The show “Home Town” is a cleverly produced show on HGTV that is set in Laurel, Mississippi, where clients choose a fixer-upper, which married couple Erin and Ben Napier team up to design and renovate for them. One clever thing they do is to really lean into the love the host couple has for their town, and the generous sense of community they reflect for clients. In most other shows, a set of homes will be shopped, and they will discuss the amenities, location, etc. On this show, they make a point to treat the clients as part of the narrative of the neighborhood’s history. Instead of calling the homes “The spacious home” vs “the big kitchen home” or something like that, they name the choices after their previous owners. “The Smith Home” vs “The Carson Home”, and when they introduce the homes, they introduce them as a sort of story. “Jim and Nadine Smith built this home in 1964 when Jim became a partner in a Laurel law firm.”
This is really good Kevin. It's strange how people can grasp that automobiles depreciate and that the used car market is a fundamental part of our economic system, but we have several generations of homeowners who live in places where housing "values" increase every year. During the pandemic, used cars enjoyed a brief surge in value because of a restricted supply of new cars and everyone grasped that building new cars was the solution to the broken filtering of car prices.
Also, the natural growth of cities over many centuries was from detached, cheaply built structures to larger scale more durable buildings that increased densification. Now, many regulatory environments (except Houston) prohibit this evolution.
Once the land is worth $150,000, if people need $150,000 homes, obviously one home on the land does not work. Is the working alternative condos? I guess if you can get 6 condos onto that land for a construction cost of $125,000 each, then we have something that works? It feels like SFH zoning is part of what's preventing a solution?
I don't know if you can build 6 condos for $750k, maybe if they're small enough 🤔
Yes. That is part of the process of how it would work out. But, also, eventually, with enough condos, the lot value declines. Or, maybe on the lots that are primed to become condo buildings the land value stays the same or maybe even goes up a little, but for each lot like that there are 20 lots scattered across the metro area that still just have the same old house on them, but now they are back to $150,000 homes on lots with minimal value.
My big worry is centered on what a return to health would have to look like. That $300k home split 50:50 home and land, will be a big loser over a couple decades when the land reverts to a more market based equilibrium. We don’t have a housing bubble, but we do have inflated asset values.
And precisely because the lowest income zip codes are where land is most inflated relative to incomes, it’s where the asset pain will be most acute. The smiths with their below market home will see zero nominal home appreciate (declining in real terms) while the wealthy Williams family sees their home appreciate at the rate of inflation.
While the solutions are obvious and necessary, I wouldn’t discount the idea that voters are well aware of their rational incentives. Even if that screws over their children.
On the bright side, it will take decades to create that shift, so I don’t think anything catastrophic will happen. Homes will yield 5% total returns over 20 years instead of 8%. Something like that.
Kevin, thank you for all you do to hold this light. You are a humane voice in the wilderness of conventional nonsense, and I appreciate what you are doing.
And a reminder at just how far out of the ballpark the orthodox or conventional macroeconomic profession has become.
If you read most economists, they are jibber-jabbering endlessly about inflation and free trade.
Even if you accept the conventional premises about those two topics---egads, the US is short 10 million housing units, resulting in lower living standards for large swaths of Americans. This is the defecating elephant in the room.
While it is not apples-to-apples, a strong case can be made living standards are lower along the West Coast and NYC-Boston areas than two generations ago. Moreover, this house-cost disease is spreading nationally.
As Erdmann points out in this column, to see the old America, visit areas with declining populations, and thus relatively adequate housing stock. Try to find one in which the local economy is not Detroit-ified.
Today's economists are like a manager of a baseball team that loses many games with scores like 4 to 16, and 3 to 15, 2 to 18. "We need better hitting," asserts the manager.
The orthodox macroeconomic profession, which may be dubious even on topics like inflation and free trade, is insisting on becoming irrelevant to the whole point of economics: What brings sustainable prosperity? What are the big issues?
Kevin, perhaps this is a silly question from a new reader, but have you written any articles that collect or summarize your proposed solutions of the housing crisis today?
The book “Building from the ground up” has a closing chapter on it. Probably under the research tab here the paper I coauthored with Scott sumner would have some general solutions:
In 4 broad strokes, in order of how directly would affect housing affordability and functionality:
1) return to lending norms of the late 1990s or really any pre-2008 standard for conventional mortgages
2) get rid of as much zoning and urban land use regs as possible
3) Texas level property taxes, fairly imposed.
4) nominal gdp targeting by the Fed
All harder to do in practice than in theory, of course.
This is really good Kevin. It's strange how people can grasp that automobiles depreciate and that the used car market is a fundamental part of our economic system, but we have several generations of homeowners who live in places where housing "values" increase every year. During the pandemic, used cars enjoyed a brief surge in value because of a restricted supply of new cars and everyone grasped that building new cars was the solution to the broken filtering of car prices.
Also, the natural growth of cities over many centuries was from detached, cheaply built structures to larger scale more durable buildings that increased densification. Now, many regulatory environments (except Houston) prohibit this evolution.
Hi Kevin,
Once the land is worth $150,000, if people need $150,000 homes, obviously one home on the land does not work. Is the working alternative condos? I guess if you can get 6 condos onto that land for a construction cost of $125,000 each, then we have something that works? It feels like SFH zoning is part of what's preventing a solution?
I don't know if you can build 6 condos for $750k, maybe if they're small enough 🤔
Yes. That is part of the process of how it would work out. But, also, eventually, with enough condos, the lot value declines. Or, maybe on the lots that are primed to become condo buildings the land value stays the same or maybe even goes up a little, but for each lot like that there are 20 lots scattered across the metro area that still just have the same old house on them, but now they are back to $150,000 homes on lots with minimal value.
I really like the angle this piece takes.
My big worry is centered on what a return to health would have to look like. That $300k home split 50:50 home and land, will be a big loser over a couple decades when the land reverts to a more market based equilibrium. We don’t have a housing bubble, but we do have inflated asset values.
And precisely because the lowest income zip codes are where land is most inflated relative to incomes, it’s where the asset pain will be most acute. The smiths with their below market home will see zero nominal home appreciate (declining in real terms) while the wealthy Williams family sees their home appreciate at the rate of inflation.
While the solutions are obvious and necessary, I wouldn’t discount the idea that voters are well aware of their rational incentives. Even if that screws over their children.
On the bright side, it will take decades to create that shift, so I don’t think anything catastrophic will happen. Homes will yield 5% total returns over 20 years instead of 8%. Something like that.
‘This problem will outlive us all’ is a helluva bright side!
Kevin, thank you for all you do to hold this light. You are a humane voice in the wilderness of conventional nonsense, and I appreciate what you are doing.
Riccardo, thank YOU for coming along for the ride for so long on this path of discovery.
Another great column from Kevin Erdmann.
And a reminder at just how far out of the ballpark the orthodox or conventional macroeconomic profession has become.
If you read most economists, they are jibber-jabbering endlessly about inflation and free trade.
Even if you accept the conventional premises about those two topics---egads, the US is short 10 million housing units, resulting in lower living standards for large swaths of Americans. This is the defecating elephant in the room.
While it is not apples-to-apples, a strong case can be made living standards are lower along the West Coast and NYC-Boston areas than two generations ago. Moreover, this house-cost disease is spreading nationally.
As Erdmann points out in this column, to see the old America, visit areas with declining populations, and thus relatively adequate housing stock. Try to find one in which the local economy is not Detroit-ified.
Today's economists are like a manager of a baseball team that loses many games with scores like 4 to 16, and 3 to 15, 2 to 18. "We need better hitting," asserts the manager.
The orthodox macroeconomic profession, which may be dubious even on topics like inflation and free trade, is insisting on becoming irrelevant to the whole point of economics: What brings sustainable prosperity? What are the big issues?
Kevin, perhaps this is a silly question from a new reader, but have you written any articles that collect or summarize your proposed solutions of the housing crisis today?
The book “Building from the ground up” has a closing chapter on it. Probably under the research tab here the paper I coauthored with Scott sumner would have some general solutions:
In 4 broad strokes, in order of how directly would affect housing affordability and functionality:
1) return to lending norms of the late 1990s or really any pre-2008 standard for conventional mortgages
2) get rid of as much zoning and urban land use regs as possible
3) Texas level property taxes, fairly imposed.
4) nominal gdp targeting by the Fed
All harder to do in practice than in theory, of course.
Well written piece. I think the multiple of income and cost of ownership relative to income are incredibly interesting to track over time.