The Unassuming Economist

From Noah Smith:

“Every so often I encounter the argument that owner-occupied housing isn’t a form of wealth. This would come as news to economists like Emmanuel Saez and Gabriel Zucman, who study wealth inequality for a living, and who definitely count owner-occupied home equity in their wealth numbers. It would also come as news to the U.S. Census Bureau, who finds that equity in owner-occupied housing represented the largest share of the wealth of households outside the top 1% as recently as 2015:

The definition of wealth here is just assets minus liabilities. An asset is anything you can sell for money. You can sell your house for money. Hence it is an asset. In fact, historically, it’s one of the assets with the best returns.

But I don’t want to make an argument from authority here. There are very good reasons we count owner-occupied housing as wealth, and they’re not too hard to understand.

To see why, first let’s make an analogy: a magic cupboard that gives you food.

The magic cupboard analogy

Suppose you had a magic cupboard that gave you three meals a day, free of charge. Furthermore, suppose there was a market for magic cupboards, and that you could sell your own for $1 million if you wanted to.

This magic cupboard represents a form of wealth. If you think it’s not, consider whether you would be poorer if your magic cupboard burned down or got stolen or stopped working. Yes, you would be poorer.

Some people might argue: “But you need food every day. If you sold your magic cupboard, you’d just have to use the money to buy food.” And indeed you would. You would have to go to the grocery store or go to restaurants, because you wouldn’t have a magic cupboard. You could use the cash from the sale of your magic cupboard to buy food at the store or at restaurants.

But now consider someone who doesn’t own a magic cupboard. They also have to eat every day. They have to go to the grocery store or go to restaurants. But unlike you if you sold your magic cupboard for cash, the person who didn’t start out with a magic cupboard has to work for the cash they need to buy food every day. Because they have to work for what you could just buy off of an asset sale, they’re poorer than you.

Thus, the magic cupboard is wealth.”

Continue reading here.

On cross-country:

• BIS residential property price statistics, Q1 2022 – BIS

On the US:    

• Eviction and Poverty in American Cities – NBER
• The Fed Sees Housing Trouble Ahead. There have been conflicting signals in the housing market. And several factors may stop any slowdown from turning into a slump. – New York Times
• American dream of owning a home out of reach for many in tight markets. Many middle- and lower-income Americans are left with a dwindling number of options or forced into renting while supply increases for the wealthiest buyers – The Guardian
• It Was the Housing Crisis Epicenter. Now the Sun Belt Is an Inflation Vanguard. Inflation has been worse in Southern cities, burdening residents and prompting the question: What can it teach the rest of the country? – New York Times
• Early effects of COVID-19 pandemic-related state policies on housing market activity in the United States – Journal of Housing Economics
• New Home Sales Plummet in July – NAHB
• Rent Price Increased for Fifth Consecutive Quarter – NAHB
• The Rental Housing Crisis Is a Supply Problem That Needs Supply Solutions. Policymakers must prioritize improving housing access and affordability for low-income households through immediate and long-term investments. – Center for American Progress
• New Apartments at 50-Year High May Ease Pressure on US Rents. About 420,000 rental units expected this year: RentCafe study. Extra supply could help alleviate record rents in some cities – Bloomberg
• Home Sellers Are Slashing Prices in Pandemic Boomtowns. Redfin found that 70% of homes for sale in Boise, Idaho, had their price cut in July, the highest share of 97 metros. – Bloomberg   
• U.S. new home sales tumble to 6-1/2-year low; prices still high – Reuters 
• Housing supply and demand are beginning to balance – Washington Post
• Where will housing prices end 2022? New data predicts a 4% drop in 5 months—and homes with these two characteristics will be hardest hit – Fortune
• Home Prices Just Dipped—Does That Mean They’re Poised To Plummet This Fall? – Realtor
• White House Pledges ‘Stability’ Vouchers for Homeless and At-Risk People. New housing vouchers build on efforts by the Biden administration to focus on unsheltered and rural homelessness and drive aid to people suffering domestic violence. – Bloomberg

On China:

• China slashes 5-year mortgage rate as property crisis deepens. Central bank equals record rate cut in May but move unlikely to resolve crisis for developers, strategists say – FT
• China’s property market is in freefall. What does this mean for the world economy? The sector is dangerously overheated – but unlike the 2008 financial crisis, the global ripple effect is likely to be limited – The Guardian
• China Probes Property Executives for Possible Law Violations. Signals potential expansion of Xi’s crackdown on corruption. Campaign has focused on financial and technology sectors – Bloomberg

On other countries:  

• [Australia] Australia’s Slumping Property Market Raises Risk of a Recession. Households’ record debt-to-income ratio squeezed by rate hikes. Major risk is fallout on consumption that makes up 60% of GDP – Bloomberg
• [Sweden] Swedish Construction Activity Slows Amid Slump in Housing Market – Bloomberg
• [United Arab Emirates] Dubai looks to restart mothballed luxury developments for wave of wealthy incomers. Volume of residential transactions is at its highest since peak of 2009, says real estate group CBRE – FT
• [United Kingdom] Where do landlords think the UK property market is going? – FT

From the IMF’s latest report on Latvia:

“Macroprudential policy should remain flexible considering high uncertainty. After augmenting their macro-prudential toolkit in mid-2020 with several borrower-based measures, the authorities broadened the scope of these tools to cover credit institutions of other EU countries operating in Latvia with or without local branches. Although real estate prices increased, they appeared to be in line with wage growth and remained less buoyant than in the other Baltic countries. However, housing prices could surge, if the already-low supply of housing is further constrained by the rising costs of capital, labor and materials, and delays in the construction sector due the spillovers of the war. A close monitoring of these developments is warranted, so that macroprudential policy can be re-calibrated accordingly in a timely manner. Credit risks could emerge due to the elevated share of high variable-interest loans to both households and non-financial corporations (87 and 94 percent of outstanding loans respectively).

(…)

Macroprudential policy should stand ready to respond to changing housing market conditions. Given the new risks caused by the war, the frequent reviews of macroprudential measures should continue to ensure the right balance between financial stability and the need for credit in the economy.”

On cross-country:

• Reflections on the Evolution of the Housing Market in Latin America: Realities and Dreams – MIT

On the US:    

• House Price Responses to Monetary Policy Surprises: Evidence from the U.S. Listings Data – Institute of Labor Economics
• Decline in Single-Family Permits in June 2022 – NAHB  
• Why rent is damn high? – The Atlantic
• Renters Can’t Celebrate Softer Inflation Readings – Bloomberg
• New York City Rents Hit Record Highs Amid Nationwide Housing-Price Increases. Where would you pay over $4,000 a month for a one-bedroom? In 20 of New York City’s neighborhoods. – Wall Street Journal
• The Fed’s Damage to the Housing Market May Last Years. The central bank created major distortions in a market where many Americans have most of their wealth. Why? – Bloomberg
• U.S. Housing Affordability in June Was the Worst Since 1989. Record-high home prices combined with rising mortgage rates to push more buyers out of the market – Wall Street Journal
• Housing Slowdown Chills Investors Who Supercharged US Market. Institutional landlords and small flippers are starting to scale back as higher borrowing costs and slowing sales complicate their strategies. – Bloomberg 
• 2 Reasons House Prices Will Start Falling Sooner Than Expected. Why house prices will be less “sticky” this time. – Real Estate Decoded
• Will Housing Prices Flatten — or Collapse? Home values are fast approaching the pace of gains that would be consistent with low inflation. But there’s a high risk of an overshoot. – Bloomberg
• Has COVID Reversed Gentrification in Major U.S. Cities? An Empirical Examination of Residential Mobility in Gentrifying Neighborhoods During the COVID-19 Crisis – Philadelphia Fed
• Rent Inflation Expected to Accelerate Then Moderate in Mid-2023 – Dallas Fed
• The Housing Market Is Bad but Not That Bad – New York Times
• Existing Home Sales Fall to Two-Year Low – NAHB

On China:

• The Bursting Chinese Housing Bubble Compounds Beijing’s Economic Woes. Home sales and prices are dropping in many cities across the country after rising for years, and the damage is spreading – Wall Street Journal
• What’s in Store for China’s Mortgage Market? – Carnegie Endowment for International Peace
• China Growth Slows Across All Fronts in July, Prompting Unexpected Rate Cut. Move comes after a month in which retail sales, property prices and youth unemployment worsened – Wall Street Journal
• China Home Prices Fall for 11th Month as Mortgage Crisis Deepens. Pace of decline widened to 0.11% after mortgage boycotts. Pressure on developers likely to remain due to covid lockdowns – Bloomberg
• China’s Housing Crisis Keeps Brewing in Beijing’s Weak Tea. There are reports of possible bond guarantees but no clear signs of any government action bold enough to revive the property market – Wall Street Journal
• As China’s Economy Stumbles, Homeowners Boycott Mortgage Payments. In a rare act of defiance, people across the country who bought property from indebted developers are refusing to repay loans on their unfinished apartments. – New York Times  

On other countries:  

• [Canada] Canadian Housing Correction Accelerates, Prices Seen Falling 25%. Desjardins updates forecasts after RBC warns of historic drop. Rate hikes drive rapid reversal of pandemic real-estate frenzy – Bloomberg
• [Denmark] Denmark’s Mortgage Market Is Luring Global Investors. Here’s Why – Bloomberg
• [Ireland] Irish house prices return to 2007 peak for first time – Reuters
• [New Zealand] RBNZ Chief Warns New Zealand Home Prices Will Keep Falling – Bloomberg 
• [United Kingdom] Britain’s housing crisis — no longer a nation of homeowners? Four books look beyond the clichés of the property boom to examine the precarious reality of those forced to rely on an overgrown private rental market – FT
• [United Kingdom] Is the UK housing market at a turning point? Interest rates are rising to stem inflation and borrowing costs are increasing fast. Could this signal the end of spiralling house prices? – FT
• [United Kingdom] New UK lender plans 50-year fixed rate mortgages. Perenna secures licence from regulators to issue long-term home loans as inflation soars – FT
• [United Kingdom] UK house price growth slows sharply to 7.8% in June – ONS – Reuters
• [United Kingdom] UK house price growth slows to 7.8% in June, says ONS. Slower rate of increase skewed by tax break changes last year as housebuilder Persimmon warns of economic pressures on sector – FT

From the IMF’s latest report on Saudi Arabia: