Friday, August 4, 2017

The Overton Window is moving.

Reader Benjamin Cole shared this link to an article from Robert Shiller.  I have been hard on Dr. Shiller occasionally, because I think his housing bust call is suspect.  The bust he was expecting was different than the bust we got.  There was never any bubble-busting supply in the Closed Access cities.  But, that is what would bust a bubble in Dr. Shiller's explanation of events.

Further, even in the Contagion cities, it wasn't really supply that busted the bubble.  What caused the bubble was some expansion in lending availability and in economic activity that allowed households with high incomes to purchase Closed Access homes more aggressively.  That accelerated the sorting of haves and have-nots into and out of the Closed Access cities and it also triggered some tactical selling by existing Closed Access homeowners who sold their homes to aspirational young families and moved away.

The Contagion city bubble busted because in 2006 and 2007 monetary and credit contraction sharply slowed down that migratory sorting.  Suddenly, migration into the Contagion cities dried up from about 1 1/2% of their resident population each year down to nothing.  That is a huge negative demand shock for those local housing markets.  It had nothing to do with oversupply.  Rents were rising in the Contagion cities, and outmigration had actually been moving up in those cities because they couldn't build enough new homes to meet that Closed Access refugee crisis.

The reason that migration dried up was that, even though there was no bubble-busting supply in the Closed Access cities - in fact homebuilding was already slowing - the demand shock that was targeted at residential investment reversed the trend of the boom.  During the boom, households were expanding their personal housing footprint.  In the Closed Access cities, with fairly fixed housing stock, that meant de-population (and out-migration).  When that reversed - when households began piling and crowding back into homes in order to economize - they stayed in the Closed Access cities instead of moving away.

The reason we imposed this shock on ourselves was because of the relentless clamoring about the supposedly unsustainable bubble and how we needed to stop it before it got any more out of hand.  Dr. Shiller was certainly in the middle of that clamoring.

But, credit where credit is due.  Shiller is now discussing work from economist Richard Florida about limits to supply!  The Overton Window is moving, friends.  Even Dr. Shiller may be within spitting distance of accepting some evidence contrary to the received wisdom about the housing bust.


  1. I am red-faced with embarrassment to see my name in the lead paragraph!

    Here is an odd one: Extremely restrictive property zoning (as determined by markets) gets a "A+" rating from the Heritage Foundation as it relates to "property rights" and "free markets."

    That is, very tight and restrictive property zoning is consistent with property rights and free markets, says the Heritage Foundation.

    Side question to Kevin Erdmann:

    Hong Kong and Singapore are "twin cities" in many regards. Yet housing in unaffordable in Hong Kong but affordable in Singapore.

    By your lights, what explains this difference?

    See here:

    1. I don't know enough to comment. In terms of the "freedom" issue, I think this is a subtle issue. I don't think there is necessarily an a priori presumption that zoning or some sort of community standard is wrong or is even a move from optimal liberty. There are many different property regimes that depend on the context. I can't just get a boat and go haul a bunch of halibut. There has to be some socially constructed limit on that, or the fishery will be destroyed. It would be great if someone could own the fish. Maybe someday there will be some technological shift that makes individual ownership the best way to manage halibut fisheries. I don't think these things can be determined completely on first principles.

      On first principles, we can begin with a strong presumption of property rights on land and improvements. At some undetermined level, those rights can actually be strengthened by some community standard. These are extremely difficult topics to mediate.

      One reason I have been drawn to this topic is that, however difficult those factors are, the facts here are extreme, so that the direction of the solutions can be argued easily without getting into those complications. That is how I invest, too, and I wonder if that is what drew me into this topic. I tend to focus on a few positions that appear to me to be several orders of magnitude out of line - a stock selling for $10 that should (or realistically could) sell for $40. Ninety percent of financial analysis is about stocks that are selling at $40 and could sell for anything from $36 to $44. That analysis is important, and probably should be most of the analysis that is done. When I buy something at $10 and it moves to $36, though, that last 10% doesn't seem that important. That's basically what I think is going on here. I found a $40 problem selling for $10.

      So, I think once the basic facts and consequences are laid out, reasonable Americans will be able to agree that the pendulum, for us, has swung too far, and for us, some shift in our governance norms needs to be implemented. I'm sure the baby boomers flooding into living rooms to complain to city councilmen in those cities about the 6 story condo building going up by the train station will complain that I don't understand the local details. Admittedly I don't, and I won't. The last 10% is hard work. For some reason, there are times when everyone is blind to the 90%, and I can see it. Maybe my work will allow others to see the 90%, and some of them will work on the last 10%. What I do know is that this problem is really hurting people, and it doesn't have to.

      Hong Kong and Singapore are special cases. I don't know that this is something for us to determine. As Americans, I think we are standing on solid ground to say to other Americans that freedom of movement toward opportunity is important to us, and it is being undermined at an extreme level. It's a slightly different argument if Hong Kong is politically set up to max out at 8 million people.

      On the other hand, the fact that those city states seem to follow some of the same patterns as other places with different housing regimes is interesting.

      Sorry. That was long-winded.

    2. Kevin, I like this analogy of demanding a margin of safety from the stances you take on public policy. Only invest in the elaboration of a position where you know you have a margin of safety, and let others stress over smaller gains from positions where being right may depend on a bunch of local contingencies.

    3. Thanks!

      This does still present a challenge, though, to be disciplined in what we perceive to be true. This approach could lead to being shrill and overconfident. One could even say that fundamentalism of various forms is characterized by this approach. The difference between being a fundamentalist and being effective in seeking some truth is, unfortunately, not so easily discerned, and may not even be helped by getting feedback. Biased communal feedback is a key ingredient of fundamentalism, after all.

    4. True, and unfortunately you'd only know if fundamentalism were creeping into your housing thesis if the Overton window kept moving toward it, exposing you to more varied and insightful pushback. Being in the "first they laugh at you" phase of something you've grown confident about makes introspection that much harder.

  2. Well, good answer, yours is the answer that will prevail, as I see very little chance of moving the needle on property zoning any time soon.

    It may become mildly "hip" in academic circles to advocate looser property zoning…but on a neighborhood by neighborhood basis, everyone loves zoning.

    I am familiar with L.A., and overlaying the problem there is you can't drive anywhere anymore. Who wants more congestion, even if you are okay with some condo towers?

    On Singapore vs. Hong Kong, we see Singapore runs current-account trade surpluses, and HK runs trade deficits. I see this pattern over and over, and of course, it has been the topic of multiple "serious" peer-reviewed published papers pretty much lining up trade deficits with house appreciation. I think I believe that explanation.

    Not sure the halibut example is relevant. Of course, fisheries can be "fished out." Evidently, the cod fisheries were permanently destroyed.

    But I have seen city development in Thailand without zoning, The idea that there is no zoning results in a different assessment of the value of the land, and in different architecture. (Same in Tokyo). Upscale urban housing in non-zoned places is often compound-style, or surrounded by high walls. They anticipate development, street-retail action. I may not even like such an architectural approach, but it is free markets in action.

    Without zoning, other methods might be put in action, such as buying first-right-of-refusal on adjacent properties, or buying an agreement with current adjacent property owners (I pay you $10,000 and you keep your house single-family detached for 10 years, etc).

    The big snag with "some property zoning is okay, even for us libertarians" is that it will quickly devolve into "development in your neighborhood is okay, but not mine."

    PS the fact that property zoning is so readily embraced by the present-day "right-wing" is also disconcerting and another reason zoning will prevail. The financial-propertied class has a stake in continued zoning (and possibly even continuing trade deficits).

    As you have pointed out, if the West Coast un-zoned, property value might actually drop---even the cumulative total value of real estate would drop, you posited.

    Still, it is annoying that a Heritage Foundation proclaims HK the freest economy in the world. It also has the least affordable housing on the planet.

    If what the Heritage Foundation says is true, then free markets lead to unaffordable housing.

  3. Add on:

    I recently posited that foreign capital can enter US property markets not just through equity (purchase) but through lending, and this explains some measure of US property appreciation (and in other nations with chronic trade deficits).

    Turns out this is old news. Many people have noted foreign capital that bought US MBS, so effectively it would foreign capital that financed the pre-2008 property appreciation.

    I wonder what caused the "bust" or rapid decline in prices.

  4. Shiller got very lucky on the timing of his book - Irrational Exuberance, which was based on a speech he started giving in 1995. Super early is a synonym for mistaken.

    1. The funny thing is that it is based on all these presumptions from behavioral finance. But, nothing is more attuned to common cognitive biases than the idea that asset prices are too high, and they are too high despite you and I knowing better because there are so many other people who are greedy and naïve. This is a common type of client known by any professional money manager, and they inevitably miss bull markets, lower returns from their tactical trades, and are constantly battling cognitive dissonance that comes from those failed tactics. They are always waiting for the bear market that refuses to come until it's too late. But, the political sales job to those biases worked so well that they influenced public policy, and we finally engineered the bear market that those biases had always led so many people to crave. Now, naturally, the public reaction is to suppose that those biases represent some kind of wisdom.