Tag Archives: housing

Revised Post 3: Skyrocketing Housing Prices in California

Mar 21st 2015

 cali_housing

(https://goldenstateoutlook.wordpress.com/2013/04/02/the-real-problem/)

Thesis: To resolve too expensive housing problems in California, its government should pass laws for construction and introduce various rent methods.

Because of the sub-prime mortgage shock in 2008, many people realize the significance of housing debt and its impact on the economic situation. In California, problems related to housing occur again, influencing on economic productivity, poverty rate, homeownership and commute time. According to Wall Street Journal, California has some of the most expensive housing market in the U.S. “The average home price in California, $440,000, is about 2½ times the national average, while California’s average monthly rent, $1,240, is about 50% higher than the average U.S. rent (Wall Street Journal).” Furthermore, the picture above shows the hours of minimum wage to afford a typical two-bedroom rent fee, describing that California is the most expensive state to live for workers. High cost of housing affects on the California economy because many employees try to avoid California to live, making companies difficult to hire and retain qualified employees.

To solve these problems, we should figure out why California has more expensive houses than other regions. Wall Street Journal points out that new home construction rate is much lower in California than the average in the U.S.; the rate in the state’s coastal metro areas increases by 32%, compared with 54% nationally. The low rate of new construction means the lack of supplies in housing, making the housing price increase. Also, some experts argue that the legislature should pass laws which would promote more density in urban areas, which is banned for the state’s environment. Randal O’Toole also contends the same statement that urban planners have crammed about 95% of Californians into just 5.1% of the state’s land area. Furthermore, according to Rothbard, there is a tendency that pro-development is bad for the environment, but that’s not necessarily the Californian case. “In a city with so much air pollution, more density-with people living closer to work and driving less-can be more environmentally friendly (Rothbard).”

cali_greenbelt

(http://en.wikipedia.org/wiki/California#/media/File:California_population_map.png)

I suggest three options to solve the density population problem in California. First one is reviewing the restrictions in development or construction. It is obvious that California has lower rate of new construction than the average rate in the U.S., because its government has strict rules in order to protect the environment. But, according to Randal O’Toole, if Californians could live at the same densities as the rest of the U.S., the state’s urban areas would cover 8.5% of the state, instead of 5.1%.

Another resolution is introducing various rent options to California. For example, Korea has a unique leasing option; tenants deposit a bunch of money (basically gives to the apartment agency) and pay less monthly rents than those who don’t deposit money. This option is flexible that monthly rents can vary depending on the amount of deposit. When tenants want to leave or the agreement terminates, homeowners should give back the deposits. This option can reduce the burdens of monthly rents for tenants while homeowners can invest that big pile money and get extra earnings.

Finally, the Californian government can support families by giving some subsidies. However, this option seems impossible because the government is almost broke; everyone knows that California State has severe problems in its budget.

Although I point out three options, the second and the third one only can be temporary solutions. The fundamental problem in California is the supply of houses is too low compared to its demand, increasing the housing prices. Some people may argue that it is the nature of the economics and should let it go. However, the pure economic theory doesn’t always fit to the reality which has numerous factors. If the Californian government shouldn’t solve this problem, middle and low income families in the state will be more suffering than others. And it already happened that that many workers, or middle class families (those who make less than $50,000 a year), left California.

Skyrocketing Housing Prices in California

Mar 18th 2015

 Thesis: To resolve too expensive housing problems in California, its government should pass laws for construction or introduce various rent methods.

Because of the subprime mortgage shock in 2008, many people realize the significance of housing debt and its impact on the economic situation. In California, problems related to housing occur again, influencing on economic productivity, poverty rate, homeownership and commute time. According to Wall Street Journal, California has some of the most expensive housing market in the U.S. “The average home price in California, $440,000, is about 2½ times the national average, while California’s average monthly rent, $1,240, is about 50% higher than the average U.S. rent (Wall Street Journal).” High cost of housing affects on the California economy because many employees try to avoid California to live, making companies difficult to hire and retain qualified employees.

To solve these problems, we should figure out why California has more expensive houses than other regions. Wall Street Journal points out that new home construction rate is much lower in California than the average in the U.S.; the rate in the state’s coastal metro areas increases by 32%, compared with 54% nationally. The low rate of new construction means the lack of supplies in housing, making the housing price increase. Also, some experts argue that the legislature should pass laws which would promote more density in urban areas, which is banned for the state’s environment. Randal O’Toole also contends the same statement that urban planners have crammed about 95% of Californians into just 5.1% of the state’s land area.

I suggest two options to solve the density population problem in California. First one is reviewing the restrictions in development or construction. It is obvious that California has lower rate of new construction than the average rate in the U.S., because its government has strict rules in order to protect the environment. But, according to Randal O’Toole, if Californians could live at the same densities as the rest of the U.S., the state’s urban areas would cover 8.5% of the state, instead of 5.1%.

Another resolution is introducing various rent options to California. For example, Korea has a unique leasing option; tenants deposit a bunch of money (basically gives to the apartment agency) and pay less monthly rents than those who don’t deposit money. This option is flexible that monthly rents can vary depending on the amount of deposit. When tenants want to leave or the agreement terminates, homeowners should give back the deposits. This option can reduce the burdens of monthly rents for tenants while homeowners can invest that big pile money and get extra earnings.

Although I point out two options, the later one only can be a temporary solution. The fundamental problem in California is the supply of houses is too low compared to its demand, increasing the housing prices. Some people may argue that it is the nature of the economics and should let it go. However, the pure economic theory doesn’t always fit to the reality which has numerous factors. If the Californian government shouldn’t solve this problem, middle and low income families in the state will be more suffering than others.

Housing Prices and Monetary Policy: The Long View

A long 140 year history on housing prices and interest rates provides evidence that lower short term interest rates have significant positive effects on mortgage borrowing and housing prices. These findings by Oscar Jorda, Moritz Schularick, and Alan Taylor pose a dilemma for monetary policymakers: should they prioritize restoring nominal GDP or trying to prevent housing bubbles? This is well illustrated by the front page of the digital WSJ at the time of writing: while the Fed considers how long it should continue keeping rates low, there are signs that subprime lending is expanding again.

Should Monetary Policy Respond to Financial Stability?

I have written before on what I think about the role of monetary policy authorities and financial stability. I am skeptical of the direct role of monetary policy for three reasons:

First, there’s no reason to believe that the Fed can accurately identify bubbles in advance. Second, even if a bubble appears, it’s not clear that raising short term interest rates could pop it. Third, even if monetary policy ends up bringing asset prices down, it is likely to do so only through hurting the livelihoods of average Americans.

In the article, I walk through a variety of historical examples including the Great Recession, the recession of 1937, and the Great Depression.

I still stand by the arguments I made in the article and want to offer several extensions. Note that I mean to criticize the idea that monetary policy should lean against financial bubbles — not the more general idea that central banks can play a role through macroprudential policies.

  1. The Swedish experience with raising rates in order to bring down debt levels has been a disaster. Instead of lowering debt to gdp ratios, tighter monetary policy instead reduced nominal incomes and caused debt to rise as a percentage of GDP.
  2. Lower rates are usually not a sign that monetary policy has been easy, but rather that it has been too tight. Low rates are typically a sign that demand is low, and as such central banks should try to lower rates even further in order to stimulate demand. If instead you try to raise rates too soon, by cutting off demand you just extend the period of low rates.
  3. There may be structural reasons to believe that housing prices tend to be higher when aggregate demand is low. Capital equipment, which is much more sensitive to the business cycle, become less attractive at every interest rate relative to houses. As such if central banks want to head off a housing bubble they may be better off ensuring rates are low enough to stimulate demand.

It’s also not clear that Jorda et. al. can get much traction on the types of monetary policy decisions facing much of the developed world right now. In their statistical approach, they identify exogenous variations in interest rates with falling interest rates from abroad that get passed through as a result of a fixed exchange rate and free capital flows. In other words, their monetary policy does not come from a domestic central banker deciding to ease instead of tighten, instead it comes from a decision from a foreign central bank.

This opens up the possibility that what they’re really identifying is unwanted expansionary monetary shocks when the economy is already booming, or the potentially destabilizing effects of rapid foreign inflows of capital. Neither of these are quite appropriate for central banks right now:

  1. The United States, for example, is sluggishly chugging along — hardly a boom time in which bubbles are started. The authors tell a Eurozone parable and explain how easy ECB monetary policy for Spain caused a property bubble. But even here we see this timing issue in effect — even if low rates in a boom cause asset prices to rise while doing little for output, the same may not be true in a slump.
  2. If the negative rate shock comes from a domestic source, that would mean that capital flows out to chase yields elsewhere . This is the exact opposite of what would be going on to the countries in the Jorda et. al. dataset.

FORGIVE AND FORGET, WHY AMERICA SEEMS TO HAVE SELECTIVE MEMORY

If you ask most people in the United States, they will remember the recession that began late 2007, characterized by the sub prime mortgage crisis (The National Bureau of Economic Research). However, often people do not actually know what any of that means, or why it happened, and what steps need to be taken to prevent it from happening again. I think it is due our animalistic nature, and ability to recognize patterns. Sometimes, creating patterns that are not really even there. If things are getting better then why won’t they continue to behave in that way? Prior to the crash, people saw rising home prices and figured that would continue forever, however, not realizing that some demand soar was due to banks risky lending patterns to people with low credit. Although people should not have lived outside of their means (buying homes merely because they thought its value would increase), I believe it is more the responsibility of the lending institution to use their resources available to them to recognize the high risk associated with lending to certain people. Now nearly seven years later, the general public of America appears to be following down the same path. After the main cause of the recession was revealed to the general public through media outlets, and regulatory agencies there was a general distaste for “banking” and “bankers.” Especially the ones viewed as profiting off the loss of others. Many people viewed them as untrustworthy, but time has passed and it seems that all is forgiven or at least forgotten.

 

“Mortgage applications soared in the first full week of the year as consumers raced to lock in mortgage rates that have hit their lowest level in almost 20 months” (Light, 2015).

 

This rise in mortgage applications is not necessarily a bad thing, as a majority of these people were refinancing to get a lower rate (Light, 2015). But, it is likely that some people are starting to notice a pattern and not wanting to miss out on an opportunity figure they should join in. Seeing the housing market as once again the way to gain wealth and to maintain it. This is not always the case. It seems that many people view financial decisions and opportunities as a get rich quick scheme, yet nearly anyone with experience will tell you to make infrequent smart calculated investments rather than chasing the bubble hoping it does not burst.

 

“Also, many people think they are being fully rational when they are depending very heavily on returns in the future having similar properties to returns in the past, and depending on those returns to have few sudden jumps” (Kimball, 2012).

 

In accounting and finance, it is said time and again that whenever you are looking over a company’s financial statements that past performance is not necessarily an indicator of future success. Just because something was increasing in the past doesn’t mean it will increase in the future, especially not at an increased rate. If this were the case there would be little risk with investing

 

“… The SEC requires funds to tell investors that a fund’s past performance does not necessarily predict future results” (U.S. Securities and Exchange Commission).

Yet, from talking to most people around me, and based on the two quotations from above, people see the price of a something (say a stock) going up and they assume it will continue that way, even if they are explicitly told that is not the case. They are not focused on the how or the why, just the bottom line increase in the value of something. They do not seem to care that a company merged with another to reduce payroll and other administrative expenses increasing net income. They just want to see the words “increase.” Maybe they just aren’t a “finance person.” This attitude is eerily similar to the attitude prior to the mortgage crisis; things are going up so people just assume they will stay that way, never worrying about the how or why. Let’s not forget what happened just a few years ago.

Sources

http://www.nber.org/cycles.html

http://blog.supplysideliberal.com/post/34160905448/international-finance-a-primer

http://www.sec.gov/answers/mperf.htm

http://www.wsj.com/articles/mortgage-applications-soar-as-consumers-snap-up-low-rates-1421236802

New Homebuilding Practices may Mean Future Troubles for Energy Sector

Last week, the National Association of Homebuilders revealed this year’s design for their New American Home showcase, an annual event featuring a model house that encapsulates the current trends and innovations of the homebuilding industry.  This year’s home, per the Wall Street Journal, is a net-zero electricity model built by Blue Heron Design.  A net-zero building is one that, as stated plainly in the term itself, consumes no energy in net, due to energy-saving features such as energy-efficient lighting, high-quality insulation, modern windows and doors, and most importantly, solar panel installations.  Such homes often produce more energy than they consume, allowing homeowners to earn credit from utility companies by feeding their excess electricity into the grid.  The fact that the NAHB is showcasing such a design reflects confidence from the industry that net-zero homes are finally becoming financially viable for widespread production – due to the rapidly falling costs of energy-efficient technology as well as increased demand from homebuyers.  As noted in the article above, “The Solar Energy Industries Association says the average price of an installed solar-power system has declined more than 50% since 2010”, leading Blue Heron to claim that they are capable of mass-producing net-zero homes for as little as $700,000.  In recent years, most homeowners who desired zero-energy houses would have had to retrofit their homes out of their own pocket, requiring costly investments in technologies like solar panels, often on top of fees for energy-efficiency consultants.  Hence, it is no surprise that net-zero homes have remained a rather niche concept – many homeowners, even if they are savvy and patient enough to see the benefit in reduced utility bills in the long-term, cannot afford the up-front costs of installing energy-efficient features.  The notion that homebuilders are beginning to construct new homes fully equipped for energy efficiency is an exciting one, and I believe it will only be a handful of years before building zero-energy homes becomes an industry standard (at least in climates where current technology permits feasibility), especially once keeping up with the Joneses syndrome kicks in.

So what does the momentum behind zero-energy homes mean for the energy industry?  Clearly, the trend represents an emerging threat for any company dependent on demand for electricity, as the US Energy Information Administration estimates that 40% of U.S. energy consumption is accounted for by residential and commercial buildings.  I have little doubt that energy-efficiency standards will be applied to commercial buildings at the same rate as residential homes (if anything, commercial buildings will be faster to adopt new technologies, since they are more likely to eat the installation costs with an eye on the longer horizon), and so it is entirely possible that within the span of the next few decades, electricity suppliers will see almost half of their current market dry up.  While the threat is by no means immediate, it will be difficult for capital-intensive energy companies to adapt to the future hit to demand – at least in the U.S., since global energy demand is still certainly on the rise.  Nevertheless, it will be a very long time before any homes are ready to go completely off the grid.  Until battery technology catches up to solar panels, houses will still need to be plugged in to the electricity grid during times when solar panels cannot produce.