The economy is going great, except for the housing market
investopedia.com
investopedia.com
You're assuming a definition of "crisis". 2/3 of households own their own homes, and a big chunk of those that don't aren't looking to buy in any circumstances. As much as we hear about the high cost of housing, it's only an issue for an extremely vocal minority. That's not to say I don't view it as a problem (clearly it is) but I'm skeptical it's going to win any political battles.
1. "Household" is not the right unit of analysis, since a household is defined as the set of people in an existing home. Some of these include adults who would like to move out, creating a new household not accounted for in your denominator.
2. According to the U.S. Census Bureau, the average American moves approximately 11.7 times throughout their lifetime. In other words, current homeowners generate demand for housing just as non-homeowners do.
If I lost my job and was unable to find something reasonable in my relatively non-existent local job market, I would be looking to move to somewhere with a larger employer base and barely be able to make a down payment on entry level housing.
They have to buy another at a higher interest rate. It's not a wash, I think it's a loss for most. If I sold my house, then bought another at the same size, the gains would not cover the monthly mortgage increase for very long.
No one is going to purposfully crash the single largest market in the world. Hyperinflation is comming.
By the way, hyperinflation doesn't just mean "large inflation". It's defined as 50% increase in prices per month. Yes, governments often (not always) choose to inflate the money supply rather than pay their debts. No, nobody deliberately chooses hyperinflation.
Mind you, you could be right this time. It could be that the next government will overspend enough (no matter who wins) and Congress will be irresponsible enough that we do in fact wind up in a hyperinflation. But so far, naysayers have predicted ten of the last zero hyperinflations.
Entire foreign countries (read: most of the world worth caring about) invest in and hold the US, whether that's stocks or bonds (Treasury bonds especially) or literal USD. The only way the US crashes at this point is if the entirety of humanity has shit the bed, it's otherwise a force of nature only going up up up.
My fear for 10+ years has been that another county or block will start a gold, commody or electronic based currency and the world will flood to the backed currency dumping USD as fast as possible. Bitcoin ALMOST became that black hole of USD before Adam Back's Blockstream was able to sucessfully hijack the BTC GitHub repo and inject hacks like SegWit and RBF that essentially killed BTC as a currency.
USD doesn't have to die, just something slightly better has to come along.
(Or, we could in most cities. A few, like New York and San Francisco, are very limited in terms of available land.)
There are zoning codes in Tokyo, but they're quite flexible compared to what people in the US are used to. In addition, perhaps most importantly, it's not possible to oppose construction, as opposed to the the US, where literally anyone can halt a construction project indefinitely for literally any bogus reason. "It might cast shade on 1 square foot of the street!"
zoning, absolutely. however, in a lot of places we have homeowners' associations as well.
random density doesn't help much, need to build density near existing and planned infrastructure.
Care to explain more? I hard disagree, and I think the research is on my side.
"Just build more" is not a solution on its own, at all.
The other side of the equation is that wages could increase relative to the price of housing.
> The other side of the equation is that wages could increase relative to the price of housing.
It's a system problem with various feedback loops, and people absolutely aren't getting paid enough and don't appreciate how little money they're making relative to what it can buy. In my city we're at a point where a new studio condo with no walls along a major thoroughfare outside the downtown area starts at ~$600k CAD, and older one bedrooms in the same range will still have asbestos and coin-op laundry in the basement. My landlords recently moved out and our living circumstances long-term are being considered. I had a conversation with one of them and she was seemingly clueless about how vulnerable it might have made us, and that's a bit humiliating; "but you guys have been here a while and surely you're making good money since moving in 5 years ago", to which I actually laughed and didn't elaborate, since we now depend on them putting in a good worth with our new overlords. We don't have the job security, we don't have the proportional increase in earning potential. Any decent money made gets erased in the next round of layoffs. Burn it all down.
So what happened to the owners of those three houses? Well, their land, which before could only had 3 dwellings, has 24. So while the value of the built houses they had dropped to zero, the value of the land they were built on went up spectacularly, so their investment paid off anyway.
Barring the craziest of regulatory situations, no house is ever a good investment. They degrade and get worse! But most homeowners end up ahead, because they own the land, and it appreciated faster than the house depreciated. And as a city gets bigger and more prosperous all land near it gets more valuable.
So all in all, in cities that aren't shinking, it's likely most homeowners end up way ahead, and the closer to downtown, the more they gain. It's only when a city shrinks that the homeowner really loses money.
1. It became was more-expensive for individuals to own a house, especially in areas with high local property taxes. (Losing the ability to deduct those payments from their personal federal income bill.)
2. Taxes on corporate profits went down in general, and some portion of those corporations may be in the business of buying housing and then renting them out. (Since companies are taxed on profit rather than income, they already pseudo-deduct property taxes and other expenses.)
That said, those two items don't feel like, er, "two ends of the same see-saw" to me, especially given how #2 is very broad.
Therefore, it becomes beneficial for the (even the same individuals) to invest in corporations that rent out real estate; and removes the ability for the city to use homestead exemptions to help discriminate to encourage owner occupied units.
So you get higher home prices/rents with fewer owner occupied properties, with less incentive for community investment (including property taxes), and fewer levers for the state/municipality to pull.
Municipalities are their own worst enemies with restrictive zoning and small-minded inability to consolidate services with neighboring districts that don't need so much duplication.
If corporate income taxes are 21%, income is reduced by expenses such as property taxes.
If individual income tax rates are 24%/32%; and a state has a low income tax rate of 5%; then a married couple making $200k earned income, then a salt cap at $10k, pays 25% more in property taxes than the corporation.
So, even if the state and local taxes are massaged to give owners a 25% discount for being owner occupied; they don't.
The idea is not the the state/city needs less services; owner occupied properties often want more services and are willing to pay for it; but now the city can no longer create policy that supports that.
I wonder if it will be allowed to expire on schedule and my taxes will go back down. Probably too much to hope for.
But I'm also willing to admit there may be some very solid policy reasons why this is a good idea. I have tried to imagine some, but no luck so far!
What kind of impact did making SALT tax no longer deductable have on the federal government? Did this change the budget noticeably?
You hit it on the nail. That was even part of the pitch, that it would hit blue states harder than red ones.
Even then, I expect the real goal was just catering to the folks with deep pockets. No attempt was made to hide that -- half the tax 'cuts' expire, but the other half are permanent. Guess which half...
Unfortunately, housing in most areas was screwed to begin with. This was not nearly the case with prior inflation bouts that required rate increases. The Fed was left with two bad choices. It did what it had to do.
If the economy was Windows XP, housing would be its networking stack - its most exploitable sector. This is largely because of local governance and regulatory capture [2]. Housing has been artificially undersupplied for 5 decades under a variety of pretexts, such as architectural integrity. It has effectively turned the sector into a pyramid scheme that captures the wages of renters.
[1] https://archive.is/8wAry (from https://www.nytimes.com/2022/04/19/opinion/inflation-interes...)
Prices consistently went up over the last couple years of high rates. The recent fed funds rate drop didn't seem to help, and last I checked loan rates had stayed flat or actually gone up a bit.
If loans weren't hurt enough them the Fed stopped raising rates too early and dropped much too early. Otherwise it would seem that they dropped in anticipation of something coming and loan rates are staying high anticipating higher risk of the same issues ahead.
As for how the Treasury and Fed managed the crisis, it was easily the most incredible macro success story since I've been alive. Had you told me in 2022 that they'd manage sub-3% inflation without a recession at all, I'd have said you believed in fairy tales.
New construction and prices are always connected, I'm not sure how you could consider one without the other. New builds increases supply, but building them requires buyers willing to pay market price for them. You can't have one without the other.
> As for how the Treasury and Fed managed the crisis, it was easily the most incredible macro success story since I've been alive. Had you told me in 2022 that they'd manage sub-3% inflation without a recession at all, I'd have said you believed in fairy tales.
Its too early to make that call either way. They may very well have managed the "soft landing" they kept pitching, but we really won't know for sure for at least a decade or so. Markets move slow and economies move even slower, give it time to shake out before popping bottles and awarding Nobel Prizes.
> we really won't know for sure for at least a decade or so
We absolutely already know. The contractionary effect of a raise in rates is largest in the short term. You can't have a lagging effect after rates are cut if there was no contraction to begin with.
That may be a goal, but it isn't the goal. The fed doesn't directly control interest rates on new construction, they control the fed funds rate. Their changes impact the cost for banks to borrow money regardless of the type of loans they underwrite. Increasing rates should decrease demand for new construction, but it decreases demand for existing homes as well. It also negatively impacts employment and many other areas, basically if your run on debt the higher rates hurt.
> We absolutely already know. The contractionary effect of a raise in rates is largest in the short term. You can't have a lagging effect after rates are cut if there was no contraction to begin with.
What makes you say that? Lagging effects after a rate cut aren't directly controlled by, or limited by, what effects we currently have - they wouldn't be lagging if the effects must have already happened. More importantly in my opinion, contraction isn't an absolute and requires a baseline for comparison.
After rates are cut we can't distinguish between a contraction relative to where we would have been without intervention. Comparing against a gross number isn't particularly helpful.
For example, say we had a house worth $100k and it was on track to be worth $110k next year. If we intervene and now it will only be worth $105k next year, wasn't that functionally a contraction induced by the intervention even though it didn't fall below the present value of $100k?
The question is not what's affected. It's how much monetary policy it takes to achieve the desired output and employment effect, and where is the employment effect. We want to stop increasing rates once the effect is achieved.
We raise rates because the economy is overheating. Too much money is chasing too few goods, raising prices. In response to the favorable prices, too many jobs are chasing too few workers, raising wages.
Rising prices and wages (without rising productivity) means inflation. We're at one edge of the Phillips curve [1] and need to move back to the middle.
> That may be a goal, but it isn't the goal.
The goal is actually to raise unemployment. That's what the "cooling the overheating economy" euphemism means. However, we don't have the tools to raise it evenly in all sectors. The only tool we have is the short term interest rate.
Luckily, it affects the long term rate, which affects demand for homes, new and existing. For (say) every 20 fewer homes sold, one realtor and one banker might go unemployed. But for every 20 fewer new homes built (say), 50 laborers might go unemployed. That's why the transmission is primarily through construction [2] [3]. The consumer durables sector (appliances) used to have a large multiplier too, but most of those manufacturing jobs have been automated or moved overseas.
> they wouldn't be lagging if the effects must have already happened
You can model the lag effects as geometric decays of the original impulse. You need a negative original effect (one impulse of high unemployment) that will then regress back to baseline (continued but fading unemployment.) We didn't have any impulse, hence no decay.
The only thing that could really go wrong is a resurgence of inflation if the cuts were too fast, but chances are we would have seen that already too.
> relative to where we would have been without intervention
The problem here is we were at too much output/employment. We had to get through that moment and fix the problem without overshooting in the opposite direction.
We couldn't do better, that's the whole point. It's not like there was potentially more output to be had. The actual problem is that output was too high. That's why there was inflation.
[1] https://en.wikipedia.org/wiki/Phillips_curve
[2] https://www.usnews.com/news/economy/articles/2022-12-20/new-...
[3] https://www.infracapfunds.com/post/why-the-us-is-unlikely-to...
Between the Sunshine Tax and thin strip of land that everyone wants to live in, and there is no solution to affordability. (Except the usual go So Cal go east until the price drops)
Homeowners are the only caste that matters.
Renters are grudgingly accepted as human in some limited circumstances.
All other adults are considered subhuman.
Not only could the government implement austerity to pay of debt or attempt to reduce inflation, they could directly control approval over every digital payment you make.
Is it better that this is instead controlled by a narrow set of “private” actors who use their private status to deny everything the government would deny plus things it constitutionally (mostly for first and/or fifth amendment reasons) couldn't?
Unless you find yourself in a political environment where the private and public sectors have merged, the state will always be more powerful. PayPal can block a transaction or even put a hold on my fund for 6 months, but they don't have an army and can't drive a tank down my street. More realistically, they also can't stop another bank down the street from taking my business.
Just look at what the Canadian government did during the trucker rallies. When the protesters wouldn't leave the government forced banks to shut down accounts, blocking protesters from being able to get hotel rooms or buy food and fuel in the middle of winter. And they were able to do that without directly owning protesters' bank accounts. What would they do once the government doesn't have to worry about forcing a private bank to comply? And though it may be reasonable to think today's government wouldn't do that, what about tomorrow's?
That's a much more important issue in my opinion, I assume we agree there. I wouldn't be surprised for any one bank to be picky, but if almost every bank refuses to service a certain type of customer that's a problem. More broadly, its a problem that having a bank account is effectively required to live in modern society.
> the unbanked population would still likely benefit from the existence of a minimalist USPS banking option.
Agreed here as well, at least in the short term. The government we have today doesn't seem interested in flexing that authority even if they had it, though the government does have a history of a slippery slope problem when it comes to federal powers.
Income tax was initially sold as a tax of only 1% on the most wealthy. While it was originally limited to that, the government gave itself the power to tax income and it only grew to leverage that more. I have no reason to think banking would be different.
They may only want to help the unbanked today, but when a big bank fails the government would offer accounts and may even offer full replacement for lost funds due to bank failure. That alone wouldn't matter, except that it could tip the scale of cost/benefit that made a USPS bank worth it for those with no other choice.
Many banks don't let you use a PO Box, but there are services for mail forwarding that give you a regular address. That also isn't my biggest complaint with banks today if we want to complain about them, I don't think that'd rank in my top 10.
What have you seen that made you think homeowners are a caste, or that anyone who doesn't own or rent is subhuman? Genuine question, I just haven't seen anything in my years to make me see the world that way.
I get it, for this author the loudest squeak is housing cost. But he really needs to also work for a big picture.
for the average joe they're working more and getting less, and getting absolutely clobbered by housing. you can do with out a new computer or a netflix subscription, but you gotta live somewhere
Looking at the securities market (stocks and bonds) they're basically a statistical anomaly with how good they're doing. Inflation is irrelevant with luxury goods and bad with life's necessities. Cost of housing is too high in the metros and reasonable in rural regions. Wages and salaries for the rank and file are stagnant but are going up for management. etc. et al.
Besides, if the theory of inverse correlation or no correlation between bonds and stocks (read: the economy) holds, it's arguably a good thing bonds in relative terms aren't doing too hot right now.