This Wall Street Journal article has an interesting analysis of U.S. home prices in terms of how many weeks an average American would have to work to pay for the mortgage on a house or for the house itself. The conclusion is that houses are cheap and therefore should not fall further in value. Nowhere in this analysis does the author, Brett Arends, consider the employment situation. If median earnings for those who continue to be in the workforce remain the same but 2 million more Americans lose their jobs, that’s approximately 1 million mortgages that won’t be paid. There isn’t a lot of demand for new or upgraded housing from unemployed people, who ultimately will have to move in with relatives.
[Note that stable wages for those with political power, but an ever-larger group of potential workers thrown under the bus is exactly what Mancur Olson predicted.]
The author treats Boston and New York City as anomalies, saying that because housing prices haven’t fallen as much they still might fall farther. To me, however, what distinguishes New York City from Miami or Las Vegas is that nearly $1 trillion of tax dollars have been sent to New York, a percentage of which turned into Wall Street bonuses, a percentage of which turned into demand for housing. Boston has an unusual number of industries that can survive the collapse of the rest of the U.S. economy, e.g., universities that can admit foreign students, biotech firms that develop drugs for world markets, and multinational high-tech firms such as EMC.
Is a house in Michigan cheap? Not if the number of houses exceeds the number of jobs. In that case, the value of an extra house is $0.
Hey Phil,
This is kinda off topic, but I’d love to see you write a blog post on a topic related to the following essay which basically says that higher education is overrated, that white collar jobs will be taken over by computers, and that the scarcity will be in natural resources and jobs that require physical interaction with the real world.
http://mit.edu/krugman/www/BACKWRD2.html
I am a college graduate with an engineering degree, the kind of person good with information but bad at precisely the physical stuff that (according to the essay) will be in highest demand in the distant future (like plumbing). I would not consider you in this category of intellectual since your practical skills include flying planes, being a very good photographer, and being the one wrote the book on the web application UI design and scalability…
Well, the value of the extra house is a bit more than zero, since I’d pay _something_ to get those freeloading relatives out of my house.
All he shows is that houses are affordable now – that it’s now possible to pay the mortgage with a reasonable proportion of an average household’s income. That’s necessary but not sufficient to make them a good purchase. In the midwest and the south, houses were affordable in 2005, but if you bought then you still lost money. It was better to wait, and it may still be.
I used similar faulty reasoning in 2005. I knew there was a real estate bubble, but I bought a house anyway because I figured that, since they were affordable, not crazy high like they were on the coasts, I wouldn’t do too badly. I knew I wouldn’t make a bunch of money flipping it (like the people who had bought it 4 years before we did and made 20% profit selling it), but I figured we’d at least get out if it clean if need be. The wife really wanted a house, so we bought one. Three years later I entered a grad program in another city, lost about $30,000 getting rid of it, and ended up filing for bankruptcy.
This points to another reason why housing won’t bounce back – the people whose credit was ruined aren’t going to be buying houses anytime soon. I’ll easily be able to swing a mortgage payment when I graduate but I won’t be able to get a loan with a good interest rate, so I won’t buy a house for a long time. Same with all the unemployed people whose credit is being ruined as they miss payments. It’s not like they’ll instantly be able to buy houses with their shitty credit when they get jobs.
The media is trying too hard to sell houses. Prices here haven’t fallen significantly. It’s still $1,200,000 for any decent house & $600,000 for any decent condo even though unemployment is 12% & private sector incomes are in the $70,000’s & even government incomes are shrinking. Official unemployment is higher than it ever was during my dad’s career which spanned 1960-1995 & that period saw houses crash hard.
Murali,
I haven’t read the Krugman article yet, but I would expect the opposite. At some point in the relatively near future I would expect robotic automation to take over even more manual work. The first areas I can see would be agriculture, mining, and roadwork, as well as even more manufacturing. After that I could see even see complex construction taken over as robotics does the ironwork, carpentry, HVAC, electrical work, plumbing, etc. Would this take very complex robots? Certainly. But I don’t see any scientific or technical limitations that are going to stop us from building these types or robots once we get the software issues worked out.
The real question is how are we going to equitably split up the bounty of automated production down the road when machines do much of this work and the number of jobs is even more drastically limited.
OK, I have read most of the Krugman article. All I can say about it is that Krugman isn’t very good at writing fiction, which is what that article is. His personal POV colors it so vividly that it is hard to take the article seriously. For example:
“Once governments got serious about making people pay for the pollution and congestion they caused, the cost of environmental licenses became a major part of the cost of doing business. Today license fees account for more than 30 percent of GDP.”
This is simply what Krugman wants, not what will happen. If something like this was passed into law, the people who passed it would certainly pay with their jobs, and maybe with their lives, and it would be reversed in short order.
@beavis “This is simply what Krugman wants, not what will happen”
I wouldn’t be so sure. The article is written from the vantage point of, well, now 86 years in the future, and makes the point that this was not always a popular idea.
50 years ago the idea of widespread congestion pricing would have been laughable. A quick google search show that while it is controversial,
right now it is happening in various places. As congestion and pollution get worse, and thus more irritating as a part of daily life, the idea of making those who benefit from it pay for it will gain more acceptance.
And really, anytime you pay to park, you are actually paying a congestion fee.