What's driving home values (Part 1A)
Bonus content for subscribers
In Part 1, I used Figure 1 to highlight how at the turn of the century, rents in some metropolitan areas started moving higher, away from the norm, and when that happened, prices in those metro areas also moved away from the norm. The misnamed “housing bubble” of the 2000s was driven by fundamentals. Rents were becoming an increasingly important factor in the decisions Americans made about where they could live, and as that sad state of affairs became endemic, prices reflected it. In the 20th century, local economies were converging because people moved where there was opportunity, and homes were built in the places they were moving to.
By the year 2000, it was becoming clear that people were moving to where costs were low, and costs were low where new homes were available. Los Angeles, New York, and San Francisco weren’t going to become more affordable any time soon, and they were going to make sure of it by obstructing the construction of new housing. Prices reflected this regime shift from national convergence to divergence and segregation.
As I noted in the last post, among the pages of Monday morning quarterbacking that are in the Financial Crisis Inquiry Commission report, is this: “Perhaps such measures [rents] were no longer relevant, when Americans could make lower down payments and obtain loans such as payment-option adjustable-rate mortgages and interest-only mortgages, with reduced initial mortgage payments. Or perhaps buying a home continued to make financial sense, given homeowners’ expectations of further price gains.”
Well, those mortgages mostly went away. What happened to prices in their absence? Even in their absence, where price/rent ratios had been high, they remain high, as do the rents that have driven them higher. Were those price expectations irrational exuberance or capitulation to our new regime of arbitrary scarcity? In either case, the expectations were correct. Maybe the FCIC should have waited until Tuesday or Wednesday to take up quarterbacking!
Here are some ways to visualize what has happened in US housing markets. Figure 2 shows home price trends since 1979, and it compares the left end of the trendlines in Figure 1, the US median, and the right end of the trendlines in Figure 1. Basically, over time, how has the median home price changed, the home price in the cities with lowest rents, and the home price in the cities with highest rents?
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