Why a “healthy” housing market has falling values
We need a new narrative for what constitutes a “healthy” housing market. There is a common misconception that increasing home values are a good thing.
Consumers win when prices fall. We understand this instinctively for other goods like cars, milk and computers. But when home prices increase, journalists write headlines line like “2016 was the best year for the US housing market since the financial crisis.”
Are rising home values really a good thing? When home values increase faster than the rate of inflation, it can signify the systematic exclusion of millions from economic opportunity.
That is no exaggeration.
- Economist Matthew Rognlie estimates that nearly the entire increase in wealth inequality since the 1970s has been caused by an increase in the cost of housing.
- The Economist cites one study that claims 28 million people would have moved to the bay area if not for rising home prices. 28 million people excluded from economic opportunity, because of housing.
- Mckinsey estimates that high housing prices cost the Californian economy $140 billion a year. The entire budget of California is $170 billion. In other words, California loses nearly as much from failed housing policy as it spends in totality on healthcare, education, etc.
A New Narrative
So if rising home values are bad, what constitutes a healthy housing market?
Simply put we need to think of housing like any other good. Lower prices are better for consumers. We need to stop focusing on the value of homes and start focusing on their cost. A healthy housing market is one in which prices do not rise.
The below chart does not represent a “healthy” housing market.
This is what a healthy housing market would look like.
Price increases above the rate of inflation are unsustainable. Remember, increased housing prices exclude millions from economic opportunity, increases wealth inequality and slows growth.
Unfortunately, this new narrative for what constitutes a healthy housing market faces an uphill battle in overcoming entrenched cultural cognitive dissonance that is fueled by perceived self-interest.
Homeownership is a core part of the american dream and 64% of Americans are homeowners. When home values rise, they become wealthier.
If you asked a homeowner:
- do you want the value of your home to rise?
- do you want housing to be more affordable?
They would likely respond yes to both questions, even though their responses are mutually incompatible.
A Radical Idea
What if homeowners came to believe that increased housing prices were not in their best interest? The evidence points in that direction.
First of all, when your house gets more expensive, so do all the other houses. Let’s say you buy a $250,000 house with a $50,000 down payment that you’ve worked really hard to save for 5 years. Then, in 3 years your house increases in value by 10% and is worth $275,000. Congratulations, you are now $25,000 wealthier. But to what end? All of the other houses now cost more too. If you want to buy a bigger house, you have to take on more debt and pay $20,000 of fees to real estate agents to sell your existing home. If you want to stay in the same house, you can’t use that wealth for anything unless you take out debt, which is also dangerous. At the end of the day, you have exactly what you started with, 1 house. The paper value is a dangerous, alluring distraction.
Second, high housing costs drive up the cost of everything else. Sure you have more paper wealth, but higher rents mean other residents can’t afford to live unless their wages go up. That means you lose teachers, firefighters, policeman, waiters, nannys, the list goes on. Those who remain demand higher wages, which translate to real costs you will pay every day. Not to mention a loss in community vibrancy. Who want to live in a society without a middle class?
Third, high housing costs slow economic growth. Remember that higher housing costs the California $140 billion a year? The same is true on a national scale. National GDP is a full 10% less ($1.6 trillion) than it would otherwise be, due to high housing costs. Your house is worth more, but your lifetime earnings are much lower. Slowing growth is also a huge problem for government entitlement programs that homeowners depend on in retirement. Social security, medicare, medicaid and pensions are all underfunded; slow economic growth increases the likelihood that those obligations will be paid for by new taxes, which will be levied on everyone, including homeowners.
Fourth and finally, high housing costs are a generational wealth transfer. America is fortunate to benefit from a growing population. As the young members of society enter the housing market, they drive up housing prices, which enriches their parents, but jeopardizes their own financial stability. Put it all together and you have a record number of working age adults living with their parents, whose homes are worth more than ever, but now have another dependent.
Embrace the New Narrative
Affordable housing and rising home values are mutually incompatible. The good news is that a truly “healthy” housing market is one in which housing is affordable, because prices are low. This narrative is in some ways very uncomfortable for a nation of homeowners who watch their paper wealth increase as prices rise. But, if we can come to understand the pervasive ways in which costly housing creates tremendous harm for the homeowners and renters alike the better equipped we will be to find appropriate solutions.
ps Homeownership is still great. Just because rising home prices are bad for society does not mean that homeownership is a bad. Homeowners can still reap the benefits of stability, roots in a community and many other joys. So by all means, buy a home and live the american dream.