The
interrelated phenomena of rapidly escalating
house prices, rising residential property taxes
and the need for affordable and accessible
housing is the 21st century version
of King Gordius’ knot. The cumulative result
of our tangled institutional imperatives is that
citizens occupying the bottom half of the
economic food chain cannot afford accessible
shelter on the open market. Even affluent
citizens are being impacted negatively.
How
can that be possible when trillions of dollars
in federal subsidy over the past 50 years have
resulted in 70 percent home ownership? There are
three reasons why the impact is so widespread
and why it is critical to address fundamental
shelter dysfunction.
First,
many existing homeowners could not afford to buy
the home they now occupy or buy a comparable
house if they wanted or needed to move. This is
especially true for the growing cohort of older
citizens. Just paying the property taxes is a
stretch for many.
Second,
if interest rates go up by a percentage point or
more as predicted, many homeowners with variable
interest mortgages, balloon payments and weak
credit will loose their equity.
Finally,
when the house price bubble bursts, many
mortgages will be underwater and many municipal
governments will be without revenue to support
their activities. (Because of recent hyper
inflation in house prices, a downturn is seen as
inevitable by most housing analysts not employed
directly or indirectly by the shelter industry.)
The
problems related to housing are complex, and a
solution is critically important to all
citizens. SYNERGY/Planning calls the complex
interaction of escalating house prices, rising
residential property taxes and the lack of
affordable and accessible housing the “Shelter
Conundrum.” [See End
Note One.]
Traffic
Congestion and the Shelter Conundrum
Like
traffic congestion (aka, immobility and lack of
access) the Shelter Conundrum (SC) is rooted in
dysfunctional human settlement patterns and
dysfunctional governance structures. Unlike
congestion/immobility/ isolation, the SC knot
will take more to untie than citizen education
and understanding. [See End
Note Two.]
In
the case of traffic congestion and regional
immobility, dysfunctional transport is
perpetuated by actions of a small but powerful
group of interests that benefit from Business As
Usual. These actions perpetuate broadly held
Myths that influence the market. [See End
Note Three.]
The
Shelter Conundrum is also generated by a complex
of individual and organization actions which are
assumed to be in the best interest of the
actors. However, unlike transport dysfunction,
no single alliance of interests provides the
motivation to perpetuate the myths. There are
far more forces, groups and interests at work,
many working at cross purposes.
Further,
there is no single solution such as a fair
allocation of location-variable costs that would
go most of the way to solving the mobility
crisis. The Shelter Conundrum (SC) will require
many more actions, although the fair allocation
of location-variable cost strategy will help and
is a first step toward a solution.
There
is one other fundamental difference. Because
almost everyone suffers from traffic congestion,
almost everyone is prone to raise a stink about
the need for a “solution.” With the Shelter
Conundrum the focus is not on fundamental causes
but on the effect: Rising residential property
taxes and lack of affordable and accessible
housing. Ironically, most citizens see rising
home prices as a benefit because they think they
are getting richer and richer.
As
with any complex tangle, the only way to solve
the Shelter Conundrum is to pull it apart and
examine each of the components. In this column
we will examine house price escalation. In
subsequent columns we will address sky rocketing
owner-occupied residential property taxes and
the lack accessible and affordable housing in
more detail.
House
Price Escalation
There
are several aspects of house price escalation
that demand attention:
-
The
unprecedented rate of increase
-
The
reasons behind this increase
-
The
myths that perpetuate individual and
organization activities which result in
residential price escalation
Unprecedented
recent house price escalation.
One usually hears about residential price
escalation in the context of rising residential
property taxes and the lack of affordable and
accessible housing. Even without those problems,
unprecedented rise in house prices is by itself
a problem.
Robert
J. Shiller a professor of economics at Yale has
prepared a national home price index that spans
the period from 1890 (sic) to 2004. He found
that when adjusted for inflation, houses
increased only 0.4 percent per year over the
last 115 years. More important, the majority of
that increase occurred in the past 8 years.
With the exception of a smaller price run up
during World War II there has never been a price
increase anything like the one we are now
experiencing. [See End
Note Four.]
According
to Shiller, when adjusted for inflation, home
prices have been flat since 1955 except
for two small boom/bust cycles. One was in the
1970s, reflecting the REIT boom/bust, and the
other in the late 1980s/early 1990s, reflecting
the Savings & Loan debacle. [See End
Note Five.]
The
rapid and unprecedented rise in house prices is
a quintessential demonstration of the Fallacy of
Composition: What is good for one is not good
for all.
It
is great if your house goes up in value. It is
not bad if you and your neighbors enjoy an up
tick. But when the prices for the whole
community, subregion and region goes up, few
really benefit unless they can bail out and go
to a place where housing is much cheaper.
Unless
people whose houses have increased in value can
move, they cannot prudently cash in on the price
increase. If they refinance or take out a second
mortgage to pull out equity and the price falls,
they are underwater.
If
they move to a place where prices are lower, by
definition that is place where fewer people want
to live based on market considerations. There is
usually a good reason for the lower price of
real estate; fewer jobs, poor climate,
isolation, air pollution, etc.
For
years it was advantageous to retire and move.
Now traditional retirement destinations have
become expensive because they attract year-round
residents who enjoy the climate, jobs taking
care of the elderly, etc. In addition, more
older citizens are retiring in place--the place
they moved to years ago for a better job, etc.
These are the places that have the
fastest-rising housing prices. A onetime (empty
nest) downsizing is a partial escape hatch but
too few are willing to make the adjustment when
they can. Those that do have been bidding up the
price of smaller, well located/well built
housing units.
One
could become a full time house flipper, buying
and then reselling to move up in the market.
That does not contribute to what the vast
majority consider a quality life. Living in an
RV or on a sail boat are also “options” for
a few.
The
only groups who really benefit from rising
prices and housing churn are agents who live on
commissions and fees. This is not a small group,
but it is a tiny minority of those impacted by
volcanic house price increases.
The
vast majority of citizens would be better off if
there were little house price escalation except
to reflect improvements in size, function or
context of the dwelling.
One
of the goals of Property Dynamics will be to
make this clear to citizens. (See Joseph
Freeman's column outlining the concept behind
Property Dynamics: "Rain
Dance," Jan. 4, 2005.)
How
dramatic is the house price rise in the Virginia
portion of the National Capital Subregion? Quite
dramatic. Here is a table based on data provided
by The Washington Post over the past 30
days.
Escalation
in House Prices and Assessments in NoVa |
|
Median
Sales Price
SFD/SFA
Dwellings
|
Average
Assessed Home Per Fiscal
(Tax)
Year
|
2000 |
2004 |
%
Change |
2000 |
2006 |
%
Change |
Alexandria |
$261.0 |
$499.5 |
91.3 |
$191.3 |
$441.8 |
131.0 |
Arlington |
255.5 |
465.0 |
82.0 |
202.7 |
458.2 |
126.0 |
Fairfax |
230.0 |
414.9 |
80.4 |
208.1 |
444.8 |
114.0 |
Loudoun |
228.6 |
420.0 |
83.8 |
183.8 |
403.4 |
120.0 |
Prince
William |
155.0 |
303.0 |
95.5 |
145.0 |
327.4 |
126.0 |
House
values in 000s.
Source: See End Note
Four. |
The
Post has not published data in the same
format for rest of the Virginia portion of the
National Capital Subregion but anecdotal data
suggest similar price rises in places such as Warrenton-Fauquier.
These
numbers document unprecedented change in house
prices. If anything like the rates of escalation
over the last five years had existed in the
prior 30 years, a home in 1970 would have had
the value of a Cracker Jack prize. We know that
was not the case.
The
conditions are especially ripe for hyper
inflation in homes in the National Capital
Subregion, the largest, fast growing job market
in the United States due to the rampant
government spending to buy our way out of
terrorism and oil dependency.
Causes
of unprecedented home price escalation.
The easy answer to why this escalation
exists is the unprecedented number of affluent
citizens at the top of the economic food chain
with no other place to invest. For many the
stock market is seen as just another gambling
venue. The tech stock market bust reinforced
this impression. That was, and is, important,
especially for the thousands of AOL
Millionaires, Microsoft Millionaires, etc. in
this and every hot housing market in the United
States.
There
are other contributing factors. One of the
easiest to pinpoint is the low mortgage interest
rates and the actions of Fannie May and Freddie
Mac to force feed mortgage money into the
expansion of home ownership, supposed source of
prosperity. The corruption at the top of these
agencies masks the larger problem of subsidizing
the construction of the wrong size houses in the
wrong locations. (A house in a dysfunctional
location is not a quality home.)
High-end
home buyers have so much easy money that they
have not only driven up primary residence prices
but have done the same for second homes, which
will have a devastating impact on Countryside
resources 20 years from now.
The
consequences of cheap money from low interest
rates is similar to those of cheap money during
the REIT bubble in
the '70s and the Savings & Loan bust in
'80s. Both bubbles were focused on raw land and
commercial real estate but they triggered recessions and
drove down house prices up, and then down. This time the
cheap money is
leveraging housing price hyper inflation.
A
“shortage of land” is often cited by “the
shelter industry” as a reason for escalating
house prices. The cost of land has gone from 20
to 25 percent up to 50 percent of the price of a
finished house according to some builders. This
creates a field day for land speculators. The
problem is directly related to municipal
controls inside the Clear Edge, as we
will document in the third column in this
series. (See the backgrounder “The
Role of Municipal Planning in Creating
Dysfunctional Human Settlement Patterns.”)
The
myths. As
one would expect, there is a cluster of myths
that cause citizens to make housing decisions
that are not in their best interests. For
instance, there is a powerful mystique
surrounding making money in residential real
estate. It is a myth. More money has been made
selling books on making money buying and selling
residential real estate than has been made from
the actual sales. A few professionals make
money. A very view amateurs strike it rich from
time to time and those are the ones that
everyone hears about. Like the lottery, there
are many small losers for every big winner in
real estate speculation.
As
documented by the 0.4 percent per year average
increase in housing over the last 115 years,
there is little room for wide-spread speculative
gain. What is amazing is how, despite universal
availability of calculators that run Internal
Rate of Return and Alternative Investment
calculations, the myth of the real estate
investment bonanza persists.
A
house is a home, not a profit center. Those who
turn a house into primarily a business deal
undermine the social and physical value of
having a home, especially one where children are
in the equation. (We explore this issue in The
Shape of the Future.)
A
window on why speculation in residential housing
is so rampant is provided by the relationship
between house price and real estate tax
assessment: If the assessment does not go up the
owner is insulted. If it does go up he claims
his house is over assessed. However, almost no
one will sell a house for its assessed value.
One
cause of these irrational perspectives is
ambivalence toward government and government
spending. Another is the reality that the
house is the major source of wealth for most
citizens in the bottom 80 percent of the
economic pyramid. Too often, families treat the
purchase of the family home as a
speculative investment decision. The focus on
speculative investment is a hangover of a
national policy, to be addressed in the next
column, that made sense in 1820 but does not in
2005.
As
suggested in “Wild
Abandonment,” Sept. 8, 2003, citizens
abandon homes and neighborhoods because they
“wear out.” It may nothing more than fire
alarm batteries, furnace filters, leaking pipes,
worn out appliances, a moldy shower, a faulty
circuit breaker or overgrown/barren landscaping.
With no time or ability to “fix” the
problem, people get frustrated and wrap up
cleaning, safety improvements and repair into
sale price and move on. (These issues will be
addressed by Property Dynamics.)
Columns
to Come in This Series
The
next column will deal with the ramifications of
property tax on owner-occupied residential real
estate. This has become a political football. We
will explore fundamental tax reform, not just
political posturing.
In
the following column we will revisit the topic
of affordable and accessible housing building on
the perspectives developed in “Affordable,
But No Bargain,” Feb. 17, 2003, and “The
Housing Dilemma,” July 14, 2003. We will
demonstrate that the availability of affordable
and accessible housing currently rests on the
trickle down theory. That does not work when
housing prices are wildly escalating and human
settlement patterns are growing ever more
dysfunctional.