Random Thoughts: Inflation, Housing, and Marriage

A.

1. The more government spends, the higher the risk of inflation.
2. The higher the risk of inflation, the more likely that prices go up.
3. When prices go up, essential items such as food and housing cost more.
4. When housing costs more, it becomes more difficult for an individual to buy a home.
5. Most individuals prefer to own a home before having children.
6. Most individuals prefer to own a home soon after getting married.
7. When the government makes it more difficult for single adults to buy a home, the most responsible ones among them will delay marriage and children.

[#7 assumes that most individual adults will have either little or no parental financial support when buying a home. It may be more defensible to change "single adults" and "individuals" to "single immigrants," who are probably less likely to be able to rely on parental financial support.]

B.

1. When prices go up, various items may become unaffordable for many families.
2. When prices go up, many families will have to use credit to finance a purchase.
3. The more expensive a product, the more likely a person will rely on credit.
4. Wall Street relies on credit. Without credit, Wall Street would probably have very little influence over the average person's daily life.
5. If you are against Wall Street and big banks, you should also be against credit.
6. If you want to minimize the use of credit, you should oppose rising prices.
7. When any large entity distributes large amounts of money to any area, it tends to increase prices in that area.
8. Government is a large entity that distributes large amounts of money to various areas.
9. The less government spends, the less likely it is to cause inflation and therefore rising prices.
10. Therefore, people who are against Wall Street and big banks ought to oppose increases in government spending.

Update: see link HERE for more on this topic. 

Which States Make It Easier for Banks to Collect on Mortgages?

Ever wonder about recourse and non-recourse states? Well, neither did I, until I came across this post:

http://www.mortgagereliefformula.com/recourse/

It appears that the following states make it easier for creditors/banks to go after homeowners personally to recover the difference between the amount owed and amount received in a sale:

Michigan, Minnesota, North Carolina, Rhode Island, South Dakota, Utah, and Wyoming.

Marriage, Dating, Housing, and the Tax Code

A. Men and Women Approach Marriage Differently

Housing investors and fans of Robert Shiller's MacroShares Major Metro Housing Up ETF (UMM) should pay attention to the dating scene. The WSJ recently had an article on Japanese dating trends. The following sentence from the article caused me to examine a link between modern marriage and housing prices:

Experts say that in tough times, single women feel an urgency to get married for financial stability, while men tend to put off marriage until they feel they can afford it.

I agree with the sentiment expressed above. If my thinking is typical, then pro-marriage advocates should promote low inflation. If a person has steady wages, s/he will probably want to buy a house. Once s/he buys a house and has steady wages, then marriage and children become the next natural step.

Of course, people may marry and have children without owning a home, but most women want a stable place to raise their children. This is sometimes called the "nesting instinct." This nesting instinct is one reason housing prices and marriage are inter-related, especially because first-time homebuyers heavily impact housing demand and sales. If you still don't see the connection between marriage, children, and housing prices, listen to Barry Ritholtz:

A newlywed couple buys a starter home from a family (with another child on the way), who are moving to a bigger home, and whose seller is moving to an even nicer part of town, and so on. It is a long chain, not of mere lateral moves, but increases in size, cost (and property taxes). If any of those sales fall through, the entire chain collapses...Can they [the newlywed couple] afford that starter house? If not, then the entire real estate chain is frozen.

In his example, Mr. Ritholtz uses a married couple expecting children. But if houses are too expensive, then the typical younger person will delay marriage because s/he will not overpay for a house and/or will be concerned about taking on too much debt. Also, if a typical younger person's net worth is low, then s/he will not have a financial safety net and will be disinclined to purchase a house due to the fear of missing monthly mortgage payments. It takes time to build a financial safety net, so we may assume it will take several years before a typical younger person will be able to purchase a home. Thus, in an area with expensive homes, the typical person in his or her 20's and 30's is likely to delay getting married and having children. These seem like reasonable assumptions. The question is whether such assumptions rationally lead to the following conclusions:

1. If the government removes the home capital gains exemption and the mortgage interest deduction, then homes will become more affordable;

2. People are more likely to marry and have children if they can afford a home;

3. Therefore, to promote marriage, the government should not subsidize home purchases and sales.

B. America's Tax Code Encourages Perpetual Housing Inflation

The more I think about it, the more I believe our taxation system is anti-marriage because it encourages housing inflation. So many people complain about Greenspan and derivatives when discussing the housing bubble, but what about the tax code itself? Our tax code almost guarantees steadily increasing housing prices because of the mortgage tax deduction and the $250K exemption on capital gains when selling a primary residence. No other investment receives such generous tax treatment.

The higher the price of a house, the longer a person has to save up to buy one. If single family houses become really expensive--like 500K+, which is still typical in the Bay Area--then the idea of saving a 10% to 20% down payment before the age of 35 becomes almost impossible. This is common sense, but if you're not convinced, just look at the Federal Reserve's numbers. According to the Fed (PDF file: February 2009 report, page A11), in 2007, the median net worth of an under-35 years old person in America was only $11,800--down from an astounding $80,700 in 2004. The median net worth of someone 35-45 was a much more respectable $86,600. Based on these numbers, and assuming banks will require at least a 10% down payment for a mortgage, it is safe to say that the typical metropolitan resident has to wait until around 35 years old to buy a single-family home (not a condo or townhouse). Again, assuming a link between homeownership, marriage and children, the longer it takes for couples to afford a home, the more couples will delay marriage and children.

However, many people get married before they turn 35 years old, and they want to buy a house, prices be damned. How does a bank accommodate a young newlywed's desire to own a home? We've already seen what happens--banks would issue a loan and then pass on the risks to Fannie Mae and Freddie Mac. They did this because the tax code encouraged and continues to encourage homeownership. Thus, subsidizing/inflating housing prices when wages do not also increase across the board results in funny accounting (e.g., Alt-A mortgages, NINJA mortgages, "liars' loans," etc.), a steadily increasing marriage age (for those who decide to wait), or both.

C. Banks Benefit from the Current Tax Code, Not the Average American Family

If we are truly concerned about marriage and birthrates, isn't it time to re-examine the mortgage tax deduction and the government's plan to re-inflate housing prices? After all, the current tax system benefits banks and mortgage lenders more than the typical American family. By subsidizing houses so heavily, the American government is inflating the value of an essential asset and giving money lenders tremendous power over our lives. Our parents didn't have such high levels of mortgage debt, and they managed just fine. Heck, our grandparents would probably start a revolution if they were under our current system. If you think I'm overstating my case, research American history, especially the Great Depression. One of my favorite sepia pictures shows about fifteen Americans protecting a house from foreclosure. Anticipating the local sheriff, the resident and his neighbors had placed a very visible noose on the front door's awning and stood in the front yard, armed with rifles. I'm willing to bet the sheriff skipped that particular house and the bank wrote off the mortgage.

You don't have go too far back to see how tax incentives have inflated housing prices. For example, there's no question that tax incentives have created housing size inflation. Just look at the size of houses built in the 1950's--they were small, decent houses. American parents did a good job raising kids in those smaller, more affordable houses. Why do we need such large houses today? Who benefits from these larger homes? The developer and bank, which charge prices based on square footage, or the typical homebuyer? Is it really worth delaying marriage and having fewer children so we can pay the bank an extra ten years' worth of mortgage interest and principal?

I'm really getting off-topic now, but there is also an interesting sociological issue with allowing the tax code to inflate housing values. More specifically, couples on the coasts and in metro areas need two incomes to own a decent single-family home. This two-income requirement skews the dating game in favor of both high-earning men and high-earning women; as such, it devalues hopeful stay-at-home parents. If a man or woman is an excellent homemaker but does not earn much money, s/he may be at a disadvantage when "competing" for a long-term relationship. As a result, a woman might be an excellent secretary, waitress, and/or mother, but her "value" will be less in an area where two incomes are necessary for homeownership. By using the tax code to inflate housing values, one could argue our government has placed women who are interested in having and raising children at a competitive disadvantage.

My conclusion: if you want to fix the marriage problem and avoid another housing bubble, re-examine our tax incentives. Encouraging inflated housing prices isn't the best way to keep a nation growing, and it doesn't encourage upward mobility. (It sure does help the banks, though.)

Bonus: from USC College Magazine, Spring/Summer 2009, page 30, Laurie Hartzell's interview of Simon Wilkie:

He adds that the relationship between median income and the median price of a home is an indication of the state of the economy. "If the average person can't afford the average mortgage, then the housing market is in trouble, and the prices are going to come down. It turns out this is a really good rule of thumb." [Despite this rule of thumb, the government is trying to increase the cost of mortgages through inflation.] Although no one will admit it, Wilkie stated, a large portion of the stimulus package will be inflationary. "One way to get people out from being under water on their houses is to inflate the value of houses back up." A massive program of inflation would solve the foreclosure problem, but the fix would only be temporary.

Bonus: added on March 30, 2015: from MIT grad Matthew Rognlie:

"Land/housing is really one of the only investments that give wealthy people a long-term leg up. "

"It might be wiser to redirect anger towards those who get in the way of new housing, rather than rely on taxes to solve our problems."

"Just 14% of homes are affordable to middle-class families. In the once diverse Mission District, where many young tech workers are now relocating, it's hard to find a new home for less than $1.5 million."

"The government should focus more on housing policy and less on taxing the wealthy, if it wants to properly deal with the inequality problem."

Bonus: added January 2017: see link HERE and HERE for more on this topic.

Bonus: added March 2017: more HERE on how the mortgage tax deduction leads to excessive reliance on the financial sector.  

Immigrants May Save Housing

Yesterday's WSJ had an excellent article from Richard Lefrak and A. Gary Shilling about America's housing problem. If you assume the problem is collapsing housing prices, then the solution--offering accelerated permanent residency in exchange for foreign housing investment--makes sense. We already sell stocks, preferred shares, leases, and government bonds to foreign countries to keep our markets liquid. Lefrak and Shilling's proposed program just adds an individual-to-individual option to increase liquidity.

From Brooklyn to Minnesota

I don't own a home. I view big homes as money pits. Once you factor in the property tax, possible HOA fees, and maintenance costs, stocks and bonds don't seem too shabby. Here's an interesting article about one couple's journey to homeownership:

http://escapebrooklyn.blogspot.com/2009/01/dhs-long-awaited-guest-post.html

Homes v. Stocks as Investments

According to an article in Charles Schwab on Investing, Fall 2007 (p. 7), which looks like it was written by Matt Wood, stocks are a better investment than housing:

[R]esidential real estate provided an annualized return of 8.6% during the period from 1978 to 2004, compared with 13.4% for the S&P 500 Index (citing Jack Clark Francis et al, Contrasting Real Estate with Comparable Investments, 1978-2004, April 2007)

In some cases, [owning a home costs] as much as three times the purchase price [due to insurance premiums, maintenance costs, and property taxes]...Robert Shiller says real estate's historic real returns are closer to zero after adjusting for inflation. [David Crook, "Your Home Isn't the Nest Egg That You Think It Is," WSJ Online, March 12, 2007]

I refused to buy any property during the last five years, believing that everything in California was overpriced. Now, however, I am not so sure. Housing and other hard assets might not be a great investment, but they no longer appear to be flagrantly overpriced.

Michael Lewis on Wall St Corruption

Michael Lewis always has great stuff:

http://www.portfolio.com/news-markets/national-news/portfolio/2008/11/11/The-End-of-Wall-Streets-Boom

My favorite parts? Here you go:

In Bakersfield, California, a Mexican strawberry picker with an income of $14,000 and no English was lent every penny he needed to buy a house for $720,000...

He called Standard & Poor’s and asked what would happen to default rates if real estate prices fell. The man at S&P couldn’t say; its model for home prices had no ability to accept a negative number. “They were just assuming home prices would keep going up,” Eisman says.

Oh, the hubris.

Bay Area Homeowners in Trouble

According to The SF Chronicle and Zillow.com, around 20% of California Bay Area homeowners have no equity in their homes:

http://www.sfgate.com/cgi-bin/article.cgi?file=/c/a/2008/11/11/MNN0142MCG.DTL&

Zillow's estimated prices are not 100% accurate (that's the nature of an estimate), but it's very hard to price houses in this market; therefore, Zillow might be the closest thing we have to getting what I call the "misery numbers."

Hat tip to Barry Ritholtz for linking to the SF Chronicle article first.

Housing Graphic of Foreclosures

From Bloomberg comes a great graphic showing the hardest hit areas in the U.S. housing crisis:

http://www.bloomberg.com/apps/data?pid=avimage&iid=ibDX8eWtKfZs

Housing's Real Issue: Bigger Ain't Always Better

The Wilson Quarterly (WQ, Summer 2008, Vol. 32, No. 3) published an article by Witold Rybczynski about affordable homes.

What's driving the high cost of houses today is not increased construction costs or higher profits...but the cost of serviced land.

The author refers to "serviced land" in two ways: one, the passing of costs from the government to developers for infrastructure; and two, NIMBY (Not In My BackYard).

Prior to Prop 13, the government would increase taxes on local communities for services that followed increased population growth, such as new roads, new parks, sewers, and general maintenance. Now, many local governments cannot increase property taxes to make up for the increased need for services, so they force developers to pay these costs if they want to build. The developers take the financial infrastructure hit up front and pass those costs onto the homebuyer at the end in the form of higher home prices.

NIMBY is easy to understand in this case. There is "widespread resistance to growth," so locals pass zoning laws and restrict building permits to prevent more houses from being built. These legally mandated slow growth policies lead to pent-up demand and not enough supply of houses, causing artificially inflated values. Anyone who's lived in Northern California and New York knows there isn't a problem with overpopulation and population density in California to justify California's slow growth policies--at least not yet. Rybczynski says,

According to the research of economists Edward Glaeser of Harvard and Joseph Gyourko of the Wharton School, since 1970 the difficulty of getting regulatory approval to build new homes is the chief cause of increases in new house prices. In other words, while demand for houses has been growing, the number of new houses that can actually be built has been shrinking.

One tactic cities use to stall new homes is zoning for large lots, like one acre. This forces larger houses and higher prices. In the past, many individual homes would be only 1/6 of an acre. Rybczynski states,

Smaller houses on smaller lots are the logical solution to the problem of affordability, yet density--and less affluent neighbors--are precisely what most communities fear most.

I would love to see a return to smaller houses. One advantage of not having a lot of space is people will consume less if they know there isn't so much space to hold their new purchases.

Follow-up from Mankiw's blog: Assar Lindbeck once called rent control "the best way to destroy a city, other than bombing." Rent control is another regulation that discourages new real estate development by providing an incentive for renters not to move. At the same time, it discourages new developers from investing in new buildings because the owners will be unable to charge higher market prices. I am conflicted about rent control, because there must be some cap on rent increases that will satisfy both renters and developers. Leaving renters to the pure whims of landlords doesn't seem ideal. Of course, in trying to establish an ideal cap on rent increases, we could end up with the problem of the cap actually inflating rents. For instance, if we enact a 5% annual cap, all landlords will probably raise the rent 5% a year when they might have kept the rent unchanged without the law.

Home Prices Nationwide and in Select Markets, Inflation-Adjusted and Actual Growth and Fall

From Barry Ritholtz at http://bigpicture.typepad.com/

http://www.nytimes.com/interactive/2008/05/28/business/
20071031_HOUSING_GRAPHIC.html

It's an interactive chart from the New York Times showing the decline and incline of housing prices over the past 20 years, both locally and nationally.