Rabu, 31 Juli 2013

The Sales Mix of the New Housing Bubble

Now that we have demonstrated that there is an extremely linear relationship between what people pay for the houses they own and their incomes, we're going to look at how the mix of house sales affects the reported sale prices.

Our first chart looks at the number of new homes sold in the previous twelve months for each month from January 2003 through June 2013, which spans all of the data reported by the U.S. Census Bureau for this measure:

Thousands of New Homes Sold in U.S. Each Month by Sales Prices, Trailing Twelve Month Moving Average, January 2003 through June 2013

In this chart, we're identifying the peak volume for the trailing twelve month average of U.S. new home sales as January 2006, which directly corresponds to the peak volume of sales for new homes in the $200,000 to $299,000 range and also the $300,000 to $399,000 range.

Our second chart takes the same data, but stacks the data so we can see the overall volume of new home sales recorded in the U.S. during that period:

Stacked: Thousands of New Homes Sold in U.S. Each Month by Sales Prices, Trailing Twelve Month Moving Average, January 2003 through June 2013

In these two charts, you can see the volume of lower priced homes decline during much of the inflation phase of the first U.S. housing bubble, as these lower priced homes were displaced by higher priced homes in the number of sales each month.

In the deflation phase for the volume of new home sales that took hold after January 2006 (the first U.S. housing bubble itself continued to inflate as new home sale prices continued to rise into early 2007), we observe that although the volumes of all new home sales by sale prices declined in this period, there is a relatively greater decline in the volume for higher priced new home sales (say for homes in the $300,000-$399,999 range) than for lower-priced new home sales (such as those in the under $150,000 range).

It's not until July 2012, with the beginning of the inflation phase of the second U.S. housing bubble, that we see the same pattern we observed during the inflation phase of the first housing bubble re-establish itself.

Our next chart looks at the relative share of sales for each range of sale prices reported by the U.S. Census Bureau, which confirms that the relative share of each level of pricing for new homes sold in the U.S. has largely returned to the levels last seen during the inflation phase of the first U.S. housing bubble:

Share of New Homes Sold in U.S. Each Month by Sales Prices, Trailing Twelve Month Moving Average, January 2003 through June 2013

This is where the extremely linear relationship that we've previously demonstrated between what people pay to live in the homes they own and their household incomes gives us a lot of insight. Unless the distribution of income within the U.S. has changed to support the price mix of new home sales, and it has not, that means that other, non-sustainable factors are driving them.

And as recognized experts on the distribution of income in the United States, we can confirm that there has been no meaningful change in that distribution in the last eleven and a half years covered by the Census Bureau's new home sale price mix data that can explain the large variation that we observe in the overall mix of new home sale prices.

The rapidly changing mix of new home sale prices then is an indication of distortionary forces at work in the U.S. housing market, where factors other than the fundamental driver of home prices, household income, are holding sway. Otherwise, we would not be seeing median new home sale prices skyrocket with respect to median household income over time. Something else is discouraging home builders from building affordable homes to satisfy the demand for housing at the lower end of the market.

That's why we describe the period since July 2012 as being the inflation phase of the second U.S. housing bubble. But what could be the consequences of having so many lower priced new homes effectively driven out of the market as a result of the second housing bubble's economic distortion effects?

Joel Kotkin of the New Geography observes how the skewing of the produced mix of new homes toward the higher end of the price scale during the current housing bubble will have very real consequences:

Generally speaking, as prices rise, single-family homes become scarcer and rents also rise. The people at the bottom, of course, suffer the most, since the lack of new construction, and the inflated prices for houses, also impacts the rental market. Since 1980, the average house price as reported by the National Association of Realtors has moved in near-lockstep with rents, as reported in the Consumer Price Index, except for the worst years of the housing bubble.

Kotkin also describes the impact of having such a skewed mix of new home production:

America's emerging housing crisis is creating widespread hardship. This can be seen in the rise of families doubling up. Moving to flee high costs has emerged as a major trend, particularly among working-class families. For those who remain behind, it's also a return to the kind of overcrowding we associate with early 20th century tenement living.

As was the case then, overcrowded conditions create poor outcomes for neighborhoods and, most particularly, for children. Overcrowding has been associated with negative consequences in multiple studies, including greater health problems. The lack of safe outside play areas is one contributing factor. Academic achievement was found to suffer in overcrowded conditions in studies by American and French researchers. Another study found a higher rate of psychological problems among children living in overcrowded housing.

This is occurring as a generation of middle-class people — weighed down by a poor economy, inflated housing prices and often high student debt — are being pushed to the margins of the ownership market. There will be some 8 million people entering their 30s in the next decade. Those struggling to move up face rising rents and dismal job prospects. It's not surprising that a growing number of Americans now believe life will be worse for their children.

Curiously, a return to tenement-style housing would seem to be the solution advocated by Paul Krugman in a recent blog post in which he cited the work of Raj Chetty, Nathaniel Hendren, Patrick Kline, and Emmanuel Saez, who would seem to blame sprawl in part for the apparent lack of economic mobility in a number of otherwise fast-growing cities where low-income earning communities find themselves geographically separated from available economic opportunities.

The distortionary effects of housing bubbles that in part result from "smart growth" or outright anti-growth policies that seek to herd lower income earning households either toward the outskirts of cities where affordable single family homes in their price range actually exist or into the high-density housing projects designated for them by their communities' organizers would not appear to be among any of the factors considered in their analysis.

Data Source

U.S. Census Bureau. New Residential Sales Historical Data. Houses Sold by Sales Price: U.S. Total (2002-present). [PDF Document]. Accessed 26 July 2013.

Previously on Political Calculations

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