Something I'll get into in future posts is that I would argue that in the US this is part of a long process of market reactions to the poor policy decisions of the past couple of decades. First, local regulatory constraints on supply drove rents higher, and prices naturally reflected that. Then, in 2008, we greatly limited access to mortgages. This drove down prices in areas where residents have lower incomes (though it didn't drive down rents). That killed the entry-level homeowner market because it drove prices too low to make construction profitable for those residents. That meant that rents HAD to rise in low income neighborhoods, as I have shown that they have (the systematic relationship between low incomes and beginning low rent levels and subsequent rent inflation should be shocking). Rents had to rise high enough to get prices back to a level that makes construction profitable. It finally has. But, it's still not easy for the owners to get mortgages, so the homes have to be built by private equity landlords, which is what is happening.
I would say that rents causing prices is the obvious direction, similarly to earnings leading to stock prices, rather than the other way around, and checking that orthodoxy with a narrative explanation confirms it. The problem is that the orthodox explanation for the housing boom and bust is so backward that it has led to several secondary levels of confusion in orthodox explanations for housing markets.
Also, I should clarify that the rent measures in the paper are estimate for all homes, not just rented homes.
There's another possible factor here, but I'm honestly not sure how it would play into your analysis, or even if its relevent. That factor is property taxes.
I only have my personal informal experience to go on, in three markets, FL, GA, and MI over the last 25 or so years. However, my observation is that property taxes for landlords have gone up much faster than inflation over that period, to the point where it is no longer profitable to be a landlord renting to long-term tenants, at least where I live currently in MI.
In most jurisdictions, property taxes are levied essentially as a % of the property value. So, if property values are going up faster than inflation then you'd expect taxes to go with them. However, many jurisdications also then offer "homesteading" to resident-owners which caps their taxes, but then accelerates the taxes on other properties: second home owners and landlords.
I had one property in FL in the 2010s that for a while was homesteaded (while my mother-in-law lived in it), the became unhomesteaded after she passed. Our taxes went from (about) 3% a year rises, to about 20% a year rises, over several years. This is simply unsustainable.
I've done the math on my current town in MI, and much as I'd like to be able to offer accomodation to long term renters (because we have a huge shortage of such accomodation and as a result a shortage of workers), its simply not economically viable for me. (Or, informally, other landlords I've spoken to).
As I said, I'm not sure how this plays into your analysis, but surely high taxation has long term impacts on housing supply. Its difficult enough to build new housing due to regulation, but taxation may be disincentivizing some home builders over the long term.
High property taxes also add fuel to the short-term (AirBnB) vs long-term rental argument, which is a factor in many towns that have seasonal tourist industries. For a landlord, Airbnb can be more profitable, but is also a lot more work and potential hassle compared to a long-term tenant. However, if taxes get high enough I might be forced to choose the high-hassle-high-profit route of AirBnB vs the lower-hassle-lower-profit year round rental, even if I would have a preference for the latter.
Interesting comments. Thanks. This is all very helpful, your observations are keen, and I hadn't thought about some of these issues in quite this way before.
I will toss out some idea here on causality, etc.
1) It seems reasonable and functional that a shift toward lower passive income potential would incentivize landlords toward economic activity that leverages effort more. There are a host of reactions and counterreactions there that seem like you're describing the magic of how markets work. I'm sure it's a pain for changes in the economic landscape to force you to change your business plan, so I can understand if you don't love it.
2) Rising prices and taxes should be limited because they induce new construction. They are, a bit, but not as much as they should, which is a long complicated story of years of poor policymaking.
3) The real losers here are the tenants that are blocked from getting mortgages because most of the costs you describe get pushed on to them in one way or another.
(Also, to clarify, the estimated rents in the paper are for all homes, not just rented homes.)
My observation is it became very fashionable in the past decade for the upper class to own multiple homes. My closest neighbor owns a beach cottage, a house in Florida and now two houses in Maryland. They are trying to sell one of the Maryland houses but put it for sale post the current cycle peak and now it languishes.
I have many friends and family in Utah and they speak of it being quite normal for people to own a second home, typically in the warmer climate of Southern Utah.
The QE / ZIRP policies of the past decade made owning real estate a very attractive investment. One got to own an asset that not only was appreciating in value but also provided cash flow as a VRBO / AirBNB rental and a promise of a large return if the house was ever sold.
What happens as home are purchased for personal use, personal investment and short term rental? The supply of homes available to live in decreases. But demand for housing grows as people (a) need a place to live and (b) there is always the desire to join the investment trend.
If we see a crash in housing prices over the next several years, will the "experts" recognize that bubbles exists? Will they acknowledge the damage caused by QE and ZIRP?
Someone has to own every home. Extreme tightening of mortgage regulations after 2007 greatly shrank the pool of potential owners, and so we have had a haves vs. have-nots market, where the haves (who can get mortgages or who have enough wealth to buy homes) could buy homes at a discount while the have-nots had to settle for rising rents in homes they were not allowed to buy. This creates a lot of crossed paths - some people able to have more home while others have less. One statistic I will point you to is that since 2007, real per capita consumption of housing has not increased. That's never happened before, at least since the Great Depression. In real terms, we have been in an extended deep housing depression. So, I think your observations are true and sincere, but incomplete. My work has basically been a years long process of learning how much of your comment is mistaken (ZIRP isn't a thing, imho, for instance). I welcome you to continue reading. I suspect you will either find it rewarding or very frustrating, depending on how committed you are to your current point of view.
I think a lot of your observations probably make sense mid-cycle in our boom/bust world. But at the extremes it gets nonsensical.
I've got a 1.875% mortgage on a Jan 2020 purchase. The exact same mortgage would be over 5% today on a list price >20% higher.
That's nuts. I really could rent my house out on AirBnB for way more then the interest and property taxes, people at my work that bought two years later are taking a bath.
I don't know is lending standards are too low now (my friend got a loan with 3% down despite being massively in debt, which seems dodgy). But certainly they were in 2008.
I'm having trouble following figure 5 and the explanation. Is it information that there are labels on the left side of the line for some and the right side for others? Where can I see in the chart that "Prices everywhere declined, but rents didn’t" in 2007-2012?
Figure 5 is just the regression lines from the charts in Figure 4, with all the dots for each individual metro area removed, so you can see how the relative pattern between metros changed from year to year. The way you can see that rents didn't decline from 2007-2012 is that the line generally moves to the right. The median rent of the metro areas is on the x-axis, and those didn't move to the left over that time (you can see the actual dots for each metro in 2007 and 2015 back in figure 4, and the lines in figure 5 are just sort of the average of those dots.) Price/rent is on the y-axis, and since prices declined, the dots moved down during that time, and so the line that is the average position of those dots also moved down in figure 5.
I hope that helps. Let me know if you still need clarification. It was a good question. Others may have not followed my explanation either. Thanks for asking.
Thanks, clear now. I wasn't grasping that the lines in Figure 5 are snapshots in time (rather than a change in time) and that the time series is how the snapshots change in relation to each other.
If house prices (and wages) didn't increase beyond inflation pressures, would housing become generic and what would be the incentive to work hard and/or innovate? Wouldn't that be a big improvement over the current state of affairs?
Yes. Low rents would be a big improvement over the current state of affairs. I would argue that a lot of the sentiment about mid-20th century (less inequality, wage growth, etc.) is due to housing abundance, which has been declining since the 1970s, and which increases costs and lowers economic opportunity for families with lower incomes. We spend more as a % of national income on rent today than we did in 1970, and really the only explanation is urban supply constraints. As we become richer, we should spend the same or less on rent. The costs have risen, and they are highly correlated across metros with inadequate construction.
If rent as a % of income had remained constant, what % of housing inflation would go away? As in, what % of the increase is just that there is more money about versus "supply".
It looks like you have 2015 to 2021 available. 2019 to 2022 would be nice to see for pandemic effect.
The problem I always have with zoning arguments is that every expensive metro I go to has lots of cheap housing, but its trapped in bad neighborhoods. Isn't price just an indirect for of neighbor quality control. How do people keep out bad neighbors if they can't price them out.
My next paper goes into this a bit. Where housing is highly constrained, high end residents have to substitute down into lower SES neighborhoods, poaching supply from those residents, and I have found systematic patterns in prices and rents that reflect that process. The way I put it is the more constrained housing supply is in a metro area, the less you costs are due to amenities and the more they are a product of the income level of other people who want your house. It leads to this perverse situation where locals object to improvements in their neighborhoods and local economy because negative amenities are the only thing keeping their housing costs from rising, and rising housing costs are causing displacement, frequently out of the metro area entirely.
Yeah, NIMBYism is BOTH rich people wanting to keep the poor out of their neighborhoods and poor people wanting to keep the rich out of their neighborhoods. We only discuss the former because the latter makes to a messy narrative.
Which makes me wonder how much of this is a social problem where because we don't want to live with each other we end up using price as a social sorting function. You won't convince people to build more housing until you address the social problems. You can't even get them to move into existing cheap housing in the metro area for the same reason. Countries like Japan that keep housing cost down don't have as much social friction in this matter.
It's one thing to generally complain about housing supply, but it's going to take more than some abstract NIMBY scolding to really change things. You're going to have to convince people, like genuinely convince them, that what you're about to do isn't going to destroy their most valuable asset and fundamentally change a way of life they have chosen. That probably involves lots of more contentious discussions around "amenities", things like crime, education, etc. Mere scolding hasn't accomplished much in decades.
Very good comment. I have been involved in this issue on the policy side, and I think you're getting at something subtle and important.
Here at the substack newsletter, my approach is more from a market analysis perspective. A lot of analysts and investors don't understand how this is the heart of the problem, and so they overestimate the influence of speculation, low interest rates, etc., and I am hoping here to provide a deeper understanding of the influences on housing and homebuilding markets, the risks ahead, and to have confidence about decisions to invest or not invest in a home or in the housing sector.
<blockquote>As Professor Shiller points out, home price inflation shouldn’t rise faster than general inflation over the long run (and it didn’t until recent decades).</blockquote>
From the demand side, why would this be true?
We've seen medical costs rise, arguably from demand for better treatments. The cost of food now splits along organic/expensive/fresh versus cheap/shippable/survival.
Homes are much more than mere shelter now, and because of cars they don't need to be super close to work. Isn't there ample room for home prices to rise simply because (some) people have excess income and want to spend it on a big/nice house?
Shiller maybe thinking of the supply side where in the absence of regulations, permissions, EIR's, etc. the supply was driven by construction costs when the supply/demand point was above the marginal cost of constructing a house, it got built. It used to only take a year to build the empire state building and in China a 50 story building in a few months.
However, we now have added a 5+ year delay to construction times for the bureaucrats, which creates a risk of the demand evaporating before you get your development on the market. To compensate for this added risk created by regulation delay times a developer needs to look at the probability of being slower than the demand cycle which increases his price point for starting his project.
These higher developer price points drive prices higher than inflation and creates unstable volatility and appearance of inelastic behavior on demand time scales less than the total construction time with delays. With the inelastic behavior, sometimes the developer hits a home run when the prices increase but if his completion is at a bad time he could go out of business and the human capital dissipated which takes even more time delays to recreate.
Good question. And, health care is probably the best counterpoint of a sector that grows with incomes. And, your intuition about the motivation for spending more on housing is accurate, in terms of location value. There are expensive places that attract wealthy buyers, and so it seems like status buying would drive up the expenditures. In theory, those sorts of forces could align to change the way people consume housing.
But housing consumption doesn't follow that pattern. Dependably, when people have higher incomes, they spend more on housing, but less as a percentage of their incomes. And, even in today's context, which I go into a lot more in the next paper, rich households tend to aim to spend similar amounts of their incomes on housing in all contexts. So, families making, say, $400,000 in Atlanta and Los Angeles won't on average necessarily have that much different of a housing budget. In Atlanta, though, they will get 2 acres, a horse, a pool, and 10,000 square feet. In LA, they'll be in a 2,500 sq. ft. condo. But, you move down to the other end of the spectrum - say, a family with a $40,000 income, and in Atlanta, they're paying $1,000 in rent while in LA they're paying $2,400 and planning a move to Atlanta.
It is the poorest residents that spend more on housing where it is undersupplied. In food and healthcare, it is the innovations and the luxuries that may drive new spending. In housing, it is the necessities. If a cure for cancer was found, aggregate spending on healthcare might rise. If we somehow built an additional 10 million homes over the next 5 years, especially in the constrained cities, total aggregate spending on housing would almost certainly decline.
when people have higher incomes, they spend more on housing, but less as a percentage of their incomes
</blockquote>
This sounds like a cross-section, whereas Professor Shiller's statement (about inflation) sounded longitudinal.
iirc there are some notable economic quantities that go opposite directions [over time / picking countries of different average GDP] versus [across wealth strata at one slice of a particular region at a particular point in time]. I think obesity may have been one of these, i.e. poor countries are thin whereas the poor in rich countries are fat.
Interesting. You’re probably onto something. I’ll have to think about it some more. Comparing housing to food, they are sort of the opposite story. Poor people in rich countries spend less on food but consume more whereas in housing they are spending more and consuming less. I think one difference is that in housing it isn’t really the income level of the economy as a whole that is driving these patterns. It’s places with legislated supply constraints, and so I think one thing that’s going on is that there are data anomalies in the national numbers that are purely coming from these locations that throttle supply, and so people are looking for the source of an American anomaly when it is really a local anomaly. I go into it a little bit in this other post, though maybe I’m covering much of the same ground in this post.
Kevin, thanks for your interesting article
A quick comment : I don't see why you assume the causality is rents->prices rather than prices->rents
The scatterplots clearly show correlation but the causality is debatable it seems to me.
Regards
Douglas,
London
Here is an old Mercatus essay where I touch on the subject of causality:
https://www.mercatus.org/bridge/commentary/rising-prices-lower-rents-rising-rents-rising-prices
Something I'll get into in future posts is that I would argue that in the US this is part of a long process of market reactions to the poor policy decisions of the past couple of decades. First, local regulatory constraints on supply drove rents higher, and prices naturally reflected that. Then, in 2008, we greatly limited access to mortgages. This drove down prices in areas where residents have lower incomes (though it didn't drive down rents). That killed the entry-level homeowner market because it drove prices too low to make construction profitable for those residents. That meant that rents HAD to rise in low income neighborhoods, as I have shown that they have (the systematic relationship between low incomes and beginning low rent levels and subsequent rent inflation should be shocking). Rents had to rise high enough to get prices back to a level that makes construction profitable. It finally has. But, it's still not easy for the owners to get mortgages, so the homes have to be built by private equity landlords, which is what is happening.
I would say that rents causing prices is the obvious direction, similarly to earnings leading to stock prices, rather than the other way around, and checking that orthodoxy with a narrative explanation confirms it. The problem is that the orthodox explanation for the housing boom and bust is so backward that it has led to several secondary levels of confusion in orthodox explanations for housing markets.
Also, I should clarify that the rent measures in the paper are estimate for all homes, not just rented homes.
There's another possible factor here, but I'm honestly not sure how it would play into your analysis, or even if its relevent. That factor is property taxes.
I only have my personal informal experience to go on, in three markets, FL, GA, and MI over the last 25 or so years. However, my observation is that property taxes for landlords have gone up much faster than inflation over that period, to the point where it is no longer profitable to be a landlord renting to long-term tenants, at least where I live currently in MI.
In most jurisdictions, property taxes are levied essentially as a % of the property value. So, if property values are going up faster than inflation then you'd expect taxes to go with them. However, many jurisdications also then offer "homesteading" to resident-owners which caps their taxes, but then accelerates the taxes on other properties: second home owners and landlords.
I had one property in FL in the 2010s that for a while was homesteaded (while my mother-in-law lived in it), the became unhomesteaded after she passed. Our taxes went from (about) 3% a year rises, to about 20% a year rises, over several years. This is simply unsustainable.
I've done the math on my current town in MI, and much as I'd like to be able to offer accomodation to long term renters (because we have a huge shortage of such accomodation and as a result a shortage of workers), its simply not economically viable for me. (Or, informally, other landlords I've spoken to).
As I said, I'm not sure how this plays into your analysis, but surely high taxation has long term impacts on housing supply. Its difficult enough to build new housing due to regulation, but taxation may be disincentivizing some home builders over the long term.
High property taxes also add fuel to the short-term (AirBnB) vs long-term rental argument, which is a factor in many towns that have seasonal tourist industries. For a landlord, Airbnb can be more profitable, but is also a lot more work and potential hassle compared to a long-term tenant. However, if taxes get high enough I might be forced to choose the high-hassle-high-profit route of AirBnB vs the lower-hassle-lower-profit year round rental, even if I would have a preference for the latter.
Interesting comments. Thanks. This is all very helpful, your observations are keen, and I hadn't thought about some of these issues in quite this way before.
I will toss out some idea here on causality, etc.
1) It seems reasonable and functional that a shift toward lower passive income potential would incentivize landlords toward economic activity that leverages effort more. There are a host of reactions and counterreactions there that seem like you're describing the magic of how markets work. I'm sure it's a pain for changes in the economic landscape to force you to change your business plan, so I can understand if you don't love it.
2) Rising prices and taxes should be limited because they induce new construction. They are, a bit, but not as much as they should, which is a long complicated story of years of poor policymaking.
3) The real losers here are the tenants that are blocked from getting mortgages because most of the costs you describe get pushed on to them in one way or another.
(Also, to clarify, the estimated rents in the paper are for all homes, not just rented homes.)
My observation is it became very fashionable in the past decade for the upper class to own multiple homes. My closest neighbor owns a beach cottage, a house in Florida and now two houses in Maryland. They are trying to sell one of the Maryland houses but put it for sale post the current cycle peak and now it languishes.
I have many friends and family in Utah and they speak of it being quite normal for people to own a second home, typically in the warmer climate of Southern Utah.
The QE / ZIRP policies of the past decade made owning real estate a very attractive investment. One got to own an asset that not only was appreciating in value but also provided cash flow as a VRBO / AirBNB rental and a promise of a large return if the house was ever sold.
What happens as home are purchased for personal use, personal investment and short term rental? The supply of homes available to live in decreases. But demand for housing grows as people (a) need a place to live and (b) there is always the desire to join the investment trend.
If we see a crash in housing prices over the next several years, will the "experts" recognize that bubbles exists? Will they acknowledge the damage caused by QE and ZIRP?
Someone has to own every home. Extreme tightening of mortgage regulations after 2007 greatly shrank the pool of potential owners, and so we have had a haves vs. have-nots market, where the haves (who can get mortgages or who have enough wealth to buy homes) could buy homes at a discount while the have-nots had to settle for rising rents in homes they were not allowed to buy. This creates a lot of crossed paths - some people able to have more home while others have less. One statistic I will point you to is that since 2007, real per capita consumption of housing has not increased. That's never happened before, at least since the Great Depression. In real terms, we have been in an extended deep housing depression. So, I think your observations are true and sincere, but incomplete. My work has basically been a years long process of learning how much of your comment is mistaken (ZIRP isn't a thing, imho, for instance). I welcome you to continue reading. I suspect you will either find it rewarding or very frustrating, depending on how committed you are to your current point of view.
I think a lot of your observations probably make sense mid-cycle in our boom/bust world. But at the extremes it gets nonsensical.
I've got a 1.875% mortgage on a Jan 2020 purchase. The exact same mortgage would be over 5% today on a list price >20% higher.
That's nuts. I really could rent my house out on AirBnB for way more then the interest and property taxes, people at my work that bought two years later are taking a bath.
I don't know is lending standards are too low now (my friend got a loan with 3% down despite being massively in debt, which seems dodgy). But certainly they were in 2008.
I'm having trouble following figure 5 and the explanation. Is it information that there are labels on the left side of the line for some and the right side for others? Where can I see in the chart that "Prices everywhere declined, but rents didn’t" in 2007-2012?
Figure 5 is just the regression lines from the charts in Figure 4, with all the dots for each individual metro area removed, so you can see how the relative pattern between metros changed from year to year. The way you can see that rents didn't decline from 2007-2012 is that the line generally moves to the right. The median rent of the metro areas is on the x-axis, and those didn't move to the left over that time (you can see the actual dots for each metro in 2007 and 2015 back in figure 4, and the lines in figure 5 are just sort of the average of those dots.) Price/rent is on the y-axis, and since prices declined, the dots moved down during that time, and so the line that is the average position of those dots also moved down in figure 5.
I hope that helps. Let me know if you still need clarification. It was a good question. Others may have not followed my explanation either. Thanks for asking.
Thanks, clear now. I wasn't grasping that the lines in Figure 5 are snapshots in time (rather than a change in time) and that the time series is how the snapshots change in relation to each other.
If house prices (and wages) didn't increase beyond inflation pressures, would housing become generic and what would be the incentive to work hard and/or innovate? Wouldn't that be a big improvement over the current state of affairs?
Yes. Low rents would be a big improvement over the current state of affairs. I would argue that a lot of the sentiment about mid-20th century (less inequality, wage growth, etc.) is due to housing abundance, which has been declining since the 1970s, and which increases costs and lowers economic opportunity for families with lower incomes. We spend more as a % of national income on rent today than we did in 1970, and really the only explanation is urban supply constraints. As we become richer, we should spend the same or less on rent. The costs have risen, and they are highly correlated across metros with inadequate construction.
If rent as a % of income had remained constant, what % of housing inflation would go away? As in, what % of the increase is just that there is more money about versus "supply".
It looks like you have 2015 to 2021 available. 2019 to 2022 would be nice to see for pandemic effect.
The problem I always have with zoning arguments is that every expensive metro I go to has lots of cheap housing, but its trapped in bad neighborhoods. Isn't price just an indirect for of neighbor quality control. How do people keep out bad neighbors if they can't price them out.
My next paper goes into this a bit. Where housing is highly constrained, high end residents have to substitute down into lower SES neighborhoods, poaching supply from those residents, and I have found systematic patterns in prices and rents that reflect that process. The way I put it is the more constrained housing supply is in a metro area, the less you costs are due to amenities and the more they are a product of the income level of other people who want your house. It leads to this perverse situation where locals object to improvements in their neighborhoods and local economy because negative amenities are the only thing keeping their housing costs from rising, and rising housing costs are causing displacement, frequently out of the metro area entirely.
Yeah, NIMBYism is BOTH rich people wanting to keep the poor out of their neighborhoods and poor people wanting to keep the rich out of their neighborhoods. We only discuss the former because the latter makes to a messy narrative.
Which makes me wonder how much of this is a social problem where because we don't want to live with each other we end up using price as a social sorting function. You won't convince people to build more housing until you address the social problems. You can't even get them to move into existing cheap housing in the metro area for the same reason. Countries like Japan that keep housing cost down don't have as much social friction in this matter.
It's one thing to generally complain about housing supply, but it's going to take more than some abstract NIMBY scolding to really change things. You're going to have to convince people, like genuinely convince them, that what you're about to do isn't going to destroy their most valuable asset and fundamentally change a way of life they have chosen. That probably involves lots of more contentious discussions around "amenities", things like crime, education, etc. Mere scolding hasn't accomplished much in decades.
Very good comment. I have been involved in this issue on the policy side, and I think you're getting at something subtle and important.
Here at the substack newsletter, my approach is more from a market analysis perspective. A lot of analysts and investors don't understand how this is the heart of the problem, and so they overestimate the influence of speculation, low interest rates, etc., and I am hoping here to provide a deeper understanding of the influences on housing and homebuilding markets, the risks ahead, and to have confidence about decisions to invest or not invest in a home or in the housing sector.
<blockquote>As Professor Shiller points out, home price inflation shouldn’t rise faster than general inflation over the long run (and it didn’t until recent decades).</blockquote>
From the demand side, why would this be true?
We've seen medical costs rise, arguably from demand for better treatments. The cost of food now splits along organic/expensive/fresh versus cheap/shippable/survival.
Homes are much more than mere shelter now, and because of cars they don't need to be super close to work. Isn't there ample room for home prices to rise simply because (some) people have excess income and want to spend it on a big/nice house?
Shiller maybe thinking of the supply side where in the absence of regulations, permissions, EIR's, etc. the supply was driven by construction costs when the supply/demand point was above the marginal cost of constructing a house, it got built. It used to only take a year to build the empire state building and in China a 50 story building in a few months.
However, we now have added a 5+ year delay to construction times for the bureaucrats, which creates a risk of the demand evaporating before you get your development on the market. To compensate for this added risk created by regulation delay times a developer needs to look at the probability of being slower than the demand cycle which increases his price point for starting his project.
These higher developer price points drive prices higher than inflation and creates unstable volatility and appearance of inelastic behavior on demand time scales less than the total construction time with delays. With the inelastic behavior, sometimes the developer hits a home run when the prices increase but if his completion is at a bad time he could go out of business and the human capital dissipated which takes even more time delays to recreate.
Good question. And, health care is probably the best counterpoint of a sector that grows with incomes. And, your intuition about the motivation for spending more on housing is accurate, in terms of location value. There are expensive places that attract wealthy buyers, and so it seems like status buying would drive up the expenditures. In theory, those sorts of forces could align to change the way people consume housing.
But housing consumption doesn't follow that pattern. Dependably, when people have higher incomes, they spend more on housing, but less as a percentage of their incomes. And, even in today's context, which I go into a lot more in the next paper, rich households tend to aim to spend similar amounts of their incomes on housing in all contexts. So, families making, say, $400,000 in Atlanta and Los Angeles won't on average necessarily have that much different of a housing budget. In Atlanta, though, they will get 2 acres, a horse, a pool, and 10,000 square feet. In LA, they'll be in a 2,500 sq. ft. condo. But, you move down to the other end of the spectrum - say, a family with a $40,000 income, and in Atlanta, they're paying $1,000 in rent while in LA they're paying $2,400 and planning a move to Atlanta.
It is the poorest residents that spend more on housing where it is undersupplied. In food and healthcare, it is the innovations and the luxuries that may drive new spending. In housing, it is the necessities. If a cure for cancer was found, aggregate spending on healthcare might rise. If we somehow built an additional 10 million homes over the next 5 years, especially in the constrained cities, total aggregate spending on housing would almost certainly decline.
Thank you for this great explanation Kevin.
One more follow-up though. Your response said
<blockquote>
when people have higher incomes, they spend more on housing, but less as a percentage of their incomes
</blockquote>
This sounds like a cross-section, whereas Professor Shiller's statement (about inflation) sounded longitudinal.
iirc there are some notable economic quantities that go opposite directions [over time / picking countries of different average GDP] versus [across wealth strata at one slice of a particular region at a particular point in time]. I think obesity may have been one of these, i.e. poor countries are thin whereas the poor in rich countries are fat.
Interesting. You’re probably onto something. I’ll have to think about it some more. Comparing housing to food, they are sort of the opposite story. Poor people in rich countries spend less on food but consume more whereas in housing they are spending more and consuming less. I think one difference is that in housing it isn’t really the income level of the economy as a whole that is driving these patterns. It’s places with legislated supply constraints, and so I think one thing that’s going on is that there are data anomalies in the national numbers that are purely coming from these locations that throttle supply, and so people are looking for the source of an American anomaly when it is really a local anomaly. I go into it a little bit in this other post, though maybe I’m covering much of the same ground in this post.
https://kevinerdmann.substack.com/p/our-cantilever-housing-market