The Future of Real Estate

Brad DeLong says home prices won't fall all the way back to their 2000 values: "We aren't buiding more superhighways, there are no major transportation improvements on the horizon, America is filling up, and so land-value gradients are on the rise. If the income distribution continues to erode, we will wind up with higher prices for scarce positional goods--chief among which is location, location, location." That sounds correct to me, but of course it's locally specific -- the huge price run-ups in, say, Arizona didn't have much to do with objective supply constraints and many of these far-flung exurbs where we're seeing a lot of foreclosures right now aren't especially well located.

But beyond the medium-term outlook for home prices (which even on the "optimistic" view isn't very good in the aggregate), this is yet another reason to rethink some of our policies regarding land use. As Kevin Drum says, the idea that home prices won't crash all that much is appealing, but the prospect of ever-higher prices for housing over the long run is a bad thing. And it's not as if it would be impossible for more people to fit into, say, DC -- the main supply constraints are regulatory in nature and the regulations could be relaxed. Similarly, Manhattan's not about to be criss-crossed with expressways, but NYC-related congestion could be ameliorated through congestion pricing if the State Assembly weren't being so brain-dead. There are ways to make it affordable for people to live within a reasonable travel time from where they want to go, it's just a question of whether or not we want to do those things. Some of those things would cost money (more transit) or require fees (congestion pricing, higher prices for street parking) but others would be deregulatory measures that could greatly increase the efficiency of our investments in the built environment. And the overall implication for our quality of life are large.

Comments

Ack -- yes yes yes but a big no too. Some of them are deregulatory measures, but others are regulatory measures to make things more affordable, and to create walkable communities, etc. There is a sad libertarian fantasy that it's all nimbyism and nastiness that creates regulation that stops the wonders of the market creating dense communities. This is crap. Time horizons, collective action, etc. etc. all mean that you need decent regulations to create a decent built environment. Plenty of regulations need to go, but plenty of others will need to come, to get things done right. Calling for nothing but relaxation will make things much less good than they could be, and may very well make them much worse than they are now.

Posted by david | April 9, 2008 12:58 PM

European cities are probably a good barometer for guessing how far down prices will go. Lots of them have great mass transit and all the other doodads that people want here to make cities livable, but places like London and Paris all still crazy expensive. Even non-chic places like York in England or Rennes in France are only a bit less crazy expensive.

Affordable housing like 1955 isn't coming back.

Posted by Jeffrey Davis | April 9, 2008 1:02 PM

Would congestion pricing really solve NYC's problems? It seems that a lot of the mess is due to people commuting to work. You'd need a significant congestion tax to push people off the roads, and that would largely push them into public transportation, which is limited too--- there are only so many buses and train tracks.

And once you do that, i.e., push people into a situation where they have to take overcrowded public transport to work, aren't you just changing the goal posts? The same mass of people will still seek to make their lives better by competing over the smaller number of close-in properties where public transportation is best, etc. Prices will be high, people will be less happy, but I suppose the roads will be clearer.

Maybe a few people will start to telecommute, but that begs the question: if you can work from home, why live near NYC at all? Let's just adopt a massively far-flung rural/exurban lifestyle where we never need to go into the city and can comfortably drive our cars everywhere. Unfortunately, that doesn't seem particularly desirable either for cities (which depend to some extent on that commuter business to justify their expensive downtowns), or from a transportation/oil policy perspective.

Posted by SomeYoungGuy | April 9, 2008 1:11 PM

Matt,
Thoughts on raising the builing height limit in DC?

Posted by Dave | April 9, 2008 1:12 PM

"Similarly, Manhattan's not about to be criss-crossed with expressways. . ."

True, but making the Henry Hudson Parkway / West Side Highway continue as a limited access highway all the way downtown would be awfully nice and could probably actually be done without impinging too much on existing real estate. As it is, West Street is terribly jammed a lot of the time. Some sort of crosstown expressway at 125th street would be awfully nice, too, but less feasable.

Posted by Galen | April 9, 2008 1:15 PM

It would seem the thing to do would be to create more urban centers if there truly is a high demand for them, rather than trying to squeeze people into the already very high priced ones that exist. There's still plenty of land, and there is no reason that we can't have a situation with many slightly smaller but still urban hubs in high population parts of the country.

Posted by lfv | April 9, 2008 1:21 PM

The problem with Brad's argument is that those basic demand factors would also drive up rents. And in fact we're been seeing a historic increase in price/rent ratios in the last 7 years. In many housing bubble cities rents have barely kept place with inflation, which prices have increased 10-20% a year, for years.

Put in the practical terms of my own DC apartment, when I moved here in 2002, a two-bedroom condo in my neighborhood (Adams Morgan) was about $250,000 to buy, compared to $1700 a month to rent (in my building). Today, a two-bedroom Adams Morgan's condo is $500,000-$700,000 to buy, compared to my $2000/month rent. And rentals aren't even as scarce to find as they were when I moved here in 2002 - we negotiated $300/month off our rent because the apartment building had most of its two-bedrooms vacant. This is hardly a story where increased demand for housing drove up prices by over 100% in six years.

Tokyo has far higher population density than any U.S. city, and 'we're out of land' certainly didn't stop their massive housing bubble bust. Nor did NYC's land density stop the the 1980s real estate bubble there from bursting. Or LA in 1990.

Posted by Matilde | April 9, 2008 1:22 PM

I think that the kind of real estate DeLong is talking about-- intown and inner suburb single-family homes, condos, townhouses, etc. was underpriced in the mid to late 90's-- partly because of lingering effects of overbuilding in the late 80's and partly because a lot of urban districts were hitting the inflection point between slow growth and fast growth. But where it will go from here isn't obvious.

One problem is that the new investment and infrastructure needed to support higher-density housing is very expensive. Who's going to invest in it? And who's going to be able to afford the final product?

Posted by MattF | April 9, 2008 1:22 PM

Any guesses what book #2 is going to be about?

The moment Heads in the Asphalt shows up on Amazon, I'm preordering.

Posted by lemuel pitkin | April 9, 2008 1:23 PM

Any guesses what book #2 is going to be about?

The moment Heads in the Asphalt shows up on Amazon, I'm preordering.

Posted by lemuel pitkin | April 9, 2008 1:26 PM

Brad DeLong makes a really good point, but I also agree with MY's clarification.

As a positional good, I think we'll see people bidding more and more of their income on property location. This should drive up the cost of property in comparison to income. On the other hand, there is no reason for the value of property to rise in comparison to the cost of rental because the expectation of capital growth built into current housing prices was unrealistic. You could model the shift in the value of location as something increasing slowly as a percentage of people's income over time, but this is not a geometric progression- it terminates at 100% and slows down much sooner, obviously. So the geometric growth in property values cannot exceed the increase in income, even if we get a linear shift in the % of income dedicated to property.

But this upper limit could take a while to reach in desirable locations if the elite's share of national income continues to grow for a while. So property in the best locations could be a pretty good 20 year investment.

Of course this does nothing for the exurb locations we are talking about, like Arizona or the inland empire in souther CA. Those were always terrible bets. Unfortunately, for precisely the same reason (stupid location), there's no real value to be had in picking up deals in those spots for prospective homeowners. Oh well.

The best bet is to use better civic management to find ways to make these desirable locations in and of themselves. If all the people living in the inland empire didn't have to commute to LA, but could work near where they live, that would be a huge improvement. All the transportation improvements in the world won't get around the fact that there is no reason (and it's hugely inefficient) for 1M people in the inland empire to commute 50 miles one way each day. Why can't they just have a business/cultural center of their own?

Posted by mpowell | April 9, 2008 1:34 PM

One problem is that the new investment and infrastructure needed to support higher-density housing is very expensive.

Wrong.

It is *much* cheaper to provide residential infrastrucutre at high densities, than low. Where do you find people living without sewer connections, because they're unaffordable -- outer suburbs and exurbs. Etc.

High-density housing is also generally cheaper to construct than detached houses -- or would be if it weren't for the regualtory constraints MY rightly emphasizes. There is a reason that all over the world, throughout the modern era, immigrants, workers and the poor have lived in big cities: It's cheaper.

Posted by lemuel pitkin | April 9, 2008 1:34 PM

I think David is correct that new land use models require a combination of new regulations and relaxation of some existing regulations.

The problem I see, however, is that land use regulation as currently practiced is largely a matter of local government. Unless there is a move toward a regional model, the required regulatory coordinantion necessary for smart land use planning cannot be achieved. As soon as you start talking about regional land use solutions, however, political turf battles ensue and nothing changes.

Posted by dizzyg | April 9, 2008 1:41 PM

Unless there is a move toward a regional model, the required regulatory coordinantion necessary for smart land use planning cannot be achieved.

Not necessarily. Lots of jurisidctions cripple themselves with restrictions on mixed-usd development, over-strict height limits, excessive parking requirements, etc. No coordination needed to fix that stuff.

Posted by lemuel pitkin | April 9, 2008 1:48 PM

"Brad DeLong says home prices won't fall all the way back to their 2000 values"

Did any of you seriously think that they would?

What about the effect congestion pricing would have on NYC's retail economy? Raising the bridge toll from $6 to $8 has already gotten me to reduce the frequency of my trips into Manhattan -- what's the point of paying $8 in tolls to buy a $7 pound of coffee from Zabar's? Through a congestion fee on top of that and I'm sure you'll chase off more retail customers.

Posted by Fred | April 9, 2008 1:50 PM

First, America as a whole is not remotely close to "filling up". There are conditions of land scarcity in certain local circumstances (e.g., within a certain distance of a particular existing city center, or a particular natural attraction, or so on), but overall we have plenty of room to house lots more people inside the United States. Indeed, our population would have to go up a factor of something like 3.5 to match the population density of the EU (let alone the the most dense countries in the EU, which are themselves 2-4 times higher than the EU as a whole). Not that such densities should be our goal, but we just aren't anywhere close to some sort of fundamental constraint.

Second, one should expect home prices to go up at least with inflation, probably plus a little since luxury is a decent-sized component of housing already and likely to grow. And such moderate home price increases should not be considered a "bad thing".

Posted by DTM | April 9, 2008 1:51 PM

Regional's good, but as Lemuel said, you can do a lot with the patchwork quickly.

Among the things one could add in to make for a better place, density bonuses for mixed-use, TOD, brownfields, affordability especially, historic preservation, targeted greenspace bonuses, new markets credits expanded, entitlement help on all these too, the list is pretty obvious, all could be brought online locally in lots of places. The key is to have public policy avoid a bubble of luxury condo and high end retail feeding it, which could lead not just to a speculative bubble but also drive the kind of sprawl you're trying to fight in the first place.

Posted by david | April 9, 2008 2:04 PM

[i]Not necessarily. Lots of jurisidctions cripple themselves with restrictions on mixed-usd development, over-strict height limits, excessive parking requirements, etc. No coordination needed to fix that stuff.[/i]

This is true, but it is also my point. What you call for is a patchwork regulatory overhaul that requires each self-interested local agency, acting alone, to "fix" the regulations you cite. Increasing density in Alexandria while promoting sprawl in Leesburg does not improve on current conditions.

Posted by dizzyg | April 9, 2008 2:05 PM

Fred, Zabar's is above the hypothetical congestion zone, since it's on West 80th St.

And while you may go in less, other people who actually have important business in NYC and/or live there will be able to go about their business much more quickly and efficiently while raising funds for needed public infrastructure. In need of a pound of coffee from Zabar's? They ship, and I'm sure shipping is less than an $8 toll.

Cripes, Fred, I'm busy and didn't want to post, today, but that comment of yours was way too ignorant to let go.

Posted by Tyro | April 9, 2008 2:08 PM

The State legislatures are the primary causes of our land use disasters -- too corrupt and too incompetent.

Federal government should use Commerce clause to strip land use powers from State governments and give it to local (county ) governments.

Posted by Don Williams | April 9, 2008 2:12 PM

While it seems certain for various reasons that prices will not fall back to 2000 levels. I think they actually will, but the mechanism is not laid out clearly by either DeLong or Drum.

The key is that there is every indication that prices will stagnate for a long period of time until prices return to the inflection point between renting/owning.

Everything I have read so far suggest that we are likely to a price drop of 20% off peak (2005) during the current period of correction. That would only take prices back to 2004 levels. But after that, it seems likely from everything I have read that prices will stagnate with zero or just slightly negative growth out until 2012-2015. At which point, accounting for inflaction, prices will be back close to 2001 levels or so. And then after that, they are likely to return to historical growth, which I believe is 3-5%.

Posted by Bubba | April 9, 2008 2:19 PM

Tyro,

Good to know that Zabar's would be above the proposed congestion zone, but the broader point stands: If you make it more expensive to go somewhere, people will spend less there.

Yes, Zabar's delivers. But I want my coffee fresh. I can spend $12 on a pound of Coffee Labs or Whole Foods coffee here on the mainland and it will still cost me less than a $7 pound of Zabar's. Similiarly, if I and my domestic partner are considering going out for dinner, and we think of one of our favorite Manhattan restaurants, we've got to add $8 to the cost. If we had Yglesias money and were planning to spend $600 at Per Se, $8 would mean much, but if you're planning to spend $40 or $50, that's a lot, on a percentage basis.

In any case, the toll increase is the work of the Port Authority's decades-long mission creep, including its initial building of the World Trade Center (which was designed to increase traffic to lower Manhattan).

Posted by Fred | April 9, 2008 2:32 PM

Federal government should use Commerce clause to strip land use powers from State governments and give it to local (county ) governments.

That's our Don -- reliably insane.

In the United States of America, on the planet we know as Earth, land-use decisions are made mainly at the city/town level, and secondarily at the county level. State governments play essentially no role at all.

Posted by lemuel pitkin | April 9, 2008 2:33 PM

Bubba,

The long-term average appreciation of real estate takes into account both booms and busts. So a reversion to the mean after a significant decline (one which will probably overshoot its fundamentals, just like the boom did) will probably be followed by higher annual appreciation than 3%-5%.

Posted by Fred | April 9, 2008 2:36 PM

Raising the bridge toll from $6 to $8 has already gotten me to reduce the frequency of my trips into Manhattan

If I weren't already a big supporter of congetion pricing, reducing the chacne of running into Fred would have me sold. (Altho I'm more of a Fairway guy.)

Seriously, as Tyro says, reducing the number of people driving into Manhattan to buy a pound of coffee is *exactly the point* of congestion pricing. Frees up the roads for trips with a higher value, and/or for which transit is not a viable substitute.

Why is it that conservatives can understand the value of price signals for everything except driving?

Posted by lemuel pitkin | April 9, 2008 2:42 PM

I find it interesting that no one is mentioning preferences among the general public. Most of our major cities have lost large chunks of their population over the past 50 years. Philly, where I live, went from over 2 million to 1.5 and be most accounts it's still shrinking even as our downtown has prospered.

So while there may not be much room left in the downtowns, there is certainly plenty of room in the adjoining neighborhoods for dense, transit oriented development. The major problem isn't even infrastructure, it's public attitude towards urban living.

Posted by Roman | April 9, 2008 2:44 PM

No, it isn't. Prices are higher for dense TOD in walkable communities, because demand is greater than supply. There's already plenty of demand from the public.

Posted by david | April 9, 2008 2:48 PM

Similarly, Manhattan's not about to be criss-crossed with expressways, but NYC-related congestion could be ameliorated through congestion pricing if the State Assembly weren't being so brain-dead.

Sorry to be ad hominem here, but it ain't the state assembly that's being brain dead about NYC-related congestion.

It seems to me that Manhattan is actually not the most congested part of NYC -- if ya wanna deal with the congestion that affects commuters in the NYC area, I think you need to do something about the BQE, the LIE, and the Staten Island Expressway (where the actual big-time traffic jams are) -- not to mention improving bus service (once you get to a train or a subway, it's easy and time-efficient to get around using public transport in the NYC area but the trains and subways don't take you everywhere in the outer-boroughs or the suburbs nor do they run frequently enough) so that people don't have to drive (maybe some more park and rides in the boroughs and the 'burbs like DC has?).

I'm not saying it's a picnic to drive in Manhattan (and it's h-e-double-hocky-sticks to park there), but when I'm faced with having to drive between Brooklyn/Queens/Long Island and NJ, there is far less traffic going through Manhattan than Staten Island and the real bottle-neck (if I avoid Staten Island) is the LIE, which has mysterious, semi-permenant traffic jams that have no obvious correspondence to actual potential causes of traffic slow-downs).

Posted by DAS | April 9, 2008 2:49 PM

By the way, for now at least you don't even need to spend a lot creating new urban centers, since there are plenty of old urban centers currently operating well under peak capacity. That is thanks largely to the depopulation caused by the mass contraction of various manufacturing industries in the second half of the Twentieth Century, and you can find such post-industrial cities through much of "flyover country".

In other words, there is plenty of room for people from DC or NYC to move to, say, Pittsburgh, and cut their housing costs by several factors (including for large historic homes in walkable neighborhoods with convenient public transit options to the local employment centers). And in fact these cities also tend to have generous and underutilized infrastructure and cultural amenities for cities of their current size (another legacy from their peak days). And their economies are being rebuilt on alternative models, which in many cases have held up particularly well recently thanks to not really participating as much in the housing bubble.

But of course I have no idea if people can be convinced to move from places like DC or NYC to places like Pittsburgh, no matter how attractive that prospect would seem to be on paper. And that I think is the basic question for these high-priced markets: if an exodus to underutilized post-industrial cities does start in response to the recent hyperappreciation in those markets, then I think a major price correction in those markets (even if it is the slow form of a major correction, meaning home price appreciation lower than inflation) will in fact happen until that differential is brought back to a more reasonable level and the exodus halts.

But if that exodus to "flyover country" never materializes, then DeLong may well be right about such a correction in high-priced markets never completely happening. Which is fine--that would just be people revealing an awfully strong preference for remaining in these high-priced markets, despite what that means for their housing costs.

Posted by DTM | April 9, 2008 2:54 PM

DAS-

Only two percent of the people driving into the congestion zone live in Manhattan, and only 45 percent live in New York City. So the congestion fee would reduce traffic in all the areas you're talking about.

Posted by lemuel pitkin | April 9, 2008 2:59 PM

Somewhat obviously, people need to specify whether they are talking in real or nominal terms when they talk about home appreciation rates. As Shiller and others have shown, the long-term rate of home appreciation (controlling for various factors) is quite low in real terms--like maybe 1% or less.

Which doesn't make home ownership a bad investment, since of course you have to factor in the implied rent savings as part of the return on your investment. But the idea of getting a substantial real return on home ownership from just the appreciation component is pretty unrealistic, and indeed not supported by the long term data.

Posted by DTM | April 9, 2008 3:10 PM

Perhaps I am missing something about congestion pricing: is it only for people whose commute is between Manhattan or someplace else or is it also charging people who drive through Manhattan on the way to their commutes. The report to which you link refers to the origin of people driving into Manhattan, but not where they end up.

My point is that there are people (I was briefly one of them) who commute between Brooklyn/Queens/Long Island and NJ. I drove through Manhattan rather than Staten Island (which latter route would have been slightly more direct) because there is actually less congestion in lower Manhattan!

Perhaps congestion pricing will encourage people who work in Manhattan to take the bus to the train/subway to their jobs. But I highly doubt it will encourage people who work in NJ and live in Queens, for example, to take the bus to the subway to the train to the bus to work. Except when everybody ends up driving through the already overburdoned Staten Island Expressway and then their commutes take even longer. Of course, they could move to NJ, but then their spouses would have the same long commute in reverse.

I'm still confused as to the push for congestion pricing -- for a place as densely populated as it is, Manhattan is actually amazingly (relatively) non-congested! If ya wanna deal with congestion in NYC -- do something about the frickin' LIE and Staten Island Expressways! They have near-permanent traffic jams, with no appearent rhyme or reason whatsoever. Give some lucky transportation studies Prof. a big grant to study what's going wrong and then fix it. That'll do far more to ease congestion than congestion pricing for lower Manhattan would.

Posted by DAS | April 9, 2008 3:18 PM

Someone on here asked if anyone seriously thinks home prices would fall to below 2000 levels. I do. In fact, i think there’s a good chance that will happen.

This whole “there’s only so much room to build” crap was one of the rationales for the strongly held, but baseless belief that “real estate prices always go up.” Now it’s used to explain why house prices will not fall below some arbitrary number “It won’t go below 2000 prices!”

You people are really whistling by the graveyard.

Look at this graph:

http://graphics8.nytimes.com/images/2005/08/21/business/21real.graphic.gif

By 2000 home prices were already at or near historical highs in real dollars. I see no reason to assume they’ll not fall below that, a good argument could be made that they’ll fall to previous recent recession era lows, such as early 1990s or the early 1980s. Or maybe even more.

This could get really, really ugly.

Posted by hankest | April 9, 2008 3:34 PM

DAS-

The charge is for anyone drigin into Manhattan. As a amtter of fact,t eh vast majority of these trips end in Manhattan; the type of commute you describe is quite unusual.

Since Manhattan is very well served by transit (and since the fee revenue would be reserved for increasing transit capacity), a major effect of the fee would be shift commutes from car to train. This would reduce traffic on all the roads used by commuters into Manhattan, including the LIE, Staten Island Expressway, etc.

If ya wanna deal with congestion in NYC -- do something about the frickin' LIE and Staten Island Expressways! They have near-permanent traffic jams, with no appearent rhyme or reason whatsoever. Give some lucky transportation studies Prof. a big grant to study what's going wrong and then fix it.

While I agree that somebody should do something about all the problems, the reality is that the only way to reduce congestion is to find some way to induce people to drive less. As long as streets (and parking spaces) are free, they will be jammed.

Posted by lemuel pitkin | April 9, 2008 3:45 PM

hankest,

Again, though, Shiller's index is in real terms, not nominal terms. For example, the CPI is up something like 47% since 1993, 23% since 2000. So a return to the same home prices in real terms as existed at those prior times would still have home prices higher in nominal terms by approximately those amounts.

Posted by DTM | April 9, 2008 3:48 PM

DTM, DeLong is talking about house values, and the graph he refers to uses inflation adjusted dollars.

I believe your saying the it won't go below 2000 prices in nominal dollars because of inflation.

Who the hell cares? Why you think discussing nominal dollars matters? That's a pointless point that no one, as far as i can tell, is trying to make.

But if you want to play - take 23% off 2000 prices and where does it get you on that graph? Enjoy.

Posted by hankest | April 9, 2008 4:06 PM

hankest,

I'm not sure what point you think I am making, other than suggesting that people need to be very clear about whether they are talking in real or nominal terms.

I will make this point, however: if people who bought in, say, 2000 or before only end up in the long run getting appreciation in line with inflation (hence, no real appreciation), they may be disappointed in light of where they thought they stood during the bubble, but they won't have gotten a particularly bad deal by historical standards.

In other words, so far the only people who appear to be in a particularly bad long-term position are the people who bought in high-appreciation markets during the peak years of the bubble--and then only if they didn't finance most of that purchase by selling a home they had bought earlier. For earlier buyers, there is no evidence yet of things truly being "ugly", even if nominal prices continue to fall for a while--at least not if one has reasonable expectations for long term appreciation rates.

Posted by DTM | April 9, 2008 4:27 PM

Yes, i agree people should make clear whether they are discussing real or nominal dollars.

To avoid confusion, let's simply stick with real dollars.

Ok, look at that graph. Again, 2000 was already at a historical peak in inflation adjusted dollars. So i see no reason why house values will not fall below that historical peak in real dollars (which is to say not "keep up with inflation.")

Posted by hankest | April 9, 2008 4:35 PM

Re petkin's comment "State governments play essentially no role [in land use decisions] at all."
---------
Bullshit.

1) I was once involved in a zoning fight that went to the Virginia Supreme Court. ( My neighbors and I were opposed to a development that would have had greater density than allowed by the zoning. We were concerned because (a) the tract would have septic tanks and the land didn't perk worth shit and (b) the water table was already dropping because of development )

2) What we found is that Northern Virginia is a miserable shithole because
a) Local zoning commissioners can't enforce zoning --because developers can simply sue in state court to overturn the zoning. Virginia legislature believes in "property rights" -- i.e, in the right of the real estate industry to give state legislators campaign donations.
b) The Virginia Legislature also ensured that Local supervisors and commissioners can request -- but not pressure -- local developers to offer profers -- i.e., something to offset the huge costs of growth (sewer, roads, water lines,etc.) Usually, the taxpayers get stuck with the bill --which is why property taxes in Fairfax and Prince William counties outside Washington DC are by far the highest in the state.
c) For decades, the Virginia legislature has taken huge sums in taxes from the Northern Virginia area and used the money to subsidize building roads in the rest of the state. Which is why in rural Virginia you see 4 lane highways with an occasional car wondering through a landscape empty except for an occasional cow. While Northern Virginia traffic is locked in gridlock for most of the day.

3) Roadbuilding except for federal Interstates -- is controlled by the state legislatures and that controls development.

Posted by Don Williams | April 9, 2008 4:36 PM

i see no reason why house values will not fall below that historical peak in real dollars

So what if they do? The only people hurt by falling house prices are people with subtantial real estate investments *beyond their own home*. For homeowners in general its neutral and for those of us who expect to buy a home in the future it's positive.

I undertand why the perspective of real-estate investors dominates a lot of the news coverage but no need for us to buy into that here. Cheap housing is good.

Posted by lemuel pitkin | April 9, 2008 4:41 PM

1) Housing can lose much of it's value unless there's local employment to provides households with high income. Just Look at Detroit.

People go where the high-paying careers are. Why else would anyone live in god-forsaken Manhattan?
(Whenever I go to the Opera there, it takes me about 90 minutes to drive from Philly to New York -- and another HOUR just to drive from the fucking Lincoln Tunnel several blocks to the Met.)

2) Companies choose where they locate --not local, state or federal government. The areas with excess housing could be fixed simply if companies chose to locate new facilities there.

3) A few of the factors influencing where companies locate -- and whether they decide to close down and leave -- is (a) whether local government is reasonable competent or whether it delights in screwing local businessmen (b) who offers the best tax concessions (c) the power of unions in the local environment and (d) whether there is an educated work force or a bunch of ignorant yokels.

Posted by Don Williams | April 9, 2008 4:52 PM

Don-

As you conede, both zoning decisions and grants of variances are made *entirely* at the local level. No state involvement at all.

If you want to challenge a land-use ruling, yes, you go to state court. Where else are you supposed to go? Well, county courts,e xcept that they, um, don't exist. Or is Cogress supposed to set up an entire new local court system as well?

Campaign finance =/= land use.

Highway building =/= land use. (And do you really wnat roads and other transportation networks built county by county? Hint: that word "network".)

I fully beleive Virginia spends way too much on highways and forces local governments to bear costs that should be paid for statewide revenue sources instead. Bu that's irrelvant to the fact that land use regulation is entirely a local matter in the US, and so your proposal to take it away from the state is nonsensical.

Words have meanings. Facts are facts. You are wrong.

Posted by lemuel pitkin | April 9, 2008 4:55 PM

hankest,

Sure, that may well happen sooner or later--the "later" version being where home prices in these high-appreciation markets stagnate, or at least appreciate slower in nominal terms than the inflation rate, until the index is restored to a more normal level from a historical perspective. But again, my substantive point is that all isn't really an "ugly" scenario for homeowners who bought in 2000 or so and before, nor for people who bought back then and then flipped during the bubble without injecting a lot of new cash.

Of course, as I previously noted some of them may be disappointed because they thought they were doing better during the bubble than it turns out they did in the long run. But since a real return from appreciation of approximately zero is about all they could have reasonably expected at the time they were originally buying, this isn't really an "ugly" long-term result, even if it is disappointing to them. And they will still get the return from avoiding rent, which historically has always been the primary source of real returns to home ownership.

Now if DeLong is right and the market only gives up about 50% of its real appreciation in the long run (admittedly a big "if"--as noted above I think he could well be wrong if people start moving to places which did not experience as much hyperappreciation), then in fact these people will have not only avoided an "ugly" scenario, but rather will have found themselves in unusually positive scenario from a historical perspective. Again, some of them might be disappointed, but in fact they will have done very well for themselves given reasonable expectations. And similarly, if DeLong is right then even fewer people will find themselves in a truly bad long-term position, because that will mean the start of the bubble was actually a little later than we are currently assuming.

Again, though, my substantive point doesn't depend on DeLong being right. Rather, it just depends on understanding what would have been a realistic expectation at the time many people were buying, and noting that your scenario actually is just giving them that result.

Posted by DTM | April 9, 2008 4:58 PM

and another HOUR just to drive from the fucking Lincoln Tunnel several blocks to the Met.)

Well, that's what you deserve for driving to Lincoln Center instead of doing the sensible thing and parking outside the city and taking a train in.

Next time you're stuck in traffic and fuming that you'll be late to the opera, take a look to your left. You may see me flying past you on the bike path...

Posted by lemuel pitkin | April 9, 2008 5:04 PM

lemuel pitkin,

To be fair, though, if you were a first-time home buyer during the peak bubble years, and if you bought in one of the bubble markets, then a more or less permanent return of the housing index in your market to its historical levels is likely going to take considerable wealth away from you that you will never get back.

So, there likely will be some genuine losers in this scenario--indeed, there probably already are some genuine losers, such as people who bought in bubble markets from roughly 2005 through 2007. Again, though, I agree with you that there are a lot more people who don't actually have much cause for complaint.

Posted by DTM | April 9, 2008 5:07 PM

Last time.

2000 was an historic high in real dollars in the nation as a whole. If values go below that in real dollars (i.e., doesn't keep up with inflation) as i suspect they will, it may take decades to get back to that high, and then again not stay there very long.

Or more simply, 2000 was already deep in an historical bubble. And if history holds, people who bought in 2000 are unlikely to ever get back their investment (in real dollars).

This is not very hard to see... look at the graph, see values at 2000, compare that to past values.

Enjoy.

Posted by hankest | April 9, 2008 5:24 PM

Enjoy.

How about you explain why we should care?

A few people who bought bigger houses than they otehrwise would have, and a very few people who bought houseses as investementns rather than homes, during the bubble years, are worse off if prices return to their historic levels and stay there.

Those of us who expect to buy our first house in the future are better off.

The majority of homeowenrs, who only plan to sell their house in order to buy a new one, are unaffected -- the value of their house only matters in relation to the value of otehr houses they might wnat to move to.

You're trying to present something as a disaster that just isn't.

Posted by lemuel pitkin | April 9, 2008 5:34 PM

hankest,

First, I'm not sure it makes sense to say that "2000 was already deep in an historical bubble." The index in 2000 was at about the same level as it had been before around 1990 and 1980, and the 1950 local peak was not too far behind. In that sense, 2000 was on the high side, but still within the "trading range" for the index during the post-WWII era.

Second, one has to be careful about overemphasizing the robustness of historical means. Asset prices do in fact experience structural breaks, and what that means is that sometimes the past is not a perfect guide to the likely future. Indeed, from the graph it seems quite likely the series experienced a structural break at least at both WWI and WWII. Unfortunately, this point tends to get obscured by the common practice of redrawing the mean for the entire series (which basically assumes away structural breaks).

Third, even assuming the index returns to something below its 2000 level and never comes back, that still might mean that people who bought for the first time in 2000 only got slightly less than the historical average real return (which again is somewhere between 0-1%).

Fourth, there is nothing particularly magical about 2000. For example, if you move back just a couple years, the index returns to approximately its post-WWII mean level. So, maybe the 2000 first-time buyers will get slightly below the historic average, and only the 1998-and-before first-time buyers will get the historic average (but not the 1990 buyers, and so on). But again, there is not such a great different between 1998 and 2000 such that the 2000 people will be terribly far outside the normal range of real returns.

Fifth and finally, it is worth remembering that not all markets have experienced this same appreciation. The nature of the index is that it tends to get dominated by the high-appreciation markets during high-appreciation periods, but that doesn't mean every homeowner is experiencing all that on an equal basis. Rather, it is the people in those high-appreciation markets who got most of the runup, and similarly it is those people who will experience most of any subsequent "correction".

Posted by DTM | April 9, 2008 5:53 PM

Re pitkin's comment "Well, that's what you deserve for driving to Lincoln Center instead of doing the sensible thing and parking outside the city and taking a train in"
--------------
Well, then I would have to ride with ..you know .. (hushed tone)
New Yorkers.

And I ripped a hole in my biohazard suit.

Posted by Don Williams | April 9, 2008 7:40 PM

The traffic situation in Manhattan: as a 1-3 times per year visitors, we decided to never drive there. Comming from PA, one can park in NJ and take PATH or an express bus (quite attractive, from free park-and-ride lots).

Within Manhattan, outside midtown, driving can actually be better than in LA, but parking is always a problem, either very expensive or very time consuming. So you move around by subway and on foot, and that includes Zabar. Big majority of commuters use mass transit. Now, if you live in Queens and work in Bronx, public transit is not particularly attractive, but the most congested zone has two train stations, bus terminal and lots of subway lines, and this is what millions of people do every day.

Paying for delivery or shipping is a good option if you want to buy more than you can or want to carry. Avoiding a single parking ticket in Manhattan pays for a lot of shipping.

My LA experience is much smaller, but it includes a nightmarish one hour taxi ride from the airport that made me truly sick. There are actually more times when you can drive fast in NYC than in LA.

Posted by piotr | April 10, 2008 4:36 AM

Really last time.

Pitkins, people who looked at real estate values in 2000-2008 and said "hmm, seems overpriced" and didn't buy - may do all right. Assuming the house prices do drop a great deal more (likely), and interest rates stay low (highly unlikely).

Inflation is bad and getting worse, so i doubt the latter.

DTM, my very point was there's no reason to think that the year 2000 is some sort of magic point below which house prices will never fall. The graph DeLong refers to, if anything, implies otherwise.

Again, the graph shows prices hitting 2000 levels (prior to 2000) during only 3 very short intervals since the 1890s. So, again, 2000 is at or near short-term historic highs. That is a fact.

And since the 1940s prices have hovered around the values seen in the early to mid-1990s. Again, that is a fact.

So, if one were to pick a bottom, logic would suggest it would be closer to those prices.

People can make arguments the bottom would be much less than seen in the 1990s, or the bottom would be much higher this time (i.e, 2000 levels). But if one were to make an argument such as that, one would need something better than "there's only so much land."

See my original post.

Posted by hankest | April 10, 2008 10:04 AM

Oh, Pitkins: "the value of their house only matters in relation to the value of otehr houses they might wnat to move to"

Not always true, if they're value goes down to where they have "negative equity" (i.e., they're underwater) it matters. It matters a great deal. Talk to suckers, i mean buyers, who picked up condos during the last "house prices never go down" extravaganza in the late 1980s.

Many were stuck until the recent bubble.

Anyone want to guess how many people bought with little down since 2000 - or who used the bubble equity to purchase crap - and will end up underwater soon? Like i said, could be ugly.

Posted by hankest | April 10, 2008 10:12 AM

hankest,

Again, I just don't see what is particularly "ugly" about the scenario you are sketching for many homeowners. Sure, maybe the "bottom" for the index will be at a mid-90s levels rather than at the 2000 level. But I just don't see what is so ugly about the index going back to doing what it has been doing since about WWII (fluctuating in this range).

And I know you are doing this in real terms, but I think it is worth making explicit once again what that means. Returning to the same index level means the relevant homes have appreciated enough in that time to keep up with inflation. Even returning to a bit under the same index level means the relevant homes have almost appreciated enough in that time to keep up with inflation. Such appreciation rates are perfectly normal for homes, and again do not mean the home owner made a bad investment, because the real returns to home ownership have historically come from the rent they avoid.

So, people who bought homes in the mid 1950s, 1980, or 1990 probably did not make a bad investment, even though it turns out that their appreciation rate ended up a little lower than people who bought at other times. Assuming your predictions are correct, I would say the same thing about people who bought in 2000--they could have done a bit better buying at another time, but probably will be doing fine given your scenario.

Anyway, I guess we have beaten this to death. I really do think, however, that people often have a fundamental misunderstanding of what it would mean if Shiller's index returned to more "normal" conditions--that isn't such a bad thing, unless you did in fact put a lot of new cash into buying a home during the parts of the bubble well outside of that "normal" range.

Posted by DTM | April 10, 2008 1:59 PM

Oh, and the real versus nominal distinction is also relevant to the issue of "negative equity", because obviously you don't get into a negative equity situation if your house has appreciated in nominal terms, even if it has also lost value in real terms.

Posted by DTM | April 10, 2008 2:39 PM