Today, a short question that may have a long answer; and certainly there are those out there more qualified than me to answer.
When considering the various cultures and lifestyles within America (compare California or Connecticut with Texas or Kansas etc...), how easy is it to explain why home prices are relatively high in one area and relatively low in another? Is it because people in California are more willing to go into debt?
We can no doubt see that "debt willingness" causes extra inflation. For example, the price of a home naturally rises over time (normal inflation), but if the consumer is willing to take on more and more debt to pay for that rising price - then the price never stops rising. So if consumers were NOT willing to go into debt for that house - the laws of supply and demand would stop the price of the house from rising.
Look at this way: Compare the average home prices with average annual income from 1940 and 2000 (according to government census information):
1940: Average home price in CA: $3,500. Average annual income: $4,000 (depending on various sources)
In 1940 a home cost about the same as your annual income.
2000: Average home price in CA: $211,000. Average annual income: $50,000
In 2000 a home cost over 4 times as much as your annual income.
(Not to mention that in 2004 the median home price in SLO county went over $400,000 - 8 times higher than annual income!!!)
So in 1940, you could very easily save and pay cash for a home. And even if you were willing to go into debt, it would take very little to purchase. To help understand better, that 1940 house, adjusted for inflation would only cost $35,000 in 2000. If a home price was that little today, you could easily save for it.
So getting back to my original question, why have home prices gone up to 4 times higher than our annual incomes? Were houses simply undervalued in 1940? Have the prices finally reached their market equilibrium point? No and no. Economic principles applied then as they do now.
The answer is that consumers have come to embrace debt. Instead of saving until we have enough, we borrow before we have enough. And so the price rises until it reaches its new equilibrium when debt-willingness is factored in.
So in earlier cultures where debt was not yet an option, housing prices could NOT rise proportionately higher than income could rise. But only when culture began to embrace debt did home prices begin to leap frog out of sight.
So what would happen to home prices if a huge amount of the culture refused to go into debt for a house? In other words, what happens to the price of a house when there are no able buyers? You got it.
And getting back to my original question: is one reason that houses are cheaper in Texas because the culture is slightly less willing to go into debt than people are in CA culture? Or maybe at least they are more willing to put more money down?
2 hours ago
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Doesn't your point also have to do with people's perceived needs. Also we have to look at other factors like the number of people per thousand that completed high school, college, post grad. Also the shift to industrial jobs versus farming; increases in welfare, unemployment, migration. Of course there is the demand for technology in business which drives up costs and I have no idea about where my random thoughts will take me next.
Getting back to your thought, how many families are willing to move in together with parents and save up until they can afford housing. Why is there such a push to get out on your own and embrace debt as a method to be "independent"(in debt). It's the old needs and wants getting ahead of cash that has created a debt ridden society. Now how do you reform youself once you have tasted "the good life" How do you kill the beast of consumerism?
By the way, how much greater has the price of a car increased compared to 1950?
There certainly are other factors causing the out-of-proportion housing increase. But studying the history of debt in 20th century America exposes the deepest reasons.
We are gullible. When department stores figured out they can make more on debt sales than they can on cash sales, what do you think they will do. Get us to believe in a term called "credit." Sneaky, isn't it. "Would you like to save 10% by signing up for a Kohl's card?" So we have bought into the marketing of it all.
Concerning cars - I thought much about that. I believe this has the potential to do something similar, but there are few factors holding it back including depreciation and the fact there are so many who will still pay cash for a car
HOWEVER!!! There ARE countries where cars are the same story as houses in the U.S.... I have been told that some people in South Africa pay more for a car than for a house.
This is a multifaceted issue. The willingness or unwillingness of sub cultures of the US to aquire debt may be a factor, but I think that three major factors contribute to the majority of the cost of housing.
1) Desireability of the climate/ area. A house on the beach will be far mor desireable to most than a house in Barstow.
2) Opportunities for employment. Houses in downtown L.A. are far more costly than the outlying areas. Some states such as Michigan are so depressed and have such a surpluss of housing that they are considering demolishing them to prevent blight. If an area is experiencing economic growth, then competition for jobs and housing will be more vigorous. Supply and demand.
3) Zoning/building regulations. Some areas have very restrictive housing regulations that make a home cost prohibitive to build, thereby driving up the cost of the finite supply of housing in that area.
There is a fourth that we've seen recently. Regulations concerning the lending industry that encouraged lenders to make irresponsible loans. When the supply of dollars increased - and common sense on the part of lenders and those lended to decreased - it artificially drove up the housing prices by increasing the demand. When people who could not afford the loans to begin with began defaulting, the bubble burst.
These factors all play a role in price, but I'm speaking of a ratio of income to home price. The ratio grew for the beach residents AND the Barstow residents. So why has the income ratio grown? And why has it not grown as much in some areas?
I think the regulation stuff may be a cause/effect issue that adds to my point. Who ultimately pays the price in a highly regulated area (zoning etc)? The consumer. We have just gotten higher loans as a result of stricter codes. We could have refused to budge and either: a) codes would loosen or b) nobody would live in Paso. But instead, for whatever reasons we wanted to stay, we were willing to go into deeper debt. So, did the codes push the cost higher or did the consumers' willingness to pay for the code allow the cost to go higher?
I'm trying to figure out why in some places income is the same as here but housing is much lower. We tend to chalk it up to desirability but I think there is more to it then that.
What I'm particularly enjoying is to see our population begin to save again... as those who were without savings (and over-extended credit) in tough times were worst-off. So as our government tries to "stimulate" spending, we are seeing more people saving. Did overpriced homes, crummy lending practices, or greedy/impatient consumers cause this mess? Yes.
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