Curbing Our Enthusiasm Over Rising Home Prices
Home prices went up in March. That was the news Tuesday from S&P/Case-Shiller; all indications are that April was an up month too, and that this summer's "selling season" will see continued price increases. Bit by bit, prices are regaining the ground lost during the long collapse from 2006 through early 2012.
In some ways this is great news. It means fewer underwater mortgages. It means better times for lenders, real estate agents and builders. It's a sign of broader economic health.
Still, if there's one thing we should have learned from the housing bust, it's that rising home prices aren't an unalloyed good. Rapid price increases in the early 2000s directly led to the subsequent crash. Sale prices lost all connection with both rents and incomes; after a certain point they were going up mainly just because they were going up, and buyers feared missing out. That couldn't go on forever.
Even short of a bubble, though, higher home prices can be problematic. As economist Matthew Rognlie reported in a famous paper last year, the rising value of housing has been a major driver of income inequality in the developed world. It has also, economists Peter Ganong and Daniel Shoag found in another paper, caused incomes to diverge among regions in the U.S. And it doesn't really take an economics degree to understand that when homes get more expensive, housing becomes less affordable.
Home prices rose at about the same pace as median incomes in the 1990s. In the early 2000s, as already noted, the two became completely disconnected. During the real estate bust the two lines came closer together, now they're diverging again. Housing is a lot more expensive, relative to income, than it used to be.
With pretty much any other good or service, higher prices are something to complain about. And yes, there are those who complain about high housing prices. But even with the big fall in the home-ownership rate since 2006, 63.5 of American households live in owner-occupied housing. For homeowners, housing isn't just something one consumes; it's an investment. And when your investment rises in price, that's a good thing.
This simple truth explains a lot about public policy surrounding housing in the U.S. The home mortgage interest deduction is a subsidy for the affluent that serves no discernible economic purpose, but is almost impossible to get rid of because removing it would (1) raise taxes for those with mortgages and (2) depress home prices across the board. Zoning and other land-use regulations have been accused (and to some extent convicted) of segregating Americans by income and slowing U.S. economic growth, but it's almost impossible to get rid of them because they raise the price of existing homes.
So no, I don't see my nation suddenly embracing the idea that rising home prices are a terrible thing. But it seems like it's worth the effort to try and at least sow a little doubt.
The Census Bureau's median household income data is annual, measured as of March of the following year. For the sake of chart comprehensibility, I put it in the January of the following year. So the number for January 2015 is the median household income for 2014. And the line in the chart is dotted because there's no data for any months other than January.
I should probably disclose that I have been a big beneficiary of both the mortgage interest deduction and land-use restrictions in New York City.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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