What if everyone owned their own home?

Mar 14 JDN 2459288

In last week’s post I suggested that if we are to use the term “gentrification”, it should specifically apply to the practice of buying homes for the purpose of renting them out.

But don’t people need to be able to rent homes? Surely we couldn’t have a system where everyone always owned their own home?

Or could we?

The usual argument for why renting is necessary is that people don’t want to commit to living in one spot for 15 or 30 years, the length of a mortgage. And this is quite reasonable; very few careers today offer the kind of stability that lets you commit in advance to 15 or more years of working in the same place. (Tenured professors are one of the few exceptions, and I dare say this has given academic economists some severe blind spots regarding the costs and risks involved in changing jobs.)

But how much does renting really help with this? One does not rent a home for a few days or even few weeks at a time. If you are staying somewhere for an interval that short, you generally room with a friend or pay for a hotel. (Or get an AirBNB, which is sort of intermediate between the two.)

One only rents housing for months at a time—in fact, most leases are 12-month leases. But since the average time to sell a house is 60-90 days, in what sense is renting actually less of a commitment than buying? It feels like less of a commitment to most people—but I’m not sure it really is less of a commitment.

There is a certainty that comes with renting—you know that once your lease is up you’re free to leave, whereas selling your house will on average take two or three months, but could very well be faster or slower than that.

Another potential advantage of renting is that you have a landlord who is responsible for maintaining the property. But this advantage is greatly overstated: First of all, if they don’t do it (and many surely don’t), you actually have very little recourse in practice. Moreover, if you own your own home, you don’t actually have to do all the work yourself; you could pay carpenters and plumbers and electricians to do it for you—which is all that most landlords were going to do anyway.

All of the “additional costs” of owning over renting such as maintenance and property taxes are going to be factored into your rent in the first place. This is a good argument for recognizing that a $1000 mortgage payment is not equivalent to a $1000 rent payment—the rent payment is all-inclusive in a way the mortgage is not. But it isn’t a good argument for renting over buying in general.

Being foreclosed on a mortgage is a terrible experience—but surely no worse than being evicted from a rental. If anything, foreclosure is probably not as bad, because you can essentially only be foreclosed for nonpayment, since the bank only owns the loan; landlords can and do evict people for all sorts of reasons, because they own the home. In particular, you can’t be foreclosed for annoying your neighbors or damaging the property. If you own your home, you can cut a hole in a wall any time you like. (Not saying you should necessarily—just that you can, and nobody can take your home away for doing so.)

I think the primary reason that people rent instead of buying is the cost of a down payment. For some reason, we have decided as a society that you should be expected to pay 10%-20% of the cost of a home up front, or else you never deserve to earn any equity in your home whatsoever. This is one of many ways that being rich makes it easier to get richer—but it is probably the most important one holding back most of the middle class of the First World.

And make no mistake, that’s what this is: It’s a social norm. There is no deep economic reason why a down payment needs to be anything in particular—or even why down payments in general are necessary.

There is some evidence that higher down payments are associated with less risk of default, but it’s not as strong as many people seem to think. The big HUD study on the subject found that one percentage point of down payment reduces default risk by about as much as 5 points of credit rating: So you should prefer to offer a mortgage to someone with an 800 rating and no down payment than someone with a 650 rating and a 20% down payment.

Also, it’s not as if mortgage lenders are unprotected from default (unlike, say, credit card lenders). Above all, they can foreclose on the house. So why is it so important to reduce the risk of default in the first place? Why do you need extra collateral in the form of a down payment, when you’ve already got an entire house of collateral?

It may be that this is actually a good opportunity for financial innovation, a phrase that should in general strike terror in one’s heart. Most of the time “financial innovation” means “clever ways of disguising fraud”. Previous attempts at “innovating” mortgages have resulted in such monstrosities as “interest-only mortgages” (a literal oxymoron, since by definition a mortgage must have a termination date—a date at which the debt “dies”), “balloon payments”, and “adjustable rate mortgages”—all of which increase risk of default while as far as I can tell accomplishing absolutely nothing. “Subprime” lending created many excuses for irresponsible or outright predatory lending—and then, above all, securitization of mortgages allowed banks to offload the risk they had taken on to third parties who typically had no idea what they were getting.

Volcker was too generous when he said that the last great financial innovation was the ATM; no, that was an innovation in electronics (and we’ve had plenty of those). The last great financial innovation I can think of is the joint-stock corporation in the 1550s. But I think a new type of mortgage contract that minimizes default risk without requiring large up-front payments might actually qualify as a useful form of financial innovation.

It would also be useful to have mortgages that make it easier to move, perhaps by putting payments on hold while the home is up for sale. That way people wouldn’t have to make two mortgage payments at once as they move from one place to another, and the bank will see that money eventually—paid for by new buyer and their mortgage.

Indeed, ideally I’d like to eliminate foreclosure as well, so that no one has to be kicked out of their homes. How might we do that?

Well, as a pandemic response measure, we should have simply instituted a freeze on all evictions and foreclosures for the duration of the pandemic. Some states did, in fact—but many didn’t, and the federal moratoria on evictions were limited. This is the kind of emergency power that government should have, to protect people from a disaster. So far it appears that the number of evictions was effectively reduced from tens of millions to tens of thousands by these measures—but evicting anyone during a pandemic is a human rights violation.

But as a long-term policy, simply banning evictions wouldn’t work. No one would want to lend out mortgages, knowing that they had no recourse if the debtor stopped paying. Even buyers with good credit might get excluded from the market, since once they actually received the house they’d have very little incentive to actually make their payments on time.

But if there are no down payments and no foreclosures, that means mortgage lenders have no collateral. How are they supposed to avoid defaults?

One option would be wage garnishment. If you have the money and are simply refusing to pay it, the courts could simply require your employer to send the money directly to your creditors. If you have other assets, those could be garnished as well.

And what if you don’t have the money, perhaps because you’re unemployed? Well, then, this isn’t really a problem of incentives at all. It isn’t that you’re choosing not to pay, it’s that you can’t pay. Taking away such people’s homes would protect banks financially, but at a grave human cost.

One option would be to simply say that the banks should have to bear the risk: That’s part of what their huge profits are supposed to be compensating them for, the willingness to take on risks others won’t. The main downside here is the fact that it would probably make it more difficult to get a mortgage and raise the interest rates that you would need to pay once you do.

Another option would be some sort of government program to make up the difference, by offering grants or guaranteed loans to homeowners who can’t afford to pay their mortgages. Since most such instances are likely to be temporary, the government wouldn’t be on the hook forever—just long enough for people to get back on their feet. Here the downside would be the same as any government spending: higher taxes or larger budget deficits. But honestly it probably wouldn’t take all that much; while the total value of all mortgages is very large, only a small portion are in default at any give time. Typically only about 2-4% of all mortgages in the US are in default. Even 4% of the $10 trillion total value of all US mortgages is about $400 billion, which sounds like a lot—but the government wouldn’t owe that full amount, just whatever portion is actually late. I couldn’t easily find figures on that, but I’d be surprised if it’s more than 10% of the total value of these mortgages that would need to be paid by the government. $40 billion is about 1% of the annual federal budget.

Reforms to our healthcare system would also help tremendously, as medical expenses are a leading cause of foreclosure in the United States (and literally nowhere else—every other country with the medical technology to make medicine this expensive also has a healthcare system that shares the burden). Here there is virtually no downside: Our healthcare system is ludicrously expensive without producing outcomes any better than the much cheaper single-payer systems in Canada, the UK, and France.

All of this sounds difficult and complicated, I suppose. Some may think that it’s not worth it. But I believe that there is a very strong moral argument for universal homeownership and ending eviction: Your home is your own, and no one else’s. No one has a right to take your home away from you.

This is also fundamentally capitalist: It is the private ownership of capital by its users, the acquisition of wealth through ownership of assets. The system of landlords and renters honestly doesn’t seem so much capitalist as it does feudal: We even call them “lords”, for goodness’ sake!

As an added bonus, if everyone owned their own homes, then perhaps we wouldn’t have to worry about “gentrification”, since rising property values would always benefit residents.

What I think “gentrification” ought to mean

Mar7 JDN 2459281

A few years back I asked the question: “What is gentrification?”

The term evokes the notion of a gentrya landed upper class who hoards wealth and keeps the rest of the population in penury and de facto servitude. Yet the usual meaning of the term really just seems to mean “rich people buying houses in poor areas”. Where did we get the idea that rich people buying houses in poor areas constitutes the formation of a landed gentry?

In that previous post I argued that the concept of “gentrification” as usually applied is not a useful one, and we should instead be focusing directly on the issues of poverty and housing affordability. I still think that’s right.

But it occurs to me that there is something “gentrification” could be used to mean, that would actually capture some of the original intended meaning. It doesn’t seem to be used this way often, but unlike the usual meaning, this one actually has some genuine connection with the original concept of a gentry.

Here goes: Gentrification is the purchasing of housing for the purpose of renting it out.

Why this definition in particular? Well, it actually does have an effect similar in direction (though hardly in magnitude) to the formation of a landed gentry: It concentrates land ownership and makes people into tenants instead of homeowners. It converts what should have been a one-time transfer of wealth from one owner to another into a permanent passive income stream that typically involves the poor indefinitely paying to the rich.

Because houses aren’t very fungible, the housing market is one of monopolistic competition: Each house is its own unique commodity, only partially substitutable with others, and this gives market power to the owners of houses. When it’s a permanent sale, that market power will be reflected in the price, but it will also effectively transfer to the new owner. When it’s a rental, that market power remains firmly in the hands of the landlord. The more a landlord owns, the more market power they can amass: A large landholding corporation like the Irvine Company can amass an enormous amount of market power, effectively monopolizing an entire city. (Now that feels like a landed gentry! Bend the knee before the great and noble House Irvine.)

Compare this to two other activities that are often called “gentrification”: Rich people buying houses in poor areas for the purpose of living in them, and developers building apartment buildings and renting them out.

When rich people buy houses for the purpose of living in them, they are not concentrating land ownership. They aren’t generating a passive income stream. They are simply doing the same thing that other people do—buying houses to live in them—but they have more money with which to do so. This is utterly unproblematic, and I think people need to stop complaining about it. There is absolutely nothing wrong with buying a house because you want to live in it, and if it’s a really expensive house—like Jeff Bezos’ $165 million mansion—then the problem isn’t rich people buying houses, it’s the massive concentration of wealth that made anyone that rich in the first place. No one should be made to feel guilty for spending their own money on their own house. Every time “gentrification” is used to describe this process, it just makes it seem like “gentrification” is nothing to worry about—or maybe even something to celebrate.

What about developers who build apartments to rent them out? Aren’t they setting up a passive income stream from the poor to the rich? Don’t they have monopolistic market power? Yes, that’s all true. But they’re also doing something else that buying houses in order to rent them doesn’t: They are increasing the supply of housing.

What are the two most important factors determining the price of housing? The same two factors as anything else: Supply and demand. If prices are too high, the best way to fix that is to increase supply. Developers do that.

Conversely, buying up a house in order to rent it is actually reducing the supply of housing—or at least the supply of permanent owner-occupied housing. Whereas developers buy land that has less housing and build more housing on it, gentrifiers (as I’m defining them) buy housing that already exists and rent it out to others.

Indeed, it’s really not clear to me that rent is a thing that needs to exist. Obviously people need housing. And it certainly makes sense to have things like hotels for very short-term stays and dorms for students who are living in an area for a fixed number of years.

But it’s not clear to me that we really needed to have a system where people would own other people’s houses and charge them for the privilege of living in them. I think the best argument for it is a libertarian one: If people want to do that, why not let them?

Yet I think the downsides of renting are clear enough: People get evicted and displaced, and in many cases landlords consistently fail to provide the additional services that they are supposed to provide. (I wasn’t able to quickly find good statistics on how common it is for landlords to evade their responsibilities like this, but anecdotal evidence would suggest that it’s not uncommon.)

The clearest upside is that security deposits are generally cheaper than down payments, so it’s generally easier to rent a home than to buy one. But why does this have to be the case? Indeed, why do banks insist on such large down payments in the first place? It seems to be only social norms that set the rate of down payments; I’m not aware of any actual economic arguments for why a particular percentage of the home’s value needs to be paid in cash up front. It’s commonly thought that large down payments somehow reduce the risk of defaulting on a mortgage; but I’m not aware of much actual evidence of this. Here’s a theoretical model saying that down payments should matter, but it’s purely theoretical. Here’s an empirical paper showing that lower down payments are associated with higher interest rates—but it may be the higher interest rates that account for the higher defaults, not the lower down payments. There is also a selection bias, where buyers with worse credit get worse loan terms (which can be a self-fulfilling prophecy).

The best empirical work I could find on the subject was a HUD study suggesting that yes, lower down payments are associated with higher default risk—but their effect is much smaller than lots of other things. In particular, one percentage point of down payment was equivalent to about 5 points of credit score. So someone with a credit score of 750 and a down payment of 0% is no more likely to default than someone with a credit score of 650 and a down payment of 20%. Or, to use an example they specifically state in the paper: “For example, to have the same probability of default as a prime loan, a B or C [subprime] loan needs to have a CLTV [combined loan-to-value ratio] that is 11.9 percentage points lower than the CLTV of an otherwise identical prime loan.” A combined loan-to-value ratio 12 percentage points lower is essentially the same thing as a down payment that is 12 percentage points larger—and 12% of the median US home price of $300,000 is $36,000, not an amount of money most middle-class families can easily come up with.

I also found a quasi-experimental study showing that support from nonprofit housing organizations was much more effective at reducing default rates than higher down payments. So even if larger down payments do reduce defaults, there are better ways of doing so.

The biggest determinant of whether you will default on your mortgage is the obvious one: whether you have steady income large enough to afford the mortgage payment. Typically when people default it’s because their adjustable interest rate surged or they lost their job. When housing prices decline and you end up “underwater” (owing more than the house’s current price), strategic default can theoretically increase your wealth; but in fact it’s relatively rare to take advantage of this, because it’s devastating to your credit rating. Only about 20% of all mortgage defaults in the crisis were strategic—the other 80% were people who actually couldn’t afford to pay.

Another potential upside is that it may be easier to move from one place to another if you rent your home, since selling a home can take a considerable amount of time. But I think this benefit is overstated: Most home leases are 12 months long, while selling a house generally takes 60-90 days. So unless you are already near the end of your lease term when you decide to move, you may actually find that you could move faster if you sold your home than if you waited for your lease to end—and if you end your lease early, the penalties are often substantial. Your best-case scenario is a flat early termination fee; your worst-case scenario is being on the hook for all the remaining rent (at which point, why bother?). Some landlords instead require you to cover rent until a new tenant is found—which you may recognize as almost exactly equivalent to selling your own home.

I think the main reason that people rent instead of buying is simply that they can’t come up with a down payment. If it seems too heavy-handed or risky to simply cap down payments, how about we offer government-subsidized loans (or even grants!) to first-time home buyers to cover their down payments? This would be expensive, but no more so than the mortgage interest deduction—and far less regressive.

For now, we can continue to let people rent out homes. When developers do this, I think the benefits generally outweigh the harms: Above all, they are increasing the supply of housing. A case could be made for policies that incentivize the construction of condos rather than rentals, but above all, policy should be focusing on incentivizing construction.

However, when someone buys an existing house and then rents it out, they are doing something harmful. It probably shouldn’t be illegal, and in some cases there may be no good alternatives to simply letting people do it. But it’s a harmful activity nonetheless, and where legal enforcement is too strict, social stigma can be useful. And for that reason, I think it might actually be fair to call them gentrifiers.

Why will no one listen to economists on rent control?

Sep 22 JDN 2458750

I am on the verge of planting my face into my desk, because California just implemented a statewide program of rent control. I understand the good intentions here; it is absolutely the case that housing in California is too expensive. There are castles in Spain cheaper than condos in California. But this is not the right solution. Indeed, it will almost certainly make the problem worse. Maybe housing prices won’t be too high; instead there simply won’t be enough homes and more people will live on the street. (It’s not a coincidence that the Bay Area has both some of the world’s tightest housing regulations and one of the highest rates of homelessness.)

There is some evidence that rent control can help keep tenants in their homes—but at the cost of reducing the overall housing supply. Most of the benefits of rent control actually fall upon the upper-middle-class, not the poor.

Price controls are in general a terrible way of intervening in the economy. Price controls are basically what destroyed Venezuela. In this case the ECON 101 argument is right: Put a cap on the price of something, and you will create a shortage of that thing. Always.

California makes this worse by including all sorts of additional regulations on housing construction. Some regulations are necessary—homes need to be safe to live in—but did we really need a “right to sunlight”? How important is “the feel of the city” compared to homelessness? Not every building needs its own parking! (That, at least, the state government seems to be beginning to understand.) And yes, we should be investing heavily in solar power, and rooftops are a decent place to put those solar panels; but you should be subsidizing solar panels, not mandating them and thereby adding the cost of solar panels to the price of every new building.

Of course, we can’t simply do nothing; we need to fix this housing crisis. But there are much better ways of doing so. Again the answer is to subsidize rather than regulate.

Here are some policy options for making housing more affordable:

  1. Give every person below a certain income threshold a one-time cash payment to help them pay for a down payment or first month’s rent. Gradually phase out the payment as their income increases in the same way as the Earned Income Tax Credit.
  2. Provide a subsidy for new housing construction, with larger subsidies for buildings with smaller, more affordable apartments.
  3. Directly pay for the construction of new public housing.
  4. Relax zoning regulations to make construction less expensive.
  5. Redistribute income from the rich to the poor using progressive taxes and transfer payments. Housing crises are always and everywhere a problem of inequality.

Some of these would cost money, yes; we would probably need to raise taxes to pay for them. But rent control has costs too. We are already paying these costs, but instead of paying them in the form of taxes that can be concentrated on the rich, we pay them in the form of a housing crisis that hurts the poor most of all.

The weirdest thing about all this is that any economist would agree.

Economists can be a contentious bunch: It has been said that if you ask five economists a question, you’ll get five answers—six if one is from Harvard. Yet the consensus among economists against rent control is absolutely overwhelming. Analyses of journal articles and polls of eminent economists suggest that over 90% of economists, regardless of their other views or their political leanings, agree that rent control is a bad idea.

This is a staggering result: There are economists who think that almost all taxes and regulations are fundamentally evil and should all be removed, and economists who think that we need radical, immediate government intervention to prevent a global climate catastrophe. But they all agree that rent control is a bad idea.

Economists differ in their views about legacy college admissions, corporate antitrust, wealth taxes, corporate social responsibility, equal pay for women, income taxes, ranked-choice voting, the distributional effects of monetary policy, the relation between health and economic growth, minimum wage, and healthcare spending. They disagree about whether Christmas is a good thing! But they all agree that rent control is a bad idea.

We’re not likely to ever get a consensus much better than this in any social science. The economic case against rent control is absolutely overwhelming. Why aren’t policymakers listening to us?

I really would like to know. It’s not that economists have ignored the problem of housing affordability. We have suggested a variety of other solutions that would obviously be better than rent control—in fact, I just did, earlier in this post. Many of them would require tax money, yes—do you want to fix this problem, or not?

Maybe that’s it: Maybe policymakers don’t really care about making housing affordable. If they did, they’d be willing to bear the cost of raising taxes on millionaires in order to build more apartments and keep people from being homeless. But they want to seem like they care about making housing affordable, because they know their constituents care. So they use a policy that seems to make housing more affordable, even though it doesn’t actually work, because that policy also doesn’t affect the government budget (at least not obviously or directly—of course it still does indirectly). They want the political support of the poor, who think this will help them; and they also want the political support of the rich, who refuse to pay a cent more in taxes.

But it really makes me wonder what we as economists are even really doing: If the evidence is this clear and the consensus is this overwhelming, and policymakers still ignore us—then why even bother?

The asymmetric impact of housing prices

Jul 22 JDN 2458323

In several previous posts I’ve talked about the international crisis of high housing prices. Today, I want to talk about some features of housing that make high housing prices particularly terrible, in a way that other high prices would not be.

First, there is the fact that some amount of housing is a basic necessity, and houses are not easily divisible. So even if the houses being built are bigger than you need, you still need some kind of house, and you can’t buy half a house; the best you could really do would be to share it with someone else, and that introduces all sorts of other complications.

Second, t here is a deep asymmetry here. While rising housing prices definitely hurt people who want to buy houses, they benefit hardly anyone.


If you bought a house for $200,000 and then all housing prices doubled so it would now sell for $400,000, are you richer? You might feel richer. You might even have access to home equity loans that would give you more real liquidity. But are you actually richer?

I contend you are not, because the only way for you to access that wealth would be to sell your home, and then you’d need to buy another home, and that other home would also be twice as expensive. The amount of money you can get for your house may have increased, but the amount of house you can get for your house is exactly the same.

Conversely, suppose that housing prices fell by half, and now that house only sells for $100,000. Are you poorer? You still have your house. Even if your mortgage isn’t paid off, it’s still the same mortgage. Your payments haven’t changed. And once again, the amount of house you can get for your house will remain the same. In fact, if you are willing to accept a deed in lieu of foreclosure (it’s bad for your credit, of course), you can walk away from that underwater house and buy a new one that’s just as good with lower payments than what you are currently making. You may actually be richer because the price of your house fell.

Relative housing prices matter, certainly. If you own a $400,000 house and move to a city where housing prices have fallen to $100,000, you are definitely richer. And if you own a $100,000 house and move to a city where housing prices have risen to $400,000, you are definitely poorer. These two effects necessarily cancel out in the aggregate.

But do absolute housing prices matter for homeowners? It really seems to me that they don’t. The people who care about absolute housing prices are not homeowners; they are people trying to enter the market for the first time.
And this means that lower housing prices are almost always better. If you could buy a house for $1,000, we would live in a paradise where it was basically impossible to be homeless. (When social workers encountered someone who was genuinely homeless, they could just buy them a house then and there.) If every home cost $10 million, those who bought homes before the price surge would be little better off than they are, but the rest of us would live on the streets.

Psychologically, people very strongly resist falling housing prices. Even in very weak housing markets, most people will flatly refuse to sell their house for less than they paid for it. As a result, housing prices usually rise with inflation, but don’t usually fall in response to deflation. Rents also display similar rigidity over time. But in reality, lower prices are almost always better for almost everyone.

There is a group of people who are harmed by low housing prices, but it is a very small group of people, most of whom are already disgustingly rich: The real estate industry. Yes, if you build new housing, or flip houses, or buy and sell houses on speculation, you will be harmed by lower housing prices. Of these, literally the only one I care about even slightly is developers; and I only care about developers insofar as they are actually doing their job building housing that people need. If falling prices hurt developers, it would be because the supply of housing was so great that everyone who needs a house could have one.

There is a subtler nuance here, which is that some people may be buying more expensive housing as a speculative saving vehicle, hoping that they can cash out on their house when they retire. To that, I really only have one word of advice: Don’t. Don’t contribute to another speculative housing bubble that could cause another Great Recession. A house is not even a particularly safe investment, because it’s completely undiversified. Buy stocks. Buy all the stocks. Buy a house because you want that house, not because you hope to make money off of it.

And if the price of your house does fall someday? Don’t panic. You may be no worse off, and other people are probably much better off.

The housing shortage is an international phenomenon

Jul 1 JDN 2458301

My posts for the next couple of weeks are going to be shorter, since I am in Europe and will be either on vacation (at the time I write this) or busy with a conference and a workshop (by the time this post goes live).

For today, I’d just like to point out that the crisis of extremely high housing prices is not unique to California or even the United States. In some respects it may even be worse elsewhere.

San Francisco remains especially bad; the median price for a home in San Francisco is a horrifying $1.6 million.

But London (where I am at the time of writing) is also terrible; the median price for a home in London recently fell to 430,000 pounds (about $600,000 at current exchange rates). The most expensive flat—not house, flat—sold a couple years ago for the mind-boggling sum of 150 million pounds (about $200 million). If I had $200 million, I would definitely not use it to buy a flat. At that point it would literally be cheaper to buy a yacht with a helipad, park it in the harbor, and commute by helicopter. Here’s a yacht with a helipad for only $20 million, and a helicopter to go with it for $6 million. That leaves $174 million; keep $20 million in stocks to be independently wealthy for the rest of your life, and then donate the remaining $154 million to charity.

The median price of a house in Vancouver stands at 1.1 million Canadian dollars, about $830,000 US.

A global comparison finds that on a per-square-meter basis, the most expensive real estate in the world is in Monaco, where $1 million US will only buy you 15 square meters. The remaining cities in the top 10 are Hong Kong, London, Singapore, Geneva, New York, Sydney, Paris, Moscow, and Shanghai.

There is astonishing variation in the level of housing prices, even within countries. Some of the most affordable markets in the US (like San Antonio and Oklahoma City) cost as little as $80 per square foot; that means that $1 million would buy you 1,160 square meters. That’s not an error; real estate in Monaco is literally 77 times more expensive than real estate in Oklahoma City. 15 square meters is a studio apartment; 1,160 square meters is a small mansion. Just comparing within the US, the price per square foot in San Francisco is over $1,120, 14 times as high as Oklahoma City. $1 million in San Francisco will buy you about 80 square meters, which is at least a two or three-bedroom house.

This says to me that policy choices matter. It may not be possible to make San Francisco as cheap as Oklahoma City—most people would definitely rather live in San Francisco, so demand is always going to be higher there. But I don’t think it’s very plausible to say that housing is just inherently 14 times as expensive to construct as housing in Oklahoma City. If it’s really that much more expensive to construct (and that may not even be the issue—this could be more a matter of oligopoly than high costs), it must be at least in part because of something the local and state governments are doing differently. Cross-national comparisons underscore that point even further: The geography of Hong Kong and Taiwan is not that different, but housing prices in Taiwan are not nearly as high.

What exactly are different cities (and countries) doing differently that has such large effects on housing prices? That’s something I’ll try to figure out in future posts.

Downsides of rent control

May 13 JDN 2458252

One of the largest ideological divides between economists and the rest of the population concerns rent control.

Tent control is very popular among the general population, especially in California—with support hovering around 60% in Orange County, San Diego County, and across California in general. About 60% of people in the UK and over 50% in Ontario, Canada also support rent control.

Meanwhile, economists overwhelmingly oppose rent control: When evaluating the statement “A ceiling on rents reduces the quantity and quality of housing available.”, over 76% of economists agreed, and 16% agreed with qualifications. For the record, I would be an “agree with qualifications” as well (as they say, there are few one-handed economists).

There is evidence of some benefits of rent control, at least for the small number of people who can actually manage to stay in rent-controlled units. People who live in rent-controlled units are about 15% more likely to stay where they are, even in places as expensive as San Francisco, which could be considered a good thing (though I’m not convinced it always is; mobility is one of the key forces driving the dynamism of the US economy).

But there are winners and losers. Landlords whose properties are rent-controlled decreased their supply of housing by an average of 15%, via a combination of converting them to condos, removing them from the market, or demolishing the buildings outright. As a result, rent control increases average rent in a city by an average of 5%. One of the most effective ways to get out of rent control is to remove a building from the market entirely; this allows you to evict all of your tenants with very little notice, and is responsible for thousands of tenants being evicted every year in Los Angeles.

Rent control disincentivizes both new housing construction and the proper maintenance of existing housing. The quality of rent-controlled homes is systematically lower than the quality of other homes.

The benefits of rent control mainly fall upon the upper-middle class, not the poor. Rent control can make an area more racially diverse—but it benefits middle-class members of racial minorities, not poor members. Most of the benefits of rent control go to older families who have lived in a city for a long time—which makes them a transfer of wealth away from young people.

Cities such as Chicago without rent control systematically have lower rents, not higher; partly this is a cause, rather than an effect, as tenants are less likely to panic and demand rent control when rents are not high. But it’s also an effect, as rent control holds down the price in part of the market but ends up driving it up in the rest. Over 40% of San Francisco’s apartments are rent-controlled, and they have the highest rents in the world.

Rent control also contributes to the tendency toward building high-end luxury apartments; if you know that you will never be able to raise the rent on your existing buildings, and may end up being stuck with whatever rent you charge the first year on your new buildings, you have a strong reason to want to charge as much as possible the first year you build new apartments. Rent control also creates subtler distortions in the size and location of apartment construction. The effects of rent control even spill over into other housing markets, such as owner-occupied homes and mobile homes.
Because it locks people into place and reduces the construction of new homes near city centers, rent control increases commute times and carbon emissions. This is probably something we should especially point out to people in California, as the two things Californians hate most are environmental degradation and traffic congestion. (Then again, the third is high rent.) California is good at avoiding the first one—our GDP/carbon emission ratio is near the best in the US. The other two? Not so much.

Of course, simply removing rent control would not immediately solve the housing shortage; while it would probably have benefits in the long run, during the transition period a lot of people currently protected by rent control would lose their homes. Even in the long run, it would probably not be enough to actually make rent affordable in the largest coastal cities.

But it’s vital not to confuse “lower rent” with “rent control”; there are much, much better ways to reduce rent prices than simply enforcing arbitrary caps on them.

We have learned not to use price controls in other markets, but not housing for some reason. Think about the gasoline market, for example. High gas prices are very politically unpopular (though frankly I never quite understood why; it’s a tiny fraction of consumption expenditure, and if we ever want to make a dent in our carbon emissions we need to make our gas prices much higher), but imagine how ridiculous it would seem for a politician to propose simply making an arbitrary cap that says you aren’t allowed to sell gasoline for more than $2.50 per gallon in a particular city. The obvious outcome would be for most gas stations in that city to immediately close, and everyone to end up buying their gas at the new gas stations that spring up just outside the city limits charging $4.00 per gallon. This is basically what happens in the housing market: Rent-controlled apartments apartments are taken off the market, and the new housing that is built ends up even more expensive.

In a future post, I’ll discuss things we can do instead of rent control that would reliably make housing more affordable. Most of these would involve additional government spending; but there are two things I’d like to say about that. First, we are already spending this money, we just don’t see it, because it comes in the form of inefficiencies and market distortions instead of a direct expenditure. Second, do we really care about making housing affordable, or not? If we really care, we should be willing to spend money on it. If we aren’t willing to spend money on it, then we must not really care.

The Irvine Company needs some serious antitrust enforcement

Dec 17, JDN 2458105

I probably wouldn’t even have known about this issue if I hadn’t ended up living in Irvine.

The wealthiest real estate magnate in the United States is Donald Bren, sole owner of the Irvine Company. His net wealth is estimated at $15 billion, which puts him behind the likes of Jeff Bezos or Bill Gates, but well above Donald Trump even at his most optimistic estimates.

Where did he get all this wealth?

The Irvine Company isn’t even particularly shy about its history, though of course they put a positive spin on it. Right there on their own website they talk about how it used to be a series of ranches farmed by immigrants. Look a bit deeper into their complaints about “squatters” and it becomes apparent that the main reason they were able to get so rich is that the immigrant tenant farmers whose land they owned were disallowed by law from owning real estate. (Not to mention how it was originally taken from Native American tribes, as most of the land in the US was.) Then of course the land has increased in price and been passed down from generation to generation.

This isn’t capitalism. Capitalism requires a competitive market with low barriers of entry and trade in real physical capital—machines, vehicles, factories. The ownership of land by a single family that passes down its title through generations while extracting wealth from tenant farmers who aren’t allowed to own anything has another name. We call it feudalism.

The Irvine Company is privately-held, and thus not required to publish its finances the way a publicly-traded company would be, so I can’t tell you exactly what assets its owns or how much profit it makes. But I can tell you that it owns over 57,000 housing units—and there are only 96,000 housing units in the city of Irvine, so that means they literally own 60% of the city. They don’t just own houses either; they also own most of the commercial districts, parks, and streets.

As a proportion of all the housing in the United States, that isn’t so much. Even compared to Southern California (the most densely populated region in North America), it may not seem all that extravagant. But within the city of Irvine itself, this is getting dangerously close to a monopoly. Housing is expensive all over California, so they can’t be entirely blamed—but is it really that hard to believe that letting one company own 60% of your city is going to increase rents?

This is sort of thing that calls for a bold and unequivocal policy response. The Irvine Company should be forced to subdivide itself into multiple companies—perhaps Irvine Residential, Irvine Commercial, and Irvine Civic—and then those companies should be made publicly-traded, and a majority of their shares immediately distributed to the residents of the city. Unlike most land reform proposals, selecting who gets shares is actually quite straightforward: Anyone who pays rent on an Irvine Company property receives a share.

Land reform has a checkered history to say the least, which is probably why policymakers are reluctant to take this sort of approach. But this is a land reform that could be handled swiftly, by a very simple mechanism, with very clear rules. Moreover, it is entirely within the rule of law, as the Irvine Company is obviously at this point an illegitimate monopoly in violation of the Sherman Antitrust Act, Clayton Antitrust Act, and Federal Trade Commission Act. The Herfindahl-Hirschman Index for real estate in the city of Irvine would be at least 3600, well over the standard threshold of 2500 that FTC guidelines consider prima facie evidence of an antitrust violation in the market. Formally, the land reform could be accomplished by collecting damages in an amount necessary to purchase the shares at the (mandatory) IPO, then the beneficiaries of the damages paid in shares would be the residents of Irvine. The FTC is also empowered to bring criminal charges if necessary.

Oddly, most of the talk about the Irvine Company among residents of Irvine centers around their detailed policy decisions, whether expanding road X was a good idea, how you feel about the fact that they built complex Y. (There’s also a bizarre reverence for the Irvine Master Plan; people speak of it as if it were the US Constitution, when it’s actually more like Amazon.com’s five-year revenue targets. This is a for-profit company. Their plan is about taking your money.) This is rather like debating whether or not you have a good king; even if you do, you’re still a feudal subject. No single individual or corporation should have that kind of power over the population of an entire city. This is not a small city, either; Irvine has about three-quarters of the population of Iceland, or a third the population of Boston. Take half of Donald Bren’s $15 billion, divide it evenly over the 250,000 people of the city, and each one gets $30,000. That’s a conservative estimate of how much monopolistic rent the Irvine Company has extracted from the people of Irvine.

By itself, redistributing the assets of the Irvine Company wouldn’t solve the problem of high rents in Southern California. But I think it would help, and I’m honestly having trouble seeing the downsides. The only people who seem to be harmed are billionaires who inherited wealth that was originally extracted from serfs. Like I said, this is within the law, and wouldn’t require new legislation. We would only need to aggressively enforce laws that have been on the books for a century. It doesn’t even seem like it should be politically unpopular, as you’re basically giving a check for tens of thousands of dollars to each voting resident in the city.

Of course, it won’t happen. As usual, I’m imagining more justice in the world than there actually has ever been.

What exactly is “gentrification”? How should we deal with it?

Nov 26, JDN 2458083

“Gentrification” is a word that is used in a variety of mutually-inconsistent ways. If you compare the way social scientists use it to the way journalists use it, for example, they are almost completely orthogonal.

The word “gentrification” is meant to invoke the concept of a feudal gentry—a hereditary landed class that extracts rents from the rest of the population while contributing little or nothing themselves.

If indeed that is what we are talking about, then obviously this is bad. Moreover, it’s not an entirely unfounded fear; there are some remarkably strong vestiges of feudalism in the developed world, even in the United States where we never formally had a tradition of feudal titles. There really is a significant portion of the world’s wealth held by a handful of billionaire landowner families.

But usually when people say “gentrification” they mean something much broader. Almost any kind of increase in urban real estate prices gets characterized as “gentrification” by at least somebody, and herein lies the problem.

In fact, the kind of change that is most likely to get characterized as “gentrification” isn’t even the rising real estate prices we should be most worried about. People aren’t concerned when the prices of suburban homes double in 20 years. You might think that things that are already too expensive getting more expensive would be the main concern, but on the contrary, people are most likely to cry “gentrification” when housing prices rise in poor areas where housing is cheap.

One of the most common fears about gentrification is that it will displace local residents. In fact, the best quasi-experimental studies show little or no displacement effect. It’s actually mainly middle-class urbanites who get displaced by rising rents. Poor people typically own their homes, and actually benefit from rising housing prices. Young upwardly-mobile middle-class people move to cities to rent apartments near where they work, and tend to assume that’s how everyone lives, but it’s not. Rising rents in a city are far more likely to push out its grad students than they are poor families that have lived there for generations. Part of why displacement does not occur may be because of policies specifically implemented to fight it, such as subsidized housing and rent control. If that’s so, let’s keep on subsidizing housing (though rent control will always be a bad idea).

Nor is gentrification actually a very widespread phenomenon. The majority of poor neighborhoods remain poor indefinitely. In most studies, only about 30% of neighborhoods classified as “gentrifiable” actually end up “gentrifying”. Less than 10% of the neighborhoods that had high poverty rates in 1970 had low poverty rates in 2010.

Most people think gentrification reduces crime, but in the short run the opposite is the case. Robbery and larceny are higher in gentrifying neighborhoods. Criminals are already there, and suddenly they get much more valuable targets to steal from, so they do.

There is also a general perception that gentrification involves White people pushing Black people out, but this is also an overly simplistic view. First of all, a lot of gentrification is led by upwardly-mobile Black and Latino people. Black people who live in gentrified neighborhoods seem to be better off than Black people who live in non-gentrified neighborhoods; though selection bias may contribute to this effect, it can’t be all that strong, or we’d observe a much stronger displacement effect. Moreover, some studies have found that gentrification actually tends to increase the racial diversity of neighborhoods, and may actually help fight urban self-segregation, though it does also tend to increase racial polarization by forcing racial mixing.

What should we conclude from all this? I think the right conclusion is we are asking the wrong question.

Rising housing prices in poor areas aren’t inherently good or inherently bad, and policies designed specifically to increase or decrease housing prices are likely to have harmful side effects. What we need to be focusing on is not houses or neighborhoods but people. Poverty is definitely a problem, for sure. Therefore we should be fighting poverty, not “gentrification”. Directly transfer wealth from the rich to the poor, and then let the housing market fall where it may.

There is still some role for government in urban planning more generally, regarding things like disaster preparedness, infrastructure development, and transit systems. It may even be worthwhile to design regulations or incentives that directly combat racial segregation at the neighborhood level, for, as the Schelling Segregation Model shows, it doesn’t take a large amount of discriminatory preference to have a large impact on socioeconomic outcomes. But don’t waste effort fighting “gentrification”; directly design policies that will incentivize desegregation.

Rising rent as a proportion of housing prices is still bad, and the fundamental distortions in our mortgage system that prevent people from buying houses are a huge problem. But rising housing prices are most likely to be harmful in rich neighborhoods, where housing is already overpriced; in poor neighborhoods where housing is cheap, rising prices might well be a good thing.
In fact, I have a proposal to rapidly raise homeownership across the United States, which is almost guaranteed to work, directly corrects an enormous distortion in financial markets, and would cost about as much as the mortgage interest deduction (which should probably be eliminated, as most economists agree). Give each US adult a one-time grant voucher which gives them $40,000 that can only be spent as a down payment on purchasing a home. Each time someone turns 18, they get a voucher. You only get one over your lifetime, so use it wisely (otherwise the policy could become extremely expensive); but this is an immediate direct transfer of wealth that also reduces your credit constraint. I know I for one would be house-hunting right now if I were offered such a voucher. The mortgage interest deduction means nothing to me, because I can’t afford a down payment. Where the mortgage interest deduction is regressive, benefiting the rich more than the poor, this policy gives everyone the same amount, like a basic income.

In the short run, this policy would probably be expensive, as we’d have to pay out a large number of vouchers at once; but with our current long-run demographic trends, the amortized cost is basically the same as the mortgage interest deduction. And the US government especially should care about the long-run amortized cost, as it is an institution that has lasted over 200 years without ever missing a payment and can currently borrow at negative real interest rates.

This is one of the worst wildfire seasons in American history. But it won’t be for long.

Oct 22, JDN 2458049

At least 38 people have now been killed by the wildfires that are still ongoing in California; in addition, 5700 buildings have been destroyed and 190,000 acres of land burned. The State of California keeps an updated map of all the fires that are ongoing and how well-controlled they are; it’s not a pretty sight.

While the particular details are extreme, this is not an isolated incident. This year alone, wildfires have destroyed over 8 million acres of land in the US. In 2015, that figure was 10 million acres.

Property damage for this year’s wildfires in California is estimated at over $65 billion. That’s more than what Trump recently added to the military budget, and getting close to our total spending on food stamps.

There is a very clear upward trend in the scale and intensity of wildfires just over the last 50 years, and the obvious explanation is climate change. As climate change gets worse, these numbers are projected to increase between 30% and 50% by the 2040s. We still haven’t broken the record of fire damage in 1910, but as the upward trend continues we might soon enough.

It’s important to keep the death tolls in perspective; much as with hurricanes, our evacuation protocols and first-response agencies do their jobs very well, and as a result we’ve been averaging only about 10 wildfire deaths per year over the whole United States for the last century. In a country of over 300 million people, that’s really an impressively small number. That number has also been trending upward, however, so we shouldn’t get complacent.

Climate change isn’t the only reason these fires are especially damaging. It also matters where you build houses. We have been expanding our urban sprawl into fire-prone zones, and that is putting a lot of people in danger. Since 1990, over 60% of new homes were built in “wildland-urban interface areas” that are at higher risk.

Why are we doing this? Because housing prices in urban centers are too expensive for people to live there, but that is where most of the jobs are. So people have little choice but to live in exurbs and suburbs closer to the areas where fires are worst. That’s right: The fires are destroying homes and killing people because the rent is too damn high.

We need to find a solution to this problem of soaring housing prices. And since housing is such a huge proportion of our total expenditure—we spend more on housing than we do on all government spending combined—this would have an enormous impact on our entire economy. If you compare the income of a typical American today to most of the world’s population, or even to a typical American a century ago, we should feel extremely rich, but we don’t—largely because we spend so much of it just on keeping a roof over our heads.

Real estate is also a major driver of economic inequality. Wealth inequality is highest in urban centers where homeownership is rare. The large wealth gaps between White and non-White Americans can be in large part attributed to policies that made homeownership much more difficult for non-White people. Housing value inequality and overall wealth inequality are very strongly correlated. The high inequality in housing prices is making it far more difficult for people to move from poor regions to rich regions, holding back one of the best means we had for achieving more equal incomes.

Moreover, the rise in capital income share since the 1970s is driven almost entirely by real estate, rather than actual physical capital. The top 10% richest housing communities constitute over 52% of the total housing wealth in the US.

There is a lot of debate about what exactly causes these rising housing prices. No doubt, there are many factors contributing, from migration patterns to zoning regulations to income inequality in general. In a later post, I’ll get into why I think many of the people who think they are fighting the problem are actually making it worse, and suggest some ideas for what they should be doing instead.

Why is housing so expensive?

Apr 30, JDN 2457874

It’s not your imagination: Housing is a lot more expensive than it used to be. Inflation adjusted into 2000 dollars, the median price of a house has risen from $30,600 in 1940 to $119,600 today. Adjusted to today’s dollars, that’s an increase from $44,000 to $173,000.

Things are particularly bad here in California, where the median price of a new home is $517,000—and especially in the Bay Area, where the median price is $838,000. Just two years ago, people were already freaking out that the median home price in the Bay Area had hit $661,000—and now it has risen 27% since then.

The rent is too damn high, but lately rent has actually not been rising as fast as housing prices. It may be that they’ve just gotten as high as they can get; in New York City rent is stable, and in San Francisco it’s actually declining—but in both cases it’s over $4,000 per month for a 2-bedroom apartment. The US still has the highest rent-to-price ratio in the world; at 11.2%, you should be able to buy a house on a 15-year mortgage for what we currently pay in rent near city centers.

But this is not a uniquely American problem.

It’s a problem in Canada: Housing in the Toronto area recently skyrocketed in price, with the mean price of a detached home now over $974,000 CAD, about $722,000 USD.

It’s a problem in the UK: The average price of a home in the UK is now over 214,000 pounds, or $274,000 (the pound is pretty weak after Brexit). In London in particular, the average home now costs nine years of the average wage.

It’s even a problem in China: An average 1000-square-foot apartment (that’s not very big!) in Shanghai now sells for 5 million yuan, which is about $725,000.

Worldwide, the US actually has a relatively low housing price to income ratio, because our incomes are so high. Venezuela’s economy is in such a terrible state that it is literally impossible for the average person to buy the average home, but in countries as diverse as France, Taiwan, and Peru, the average home still costs more than 10 years of the average household income.

Why is this happening? Why is housing so expensive, and getting worse all the time?

There are a lot of reasons that have been proposed.

The most obvious and fundamental reason is basic supply and demand. Demand for housing in major cities is rapidly rising, and supply of housing just isn’t keeping up.

Indeed, in California, the rate of new housing construction has fallen in recent years, even as we’ve had rapid population growth and skyrocketing housing prices. This is probably the number one reason why our housing here is so expensive.

But that raises its own questions: why aren’t more houses getting built? The market is supposed to correct for this sort of thing. Higher prices incentivize more construction, so prices get brought back down.

I think with housing in particular, we have a fundamental problem with that mechanism, and it is this: The people who make the policy don’t want the prices to come down.

No, I’m not talking about mayors and city councils, though they do like their property tax revenue. I’m talking about homeowners. People who go to homeowners’ association meetings and complain that someone else’s lopsided deck or un-weeded garden is “lowering property values”. People who join NIMBY political campaigns to stop new development, prevent the construction of taller buildings, or even stop the installation of new electrical substations. People who already got theirs and don’t care about anyone else.

Homeowners have an enormous influence in local politics, and it is by local politics that most of these decisions about zoning and development are made. They make all kinds of excuses about “preserving the community” and “the feel of the city”, but when you get right down to it, these people care more about preserving their own home equity than they do about making other people homeless.

In some cases, people may be so fundamentally confused that they think new development actually somehow causes higher housing prices, and so they try to fight development in a vain effort to stop rising housing prices and only end up making things worse. It’s also very common for people to support rent control policies in an effort to keep housing affordable—and economists of all political stripes are in almost total consensus that rent control only serves to restrict supply, increase inequality, and make housing prices even worse. As one might expect, the stricter the rent control, the worse this effect is. Some mild forms of rent control might be justifiable in particularly monopolistic markets, but in general it’s not a good long-term solution. Rent control forces rationing, and often the rationing is not in favor of who needs it the most but who is the most well-connected. The people who benefit most from rent control are usually of higher income than the average for the city.

On the other hand, removing rent control can cause a spike in prices, and make things worse in the short run, before there is time for new construction to increase the supply of housing. Also, many economists assume in their models that tenants who get forced out by the higher rents would get compensated for it, which is not at all how the real world works. It’s also unclear exactly how large the effect sizes are, because the empirical studies get quite mixed results. Still, rent control is a bad idea. Don’t take it from me, take it from Paul Krugman.

It’s also common to blame foreign investors—because humans are tribal, and blaming foreigners is always popular—even though that makes no economic sense. Investors are buying your houses because the prices keep rising. It’s possible that there could be some sort of speculative bubble, but that’s actually harder to sustain in housing than it is in most other assets, precisely because houses are immobile and expensive. Speculative bubbles in gold happen all the time (indeed, perhaps literally all the time, as the price of gold has never fallen to its real fundamental value in all of human history), but gold is a tradeable, transportable, fungible commodity that can be bought in arbitrarily small quantities. (Because it’s an element, you’re literally only limited to the atomic level!)

Moreover, it isn’t just supply and demand at work here. Fluctuations in economic growth have strong effects on housing prices—and vice-versa. There are monetary policy effects, particularly in a liquidity trap; lower interest rates combined with low inflation create a perfect storm for higher housing prices.

Overall economic inequality is a major contributor to steep housing prices, as well as the segregation of housing across racial and economic lines. And as the rate of return on productive capital continues to decrease while the rate of return on real estate does not, more and more of our wealth concentration is going to be in the form of higher housing prices—making the whole problem self-reinforcing.

People also seem really ambivalent about whether they want housing prices to be low or high. In one breath they’ll bemoan the lack of affordable housing, and in another they’ll talk about “protecting property values”. Even the IMF called the increase in housing prices after the Second Depression a “recovery”. Is it really so hard to understand that higher prices mean higher prices?

But we think of housing as two fundamentally different things. On the one hand, it’s a durable consumption good, like a car or a refrigerator—something you buy because it’s useful, and keep around to use for a long time. On the other hand, it’s a financial asset—a store of value for your savings and a potential source of income. When you’re thinking of it as a consumption good, you want it to be “affordable”; when you’re thinking of it as an asset, you want to “protect its value”. But it’s the same house with the same price. You can’t do both of those things at once, and clearly, as a society—perhaps as a civilization—we have been tilting way too far in the “asset” direction.

I get it: Financial assets that grow over time have the allure of easy money. The stock market, the derivatives market, even the lottery and Las Vegas, all have this tantalizing property that they seem to give you money for nothing. They are like the quest for the Philosopher’s Stone in days of yore.

But they are just as much a chimera as the Philosopher’s Stone itself. (Also, if anyone had found the Philosopher’s Stone, the glut of gold would have triggered massive inflation, not unlike what happened in Spain in the 16th century.) Any money you get from simply owning an asset or placing a bet is money that had to come from somewhere else. In the case of the stock market, that “somewhere else” is the profits of the corporations you bought, and if you did actually contribute to the investment of those corporations there’s nothing wrong with you getting a proportional share of those profits. But most people aren’t thinking in those terms when they buy stocks, and once you get all the way to sophisticated derivatives you’re basically in full gambling territory. Every option that’s in the money is another option that’s out of the money. Every interest rate swap that turns a profit is another one that bears a loss.

And when it comes to housing, if you magically gain equity from rising property values, where is that money coming from? It’s coming from people desperately struggling to afford to live in your city, people giving up 40%, 50%, even 60% of their disposable income just for the chance to leave in a tiny apartment because they want to be in your city that badly. It’s coming from people who started that way, lost their job, and ended up homeless because they couldn’t sustain the payments anymore. All that easy money is coming from hard-working young people trying to hold themselves out of poverty.

It’s different if your home gains value because you actually did something to make it better—renovations, additions, landscaping. Even then I think these things are sort of overrated; but they do constitute a real economic benefit to the people who live there. But if your home rises in value because zoning regulations and protesting homeowners stop the construction of new high-rises, that’s very much still on the backs of struggling young people.

We need to stop thinking houses as assets that are supposed to earn a return, and instead think of them as consumption goods that provide benefits to people. If you want a return, buy stocks and bonds. When you’re buying a house, you should be buying a house—not some dream of making money for nothing as housing prices rise forever. Because they can’t—sooner or later, the bubble will break—and even if they could, it would be terrible for everyone who didn’t get into the market soon enough.