June 21, 2004

UCLA's Ed Leamer Says We Are in a Housing Bubble

UCLA's Ed Leamer says that we are in a housing bubble. But this article annoys me. This article annoys me because (a) I can't find anything accessible in which Leamer gives his views at greater length, and (b) two crucial points seem to me to be left out:

  1. He compares house prices to rentals on a 2000 sq ft apartment. Houses are growing bigger (and better) over time. How fast are they growing bigger (and better)? How much of a time trend does this impart to his numbers?
  2. P/E ratios--of all kinds--should be high when interest rates are low now and are expected to be low in the future. Interest rates are very low now. Long-term interest rates tell us that short term rates are not expected to rise that much. How should we expect house prices to react to low interest rates? Given that interest rates are so low, is there good reason to think that housing prices are too high outside LA, SF, and New York?

It's not that I'm sure we're not in a housing bubble. But I want to see the full argument. (Personally, I think we are in an interest rate bubble--and that high housing prices are (outside of New York, SF, and LA) probably a rational reaction to very low interest rates.)

Alarm over price of homes: Remember how the price-earnings ratio for stocks soared before the market crashed? Well, the price-earnings ratio for homes in the Bay Area and greater Los Angeles is also skyrocketing, according to a forthcoming report from UCLA economist Ed Leamer. He says homes are so overvalued that prices are likely to fall when the Federal Reserve raises interest rates. A P/E ratio shows how much investors are willing to pay for a dollar of earnings. It is one way to measure the public's enthusiasm for a particular asset class. The higher the ratio, the greater the zeal.

In the stock market, you calculate P/E by dividing a company's share price by its annual earnings per share. In the housing market, you divide the price of a house by the annual rent it could fetch. Leamer calculated the average P/E for homes in several California metro areas by dividing the median price for a single family home by the average annual rent for a 2,000- square-foot apartment in each region. (You can get more and better data for apartments than rental homes, and the two tend to track each other.) His findings: In the Bay Area, the average P/E for a house shot up to 13. 8 in the first quarter of 2004, compared with 7.2 in 1999 and 2000. Today's ratio is more than a third higher than it was 1989, just before housing prices started a multi-year descent.

In Santa Clara County, the average P/E is 15.8 today, compared with 10.3 in 1989. "We are in a situation that is more extreme than it was in 1989," says Leamer, director of the UCLA Anderson forecast. In the Bay Area, P/E ratios are skyrocketing because rents are falling while home prices are escalating, Leamer says. In San Francisco, the average rent has skidded to $22.01 per square foot from $31 per square foot in 2000, while the median home price has risen to $606,000 from $450,755. In Southern California, where the economy is stronger and more diverse, rents are rising, but housing prices are rising even faster. As a result, P/Es are also rising, though not quite as far as in Northern California...

Posted by DeLong at June 21, 2004 07:47 AM | TrackBack | | Other weblogs commenting on this post
Comments

Fun place to read about the housing bubble is at Dean Baker's (i.e., CEPR's) website:
http://www.cepr.net

Posted by: liberal on June 21, 2004 08:09 AM

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Thanks for the excellent blog--it's one of my daily stops.

Two questions on today's posts:

What is an interest-rate bubble?

Have you seen the case that there is a housing bubble on http://www.cepr.net/ (several essays linked on the lower right-hand corner of the page)? Is it convincing?

Posted by: Westernmass on June 21, 2004 08:10 AM

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BDL wrote, "P/E ratios--of all kinds--should be high when interest rates are low now and are expected to be low in the future. Interest rates are very low now."

Yes, but what happens to your portfolio when interest rates rise again and P/E's decline?

If one argues "it doesn't make any difference," why shouldn't one then blithely invest in long-duration bonds, which offer a higher yield than shorter durations, even when interest rates are low and there's a good chance they'll rise?

Posted by: liberal on June 21, 2004 08:12 AM

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Maybe it's different in California, but in the DC area (and presumably in the NY area as well), a 2000 square foot apartment is considered very large and would rent (or sell) for a premium-- so I'd say that results based an apartment that size may be atypical. It's rare to be able to buy one that large, and finding one for rent is practically impossible.

Posted by: Matt on June 21, 2004 08:24 AM

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IS there a housing bubble? Perhaps yes, perhaps no...I think it depends on where you are. In NYC, and presumably LA, SF, and Wash DC there is not a lot of available space for new construction and any construction is therefore more exopensive because the cost of land is more expensive. If new units are selling for more then exisitng units sell for more. In NYC we are experiencing a rental rate softening and yet husing prices seem to be going up up up. Why, Where can you build? Yesterdays exurbia is todays suburbia with hour plus commutes considered "reasonable". Yes housing values will soften when interest rates rise, but how fast will they do so? We have already experienced a nearly 100 BPS upward move on 10 year treasuries yet prices still are going up. Is this because peoples incomes are increasing? In anycase this is a home not a piece of stock and unless you have to sell you should not be negatively impacted.

A more real issue in my opinion is the demographic one where the baby boomer homes will need to be sold when baby boomer want to tap their equity in 10 - 20 years. Because of the smaller populations trailing the boomers who will buy? THere will be more supply then demand and that means prices will come down.

Posted by: Karl on June 21, 2004 08:45 AM

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I have a working paper with Amy Cutts on this. While the paper is rough, I think its findings are liekly correct.

We find that when one adjusts for quality, house prices generally moved in tandem with rents over the course of the 1990s. And when looks at after-tax user cost of housing, there are only a few markets that cannot be explained with fundamentals--in fact, in most parts of the countries, prices are lower than one might expect given changes in rents and user cost.

Posted by: Richard Green on June 21, 2004 09:21 AM

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To address concern a), it seems that this article is covering the talk tomorrow by Cutts and Leamer at a UCLA Anderson Forecast conference, entitled "Real Estate Bubbles 101." There's a blurb on the UCLA Anderson Forecast website about it, and this all seems to ultimately reference a 2002 forecast paper (well, more of a friendly discussion, really) by Leamer, which is on their site, as well:

http://www.uclaforecast.com/uploads/forecasts/2002/june/articles/bubble.asp

There are also updated graphs for June 2003 on the front page of the site. Still no detailed explanation of methodology, though.

Posted by: Gray on June 21, 2004 09:49 AM

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Technical note- I seem to be unable to load this blog using Safari, though Explorer works fine. Anyone else having this problem?

Posted by: Bernard Yomtov on June 21, 2004 10:02 AM

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I would like to know how the cost of housing is related to the price. What proportion of housing cost is zoning (direct and indirect), versus materials, labor, etc? How are zoning costs broken down by return on government paid infrastructure costs, lifestyle density, habitat preservation, etc? Anybody know a good source on that?

Posted by: walter willis on June 21, 2004 10:22 AM

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One more point. Although most housing markets in the country can be explained using fundamentals, San Francisco is an exception. By any standard, it would be more cost-effective to rent in San Francisco than to own, which means people should be selling their houses. This in turn would lead house prices to deflate.

But when I taught an executuve MBA class in San Francisco this past spring, I found that many of my students (1) understood that is was more expensive to own than rent there and (2) had no interest in selling their houses anyway. It appears that after a time, houses have idiosyncratic characteristics that match their owners' idiosyncratic tastes (Sherwin Rosen's classic 1974 JPE paper discusses "matching" in the housing market between buyers and houses). Owners looking for a place to rent will not be able to find a true substitute for where they live.

Eventually, of course, the gap between owner costs and renter costs would become sufficiently large that people would start selling and moving anyway. But the fact that houses are differentiated products creates real frictions, and might explain the persistence of small apparent bubbles.

Some other good papers on this are by Richard Meese and Nancy Wallace, and by Francois Ortalo-Magne.

Posted by: Richard Green on June 21, 2004 10:23 AM

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Re: Walter Willis' query

Some fine work on the costs of zoning has been done by Steve Malpezzi at Wisconsin, Joe Gyourko at Penn, Ed Glaeser at Harvard and Steve Shepherd at Oberlin.

Posted by: Richard Green on June 21, 2004 10:32 AM

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This linking of home ownership to rentals through a "P/E" mechanism is tortuous at best. Many people buy and rent for different reasons. There may well be a housing bubble in many places (just looking at the size of price increases in many urban markets would lead one to that conclusion w/o reference to rentals).

However, there must be better explanations of this buyer mania than lock-step linkages to rental prices. Tulip mania better describes this phenomena than rental aversion.

Professor, here's your chance for a Nobel!

Posted by: Lawrence on June 21, 2004 10:52 AM

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The 8:12 AM post by "liberal" makes the right point. On top of that, most people buying houses are taking on at least 4:1 leverage (often 9:1 or even more), and more than a third are buying with adjustable-rate mortgages. What would you call a person who would buy an illiquid 10-year bond using a variable-rate margin loan for 4:1 leverage?

There are any number of scenarios in which these people will find these homes to be tar babies. A rise in interest rates is only one. Another is that incomes stagnate or decline due to off-shoring, while more and more baby boomers lose their jobs due to age discrimination or even true age-related incapacity and are forced to trade down, glutting the market.

Posted by: jm on June 21, 2004 11:49 AM

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I live in Boston, MA. If this ain't a housing bubble, we're still screwed. Housing prices are up by about 75% since 1997. 75%?!?!?! That's ridiculous! It's GOT to be a bubble.

Why?
1. Incomes haven't gone up 75% since 1997. Housing is much more expensive now.
2. Rents for comparable properties are down (Last year, I went from living in a 1 bedroom that cost $1800 to living in a 2 bedroom that cost $1400.)
2b. A mortgage on a typical multi-family house costs significantly more than what you could rent the individual units for.

If it isn't a bubble we're screwed anyway because no one can afford to buy property anymore.


Posted by: Tauphin Mauphinburphy on June 21, 2004 12:02 PM

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Regarding Tauphin Mauphinburphy's comments ("we're screwed"), I think you are right. There's a Harvard Law professor (Elizabeth Warren?) who has argued in a recent book that much of the income gains American households have seen in the past two decades (from income growth, but more from the growth in two-wage families) has been focused on a big bidding war for housing and schooling and other such items.

Her numbers are intresting. It's not that the economic pie hasn't grown, she argues, it's that we aren't spreading our growing wealth evenly across the economy. We'll all work harder and longer so we can jack up housing prices, the book suggests.

Posted by: Drew on June 21, 2004 12:18 PM

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I live in San Diego where house prices have moved upwards very quickly. The relatively low income level of the area compared with the high house prices has made San Diego one of the most unaffordable areas of the country.

I've talked with sereral buyers, and they all say the same thing--they aren't buying because they think its a good deal. They are buying because they expect the deals will only get worse. I haven't heard of anyone doing a "rent vs buy" analysis. Instead they all take on faith that buying is the only way to go. Almost everyone sees that the only path for prices is up; its just a question of how fast. There seems to be a self-feeding cycle of "prices are going up, therefore I need to buy now!"

Lawence mentioned the tulips, and it may not be that crazy, but there seems to be a touch of mania in the air.

Keith

Posted by: Keith on June 21, 2004 12:41 PM

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I doubt that there are very many first time home buyers in any of the bubble markets. To qualify for a $550,000 property, which gets you a 2 bedroom condo in SF, you need well over $140,000 in annual income, plus your down payment. That is nowhere near in line with average area incomes.

What I would like to see is a comparison of the distribution of home prices in a particular area with a distribution of household income. Have the last 5-10 years been driven by people "moving up," all the new loan types (1, 5 and 10 yr ARMs), a shifting of the demographic in certain areas?

house-rich, morgage poor really comes to mind these days.

Posted by: jjj on June 21, 2004 01:13 PM

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walter willis wrote, "I would like to know how the cost of housing is related to the price. What proportion of housing cost is zoning (direct and indirect), versus materials, labor, etc? How are zoning costs broken down by return on government paid infrastructure costs, lifestyle density, habitat preservation, etc? Anybody know a good source on that?"

I don't think "zoning" is a good term for this. "Zoning" may add to site value, but the word you want, really, is something like "site value" or "value minus improvements," etc.

The fundamental point is that the supply of land is very inelastic. So demand will force the cost of (unimproved) land to rise even as GDP rises. This was pointed out by Ricardo centuries ago.

Google on "Henry George"...

Posted by: liberal on June 21, 2004 01:15 PM

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In response to what Keith wrote at 12:41 PM...

Your point that people are buying NOT because they think it's a good deal but out of desperation and fear that it will only get more ridiculous is another classic sign of a housing bubble.

This academic paper analyzes the psychology of the housing market in several large cities and compares them to a control city (Milwakee, WI).

It's 61 pages long but it's really worth the read.

link --> http://tinyurl.com/2bkoe

Posted by: Tauphin Mauphinburphy on June 21, 2004 02:01 PM

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In response to what Keith wrote at 12:41 PM...

Your point that people are buying NOT because they think it's a good deal but out of desperation and fear that it will only get more ridiculous is another classic sign of a housing bubble.

This academic paper analyzes the psychology of the housing market in several large cities and compares them to a control city (Milwakee, WI).

It's 61 pages long but it's really worth the read.

link --> http://tinyurl.com/2bkoe

Posted by: Tauphin Mauphinburphy on June 21, 2004 02:02 PM

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I hate to get empirical but the Economist's home cost index says prices in the US now are only 10% above the norm, and have risen only 53% since 1997 -- that's just a bit over 6% annually. http://www.economist.com/displaystory.cfm?story_id=2736477

If true, that's not much of a bubble. The story says the real bubbles are in other parts of the world.

"I live in Boston ... Housing prices are up by about 75% since 1997. 75%?!?!?! ... It's GOT to be a bubble."

That's nothing. In the part of Manhattan where I live prices are up >100% in just the last *one* year. Harrison Ford just bought an apartment diagonally across the street from me -- and when I got my apartment here Xty years ago it was because this was the only neighborhood cheap enough on this island for a just-out-of-school slacker like me to afford. (BTW, Harrison's an unpretentious guy, stands in line at the deli for his coffee with everyone else, no visible factotums. /End celebrity namedropping.)

But 100% appreciation in a year here doesn't mean "bubble", it means "volatile", as in extremely fixed supply -- there's only so much land, and bizarrely outlandish regulations block building more housing on it -- along with highly variable demand, so the adjustment is all in price. The NYC economy after a long slump now is booming at 7%, the stock market is handing out big bonuses again, it's a hot stylish neighborhood now, so local prices zoom. But I've also seen prices fall 50% a year in this neighborhood.

Housing isn't liquid and portable, so local market conditions can be a long way off from general conditions.

"What proportion of housing cost is zoning (direct and indirect), versus materials, labor, etc?"

In places like where I am, zoning and other regulations affect housing market price *a lot*.

*"Zoning" may add to site value, but the word you want, really, is something like "site value" or "value minus improvements," etc.*

Value *with* improvements. Nobody lives on bare land. Fixed-in-amount as land may be in the short run, the supply of housing on it and its construction cost are *not* so. The amount can be increased fairly rapidly (e.g, by building upwards, converting commerical space to residential, etc.) and housing like anything else can be supplied at lower cost with efficiency innovations.

But bizzaro-world regulation as there is here that both largely blocks the construction of new housing and greatly increases the cost of whatever is constructed of course has a significant effect on housing price -- and increases price volatility, since it reduces elasticity of supply.

This all makes local prices roller-coaster fun for investors, but I'd say they reflect near zero about the national housing market.

Posted by: Jim Glass on June 21, 2004 02:56 PM

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Question for our host (and any others who want to chip in):

What do you mean by "houses are growing...better?" I'm not trying to be snarky, but I'm coming at this from the viewpoint of an architect with construction experience, and I have seen no evidence, anywhere, of appreciable improvements in quality. I suspect you simply mean "more amenities," which I wouldn't argue with. But I am curious about popular viewpoints on this matter. The most striking thing to me about McMansions is not the tackiness that many observers decry, but the actual low quality of them - they are generally built to the same standards as the crummiest of tract housing, but with (some) upgraded finishes and more amenities. Does anyone know this? Does anyone care? I assume not, based on market evidence, but I can't help but wonder.

Speculation: this phenomenon traces not only to consumer ignorance, but also to modern attitudes towards houses as investments/commodities, not "homes." I believe that this would mesh with some of the above interpretations of the bubblesque housing market.

Posted by: JRoth on June 21, 2004 03:11 PM

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Much more on topic, it strikes me, Jim, that housing in any developed area is inherently inelastic in the short term. I can assure you that, in any area with existing property owners, it is effectively impossible to get even the simplest housing occupied in under, say, a year (18 months much more likely). More complex projects (such as would help NYC's situation) take more like 2-3 years.

I'm not trying to raise any debates about the role of rent control or anything; just clarifying that housing is simply not elastic, for fairly obvious reasons. In the exurbs, you can act a little faster, but there are inherent obstacles in urban housing independent of any regulatory regime.

Posted by: JRoth on June 21, 2004 03:18 PM

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How long are you going to own that property? The average is under 7 years- so why should you care about defects that only manifest after 10 or fifteen years. My wife's house is a great example- we had to have it replumbed after 4 slab leaks in a row after only 15 years. We then find out that they just unrolled the soft copper pipe and buried it with excavated debris- including large sharp rocks- Of course we could sue the builder- but wait he has been dead for five years. Rats. Six grand for nothing. Plus higher insurance from our lousy carrier- which did not *pay* a dime for the replumbing job. Now we have plumbing that at least can be fixed, but lord at what cost. Cheap construction. I build my own projects to last a long time as I do not intend to sell my properties.

Posted by: AllenM on June 21, 2004 04:19 PM

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Richard Green -

Urbanism should come into it too, eh? That is, in a place with pedestrian neighborhoods, you invest time in your social connections where you live. You can't change your café without changing your life.

Posted by: clew on June 21, 2004 04:55 PM

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"Much more on topic, it strikes me, Jim, that housing in any developed area is inherently inelastic in the short term. I can assure you that, in any area with existing property owners, it is effectively impossible to get even the simplest housing occupied in under, say, a year..."

Remember that prices largely are based on expectations, not just immediate supply/demand.

Today's demand rises to whatever it is -- if I know that for whatever reason supply is fixed and won't increase, I'm going to willing to pay a good deal more for an apartment than if I think a lot of supply is going to come on later with even a two- or three-year lag.

In any event, the main point is that as housing is neither liquid nor portable I doubt that the particularly hot housing localities in Calfornia reflect the national market any more than my part of Manhattan does. OTOH, the Economist's index does claim to reflect the national market.

Posted by: Jim Glass on June 21, 2004 05:31 PM

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Need to see this expanded: " I think we are in an interest rate bubble."
So the record low interest rates are inflated?! ( it's the only bubble I know) And is/are about to pop? ( what else do bubbles do?)
Try as I might, this one defeats me: "Alan, quit sucking on that bubble and let it be (grow a couple of % like Stephen says/wants)".
What could this mean?

Posted by: calmo on June 21, 2004 08:03 PM

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"I live in Boston, MA. If this ain't a housing bubble, we're still screwed. Housing prices are up by about 75% since 1997. 75%?!?!?! That's ridiculous! It's GOT to be a bubble."

I bought a house in Santa Cruz in 1999 for $199K. Similar houses are selling for about $730K now.

I expect my house to be about $350K next year.

Posted by: Dave Johnson on June 21, 2004 09:50 PM

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Jim Glass wrote, "I hate to get empirical but the Economist's home cost index says prices in the US now are only 10% above the norm, and have risen only 53% since 1997 -- that's just a bit over 6% annually. http://www.economist.com/displaystory.cfm?story_id=2736477"

But that's presumably averaged over the entire US. Clearly the interesting conjecture is not "is the US as a whole in a housing bubble?" but rather "are certain metropolitan areas in the US in a housing bubble?"

"If true, that's not much of a bubble. The story says the real bubbles are in other parts of the world."

They do say that prices in the US would have to fall 10% to return to the historical average. Because of the heterogeneous nature of the national housing market, it's reasonable to posit that the fall in certain cities would have to be greater.

The numbers on Britain are consistent with two econophysicists' claim that there's a bubble in the UK but not in the US.

Posted by: liberal on June 22, 2004 04:31 AM

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To Clew:

Yes, of couse you are correct. This is why the "match" between house and owner improves over time, and why there might not be an actual substitute in the rental market.

FWIW, I regularly check out house rents in my area (Montgomery County, MD), and on an after-tax basis, the cash flow cost of owning (including the opportunity cost of equity) would be less than the cost of renting even if mortgage interest rates rose to 7 percent, and maintenance costs were 3 percent of value per year. So while prices have risen a lot here, the market can be explained by fundamentals.

In fact, one of the reasons House Prices relative to rents in California are so high is the tax benefits of owner housing are higher there than anywhere else. State marginal tax rates are very high there, as are nominal incomes, which means that federal marginal tax rates are high. This means the mortgage interest deduction and absence of a tax on impited rent are very valuable. At the same time, property taxes are low (too low, in my view), so that the user cost of owning in California per dollar of value is very low. When you add to this the fact that the AMT does not generally bite the Mortgage Interest Deduction (or the tax free status of imputed rent), it is not surprising that prices in California are high relative to rents.

Despite this, prices in SF are "too high."


Posted by: Richard Green on June 22, 2004 07:12 AM

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Clearly the interesting conjecture is not "is the US as a whole in a housing bubble?" but rather "are certain metropolitan areas in the US in a housing bubble?"
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Why would that be the interesting thing? That's not what interests the Fed (or The Economist). If when Leamer says "We are in a bubble" the "we" refers to just him and his immediate neighbors, why would the rest of the world outside of SF care?

If we define "bubble" down to mean any little market in anything where prices seem largely out of whack, one can pick up the WSJ and read about a half dozen of them any time one wants.


Posted by: Jim Glass on June 22, 2004 07:48 AM

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Tauphin writes: "Your point that people are buying NOT because they think it's a good deal but out of desperation and fear that it will only get more ridiculous is another classic sign of a housing bubble."

Or it could be a rational prediction of future price changes. That logical step was just too fast.

Interesting discussion.

Posted by: JT on June 22, 2004 09:02 AM

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OK Jim you win. There is no national housing bubble. Only local metro volatility. Those guys in SF and San Diego should just wait (or move to South Dakota.) I am glad the 6% figure placates you, especially in your NYC apartment. I am swamped with this:
http://www.northerntrust.com/popups/popup.html?http://www.northerntrust.com/library/econ_research/weekly/us/pc060404.pdf
and a picture of our economy that shows increasing dependence on consumption and consumption that is increasingly tied to housing.
6% annual average increase over the last half century is a tad distracting from what you see out of your front room window, no?

Posted by: calmo on June 22, 2004 10:17 AM

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How is "the bubble" account for the report that recently (under Shrub, for some reason) more minority, immigrant, and otherwise formerly-impoverished classes have entered the ranks of homeowners (thereby becoming illiquid, upside down, and "house-poor") than at any prior time?

More homeowners would seem to me to be more demand and therefore lead to increased prices. But that's no doubt primitive analysis...

Posted by: Pouncer on June 22, 2004 10:55 AM

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Pouncer,

This surely has an impact, but do you think this is the primary driver? If so, why would we see price increases in all levels of home values rather than just entry-level? Are these new buyers the ones driving a $500K house to $600K in a single year?

Posted by: Keith on June 22, 2004 01:40 PM

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Last week I went residence shopping in the New York area. This includes Manhattan, Bergen County NJ and CT (the area close to NYC). In Manhattan, you cannot rent 1400 or even 1200 square feet for $3,500 per month unless you go north of 96th street. Moreover, the landlords want you to prove that the rent is only of your income. To get that much space in a condo you will have to pay over $1 million, and only outside of the hot areas. A new building under construction at about 75th street and Broadway is already rented. A two bedroom will cost you $6700 per month there. This information comes from an experienced real estate broker who very well connected to the latest information. However, the market for condos is softening (according to my broker) and it appears (at least in Manhattan) that the bubble is about to deflate. You can go across the river to NJ and knock about a $2,000 off your rent for the equivalent amount of space.

Posted by: A. Zarkov on June 22, 2004 03:15 PM

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To A. Zarkow

I lived in NYC all my life but recently moved to CA. While yes the rents are extremely high there (and here), in 2001 I was able to find a 1,000 square foot one bedroom on the upper east side for only $1,500. If you look around there are plenty of deals.

My apartment in SF is an extremely desirable area (near public tranport- a big deal), has a car garage, 2000 Square feet and antique interior for only $2,000 - no fee in order to move in unlike in NYC.

In my opinion, there is definetly an Ownership Bubble. In at least East/West Coast. Given these facts:

1) Rentals can be found for a fraction of what ownership goes for in both SF and NYC.

2) Everyone I talk with is convinced that home ownership is great deal and is either buying, saving to buy or owns.

3) Home prices contnue to climb while salaries remain stangnant.

4) Immigration and land scarcity can not account for all the gains, since there is an increase at all levels.

5) The newsmedia has no incentive to squash the bubble since real estate adverts is thier number one source of income.

6) The economist has been predicting a collapse for over a year and austrailia finally saw one - Alan Greenspan called it irrational exuberance in 1996! And that bubble went on for 5 more years.

7) It ony takes a few houses to go for below market value to have the entire thing spiral downward. I am convinced this bull market has 6 months more to go before a serious decline.

Posted by: Gregory on June 22, 2004 04:23 PM

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I lived in NYC all my life but recently moved to CA. While yes the rents are extremely high there (and here), in 2001 I was able to find a 1,000 square foot one bedroom on the upper east side for only $1,500. If you look around there are plenty of deals.

I think things have changed a lot since 2001. The Upper East Side is one of the cheaper neighborhoods south of 96th street, and that extra 200 or 400 square feet really increases the price. The buildings on the Upper East Side tend to be newer, smaller and more poorly constructed the buildings on the Upper West Side. I also lived in New York City for a long time and the Bay area as well. While SF is cheaper than NY now, the gap was narrower in 2000. The breaking of the tech bubble in 2000 did a lot to reduce rents in the Bay Area, especially in SF and San Jose. Not so for buying residential real estate which continues to soar since early 1998. I completely agree with all the items on your list. While it seems that the real estate bubble should deflate soon, you never can tell how long it will really take. But nevertheless the prices in NYC continue to astound me.

Posted by: A. Zarkov on June 22, 2004 06:53 PM

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Recent NY Fed study that debunks the notion of a housing bubble-- http://www.reuters.com/newsArticle.jhtml?type=reutersEdge&storyID=5485522

Posted by: John on June 22, 2004 07:17 PM

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Just wanted to put my two cents with hands-on real estate finance/accounting background.

1) Re: New Housing Prices - Developers love markets like these .. b/c it gives them the opportunity to raise prices at a moments notice.
Let's just say 30%-45% margins are the norm these days.

2) Re: Renting vs. Buying .. in San Jose you can still bargain for a nice (ie .. fairly new and mid-scale) 2 bedroom 2bath apartment 1,150 square foot apartment for around $1,350-$1,400/month ... tax equivalent mortgage (taking into account mortgage interest deductions) would be about $2,100/month which would only get you a $340,000 loan at 6.375% (no closing cost loan) ... with a $60K down payment would afford you
a decent condo (about 1,000 square foot or so) for $400,000. However, I'd take renting for now b/c taking into account real estate taxes, HOA fees, insurance and possibly PMI that $2,100 pmt balloons to closer to $2,700-$2,800/month. Thanks but no thanks. That extra cash flow is going directly into my 401K.

3) Re: Housing Bubble

With the Secondary Markets being responsible for $8 trillion of the nations mortgages ... and optimistic realtors dreaming about a $17 trillion market in the next decade? What's going to happen if the foreclosure rate is at 6% at that time? ... FNMA and Freddie Mac's got a $1 trillion default on their hands.
It would seem very ironic that the nation's mortgage debt is apparently in lock step with our own national debt. If this bubble is going to burst homeowners who bought at the peak will find themselves underwater ... and those with the cash to jump in at the bubble's bursting will find themselves richly rewarded during the next boom cycle.

Posted by: Renter on June 23, 2004 01:20 AM

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Jim Glass wrote, " 'Clearly the interesting conjecture is not "is the US as a whole in a housing bubble?" but rather "are certain metropolitan areas in the US in a housing bubble?" '
~~~~

"Why would that be the interesting thing?"

By "certain metropolitan areas," I meant "a substantial fraction of the national housing market."

Posted by: liberal on June 23, 2004 04:50 AM

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Liberal is showing Coastal bias. The only markets that are good bubble candidates are in New England and the Bay Area. New York, Washington, the Pacific Northwest and Southern California are expensive, but can be explained with fundamentals.

Everywhere else is still pretty inexpensive relative to incomes, particularly by world standards. And the vast majority of people live everywhere else.

Posted by: Richard Green on June 23, 2004 07:38 AM

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I believe Leamer is looking only at California housing markets, not at the country as a whole. A bubble seems more likely as a local phenomenon.

Posted by: Virginia Postrel on June 23, 2004 08:41 AM

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Richard Green wrote:
"Liberal is showing Coastal bias. The only markets that are good bubble candidates are in New England and the Bay Area. New York, Washington, the Pacific Northwest and Southern California are expensive, but can be explained with fundamentals."

I heard that story about internet stocks.

Try explaining San Diego housing prices with fundamentals. Doesn't work, unless by "fundamentals" you mean the willingness of buyers to take on as much debt as the lender will allow in the form of interest-only variable-rate loans.

Fundamentals are not an explanation for insane risk like that. The only explanation is buyers believing that rising home prices keep the dike high enough to keep rising interest rates from drowning the buyer.

Aside from all that, another factor that I believe will come into play is a reduction in construction costs (together with deflation of the outsized margins builders can command today). The rapid pace of homebuilding, combined with other pressures on the costs of building supplies (China growth, U.S. military demand in Iraq region) have temporarily pushed the cost of new homes up. I expect some deflation there as pressures ease.

Posted by: vote no on (almost) all CA propositions on June 23, 2004 12:31 PM

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Whether there's a bubble or not, there's a problem. I'm a professor at a public university in San Diego with a wife and two kids. On our income, we could afford to buy maybe 800 sq ft in a dicey neighborhood. If we were willing to commute more than an hour, we might be able to double that, but there's still no McMansions in our future. We're renting for now, and if things don't change in the next few years, we'll simply leave San Diego. I have a PhD in a computer related field, I could find another job. Bubble or no bubble, high housing prices are going to have a social cost.

Posted by: Rob Malouf on June 23, 2004 01:48 PM

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I just looked at the San Diego Union rental and owner sections.

A small house in an inland area rents for $2100 per month. It costs $550,000 per month to buy. Assume before tax cost of 6.5 percent, marginal state and federal tax rate of 30 percent, 1 percent property tax rate, and 10,000 per year for maintenance. I get a total cash flow user cost of owning of 38,875, while renting costs 25,200. This means the house must go up in value by 2.3 percent to make things even. If closing costs are another 10,000, then add a little more (which is amortized over expected length of tenure). So expectations about future house prices needn't be above the expected inflation for owning to be an even proposition to renting financially.

The most important financial characteristic of a house is its dividend--the rent you don't have to pay when you live in one. Security of tenure matters too.

Is housing too expensive in Southern California? Sure. Supply is so inelastic (largely because of regulation) that increases in demand turn into higher rents and therefore higher prices. Could house prices fall? Again, sure, if interest rates rise a lot or if constraints on supply are loosened or if employment fell substantially. But then prices would be reflecting changes in fundementals, not the deflation of a "bubble."


Posted by: Richard Green on June 23, 2004 02:04 PM

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Most people can't afford a half million dollar house. Won't that by itself limit demand, even if the population increases? That's what confuses me about supply-and-demand analyses of the real estate market. A large and growing chunk of the population is simply priced out of buying a house.

Posted by: Rob Malouf on June 23, 2004 02:18 PM

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Um, Richard, "inland" covers a lot of territory in San Diego county. You might be comparing apples to apple cores.

Try a more compact area, such as University City. The Union Tribune lists it in the "coastal" section, but don't get the idea that there is any beach property involved.

What rents for $2100/mo there sells for $650,000 and up. Add another $5200 in after-tax cash flow for interest and tax.

And your calculation of cash flow cost of ownership makes the dubious assumption that the owner gets the 30% tax deduction for all $41,000 in mortgage interest and property tax. Given typical San Diego income (crummy) and the high standard deduction, I'd say that a good $5000 to $7000 of the interest and prop tax aren't reducing taxes. Add another $1500 to $2100/year in after-tax cash cost for the owner.

Further, your figure for owner "cash flow" omits the principal payments on the mortgage. True, there is no net change in wealth, but the owner has to come up with another $6147 cash (for the $550,000 case; $7265 for $650,000).

Overall, then, the owner in your $550,000 case has to come up with $46,800 in after-tax cash versus $25,200 for the renter--a $21,600 difference ($52,000 and a $26,800 difference for the $650,000 case).

Those are rather significant differences given that median household income in San Diego county was only $46,503 in 2000 (and only $68,298 in the city with the 2nd highest income level in the entire county). http://www.signonsandiego.com/bookoffacts/county_overview/county_overviewindex.html

The fact is that the way people are managing to pay the prices they do on the salaries they earn in San Diego is that they are taking huge gambles with variable-rate loans. It is "fundamentally" unwise unless one assumes that home prices won't fall.

Posted by: vote no an (almost) all CA propositions on June 23, 2004 03:52 PM

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OK Dr. No.

I should have been more specific--I looked at Scripps Ranch.

Of course a household with income of $46,500 is not going to buy a $550,000 house--they won't qualify for it. I also doubt a landlord would let such a household rent at $2100 a month.

Because California has a high marginal state tax rate (9.3 percent for joint filers at taxable incomes above $78,266) even non-owners with incomes sufficient to buy a $550,000 house will likely have an incentive to itemize. And their state and federal marginal tax rate will likely exceed 30 percent.

As to your point that if prices fall renting would be better, well, of course. Because you are worried about it, you shouldn't buy. But a market that can be explained with prices rising at about the rate of expected inflation is not a market out of whack with fundamentals. We are not talking about dot coms with negative earnings here.

House prices in San Diego are expensive. They could certainly fall. But they are far easier to explain that the NASDAQ was four years ago, or house prices now in San Jose, or Boston, or London, or Munich or Tokyo.

Posted by: Richard Green on June 23, 2004 04:58 PM

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I just moved to San Diego ("North County Inland"). I am renting for $1500 a month (a 3 bedroom 2.5 ba townhouse, about 1500 sq feet). Roughly five or six comparable units in the complex are for sale for between $500K and $550K. With 10% down, I calculate that mortgage payment to be about $3100, plus $200/month HOA, plus $500 a month real estate tax.

So, $3800 versus $1500... bubble or not, not much of a choice there.

Posted by: Caleb on June 23, 2004 10:04 PM

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OK--if rents are really only $1500, San Diego is starting to look like San Jose, which means fundamentals can't explain prices.

Posted by: Richard Green on June 24, 2004 05:17 AM

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Richard Green wrote, "Supply is so inelastic (largely because of regulation)..."

No, the number one reason supply is relatively inelastic is that the supply of *land* is fixed.

Which is why you should read up on Henry George.

"Because California has a high marginal state tax rate (9.3 percent for joint filers at taxable incomes above $78,266) even non-owners with incomes sufficient to buy a $550,000 house will likely have an incentive to itemize. And their state and federal marginal tax rate will likely exceed 30 percent."

That's true. Don't forget---which most people seem to do---that they completely lose their deduction.

Posted by: liberal on June 24, 2004 05:23 AM

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Virginia Postrel wrote, "I believe Leamer is looking only at California housing markets, not at the country as a whole. A bubble seems more likely as a local phenomenon."

The article Brad cites from seems to be about California---not surprising, as it's from the _San Francisco Chronicle_. But a google search on
housing bubble boston "san diego" washington "new york"
found this link which features data from Leamer which is clearly national:
http://moneycentral.msn.com/content/Banking/Homebuyingguide/P37631.asp

Posted by: liberal on June 24, 2004 05:27 AM

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I have read Henry George. While there is a germ of truth in his writing, he is wrong about the inelasticity of land. (Ironically, the place that has tried Henry George Taxes--Pennsylvania--is a place with low land values.)

In most parts of the country where population is growing rapidly (think Texas, Nevada, Georgia, Arizona) land is very elastic. This is why even in the face of large population pressures, prices don't move as much as elsewhere--when demand goes up, values rise above replacement cost, and developers build until competition pushes prices down again.

The coasts are exceptions to this, because when prices rise, developers still can't build. Building permits in California are way behind household growth. The best work we have on this issue (by Steve Malpezzi, Ed Glaeser, Joe Gyourko and others) has shown that land use regulation is more important than the physical characteristics of land in determining supply elastictity.

As for tax deductions, yes, there is a phase-out, but it is not complete. Moreoever, the MID for a principal residence is still an allowable deduction for the AMT.

Posted by: Richard Green on June 24, 2004 05:42 AM

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Richard,

I noticed that you did your analysis on Scripps Ranch. Hello, neighbor!

We currently rent in Scripps a 4 bdrm, 1750 sq foot townhouse where our rent is $1625. The units seem to be recently priced around $550K. A similar unit (1725 sq ft) sold last spring at $342K.

I have done analysis similar to what you completed, and you are correct that the buy vs rent analysis still pointed to buying until about 6-9 months ago. Then the market moved from "hot" to "crazy". Your comparison to San Jose is apt--I lived there a few years ago.

Although this pricing is just a big annoyance to me, I think the real issue is how widespread the problem in other cities. Most real estate melt-downs are localized, but this one could have a larger scope. If so, what could be the impact to financial institutions nationally? I think that the very low interest rates that were put in place to fight the recession may have just pushed the problem into the future, and we may have to deal with some asset deflation in the next few years.

Posted by: Keith on June 24, 2004 12:25 PM

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Richard Green wrote, "While there is a germ of truth in his writing, he is wrong about the inelasticity of land."

No, he's not wrong; you just don't understand the meaning of Ricardian land rent.

In a place with lots of land, the amount of land is still in fixed supply. Whats changes over time is the value of the land rent associated with a particular parcel.

If you take a parcel in the middle of Texas with no good road next to it, then there's little Ricardian land rent associated with that parcel (at least, not much stemming from demand for residential housing).

If a suburb slowly grows out to the parcel, a road is built, etc, then there are more potential users willing to bid up the asking price.

Thus, while it's true that there is lots of unused land in the US---e.g. semi-dessert in Wyoming---that doesn't do you any good if you work in Boston.

The real point George made, of course, that land is (a) in fixed supply, (b) a natural resource that the person who "owns" the land had no hand in creating (that's apart from improvements, of course). All economists agree that most of Ricardian land rent can be taxed away with no distortionary effects whatsoever, because land is inelastic in supply. This would be (a) efficient (for the usual reasons that private collection of economic rents is inefficient), and (b) just, on net (insofar as landowners, on net, tend to be wealthier than nonlandowners).

This is one reason California will continue to do poorly as long as it doesn't revoke Proposition 13: the usual situation of the government handing landlords an annual subsidy equal to Ricardian rent minus property taxes on unimproved land is even worse (in terms of the fraction of land rent returned annually as property taxes).

Posted by: liberal on June 24, 2004 02:25 PM

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Keith wrote, "Although this pricing is just a big annoyance to me, I think the real issue is how widespread the problem in other cities. Most real estate melt-downs are localized, but this one could have a larger scope. If so, what could be the impact to financial institutions nationally?"

Exactly. That was the point of my first post to this thread: averaging out over the entire nation doesn't allow you to distinguish between all markets being just somewhat overvalued versus a fewer number of markets being very overvalued. In the latter case, there will be more defaults than the former.

Posted by: liberal on June 24, 2004 02:28 PM

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Probably a coastal phenomena. Fly-over country will be less effected. I'm familiar with Seattle and Portland areas having recently sold houses in both (are we selling at the top of a bubble or should we hang on for another year or three?). There are limits to new construction there that do not exist in Omaha, where we are now shopping for a house. Higher housing cost notwithstanding, it is likely that when this Omaha gig is over, I'll return to Portland area.

Recent article in the paper here points out that Omaha-Lincoln are gaining population while the rest of the state is losing. There are some very good housing deals out there if you are flexible as to where you live.

In the Omaha area, rents are still relatively high. $690/mo for 850SF apartment with a detached garage. This would make the payments on a 1200SF house with an attached 1 car garage ($110,000 house). We looked at a 2500SF with 2 car garage for $170,000 yesterday in very nice condition. We also looked at a 2900 SF house that had not been updated since it was built in the 60s: $140,000 and it may well go for less.

Our research in county tax records indicate that asking prices reflect less than 5% annual appreciation in the value of the house over the last 7-10 years.

Posted by: Robert Monical on June 24, 2004 05:53 PM

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For example
http://www.npdodge.com/idx_home.cfm?mls=0406525

Posted by: Robert Monical on June 24, 2004 06:00 PM

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There's the personal or private interest in the question 'Is there a housing bubble?' and one can go on to make a local decision about renting or buying. And there's the um... academic question 'Is there a bubble?' where no personal financing need occur and we are just asking for the hell of it.( Didn't I say "academic"?) Well almost-- Asking out of a modest interest in economics.
Caleb - (I too am renting) So if the $500G house is $700G next year, your $50G investment plus the mortgage/rent difference ( ~$25G) is still a tidy net of $125G, no? Too bad you can't find that extra $2300/mo. Sure, it can go the other way too. But is hasn't and it hardly ever has in the past and therefore, the hype goes, it won't.
This picture is entirely local but there is a broader view that I find very convincing here:
http://www.northerntrust.com/popups/popup.html?http://www.northerntrust.com/library/econ_research/weekly/us/pc060404.pdf

Posted by: calmo on June 25, 2004 12:36 AM

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liberal

I am a great admirer of Ricardo. That doesn't mean he was right about land rent (or about the Labor Theory of Value) for that matter. It wasn't his fault--he came before the marginalists. I am guessing that you haven't read economic theory from the last, oh, 100 years.

Piet Eicholz did some interesting work measuring property values in central Amtredam going bank 200 years. His finding--on an inflation adjusted basis, land prices have basically not changed over that period of time. The reason--when land gets too expensive in one area (unless it is a truly unique place), people move to another so as to economize on land prices.

So what about Boston? Yes, I have already noted that land is inelastically supplied there--but the best empirical evidence we have shows that it is land use regulation, rather than physical scarcity, that has made it inelastic. Similarly in California, regulation makes it difficult to build new housing (and Prop 13 is capitalized into land prices).

So, why don't you read something new (you can google the people I have listed in previous posts--also look at work by Ed Mills (the father of modern urban economic), Dennis Capozza, Pete Colwell and John Kain. If after that your religious fervor for Henry George remains in tact, so be it.

Posted by: Richard Green on June 25, 2004 06:27 AM

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How is "the bubble" account for the report that recently (under Shrub, for some reason) more minority, immigrant, and otherwise formerly-impoverished classes have entered the ranks of homeowners (thereby becoming illiquid, upside down, and "house-poor") than at any prior time?

More homeowners would seem to me to be more demand and therefore lead to increased prices. But that's no doubt primitive analysis...

英国留学

Posted by: 英国留学 on June 25, 2004 08:46 PM

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Richard Green wrote, "I am a great admirer of Ricardo. That doesn't mean he was right about land rent (or about the Labor Theory of Value) for that matter."

Just because he's wrong about the Labor Theory of Value doesn't mean he's wrong about land rent. That's a logical fallacy.

"It wasn't his fault--he came before the marginalists. I am guessing that you haven't read economic theory from the last, oh, 100 years."

And I'm guessing you don't mind publically displaying your ignorance of modern economic theory; modern textbooks still say Ricardo's theory of land rent is correct.

Please give a citation showing that the concensus of modern economics is that the notion of Ricardian land rent is wrong.

For example, here's a link with an excerpt from Samuelson's textbook agreeing with Ricardo's theory:
http://www.cooperativeindividualism.org/samuelson_on_rent_and_henry_george.html

Here's another link from a modern economics site:
http://www.econlib.org/library/Enc/bios/Ricardo.html

Quote from the last citation:

"One of Ricardo's chief contributions, arrived at without mathematical tools, is his theory of rents. Borrowing from Malthus, with whom Ricardo was closely, but often diametrically, associated, Ricardo explained that as more land was cultivated, farmers would have to start using less productive land. But because a bushel of corn from less productive land sells for the same price as a bushel from highly productive land, tenant farmers would be willing to pay more to rent the highly productive land. Result: the landowners, not the tenant farmers, are the ones who gain from productive land. This finding has withstood the test of time. Economists use Ricardian reasoning today to explain why agricultural price supports do not help farmers per se but do make owners of farmland wealthier. Economists use similar reasoning to explain why the beneficiaries of laws that restrict the number of taxicabs are not cab drivers per se but rather those who owned the limited number of taxi medallions (licenses) when the restriction was first imposed."

Posted by: liberal on June 26, 2004 12:01 AM

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In Chapter I, Section IV of the third edition of his Principles, Ricardo explains that prices cannot be expected to be proportional to labor values. Why should one believe that Ricardo is wrong about the labor theory of value here?

Posted by: Robert on June 26, 2004 01:33 AM

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liberal

Ricardo's concept of rents in the face of inelastic supply are correct. But urban land is not inelastic (except in some rare instances); places can substitute for one another, so the opportunities for economic rents in most places is limited.

I have given a number of citations on the theory of urban land. Start with William Alonzo (his paper is quite simple). He shows that (one) in an urban land context, economic rents get bid away through competitive pressures and (two) land prices send signals that lead land to be used at its highest and best use. Certainly the entity that winds up owning a central location could reap a one-time windfall, but that would only be ex-post--ex ante expectations about where intensive development will occur have risk attached to them.

If one bid away all differences in land values through taxation, there would be no mechanism to channel capital improvements to land to their best use (unless you think central planners can do the job). I cannot fathom how this would be good policy.

You think urban land is inelastic--I disagree. Whether Ricardo's argument applies turns on the correct answer to that empirical question. I have cited a number of empirical papers--you have cited none.

Finally, if you are going to insult someone who is trying to engage in an argument with you, you should at least have the guts to put your name (or email address) behind the insult.

Posted by: Richard Green on June 28, 2004 10:15 AM

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Also see

www.nber.org/~confer/2002/si2002/wheaton.pdf

Robert--good cite and good point.

Posted by: Richard Green on June 28, 2004 10:38 AM

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Richard, since you are still on this thread, I thought I'd fill you in on Calif income taxes.

You wrote:
"Because California has a high marginal state tax rate (9.3 percent for joint filers at taxable incomes above $78,266) even non-owners with incomes sufficient to buy a $550,000 house will likely have an incentive to itemize."

Yes, there are high marginal rates, but Calif taxes are also highly progressive. Our plain-vanilla state return (2 adults, 1 dependent, std deduction, etc.) last year had an adjusted gross income of just under $90,000 and our state tax bill was under $4000. Needless to say, we took the $9500 std deduction on the Fed return.

Now, you made the argument earlier that households earning the median income (currently $54,500) would not be buying a $550,000 house (not much above the median home price of $527,000 in April). True. However, the buyers also are not households that earn the $125,000 that it would take under conventional lending practices.

Note this astounding claim from yesterday's S.D. Union Tribune: "As many as 75 percent of all buyers are getting interest-only loans, said Karen Peterson, president of the San Diego Association of Realtors"
http://www.signonsandiego.com/uniontrib/20040627/news_1h27afford.html

The S.D. housing market doesn't HAVE to pop, but lenders have pumped buy-side pressure past sensible limits. If there is a pop, it could be very painful.

Posted by: vote no an (almost) all CA propositions on June 28, 2004 05:20 PM

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Actually, some of the information in the thread suggests to me that S.D. has become more like San Francisco and San Jose--that fundementals can't explain house prices. I wrote back in 2000 that San Jose house prices should have fallen in the succeeding years--but they haven't yet. It is all very strange.

Interest Only Loans with floating rates actually concern me a lot--they are hazardous to household balance sheets in all sorts of ways.

But my broarder point--that the Chicagos, Philadelphias and Houstons of the world have prices that can be explained reasonably well--remains. I alos believe it is no coincidence that the most heavily regulated property markets are also the most expensive.

Posted by: Richard Green on June 29, 2004 08:56 AM

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Richard, I appreciate that you are willing to adjust your opinion on the San Diego market in response to new information.

Based on your initial buy-vs-rent analysis for San Diego, I fear that your approach is biased toward ownership even when you are using good numbers for equivalent rental cost.

I say that for two reasons.

The first, and least important of the two, is that you left out some important additional costs of ownership. PMI, the higher cost of homeowner's insurance (fires plus earthquakes in So. Cal.) vs. renter's insurance, HOA fees, and (often) gardener service provided for the renter by the landlord. Those items easily reach $5000/year for the Scripps case we discussed. You probably get a pass on this, thanks to the $10,000 you allowed for "maintenance", but it may well be that HOI costs are much higher than I'm estimating (349 homes were destroyed in Scripps Ranch by the big 2003 fire).

The second and more important reason is that you aren't considering the added risk to a household of putting a lot of money into an illiquid, highly leveraged investment.

In the days of old when knights were bold and homebuyers put 20% down and lenders offered fixed mortagage payments limited to 25% of gross income, moderate drops in home prices were tolerable and homeowners had plenty of slack in the budget to save for a rainy day.

Today, down payments have shrunk, lending ratios commonly reach 40%, and two-income households have little left over for savings.

Recall that you found a $550,000 purchase price supported by fundamentals when the equivalent rent was $2100. Your example required the buyer to come up with $46,800 after-tax dollars per year to stay in the home vs. $25,200 per year for the renter. Your analysis appears to focus on whether or not economic considerations and the other benefits of home ownership justify the additional $21,600 per year. What you might be missing is the growing number of buyers that are stretching so far to make the purchase that they run a substantial risk of losing their homes.

I suspect (without having attempted to investigate) that the same risky lending/borrowing practices taking place in the frothiest areas are taking place also in many of the "Chicagos, Philadelphias and Houstons of the world" that "have prices that can be explained reasonably well".

The ratio of median home price to median household income is a good rough indicator of the degree of risk-taking. I would want to consider that ratio together with overall rates of home ownership in an area. For example, a home/income ratio of 9.0 is more alarming in San Diego than in New York City, because, according to the 2000 census, 50% of SD housing units were owner occupied versus 30% for NYC.

Posted by: vote no on (almost) all CA propositions on June 29, 2004 02:57 PM

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It is very interesting to hear about housing situations in different cities. I live in Las Vegas. Housing prices have gone up 50% in the last year. If you read the stats I think they say 30%, however, that is an average. I know from looking at houses and talking to people all day long that it is 50% or more. The only thing people talk about here is how much their homes are worth. Everyone I've talked to has refinanced and blown the money on stuff like vacations, sailboats, SUV's. I know a 26-years-old who owns 8 properties. That is just an example of many people I've talked to who own 3,4,or even 5 homes. These people are not realators,mortgage brokers or not even investors (I guess they are now). The point is, people here are going manic over real estate. I know of people camping out for days in order to get a chance to buy a new tract home community, because they know it will gain value very quickly. Most of these people are not buying these homes to live in, it's an investment boom. Sure, if housing loses value not everyone will drop them like stocks, but I think many will try. 5000-6000 people move here each month, supposedly(that is what they tell us anyway,whoever "they" is).One in 3 of these people are from southern California. People in California are selling their homes for enormous amounts and moving here. In the classifieds there are pages of rentals, houses and apartments. If there is such a mass immigration why are there so many rentals available? I saw a couple on the tv show House Hunters sell their CA prop. and move to Vegas to buy 2 homes, one for speculation. These Californians are driving up the prices so much here. There is a serious mania going on here. I was caught up in it for a while. The mainstream idea here is you have to buy something now! or you will be priced out of the market. I got approved for 240,000. I can't buy squat for that now. I Keep in mind that this was a very affordable place to live even 2 years ago. You could buy a 1600sq.or so ft home for around 150,000, now it would sell for over 3oo,000. I've decided not to buy for the time being. It's just too crazy. House were being sold in less than a day with multiple offers as recently as a couple of weeks ago. I think it might have cooled a bit. People say I'm crazy for not buying, "Prices are just going to go up and up". It just doesn't feel right. I'm just going to see what happens like all of you.

Posted by: Emily on July 2, 2004 12:29 AM

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It is very interesting to hear about housing situations in different cities. I live in Las Vegas. Housing prices have gone up 50% in the last year. If you read the stats I think they say 30%, however, that is an average. I know from looking at houses and talking to people all day long that it is 50% or more. The only thing people talk about here is how much their homes are worth. Everyone I've talked to has refinanced and blown the money on stuff like vacations, sailboats, SUV's. I know a 26-years-old who owns 8 properties. That is just an example of many people I've talked to who own 3,4,or even 5 homes. These people are not realators,mortgage brokers or not even investors (I guess they are now). The point is, people here are going manic over real estate. I know of people camping out for days in order to get a chance to buy a new tract home community, because they know it will gain value very quickly. Most of these people are not buying these homes to live in, it's an investment boom. Sure, if housing loses value not everyone will drop them like stocks, but I think many will try. 5000-6000 people move here each month, supposedly(that is what they tell us anyway,whoever "they" is).One in 3 of these people are from southern California. People in California are selling their homes for enormous amounts and moving here. In the classifieds there are pages of rentals, houses and apartments. If there is such a mass immigration why are there so many rentals available? I saw a couple on the tv show House Hunters sell their CA prop. and move to Vegas to buy 2 homes, one for speculation. These Californians are driving up the prices so much here. There is a serious mania going on here. I was caught up in it for a while. The mainstream idea here is you have to buy something now! or you will be priced out of the market. I got approved for 240,000. I can't buy squat for that now. I Keep in mind that this was a very affordable place to live even 2 years ago. You could buy a 1600sq.or so ft home for around 150,000, now it would sell for over 3oo,000. I've decided not to buy for the time being. It's just too crazy. House were being sold in less than a day with multiple offers as recently as a couple of weeks ago. I think it might have cooled a bit. People say I'm crazy for not buying, "Prices are just going to go up and up". It just doesn't feel right. I'm just going to see what happens like all of you.

Posted by: Emily on July 2, 2004 12:30 AM

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It is very interesting to hear about housing situations in different cities. I live in Las Vegas. Housing prices have gone up 50% in the last year. If you read the stats I think they say 30%, however, that is an average. I know from looking at houses and talking to people all day long that it is 50% or more. The only thing people talk about here is how much their homes are worth. Everyone I've talked to has refinanced and blown the money on stuff like vacations, sailboats, SUV's. I know a 26-years-old who owns 8 properties. That is just an example of many people I've talked to who own 3,4,or even 5 homes. These people are not realators,mortgage brokers or not even investors (I guess they are now). The point is, people here are going manic over real estate. I know of people camping out for days in order to get a chance to buy a new tract home community, because they know it will gain value very quickly. Most of these people are not buying these homes to live in, it's an investment boom. Sure, if housing loses value not everyone will drop them like stocks, but I think many will try. 5000-6000 people move here each month, supposedly(that is what they tell us anyway,whoever "they" is).One in 3 of these people are from southern California. People in California are selling their homes for enormous amounts and moving here. In the classifieds there are pages of rentals, houses and apartments. If there is such a mass immigration why are there so many rentals available? I saw a couple on the tv show House Hunters sell their CA prop. and move to Vegas to buy 2 homes, one for speculation. These Californians are driving up the prices so much here. There is a serious mania going on here. I was caught up in it for a while. The mainstream idea here is you have to buy something now! or you will be priced out of the market. I got approved for 240,000. I can't buy squat for that now. I Keep in mind that this was a very affordable place to live even 2 years ago. You could buy a 1600sq.or so ft home for around 150,000, now it would sell for over 3oo,000. I've decided not to buy for the time being. It's just too crazy. House were being sold in less than a day with multiple offers as recently as a couple of weeks ago. I think it might have cooled a bit. People say I'm crazy for not buying, "Prices are just going to go up and up". It just doesn't feel right. I'm just going to see what happens like all of you.

Posted by: Emily on July 2, 2004 12:30 AM

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