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.
Also, So. Cal. has about the nicest weather in the world for nice life outside.
Perhaps "California is a terrible place to live if you are a middle class family with kids - and do not yet own a home". Those who bought homes 5+ (10+? 3+?) years ago, have made enough on price appreciation to make a down payment on a nicer place, or don't have to move.
The "good school districts" places will remain very valuable and continue to increase, tho at some time at a pace slower than inflation. It's not yet. And it might well merely plateau, without a huge drop, even if housing tanks in many other places.
As people get richer, weather gets more important.
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.
Excellent description of the problem. My only addendum would be that you don't need to understand the complex math to see why those supply delays and uncertainties would be an issue, you only need to have spent time forecasting for a business, or worked in supply chain. We learned about "the bullwhip effect" in undergrad supply chain classes playing a very simple game ("The Beer Game") demonstrating how slow response time, uncertainty and poor communication up and down the supply chain results in huge swings up and down in demand, along with high costs. Nothing I saw while getting a PhD in economics approached that level of understanding, and indeed only a small number of the economists I have spoken with really understood that. I think academia is a very poor place to learn that, and most economists spend no time in industry.
I just like the math as it shows that everything from economic oscillations to rocket control system to "The Beer Game" have similar behaviors. As knowledge increases the apparent complexity of the observable world increases, but then it can be simplified again when the dynamics are described by the same mathematics across a broad range of subject areas.
It is a good model for understand a lot of observations from many areas of the web of human knowledge.
Oh yea, I have nothing against the math per se! Just saying that you don't need the math to understand the phenomenon, and that academic economists often understand neither.
‘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.
That was my thought as well. Considering it was Sumner's second home, I am guessing it wasn't in Compton. If people are moving out of lesser spots and into more desirable ones, you can still see average prices going up. Wealth inequality does not mean prices have to rise or fall, average or otherwise. Likewise, we are more likely to hear of the upper middle class leaving than the lower classes staying, just due to social circles and our sources of news.
Tie that in with the point that much of the exodus is from people with kids, and empty nesters are bidding up the remainder with their extra disposable income, and you can see further increases.
‘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.
Science is of no practical use to Mankind unless and until it is engineered. Technology is of no benefit unless it has a practical use. Steam technology was invented around 73AD but it had no use until around the 18th Century - and drove the Industrial Revolution. The science of steam power wasn’t understood until scientists, prompted by its use, investigated it in the mid-19th Century.
The popular notion (particularly among deadbeat politicians) is that everything starts with ‘The Science’ and useful technology automatically follows, thus throw loads of taxpayer money at whatever ‘science’ the political galoots thinks will be a winner or looks most ‘sexy’.
The true drivers are innovators, those who find uses/new uses for current technology, often combining two or more. They anticipate what the masses might like, and combined with capitalism present it to the market. Most fail, as it is still up to the masses whether they adopt it or not.
Government forcing technology, or technological change for political or ideological reasons, will cause economic and social regression - for example. destroying fossil fuel based technology, industrial farming and going back to what it replaced in pursuit of absurd, fantastical notions about ‘saving the Planet’.
Don't dismiss curiosity as the driver, though. Why did Newton investigate light and colors? He could not possibly have foreseen lasers and other technological applications of optics. Stobaeus' story about Euclid and the young man also shows that Hellenistic Greek scientists, while not at all shy about technology and practical applications of their work (Archimedes himself was reportedly the chief scientific consultant of Syracuse's shipyards, and his On Floating Bodies is obviously related to naval architecture), deprecated the exclusive focus on practicality. Stobaeus tells us that so-and-so started to study geometry with Euclid, and after having learned the first theorem he asked the master, "But what will I get out of it once I've learned all this?" Euclid called his slave and told him, "Give him three obols, the man must profit from what he's learning."
I don’t dismiss scientific curiosity, but the issue is what drives economic/social progress and that is innovation which can and does happen without the need for science, that is not to say science cannot provide ideas for invention and innovation, just that it is not essential.
Fire - or how to make it - certainly was discovered before the science of combustion was understood, the wheel invented before the physics of angular momentum, rafts and boats in use without the insights of Archimedes.
Yes, and the Egyptians built their pyramids and stuff without knowing what a theorem was. But this sort of purely empirical development seems to be inherently limited. Eventually you need a framework and foundations to build technology upon, and this is often provided either by curiosity, as with Newton's optics, or by developments in unrelated fields, as the development of the valve and valve pump by Ctesibius (later his design became standard issue Roman firefighting equipment) may have been spurred by Herophilus' dissections.
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.
I suspect this is mostly true.
Also, So. Cal. has about the nicest weather in the world for nice life outside.
Perhaps "California is a terrible place to live if you are a middle class family with kids - and do not yet own a home". Those who bought homes 5+ (10+? 3+?) years ago, have made enough on price appreciation to make a down payment on a nicer place, or don't have to move.
The "good school districts" places will remain very valuable and continue to increase, tho at some time at a pace slower than inflation. It's not yet. And it might well merely plateau, without a huge drop, even if housing tanks in many other places.
As people get richer, weather gets more important.
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
Excellent description of the problem. My only addendum would be that you don't need to understand the complex math to see why those supply delays and uncertainties would be an issue, you only need to have spent time forecasting for a business, or worked in supply chain. We learned about "the bullwhip effect" in undergrad supply chain classes playing a very simple game ("The Beer Game") demonstrating how slow response time, uncertainty and poor communication up and down the supply chain results in huge swings up and down in demand, along with high costs. Nothing I saw while getting a PhD in economics approached that level of understanding, and indeed only a small number of the economists I have spoken with really understood that. I think academia is a very poor place to learn that, and most economists spend no time in industry.
I just like the math as it shows that everything from economic oscillations to rocket control system to "The Beer Game" have similar behaviors. As knowledge increases the apparent complexity of the observable world increases, but then it can be simplified again when the dynamics are described by the same mathematics across a broad range of subject areas.
It is a good model for understand a lot of observations from many areas of the web of human knowledge.
Oh yea, I have nothing against the math per se! Just saying that you don't need the math to understand the phenomenon, and that academic economists often understand neither.
‘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.
Losing a Congressional District is a lot better indication of the general population trend relative to the rest of the country.
That was my thought as well. Considering it was Sumner's second home, I am guessing it wasn't in Compton. If people are moving out of lesser spots and into more desirable ones, you can still see average prices going up. Wealth inequality does not mean prices have to rise or fall, average or otherwise. Likewise, we are more likely to hear of the upper middle class leaving than the lower classes staying, just due to social circles and our sources of news.
Tie that in with the point that much of the exodus is from people with kids, and empty nesters are bidding up the remainder with their extra disposable income, and you can see further increases.
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.
"Technical growth and technical progress is not driven by the masses." -- replace econ with tech, and it becomes more true.
Henry Ford & even earlier the CA Robber Barons like Leland Stanford, were promoting mass driven econ growth.
Science is of no practical use to Mankind unless and until it is engineered. Technology is of no benefit unless it has a practical use. Steam technology was invented around 73AD but it had no use until around the 18th Century - and drove the Industrial Revolution. The science of steam power wasn’t understood until scientists, prompted by its use, investigated it in the mid-19th Century.
The popular notion (particularly among deadbeat politicians) is that everything starts with ‘The Science’ and useful technology automatically follows, thus throw loads of taxpayer money at whatever ‘science’ the political galoots thinks will be a winner or looks most ‘sexy’.
The true drivers are innovators, those who find uses/new uses for current technology, often combining two or more. They anticipate what the masses might like, and combined with capitalism present it to the market. Most fail, as it is still up to the masses whether they adopt it or not.
Government forcing technology, or technological change for political or ideological reasons, will cause economic and social regression - for example. destroying fossil fuel based technology, industrial farming and going back to what it replaced in pursuit of absurd, fantastical notions about ‘saving the Planet’.
Don't dismiss curiosity as the driver, though. Why did Newton investigate light and colors? He could not possibly have foreseen lasers and other technological applications of optics. Stobaeus' story about Euclid and the young man also shows that Hellenistic Greek scientists, while not at all shy about technology and practical applications of their work (Archimedes himself was reportedly the chief scientific consultant of Syracuse's shipyards, and his On Floating Bodies is obviously related to naval architecture), deprecated the exclusive focus on practicality. Stobaeus tells us that so-and-so started to study geometry with Euclid, and after having learned the first theorem he asked the master, "But what will I get out of it once I've learned all this?" Euclid called his slave and told him, "Give him three obols, the man must profit from what he's learning."
I don’t dismiss scientific curiosity, but the issue is what drives economic/social progress and that is innovation which can and does happen without the need for science, that is not to say science cannot provide ideas for invention and innovation, just that it is not essential.
Fire - or how to make it - certainly was discovered before the science of combustion was understood, the wheel invented before the physics of angular momentum, rafts and boats in use without the insights of Archimedes.
Yes, and the Egyptians built their pyramids and stuff without knowing what a theorem was. But this sort of purely empirical development seems to be inherently limited. Eventually you need a framework and foundations to build technology upon, and this is often provided either by curiosity, as with Newton's optics, or by developments in unrelated fields, as the development of the valve and valve pump by Ctesibius (later his design became standard issue Roman firefighting equipment) may have been spurred by Herophilus' dissections.
Well back to my point. Now you have your technology, what do you do with it? Without innovators technology is no benefit.
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.
"My wife’s hairdresser flys in for one week a month from Idaho."
Wow.
I can kind of guess... but what about that surprises you?
That's a really long commute. And not for some high-priced consultant, but for a hair dresser...