Friday, October 14, 2011

Dr. Housing Bubble —The twin bubbles of housing and higher education

The twin bubbles of housing and higher education – housing bubble expanded from 1997 to 2007 and imploded. Since 2000 tuition costs have been soaring but graduate pay has been falling. What happens when you price out a generation looking for starter homes?
This post is a shocker if you are not up on the numbers. Looks ominous.

Financialization is spreading to all areas from which rent can be extracted. With incomes stagnant or falling and debt burden increasing, what can the next generation hope for and how is this going to effect the economy?


marris said...

Tom, how are you thinking of rent? You mentioned at some point that the classical economists thought of product price as "cost of production" and a rent component (whatever). Is this the definition you're using?

If so, what your ethical analysis of this. Is every cash flow that meets this criteria "bad"? Or is there something more complicated going on?

Tom Hickey said...

The basic principle is earned v. unearned gain. Very broadly, economic rent can be defined as making money from money rather than production. The financial sector does not produce anything. Land per se does not produce anything unless it is worked, Monopoly allows a producer to gain beyond the fair market price in a competitive market as the price setter, so that price exceeds actual value.

Transactions involving rent add to GDP in the same way as transactions based on production. Failure to make this distinction masks the take-over of the economy by rentier behavior. That results in hollowing out.

The dual problem that Dr. Housing Bubble sees is the growing student debt along with falling real wages wrt to housing prices, which remain largely unaffordable even though the price level has fallen nationally. He has harped on the latter in recent articles. In this article he is calling attention to the issue of rising student debt, which is further hobbling first time buyers even with historically low rates.

He does not see significant improvement until either incomes rise to meet prices, or prices fall to an affordable level. Further exacerbating the situation is the student and credit card deb often used to manage cash flow, payments on which make prospective borrowers less creditworthy.

According to his analysis, housing prices rise to the level banks are willing to loan. Banks just got burned badly making imprudent loans, often NINJA loans — no income, no job, no assets. That drove housing through the roof.

Banks are not likely to go back to that business model anytime soon. Ergo, housing prices are still too high in many areas.

Tom Hickey said...

Dr. Housing Bubble doesn't mention it here but another problem in housing is liquidity. The US mobile lifestyle and the economy that is dependent on it requires a relatively liquid housing market. when houses are hard to sell, it is difficult for workers to relocate for employment, both to find work when the need it or to move up.

Similarly, if there is insufficient demand for starter homes, those in starter homes find it difficult to sell their houses at a price they are willing to take when they are ready to move up.

Liquidity issue affect prices at all levels of housing, inhibiting sales, frustrating plans, and affecting the job market, too.

marris said...

I don't get it. If I have a cash balance, I can spend it on consumer goods, spend it on capital goods and "produce" something by doing all the work, or I can buy capital goods and hire workers to do the actual "moving stuff" around. Is net income in this last case unearned? Further, what if someone comes to me and says "I have a great idea, but no money. Partner with me and I will get you a cut." Why is my cut unearned?

Or is there some other example which illustrates "unearned income" more clearly?

Tom Hickey said...

If it contributes directly to the production > distribution > consumption cycle it is earned. If it extracts from it, it is unearned.

Basically, earned gain contributed to bringing production to market at a fair price in a competitive marketplace and maintaining it there.

Examples of economic rent are appreciation of land value less value of owner-added improvements, business gains due to price setting power rather than competitiveness, and financial gain unrelated to basic intermediation and primary investment.

The point is not so much ethics as economic efficiency. The point is to incentivize productive contribution of investors, entrepreneurs and workers, and to disincentivize rent-seeking behavior that contributes little or nothing, and especially if it is extractive.

The present push is to leave unearned gain untaxed and to tax incomes. Since high income earners have access to tax shelters, this puts the burden of taxation on ordinary workers.

marris said...

> Examples of economic rent are appreciation of land value less value of owner-added improvements...

If my house is near the lake and all of a sudden, a "houses near lakes" fad catches on, then in what sense did not I "earn" the increase in home prices? Anyone else could have bid with me on the market. I bid the highest price. Maybe I am a trend forecaster who predicted the fad. I bought the house and chose not to knock it down because I "saved" it for the lakers. Or maybe I bought the house for other reasons. Who cares?

> business gains due to price setting power rather than competitiveness...

Dude, in the real world, no firms demand curve is horizontal. So you will always have "deadweight loss." Is this what you mean? If my company didn't "earn" that, then whose is it? It can't belong to the "customers." If they wanted this thing without the deadweight loss, they should have bought the factors and produced the good themselves.

> and financial gain unrelated to basic intermediation and primary investment.

Like what? Bailouts?

> The point is not so much ethics as economic efficiency.

Ugh. You'll need to be more specific. Are you talking about idle real resources again? Otherwise, you're just "defining" efficiency to be a measure of X. In this case, no land appreciation or whatever. So what? Why should anyone care about _that_ definition of efficiency?

Tom Hickey said...

Some examples:

1. Land rent is recognized as the way that privatization of the commons has transferred wealth to the ruling elite of every society and continues to benefit the well-connected, who have prior knowledge of public development plans and buy up land they know will appreciate quickly through public investment in the environs.

2. Monopoly rent arises in non-competitive markets in which firms are price setters due to their position. That's why we have anti-trust legislation, for example, and laws against collusion among large producers to set prices or manage scarcity to their advantage.

3. Interest paid on Treasuries is operationally unnecessary under the present system so it is a subsidy for holder of Treasuries. Speculation in commodities by non-users increases price without increasing production.