Friday, April 17, 2020

Why housing costs outpace wages in a nutshell. At least in my opinion.

Interesting article came up in my Facebook feed.

Coronavirus has cost more than 100,000 people around Seattle their jobs. So why aren’t rents going down?

Here's some of my related thinking.

The disconnect between high property values and much of the rest of the economy becomes more apparent during the corona virus shut down.

I would say that the disconnect between housing costs and much of the economy is driven by several factors. A big factor is that housing has become a for of savings. A more lucrative alternative to low interest rates at banks.

Other factors drive this problem as well, but the savings bank issue is a big factor.

Population growth, in popular areas, is big also, but it can't explain the entire thing.

Bad planning around automobile dependency and low density is part of the problem as well. These factors vary from region to region.

Possibly the biggest factor is the investment problem. Housing has become too much of an investment vehicle. It's become an alternative to low interest at banks. This relates, to some extent (I think), to the printing of money which has propped up low interest rates over recent years.

The inflation one expects from printed money hasn't shown up across the whole economy. Much of the economy remains based on cheap goods and services and the low wages these activities pay. The Walmart style economy. Much of the economy experiences pressure to keep prices and wages low. Pressure that comes from automation, globalization and other efficiencies. Think of all the low cost and free things available on the internet, for instance.

Inflation has shown up in housing costs. Costs at least in popular areas, like Seattle and to some extent here in Bellingham. It's also shown up in things like executive salaries and the high costs of education and healthcare associated with these salaries.

It's shown up in what economists call "asset bubbles." The stock market experiences asset bubble economics where the bubbles, sometimes burst. People, in general, tend to be wary of stocks so they invest in real estate instead.

Real estate has become the investment vehicle for the average American. Stocks are part of the investment picture, also, in terms of a portion of people's retirement plans, but most investment in stocks is highly skewed toward high income investors. Housing has become too much the investment of choice for more average people. Average as well as wealthy people.

Now some of those chickens are coming home to roost. In order to keep up with these prices, while maintaining the corona virus shutdown, our economy has had to resort to more printed money just to keep people whole. New printed money chasing after old printed money.

We now need more government spending for unemployment, aids to business, tax rebates and so forth. We probably also need more long term solutions such as expanded Section 8 housing vouchers and, of course, subsidized health insurance.

Cancelling people's health insurance is a bad idea in the middle of a pandemic. That's what happens when insurance is based on employment and people are ask not to go to work. Folks are being asked to refrain from working for the health of society. Lots of folks being ask not to work except for people in what is deemed "essential services," some others such as folks that can work from home.

Nothing is totally wrong with printed money as long as we can stay healthy and stay housed. Inflation can be a problem, but if all income classes can stay on the same page, or at least on a similar page, we can survive. If renters can stay on the same page as property owners, we can survive.

Across the board inflation isn't a problem now, but inflation is a problem if one's rent, or mortgage payments, are high while their income is low. This type of inflation has been apparent over recent years. Inflation has been in confined sectors; such as home values. Inflation is not evenly spread across all regions as well.

Folks setting economic policy often think of inflation as one figure. In reality it's a complex story of different inflation rates for different sectors. It's almost impossible to create rational policy in this environment.

Now we are just having to resort to printing more and more money just to keep people whole.

If overall inflation starts to rear it's ugly head, it isn't likely to be as bad as in past eras. This is an era when money is, basically, just a computer entry.

If a loaf of bread costs $100, in the future, someone will not need a wheel barrow full of heavy, awkward coins to purchase the loaf. It will just be a case of moving the decimal point over.

Here is a thought experiment. What if someone was to try and buy a "fixer upper" house, in Seattle, for 1 million dollars in pennies? That would truly be an inconvenient truckload. Several truckloads.

We don't really have that problem these days at least.

Myself, I am fortunate to be in subsidized housing so my rent takes my income into account.

We are now in uncharted territory.

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