Aggregate housing prices in the US have recently been approaching the levels seen at the peak of the housing bubble back in 2006. Indeed, in some locations they have gone higher than they did then, such as in San Francisco. This has led some to speculate that the US is getting back into a housing bubble again. Maybe, but probably not, and the reason is not something to be happy about: rising rents, especially for lowest income Americans who cannot afford to buy even a cheap house.
When in 2005 Robert Shiller published the second edition of his influential book, Irrational Exuberance, his new second chapter that documented the long historical path of price-rent ratios in US housing pretty much convinced anybody who looked at it that indeed the US was having a housing bubble as that ratio had been sharply rising and was at all time historical highs. Indeed, it would peak a year later, with prices falling while rents did not as we plunged into the crash that led to the Great Recession through many channels.
The Economist has provided some more detailed data on prices and rents for three major US cities, high growth San Francisco, more intermediate growth New York, and more slowly growing Philadelphia. Checking the various charts at this site one finds that San Francisco now has noticeably higher house prices than at the 2006 peak, New York has come up from its bottom by about a third to the former peak, and Philadelphia has nearly fully recovered its peak, but not quite. OTOH, price to rent ratios have behaved very differently. At the peak, San Francisco was at 30, but is now just at 20, although rising somewhat. New York's has not been rising at all, was at 25 at the peeak and now about 14 and stagnant. Philadelphia was at 15 at the peak, at 10 at its bottom, but now only at 11. It is simple arithmetic that if prices have been rising substantially while price to rent ratios have not been, then rents must be rising.
Dan Crawford, reposting work by New Deal Democrat at Angry Bear today, lays out more details on what is going on, including one graph that shows the steady rise in rents over time. More striking and disturbing is the information about rents being paid by lower income people, particularly the bottom third in income of renters. Their rents spiked noticeably in 2014 (data since not yet available), with the proportion of their incomes these people now paying on rent approaching 50%. This is a serious problem, and I do not know why exactly this is happening. But there has been little notice or publicity about it. In any case, it is precisely these people who are not able to afford to buy a house and thus must rent in order to live somewhere.
So, no, despite housing prices approaching former peaks, it does not look like we have a housing bubble (although possibly in a few locations). But it certainly looks like we have an acute low income rental housing crisis that has not been publicized that has become very severe, making life much harder for those at the bottom in what is supposedly a nicely recovering, almost "Goldilocks," economy.
Addendum: After posting this read today's Business section of the Washington Post where on p. 2 there is a fairly substantial article by Emily Badger detailing the cost of living problems for basics for the poor, nothing that transportation, food, and medical costs have also risen for the poor, although houising cost increases have been the most serious and reconfirming the figure that for the poorest third of renters, housing costs now consume nearly 50% of their income.
Barkley Rosser
You overlook the elephant in the living room -- large numbers of units left the housing market into the arms of investors during the bust, and those investors are holding on to those units waiting to flip them when the time is right. Some of those units are rented. Many, however, are not, because many of these people have enough money that they don't care about losing rents, they just don't want the headaches of hiring rental managers and dealing with deadbeat tenants who destroy properties and maintaining properties and all that. They're just waiting to flip.
ReplyDeleteThat said, there's certainly evidence that some places where housing looks rather bubbly, like the SF Bay Area, in fact are suffering a sharp rise in prices not because of a bubble but because of an overall shortage of housing. According to one source there is a deficit of roughly 1 million units in the SF Bay Area between what exists there and what is needed to house all the people who lives there. The deficit is made up by people rooming with each other etc., but that is not an ideal situation and they move out to a place where they have fewer or no roommates as soon as they can scrape up the money to do so, paying whatever it takes. That drives up both rental and purchase prices. On the other hand, you certainly can't say that about places like Las Vegas. Housing prices there jumped up 9.5% year over year, far above any inflation rate, and there's certainly no shortage of housing there. Las Vegas is looking rather bubbly at the moment...
It is almost as if financialization of the economy is succeeding at extracting an increasing share of income for the top from the bottom.
ReplyDeleteI accept that there probably are some locations, perhaps including Las Vegas, that have been getting somewhat bubbly. I also agree that the general increase in rents and prices has been seriously driven by supply restrictions in many locales, especially SF, that should be relaxed.
ReplyDeleteA follow-up on SF supply restrictions. This is a big issue in New York City too with rents rising even relative to their sky high past (pun intended). Mayor De Blasio wants to change that. Some of the left say he is not going far enough. But the landlords are furious that he is doing anything. It seems rents in Manhattan has taken a short pause in their escalation.
ReplyDeleteIf you're very rich you don't want to be actively managing rental properties and dealing with a succession of tenants who don't pay their rent (often) and who regularly damage the property. It's easier to simply speculate.
ReplyDeleteIf you're not rich and you own a house that you're renting (often for involuntary reasons) then it can be very expensive to be managing this property and dealing with difficult tenants. The house doesn't come cheap.
I'm all for home ownership (ie NOT renting) as the best solution to a housing crisis, but the current housing model doesn't appear to be appropriate for struggling citizens. Small compact (easy to build) houses in a compact 'village' with communal 'shed' facilities and food gardens and forests. Plentitude, rather than scarcity.
Myrtle, we're building a *lot* of condos here in the SF Bay area. That's because all our land is built out, which leaves only (very expensive) infill as a way to add housing. In one case a block of ten duplexes was painstakingly bought up over the course of half a decade by a developer and is currently being replaced by around 100 condo units. But even these "less desirable" condo units are selling for $850K and up, even though they're basically apartment-sized (650 square feet to 1100 square feet).
ReplyDeleteNote that your compact "village" requires *land*, and that's what we don't have here in the SF Bay area. Right-wing zealots are always quick to whine about how much of our land is off limits as "open space" or whatever, but what they don't tell you is that *most of that land is unbuildable*. It's mountainous areas subject to landslides and in an active fault zone, or it's wetlands that would require very expensive foundation work to build in an earthquake-safe manner (because the land underneath it will liquify in any sizable earthquake). All the easily buildable land is already built out. The only way to go is *up*, and that is running into NIMBY in many cases because people don't want that kind of density in "their" neighborhood. Add in a mass transit system that is already running well above capacity so that it's getting hard to get from point A to point B regardless of what form of transportation you take, and it's clear that a "compact village" model is not going to solve our housing problem here in the SF Bay area... the solution has to be more complex than that, not only because all the land is built out, but because of the core transportation problems caused by being a rim of land around a big bowl of water in the middle, which makes it hard to move people from point A to point B when they're on opposite sides of the bowl.
BadTux, you're describing 'limits to growth' in that locality. then I agree that the solution is more complex. Why are people attracted to that place, versus less densely populated areas? Why can't/won't they move?
ReplyDeletePeople go where the jobs are, Myrtle. And the jobs go where the people are. If you intend to create innovative computer software and hardware, the SF Bay Area is where you need to be. The critical mass of people to build your stuff isn't there anywhere else on the planet. If you like working on innovative computer software and hardware rather than some Fortune 500 accounting system, again, you need to move to the SF Bay Area because nowhere else are you absolutely guaranteed to be working on some of the coolest most innovative stuff on the planet.
ReplyDeleteSure, you can set up in Flint, Michigan, where you can buy a house for $8,000. But a) you'll have to pay a *lot* of money to get people to move there to work on your product, and b) you won't be able to get most of the best people on the planet to move there, because the best people in the planet already have their pick of jobs that don't require them to move.
Believe me, I'd live somewhere else other than the SF Bay Area if it was at all feasible to do so. But it's not -- this is where my industry *is* in the United States. Period.
'jobs' = 'money' and money is an abstraction of power, as is 'prestige' [ie "best people"].
ReplyDeleteWhat power is money if the only option, as you say, is to live in the fouled nest of San Francisco?
"Something that cannot go on will stop" said Herb Stein in the 1970s. People will argue about the local manifestations of limits to growth, but it is nature that will take action.