Why can't people choose how to spend their own money?
People choose to live in more expensive homes. They choose stainless steel appliances, solid wood floors, etc. All things that make the houses of the 70's look quite paltry.
Again, the only reason we care in general is if we have to bail this people out because they chose homes they couldn't afford.
In the natural order of things (if there is such a thing), if a homeowner couldn't make their mortgage, house goes back to bank. Banks don't want houses (no profit) so they naturally try to avoid people who are likely to stop paying their mortgage.
Enter gov't interference, guaranteeing loans, etc and you have a huge distortion.
So we(as a nation/gov't) probably should't have gotten involved in the housing market in first place.
I didn't choose anything for my rent to skyrocket because suddenly I live in a million dollar 1-br.
Everybody has to live somewhere. And by speculatively inflating the cost of housing (and getting out of it before the burst) a speculator effectively strips general public of their cash.
You don't have a choice: unless you live on the street, you're participating in this game and you're getting screwed even if you rent.
Imagine this: assume I have many billions of hypothetical dollars to play with. I go and buy a lot of houses and rent them out. Then I start giving out loans with 50yr/0% APR to everybody. Guess what happens to the houses I already own? Their value will skyrocket. So I can sell my loans to the next guy (who's hoping to re-sell them as well, since prices are going up) and I sell my expensive real estate too. When everything goes to hell, everybody will be poorer but me, including poor souls who's been paying insane rents and refused to invest in the bubble.
So yes, we have a problem because the system allows this to happen.
A single person as an individual doesn't choose to live in more expensive houses necessarily, but we as a society do: take a look at the graph attached to Virginia Postrel's "A Tale of Two Houses:" http://www.theatlantic.com/doc/200711/housing . Notice how much it costs to build in many of America's most expensive cities. If you take a desirable, urban place to live and slap extensive controls on building height and the like, you get expensive housing. Much of our housing problem is self-made.
This has been chronicled extensively by urban planners, economists, and on blogs like The Bellows: http://www.ryanavent.com/blog . But relatively few people trace the cost of houses back to the fundamental issue of land controls.
We have a problem because we allow this to happen. The system doesn't exist as an independent entity. The system, however constituted, is a reflection upon those upon whom it operates. We choose what we allow to fly, and our generations are stuck with the responsibility, however you slice it.
For instance, people could look at a 50yr/0% loan and say, "There's no way I am going to wager on something for 50 years, that is crazy, also 0% APR means a tricky, tricky bank". Instead, we eat that kind of stuff up, because all we think about is getting what we want and getting it now. People are too excited to think ahead.
Same goes for government. You can wax on about corruption in politics all the day long, but as long as you're propping up the same institutions by electing the same incumbents or their alter-egos in the two main parties or patronizing major media corporations, you're a part of the cause. If the people were unwilling to accept corruption, there wouldn't be any.
The solution is to change the system by the individual action and perspective that will diminish the entrenched badness, and to spread these philosophies among friends. Alteration by artifice as government intervention is not effective -- whatever laws you pass, the same practices will resurface in new robes because the population can still be exploited. The population will remain exploitable until they change their conceptions and actions, no matter what you do with the government.
The reaction to the housing crisis is a dog and pony show meant to appease populist fervor without causing significant disruption in "business as usual" for either the consumer or its providers.
It has done no good, and it could not have done any good. We need an ideological shift, not band-aids, talking points, or press releases.
The solution is to change the system by the individual action and perspective that will diminish the entrenched badness, and to spread these philosophies among friends.
So you're suggesting to combat crime with spreading proper philosophies among friends? Good luck with that. What do you think will happen if rape or theft was legalized tomorrow?
Of course. Is law more than canonized moral philosophy?
I don't think rape or theft would be legalized tomorrow, because I don't think the people would accept rapists or thieves among them publicly. If the state refused to act upon its mandate to enforce the canonized moral code of the people (read: the law), the people would enforce it themselves and install a new state that provided the services desired.
The law and other social constructs reflect their society, not the opposite. That's my whole point.
The other factors that have changed are the tax exclusion on mortgage interest and capital gains from home sales and interest rate manipulation. The mortgage interest exclusion eventually led people to devise and ask for "piggyback" loans instead of paying for private mortgage insurance, which was not tax deductible. The capital gains exclusion on housing sales up to $500,000 led people to overvalue homes as investment assets, since they had less tax drag than other investments. Interest rate manipulation lowered the real monthly cash outlay for payments, which drove up the actual home prices. It also increased the risk for banks, because they were accepting a lower risk premium on volatile collateral.
Nowhere else in the economy do we so explicitly support ordinary folks to make highly leveraged investments. When housing price volatility increased, the down payment requirements should have gone up as the risk premium increased. Instead, our government conspired and is still conspiring to drive them down, backed with our tax dollars buying the loans and now buying up the MBS.
If you break out the numbers further, it's land prices that have been responsible for the housing price increases, not the cost of construction. The main culprits are zoning laws. It's simply not possible to build duplexes or more densely packed homes in most suburbs, and so all the land gets spoken for and no more housing can get built.
I disagree. The Vancouver area is one of the most expensive in the world for detached house (median house price > 10 x median income), but that's not for lack of denser housing options. I don't know anyone under age 40 who has even considered buying a detached house here; the default option is to buy a condo in one of the many towers which are going up, and the expensive "yuppie" option is to get a townhouse.
Land is expensive because people want to live close to the city center; not due to excessive zoning restrictions.
Vancouverite here - the city has infamous height restrictions as well as maximum density bylaws in zoning. The downtown core would be an even denser maze of skyscrapers if it weren't for these laws, and IMHO they do contribute to the sky-high housing prices.
Vancouver's transit was essentially in standstill since the 80s until very recently, and "reasonably accessible to downtown" land was already all spoken for. Couple this with onerous zoning restrictions and you see why stuff got expensive real fast; the influx of rich immigrant housing speculators really didn't help either.
The city's overdue for a major reckoning of housing prices, and I for one will be happy to see it. It is ludicrous for housing to be 10x income.
While the fact that more people want to live in Vancouver than there are houses in Vancouver contributes to the cost, the city does place a premium on views of the north short mountains and it being a livable city to the detriment of increasing supply:
While the 10x median stats has many causes, one cannot discount the zoning element as being trivial. I imagine one can find similar practices in most major north american cities.
Every city with wide swaths of land with restricted density has an oversupply of detached housing, which lowers prices relative to the alternatives, but increases prices across the board due to the overall reduction in available units. Reducing restrictions on density allows developers to build what they think people will buy, and people can choose the price they're willing to pay for it. If anything, the gap between condo and house prices in Vancouver is evidence that zoning in other cities is raising prices. Vancouverites clearly prefer to trade detached housing for a better location, and cities that prevent people from making that choice are doing their citizens a disservice by making any given location more expensive to live in.
If Vancouver had zoning similar to Sun Belt cities, people under 40 would buy more detached houses, but they would be in the suburbs. Housing in those suburbs would be more expensive than it would be in current suburbs if there wasn't an urban growth boundary.
> "people under 40 would buy more detached houses, but they would be in the suburbs."
The trick with Vancouver is that it's completely boxed in, and almost all land is spoken for already. Pacific ocean on the west, mountains to the north, mountains to the east, and the US border to the south. There's not a lot of land to sprawl into, especially if the province wants to retain agricultural output.
Far-away suburbs like Surrey have already seen skyrocketing housing prices, and developers are trying to convert as much farmland as possible, but the reality is that Vancouver simply doesn't have the luxury of sprawling outwards. I'm not particularly sad about this fact (I just can't get behind suburban models of cities), but it does contribute to the ridiculous housing prices.
Ah, I didn't realize that. My point was that in the absence of boundaries, suburban detached housing will be cheaper without zoning that restricts density to an artificially low level.
There are different municipal incentives at work in a large urban center than in a suburban environment. In the suburbs there is a definite bias towards larger detached homes that cost more money as it increases the tax base while only slightly increasing the per capita costs (for water + sewer + roads, etc).
Vancouver is an exception because there isn't much land. They are choosing, as a city, to build up, not out. There are only a few roads out and if you've been stuck in the traffic on the 1 just outside the city, then you know it isn't convenient to live far from downtown. Commuting isn't fun and Vancouver has almost the best weather in Canada, definitely the best for a major city not on an island.
Even more, the hongkongese loved vancouver and chose it over many of the other options for post brit rule.
And I know some < 40er's with detached homes, so I suspect your hyperbole is a bit extreme and indicates a lack of real effort to communicate honestly or a lack of real understanding of the situation in vancouver.
I'm from Vancouver, my folks own a detached home there... and the previous poster isn't entirely incorrect in his statements on Vancouver housing.
The speculative bubble started in the mid 90s, and housing has been rising ever since. It was still within reach of middle class folk all the way up till, oh, about 1997-98 or so. The announcement of the Olympics drove prices even higher, so that's where we're at today.
My folks bought in about 15 years ago, and even then our modest 2-story cost about $300K. It is worth $800K now, and our neighbourhood is not even one of the explosive-growth neighbourhoods. Heck, we're not even in Vancouver proper. Buying a detached home in Vancouver city itself is, to put it strongly, impossible for anyone who only has a day job as income. Tiny single-floor bungalows are priced into the $700K's, it's just all so absurd.
In the Boston area, where I live, the central city and inner suburbs have bans on how high a building can go and generally make it extremely difficult to get building permits. I've heard it takes up to 10 years and millions in lawyer fees to get a permit to build a new apartment tower. The mid to outer suburbs have strict laws against duplexes, have minimum lot size, and greatly restrict new development.
So either way, it is nearly impossible to build. With unrestricted supply, the cost of housing would be no greater than the marginal cost of building a new apartment tower. But because of the supply restriction, any house within 30 miles of Boston costs far, far more.
But excessive zoning restrictions exacerbate the problem. In Cambridge, MA there are significant limitations on how high buildings can be thus limiting construction of larger apartment buildings. This in turn drives up the cost of housing due to the lack of supply.
At the national median price you'd be lucky to get a mobile home on a very tiny lot where I live in California. And a condominium is even more. I know elderly people with single family homes that are paid for, but the valuation is so high, that if their property taxes were based on current value, they'd take their entire social security or disability income.
These are people that worked and saved all of their lives.
Some low wage earners are forced to share apartments to avoid being homeless. Working full time at minimum wage is getting to where it isn't enough even for rent.
Conservatives complain about businesses covering any part of health care cost. Look at an area like Santa Barbara and you'll find businesses having trouble getting low-wage employees because they can't afford to live in the area?
Are they expected to live a dozen people to a house?
The price of the same good (livable land amongst interesting opportunities and people) increased rapidly as the supply of money increased. What's worse is that the supply of money increased primarily for those people who wanted to blow it on a home spending bonanza. Now that the supply of money has dwindled, there's hardly any left in desirable areas at affordable prices for people who are not rich.
Suppose I wanted to buy land to build my own home, starting from a tent, in the bay area. Where would I go?
#1 -- median home prices have shot up. That includes homes without {stainless steel appliances, marble counters, and whatever else it is you think people shouldn't be consuming}
#2 -- people didn't just choose homes they couldn't afford. Banks gave people loans they had no hope of repaying. Bankers lied on applications to get their clients larger mortgages. Appraisers inflated valuations. Credit agencies accepted bribes to allow banks to syndicate loans. Government, in this case mostly Republicans, looked the other way as housing advocates begged for intervention.
Your natural order is characteristic of your utter lack of knowledge. Banks didn't hold the vast majority of mortgages, so they got paid either way.
The government was not at fault for guaranteeing loans -- try actually learning something about the situation. Fannie / Freddie loans plummeted as a share of the market and performed, and continue to perform, far better than mortgages originated elsewhere.
The government (/we/nation) is involved in the housing market -- and this is complicated -- because PEOPLE NEED A PLACE TO LIVE. So while I agree that government probably oughtn't be involved in, say, video game production, they should be involved in {housing, food, medicine, education} -- basically life's necessities.
I'm sorry for being blunt, but perhaps you could try educating yourself just a tiny bit before forming and sharing nonsensical opinions.
House prices also raise because we have more unaffected money:
- food represents a smaller and smaller proportion of our expenses;
- manufactured goods also became more affordable, as they're produced either by robots or by 3rd world workers;
- double-income families have become the norm.
Since the housing market is essentially an auction system, with limited offer elasticity, it's natural that it swallows a large chunk of what could have been our disposable money growth.
Now, there are other factors, especially in the USA, which will evolve:
- the gold rush on estate as a speculative investment undoublty caused a bubble (although it only explains part of the price explosion). This seems now largely over.
- by accepting to lend to everyone, banks have artificially increased the number of potential buyers, hence further increasing the prices reached by auctions. Now that those dummy buyers have played and lost with the banks' money, banks will have to acknowledge it as ARM-induced foreclosures unfold, and they'll probably be more careful before letting someone enter the house-buying game.
So prices are very likely to go down, but not to go down as low as they were in the '70s, even in terms of income proportion.
This change, while dramatic, isn't necessarily a sign of problems. Over the past 35 years, and especially in the past 10--15 years, the US (and most of the rest of the world) has progressively urbanized; in many areas, it has become the norm for people to live in condos rather than detached houses.
I can't find any relevant data on the US Census website, but I strongly suspect that if you add duplexes, condominiums, etc. into the mix, you'll find that while houses have become relatively unaffordable, housing has not.
I don't believe this is alone because of location.
Building codes in cities are usually considerably stricter than those in the suburbs and ex-urbs, and meeting code itself requires more expensive design choices. Additionally, you're not going to build an inexpensively built, unnecessarily gabled raised ranch with a portico in the middle of a city, mostly because you wouldn't get approval because the aesthetics would conflict with the existing neighborhood.
Price and location are not independent. I looked a while back in an MA suburb where 2300 square foot homes were being sold around $300K. I looked into buying an equivalent-sized empty plot just outside that subdivision on which to build a 1150 square foot "atomic ranch", and I was looking more at $500-550K for something half the size on a similarly priced plot.
Cost per square foot relates to both the building height and land costs. A ten story building on cheap land costs a lot more per square foot than a once story house. However, as the cost of land goes up that shifts.
PS: I spend 1700$ a month on a 1br apartment because it's in a 20+ story building and on expensive land (great location). The problem with apartment buildings is they are only reasonable in expensive areas so their minimum price is even higher than the premium of building the building.
The house I am (in the process of) buying is only 2.8x my annual income. It was also built in the 70s. There's a lot more potential in it as it is a more basic structure than a newer house would be.
This article has lot of facts and figures and i really apologise for just dropping this like this (late night/early morning) but with the median figures adjusted for inflation from consumer price index, I don't think its quite fair to say that you can just drop numbers and compare them to present day. I didn't see this mentioned but then again my eyes are really tired and maybe missing the point but:
$148,800.00 house in 1975 is the equivilant of $595,484.88 in 2008 in buying power
Median income of $42,936 in 1975 has buying power of $171,826.20 in 2008.
Roles Reversed
$245,300.00 house in 2008 in buying power is $61,295.66 house in 1975
$50,303 median income in 2008 is the equivilant of $12,569.73 in 1975
"The CPI inflation calculator uses the average Consumer Price Index for a given calendar year. This data represents changes in prices of all goods and services purchased for consumption by urban households. This index value has been calculated every year since 1913. For the current year, the latest monthly index value is used."
Now maths really isn't my strong point. Actually really bad and I know that there are many of you far far clever than me so I reserve judgement and hope someone can double check for me but i just wanted to mention this because I didn't see it discussed.
I'm still confused here (Math is not my strong point either).
He mentions he adjusts the income figures for inflation to compare 1975 income to 2001. He then mentions he adjusts house prices to inflation to compare 1975 prices to 2008.
But what I don't understand is where he gets the 2008 median income figure from (Even adjusted to inflation) as he said he has no income data past 2001. He needs an actual figure before he can adjust right?
One reason I've seen cited in many of these new "edutainment" economics books for the rising price of housing is that more people choose to live alone than ever before. If more people live alone and want their "own place", the amount of demand goes up sharply while the supply grows at a more modest rate. Extended families certainly don't seem to be all the rage anymore..
With housing bubble and all, it seems that this is part of a long-term trend. Choosing 1975 as the hypothetical standard of where the ratio might return seems completely arbitrary.
Anecdotally, the standard advice I've always heard is that you should look for a house priced at around 3x your annual salary, and that you should be able to make a 20% down payment. If it's not possible to find a reasonable house which fits that, then there's a problem somewhere.
You think people really make more money than they did in 2001? That's one of the things that is fueling the populist anger we see in the Tea Party movement. People want to know where their money has gone.
Of course, the major exception is that the rich have made staggering gains in income (compared to the working class, when adjusted for inflation) over the last few decades. You can't tell me that they're just working that much harder than they were 30 years ago.
> "That's one of the things that is fueling the populist anger we see in the Tea Party movement"
...And simultaneously one of the most ironic things about the Tea Party movement.
While legitimately wondering where their money has gone, they're giving tacit support to policies that would only exacerbate the divide. (lowered taxes, increased selective deregulation, etc)
40 years ago my parents purchased a house on a 7-year mortgage. At the time dad and mom were employed as a carpenter and a social worker, respectively. The price was about 3X their yearly income, they put up 30% up front, and they paid off the rest in 5 years. BTW, it was large enough to raise 4 kids and a flock of poultry.
Today houses where I live cost 8-15X (!!) my family's yearly income, and the standard mortgage term is 30 years. Part off this is the shift from farm-country Texas to geekville San Francisco, but the other part is that homes are much more expensive compared to incomes than they used to be.
as a region becomes denser and zoning laws limit the speed at which the housing market reacts to changes in housing demand you'll see a rise in price vs other goods. this is normal.
What's missing from this article: a correction for the quality of the housing. That houses are 40% more expensive is hardly surprising when they are also 40% larger.
I have yet to meet an individual who has, in the last 10 years, both remodeled a kitchen and adopted an austere entertainment budget (in which I include restaurants and movies).
I doubt anybody would claim my entertainment budget is "austere", but it is substantially reduced from what it was when we lived in a smaller place. We almost completely stopped ordering out on weekdays, and we eat out about half as much as we used to on weekends.
We went from buying everything, to buying only things we don't know how to cook, or that are a pain to cook.
That's because Zillow.com calulates values using square footage! Calculations don't make it so!
I won't disagree that square footage plays a very significant role in value, but how significant will vary.
Their estimates are interesting to look at, but are subject to error from many sources. A place with bad paint, a cracked/shifting foundation, termites, no central heat and a bad roof doesn't have those things properly accounted for. Also, one nearby property selling unusually high or low for some odd reason with throw off the numbers for the other properties nearby. I saw that with a apartment to condo conversion where the last unit went to a family member of the developer for a much lower price. As the other units sold, local houses were seeing a rise, when that last one sold there was a $30,000 drop.
Even actual selling prices aren't too reliable of an indicator now with such a disturbed market. Bankruptcy sales (or panic sales to avoid bankruptcy) certainly can distort values.
It'll vary with the market, but I think I'd feel safer testing estimated value against other criteria. The price is a fairly safe one if rental income could cover payments on a 30 yr fixed loan for 90% of the amount (the rest being the down payment). At least that method isn't so easily disturbed by erratic pricing nearby.
People choose to live in more expensive homes. They choose stainless steel appliances, solid wood floors, etc. All things that make the houses of the 70's look quite paltry.
Again, the only reason we care in general is if we have to bail this people out because they chose homes they couldn't afford.
In the natural order of things (if there is such a thing), if a homeowner couldn't make their mortgage, house goes back to bank. Banks don't want houses (no profit) so they naturally try to avoid people who are likely to stop paying their mortgage.
Enter gov't interference, guaranteeing loans, etc and you have a huge distortion.
So we(as a nation/gov't) probably should't have gotten involved in the housing market in first place.