Housing Demand

Today Robert Samuelson assures us that there is no oversupply of housing - it's just that there's not enough demand. And that, he's confident, will stop being a problem as soon as housing prices drop "to a level where housing can escape its present stagnation".

It's elementary economics. Pretend that houses are apples. We have 1,000 apples, priced at $1 each. They don't sell. We can either keep the price at $1 and watch the apples rot or cut the price until people buy. Housing is no different.

If we have a few million customers, that's true. If we have 1,000 customers, that may be true. If we have one customer, cutting the price per apple to a penny probably won't convince the customer to buy them all, save perhaps if he owns a cider mill. But that's an aside from Samuelson's argument - yes, if you cut prices low enough, you will find buyers for all homes presently on the market. If Toll Brothers started selling McMansions for $1, the demand would outstrip anything they could reasonably supply.

Samuelson is correct that, as exemplified by the guy building the huge house in his neighborhood, there remains demand for housing and even for McMansions. But isn't there a bit more than that to the picture?

Builders want their profits - and some may go bankrupt or go out of business if they immediately cut prices to the point where supply and demand curves cross. Lenders who have foreclosed on houses want to cut their losses. Homeowners who are upside-down on their mortgages don't want to have to pay back the difference when they sell their homes, or hope to stay in their homes until they can find a buyer who will pay what their house is "really worth". A lot of people who aren't upside-down still want to hold onto their homes until they can get what it's "really worth". Oversupply in some pockets of the nation is real - where high-end houses were being snapped up by speculators, not by people intending to make the houses their homes, and few people presently even qualify to buy the homes.

I don't argue with Samuelson's belief that the sooner all of this shakes out, the sooner "housing can escape its present stagnation".

The understandable impulse to minimize foreclosures should not be a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today's homeowners makes little sense if it penalizes tomorrow's homeowners. An unstoppable free-fall of prices seems unlikely. Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices.

The problem for the economy and housing market is, with or without intervention, that process is likely to occur over a period of years.

A McMansion In My Back Yard?

Robert Samuelson, apparently inspired by the construction of a huge house in his neighborhood, takes on the McMansion:

Down the block from my home, workmen are finishing a new house. It replaces a bungalow that had measured about 1,500 square feet. The new home has a covered front porch, two fireplaces and a finished basement. It comes in at just under 5,700 square feet. What is it with Americans and their homes?

Eugene Robinson has a passing comment in today's column, Outside the Echo Chamber, which seems germane:

We in Washington are increasingly isolated from the people in whose interest we claim to labor. The economic gap between us and most of the country is widening to a chasm. In most American cities, a $600,000 house in a leafy neighborhood would be considered an extravagance reserved for the wealthy. Here, we'd call it a bargain.

Assuming a $600,000 purchase price, the person who replaced the old bungalow with the modern "McMansion" paid probably $400,000 - $450,000 for the land under the bungalow. Samuelson, sitting in what is no doubt a very large house for the era in which it was built, should consider the economics of the redevelopment of that lot - the value of the huge house that is being built is likely commensurate with the value of the lot.

It is interesting to me that "housing lust" is only a problem if it reaches "the masses" - the "huge" house Samuelson describes is small compared to many mansions (and let's not forget castles) of the past - the difference appears to be one of prevalence and availability. If you're going to focus on our planet's limited resources, and whether this form of housing is wasteful, that's one thing. But if you're going to get moralistic and speak of "house lust", I think you should explain why it is suddenly wrong for the average (or, really, the average upper middle class) American to want the same type of self-indulgent, showy, overpriced housing that the rich have always enjoyed (even if on a smaller lot).

Worse, government subsidizes these supersize homes along with suburban sprawl and, just incidentally, global warming. In 2008, the tax deduction for mortgage interest payments will cost the federal government $89 billion. The savings go heavily to the upper-middle class and the wealthy -- the least needy people -- and encourage ever-larger homes. Even with energy-saving appliances, those homes are likely to generate more greenhouse gases than their smaller predecessors. As individuals and a society, we've overinvested in housing; we'd be better off if more of our savings went into productive investments elsewhere.

In the case of the house in Samuelson's neighborhood, the issue of "subsidy" was resolved decades ago (probably 80 or so years ago) when it went up as an upper middle class (or wealthy) suburb of Bethesda. If the home is well constructed, its heating and cooling bills may not be much different from that of neighboring houses (including Samuelson's). If it uses geothermal heating and cooling - something that I think the government should be actively encouraging and subsidizing - the cost will be substantially less - perhaps $150 per month to heat and cool an enormous house. And yes, I think it is better for a lot in an existing neighborhood to be redeveloped, than for a similar home to be built in a new subdivision. (No houses like that will be going up in my neighborhood - the lots aren't big enough, and the land's not worth enough.)

I do agree with Samuelson that indulging in an oversized house is an extravagence, and that we should be concerned about the environmental impact of new developments, as well as the cost of bringing municipal services to those developments. But those concerns are neither new nor limited to Toll Brothers-type neighborhoods. I am also of the opinion that we are not likely to suddenly put the brakes on American consumerism or a mentality of "keeping up with the Joneses", so our energies are probably better spent focusing on how to minimize the environmental footprint of our present levels of consumerism while taking a more gradual approach to the reinvention of society.

Why Americans Have More Children?

Robert Samuelson takes on the so-called "birth dearth" today, changing horses in midstream. First relying upon the work of Ben Wattenberg, Samuelson states,

Up to a point, we understand plunging fertility rates. Wattenberg reviews the usual suspects: improved incomes; health and life expectancies (as more children survive, parents have fewer babies); growing urbanization (families need fewer children to work the fields); women's access to education and jobs; contraception; later and fewer marriages; more divorces. But our understanding is only partial, because there's one big exception to low fertility rates: the United States.

It would have been interesting, had Samuelson presented some of the socio-economic data apparently considered by Wattenberg, but instead he tells us:

American fertility is roughly at the replacement rate, 2.1 children per woman. Nor does the U.S. rate merely reflect, as some think, a higher rate among Hispanic Americans. The fertility rate is 1.9 for non-Hispanic whites and about 2 for African Americans, reports demographer Nicholas Eberstadt of the American Enterprise Institute. What explains the American exception? Eberstadt cites three differences with Europe and most other advanced countries: greater optimism, greater patriotism and stronger religious values. There's some supporting evidence. A survey by the National Opinion Research Center at the University of Chicago asked respondents in 33 countries to react to this statement: "I would rather be a citizen of [my country] than of any other." Among Americans, 75 percent "strongly" agreed; among Germans, French and Spanish, comparable responses were 21 percent, 34 percent and 21 percent, respectively.

That's the best he can do to support the thesis of "greater optimism, greater patriotism and stronger religious values" resulting in higher birth rates?

Now there is no real dispute that U.S. birthrates are declining along with those of the rest of the developed world - they're just declining a bit more slowly. Looking at Samuelson's data, you can see that he places the birth rates for both African Americans and non-Hispanic whites as below the replacement rate. While he suggests that the U.S. fertility rate isn't merely due to the birth rates of non-Hispanic whites, which I understand to be approximately 2.7 children per woman, there is little question but that birth rates among that demographic do help boost the overall fertility figure to the approximate replacement rate.

Samuelson, of course, provides no explanation as to why Hispanics have greater optimism, greater patriotism and stronger religious values than non-Hispanic whites. Nor, for that matter, does he explain why African Americans also have greater optimism, greater patriotism and stronger religious values.

My guess is that if he had stuck with Wattenberg's analysis, Samuelson might have found some interesting socio-economic and immigration-related fertility statistics which could explain U.S. birth rates. I haven't been able to find birth rates by socio-economic group, but it is my understanding that lower SES populations have higher birth rates than higher SES populations. It is also my understanding that immigrants from developing nations have higher birth rates than non-immigrants. Further, I understand that larger families are more likely to occur in rural communities than among city dwellers - it's more expensive to raise kids in a city. Of course, Samuelson might accept all of that but nonetheless argue that being an impoverished immigrant, particularly in a rural community, leads to greater optimism, greater patriotism and stronger religious values....

But perhaps he would instead take a step back from his advocacy for a wall on the Mexican border, and realize that the population statistics he seems to believe will keep us more vibrant and competitive than Europe arise in no small part from immigration.