One thing I've found puzzling about my neighborhood is that so many of the buyers of these giant expensive houses are DINKs or empty nestors. There is even one single lady in her 50s (why does she need a five bedroom house)?
One interesting dyanamic is that the cities and states with highest housing price growth have some of the lowest TFR. You might think that would lead to less housing demand, but I think that the extra disposable income that comes from not having kids gets plowed back into housing.
In addition many of the things people complain about in places like California hits people with multiple kids hardest. If you don't have many (any) kids or you have a high enough income to opt out of public goods than its less of an issue.
Net out migration from these states is mostly of middle class families with kids.
Maybe "California is a terrible place to live if you are a middle class family with kids" is the real takeaway. For now that isn't the demographic driving California housing prices.
We'll see how far into the upper middle class CA can push with its idiocy before housing demand breaks.
California has a special problem with real estate value oscillations on a massive scale. The reason for this is an interaction between normal demand variations and the response times associated with the supply of housing (which includes regulatory time delays).
The very nature of a supply/demand system is a feedback loop where an increase in demand causes the suppliers to increase the supply. If the normal time constant for the supplier to provide more housing is only a year or so for construction time, as it was in California when I was young ('50s), and LA was experiencing a huge demand increase, the price only moved a little bid and someone built a new city almost overnight. When the supply time scales become similar to the demand functions, the control system becomes mathematically unstable and will oscillate as a developer spend many years with permissions, and by the time you have housing for sale the demand and prices are going down, which drives as oscillation.
You can't drive a vehicle whose response time is the same as yours and you will make oscillations worse with each control response. All electrical engineers and control system engineers know this, but economists who generally don't understand complex math and system dynamics don't see it. When the supply response function is very slow like with mining, chemical production, oil/gas, etc. projects you get a medium-term inelastic supply response, and the price can skyrocket for decades until the supply increases. https://en.wikipedia.org/wiki/Complex_number
Chapman University's paper has an excellent graph showing Calif. housing (change in price/ft2 over time) similar to the rest of the country on housing before the '70s when we got massive delays added to the supply systems response time (mainly zoning and environmental reports -- the source of delay is irrelevant, only the time is relevant). It is like putting an insulator over your heater/cooler thermostat, which will cause delays in the thermostat response time and make the house temperature oscillate.
‘So why are homes in California worth so much, and still rising rapidly in value, if the state is a dystopian hell that everyone’s fleeing for Texas and Florida?’
Nothing has any intrinsic value. Value is subjective and personal - auctions demonstrate this rather nicely.
So houses sell for whatever someone is prepared to pay, and that is unknown until you try to sell it. The question then is which houses in California are selling for higher prices, all houses or just some?
Could it be that as some parts of California become undesirable, demand for property in the ‘good’ parts increases particularly if people are moving in from the downgraded areas, and this is what is driving prices? This is not an uncommon occurrence everywhere in the World.
‘Economic growth and economic progress is not driven by the masses. It is not driven by the population at large.’
But it is. Without consumer demand there is no need for an economy and therefore no economy.
Consumption is the sole end and purpose of all production. - Adam Smith.
‘… it's the elite, it's the people who are educated—not necessarily intellectuals.’
That’s how the World was pre-Industrial Revolution, without economic or social progress. It wasn’t the elites who started and drove the Industrial Revolution, it was the masses and people who rose up out of the masses most with no formal education.
The trouble with ‘social science’ is there is no history prior to its recent invention.
Living in Australia I can’t comment on why house prices in California are rising, but one thing Scott Sumner likes to say is “never reason from a price change”…maybe he should follow his own (very good) advice?
On California, we live in one of the areas where prices have been steadily rising on already head-scratchingly high numbers. So obviously people with money are here and are willing to pay high dollars for homes.
The thing you see for sure is that non-white collar, skilled workers are very hard to come by. My wife’s hairdresser flys in for one week a month from Idaho. It’s impossible to find a repair guy for our stove. Construction costs for relatively small projects are enough to buy a nice home in another state… and you have to wait a year to get started. This is an issue and will start to affect the quality of life in the state. But it’s still a beautiful place with remarkable career opportunities.
One thing I've found puzzling about my neighborhood is that so many of the buyers of these giant expensive houses are DINKs or empty nestors. There is even one single lady in her 50s (why does she need a five bedroom house)?
One interesting dyanamic is that the cities and states with highest housing price growth have some of the lowest TFR. You might think that would lead to less housing demand, but I think that the extra disposable income that comes from not having kids gets plowed back into housing.
In addition many of the things people complain about in places like California hits people with multiple kids hardest. If you don't have many (any) kids or you have a high enough income to opt out of public goods than its less of an issue.
Net out migration from these states is mostly of middle class families with kids.
Maybe "California is a terrible place to live if you are a middle class family with kids" is the real takeaway. For now that isn't the demographic driving California housing prices.
We'll see how far into the upper middle class CA can push with its idiocy before housing demand breaks.
California has a special problem with real estate value oscillations on a massive scale. The reason for this is an interaction between normal demand variations and the response times associated with the supply of housing (which includes regulatory time delays).
The very nature of a supply/demand system is a feedback loop where an increase in demand causes the suppliers to increase the supply. If the normal time constant for the supplier to provide more housing is only a year or so for construction time, as it was in California when I was young ('50s), and LA was experiencing a huge demand increase, the price only moved a little bid and someone built a new city almost overnight. When the supply time scales become similar to the demand functions, the control system becomes mathematically unstable and will oscillate as a developer spend many years with permissions, and by the time you have housing for sale the demand and prices are going down, which drives as oscillation.
You can't drive a vehicle whose response time is the same as yours and you will make oscillations worse with each control response. All electrical engineers and control system engineers know this, but economists who generally don't understand complex math and system dynamics don't see it. When the supply response function is very slow like with mining, chemical production, oil/gas, etc. projects you get a medium-term inelastic supply response, and the price can skyrocket for decades until the supply increases. https://en.wikipedia.org/wiki/Complex_number
https://en.wikipedia.org/wiki/Complex_plane#Use_in_control_theory
Chapman University's paper has an excellent graph showing Calif. housing (change in price/ft2 over time) similar to the rest of the country on housing before the '70s when we got massive delays added to the supply systems response time (mainly zoning and environmental reports -- the source of delay is irrelevant, only the time is relevant). It is like putting an insulator over your heater/cooler thermostat, which will cause delays in the thermostat response time and make the house temperature oscillate.
https://www.dropbox.com/s/7go8mum7wmgljsg/Realestate%20oscillation%20Ca.pdf?dl=0
‘So why are homes in California worth so much, and still rising rapidly in value, if the state is a dystopian hell that everyone’s fleeing for Texas and Florida?’
Nothing has any intrinsic value. Value is subjective and personal - auctions demonstrate this rather nicely.
So houses sell for whatever someone is prepared to pay, and that is unknown until you try to sell it. The question then is which houses in California are selling for higher prices, all houses or just some?
Could it be that as some parts of California become undesirable, demand for property in the ‘good’ parts increases particularly if people are moving in from the downgraded areas, and this is what is driving prices? This is not an uncommon occurrence everywhere in the World.
I challenge Sumner to sell his house, and use the profits to build another house in California.
‘Economic growth and economic progress is not driven by the masses. It is not driven by the population at large.’
But it is. Without consumer demand there is no need for an economy and therefore no economy.
Consumption is the sole end and purpose of all production. - Adam Smith.
‘… it's the elite, it's the people who are educated—not necessarily intellectuals.’
That’s how the World was pre-Industrial Revolution, without economic or social progress. It wasn’t the elites who started and drove the Industrial Revolution, it was the masses and people who rose up out of the masses most with no formal education.
The trouble with ‘social science’ is there is no history prior to its recent invention.
Living in Australia I can’t comment on why house prices in California are rising, but one thing Scott Sumner likes to say is “never reason from a price change”…maybe he should follow his own (very good) advice?
Very nice selection today!
On California, we live in one of the areas where prices have been steadily rising on already head-scratchingly high numbers. So obviously people with money are here and are willing to pay high dollars for homes.
The thing you see for sure is that non-white collar, skilled workers are very hard to come by. My wife’s hairdresser flys in for one week a month from Idaho. It’s impossible to find a repair guy for our stove. Construction costs for relatively small projects are enough to buy a nice home in another state… and you have to wait a year to get started. This is an issue and will start to affect the quality of life in the state. But it’s still a beautiful place with remarkable career opportunities.