How Urban Homeowners Rigged The Housing Market And Killed GDP Growth

Featured in Zero Hedge

Daniel Drew,  6/21/2015


Homeownership has been one of the most significant issues in recent financial history. It first came to the forefront in 2002, when President George W. Bush spoke about the importance of homeownership and the American Dream. He announced policies like the American Dream Downpayment Initiative, which would pay the down payment for poor people. The resulting surge in homeownership pushed housing prices to unsustainable levels, and then it all came crashing down in 2008 in one giant national margin call. When Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson gave Bush the tap on the shoulder, he wondered, "How did we get here?" Now, seven years later, first-time urban home buyers are asking the same question.

If you have ever looked at real estate prices in San Francisco, you probably wondered if there were some kind of typo in the listing price. The median sales price of a home in San Francisco is $1.1 million.

San Francisco Housing Prices

These aren't mansions either. The median price per square foot is $958, which means that $1.1 million will get you a place that's only 1,150 square feet. This particular home is 127 years old.

San Francisco House

In the rest of the country, the median sales price is $208,000, and the median price per square foot is $125.

United States Housing Prices

The median price per square foot in San Francisco is 7.6 times higher than the rest of the United States. As your real estate agent will tell you, it's all about location. But the last time I checked, the people in San Francisco aren't shitting gold, there's no fountain of youth in Golden Gate Park, and there are no Everlasting Gobstoppers downtown.

What could possibly make San Francisco 7.6 times more valuable than the rest of the country? While they are the location of the booming tech industry, that doesn't explain the prolonged housing shortage. In the "free market," if there is such a thing, shortages are corrected as suppliers respond to higher prices. However, as usual, the free market turns out to be nothing more than a fantasy. The best description of a free market was provided by Matthew McConaughey's character in The Wolf of Wall Street:
It's all a fugazi. Do you know what a fugazi is? Fugayzi, fugazi, it's a wazie, it's a woosie, it's...(whistles)... fairy dust. It doesn't exist. It's never landed. It is no matter. It's not on the elemental chart. It's not fuckin' real.
Take a look at San Francisco's zoning map, and ask yourself if that is what a free market looks like.

San Francisco Zoning Map

And if you were wondering what all those yellow squares were, this explains it:

Single Unit Zoning

As you can see, the entire city has been designated as a perpetual single-unit metropolis, and with water on three sides, the sprawl potential is limited. After seeing this, it's no surprise that houses from the 19th century cost $1 million.

The phenomenon of homeowners objecting to new development is called NIMBYism, which stands for "Not In My Back Yard." The premise behind this is that homeowners don't want to risk any changes that could adversely affect their living space or the value of their property. There seems to be a legitimate case for this. Professor William A. Fischel of Dartmouth College elaborates on this situation in his paper about NIMBYism. For the average American, a home is their most valuable asset, and they are usually highly leveraged in it with a long-term mortgage. Unlike billionaire hedge fund manager John Paulson, the average homeowner cannot short the ABX mortgage index to hedge the risk of their home value depreciating. Without any kind of price insurance, it's only natural they would fear a devaluation. Consequently, they will do anything they can to mitigate the risk, however small it may be.

However, it's easy to see another motive behind NIMBYism: greed. As an investor of a highly leveraged asset, the average homeowner has every reason to inflate the price of their home as much as they can. You may not care about environmentalism, the skyline, or urban planning, but if halting new development will limit the supply of homes and boost your property value, you will definitely attend the local city council meeting to "voice your concern." This is not any different than an activist hedge fund manager clamoring for board seats.

It's easy to dismiss this as a local issue, but a recent study by Chang-Tai Hsieh and Enrico Moretti showed that these kinds of housing restrictions in high productivity cities like New York, San Francisco, and San Jose are reducing GDP by 9.5%. To put that into perspective, consider that U.S. GDP is $17 trillion. That means eliminating NIMBYism would boost GDP by $1.6 trillion. That's more than the entire GDP of Spain.

NIMBYism also contributes to inequality. In response to Thomas Piketty's Capital in the Twenty-First Century, Matthew Rognlie, a 26-year-old graduate student at MIT, wrote a paper called "Deciphering the fall and rise in the net capital share." The Economist summarized the paper as follows:
Surging house prices are almost entirely responsible for growing returns on capital...Policy-makers should deal with the planning regulations and NIMBYism that inhibit housebuilding and which allow homeowners to capture super-normal returns on their investments.
Capital Income

NIMBYism perpetuates the two-class society that we see today. As Professor Fischel noted, "Most of the labor demand increase was manifested as higher nominal wages instead of higher employment." In other words, a San Francisco tech job is good work if you can get it, but most people can't. You are either one of the few highly-paid workers, or you're out of a job - possibly even homeless. Robert Aguirre, a 60-year-old electrical engineer, went from being the owner of a successful tech firm to living in a tent in "The Jungle," a homeless enclave in San Jose. The NIMBYs eventually shut down the encampment.

Finding a way to combat NIMBYism is not easy. I don't want to deny the importance of homeownership. However, inflating home values like the Federal Reserve inflates the stock market ruins people's lives. To help homeowners with legitimate fears about property depreciation, perhaps they should be given access to mortgage indices like the ABX, or an index tailored for their local area. It could just be one of those things people check off their list: liability insurance, fire insurance, and price insurance. This wouldn't solve the problem by itself. Legislation at a higher level than the municipal authority would be required. Undoubtedly, this would incite anger about government meddling, but I don't see any other option to stop the NIMBYs and their ridiculous objections to development. For now, millennials are renting at a higher rate than ever before, but if they ever start buying en masse, they could provide considerable political support for new anti-NIMBY legislation.

The NIMBYs are trying to corner the housing market, but all monopolies eventually end.