomes -- what happens to the banks other debtees? Many people like to say "Oh, all deposits are loans, so you should treat them all the same". But I expect banks avoid some of that by just making deposits at other banks. Ah, the great fiction of finance--it's all a pyramid of debt created by fractional reserve banking. In a way, modern finance very like insurance. It only works because the market is 'deep' enough, with enough participants, for the law of averages to work out, and risks to be born. There are those among us that say that bearing risk is the role of equity, not of finance.

'Quantity of money' economic analysis seems surreal to me, when it's clearly the speed of money that matters. Maybe back in the day it mattered, because there was a lot of money just sitting (in the form of gold bars) in safes and vaults. But after the invention of fractional reserve banking, it seems absurd. Even with the gold standard, it seems absurd. Maybe it was different when it was all bank-mediated. Now, with bank-to-bank lending, fractional reserve banking is functionally exponential -- there is no limit to the amount of money that can be created. 

Housing affordability

I'm spending more and more time thinking about housing affordability these days. CityLab's article (and paper on which it is based) effectively destroyed my naive belief that 'filtering' can ever provide affordable housing. In a nutshell, filtering only works if the population is stagnant or declining. (Or if the rich are your only immigrants, ha ha ha). One of the things that gets proposed is subsidized housing. Which is troubling, because the American history of public housing is generally one of grotesque failure (Cabrini-Green), and/or regulatory capture (Section 8, aka 'landlord support'). Affordable housing tax credits are also designed with a critical flaw: You can only take them to 'top up' the project to viability, destroying any profitability, and making them (mostly) only useful for specialty not-for-profit developers.

I'm enough of a libertarian to ask "Is there a way we could do this using market methods?" The immediate answer being 'of course not', as the problem is that the market can't provide enough affordable housing, because it isn't profitable enough. Still--do we need government construction of housing? Might not government subsidy of affordable housing be enough? (It's certainly worked well enough for single family detached). Hearsay has it that in the past ('70's?) the Feds managed to generate more multifamily by making it more profitable, by altering the tax laws on depreciation.

I can already hear the baying hounds of 'Thatcherism', about how the British built, and then sold off all of their social housing ('council houses'). And guess what? A generation later, and they have a cataclysmic housing crisis. None of the public housing that was sold off was replaced, and now Britain get to enjoy another round of the housing crisis which engendered the public support to create the public housing in the first place!

Which suggests that public housing has a generational issue as well: To be sustainable, it must be sustainable against the interference of the feckless short-termism later politicians. (Plundering the commonwealth by under-pricing public assets and selling them to select people wins votes--who knew?) Which in turn suggests that Federal ownership of homes represents a clear and present danger to sustainable public housing.

I've suggested elsewhere that China may have the right model for urban land: 99 year leases. Long enough for any structure to depreciate (financially), and so setting no limitation on their development potential. Yet the land, the portion which benefits from location, and appreciates accordingly, remains in the public hands. (That public investment is the primary creator of location value has been argued elsewhere).

Tangentially, private cemeteries are obscene: The developer makes money selling lots (3'x6'). At some point, the land runs out, the maintenance stops, the developer goes bankrupt, and the public is left with the cost of maintaining the land or moving the graves).  Any jurisdiction that fails to provide cemeteries is abrogating a public trust, dodging responsibility. The solution is practically biblical: : Pick the worst piece of land in the jurisdiction (ie, a potters field) and make that the cemetary.

Home buyers, housing stock, and the Patriarchy.

https://usa.streetsblog.org/2018/11/02/single-family-housing-upholds-the-patriarchy-and-hurts-moms/

The article argues, persuasively, that suburban GEOGRAPHY does enforce female isolation: By disaggregating shared-use spaces into private spaces, and then burdening women with labor of upkeep and operation of those spaces. Cooking has natural economies of scale (notice bachelors rarely cook), as does childcare (minding ten children is scarcely harder than minding nine).

Some people embrace suburban living. But for many people, suburban living is an imposition. You take what you can get, because it's the best you can afford. Housing is durable, and few people buy new houses: In the last 10 years, there has been (annually) about 10 new house per 1000 people. Everyone else buys used. Each year, if we only build houses for new-home buyers (typically dual-income families with children), then in ten years, 10% of the housing stock is houses best suited for that style of household. Most people are living in hand-me down housing. And like most things handed down, it rarely fits well.

Some Simplicio will doubtless argue that if there was a market for other things, developers would built them. And if there was a free market in housing, they might even be right. Claiming that housing is a free market is either a lie or bullshit (in the technical sense). Zoning forbids multifamily development on 90% of urban land. An attached single family home, ie a townhouse, condo) is still a single family home, without any of the agglomeration economies of multi-family.

Millenial Housing Problems

"It leaves my friends and I, .... with gloomy prospects for how and where we can live. More people are being pushed out to the car-dependent suburbs because it's more affordable."

Millenial housing problems in a nutshell. Priced out of desired urban areas, exiled to suburbia, until you can make enough money to buy one of the few, rare, homes available in the urban areas. (And then you can get accused of gentrification! All because the local city counselor grew up in a 1950's suburb, and can't imagine anyone ever wanting to lie any other way, and so won't permit anything else to be built. Never mind that land values have tripled, and so to maintain the same level of affordability, densities need to triple as well. 

Affordable Housing Modifications bill

via: Planetizen

Utah State Senator Jake Anderegg, R-Lehi proposed SB 34, an "Affordable Housing Modifications" bill for consideration by the State Legislature this year.

In addition to increasing funding for the state's largest affordable housing loan fund, SB 34 would allow mother-in-law apartments and encourage construction of high-density housing near transit in the hopes of promoting housing affordability (for more details on the proposed legislation, see news coverage by Tony Semerad from December 2018).

As noted by an article by Nolan Gray and Brandon Fuller, SB 34 would force local governments to plan for the state's worsening housing crisis. But unlike proposed laws in California and Oregon, SB 34 leaves much of the legal control of land use regulations in the hands of local governments. It will still be up to cities how they go about achieving their plans for growth.

"Municipalities facing a housing crunch would have to adopt at least three policies from a menu of popular housing reforms—policies that run the gamut from bread-and-butter housing policy to radical reforms. More conservative options, like starting a community land trust or purchasing and preserving existing affordable units, are still on the table. So, too, are permitting accessory dwelling units and lowering parking requirements," according to Gray and Fuller.

Doom Loop

So, let me posit an argument: As long as the accessibility supplied by highway outstrips the dis-accessibility of congestion, urban areas can keep expanding. As long as the supply of urban land keeps growing at the same rate as demand, land prices remain low. When this ceases, the price of existing urbanized land begins to rise. As those values rise, fewer and fewer people are able to buy, and the rents from that land ownership accrues to fewer and fewer people. This rents enable the purchase of more land, so there is a self-reinforcing feedback loop. Over time, fewer and fewer people own their houses.

Now, this cycle has two possible outcomes: Socialism or Communism. In the Communism case, you get violent revolution by a oppressed proletariat renter class. The US is largely immune, because we have a functional democracy, and can enact 'regime change' non-violently.*

In the socialism case, governments recognize housing has outstripped private ownership for the majority of the population, and start producing 'social housing', where the government owns/rents the land. This is basically where Europe went with post-war welfare states (Britain, Germany). Britain sold off all of it's social housing under Thatcher, permitting people to buy it. It created a one-off surge of Tory home-owners. But now the same problem has re-occurred: The population needs housing, the land is owned by rentier land-lands, and the rent is too damn high.

Fools (conservative and liberal) would like to believe that this dynamic can be fixed by making it easy to buy homes: downpayment assistance, subsidized mortgage rates, mortgage interest tax deductions, home owners property tax deductions. It's foolish because it ignores the underlying dynamic: A fixed supply of land driving increasing land rents.

It's also grossly inegalitarian; it disproportionately benefits the wealthy. Having money (enough to become a landowner) should not be reward by a government handout. Arguably, if it reaches enough people, it's re-distributive. But what share is that? And how shall it be measured? Using the home ownership rate is almost criminal in its duplicity: It reflect people who could buy homes in the last 50 years, not people who can buy houses now.

To my mind, the solution is Georgist: The value of land is not created by private action, but by public investment in transportation. Those outlays should be recouped, in proportion to the degree of value they have created.









*Assuming we have fair boundaries, rather than 'pocket burroughs' owned by one party through gerrymandering....

Housing Affordability in SLC

"The consensus among real estate experts is that the recent expansion in housing supply has managed to keep DC area rents from spiraling out of control....December's year-over-year multifamily apartment rent growth in the DC metro region was 2.6 percent.....considerably lower than the national average of 4 percent.....attribute this to DC’s above-average multifamily housing stock growth rate (3.6 percent last year, compared to 2.4 percent nationally)....supply has narrowly outpaced demand recently. - Greater Greater Washington.

Seems pretty clear to me. If rents are rising, supply is not meeting demand. SLC's rents are rising; We can't control demand; we can only control supply. There is strong market demand for housing, and the limit is regulatory. Relax regulatory limits, and increase supply.

I recognize no one wants a high-rise worth of buildings looking into their backyard. For owner-occupiers, their homes are their primary investment, and they are willing to fight to project that, which makes them politically powerful. So clearly some sort of buffering is going to be necessary. What that is going to look like is (broadly) hammered out: Two story buildings, over a half basement, with a total height of about 30'. The major conflict is over cars, and where to put them. On-street parking can accommodate 3 cars per 33' lot. Beyond that, off-street parking is required. How that is going to work out needs serious consideration as part of accessory dwelling units.

I'm opposed to efforts focuses on increasing the supply of owner-occupied housing. I rent, and I resent the implication that it means my housing preferences are inferior. It's also deeply inequitable: Providing a few more owner-occupied houses means a few more people are going to be able to 'win the lottery' by buying a home and sitting on it while it appreciates, without it doing anything to alter the fundamental dynamics of the housing market.

But relying on market solutions alone is not going to solve SLC's affordable housing problems. All the housing that is being added is being added on the higher end of the market. This is natural, and somewhat necessary--new construction requires higher rents. While that mitigates the tendency for mid-range apartments to be rehabbed and upgraded, it doesn't provide short-term relief for the low end of the rental market.

Market rate new construction requires high rents. So to provide low rents, a non-market intervention is required. SLC, as part of its homeless initiatives, is already engaging in this policy, at the low-income level. I'd like to see that extended further into the low-middle, and middle-income levels (50-80% of area median income).

As a long-term policy, a 'overbuild' in elevator apartments is appealing. Permit a very large number of high-rise apartments. Apartment construction is 'lumpy', and buildings 'package' units big bunches. Over-building is a expected characteristic of the development cycle; people start new projects until the financing runs out; the projects take a long time to complete, and my the time many hit the market, the increase in supply has caused rents to fall, and the projects are no longer profitable. Rather than competing with the private market at the peak of the cycle, the city should take over 'orphan projects' partially through the development process, and convert them to use as affordable housing. Denver's housing agency has done so with single family homes on a pretty successful basis.

To go even further, SLC could use public money to 'overbuild' the multi-family market after the development cycle has peaked. I'm less of a fan--the oversupply generates a 'hangover' effect that last decades, suppressing new market-rate multi-family development. I'd far prefer reducing market costs for new multi-family construction.

Finally, I'd like to suggest that the regulation most in need of attention is per-unit parking requirements. Parking is expensive, and mandating 2 stalls per unit seriously affects the affordability of a unit. There are increasing number of people in SLC that would be willing to make do with one less car (or no car) if that made rent cheaper. As a back of the envelope calculation, assume that a stall in a parking garage costs $40,000 to build. Using the 'building worth is 10 years of rent' ratio, that means a $40,000 bit of real estate is worth about $333 per month. I think many people would be willing to shed a car to reduce their rent by that much.

The immediate objection to such a policy would be the ease of violation: Deprived on on-site parking, people turn to on-street parking, and then overflow into near by areas, putting them in conflict with other users of on-street parking. Potential policy solutions include permitting reduced parking ratios only where on-street parking is metered for all nearby areas. For districts lacking meters, residents in the low-car or car-free units could be required to verify that they do not have a registered vehicle.

Housing Bubble Goes On

Never trust a trade industry publication. The National Association of Realtors is cooking the books again. The graph below LOOKS great--time to buy a house! But wait... what are they using? Ah. Not median income (as any sensible person would), but 'per capita disposable income'. Per capita disposable income is an average, and like all averages, is prone to distortion due to large outliers.

Given that the distribution of income in the United States follows a log distribution, can begin to understand how the presence of a few thousand millionaires begins to skew the numbers. 

The reality shows that it will be a couple more years. Political Calculations had a good graphic on it: 

The housing bubble will finally be deflated when that blue segmented line meets the dashed green line. But that may be a while. Housing prices are sticky, there has been some massive Federal intervention, and there is a huge 'shadow inventory' of bank owned homes that aren't even on the market yet. 

But have hope--the crisis part of things is over. Prices are showing a 'steady' oscillation pattern, and the inflation adjusted housing price should meet the trend line within a couple of years. 

But an undershoot remains a very real possibility. The years 1997 to 2000 seems to have been a 'reversion to mean' period, followed by the frantic escalation between 2000 and 2006...at which point the 'teaser' rates on ARM mortgages began to reset, and mortgage defaults began, coming to fullness only in 2008. Historic undershoots of the trend line look to have been in the 8-10% range, and it's not impossible we might see that again. Still, it's been almost two decades since we've seen that much amplitude in the oscillation of housing prices.