In San Francisco, for example, we found that while the median expectation for annual home price increases over the next 10 years was only 5 percent, a quarter of the respondents said they thought prices would increase each year by 10 percent or more. That would mean a net 150 percent increase in a decade. These people are apparently not thinking about the supply response that so big a price increase would generate.--Shiller
This is an astonishing comment to make.
Oh, maybe those city residents knew exactly what the supply response would be. You see, they were there, on the ground in SF, while Shiller was pontificating from New Haven.
I sometimes think the words "structural impediments" have been banished from the macroeconomics profession. Theory is so much more fun.
The nice thing about macroeconomic theoretical debates is no one is ever wrong.
Thanks for highlighting those quote by Shiller, particularly "...the supply response..." and I'm glad Ben took a dig at how Shiller was sitting on some silver throne in some ivory tower in New Haven. I think that Yale has a deeply corrosive effect on intelligence because the ravaged landscape of that city provides so many lessons about American social policy that seem to be lost on the inhabitants behind the gates of the university.
Curiously, Chip Case was based in Wellesley, Massachusetts, which is now a community where constructing a new house requires over a million dollars in cash and the patience of Job to acquire a building permit. Notably, its population has remained more or less unchanged since 1970, and the density and character of the town is preserved by vigorously enforced zoning regulations that get a little bit worse each year. I think that Case was able to put down roots in that community when houses were still affordable and his early papers on housing bubbles probably gave him a distorted view of market conditions going into the early 2000's.
Being in land development I always start there and try to move out. Austin where I live and do some business seems like a reasonable example. This is simple, but indicative:
+ Revenue
Units X $/Unit
- Construction costs
- Operating Costs
- Financing Costs
Equity
Debt
- Land
= Profit
If developer profit goes up, you can be sure that landowners and contractors grab a share. Using a little algebra one can move the items to one side of the = sign or the other.
All theory aside what happened in Austin is construction costs were low from the Great Recession, density (the number of units per project) increased, rent per unit increased, financing costs decreased, and exit cap rates decreased. The intermediate result was developer profits soared.
Next land prices and construction prices rose, cap rates stayed the same, financing costs stayed the same, developers could still push rents, and profits continued to be high. Basically, rents covered the new costs.
Land prices and construction costs continued to rise, cap rates stayed low, and the ability to push rents kept profits up. Land and construction could not continue to rise unless cap rates stayed low and rents rose. Construction would have stopped.
The interesting, maybe crazy, thing is that in the city limits Austin added 60,000 additional households making over $150,000, roughly twice the previous median, in the 5-year period from the of 2017 through 2022. The median income increased by $20,000 during that period. The ability to push rents based on the incomes of the additional households played a big part in what happened.
I don't think it was agglomeration or productivity. It seems like development fundamentals, demographics, and the Fed. I guess agglomeration could have caused the 60,000 households to show up, but that seems like reaching. The Pandemic is more likely.
My hunch and it's only a hunch is all of this is now baked into the cost structure (and rent structure) here and without a major economic event it will not change. It may move a few points, but Austin will stay high-cost which means it will stay high-rent.
The footnote I would add is that rents can moderate, but it will be a slow, years-long process, and the moderation will probably happen more in the older existing units than in new units, so the relative costs and rents of new units get multiplied out through the city and don’t have to move as much as it seems they would need to.
I'm still trying to get my arms around filtering as a housing policy. Promise not trying to be snarky - Keynes comment that eventually we all die keeps popping into my head.
This is really more of a tweet that a substack. I apologize.
Again from a developer's perspective I resist the local regulation or agglomeration theory. Seems like it's Dr. Doolittle's Push Me Pull You, the old Gordian Knot, or the perfect storm.
Lots of things have changed in residential real estate. Local regulation is certainly one. Consolidation is another. Roughly 55% of apartments are now institutionally owned and professionally managed. That industry is built on rent growth. Most single-family building in high growth markets is done by publicly traded builders. The amount, availability, and use of data has changed. Have you kept up with the lawsuits against Yieldstar? Wall Street is now a player in residential real estate. The pandemic and work from home or anywhere had large demographic impacts on populations. Back to the office will also. Mortgage regulation, deregulation, and then over regulation had impacts. Immigration policy has impacts. Residential apartments going from 2 story surface parked to 5+ story garage parked had impacts, not sure if it was a push or a pull. I'd argue that venture capital funded money losing tech companies that paid high salaries mattered. The actions of the Fed mattered. China policy matters - we couldn't get refrigerators for finished apartments.
Changes to tax laws also. Many of the older duplexes and small apartment complexes were built as tax shelters.
In San Francisco, for example, we found that while the median expectation for annual home price increases over the next 10 years was only 5 percent, a quarter of the respondents said they thought prices would increase each year by 10 percent or more. That would mean a net 150 percent increase in a decade. These people are apparently not thinking about the supply response that so big a price increase would generate.--Shiller
This is an astonishing comment to make.
Oh, maybe those city residents knew exactly what the supply response would be. You see, they were there, on the ground in SF, while Shiller was pontificating from New Haven.
I sometimes think the words "structural impediments" have been banished from the macroeconomics profession. Theory is so much more fun.
The nice thing about macroeconomic theoretical debates is no one is ever wrong.
Thanks for highlighting those quote by Shiller, particularly "...the supply response..." and I'm glad Ben took a dig at how Shiller was sitting on some silver throne in some ivory tower in New Haven. I think that Yale has a deeply corrosive effect on intelligence because the ravaged landscape of that city provides so many lessons about American social policy that seem to be lost on the inhabitants behind the gates of the university.
Curiously, Chip Case was based in Wellesley, Massachusetts, which is now a community where constructing a new house requires over a million dollars in cash and the patience of Job to acquire a building permit. Notably, its population has remained more or less unchanged since 1970, and the density and character of the town is preserved by vigorously enforced zoning regulations that get a little bit worse each year. I think that Case was able to put down roots in that community when houses were still affordable and his early papers on housing bubbles probably gave him a distorted view of market conditions going into the early 2000's.
Well, thanks for noticing my comments. I am not sure I have ever had positive feedback on the internet before.
Waaaayyyy OT, but the deposed President Gay was making $900k a year (or maybe more. that was before she was promoted). She has a working husband too.
You think she is in touch...with anything?
Interesting stuff!
Being in land development I always start there and try to move out. Austin where I live and do some business seems like a reasonable example. This is simple, but indicative:
+ Revenue
Units X $/Unit
- Construction costs
- Operating Costs
- Financing Costs
Equity
Debt
- Land
= Profit
If developer profit goes up, you can be sure that landowners and contractors grab a share. Using a little algebra one can move the items to one side of the = sign or the other.
All theory aside what happened in Austin is construction costs were low from the Great Recession, density (the number of units per project) increased, rent per unit increased, financing costs decreased, and exit cap rates decreased. The intermediate result was developer profits soared.
Next land prices and construction prices rose, cap rates stayed the same, financing costs stayed the same, developers could still push rents, and profits continued to be high. Basically, rents covered the new costs.
Land prices and construction costs continued to rise, cap rates stayed low, and the ability to push rents kept profits up. Land and construction could not continue to rise unless cap rates stayed low and rents rose. Construction would have stopped.
The interesting, maybe crazy, thing is that in the city limits Austin added 60,000 additional households making over $150,000, roughly twice the previous median, in the 5-year period from the of 2017 through 2022. The median income increased by $20,000 during that period. The ability to push rents based on the incomes of the additional households played a big part in what happened.
I don't think it was agglomeration or productivity. It seems like development fundamentals, demographics, and the Fed. I guess agglomeration could have caused the 60,000 households to show up, but that seems like reaching. The Pandemic is more likely.
My hunch and it's only a hunch is all of this is now baked into the cost structure (and rent structure) here and without a major economic event it will not change. It may move a few points, but Austin will stay high-cost which means it will stay high-rent.
Kinda seems like a chicken and egg thing.
That all makes sense.
The footnote I would add is that rents can moderate, but it will be a slow, years-long process, and the moderation will probably happen more in the older existing units than in new units, so the relative costs and rents of new units get multiplied out through the city and don’t have to move as much as it seems they would need to.
I'm still trying to get my arms around filtering as a housing policy. Promise not trying to be snarky - Keynes comment that eventually we all die keeps popping into my head.
This is really more of a tweet that a substack. I apologize.
Again from a developer's perspective I resist the local regulation or agglomeration theory. Seems like it's Dr. Doolittle's Push Me Pull You, the old Gordian Knot, or the perfect storm.
Lots of things have changed in residential real estate. Local regulation is certainly one. Consolidation is another. Roughly 55% of apartments are now institutionally owned and professionally managed. That industry is built on rent growth. Most single-family building in high growth markets is done by publicly traded builders. The amount, availability, and use of data has changed. Have you kept up with the lawsuits against Yieldstar? Wall Street is now a player in residential real estate. The pandemic and work from home or anywhere had large demographic impacts on populations. Back to the office will also. Mortgage regulation, deregulation, and then over regulation had impacts. Immigration policy has impacts. Residential apartments going from 2 story surface parked to 5+ story garage parked had impacts, not sure if it was a push or a pull. I'd argue that venture capital funded money losing tech companies that paid high salaries mattered. The actions of the Fed mattered. China policy matters - we couldn't get refrigerators for finished apartments.
It's a big mess.