Tuesday, December 29, 2009

"Bad News for Housing: Prices Flattening"

The quote is the headline of a story on CNN money. The author seems to take it for granted that it is good for housing to cost more, bad for it to cost less. I don't know if it has occurred to him that every time a house is sold, it is also bought, and that while a lower price is bad news for the seller, it is good news for the buyer.


Michael F. Martin said...

I remember you making this point in one of your books. Of course that's correct.

But an asymmetry does creep in because of the leverage used to buy homes. Declines in value can wipe individuals out since many buyers (if not most in some areas) have only a thin cushion of equity permitting them to (at least nominally) claim ownership to their house.

The article reflects a profound truth -- that leverage requires one to be correct about both the direction and the timing of market price changes.

Gray Woodland said...

I seem to recall your going further than this elsewhere, and pointing out that for most goods - food, computers, and so forth - most people have excellent reason to wish real prices to trend down rather than up. So the pro-boom argument is going further astray than in only missing a logical symmetry.

However, for people heavily invested in housing, the tone of the linked article is surely just about right.

This may accurately reflect the profile of CNN Money's expected audience. I'm rather more confident that it reflects the profile of its bosses - to say nothing of their political pals.

Who might find it very much in their rational interest to keep this particular chestnut passing for 'common sense' by ubiquitous and authoritative-sounding repetition...

Anonymous said...

Falling house prices are bad for creditors.

But since many people are underwater on their mortgage, falling house prices are good for many homeowners (assuming they can default without any terrible consequences).

Randall Randall said...

Well, increasing prices are good for sellers, as you point out, and also good for owners, since any owner is a potential seller. Since every buyer becomes an owner immediately, though, even buyers only wish for housing prices to fall in the tiny window they're buying, and to increase thereafter, so I think it's safe to assume that nearly everyone wants housing prices to rise, at least while they are affordable at all.

Matt said...

It always seemed to me a little nuts that the price of a basic necessity of life shooting up 20% per year was great, but now its crashing back down is a disaster.

If the problem is we have too many houses is the solution to start bulldozing some?

Matt said...

Also for most of your life you're (with luck) moving up the market. If you are consistently buying more house that you're selling wouldn't you prefer lower prices?

Gray Woodland said...

Randall, are you illustrating a psychological rationalization, or asserting a valid rationale based on a sort of sunk-costs ratchet effect?

I'd have expected the disadvantages of trading up during a price boom to be very much in a lot of people's minds, and I'm a little puzzled at just how low a profile this has.

Bill said...

This post would be a lot stronger if you interacted with the actual reasons smart people think it would be good for housing prices to rise.

For example, that a lot fewer banks will fail with rising house prices. That a lot fewer MBSs will default, limiting the harm to perceptions of honesty and stability in financial markets. That higher prices call forth supply and since the contraction in employment was concentrated in construction, this would have good macro effects.

You may think that the macro transmission mechanisms implicitly being appealed to in these stories are wrong, but the people who want the housing market reflated want it for reasons a lot less superficial than those provided in, say, this post.

Anonymous said...

"For example, that a lot fewer banks will fail with rising house prices."

This doesn't matter, sice the Fed and/or the Treasury will bail out any banks which do fail. And it's a bit hard to "call forth" new supply of land, which is what most of the price rise comes down to.

Randall Randall, increasing prices are at best neutral for owners, since an owner who sells has to rent thereafter, and rents track housing prices in the long run.

Michael F. Martin said...

@Anonymous 11:26 AM

You must live in a big city. In those parts of the country where the bubble and crash have had the biggest impact, it is not the value of the land that drove prices up.

In fact, some folks at Yale and Lee Fennell at Chicago have suggested that home prices would be more stable by mandating insurance against declines in home price due to off-site factors. This would effectively add negative feedback into any trends in home prices in areas without a diversified local economy to support mortgage payments.

Eric Rasmusen said...

I wonder how much of the increase is inflation in general?

Anonymous said...

From a fundamental point of view, it would be best for humanity if housing costs were zero. Then, all the resources currently spent on housing could be used for other purposes, increasing the total quality of life.

Although that ideal situation is impossible, it shows that, fundamentally, the lower the cost of housing the better, for humanity overall. The only people who are hurt by falling housing prices are those who made past (possibly leveraged) investments in housing. They want higher prices for their investment without regard to the fact that such higher prices depress the standard of living of the population as a whole.

Consider the fact that air is free (more or less). If we had to pay for the air we breath, would we be better off? Would we be better off as air became more and more expensive?

neil craig said...

It is the only industry, apart from Old Masters in which expansion consists of prices going up rather than quantity sold going up. Imagine if computers were like that.

The reason is that we have government rules which severely restrict new house building sothe number of houses cannot significantly go up. Since Henry Ford invested mass production house prices have gone up roughly 4 times compared to other prices. There is no technological reason for this - it is all government enforced monopolism.