Will US home prices be higher in 2015?
Recently someone posted a comment to this blog, suggesting that I eat my words about the future of US home prices. See: Home ownership
Here is what I wrote in August 2005:
It seems likely that most residential real estate values in the ‘fly-over’ areas of the United States will be higher in ten years than today.
In December 2005, the median US home price (National Association of Realtors) was $222,000. In January 2009, as a result of sub-prime mortgage lending and the collapse of lending in general, this value had fallen to $170,300. The question is, therefore, whether current prices are likely to rise more than 30% by August 2015?
It’s not over until the fat lady sings
My argument in 2005 was essentially that the “fat lady” in long term real estate prices is inflation. Now, I’ve lived over 23 years in Brazil during a period when the inflation was never less than 20%. I’ve lived through the Jimmy Carter years of stagflation and seen the value of my US home jump 100% in four years. I know well the smell and reality of inflation and its harbingers.
We are now living in a time of deflation — I would say, perhaps, “temporary deflation”.
However, the way that Washington is pouring money into “stimulus” packages, fairly stinks of the fuels of inflation. Bigger government, more government employees, more government-directed spending. And at extreme levels.
Furthermore, Ben Bernanke, the Fed Chairman, is a student of the Great Depression and seems to think that deflation is a bad thing, perhaps to be feared more than inflation.
Nevertheless, the Obama administration is also taking a page from the FDR New Deal playbook: bashing entrepreneurs, taxing income, taxing spending (the carbon tax), re-distributing wealth. This all reeks of deflation.
The question is, which will win out in the long run, say by August 2015? Inflation or deflation?
Is long-term deflation likely?
The prime historical example of deflation in the US is the Great Depression. Mr. Obama seems bent on imitating FDR’s belief that all government spending is good, especially when directed to political constituencies that might keep him in power — or on initiatives that are designed to fashion the nation to his liking for a very long time, even if he is not re-elected.
FDR was re-elected two times because the majority of US workers belonged to labor unions and because many “intellectuals”, perhaps the majority, thought that capitalism had failed and that the Soviet Union was the sign of the future. (He also won a fourth term, propped up and dying, because the US was at war and nobody wanted to change commanders).
Furthermore, FDR was successfully able to blame Herbert Hoover for the Depression, primarily because Hoover was, in fact, to blame and also because Hoover had three years to do something about it before the election, and failed. It was Hoover who signed the Smoot-Hawley Tariff and who raised income taxes to absurd levels. “Hoovervilles” — squatter camps outside of city limits — were festering with discontent while Hoover has still president.
Obama, however, faces a strikingly different scenario:
- The collapse of the economy occurred only months before the election. When Obama was elected, employment was still high. George Bush had not raised taxes. There were no “Bushvilles” of unemployed migrants. If voters are asked in 2012, are you better off than in November 2008, Obama may lose the election if unemployment is still over 7% and if the economy has not recovered.
- Blame for the collapse is placed on “Wall Street Greed” and “Washington politicians”, rather than a failure of the capitalist system. No one is advocating the former Soviet Union as an example to follow. Socialism is a dirty word. Regulation of capitalism, rather than some untried alternate system, is seen as the solution.
- Most Americans consider excessive government spending as a problem, rather than as a cure.
- The labor union movement is far from its glory days of FDR when unions alone had enough votes to elect a president.
- Americans are far less tolerant of pain than their great-grandfathers that lived through the Great Depression. The electorate is self-indulgent and already panicky and losing patience. Nine out of ten people are depressed in anticipation of unemployment and hard times, rather than the fact.
- The banks have not failed. In the 1930s, banks closed and people lost all their savings. In some localities, merchants issued their own “money” to keep commerce going. Most families had only one wage-earner. There was no social security, no medicaid, no unemployment insurance. Vagrants without five dollars in their pockets were picked up by the police and dumped on the outskirts of town. Migrant Mother, after the fact, became a symbol of the times.
- FDR lived in the age of radio, not television. There was no 24-hour news cycle, no Internet, no twitter or blogosphere. FDR could control the message, even siccing tax authorities on newspapers that wrote against him. Obama can’t do that. In fact, he has installed a daily news briefing, which in the hands of the current Press Secretary, seems to be doing him no good.
- Control of Congress by the Democrats will be tested soon, in November 2010. Obama’s popularity has been failing during his first 50 days in office. The internals of the opinion polls already spell problems for the Democrats.
- The history of the failure of big government spending and high taxes is now well documented. We have the examples of Lyndon Johnson and Jimmy Carter (not to mention the Soviet Union) to provide instructive guidance. The Democrats, even as recently as Bill Clinton, believed in trying to balance the budget. The party still parrots that line, while approving the greatest government spending of all time.
- Most American now have an interest in the stock market, directly or indirectly. Attacking Wall Street has the potential to backfire on the administration. Falling stock prices really mean something to many, many millions of voters. In the time of FDR, there were few mutual funds, no 401(k) plans, no IRAs, and only about 5% of the population owned stocks. FDR could ignore the daily ups and downs of the market. Obama is not so fortunate.
This is not to argue that prolonged deflation may not occur — only that the Obama administration will probably not be able to follow the example of FDR and stay in office.
The argument for inflation
The current government “stimulus” packages are so huge as to almost defy human comprehension. To avoid inflation, this money must be somehow “soaked up”, either by:
- Taxes,
- Issuance of government bonds, or
- Cutting government expenditures in other areas.
Now, the history of successful reduction of government spending is hardly an encouraging argument for containing inflation. So let’s just rule that out.
Taxing the rich won’t work, because the truly rich know how to avoid taxes. For example, they could invest in municipal bonds. Or they could just not invest at all, living off their accumulated wealth. (The income tax is not really a wealth tax; it is only a tax on increments to wealth.) Taxing the rich will remove a source of funds for charities, including churches, museums, art galleries and worthy endeavors. Taxing the rich will remove a prime source of venture capital. Expect a backlash. Whoopi Goldberg is already complaining.
Issuing government bonds in huge quantities, beyond the amount that can be financed by the US trade deficit, will drive up long-term interest rates, which would keep the economy depressed and wreck havoc on bond holders, insurance companies, and older investors. Not a politically attractive solution.
That leaves taxing the general populace, directly or indirectly (through the carbon tax). The problem here is that either this will prolong economic hard times, or the Democrats will be voted out of office. Obama is a great fan of Lincoln. Perhaps he should post the line about “fooling all of the people all of the time” on the wall of the Oval Office, as a reminder of the limits of power.
On the other hand, inflation is politically acceptable to debtors, which includes most of the US population. Inflation pays off mortgages, while raising home prices, liquidates credit card burdens — inflation has been the rallying cry of debtors well before the days of William Jennings Bryant and the “Cross of Gold” speech.
This seems to suggest that Obama is laying the groundwork for stagflation. He is in danger of becoming a Jimmy Carter on steroids.
Why I won’t eat my words just yet
So, although I have no better way to see the future than anyone else, it seems to me that both the political and economic arguments favor inflation, rather than deflation.
This suggest that, indeed, the median price of US homes may be higher in 2015 than in 2005, especially in the “fly-over” areas of the country, far from the devasting effects of labor unions (like Detroit) or big city politics and the economic time bombs of over-reaching public servant pension plans (like New York City).
If inflation does indeed come, especially Jimmy Carter level inflation, the people who are able to hang onto their homes and keep their mortgages will be better off than those with savings in money market accounts or bank CDs.
Another thing to consider when examining the “bubble” in home prices in recent years is the relative size of homes today, compared to fifty years ago. When cost per square foot is taken into consideration, the long-term rise in the cost of a home is not as impressive when the typical 2009 home is compared to a post WW II abode in Levittown. Also, the quality, construction, and features of homes have changed dramatically over the years. Compare a Florida home build in 1947 with one built to today’s codes and with modern amenities.
I’m old enough to have lived in US homes fifty years ago, under the conditions of those times. Most homes then had only one bathroom, few kitchen appliances, certainly no granite sink tops, little effective insulation against heat loss and drafts, small cramped bedrooms, no walk-in closets, no burglar alarms, no double-pane windows in cold climates, no automatic garage door openers, only single-car garages or a car port, no smoke alarms, and without many other features seen even in “middle-class” homes today.
The cost of a home reflects the cost of building. The bigger the home, the more it costs. Before drawing any lines on a graph to suggest the level to which home prices “should” fall, based on long-term historical trends, ask yourself, would you really like to live in a typical 1945 size-and-quality home today? Maybe you would. But the price of homes will, at least in some degree, depend upon supply and demand and the tastes of the many.
So, I’m not quite ready to give up on a recovery in the value of residential real estate in the US, at least in a 2015 time frame.
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