Monday, May 16, 2016

Housing: Part 149 - Imputed Priorities

Just a brief postscript on yesterday's post.  Considering that in many neighborhoods, for years now, across this country, the costs of owning even a fully leveraged home have been much lower than the costs of renting, I have a question.

In books and articles about the housing boom and bust, it is common to see recommendations of refinancing, cram downs, homeowner subsidies, etc.  Generally, the idea is to get rid of negative equity or to reduce the cost of mortgages for families with financial difficulties.  Sometimes, this is suggested through taxpayer support, sometimes at the expense of the banks and investors that hold the mortgages.

I don't know if I have seen any public policy proposals recommending that we incentivize banks to make more mortgages to households in low priced homes.  This would be preferable to the above scenarios in every way, because nobody would be taking a loss.  The residents would be lowering their monthly payments, mortgage bankers would be earning profits.  Also, the secondary effects would be positive pressure on home prices which would naturally relieve some of the problems with negative equity.  And, support for homebuilding would help pull interest rates up naturally.

What set of priorities leads to the first proposal but not the second?  I understand that a common reaction to this question will be that the second proposal sounds a lot like the sorts of shenanigans that created the crisis in the first place.  I reject the premises that that reaction is built on (see parts 35 to 148).  But, even without arguing the premise, there is the simple mathematical fact that returns on investment for low priced homes are incredibly high relative to borrowing costs.  If you're going to make that objection, I just ask that you make some check on the facts.  I mean, if not now, when?  Is there a level where home prices are low enough that marginal households can safely take on ownership?

8 comments:

  1. "But, even without arguing the premise, there is the simple mathematical fact that returns on investment for low priced homes are incredibly high relative to borrowing costs"

    What if i replace "low priced homes" with "low p/e stocks"? Do you favor a national initiative to help low-income people buy low P/E stocks on leverage? I honestly think you're too wedded to this thesis of your. These homes have high rental yields for a reason.

    Private equity is getting OUT of the landlord business. That should tell you something.

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    1. They do have low returns for a reason. However, two of those reasons are (1) credit constraints and (2) cash flow uncertainty in rental contexts. Both of those reasons are ameliorated by credit access to owner-occupiers. If interest rates were 2% higher, this would not be so clear cut.

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  2. Massive amounts of empty homes in Las Vegas as people double up. Investors are probably getting pretty nervous. Gated homes go quickly though.

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    1. Census Bureau says Las Vegas homeowner vacancy rate is 2% and rental vacancy rate is 6.5%.

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  3. I'm sure you saw Tim Taylor's blog post today. Interesting article by Eyigungor was cited.

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    1. Thanks. I saw the post, but hadn't clicked on the link. Some stuff to chew on there.

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  4. Ot to the post, on-topic to the blog

    https://experimental-geography.blogspot.com/2016/05/employment-construction-and-cost-of-san.html
    https://medium.com/@andersem/a-guy-just-transcribed-30-years-of-for-rent-ads-heres-what-it-taught-us-about-sf-housing-prices-bd61fd0e4ef9#.rskbegp1p

    "It’s a chart that almost perfectly predicts the San Francisco housing market using only three variables:
    The number of jobs located in San Francisco County.
    The number of places in San Francisco County for people to live.
    The total amount of money that is paid to everyone who works jobs in San Francisco County."

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    1. Yeah. That's an interesting post. It goes to show how just a little bit of building over decades would have prevented the problem. Now they need to build hundreds of thousands of units and it seems insurmountable.

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