I hate to disagree with Chip Case, but I must

1732_952_LLA100103.pdf (application/pdf Object).  "Housing, Land and the Economic Crisis" and it appears in "Land Lines." 

The Lincoln Institute of Land Policy, an organization founded back in the 1940s by an industrialist enthusiastic about the ideas of Henry George, who intended that his wealth be used to promote those ideas, publishes a newsletter, the link to which arrived in my inbox last week.  One of the articles was by Chip Case, recently retired from Wellesley, and half of Case-Shiller.  The article is titled, "Housing, Land and the Economic Crisis" and it appears in "Land Lines." 

What I take issue with is this statement:

The expansionary monetary policy pursued during this short period reduced the cost of buying a home by almost a third.

It might be correct to say that monetary policy reduced the cost of borrowing a particular amount of money by almost a third, and I suspect that is what Chip meant to say.    But the reality is that instead of a potential buyer being able to purchase a particular house for 1/3 less monthly outlay for mortgage costs, he was able to borrow 50% more for the same monthly outlay -- and indeed, if he wanted to buy that particular house, he was competing for it with other people who WOULD be willing to borrow 50% more, so he would have to.   And he needed to accept an adjustable rate mortgage, with all the downside that leads to.

This drove up the transaction prices, and produced the appearance of home equity against which a larger percentage of non-sellers were able to borrow.  The spending -- on credit -- has led to profits for retailers and manufacturers, and most certainly for bankers (and thus to greater concentration of our wealth and income) and, as it had to, to a bust of large magnitude and widespread pain.

Have we learned, or are we going to do this again?

The article is titled, "Housing, Land and the Economic Crisis" and it appears in "Land Lines."    But the word "land" appears only twice in the article:

1. second paragraph:  "Between 2000 and 2005, the value of residential land and buildings increased from about $14 trillion to $24 trillion. About half of this increase reflected new construction, and half was due to rising land values, primarily on the coasts (Case 2007). But in late 2006 prices began to decline, and by mid-2009 they had fallen roughly 30 percent.
2. antepenultimate paragraph (I knew I'd have a use for that word someday!):  "California represents about 25 percent of all the land value in the United States, and events there have major implications for the rest of the country. The good news is that for the last three months, the indexes for San Francisco, San Diego, and Los Angeles have led the nation in price appreciation. The California Association of Realtors reports substantial increases in home sales volumes except in the Central Valley.

I'm disappointed that neither Case nor Lincoln saw fit to connect the dots.

(And I'll note parenthetically that California and Florida's steeply rising land prices were in part due to their limitations on the property tax under Proposition 13 and "Save Our Homes" respectively.   Many of California's problems would get better if they would simply fund their public spending from a tax on their land value, rather than suppressing that tax and relying on taxes on sales and wages, both of which depress any economy.)

To connect the dots, I'll ask that you read Mason Gaffney: The Great Crash of 2008, at http://www.masongaffney.org/ and his new book, After the Crash: Designing a Depression-free Economy, available at http://www.schalkenbach.org/store.php?crn=78&rn=610&action=show_detail

Lenders ought not to be lending on speculative land values. Localities ought to be collecting more of the economic rent on the land within their borders, lowering the selling price of land without reducing its value in use -- and arguably increasing it!  Localities and states ought to be lowering their taxes on buildings, on wages, on sales, and substitute the revenue from collecting economic rent.  See also Mason Gaffney: How to Thaw Credit, Now and Forever, online at his website (above).

 

Comments

[Troy]

$14 trillion to $24 trillion. About half of this increase reflected new construction

$10T over 7 years? $1.5T in new residential construction every year??? chyeah right.

The good news is that for the last three months, the indexes for San Francisco, San Diego, and Los Angeles have led the nation in price appreciation

do newspapers cheer when oil prices go up? Why is the cost of housing going up "good news"???