
Why has regional income convergence in the U.S. declined? Housing costs - jseliger
http://marginalrevolution.com/marginalrevolution/2017/07/regional-income-convergence-u-s-declined.html
======
jandrese
IMHO the inflation of housing costs has many factors, but one of the ones that
gets overlooked is the concentration of wealth near the top. Rich people need
safe places to stash their money, and they end up buying real estate all over
the country. This isn't just Americans either, US real estate is a popular
investment all over the world. But when you are buying real estate as an
investment where do you buy, not out in some no-name town in some flyover
state. You buy in a place where the market is already hot and ride the wave.
Thousands of millionaire investors piling into a market end up pricing out
regular folks who just want a place to live.

I'm frankly surprised that we have not seen more real estate bubbles pop over
the years. It's clearly unsustainable, yet somehow the market keeps going. Ask
your parents if they could afford to buy their home today, even with their
best yearly income. Most of them will say no if they lived in the city for a
couple of decades or more. I know so many who bought their house for
$70k-$100k in the 70s and now see their neighbors sell for $1m-$1.5m. It's
insane.

~~~
colechristensen
I'd assume it was forced by all of the initiatives of making the "American
dream" of owning a home a reality for as many people as possible.

Real estate shouldn't be an investment, it shouldn't raise in value, and it
shouldn't be possible for a huge chunk of the population to fund the financial
sector through mortgage interest. It's a tax on everyone designed to funnel
wealth upwards towards a sector of capital owners that get paid for doing very
little.

Regulations and taxes should be arranged such that it is very expensive to own
real property that isn't for your own personal or business use. If you want to
act as a gatekeeper for real estate, at least a large chunk of the profit
should go to the state for the benefit of the public. If it's expensive and
not beneficial to own things so others have to pay you to use them, the market
will shrink dramatically and more people will actually be able to own homes.

~~~
seanp2k2
Yep. And as you also know, there's so much money in it that we won't see it
change in our lifetimes. Why work when you can let the land work for you?

~~~
sokoloff
Why spend all your income today when you can save and invest some for the
future, thereby allowing you to consume more later in exchange for consuming
less now?

Investments, including land, are owned on the backs of consumption foregone in
the past.

~~~
ItendToDisagree
Just no.

All investments are not owned on the back of consumption foregone in the past.

Unless you believe that someone with 100 million dollars is "foregoing
consumption" when they invest (particularly in real estate).

~~~
sokoloff
I do believe that. They can take that $X MM and put it into an investment xor
into a yacht/airplane/supercars/vacations.

One is consumption; the other is investing.

~~~
mywittyname
Fancy-ass houses and condos are consumption. Most of these people buy up a
place, then completely gut it, replacing everything with the new trendy
kitchen or whatever. Even if they sold it for more than they paid, there's no
way they made money on it after renovations, taxes, utilities, upkeep, and
staffing.

------
grandalf
After decades of Federal policy to encourage investment in housing, the
consequences are getting harder and harder to ignore, yet the blind faith in
these sorts of paternalistic policies remains unabated.

The many tax breaks and loopholes for real-estate investors resulted in
overbuild in many parts of the country... these were the parts that were hit
hardest in the crash of 2008.

Not only was this a big misallocation of capital which robbed other industries
of investment for decades, but the response to the crash was to prop up real-
estate prices through other drastic measures.

These massively inflated prices enriched many of the landlords in urban areas,
greatly increasing their political clout and ability to push for regulations
that protect their incomes and harm the public.

Meanwhile, transit systems and roadways declined, further increasing the value
of urban real-estate because of the great inefficiency of getting to and from
a city if one lives outside of the city.

So now, real-estate-fueled urban price inflation has altered mobility patterns
creating further economic distortion. Software engineers in SF make high
salaries but live a lower standard of living than those in other cities:

[https://www.codementor.io/blog/best-cities-software-
engineer...](https://www.codementor.io/blog/best-cities-software-engineer-
earnings-271vpf599k)

Who is benefitting from all of this? The landlord class, builders, and
construction companies.

When you see a politician wearing a hard hat chances are that politician is
helping enrich those interest groups at the expense of everyone else.

~~~
wbl
Builders don't profit because they don't have places to build legally.

------
api
The problem has been popularly summarized as "housing cannot be both
affordable and a good investment."

Of course that might be an oversimplification. Housing has been an investment
class as long as it's existed and yet there hasn't been an affordability
crisis like this since at least before WWII. What's different now?

~~~
sokoloff
Housing that you live in (aka "consume") has not been a particularly good
investment, IMO. What confuses many people into thinking that it is is that
you often end up holding it for a long period of time, paying down the
mortgage and when you go to sell, you have a large gain, where you started
with a very small downpayment. For most people, that gain is also tax-free, so
it seems like a magic windfall.

The problem is that over that long a period of time, inflation may have halved
the purchasing power, meaning your gain is a paper one, you spent a lot of
years fixing and maintaining the house, paying taxes and insurance, working on
the yard, maybe did some remodeling, etc. If you'd instead invested in the
stock market any surplus over renting, you often would have come out ahead.

Most people would find a way for that surplus to turn into lattes, vacations,
new cars, and large TVs rather than into shares of VTSAX, so for them,
homeownership is a good idea, not because it's a better investment than
equities, but because it's a better savings vehicle than nothing.

I'm a homeowner and very happy about that fact for our family (for lifestyle
reasons), but even in a steeply rising market (Cambridge, MA), my other
investments have performed much, much better (even including the 2007/2008
crisis).

~~~
rpazyaquian
What's your investment strategy? I recently started a Roth IRA and started
maxing it out each year, but I don't know what else to do with my savings
(that are extra over my ~6mo salary buffer + emergency fund, I mean). Dumping
it all into something like VTSAX is something I've thought about for a while,
but I'm not sure how well it works for long-term investment/"making my money
work for me".

~~~
thaumasiotes
> I recently started a Roth IRA and started maxing it out each year

Huh? There's no limit on how much you can put into a Roth IRA each year, as
far as I've ever heard.

[http://www.rothira.com/what-is-a-backdoor-roth-
ira](http://www.rothira.com/what-is-a-backdoor-roth-ira)

~~~
rpazyaquian
The IRS website says its $5500 contribution max per year.
[https://www.irs.gov/retirement-plans/plan-participant-
employ...](https://www.irs.gov/retirement-plans/plan-participant-
employee/retirement-topics-ira-contribution-limits)

~~~
sokoloff
Yes, but read the "mega backdoor Roth" technique. It allows many people to
effectively contribute much larger sums into Roth IRAs, even though there is a
$5500 "front door" limit.

If you have a low current marginal rate and a lot of money to stash away for
retirement (that might be a semi-uncommon combination), it's absolutely
something to look into. I have a high marginal rate, so I haven't done it.

~~~
rpazyaquian
So it's basically opening a Trad IRA, putting money into it, then immediately
rolling it into a Roth IRA? I thought the contribution limit was across all
IRAs you own, so you still wouldn't be able to put any extra into the IRAs in
general?

This is complicated and weird. I might hold off until I understand it better.

~~~
sokoloff
Mega backdoor Roth primer is here: [http://www.madfientist.com/after-tax-
contributions/](http://www.madfientist.com/after-tax-contributions/)

Don't get hung up/paralyzed into doing nothing for fear that something
slightly better might be available if you did hundreds of hours of research.
The most important thing is to get started, IMO.

~~~
pilom
Just to be clear. The Mega backdoor Roth requires a 401k that allows After-Tax
Contributions. Most won't let you do that. Their software will say "that
contribution percentage you have selected will result in more than $18k/year
in contributions and that isn't allowed" or you'll get to the end of the year
and they'll just refund you the extra contributions. Which also doesn't help
you.

------
francisofascii
In retrospect, the problem is the US has had poor property tax policies.
Property tax should be based on 1) the land square footage and 2) the value of
the location. If a lot is double the space of normal lot, the tax should be at
least 50% higher. If the price increases sharply, the taxes should as well.
This way large lots sizes and price fluctuations would stay in check. The
property taxes in SF, by the way, are way too low for the current value and
square footage of the lots.

~~~
epistasis
Prop 13 has hugely restricted the ability of municipalities to tax land.
Despite being sold as keeping the elderly in their home after retirement,
that's a tiny subset of what was actually covered in the law.

I agree that a more Georgist tax policy is in order, but fixing Prop 13 is
pretty tough. It gets older residents really really riled up when changing
Prop 13 is mentioned.

~~~
s73ver
With decent reason. There is no, and I really mean no reason why someone
should be forced out of their house due to rising property taxes. That's just
not what taxes should be used for.

Really, it should have applied to one's primary residence, and that's it.
Maybe the primary office of a small/medium business.

------
TheAdamAndChe
It always stuns me to hear so many people blaming NIMBY movements for housing
prices while completely ignoring the effect that good job concentration has on
the local housing markets. Housing is insanely expensive on the east and west
coast because those are the only areas of the country seeing economic growth.
If everyone is required to be in such a small area to even have an opportunity
to get a good job, then of course it will be expensive to live there.

~~~
cestith
Perhaps you'd like to hear about a little-known, tiny little state named
"Texas".

~~~
seanp2k2
How is the tech job market there, especially outside of Austin, which also has
skyrocketing rent? [https://www.rentjungle.com/average-rent-in-austin-rent-
trend...](https://www.rentjungle.com/average-rent-in-austin-rent-trends/)

~~~
scythe
I've heard good things about San Antonio, but I don't know the specifics.
Texas is just too hot and dry for me to live there, though, so if it suits you
good luck

~~~
runamok
If you don't like dry, Houston is for you! ;-) It is one of the few places I
know of where humidity can be 100% and it not rain...

------
1024core
Inflation of housing costs wouldn't be _that big_ of a problem if we had cheap
and fast public transportation.

I live in the Bay Area, and I've seen families forced to move further and
further from the area to afford a reasonable house and good education for
their kids. The problem is, now they have to commute for hours, driving in
sub-optimal conditions to get to their jobs.

Imagine if BART charged a flat $1 fare? Or if the Caltrain ran every 15
minutes from 5AM to 1AM and charged $1/ride? Then living far away wouldn't be
_that_ bad. But we're getting squeezed from both sides here: sky high housing
costs, _and_ terrible commutes on gridlocked "highways".

~~~
DrScump

      Or if the Caltrain ran every 15 minutes from 5AM to 1AM and charged $1/ride? 
    

Then you'd have absolute gridlock at all unseparated crossings (e.g. Castro
Street, Rengstorff, Menlo, Redwood City, etc. Those would have to be separated
first.

------
a2tech
Well no kidding. You don't need to be a genius to see that housing costs in
big cities have outstripped wage growth by a large margin for many years.
Housing costs outside of the big population centers have grown at a much more
reasonable rate.

------
mojomark
This article speaks to regional income convergence. However, national wages,
according to Bureau of Labor Statistics data (1) for Usual Weekly Earnings
(parsed by education level in particular) show clear divergence - along with a
clear dissappearance of the middle class.

Perhaps regional economies are simply settling down and catching up to the
economy at large (I'm not implying that wage divergence is good or fair - it
just seems to be what is happening based on BLS data).

1\.
[https://www.bls.gov/news.release/wkyeng.nr0.htm](https://www.bls.gov/news.release/wkyeng.nr0.htm)

------
Dirlewanger
I don't know shit about real estate, be it property taxes or zoning laws. From
my dumb angle, I see it as metropolitan markets across the country going crazy
because of the decade-long-or-so trend of people moving to cities. In simple
terms, what are governments doing/not doing that is causing such ridiculous
costs?

~~~
wbl
Banning housing construction in "cities" through hight limits.

------
joshe
It is not a conspiracy or an inevitable consequence of growth. It is not
because of the concentration of wealth (also a problem!). It is because there
is not enough housing.

There are many kinds of restrictions, some you probably agree with. Most of
the restrictions are popular with liberals, conservatives, Democrats, and
Republicans.

Restrictions like:

    
    
      * must build parking per housing unit
      * zoning restrictions to limit density
      * long approval processes for construction
      * many blocks to construction approval even after complying with all the restrictions
    

This is a bipartisan problem, it's really a culture problem. It's
understandable, even on the micro scale. When you move into a place (and are
done renovating it), you'd prefer that the neighborhood never change and that
no one does any construction in it. There's a little tinge of atavistic fear
of strangers too, even though people are moving in and out of neighborhoods
all the time.

In 1960, San Francisco population was 740,000. 50 years later in 2010 it's
808,235. The east bay and peninsula have been as reticent about housing.

Despite wanting to live in SF and ending up in San Mateo once they get there
they don't want anyone to build anything - no more density. Despite wanting to
live in the mission/noe valley/haight and ending up in the less dense sunset
once people get there they vote against more housing.

The solution is more housing. Transit oriented development (denser zoning and
no parking requirements near transit), allowing people to convert illegal
inlaws to legal apartments, converting garages into apartments, and allowing
people to add stories to their homes are all possible good moves. Maybe there
are some of those you don't like, but each one we don't do is less housing and
higher costs.

And when you do vote for more housing you are getting:

    
    
      * cheaper housing
      * less climate change
      * less pollution
      * less homelessness (because homes)
      * less inequality (housing costs are a regressive expense)
      * a more prosperous city (you personally will have more money)
      * a more interesting city (you personally will have more interesting restaurants and things to do)
    

You think that cute 4 story victorian in Noe looks cool? Maybe make it legal
to build it anywhere in the city or bay area. The whole sunset and richmond
are filed with 1 story single family homes. Even pretty dense
mission/noe/haight have lots of individually low density properties.
Regionally why not let people build 4 story houses with apartment flats
anywhere along caltrain or bart?

But does it work in practice? Check out Tokyo:
[https://www.ft.com/content/023562e2-54a6-11e6-befd-2fc0c26b3...](https://www.ft.com/content/023562e2-54a6-11e6-befd-2fc0c26b3c60)

(SF resident)

------
coliveira
The dirty secret of the tech industry is that their leaders and investors are
making a killing in Real Estate. VC owners and their billionaire friends have
bought a lot of land and buildings in San Francisco, Seattle, and other
cities, and are "forcing" their companies to move into these cities. This has
the nice side effect of making another fortune for them. At the same time,
tech workers need to pay essentially a large tax for living where the jobs
are, and other types of workers cannot even live in these cities anymore.

~~~
ksec
I hope this is not true. It just means all these tech billionaires are, not
actually "tech" billionaires....

For some unknown, and Stupid reason, I personally think it is unethical to
invest in Real Estate. Previously you would have to live in area like Seoul or
Hong Kong to understand that. Now I guess people in London, Vancouver or San
Francisco may understand a little bit more.

~~~
larsiusprime
> For some unknown, and Stupid reason, I personally think it is unethical to
> invest in Real Estate.

Here's the moral framework you might be unconsciously subscribing to:

[https://en.wikipedia.org/wiki/Georgism](https://en.wikipedia.org/wiki/Georgism)

------
guntars
I don't think people who rent have a right to complain about the housing
market. If there's a toxic spill across the street, they can just pack up and
move. They also can't complain about gentrification of "their neighborhood"
since it's not really their neighborhood, they're just visitors.

~~~
jahewson
Yeah it's the investor's neighbourhood! Despite the fact that they live in a
fancy part of town in some other city, or in China, or they're a corporation.
Screw the people who actually live there. It's not like they _are_ the
neighbourhood. /s

~~~
guntars
There's no need for snarkasm. You don't have to be a Chinese investor to buy
an apartment. I simply have no sympathy for people who rent long term:

1) They can take off any time. A new job? A market crash? No problem, just
pack your stuff and leave. 2) Someone else is doing all the maintenance and
dealing with building codes and paying all the taxes, etc.

Because of the inherent risk in owning a home and the effort required to
maintain it, it will always be cheaper to buy than rent. If someone likes
their neighborhood, but isn't willing to commit and put in the work, they
deserve what's coming for them.

~~~
styrophone
>it will always be cheaper to buy than rent.

That's decidedly untrue. In many markets you can make the case that
conservative assumptions result in a cheaper buy option. However, the Bay Area
in particular throws that calculus in reverse for many neighborhoods and
property types.

Your argument seems to rely on the premise that buying is monteraily cheaper
in the long run as long as you're willing to put in nominal sweat equity and
risk. And that labor buys you some sort of citizenship that money, for the
same amount of tenure, does not. The Bay Area market does not reward that
puritanical ethic.

~~~
guntars
Can you explain how buying in Bay Area can be more expensive than renting? The
only reason I can think of is that there's an expectation that the property
will appreciate greatly in the near term and can be sold for a profit, but
eventually either the rents will raise to be above the buy option (in which
case congrats to those who bought, well done) or someone will be left holding
the bag.

So yes, I'll concede that in the temporary situation that buy is more
expensive than rent, and there's a market correction coming, it's savvy to
rent, but those aren't the folks that cry "Gentrification!".

And yes, owning a deed to your place or, even better, owning a business in the
neighborhood, counts for more than just "having been there".

------
bradleyjg
We would have been much better off if politicians left housing alone and just
cut checks to the people they are buying off with all the interventions into
the housing market.

Of course that would run into the problem that people love to push for
giveaways from the government but want it to be slightly obfuscated so they
can tell themselves stories about how they never got anything from anyone.
Witness the uproar over "you didn't build that."

Rent seeking is a fact of life, I can accept it. But the hypocrisy and self
righteousness of some rent seekers just drives me bananas.

