Housing Prices
by Joseph Rowlands

When the housing bubble deflated somewhat, people started panicking over how low the housing prices were dropping. Politicians started looking for ways of improving things. They wanted to prevent banks from foreclosing quickly. They wanted to provide some guaranteed loans. They wanted to lower the interest rate. They wanted a moratorium on foreclosures. They wanted to provide tax breaks for home buyers. There were many, many interventions dreamed of and quite a few implemented to some degree.

What is most interesting is that assumption that high housing prices is a good thing. There is almost universal consensus that high prices is good for the country, and good for the economy. But does that make sense at all?

What about other commodities? Are high prices good for televisions, cell phones, or computers? What about cars? Is it good to have car prices going up?

We recognize in that high prices, in general, are bad. Artificially increasing the cost of production if an item can increase the price, but it isn't good. Higher prices means less people can afford it. Higher costs means that resources are being wasted. For almost any other product, high prices is known to be bad.

Housing isn't any different. If the government increases the cost of building a home, such as through restrictions on land use, environmental regulations and studies, or any other cost-increasing methods, people are poorer because of it. Those who want to buy a house may not be able to afford it, or they'll be stuck purchasing a greatly inferior product.

Obviously the idea that high prices is good in real estate is intended to favor the current owners of homes at the expense of new buyers. By increasing costs, supply is pushed down, and prices go up. People can sell their homes at a higher rate.

There are some problems with this view, though. One is that sellers are also buyers. If you own a home, you may desire to buy a larger home, a more luxurious home, or a home in a better neighborhood. But the higher prices prevent this as well. You may have a house that sells for a lot, but upgrading still costs you. Instead of prices coming down over time and houses getting better over time, which is desirable with any other product, there is a push towards increasing costs.

A different problem with this view is that current owners only gain at the expense of others if they bought while the price was low. So higher prices aren't necessarily the goal. Ever increasing prices is the goal. This is why the bubble was popular, and why people desire its return. The idea of free money is always popular, even if it is at the expense of others.

One of the alleged benefits of high housing prices is that people have a sizable nest-egg of savings. The Keynesians like this because people who think they have money in savings will be more likely to spend their dollars more freely, as the marginal value of more savings keeps going down. And those who think spending drives the economy are always happy to see people spending instead of saving. Too bad this understanding of economics is faulty.

The large savings is also problematic for a couple reasons. First, if you had to pay for the full value of the house, the high price doesn't actually gain you anything. A lower price would have allowed you to use that money elsewhere, like a productive investment. Or you could have purchased a better home. So if the price reflects what you paid in, there is no benefit to a high price.

Of course, the bubble-induced view of real estate is that you are supposed to pay very little and then have a house that's worth far more. The hope is that someone else is paying for it. But not everyone can gain that way.

There's another problem with this view, though. Even if prices go up, there's no way that everyone can sell their homes at the higher price. There just aren't enough people out there who want to buy and are able to buy at the higher price. So politicians and voters who are seeking to recreate the bubble will just find themselves back where they started.

Interestingly enough, politicians want prices to go up, but they also want houses to be more affordable. They try enact these opposite goals by making loans more readily available and at a lower interest rate. More people can purchase a home, and the lower the interest rate, the larger the home they can attempt to buy. It's compounded even more in a bubble where there is an expectation that you can just sell the house for a profit once you start running out of money. None of this is sustainable. The interest rates can't stay low forever, a bubble can't continue forever, and loans can't keep getting easier to get.

The goal of lowering the interest rate to make the houses more affordable while attempting to increase the prices is deceitful. The immediate burden of buying a home may decrease because of the lower interest rates, but you'll end up paying it off for much, much longer. This might not seem to be a problem when there's a bubble, and you can always sell it early, but in a normal, functioning economy, the higher prices is a real burden.

It's important to note that there is one other commodity that is viewed as good when the prices are higher. That's the stock market. The same idea for housing applies to stock. The idea is that higher prices means an increase in real wealth. The thought is that the nation is wealthier if our assets go up in value. And this is one of the most tempting of the justifications.

The reason it is tempting to accept it is that it parallels what's true of an individual. If I have an asset, and the price of it goes up, I am wealthier because of it. But this parallel isn't valid. It requires an outside buyer. The higher price allows me to gain at this expense. But if we're talking about the entire country, then the buyers and sellers are all part of the country. One side gaining at the expense of another does not increase overall wealth. It just redistributes it.

But does that mean that it is a net balance? Are high prices equivalent to low prices? Not at all. Lower prices are better in general. They indicate that supply is plentiful and costs are low. That means it's both efficient to produce, and its is readily available. As one of the things money can buy, a lower price means that money goes further. Everyone is richer when they can buy more with their earnings. A real drop in price is good.

How does this work with the stock market? Clearly those who have stock will tend to want the price to increase, so they can sell it for higher, but that is at the expense of new buyers. But a lower price would mean that you can invest your money and get a higher rate of return. If you buy a stock for $20 and it has an annual rate of return that is the same as a stock that is $200, the former is clearly better than the latter. And in terms of the overall economy, it indicates that investments are more productive. Lower prices are better again.

Housing works the same way. Lower prices are preferable. Obviously that is only true if the price is set by the market without government interference. A price cap would be a disaster, for instance. But the market on its own tends to push prices down. Politicians should not work to push prices up. That's not a desirable goal. It may produce some short-term winners, but that can't be sustained and in the end everyone will lose as their earnings can't go as far as they otherwise would.

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