Housing affordability and bubble economics...

[Kevin]

In response to the interesting essay...

Why Can't We Build an Affordable House?
by Witold Rybczynsk

http://www.wilsoncenter.org/index.cfm?fuseaction=wq.essay&essay_id=476601

"So what’s keeping housing prices high?"

The first three-fourths of the essay is interesting and informative. Thanks very much, Professor Rybczynsk! We always look forward to your insightful writings.

But with regards to the last quarter of the essay... Why, even as we sit looking at the back-end of an enormous housing bubble, would we persist in the presumption that housing prices are based essentially on adding up costs?

Because we can assume the markets are so perfect as to require it? That's more like market fundamentalism, than robust analytical thinking.

The greater rise, and subsequent crash in the less-regulated housing markets like Las Vegas, while housing prices rose more slowly (and are lowering more moderately) in places like Oregon, belie a simplistic blame game.

Homebuilders are far from being the victims of elitist communities. They have lobbied hard, locally, state by state, and nationally through the NAHB, to maximize the availability of the larger lots on which they could build McMansions - largely because, much like their mobile equivalent the SUV, the profit-margins are easier, and also because decades of tax and labor policies that have redistributed wealth upwards make the upper-end market additionally attractive.

A more balanced (if also imperfect) treatment of the complex relationship between zoning regulations, housing value, and housing prices, done for the Brookings Institution, is available here:
http://www.smartgrowthamerica.org/growthmang.pdf

According to the New York Times, there was vastly more money in the derivatives of mortgage-backed securities, than in the underlying mortgages themselves. And at the same time, using such unregulated pyramid-scheme instruments, bad-boy Bear Stearns was leveraged in market about 33 to 1, while supposed good-boy Goldman-Sachs was itself overextended to 28 to 1 (before scrambling on selloffs and billions of new investment, etc. to quickly get back to 20 to 1).

That reckless margin pile-up (regarding which, I was taught in high school, we'd learned our lesson in the 1930s), together with the lax monetary policies (low interest rates, etc.) that helped keep the pyramid climbing, was the driving force behind the housing bubble.

Why was electricity so expensive when Enron was selling it to California?

What’s keeping housing prices high? In the case of the last few years, it's a runaway speculative bubble - not the actual costs of new houses (land included) costs which were left behind by prices as far back as about 2002.

Housing prices still have quite a ways to fall to hit the costs of new construction - which, real estate economists suggest, tends to provide a floor for housing prices, not their peak.