This week’s voiceofsandiego.org piece addresses a fairly common line of reasoning: that the upper limits on San Diego’s supply of buildable land both explain the rapid home price rise and protect San Diego from a housing downturn.
This argument fails in the first case because while we may eventually use up all the land, we haven’t done so yet. The fact that housing supply has grown at a decent clip (and faster than the population) over the past few years makes this clear enough. The second case doesn’t make sense either, as many boxed-in locations, including San Diego itself, have seen home prices decline before.
Interesting fact I dug up while researching this article: it took 11 years for Japanese home prices to double. Accoring to the new Case-Shiller housing index, a given San Diego home saw its price double in less than 5 years. However crazy their bubble was, ours is apparently crazier.
Anyway, for more details check out the article here.
This argument has never made
This argument has never made sense to me, since Las Vegas and Phoenix, with open and buildable land without zoning restrictions as far as the eye can see, has seen runups similar to San Diego’s.
In Sell Now, John Talbott goes so far as to denote an entire chapter to Status Seeking as a reason for home price runups. Have you ever considered this Rich?
He asks why middle-class people would stretch themselves so perilously just to put a roof over their heads. Why are they spending significantly greater amounts of their incomes on housing, and thus have less left to spend on charitable giving, new business opportunities, travel?
Traditional demand/supply pricing doesn’t apply in the status category, where people pay more for something just because of its exclusivity. Since 1976, home prices have increased 5 fold, but other luxury items have gone up much more (75’Hatteras yacht 21x, Rolls Royce Silver Seraph 9x, Met tickets 10x). The rich can afford status seeking, but for the 80-90 million Americans who live paycheck-to-paycheck, status seeking is a risky game.
We find proof for this status-seeking theory, in noting our society places ever increasing importance on celebrity. I am an exception in that I would rather meet Rich or John Talbott than Britney Spears or Tom Cruise. Most of us are hypnotized by celebrity, status, keeping up with the neighbors. More Americans watch Survivor or American Idol than PBS or economics/political shows.
A study by Gary Becker and Kevin Murphy of the Univ of Chicago and Ivan Werning of MIT (Journal of Political Economy, April 2005)argues that status seekers are drawn to risky lottery-type investments with small initial investments but big potential upsides. Hey, this is what we’ve all done with housing! Status seekers seek that quantum return on their investment so they can enter a new class. Lenders have made it easy for status seekers to use housing to enter the get-rich-quick lottery.
He ends by noting that status seeking is not economically productive. The seeker is temporary happier, just as the drug addict, but little social good comes of it. Society is improved by economic activity, trade, and productivity improvements, because they increase the goods and services that can be distributed to society. Status seeking does not confer real economic progress. Banks will eventually pull the plug on this lottery-like status seeking, so the housing market will crash regardless of whether status seekers mend their ways.
“And many of the most stretched status seekers will exhaust their incomes long before they ever beocme satisified with the size of their homes or the look of their neighbors.”
To what extent has status seeking been the reason for the home price runup? I had not considered it before, but his arguments make sense.
Actually, Vegas is running
Actually, Vegas is running out of buildable land. I have a buddy in land acquisition for a major homebuilder there and due to a number of factors, which I believe includes the fact that a lot of the desert surrounding Vegas is BLM land, land is beginning to get scarce. There’s a reason he’s been scouting a lot of in-fill lots.
but the BLM is always
but the BLM is always auctioning off new land, it just did that a couple of months ago if I remembered correctly.
there’s no land shortage in Vegas, there never will be. there is a water shortage issue. that will choke off future development before the land issue comes up to play.
All I’m going by is what
All I’m going by is what he’s telling me as I’m not in that business. He’s a sharp guy and he’s on the ground in Vegas trying to buy land. If he believes the supply of buildable Vegas land is getting tight, I’ll take him at his word.
All I’m going by is what
All I’m going by is what he’s telling me as I’m not in that business. He’s a sharp guy and he’s on the ground in Vegas trying to buy land. If he believes the supply of buildable Vegas land is getting tight, I’ll take him at his word.
In the current issue of
In the current issue of Harper’s, there’s an article entitled “The New Road to Serfdom: An illustrated Guide to the Coming Real Estate Collapse”. A must-read. The author, Michael Hudson, opens with a similar argument for why homeownership has become so popular — that more Americans, especially in light of stagnating earnings over the past decaade or so, are looking to join what he calls the “rentier” class. These are people who make use of “economic rents”, including dividends, interest and capital gains. As he puts it “Most members of the rentier class are very rich. One might like to join that class”.
He goes on to say that “…this particular real estate bubble has been carefully engineered to lure home buyers into circumstances detrimental to their own best interests.”
The idea is that, as long as you can pillage your home’s equity to pay for an increased standard of living, you’re in good shape. Of course, as he goes on to illustrate, that’s about to change, much to the detriment of the economy as a whole.
As for renters, in my neighborhood at least I think one of the sorriest side-effects of this bubble has been the numbers of middle-class renters either too sensible to spend $700K on a two bedroom condo or two well-off to qualify for housing assistance being kicked to the curb as their reasonably priced rental buildings are sold off to make way for more high-priced condo developments. There is something to be said for the security of ownership, as long as it’s really secure.
I agree with you on that
I agree with you on that Rich. It’s an issue of “I’m ok” (after purchasing a house) vs “I’m not ok” (because I’m still renting). You know, this is less and less so, as banks have extended 100% loans to anyone with a pulse. Buying a house used to signify you had some financial stability, because of rigorous qualifying rules, a requirement for 10% down, and your ability to get only 3x your income in a mortgage. You could judge someone’s income by the house they bought. Not any longer.
I was intrigued by Talbott’s theory of status seeking as a factor driving up home prices. It’s an interesting read, even if it’s not accurate. But he does make a good point: all the extra income going to housing precludes people from saving, giving to the community, etc.
I was going to make the
I was going to make the point about Japan (where land is much more scarce than in the U.S. but where real estate values declined for about 14 years straight) but I see that it was made in the original article.
Lately I have noticed a lot of hand-made “for-sale” signs in my neighborhood. My own theory is that the owners of these homes are trying to get out of them, but they have so little equity in them that they cannot afford to pay a sales commission, so they are trying to sell them without a realtor. Is that a stretch? Just thinking out loud.
Just a theory…
I was talking to a big
I was talking to a big Orange County developer last week who made the observation that when raw land becomes scarce you will start to see changes in use, zoning and density allowed. Developers are still building in New York, after all. So the “no more land” really doesn’t hold true.
I was going to mention the
I was going to mention the same thing. There is plenty of room to move “up” in San Diego.