It is time to stop quivering in our boots in pointless fear of the future and just roll up our sleeves and build it.
- Ray Pierrehumbert

Monday, March 24, 2008

Economics Question

How much of the housing bubble is due to the fact that America is overbuilt?
I have never seen discussions of housing units per capita. I do see a surprising number of unoccupied houses, though. I suspect it is much too high.

(There are cases where extended families need to reduce costs and would tolerate moving from two houses to one (ironically, often adding to demand for gasoline) but in the home ownership culture that prevails here end up stuck with an albatross mortgage. In other countries where rental still affords a civilized lifestyle, these liabilities would more frequently accrue to large corporate or government property holders. )

I once had a condo salesman tell me with a straight face that "property values never go down" and reassert it calmly when challenged. If professionals in real estate really believed this in America, it is little wonder that there is a housing bubble. On this view it has rather little to do with banking practices, and much to do with some stupidly simplistic extrapolations. If the banks were overextended they merely did us a favor by ending this nonsense sooner than it might otherwise have occurred.

Unlike extra tulips or extra dot-coms, though, extra housing units take a very long time to go away. Anyway it now stands to reason that we need to loosen immigration and tourism visas and in general stop humiliating people at the border, especially if they have some money. I wonder how long it will take to figure that out.

6 comments:

Dano said...

Excellent and interesting question.

Local and regional housing markets are VERY different from one another, surprisingly. So many things to tease out.

This makes blanket statements difficult. Meaning: I'm not sure you're going to find what you want today. In a few years, expect Glaeser, Guyorko, Carruthers et al to have some decent analysis on the question. Further complicating matters: in a past life, I worked as an analyst for a large bank, one that would only make safe, vanilla loans. We'd have big market share in safe loans in submarkets. You see less of that today with deregulation, but it's still out there.

Best,

D

cieldumort said...

Considering a lot of the overbuilt housing units were, in fact, built by illegal immigrant labor, sure - makes even more sense to me, at least.

However, with such a plan, there is already something just a weeee bit unseemly about companies hiring people under the table for less than a fair wage and at a price of now hiring our own U.S. citizens - many of who would end up living in their apartments.. while the very illegal immigrants who jumped the border to build the homes for under-the-table pay are welcomed in to buy them up.

Tell you what, tho -
If they were offered to U.S. citizens first.. and at attractive interest rates, with buyer incentives, etc. - and, only then, what is left over is then offered to new immigrants - I would pretty much be all for it.

We're having a lot of fun discussing the housing bubble over at http://community.livejournal.com/the_recession/profile.

More great blogging on it at
http://housingpanic.blogspot.com/

Love this graph, myself
http://bp1.blogger.com/_pMscxxELHEg/R8W1Q2jX_tI/AAAAAAAABpY/qGNLnX_RGnM/s1600-h/NHSrecessionsJan08.jpg

Michael Tobis said...

Regardless of our relative sympathies for people with the wrong papers (my family definitely had the wrong papers not too long ago in central Europe) my suggestion has to do with people with enough money to buy up housing stock. That is certainly not the same people as the ones who undercut domestic manual labor.

Michael Tobis said...

Hm, that graph is interesting. Notice how the rate of new home construction was approximately constant until 1990. The difference can be accounted for by 1) increased population growth 2) increased destruction of older housing stock or 3) increasing number of houses per capita. Did I miss anything? I don't see much evidence for 1 or 2 on that scale.

cieldumort said...

To your first reply - Guess I misunderstood your plan for bringing down the housing oversupply. I'm not sure if I still understand, but if it entails selling housing stock (supply?) to foreign investors, I don't think that there is anything keeping us from doing so, already. The homes just aren't selling. The CDOs, CIVs, and other bunk paper out there, just isn't trading. It's as close to a market dead in the water as one will ever see.

About the graph -
I agree with your take fully. The great housing bubble economy began in the 90s, under "I'll be the best friend Wall Street has ever had" Bill Clinton.

Michael Tobis said...

Foreign investors have even less incentive to buy up garbage denominated in a declining currency than local investors do.

Foreign vacationers and retirees do, though, especially with a declining currency. America remains very attractive as a destination. People avoid it because of the uncertainties of the border.

Consider the possibility of your vacation or even access to your country estate being at the whim of an arrogant xenophobic border guard on entering country X, and you will not be inclined to sink your discretionary income into country X.

Despite the collapsing dollar foreign tourism into the US has not recovered to pre - 9/11 levels, I have heard. It's believable. And more stupid than ever under the circumstances.

Admittedly not everywhere in the US will attract wealthy foreigners, but I note that some of the biggest losses are in California and Florida, which certainly would.

This requires dealing with security and immigration constraints some other way than making border crossings capricious and humiliating. Those Euros are looking awful nice these days.