[lbo-talk] housing bubble?

Wojtek Sokolowski sokol at jhu.edu
Mon Jan 31 06:59:01 PST 2005


Joanna:
> How come, when my dad bought a house in the middle of LA in 1971, for
> $26,000, it represented about 1.5 times his salary as a unionized
> billing clerk (Teamsters); but, if I wanted to by a comparable house in
> the bay area today at about 500,000, I would be paying five times my
> annual salary as a bleeding edge/hi tech/ tech writer?
>
> Genuinely curious,

I think it may have something to do with housing market segmentation. There is a high demand for housing in "livable" housing market areas, which drives the prices up, and a lot vacant houses that nobody wants in "not livable" areas. This kind of segmentation is due to the growing polarization of the US society - and the housing cost is a part of the price we pay for that polarization.

Another element is the growing incompatibility between life style expectations and what the physical environment can bear (see Jared Diamon, _Collapse_ on that). The developers have an extra capacity to sell - so they push for bigger and bigger MacMansions and of course they expect bigger and bigger profit margins. Add to it various transaction costs: from building new infrastructure to selling/buying costs. Al those raising costs have tobe absorbed by the consumer or otherwise they would result in a net loss to the construction and real estate industry.

In one way these more and more expensive MacMansions are like Microsoft Windows - ways to absorb excess capacity (income or hardware capacity) on the part of the consumer.

Excess income (at least in some segments of the population), housing market segmentation (with underlying race and class divisions) acting like a stick, more and more alluring MacMansions acting like a carrot are main factors that imho explain the skyrocketing housing cost.

PS. If we consider hedonic valuation used in, say, the computer industry, which takes into account changes in product quality to determine real value - the increase of housing price is even higher due to increasingly shoddy construction (which according to the Consumer reports is becoming a serious problem).

Wojtek



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