Interesting bit from Julian Sanchez in the December Reason:
As market watchers puzzle over the the current housing boom, a recent study suggests government may be fueling price increases.
In a paper to be published in the American Economic Review, two Harvard economists, Edward L. Glaeser and Raven E. Saks, and Joseph Gyourko, a professor of finance and real estate at the University of Pennsylvania, note that housing prices have been rising at a brisk clip since 1950. Until about 1970, they increased more or less in tandem with construction costs. But in recent decades, the gap between house prices and construction costs has been increasing in many metropolitan areas, especially in the highest-priced markets. Normally, rising prices lead to a corresponding construction boom, yet new building seems to have lagged behind ballooning price tags. Evidence points to manmade scarcity, in the form of government regulations on new housing, as the culprit.
One factor, Glaeser and his co-authors note, is a trend toward court decisions hostile to new development. But what explains that change? One intriguing possibility is that media scrutiny has made it more difficult for developers to grease the regulatory wheels by means of under-the-table payments to local politicians. But the most plausible explanation is the increasing organization, sophistication, and political participation of homeowners’ groups and neighborhood associations, which have become adept at using political pressure, courts, and the media to block new construction.
Aside from the aesthetic benefits of a low-density neighborhood, people who already own homes benefit from less competition when it comes time to put their houses on the market. If the paper’s explanation is right, then American dream of home ownership may have matured into a cartel.
The tension here for libertarians is interesting to consider. On the one hand, Sanchez clearly favors competition and deregulation; on the other hand, citizens using market principles to increase their property value seems quintessentially American —and using “political pressure” and “the media” to block new construction is simply using free speech to advocate for your position. Using the courts is more problematic, unless of course these homeowners groups are simply using the remedies of established law.
And so here’s an interesting question: are such “cartels” ipso facto anti-libertarian? Or do they represent a certain intriguing manifestation of the libertarian impulse toward free markets—with market “freedom” here marked by a freedom to use information and persuasion to game the system and guide the market not through regulation, but rather through all fair means available to citizens under the Constitution? After all, developers can use the same mechanisms to fight back, can they not?
Thoughts?
Well, at what point do freedoms used to restrict other freedoms lose the moniker “freedom”?
Turing word “issue”, as in “Interesting issue, though.”
I wouldn’t count Sanchez as much of a libertarian. He is just a liberal/leftist who gives props to markets sometimes. He’s willing to use force to block a Wallmart, but not to overthrow a genocidal dictatorship.
Since you asked for our thoughts, here’s mine: the so-called cartels are manifestly anti-libertarian because they’re using a regulatory syste (a fairly corrupt one, in fact) for the purpose of stifling, or even controlling development. I’ve had to pitch several buildings to various city councils and zoning review boards, and I would generally describe the process as less appealing than having a cathader removed with the amount force employed to pull start a lawnmower. Even worse, the permit process increasingly gives power to government officials to impose upon architects and developers their own aesthetics (which tend towards the garish and put-put golf course inspired historicism) simply on a whim. If I own a piece of property, I should be allowed to develop it as I see fit so long as I don’t harm others or create a nuisance in the process. Sadly, this very fundamental aspect of indivual liberty has been almost totally overwritten.
Now, of course, I hate to engage in the legal “well what if…” stipulation often used by lefties and the feminist types (Not so much the feministe types) where we dig for consequences of a policy decision and then must account for every imaginable misuse, but you’d think that, at the rate this is going, the market is getting de facto regulated by the cartels, instead of the government.
Were Katie Holme’s nipples absolutely necessary in telling the story to Batman Begins?
As far as thoughts regarding your post….no, not really. I mean, my backyard consists of a brick fence, a road, and a large swath of tree covered land. Ripe for a CVS or Wal-Mart, and I’d fight it tooth and nail if it ever came to that. But I’d do it using the media and political pressure, not the courts. There’s nothing wrong or anti-libertarian with gaming the syste (that’s what the system is there for).
Damn. Musta missed that.
Well, is there a Line(tm) on gaming the system that exists to be not crossed? I’m undecided here, but this is fairly interesting to think about.
Any time people game “the system” when “the system” is “the government” it’s anti-libertarian. As such, I don’t see this system really reflecting a free market outcome, but rather, the usual market distortions which occur anytime regulatory restrictions leech onto a market. A libertarian solution for home owners which I would not have a problem with would be to simply buy up all the land, then only sell it to people who signed onto a corresponding set of deed restrictions.
Of course, extreme anarcho-capitalists (e.g. Robert Anton Wilson) argue that land ownership is anti-libertarian unless that land is actually being used by the owner. It all ties into the old P.J. Proudhom joint concepts of “Property is theft,” “Property is liberty,” “Property is impossible.”
Depends Ohnoes. Like I said, my property is at it’s worth because of the view it has – more pointedly, the fact that you can sit on my back porch, sip some tea, and not see a single Ford dealership.
Whoever owns that land has had to receive mega offers on it because it’s prime area for residential building. But they’ve so far failed to sell it and instead use it to farm honey bees and a rather scraggly looking set of pines. Fine with me.
If they do decide to sell, I have no issues raising a stink about it so that (a) if they build houses, they will be of the same quality as my neighborhood (or greater) or (b) ensure that the prospects for building a Starbucks are unattractive due to the negative press they will receive.
I won’t lay down in front of bulldozers or take potshots at construction workers. I won’t sue. What I would probably do is see how bad the price of my home drops and take what I can when I can and move my family someplace further out. Sucks, but it’s either that or look at a strip mall during dinner.
So-called “smart growth” advocates seek to increase the value of their property by restricting development of neighboring properties. In the north Texas suburban city where I live, they successfully positioned themselves as defenders of the pastoral character of our town. They succeeded in having farmland zoned as wilderness preservation (wilderness only 5 miles north of one of the world’s largest airports.) But they only did so after their properties were zoned for development and they were assured of hundreds of thousands and millions of dollars. I can’t be assured of the motives of all members of the movement, but several have told me that property appreciation was the important goal.
I think this simply NIMBY (Not In My Back Yard)on a national scale. Everybody wants the nice house and the big yard, but nobody wants more traffic, pollution, or longer lines at the grocery store.
What I don’t believe is that homeowners are actively thinking about how to increase their property value through legislation. They’re actively thinking about new carpets, an addition, a home theater, or an improved irrigation system, thus the rapid rise of Home Depot and others. The fact that almost unchecked growth in the ‘70s and ‘80s has resulted in recent laws to limit growth is at most a secondary and likely an almost subliminal thought for most of us.
Put another way, if you asked most Americans if everyone should own a home, I’d wager the answer would be a resounding “yes”. Then ask if it’d be ok to build some of these new houses within 5 miles of them and the answer would change to an almost unanimous “no”.
So I wouldn’t yet characterize homeowners as a ‘cartel’, but as available land dwindles and the crowding that plagues many cities becomes universal? Sure, a politician could successfully court this group with specific legislation (and will, no doubt) though I haven’t seen that done yet with any sort of specificity or vigor. Politicians still prefer to use the surrogates of class instead. “Middle class” and the like.
I think he’s partly right and I think he is partly wrong. (Boy, I can straddle a fence) I have often said (for many years) that the cost of housing (and medical care) has increased due to the establishment of a “subsidized market”. That is, that prior to HUD & FHA the home ownership market consisted of those willing to save enough for the required down payment and the consequent equity required by lenders.
With the advent of the “no down payment or 3% down payment” mortgage loan, subsidized or guaranteed by the government, there has been an increasing demand. That coupled with the recent “creative financing” of ARM’s, etc. and the creation of Freddie Mac and Fannie Mae, the relaxation of debt to income ratios, demand has outstripped the supply. The result is, in dense areas, existing property has increased significantly in value. So much so, that in certain desired areas, it is economically feasable to purchase a property and raze it to build a new home.
Just as the government has done with Medicaid and Medicare to the medical services (artificial or, if you prefer, subsidized demand) has created an “Industry” versus a service, they have done the same to the housing market. It is now an “Industry” subsidized indirectly by the Government.
This guy definitely has a point. In the San Francisco Bay area (where I used to live), housing prices are outrageous. I had a friend pay $750 K for a tiny, dilapidated 2 story townhouse.
On the other hand, if you drive through the Peninsula (San Mateo county, south of San Fran), it’s half empty. Thanks to regulatory restrictions, no more houses can be built there.
The funny this is, most people don’t get this. I remember watching a local news broadcast which presented two stories:
1) Story one honored two “local environmentalist activists” for their work in “protecting the Bay area from development”
2) Story two complained about high housing prices and worried about the effect on the “disadvantaged”.
I didn’t hear the third story because I was too busy screaming at my TV set.
spam word: result. The effect is a “result” of the cause.
The main factors in the recent spike in property valuation (primarily on both coasts, but also in a few middle America hot spots) are:
1. Several years of ridiculously cheap money, which allowed many people to either a)purchase a first home; b)upgrade to a larger home; c)purchase investment property or d)all of the above
B. What I’ll generously term “creative financing”
The old standard of a 20% down payment/80% max LTV ratio has long since gone out the window. Not only can you buy a house in many markets –and through many lenders–with no money down, you can also often immediately sign on a home equity loan or HELOC, even though you have ZERO equity against which to borrow! There have been a lot of very poorly-secured loans made in the last few years, with both borrower and lender praying for continued appreciation.
III. Increasing amounts of speculative money pouring into the residential RE market. By some counts, in 2004-present nearly 2/3 of all 1-4 RE transactions were NOT purchased as primary residences. That is, of course, a ridiculously high proportion.
The net effect of all this, as rls mentioned, is to throw the demand/supply curve all loopy, especially in prime RE markets. That’s why a friend of mine was able to buy a condo near San Diego for $270,000 a handful of years ago, and sell it for $750,000 this year.
It is certainly possible that governmental restriction play a role in crimping availability, but new construction housing has also boomed over the last several years, so I don’t see that as true on a grand scale.
On a related note, that sound you hear is the beginning of the collapse (or at least correction) of the overheated market. Long-term money (i.e. 30-year mortgage) simply can not lag behind the rate of increase for short-term money forever. In fact, the climb has already begun.
My bank sells many of its loans to FHLB, and their 30-year rates have leapt from roughly 5.75 to 6.375 in a matter of 10 days or so. And they’ll go much higher before they go lower, I think. A consequence of this is that many of those who could afford larger mortgages on a 1/1 or 3/1 ARM than a 15- or 30-year fixed rate, and whose mortgages are now reaching their adjustment date, may find they can no longer afford their payments. And trust me—there are LOTS of them out there.
Once these borrowers, but the thousands, discover that they can’t make their payments, these brilliant, creative lenders are going to find that they have a heavy lourde o’ foreclosures on their hands at the same time as the market is cooling down and demand (and/or capacity) is dwindling. Bad, bad, bad.
Or maybe Bernanke will hold a Greenspan revival, ignore inflation, and keep rates low-ish. Either way, people are going to get their asses kicked in this.
Yeah, that’s all great and everything, but let’s not stray too far from the original topic of Katie Holme’s nipples and their effects on home prices, shall we?
Of course they are.
A developer does no harm to anyone when he builds houses on land he has purchased from a willing seller. He is producing a valuable good to willing customers on a voluntary basis.
Therefore, there is no justification for restricting that behavior. Only the prevention (or remedy) of behavior that infringes on someone else’s rights to life, liberty or property can be a valid basis for government action.
Now, in order to really get to the root of the cause for the explosion of housing prices (which in turn distorts and drives the construction market), we have to look at the insane policies of the Federal Reserve and the government’s easy-credit policies for mortgages.
The government has spent decades pumping money into the residential housing market. They have been engaged in a massive manipulation of the interest rates and other qualification criteria to qualify for a mortgage. Fannie Mae and Freddie Mac currently hold something like 7 trillion in housing debt.
7 trillion.
This, of course, has caused a huge inflation in the housing sector. They have artificially stimulated demand for mortgage lending.
The real bite will come when these policies have to be scaled back, which they will to prevent hyperinflation. When that happens, we will see a collapse of the housing market that will, in many ways, be similar to the stock market crash of 1929.
Of course, the Left’s response to this self-made disaster will be to call this a “market failure,” when it will actually be the result of a failure to allow the free market for housing to operate in the first place.
The old standard of a 20% down payment/80% max LTV ratio has long since gone out the window.
Although I agree that this is a reason for the housing boom, I also believe that the 20/down requirement was always a ridiculously subjective requirement anyway. And if you put less than 20% down, you had to pay PMI, which supposedly insures that you won’t default (as if having a higher than necessary payment guarantees loan payments).
I wish I was in the PMI business – I’d be worth zillions.
Of course, I’ve always held mortgage companies in the same category as ambulance-chasing lawyers and certain members of the New Jersey mob.
The point is this – mortgage companies used to bend backwards to make sure that NO ONE ever defaulted. It was easier to buy a car (which can be hidden upon default) than a house (which can’t). I’ve never understood this.
Whatever changed, it’s for the better. We now have competing mortgage companies, and lower terms. I can’t see how this is a bad thing.
TV (Harry)
I’m not talking about governmental restriction here, Phinn. My question was more to the rights of citizens. I’m asking about private homeowners using the press, their first amendment rights, and extant, constitutionally-approved law to advocate for their own property interests to thwart development they feel will lower property values.
The advent of PMI came only after the influx of HUD/FHA lending. PMI was used for those that did not qualify for low income assistance (HUD/FHA) so that they also could buy with a lower down payment. Today hardly anyone, especially first time buyers, pays 20% down. Thus an artificial demand is created.
Before Fannie Mae and Freddie Mac a 30 year mortgage was non existent. Local S&L’s had to be able to “churn” their mortgage money, so 10, 12 & 15 yr mortgages were the norm. That money had to come back in so it could go back out. Bad shit having to tell your customer that you didn’t have any mortgage money to lend him. With Freddie Mac & Fannie Mae the lender could sell the loan, continue to service it, collect a servicing fee and get his money back immediately to lend out again. As long as the packaged loan met certain criteria.
What I am saying basically is the reason housing is so expensive is because the Government fucked with the market – in sooooo many ways.
My wife and I will be in the market for our first actual house sometime in April and beyond. Instead of saving up for a large downpayment, we have instead been ridding ourselves of credit card debt, car payments, etc, so that our income-to-debt ratio will be miniscule.
Those of you who know about these kinds of things, is this a good tactic?
Good in many ways. Getting rid of debt prior to purchasing has always been one of my keys to “getting the house you want”. Your debt to payment ratio should be low enough to qualify you for the maximum house you think you can buy. Get pre-qualified and you are then a “cash buyer”, better able to negotiate with the seller. Not only that, but revolving credit debt always has a higher interest rate than mortgage debt.
I’m not talking about governmental restriction here, Phinn. My question was more to the rights of citizens. I’m asking about private homeowners using the press, their first amendment rights, and extant, constitutionally-approved law to advocate for their own property interests to thwart development they feel will lower property values.
How would this affect the development unless there was a political entity with teeth that could be influenced by such press? It’s not the developer who’s likely to be influenced by bad press, but some governmental agency with oversight powers.
Unless you are talking about using the courts via a civil lawsuit to block a development based upon anticipated loss of property value or other harm? I’m not a legal expert, but I suspect that would be hard to prove in advance of the development actually going forward.
I’m having a hard time imagining a circumstance where such a cartel could operate effectively without the cooperation of a political entity. Unless there is such a circumstance, I’d be inclined to say they are rather anti-libertarian.
Personally I can’t stand HOA’s and would only purchase property in an area controlled by a HOA as a last resort.
I feel the same way about HOAs, DC.
In the scenario I was imagining, I can think of instances where developers could be cowed by bad press and using existing laws to make things more difficult on them. These are the kinds of scenarios I was envisioning. Really just a thought experiment. Perhaps not a very good one.
This is a very interesting report from a Stanford Law student written for a talk for the free-market Civil Society Institute at Santa Clara University a few years ago. It’s really long, so here is the link, with some of the conclusions below:
http://www.scu.edu/civilsocietyinstitute/events/upload/SVHousing.pdf
· Artificial limits to growth are the single most important cause of the
Valley’s high (and volatile) housing prices.
· “Lack of space†is not the problem – housing density is not especially high in Silicon Valley, nor is open space especially scarce.
· Housing restrictions that are exceptional in Silicon Valley include zoning, building codes, affordable-housing requirements, development fees, urban growth boundaries, environmental review, and “open spaces.â€Â
· These policies are plagued by an intervention dynamic. Each new set of regulations leads to additional problems, which provide the motivation for yet another round of regulatory “solutions.â€Â
· Environmental and other anti-development attitudes have thus made the Valley’s housing market progressively less open, affordable, and responsive to consumer needs.
· Freedom is the best “affordable housing†policy – freedom of contract, private property rights, and minimal regulation.
On the basic question; the whole thing is very anti-libertarian. Using government regulation to control how someone else uses their property is anathema. That is what zoning is all about.
Allowing anyone with the scratch to buy property and use it for whatever purpose they choose is libertarian. This has the effect of holding property values in line and promoting best use. These are both goals of zoning, but rarely outcomes.
I’ve often said that the reason Houston succeeds is the invention of air conditioning and no zoning!
Ask Dennis the Peasant. I think you might know of him
http://dennisthepeasant.typepad.com/
As to real estate in the East, scarcity of land and scarcity of labor drive the price up. Irrevocably. We aint making land and we aint making tradesmen.
These are usually instances where a single-family residential subdivision was granted first in a rural area, and its home buyers get an “I’ve got mine, Jack” attitude and seem to think they also bought the right to control all the property they can see from their house.
Buffer zones between less compatible uses can be good; but often homeowners hang their arguments on “no more extra density than I already created” kind of arguments.
The instant need for all-taxpayer-subsidized government schools, on top of sewer, utility, and road extensions, all DO present serious problems for local government. Class flight often drives housing.
Governmental regulations have certainly hampered development in areas like California where housing scarcity is a perennial issue. I was working on developing a small shopping center in SoCal and was confronted with several governmental roadblocks that eventually spiked the deal. High land costs as a result of hardcore NIMBY action in the area didn’t help either. The entitlement process is very expensive and is now measured in years instead of months. Also, requirements that under certain conditions state law mandates that I pay my contractors the going union wage was instrumental in killing my project.
Oh. Well, then, yeah. Knock your socks off. No real libertarian objection there.
Although I suspect that developers would be more interested in the opinions of prospective house purchasers, rather than those of existing house owners.
But then, if the only thing the objectors have are their opinions, then we’re not talking about a cartel anymore. A cartel is, by definition, an organization that possesses a special power to punish non-compliant members and exclude new competitors. These things can only be accomplished with decidedly non-libertarian violence (typically governmental, although not always).
Any cartel that attempts to organize without the special ability to violate the property or other rights of its members or prospective competitors can never grow larger than about 5 members, and even then it will be temporary. Someone will always find it in his interest to cease to abide by the restrictions and take advantage of the opportunities.
As an interesting side note, there has never been a harmful monopoly or cartel in the history of the world that did not operate on the basis of that kind of violence. Not one. All true (and harmful) monopolies and cartels have always been government-sponsored, or backed up by some sort of criminal violence (but I repeat myself). They’re a myth.
The level of misinformation and ignorance that had to go into the campaign to get people to believe that monopolies and cartels result from some sort of market failure is absolutely mind-boggling.
Hm. Interesting. Some random thoughts:
– When my husband and I bought our house in a small town in Southern California, we were attracted to the quasi-rural nature of it, and the fact that it had a good school system. Now people are building large, tasteless “McMansions” that really–I’m sorry–do change the nature of this formerly charming place to live. I want to be a good libertarian and say, “hey, you should be able to build to the edge of your lot if you want to,” but a lot of the local developers want to so they can build huge uber-houses with practically zero yard. (Have you been to Southern California?–the main benefit is that it’s really nice here ten months a year or so. The perk is being able to go outside.)
– I don’t resent what I perceive to be “overdevelopment” because I want my property values to increase at obscene rates, but because I paid a lot of money to live in a town with a certain character, and that character is being destroyed by The Invasion of the Ugly Psuedo-Mediterranean Villas and the Psuedo Mexican Missons. And by the cramming of houses onto what was considered nine years ago to be unbuildable land.
– In the L.A. area the trend toward finding yourself a nice suburb and commuting appears to be reversing itself, now that it takes a good two hours to cross the city. Suddenly people want to live as close to their workplaces as they possibly can. Therefore small homes and condos in Pasadena, L.A., Burbank (where the studios are) and other areas “closer in” are becoming more popular.
– My husband and I are about to bail out of the market. We’d love to get back in in another year, so a “crash” would be perfectly lovely as far as we’re concerned. But personally I don’t really expect that: too many people want to live here. I really anticipate a small adjustment. We’ll see. Though a lot of people in entertainment are still hurting, and that’s bound to have an effect. (Thank you, reality TV. Thank you, idiot studio execs who only buy the blandest stuff they can find.)
– My town is small enough that the City Council does have to be somewhat responsive to people’s needs. For instance, a local retailer wanted to build a huge mall-like corporate center here a few years ago, and people were rather horrified: we like having a grid-like feel in the middle of town, and don’t want to have to look at huge parking lots in front of the stores (why can’t they go behind the stores?).
I want to ensure my point is clear on this (at least as clear as Mrs. Holmes’ nipples are in the scene where she’s walking trhough the charred rubble of what was Wayne manor) –
The people who own the land behind me have every right to sell their property to whomever they want. The only thing that would not raise my hackles would be housing that is at least the same level as what I live in – no low-income / multi-family / apartments, nor would I like it to go commercial (although where I live I can’t imagine someone would as its location wouldn’t be condusive to business).
While I could make a big stink about it, I would not use any sort of governmental intrusion to prevent anything. If I cannot change people’s minds through discussion and the media, then too bad for me.
Now if you’ll excuse me, I need to go unpause the DVD player before I have two, pencil-eraser sized dots permanently burned into the screen.
To an extent you’re right. It is good for buyers who have steady employment, some cash reserves, and who don’t bite off more house than they can…um…chew.
However, it is very, very, very, very bad for those who were able to qualify for a loan—particularly a short ARM—due mainly to historically, ridiculously low interest rates. If such a buyer bought the most house they could “afford” at artificially low interest rates, it ain’t going to be pretty when their rate adjusts. Sure you can refi, but then you eat up thousands of dollars of your equity (or reserve cash) in additional closing costs. And even if you decide to go that route, at this point you will certainly end up with a higher rate than what you initially had. Once that occurs, your debt service can quickly become untenable, and any kink in the family cash flow becomes a crisis rather than an annoyance.
It is also a bad thing for banks, especially smaller community banks who engaged in rate chasing while trying to compete with the big boys. There will be a marked rise in defaulted mortgage loans, I believe, and that hurts everybody involved.
Phinn – you echoed some of my thoughts, but I believe we will see a correction rather than a crash. Some of the most overheated coastal markets may see a severe correction—declines of 25% or so in a fairly short span—but I think that the market as a whole is more likely to stagnate, then slowly deflate. And even in those markets, the values will eventually rise again due to the scarcity issues mentioned above.
Jeff G – paying down other debt isn’t a bad way to go, for a couple reasons. First, it will improve your D/I ratio and enable you to (assuming good credit history) qualify for more house at the best available rate. Second, paying down the other debt gives you more cushion to absorb the additional, unforeseen expenses that invariably arrive with ownership.
My #1 piece o’ advice to you:
If you’re planning on living in your house for any appreciable amount of time, get a FIXED rate on your mortgage. Evidence is mounting that we are entering an inflationary period, and I don’t think the Fed can stop it by adjusting rates without causing a pretty nasty recession. In such a climate, getting fixed-rate money on the front end is a huge money saver in the long run.
Oh – and with a toddler, make sure you get flooring that cleans easily and is stain-resistant. We found that out realllllll fast.
Oh – and I’m a little leery of Katie Holmes’ nipples. I mean, have they gone crazy too?
Wow. Nice callback, Kyle. I hope Satchel is reading this.