David Leonhardt offers a very useful way to think about the housing market:
I can’t claim to clear up all the uncertainty. But I do want to suggest a framework for figuring out whether you lean bearish or less bearish: do you believe that housing is a luxury good and that societies spend more on it as they get richer? Or do you think it’s more like food, clothing and other staples that account for an ever smaller share of consumer spending over time?
Basically, if you think housing is a staple then today houses look overvalued. If you think housing is a luxury, then today houses look maybe okay. Leonhardt offers plenty of additional text to consider while you ponder this, but let’s ponder his chart instead:
What this makes me think is that we shouldn’t see these staples and luxuries as metaphysical constants. Food is the kind of thing that declines as a share of income except for during the decades-long period when it steadily rose.
What’s more, with housing there’s also the question of land:
For a house whose location has any value — in a major city or a nearby suburb, where a builder can’t simply put up a similar house down the street — the land is a big part of the equation. Over time, Mr. Zandi says, the value of that land should grow almost as fast as the local area’s economic output or, in other words, with incomes.
What I would add here is that policy matters. The value of land in some American urban areas and their inner suburbs appears to be on an upward trajectory. Absent regulation, the main impact of increased land prices in Fairfax County, VA would be to increase the density of housing construction in Fairfax County. The high price of the land would still be relevant to the price of Fairfax housing, but only to a limited extent. Instead, thanks to regulatory barriers to density, higher land prices in Fairfax County mainly drive the construction of new housing in other further-away places. This is an important dynamic in America, but the policies driving it are bad policies. Will they ever be improved?
Me buying a condo in downtown Washignton, DC is in part a bet on the idea that I won’t be very successful at persuading people to allow denser construction in the city.
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