Friday, October 21, 2005

Article: Housing Market to Suck Forever

There was a great article in the NY Times Magazine this past weekend by Jon Gertner about the future of the housing market. While long, you should read the whole thing. Its very well written and has reminded me that I may never own a home, and that if I do, it will be small and crappy. So, lots of interesting stuff...

First, its nice that it references West Windsor NJ, where I went to high school (though I lived on the "wrong side of the tracks" in Plainsboro), and the Philly area, where bunches of my friends live.

Now getting on with the summary and commentary stuff:

As population increases, the number of houses increases. But as the land available fills up, municipalities have passed stricter zoning laws and made it much more difficult and costly for anyone to build anywhere. Traditionally, when a population center reaches a certain tipping point, people stop moving there in large numbers and start moving to other smaller localities where land is more abundant and costs are lower. But now, at least on the coasts, there's almost nowhere left to go. So population centers just keep growing, municipalities regulate heavily to try and limit growth/sprawl, and housing becomes exponentially more expensive.

Currently, the market is controlled mostly by local firms, who have a built in advantage of knowing all the local officials, knowing the area, being able to build on smaller plots of land, etc. But increased regulation has brought vastly higher costs. Corporate firms have the time and resources to invest (generally between 2-5 years, and millions of dollars) in fighting zoning laws, and smaller firms don't. I predict that this will also lead to the further homogenization of housing styles, and that new houses will continue their trend of being built out of the lowest cost/lowest quality materials. It will also lead to even higher costs, as fewer firms means less competition - as a market trends towards oligopoly, prices rise. (Think Microsoft and Mac).

As I've written before, it is unlikely that housing prices will ever come down, though they are likely to level off.

It's simple economics - limited supply of land and housing - growing demand of natural population growth, immigrants, and Baby Boomers who are living longer then any generation in recorded history.

Throw this together with increased regulation and corporate takeover of an industry formerly dominated by small businesses, and we get something quite scary that I hadn't considered before. The U.S.A. housing market is likely to become much more like the European housing market:

In the past couple of years, Toll and his deputies have begun analyzing European housing data to see if they hold any lessons for a maturing American housing market. Toll has been talking up the research to stock analysts and the financial press for the past year. His conclusions carry a whiff of new-paradigm thinking, but he nevertheless seems convinced that Europe's present-day reality is America's destiny. I asked Toll what our children - my kids are both under 8, I told him - would be paying when they're ready to buy. "They're going to live with us until they're 40," Toll said matter-of-factly. "And when they have their second kid, then we'll finally kick them out and make them pay for the house that we paid for. And that house will cost them 45 to 50 percent of their income."

I grew alarmed. Was he kidding? He assured me he was not. "It's all just logic," Toll said. "In Britain you pay seven times your annual income for a home; in the U.S. you pay three and a half." The British get 330 square feet, per person, in their homes; in the U.S., we get 750 square feet. Not only does Toll say he believes the next generation of buyers will be paying twice as much of their annual incomes; in terms of space, he also seems to think they're going to get only half as much. "And that average, million-dollar insane home in the burbs? It's going to be $4 million."

Holy crap.

Some of you might remember this post, where I wrote about the annual costs of living in the world's most expensive cities. I looked at the numbers again, and its scary. If we expect New York City to become more like London, and Washington DC to become more like Paris, we can expect a 20% increase in the cost of living. Now, part of this may already be occurring in our current housing and gas prices. But this data strongly suggests that, even with a tight monetary policy, that inflation is going to be a huge problem in the coming years. And since wages have been stagnant for the bottom 50% of Americans for the past 30 years, we can look forward to a drastic reduction in our national standard of living.

Unless, of course, there is a major change in government policy coupled with technological innovation. The 90's would have sucked royally if not for balanced budgets and the internet. But its hard to envision a technological innovation that will alleviate housing needs. Underwater housing? Improvements in digging technology that allow for cheaper underground housing? Shrinking ray gun technology? There are rumblings of change on the horizon. Let's hope that its not giant ants that are born of a horrible housing experiment gone wrong.

Other huge problems of the 21st century.
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