According to 400-year data, we’re in a housing bubble

This post covers current factors affecting housing, and a few possible causes for why home prices are so high.

No comments

The underlying problem: cost of housing seems extremely high in many places.

Data taken over 400 years (since the year 1620) show that housing prices are in fact extremely high right now.

The price data has been adjusted for inflation, which means it is calibrated so that the value of 1 dollar is absolute across the 400 year dataset.

Figure 1: Here’s a link to the source if you want to draw your own conclusions.

Although the study is focused on real estate prices in Amsterdam, Netherlands, I will primarily focus on home prices in the United States, and perhaps this should be viewed as a shortcoming of this blog post.

The current state, factors affecting housing:

Record low mortgage rates mean more people are incentivized to purchase homes. Those of us that have purchased homes today are locking in a 30-year rate around 3%, which is good. If the Fed raises rates, then home prices may come down naturally, but the total amount that consumers pay per month (principle + interest) won’t change much.

Migration out of metropolitan areas, to tier 2 and tier 3 cities – due to the COVID-19 pandemic as well as the trend towards remote work means that housing cost in cities should go down, while prices in suburbs should go up.

However, people are starting to move back to the cities. Millenials that moved in with their parents during covid may be ready to leave, etc.

Long-term trends include:

  • more people renting homes
  • lower testosterone in males and thus lower fertility rate
  • women are more career oriented so having few kids
  • ultimately people are getting married later, which means they are having even fewer kids.
  • moving more and less stable

So what’s causing higher home costs?

I’m not sure what the ultimate cause is, but here are a few possible explanations. This of course may be wrong… but I’m going to give it a go. Feedback is encouraged.

Inflation?

The graph in Figure 1 above is adjusted for inflation, so I actually don’t believe inflation is the cause of house prices increasing. Nor do I think inflation will really impact the housing market directly over the foreseeable future.

The ones most harmed by inflation seem to be people who hold large amounts of cash, and this is a separate matter.

What about deflation?

While not directly related to housing, discussing inflationary risk should be combined with the possibility of deflationary risk as well.

There are of course people like Cathie Wood that actual think deflation is a greater risk than inflation, and that’s a whole nother story.

Ms. Wood’s reasoning behind deflationary risk is the rapid acceleration of emerging technologies which she believes will drive costs lower. She certainly makes a solid argument.

Is there a housing shortage?

Some say that a housing shortage is driving costs skyward. Based on simple rules of supply and demand, this is worth looking into further.

However, given the free-market economy in which we live (both US and Netherlands), would this not incentivize more homes to be built?

Wouldn’t construction companies be having a ball in this world?

The answer is maybe, but it is complicated.

The cause behind the housing shortage, that I’ve read, is that construction sharply declined after the 2008-2009 financial crisis, which has resulted in a lagging long-term housing shortage, although construction rates have increased since then.

Figure 2: source: https://calculatedrisk.substack.com/p/the-rapid-increase-in-rents

Notice the low rate of construction between 2007 and 2014 in the graph above. This period of low home construction may be the origin of the lag, which could be partially responsible for today’s shortage.

And while there is technically a shortage of inventory, I’m not so sure the shortage is as dramatic as everyone says. While the inventory shortage may be real, I do not believe that the severity of inventory shortage is the primary cause for the current state of housing market.

I’m not convinced that new home construction and increasing inventory will really solve the underlying problem.

As explained in this blog post on this MathBabe blog post, increases in inventory don’t necessarily mean that more people get their own house. Vacant homes are a real risk here, as stated regarding the 2008-2009 financial crisis: “the boom in housing supply gave way to a boom in foreclosures, leading many empty houses to be held by banks for years.”

Is population increase making the housing shortage worse?

The argument that population is continuing to increase which is causing a housing shortage is 100% false.

Population growth (at least in the United States – see link here) is severely stagnating and risk of population collapse over the next few generations is not out of the question. But again, this is

Given these facts, I do not believe housing prices are going up due to housing shortage.

How about a housing bubble?

Are we even in a housing bubble? According to the Calculated Risk blog post, the answer is no, we’re not in a bubble.

However, the blog post linked above suggests prices might decline a bit, on the basis that the Case-Shiller house price index (based on the ratio of income to house price) is somewhat inflated right now, as it was before the financial crisis of 2008-2009.

I feel the arguments presented in the Calculated Risk blog post are well presented and credible, and that we are not in a bubble right now.

I will not duplicate what the post explains, but I do recommend reading it.

Wealth Inequality

I believe we have a situation where wealthier individuals who own a home have realized the savvy financial play that landlording brings, and have purchased their second or third or even fourth homes – whether for vacation or as rental property, or some combination of the two (i.e. Airbnb).

There are a few reasons for this. Financially, it is generally smarter to own than to rent, so people that can afford to will usually choose to own.

Second, given the high cost of capital gains taxes, homeowners are disincentivized from ever selling real estate once they acquire it. They may transfer equity to another property, but by and large people who buy a home tend to remain homeowners forever.

Once you’re a homeowner, people usually never go back to renting for the rest of their lives.

One might wonder how lowering the capital gains tax rate would affect this, but regardless – that would not solve the underlying problem.

Anyways, we have a trend where wealthier people, maybe the top 20% or 30% of people in terms of net worth, own more than one house, while poorer people do not own houses and cannot afford to buy a house. The most severe manifestation of this problem is when poor people also cannot afford to rent.

Starrygordon from mathbabe.org posted the following comment, which I believe is worth a read:

starrygordon from mathbabe.org (link)
June 4, 2021 at 11:37 am
It has been the practice of the Federal government for many years to, in effect, print money and give it to rich people. Since ‘money’ is now actually credit, and since credit is denied to the not-rich, not too much inflation has occurred in the ‘real’ (not-rich-people’s) economy; instead, the new funny money has gone to inflate rich people’s asset prices — stock market, collectibles, luxury goods, credentializing education, politicians and political influence, and so on. The two worlds could get along in parallel as long as the not-rich ate their potatoes in silence. However, there is a cross-over point: real estate. The rich like real estate as an asset, an abstract form of wealth, but even the not-rich have to live somewhere, hence, as rich people’s assets inflate, they drive up not-rich people’s house and rental prices. The not-rich get a little of the funny money through lowered mortgage rates, but that’s about all. As a result, we observe a shortage of, not housing, but affordable housing, and an increase in homelessness. The conditions will continue until the present arrangement is changed or collapses.

The picture painted by starrygordon seems pretty close to reality, in my opinion. Starrygordon explains it quite well when they say that we’re not seeing a housing shortage, but a shortage of affordable housing.

However, there are alternate ideas and quite convincing data that might signal otherwise…

For example, the Calculated Risk blog post makes the argument – backed by data, that housing actually might not be that unaffordable after all. This is based on the fact that mortgage interest rates are extremely low right now.

What do you think?

Monopolistic Ownership?

The infamous moniker “you’ll own nothing and be happy” published by the World economic forum, while dystopian, may actually have some merit.

And while the scenario of wealth inequality painted above is related to Monopolistic Ownership, there are a few differences.

Parsing Parcel Data to Understand Properties, Parks, and Prices |  UrbanFootprint
Parcels in Manhattan, NYC. Source: Urban Footprint

The key worry is for me is that, imagine if a single company just bought all the land in a city.

I’m talking every single parcel. Look at the picture of Manhattan in the photo on the right and imagine every square centimeter of land in Manhattan was owned by a single person or company.

A business or organization that did this could undoubtedly control the price of rent, and more.

Thus, they could charge whatever they knew people could afford.

Not what people are happy paying – but MORE than people want to pay, just at the edge of unaffordability to the point where people can technically afford to live there, but just barely scrape to get by.

As Peter Thiel has described in his book Zero to One, great businesses should try to create monopolies for themselves.

Although monopolies are bad for society (and technically illegal), a business is incentivized to try to get as close to a monopoly as possible.

And this is exactly what large investment companies seem to be doing.

Huge investment companies are buying up all the most important houses. This includes hedge funds like BlackRock.

These monopolistic ownerships are largely occuring in the big cities and large metropolitan areas.

The countryside and rural land has yet to be monopolized.

How much is rural land worth?

Given that affordable housing seems the be the real issue here, one might argue that people can and should simply move the the suburbs or the country, and find lower costs of housing.

I mean, the remote economy is enabling this after all.

And people are largely doing moving out of major cities.

But will this always be possible? Will we always have beautiful rural vacant land available to buy in the united states?

And what happens when companies like Blackrock buy up and own ALL the land in the United States?

Is this even possible?

Let’s run a few numbers:

First, there are 2.43 billion acres of land in the United States – that’s 2,430,000,000.

Let’s assume that the majority of the land in the united states is rural land, and let’s price it based on the price of agricultural land, at $3160 per acre.

If we price out all the land in the United States at that estimate, multiply 2.43 billion by $3160 per acre, then we get an estimate for how much all the rural non-city land is worth in the United States.

Based on the number estimates, this is around $7.6 trillion, or $7,678,800,000,000.

Given that there are companies in the US with a market cap over $1 trillion, (Apple, for example coming in at a whopping $2.91 T) it is certainly plausible that a large company could begin to buy up more and more and more rural land, or even control portions of the United States real estate market.

This wouldn’t only to impact Manhattan real estate and beachfront property. This could result in some type of dystopian price fixing outside of cities, expanding into the countryside as well.

Government intervention

While the issue is complicated, I do not believe the solution is greater government intervention. I think too much government involvement tends to do more long term harm than good, and we want to avoid this as a free society.

Governments should continue to do what they do best, and act like referees on the playing field. Keeping the game fair, preventing monopolies, keeping the country safe, etc.

As explained in the Gold Observer’s blog post, long term effects of too much government intervention tend to be negative, regardless of how helpful it might seem over the short term:

“In response to the crisis governments came to the rescue to bail out banks and support the economy—which increased government debt. The housing bubble was not allowed to fully deflate.” – Gold Observer post

It is unfortunate that we can’t simply let the free market economy run through the natural up and down cycles that will inevitably happen.

The government unfortunately always seems to get involved, bail out the banks, stimulate the economy, etc.

The short term effects of these practices might seem ok or even good to some people, but the long term effects mean that the United States has ended up worse off in the end.

Another example is economic stimulus during the COVID-19 pandemic. Printing so much money is causing long term inflation which unfortunately seems to do more long term damage.

Conclusion – will home prices rise forever?

Will house prices continue to go up, or will we see prices eventually start to go down?

As covered in this post, I think it is a combination of things. I don’t have the answer and don’t claim to. Please think about some of the data points I’ve presented, and consider what some solutions might be and how the future is likely to play out.

What I will say is that construction is increasing. Inventory will soon mean that the economies of supply and demand are better matched so that the people that need homes can purchase them.

While this may do some good, I do not believe this will completely solve the problem.

Wealth inequality is certainly the main cause for concern. For example, as inventory rises, what’s stopping wealthy people from acquiring a 2nd, 3rd, or 4th home, and then renting it out to lower-income individuals?

This is a scenario that might play out, which wouldn’t help the housing costs go down at all.

Only time will tell.

If you took the time to read this, please reach out to me on Twitter – I almost always respond and I’d love to hear what other people think.

Where am I right / wrong? What did I miss?

Cheers, and happy 2022.

Sources:

Calculated Risk blog: https://www.calculatedriskblog.com/?m=1

Slate

MathBabe

Gold Observer

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s