A prescription for a real estate bubble and subsequent crash

Yesterday's Post had an article, "Why you're often better off saving for retirement than buying a house," making the point that in many housing submarkets across the US, prices are stagnant, so people can "make more money" by investing rather than owning a house which isn't likely to appreciate and when the tax benefits of the mortgage deduction are minimal.

In Understanding Neighborhood Change: The Role of Expectations in Urban Revitalization authored by Rolf Goetze, then the research director of the Boston Redevelopment Authority and published in 1979, he makes the point that the reason that center city real estate markets crashed in the 1960s was not just because of outmigration to the suburbs per se but because far more housing (and retail space) supply was created than there was overall demand. So with an oversupply in total, and various trends and policy mechanisms working to support the suburbs, the cities went into tank.

Today it's a little different, in some markets, where there is a supply restriction and heavy demand, then you see great housing price appreciation.  E.g., in my old H Street neighborhood, property values have increased by 3 to 6 times since 2004 in the part of the neighborhood north of H Street.

(They dropped some after the recession and since have come roaring back as various new projects like apartment buildings, condominiums, lots of bars and restaurants, supermarkets, and a new streetcar line are delivered.)

In Vox, Matthew Yglesias suggests ("The best cure for wage stagnation nobody in Washington is talking about") that current wage stagnation could be addressed by densification in cities and inner suburbs, leading to a massive construction program, which would stoke the economy now, especially by adding construction jobs, rather than undertaking measures with extremely long payback periods.

The problem with the proscription is it sounds like the US housing market from the late 1990s to 2008.

Media coverage of sprawl and the beginnings of the foreclosure place in Florida, North Carolina (Charlotte Observer coverage), Las Vegas, and Arizona became particularly evident starting in 2006, more than two years before the big commercial real estate crash touched of by the bankruptcy of Lehman Brothers and the subsequent failure of subprime mortgage company Countrywide, and others.

The reason that the housing market boomed was a slumping economy led to low mortgage interest rates (pumped along by other global capital flows I won't detail), and low interest rates boosted the housing market. To keep things going when normal demand was met, the market dipped into the subprime end, which ended up blowing up in terrible fashion.

But when the boom was booming, it was great for people in real estate, construction, and banking.

2. There are a couple problems with the Yglesias thesis. First, the reason for wage stagnation is (global) overcapacity, automation, and an increasingly integrated global economy, which depresses wages. That's a structural problem that won't be going away any time soon, especially when the general policy for national governments is austerity, not investing in major capital infrastructure projects that will have significantly positive and extraordinary investment returns.

Second, while I have no problem with intensification within the built environment, it is difficult to pull off because so much of land use is devoted to owner occupied single family housing, and in only the most extraordinary situations can that zoning and building intensity be changed.

Generally, commercial property zoning can be changed more easily and the land intensified.  That's why in DC, most of the bigger buildings are going into commercial districts or otherwise repurposed land (federal, industrial, etc.), and are not being constructed by rezoning single family housing and converting low density neighborhoods to "tower districts."

Third, what this would do is shift demand and supply within a metropolitan area, not so much create new wealth, and the wealth would be created in part by destroying the real estate values of farther out locations, in the same manner as what happened in the center cities in response to suburban outmigration. So new value created in one area cancels out existing value in another.

As a center city proponent, of course I am fine with the cities benefiting from in-migration of residents and commerce, but it's not possible for me to ignore the other impacts.