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Home Publications Blogs Beat the Press Do We Want High House Prices or Affordable Housing? Lessons on the Government Debt

Do We Want High House Prices or Affordable Housing? Lessons on the Government Debt

Wednesday, 07 August 2013 13:17

Matt Yglesias asked this question of President Obama on his twitter feed. It's a very good question and reporters at President Obama's speech in Phoenix would have been asking it if they were awake.

In case folks missed it, President Obama touted immigration reform as one of the actions he would do for housing. He said that this would raise house prices.

There probably is some truth to this. Normalizing the status of 10-12 million immigrants living in the country will allow more of them to be homeowners, which should have some upward impact on house prices.

(Don't get too carried away on this one. The incremental boost to homeownership will be modest. Furthermore, these people were living somewhere. If they had been living in rental units, these units would become vacant. Then rents would fall, other things equal. That would cause some would be homeowners to rent instead and for some rental units to be converted to ownership units. In other words, don't expect to make your fortune on immigration reform sending the price of your home soaring.)

However this raises a basic question, why would we think that high house prices are good? Obviously high house prices are good for people who own homes. But they are bad news for people who are renting and hope to become homeowners or young people just starting their own households.

Saying that we want high house prices is in effect saying that we want to transfer wealth from those who don't own homes to those who do. That looks a lot like upward redistribution, which is not ordinarily an explicit goal of government policy, even if that is often an outcome.

The upward redistribution attributable to rising home prices can look a bit like the debt burden story that people in Washington whine about. The line is that our public debt of $12.2 trillion (76.3 percent of GDP) is a burden that we pass on to future generations.

There can be some sense in which this is true when the economy is near full employment. In that situation the argument is that deficit spending raises interest rates and therefore discourages investment. With less investment the economy will be less productive and therefore poorer. Insofar as this is the story with large deficits, we can say that deficits hurt future generations, since they will cause the economy to be smaller and less productive.

There is also the story people push to take advantage of racist and xenophobic sentiments, that the government is financing its debt by borrowing from foreigners, most importantly China. The problem with this story, aside from the fact that the vast majority of the debt is still held domestically, is that our indebtedness to foreigners is determined by the trade deficit, not the budget deficit.

The ability of China and other foreign countries to buy up U.S. government bonds depends on their having a trade surplus with the United States. Their trade surplus is in turn the result of over-valued dollar that makes our goods less competitive in world markets. A large budget deficit can contribute to an over-valued dollar by leading to higher interest rates and therefore making it more attractive for foreigners to buy dollar denominated assets. 

But this effect is indirect and still requires the dollar to rise. If people don't want China to own U.S. assets then they should be yelling about the over-valued dollar, not the budget deficit. (By adding to growth, a budget deficit will lead to more imports and therefore a larger trade deficit, but that is true of increased investment and consumption as well. Anything that boosts growth will worsen the trade deficit, other things equal.)

However, when the economy is seriously depressed, as is the case today, it is not plausible to tell a story of budget deficits raising interest rates and crowding out investment. With interest rates still at extraordinarily low levels, deficits are more likely to boost investment by increasing demand than to crowd it out through any interest rate effect.

In this situation, the deficit does not make future generations as a whole worse off. If anything, by boosting investment (both public and private) and putting children's parents back to work, it is likely to make future generations as a whole better off.

There is still the question of who owns the debt. While ownership of the debt will be passed on largely to future generations, to some extent it will lead to higher consumption by current generations. In this sense, it is very similar to the story of higher house prices.

Suppose that the government increases the debt by $4 trillion over the next 4 four years. This means that households will have $4 trillion in assets (i.e. government bonds) they would not have otherwise. (We're ignoring the evil foreigners and also the pension funds and other institutional investors.) Much of this wealth will simply be passed on to future generations as either money spent on them in their upbringing or as an inheritance.

But some of this wealth will be translated into additional consumption. This is money that holders of the bonds will spend on themselves, effectively pulling away money from our children and grandchildren. But this is an almost identical story to housing wealth. If the value of residential real estate rises by 20 percent, it would mean that today's homeowners have roughly $4 trillion more in wealth than would otherwise be the case.

As with the story of government debt, most of this money would be spent on or inherited by future generations. However some of this additional wealth would translate into more consumption by the current generation of homeowners on themselves.

The question that awake reporters should have asked the president is how can he think it is good that we transfer wealth from future generations to current generations from higher home prices, but he somehow is greatly troubled (along with the other Very Serious People) by the rise in the government debt? This is the same story.

Come on Fox News, you've got President Obama contradicting himself in the hot Arizona sun. Why don't you tear him to shreds?



Comments (12)Add Comment
Great point
written by Troy, August 07, 2013 4:35
that I bang on over and over as a quasi-Georgist.

The problem is simply politics, home-owners vote more than renters.

Rove saw this last decade and did what he could to get the Bush Admin pushing home ownership early in the first term, since his numbers apparently also indicated home-owners vote more conservative than renters.

As for dollar policy, again it is our politics -- electorate -- killing us with stupidity, since nobody is going to vote for a "weak dollar" policy even it benefits them directly, because weakness is bad.
written by Bloix, August 07, 2013 5:10
Minimum-wage gardeners and day-care providers will flood into the housing market and bid up prices!
Obamanomics and Middle Class Inequality
written by Last Mover, August 07, 2013 5:10

Exactly. Take peanut butter and cat food for example, two substitutes consumed by the middle class as the main meal for several years now, once reserved for the lower class.

Obama could have said rising peanut butter prices would benefit the middle class who stored much of it as a durable asset, forcing those who haven't stored it to pay more.

As immigrants eat more peanut butter prices would rise to benefit peanut butter hoarders but punish day-to-day eaters trying to switch from cat food to peanut butter.

This is the economic question facing America so astutely observed by Obama. Should those wealthy enough already to have peanut butter gain more wealth so those who come after them don't have to eat cat food under a trickle down peanut butter policy?

Or will enough cat food be consumed to pull down the price of peanut butter and reverse the rising concentration of wealth in peanut butter through more opportunities to work in the cat food industry?

Once again the media reports and you decide.
So much for Hope!
written by John Parks, August 07, 2013 7:48
While I can not remotely be described as an apologist for Obama, who's main support now has resorted to the logic that "At least he didn't bring about the apocalypse" I can suggest that perhaps Obama is hoping for increased home values so that the home owners can then cash in on their equities and create another temporary stimulus to the economy.
In my opinion though, homeowners are not so confident as they were previously to head down that road again.
written by Dave, August 07, 2013 10:11
Why is it obvious that "high house prices are good for people who own homes"? I'd say that it is obvious that I wouldn't want prices to fall after I bought my home, but why would I want prices to rise? I'm not selling. I have to live somewhere. What does equity do for me, exactly? Let me borrow against it, I guess, but we know how that turned out.
where is the magic demand for labor coming from
written by pete, August 08, 2013 3:08
This is the myth that if we can just make immigrant labor legal they will get a huge increase in pay, enought to pay 12.5% payroll tax and health care etc. Wow, pass the koolaid. Legalizaion and forced check of employers will increase the true unemployment rate and send the immigrants back to Mexico. This will raise the cost of business in the U.S., further shipping unskilled jobs down there. Don't know what economic model this is coming from. So, indeed, legalizing, by kicking out affordable labor, will probably raise the cost of construction, for sure, and should raise the cost of housing, but not because magically some undocumented construction worker is going to receive a doubling or tripling of his wage and still be employed. We have what, an effective 20% or so unemployment rate as it is without counting the undocumented. Most of these are clearly quite skilled at say sheetrocking or roofing. Let's keep em here.
written by James, August 08, 2013 7:05
The Senate amnesty bill isn't just about converting the status of illegal immigrants who are already here. According to Numbers USA it will increase the population by at least 30 million people within the first decade. It allows a massive increase in legal immigration and massive chain migration from the relatives and spouses. The 1986 amnesty also induced a baby boom among its recipients and enticed a huge new flow of illegal immigration.

There will be another more indirect effect on house prices. If California is any guide then a massive influx of poor immigrants ruins neighborhoods and destroys schools. This will reduce the supply of good neighborhoods, and it make housing less affordable for regular law-abiding Americans who just want to raise their family in a safe place with decent public schools.
written by a, August 08, 2013 8:41
Could be wrong, but I don't think your argument on the debt works as clearly as you would like. OK, on one side, it does: stimulus spending reduces unemployment, gives parents money to spend on their children, improves schools, so makes the future generation's life better.

But on the other hand, an increased deficit means higher interest payments in the future, from taxpayers to owners of the debt. The latter on the whole are richer than the former on the whole, so accumulating deficits implies a future upward redistribution.

I'm not wise enough to say which effect outweighs the other.
And there you have it
written by Matt, August 08, 2013 2:46
There it is, yet another dilemma posed by the failure to tax land value: half the population is doing all it can to ensure house prices rise or at least never fall, and the other half is hoping like hell that they can get affordable housing. They're both very much fighting for their livelihoods, and neither is really in the wrong. Yet, the problem could be easily resolved by up-taxing land and down-taxing production.
written by Dean, August 08, 2013 3:27
My argument on the debt worked exactly as I liked -- we can create jobs today for a modest interest burden in the future. That seems like a no-brainer. We are seeing millions of families wrecked now so that we can save maybe 1 percent of GDP in interest payments 10 years out? In addition, we can boost future GDP by adding to the capital stock and keeping workers productive by keeping them employed.

That one takes no time -- especially since much of the money to pay the interest is coming as tax revenues from people getting the interest (40 percent in the case of high income earners). In fact, there will be a large overlap of income taxpayers and bondholders generally so you are seeing pretty trivial redistribution at the end of the day. This is very far from being close.
How are home prices a good thing?
written by Chris G, August 09, 2013 6:06
> Obviously high house prices are good for people who own homes.

Speaking as a homeowner, I don't think I buy that. My take is that higher home prices are only good for me if a) my salary is increasing faster than the rate home prices are increasing (no, it's not) or b) if we were looking to downsize, e.g., retirees (which we're not).

If we were to move it would be to move to a bigger house. We have to pay the cost differential between what we'd buy and what we'd sell. If the differential is increasing faster than our income (which it is) then I'm not happy about it. Unfortunately, rising home prices also drive up the cost to renovate. In summary, I don't see any reason to be happy about rising home prices.
written by Blissex, August 11, 2013 5:04
«Saying that we want high house prices is in effect saying that we want to transfer wealth from those who don't own homes to those who do.»

Far more than that, it redistributes wealth and income from owners of smaller properties to owners of bigger properties, as another commenter realizes:

«Speaking as a homeowner, I don't think I buy that. My take is that higher home prices are only good for me if a) my salary is increasing faster than the rate home prices are increasing (no, it's not) or b) if we were looking to downsize, e.g., retirees (which we're not). If we were to move it would be to move to a bigger house. We have to pay the cost differential between what we'd buy and what we'd sell.»

But most homeowners don't care about that -- all they see is the big tax-free capital gains they get on their property, and want bigger tax-free house prices and lower heavily taxed wages.

However they have a point: thanks to the sorcery of Wall Street, homeowners don't have to downsize to realize their tax-free capital gain, they just need to remortgage, in the process generating massive fees and profits for Wall Street businesses, which is a big advantage it has, and it also has the advantage that capital gains can be monetized without actually selling the property and downsizing, which would depress house prices by way of increased offer of properties.

Home equity extraction as Doug Henwood in "Wall Street: the book" and others have pointed out has been bigger than GDP growth for most of the past 20 years in the USA, the UK and other countries.

It has been the miraculous engine of bigger profits and growth for Wall Street for decades, and nobody is complaining that the enormous resulting mass of toxic mortgage debt has resulted in it being bought at high prices by the government owned Fannie and Fred and the government sponsored Fed Reserve, to the immense profits of Wall Street, with the result that 95% of the mortgage inventory and market and resulting losses have been nationalized, that is paid by workers to the benefit of speculators.

If Obama, like Cameron and others, is calling for higher house prices, this may be related to that immense overhang of toxic debt that has been nationalized; a massive increase in house prices would definitively and effective transfer the cost of those losses to poorer people earning less from voters who usually are the 50% richest and highest earning voters.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.