If They Had Asked ME...

It's amazing to think that this time last year, the housing market was still going strong. But people were already warning that the bubble couldn't last forever. I had my own thoughts about the topic, and came across them today. It was never posted because it's both unfinished and disjointed. But it was interesting to read again, even if it is more proof that world-class economist, I'm not...

One of the ways to end the upward pressure on home prices, I suspect, is to make it harder (in the short term) to own a home. Chose a modest percentage of an average worker's take-home pay, and make it illegal to write a mortgage loan that requires they pay more than that. Period. When the only way to sell more homes becomes to lower the price, that's what will happen.

Home prices are going up because people are chasing home ownership. The more frenetic the chase, the more money people are willing to pour into it. As you move up the socio-economic scale, the greater percentage of your income that you can afford to place into housing without making serious cutbacks in other areas. This advantage of the more affluent is what's driving home prices ever higher, and making it harder for the lower-paid to compete for real-estate. And the chase is auto-catalytic, in that as home prices spiral, people become more desperate to get in so that they can profit from the "bigger fools" that they expect will enter the market after them. They become willing to speculate with large amounts of their income, pushing prices higher.

The overall problem with attempting to rein in an "out-of-control" housing market is that it's really hard to not break the market in the attempt.

The REALLY simple solution is to simply massively overbuild the region, and pull the bottom out from under the market. When there are "For Sale" signs four and five to a block, and sellers are chasing buyers, prices will come down. But engineering a situation like this without sinking half the homebuilders in an area (or the entire local economy) isn't easy by any stretch.

There are a number of local, regional and even national constituencies that I suspect are benefitting quite nicely from the high price of housing, and will fight to prevent a fall in home prices, which will make ANY solution more difficult to implement.

In the long run, the best solution is also perhaps the hardest - for those people who can't afford to stay to move somewhere else (just not all to the same place). That will a) reduce the competition for housing and b) tighten the labor market at the low end of the scale so that those who remain can ask more for their services, thus raising their incomes to a point where they can afford better. But that means the people who leave "lose out," to a certain extent, to the benefit of those who can hang on the longest. It's that unwillingness to lose out that's driving this. The undersupply of housing desirable and/or accessible housing and the relative oversupply of people at the lower end of the job ladder (in that there are too many people willing to work for lower wages to force wages higher), contributes to a situation where home prices escalate faster than wages do.

And as you move up the socio-economic scale, the greater percentage of your income that you can afford to place into housing without making serious cutbacks in other areas. This advantage of the more affluent is what's driving home prices even higher, and making it exponentially harder for the lower-paid to compete for real-estate. And the chase is auto-catalytic, in that as home prices spiral, people become more desperate to get in so that they can profit from the "greater fools" that they expect will enter the market after them. They become willing to speculate with larger percentages of their income, pushing prices higher.

And since the supply of housing is not as elastic as the number of possible buyers, neither the market for purchases or rentals can really keep up. Apartments being converted to condominiums drive rental prices up, while homes being purchased for rental drive purchase prices up. (Not to mention the fact that if you've spent a lot to buy a place that you plan to rent out, you need rental prices to rise to be able to profitably lease the place out.) It's another auto-catalytic spiral.

Making the housing pool more elastic than the population pool is next to impossible. Even if you could physically manage it, there are a number of people who more or less directly benefit from the current situation - especially many homeowners, who would feel at risk of losing out if prices fell, or simply rose more slowly than wages for several years.