Economy & Business

This Housing Bubble Will End Badly, Too

(Photo Illustration: NRO)
We’ve inflated another bubble; count on the crash.

People complain about high prices when they’re buying, not when they’re selling, and that’s why housing bubbles are always politically popular: The sort of people who own homes are the sort of people who vote and volunteer on political campaigns and make donations. And the fact that tax revenue tends to increase as housing prices rise doesn’t go unnoticed by the nation’s mayors and governors. Renters tend to have more sensible views — you’ll never hear a renter say, “Hey, my rent is doubling this year — that’s awesome! The economy must be doing great!” But nobody listens to them.

And that’s why we’ve inflated a second housing bubble.

In some ways, the current housing bubble is even more bonkers than the last one — which, if you’ll recall, sorta-kinda almost destroyed the world’s financial system.

As of this writing, the median U.S. home price is just 3 percent shy of its 2007 peak. (Existing-home prices already are at a record high.) But that does not even begin to capture the story. In San Francisco, the median price of a single-family home has doubled since 2012. The median San Francisco home is now nearly $1.4 million, or 50 percent higher than it was at the peak of the last bubble. The median household income in San Francisco is about $77,000. Put another way: The median home price in San Francisco is now 18 times the median household income.

Does that sound like a stable position to you?

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Elsewhere in California, a less dramatic version of the same situation can be found. In a dozen or more Los Angeles–area ZIP codes, housing prices today exceed their levels during the bubble, mostly in high-income areas such as Irvine and Los Feliz.

It isn’t just California. Prices in Austin are up 13 percent in one year; central-Florida prices are up 28 percent in a year; Chicago prices climbed 11 percent in six months; in Texas, prices are up 8 percent for the year; in greater Seattle, prices are up 10 percent for the year, the median crossing the half-million-dollar mark for the first time.

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If the value of your home has improved dramatically, take a momentary break from dreaming about what you’ll do with that money once you cash in and ask yourself: Why? Why is my house today worth twice as much as it was five or six years ago? It’s five or six years older, for one thing, and unless you are in possession of a charming New England stone colonial, houses are not like wine, growing better with age. Maybe home prices are up because of good ol’ supply and demand, with housing construction failing to keep up with population growth. No, that’s not it, either: Housing construction is soaring, up 26 percent since last summer; needless to say, the number of U.S. households is not up 26 percent since last summer, executive amnesty be damned. It’s not like a bunch of old houses disappear from the market in a flash — SMOD 16 doesn’t arrive for a while yet. It’s not like we’ve all put in Snaidero kitchens and saltwater pools; most of us haven’t done much of anything to our houses (and some of you really need to).

So, why the high prices?

There are local forces at work: San Francisco, having been governed exclusively by progressives for a generation, has been transformed into precisely the sort of place that progressives say they fear: The one in which the multimillionaires and billionaires effectively run everything, a city in which a family of ordinary means has practically no hope of achieving such a small thing as owning a house with a little yard for the children to play in. California urban anthropology is a fascinating subject, a grand collision of big technology paydays, liberal self-segregation (“Welcome To West Los Angeles: Poor People, Please Make the First U-Turn”), geographic realities, epic NIMBYism, etc. It is probably going to end badly — it is difficult to see how the difference between median income and median home prices in San Francisco, or in California generally, can be sustained — but we probably don’t need to worry too much about mid-level Google employees defaulting on their mortgages.

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But most of the country isn’t very much like the Bay Area, and when house prices are rising at 6 percent or 7 percent a year (and rents rising even faster) while U.S. incomes are growing at their slowest rate at any time since Beyoncé Knowles has been walking the Earth (NB: Beyoncé’s income is doing just fine, thanks: She just spent $300,000 on a pair of diamond-encrusted stilettos from House of Borgezie) it isn’t supply and demand at work.

Instead, housing prices are going up for the same reason that college tuitions are: because the government facilitates lending people money at concessionary rates to purchase them. The Fed has, despite the occasional sobering gander in the direction of reality, been keeping the cheap-money sluices pretty much wide open. The federal regulators have loosened their grip over Fannie Mae and Freddie Mac’s lending activities, and, according to a Fed report released Monday, banks are once again loosening up their lending standards.

This ended badly the last time. It’ll end badly this time, too.


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