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Comment by nostromo | Hacker News Reader

A number of your indicators are signs of a booming economy.

Rents go up when people can afford higher rents. Consumers take out loans and save less when unemployment is low and they feel safe in their job prospects. Inflation was below healthy rates for a number of years, and is now where the Fed likes it. Wages aren't booming, but they're up, and up more than inflation.

Chapter 11s were at the same level in 2011 -- were you predicting a recession then too?

There are also reasons to be optimistic, for example, US corporate earnings are way up -- 2018 is up 20% over 2016 alone -- that's huge.

https://tradingeconomics.com/united-states/corporate-profits

I think that the article is right: while the US seems very healthy, there are lots of international issues that could form the next recession (China specifically).

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Speaking from this space, everyone I see on my end is paying higher rents but it is eating into their ability to save and forcing them to consume less. Wage increases exist but are coupled with moves to riskier companies.

> Rents go up when people can afford higher rents.

Only if supply is capped artificially, e.g. in major cities where it's almost impossible to build.

> Consumers take out loans and save less when unemployment is low and they feel safe in their job prospects.

Other reasons to take out loans: The wealth effect (currently fully in force), cheap loans (record low interest), easy loans (no risk assessment), outright stupid loans (US student loans) or loans that are necessary to make ends meet. All signs of a market overheating.

> Chapter 11s were at the same level in 2011 -- were you predicting a recession then too?

There was no reason to predict it when it had already just happened.

It goes up regardless of building restrictions in a booming economy, but restrictions can make it worse.

This is called the Law of Rent. Land prices function like monopoly prices, and rise whenever the value obtainable from the location rises compared to the best available rent-free alternative. Seeing how there's usually no rent-free alternatives, prices tend towards the entire value obtainable from the location for an average consumer.

For instance, the value of the location may be money and time saved on commuting. You'll generally find that the money and time you save on commuting about equals the higher land rents, netting out to no monetary benefit between the two options.

The Law of Rent is about the cost of leasing the land from the owner of the land. This is not the relationship between tenant and the owner of the real estate.

It's not the tenant who is looking for maximum productivity from the land, it's the real estate owner renting out places to live. A tall tower housing more people paying individually lower rent is more productive than a small house housing a single affluent person. Unless building is restricted artificially, supply increases until demand is met fully, which leads to price competition and ultimately rents that are as low as they can be.

> supply increases until demand is met fully

That is a very optimistic view.

What I've seen in Finland and UK is pretty much the opposite of what you claim. In both countries the housing supply in growth centers is essentially controlled by a handful of huge developers. In an attempt to make the planning permission system more comprehensive, it has only turned out more complex and expensive to navigate. That means that only the largest operators can afford to work within it.

In both countries we see developers deliberately restricting the speed with which new housing stock enters the market. In UK, the common pattern seems to be to sell a floor or two at a time, while the others are still supposedly under construction. In Finland, the developers literally shut down their sales and rather took a hit in maintenance costs than sell their available stock while the market was too slow.

Your assumption therefore makes a crucial mistake - it stems from an assumption of perfect markets and unrestricted housing supply. In reality neither of those two hold true.

> In an attempt to make the planning permission system more comprehensive, it has only turned out more complex and expensive to navigate. That means that only the largest operators can afford to work within it.

That's exactly what I'm talking about when I say "artificial restrictions". Don't assume that the market players don't want these restrictions, it's easier to sit on past success than fighting for sustained success. Big players always profit (relatively) from regulation, it keeps down competition from below.

> Your assumption therefore makes a crucial mistake - it stems from an assumption of perfect markets and unrestricted housing supply. In reality neither of those two hold true.

Of course it's an idealization, I'm talking about what would happen to prices if these restrictions didn't exist. Housing supply doesn't have to be unlimited, demand could easily be met, we're far away from any physical limits. You really have to ask yourself, why does San Francisco not look a little bit more like Hong Kong? What would happen to minimum rents if a dozen of residential highrises could be built near the center?

Rent rises with the productivity of locations, and density makes locations more productive in the aggregate. Agglomeration is the economic term for why that is.

It may seem paradoxical to you, but supply and demand simply doesn't function the same way when it comes to land. The supply of land is fixed. That is why rents are more like monopoly pricing.

The supply in question isn't land, it's housing. There's enough vertical space available, so far all intents and purposes, it's not a limiting factor.

What's limiting efficient land use is artificial constraints put on construction.

> e.g. in major cities where it's almost impossible to build.

If you define a major city as > 1mil, then nearly 10% of the US population falls into that category. That doesn't include cities, like Portland OR, which are notorious for artificially capping housing. So it's likely to be closer to 20-25% (or more) of the US population.

1. http://worldpopulationreview.com/us-cities/

"Consumers take out loans and save less when unemployment is low and they feel safe in their job prospects" - this likely applies to the upper 20% (my estimate) who have enough savings to survive an emergency and can afford to save a little less to put in the new kitchen. The majority of people especially those who cant afford a $400 emergency save less and take out CC debt because they need it to survive until the end of the month.

Rents do go up when people can afford it and then there is the very real possibility of a a large portion of people suddenly not being able to afford it anymore and evictions spike. People afford it because they have to live somewhere if all rents in the area are high and they cant afford to move, they cut elsewhere. The 35% of people that cant afford $400 cant afford to move so they will eat the rent increase of $50 per month because they have no choice.

Chapter 11's are an indicator, perhaps not a strong one but as business consolidates, employee choice is affected.

> There are also reasons to be optimistic, for example, US corporate earnings are way up -- 2018 is up 20% over 2016 alone -- that's huge.

Isn't that mainly the result of the large cuts to corporate taxes? Deficits are also up as the article notes for the same reason making it harder for the US government to respond with stimulus in the event of a recession.

Sadly, booming economies often create the conditions for recession (e.g. supply chain constrictions, pricing distortions). They're hard to predict - often we don't know we're in one until it's been going for months. The old adage still stands - if it can't go up forever, it'll come down.

> A number of your indicators are signs of a booming economy.

35% of adults not being able to handle a $400 emergency is a sign that a third of the country is barely managing to live, and a relatively small problem can have huge consequences for them. I don't know about you, but it really makes me sad.

> Rents go up when people can afford higher rents

Or is it that rents go up when people can't afford to buy homes due to higher interest rates and down-payment requirements, which ends up putting a lot more people in the renters market, thereby raising rents in a supply-demand price war?

Asking, not stating.

In my opinion, you are right. Supply-demand is a universal driver. Ie. An aging youth that cannot afford homes. A whole generation, introduced to the renting market.

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