From a labor slack standpoint, the pool of potential construction workers is probably well-represented by unemployed men under the age of 55. To get back to late ‘90s levels of male unemployment (from a level standpoint, not an unemployment % standpoint), we would need essentially every single male unemployed worker who finds a job in the coming years to go into construction.
Generic pointer from Tyler Cowen. Like Kevin Erdmann, Sen sees us having to build a lot of housing to make up for under-production from 2008-present.
I am not sure there is a housing shortage. A lot of people my age have too much house. That is why they do not mind having their kids move back in with them. It could be that what we need is not so much a surge in construction as a redistribution of housing.
Indeed, Mark J. Perry writes,
In 2015, the average size of new houses built in the US increased to an all-time high of 2,687 square feet (see dark blue line in top chart above), and the median size new house set a new record of 2,467 square feet (see light blue line in top chart). Over the last 42 years, the average new US house has increased in size by more than 1,000 square feet, from an average size of 1,660 square feet in 1973 (earliest year available from the Census Bureau) to 2,687 square feet last year. Likewise, the median-size house has increased in size by almost 1,000 square feet, from 1,525 square feet in 1973 to 2,467 last year. In percentage terms, both the average and median size of new US houses have increased by 62% since 1973.
Combined with a decline in household size, this means according to Perry that living space per person has nearly doubled.
Because we need more space to store our cookbooks, vinyl records, maps, encylopedias, radios, and photo albums.
In Southern California, we are seeing a lot of define Multi-Gen housing here with 3,000 sq. ft. in which there is a ‘main house with 3 – 5 bedrooms and then a somewhat separated one bedroom 600+ sq foot apartment. (I have noticed this multi-generational living very popular with Asian and Hispanic-Americans.) So we are witnessing this distribution of housing here in California.
Otherwise, the big long term concern here is not redistribution of housing but what happens to continued slowdowns in family formations in the developed world. It still say the main problem with the Japanese economy today is too few families and babies to diminish economic growth and investment while all European and Far East Asian nations are going to this route the next twenty years. Just think Japan has about 1.2M babies compared to 2.1M babies in 1950s baby boom. How do you grow an economy with shrinking populations?
“Because we need more space to store our cookbooks, vinyl records, maps, encylopedias, radios, and photo albums.”
On the flipside, there certainly has been a proliferation of kitchen appliances the last thirty years or so. My other thought is: how common was it to have exercise equipment in the house thirty years ago? Probably not nearly as much as today, since we were all a lot thinner back then.
There’s no way to redistribute down in any significant way. All legal, social, market and even fashion trends have pushed the distribution of housing upscale. Our parents, whether they were prosperous or not, did not see granite countertops as a necessity.
In many places, it is now impossible to build a home at a price appropriate for a middle class or lower middle class family, and in these places, the existing housing stock that remains within reach is getting gobbled up and renovated out of its original price range. So, we have plenty of housing, unless you are in the bottom half of the population income wise. Then, you either have a house from 25 years ago, or you are screwed.
“Because we need more space to store our cookbooks, vinyl records, maps, encylopedias, radios, and photo albums.”
But of course, it’s not what people need — demand is based on what people want, and what they can afford. Around here (Michigan) a lot of people would like not only one big house but also a cottage ‘up north’ to go with it. So demand will increase with wealth, even if population does not grow. And then, there’s the demand generated by ‘exit’. Tens of thousands of houses in the city of Detroit have been demolished, and thousands more will follow if trends persist That migration creates demand for additional housing elsewhere.
I live in an area clearly designed for families: larger houses close to a school and sports fields. And 30 years ago it was full of families. But then the kids grew up and their parents never left, because they like the neighborhood and the neighbors they raised their kids with too much. It’s hard to leave a good group, so there are these huge ’empty nest eggs’, as I like to call them.
I suspect that certain changes in the market are making it easier for older people to stay in their cooler-climate homes, and making sun states like Arizona or Florida less attractive. If younger people are living with you, they can also handle the tasks better suited to the young, which makes life even easier.
So, the redistribution will happen, but only through the attrition of generational turnover. That kind of thing tends to be lumpy and punctuated rather than continuous. One sees that with employment turnover too, with a lot of people retiring in relatively short bursts.
Space is the ultimate luxury. An real increase of 15% / sf in median home over that period.
There is a tight systematic rise in Price/Rent as home prices rise, which I think is mostly due to utilization of tax benefits. In open access cities, this probably just mostly leads to larger homes at the high end. In closed access cities, the effects are a little more interesting. It basically gives a high income buyer a bidding advantage over a low income buyer. This hastens the migration pattern of high income into those cities and low income out.
Migration of high skilled workers into those cities is crucial for economic growth, so in this case, the tax benefits probably benefit economic growth. The fact that economic growth requires a painful migration is a problem created by the closed access cities. If they want to fix that, then they need to build houses.
In a better world, we would do the opposite of what we have done. We would remove the tax benefits to homeownership and bring back accessible credit markets.
Actually, I think this may be the strongest argument for getting rid of capital taxation in general. Much of the lost revenue from corporate taxes, etc., would be recovered by eliminating the mortgage tax deduction. And, in total, considering the extensive benefits capital taxation brings to homeowners, the net result would be very progressive. Pairing it with a nudge up in property taxes wouldn’t be the worst idea ever.
But, I almost feel embarrassed suggesting this. The way the national attitudes are these days, talking about optimizing tax policy is a bit like walking into an insane asylum, going into a room where a guy is jabbing a fork into his arm, and talking to him about how to improve his GMAT scores.
House = capital
Property tax = tax on value of home = tax on imputed rent = tax on capital
True. My language was sloppy. Some of that is a tax on land/location though, which is slightly different.
OK, good. But let me break it down a little more:
house = asset
value of house at sale = NPV of all discounted future rent, imputed or otherwise
If I buy an asset, in general, I pay taxes 1) on the income I use to purchase the asset, and 2) taxes going forward on any income generated by the asset. You can argue whether or not this is fair, but that is basically the way it is for most things.
If I buy a house with cash, I use cash that I have paid income tax on. If I pay with a mortgage, I pay income tax on that portion which goes towards buying the asset (principal). When the house is paid off, I will have paid income tax on all the income equal to the NPV at the time of purchase, exactly the same as if I had paid cash. I will not pay tax on that portion which represents the bank’s income due to it’s implicit equity in the house and which it collects as interest. Instead, the bank pays tax on that income, presumably through corporate or other income taxes. Whether I use a mortgage or pay cash, I pay the same tax. If you take away the interest deduction, that will simply not be the case.
In either case, going forward, I will pay tax on the imputed rent on the house through property taxes, i.e., an ‘income tax,’ collected through the proxy of a capital tax, since rent is not paid on most households so the imputed rent is unknown. It is simply inferred in the value of the house. I consume this value generated by the house, and I pay the tax on this imputed income.
In the case of renters, the renter opts not to pay the NPV of future income of the asset, either up front or though a mortgage. Instead, he pays only the value consumed over short time intervals. Likewise, he pays income tax on the income used to purchase this value, just as the owner who paid cash up front, and the owner who chose to use a mortgage. In addition, he implicitly pays the property tax for the landlord, since the value of the house is discounted due to a portion of its income flowing to the government through tax (in other words, generally rent > house payment, because the income is discounted due to tax and other expenses. The present value of use of the house (rent income) is partitioned, one part going to government, one part going to the owner of the property). It is discounted for him just as it would be discounted for me as a buyer. If anything, the renter benefits slightly. If you believe in even a very rough EMH, surely you see that this must be the case. Landlords do not buy houses to lose money.
Basically, we tax houses more or less the way we tax any other asset, and all people who consume housing pay roughly the same way. I can understand maybe saying the system isn’t perfect, for example, the renter and the mortgage borrower get to defer tax on the NPV of the house at sale, etc. But 1) it does not make economic sense to tax mortgage interest, and 2) the system as it is stands is pretty darn reasonable. I do not know what egghead came up with it, but I consider myself fairly intelligent, and working through it was not easy. The fact that it is as fair as it is is pretty amazing.
One would hardly be fork-in-the-arm insane for defending the status quo. And because of the basic interchangeability of asset prices and incomes, and the basic system of price equilibrium, most of your statements amount to “lets tax this capital instead of that capital,” or “lets tax this income instead of that income,” which are themselves even interchangeable.
Please excuse those of us who really feel that we don’t want any more meddling, and really feel that you are trying to split a very fine and curly hair with a rather dull scalpel. How about we just leave things alone?
I don’t think I have any technical disagreements with your logic here. I think what I am proposing isn’t particularly meddlesome. Basically, I’m saying we could stop taxing rental, interest, and profit income and we wouldn’t have to worry about all of this. The net loss in tax revenue is less than one might think.
Partly I am thinking of all these things in the context of the moral panic that just happened with home prices. The income tax benefits tend to make prices more volatile and property taxes make them more stable, for tax incidence reasons that you outlined above. And the tax benefits are very regressive. You can see this in price/rent data where p/r systematically rises with home prices up to about $500,000. Largely, I think, because of tax benefit utilization.
So, ironically, even with a property tax, which is somewhat regressive, as you point out, because it is paid by the tenant and poor households spend more on housing, eliminating capital taxation would probably be progressive.
On the sanity comment, I’m sorry. I was unclear. I meant that it was silly to talk about mundane tax issues while everyone has gone insane about everything else. First busting a bubble they thought was built on loans to unqualified borrowers when there is zero evidence of any downward shift in credit worthiness of homeowners and then after creating a bust, everyone’s mad about a rigged system and wondering why capital markets are screwed up while at the same time insisting that the banks can’t make mortgages to half the country while a housing depression has gone on for a decade and screaming “bubble” everytime a groundhog sees it’s shadow.
And sorry, I just used language that made it seem like property tax wasn’t a form of capital taxation. It’s the exception. I’m making to get rid of the others.
All Employees: Construction as a percentage of the Civilian Labor Force in May: 4.19%. Historical average since 1948: 4.23%.
WE NEED MOAR CONSTRUCTION JOBS GUYZ!!!1!
For some reason, there has been a drift between the establishment survey and the household survey. You’re mixing surveys. Using total employment from the establishment survey makes construction look lower.
https://research.stlouisfed.org/fred2/graph/?g=4E0V
Is the difference due to farm employment in the mid 20th century that wouldn’t be in the establishment measure of non-farm employment?
It’s hard to say for sure because I can’t find a recent FRED series that includes unpaid family farm workers, but: there were around 10.3 million hired + unpaid farm workers in 1948, and about 13.4 million CLF – PAYEMS, so farm labor once made up the bulk of the difference between the two surveys, especially unpaid family farm labor.
My guess is this explains most if not all of the drift but again, lacking more recent data on unpaid family farm labor I can’t say for sure.
Reading Sen’s post I was hoping he would also address the scope for increases in the participation rate to cover the shortfall of construction workers.
I think in many place there is no housing shortage–not in Upstate New York (Rochester) where I live. Many households in the top quintile of wealth have more house than they need, and won’t sell it the house until they are ready to downsize.
For people in the bottom one or two quintiles of income and wealth, there is a “shortage” of good housing in safe neighborhoods with “good schools.” I observe considerable de facto segregation / market segmentation by race / class / “future orientation.” This is nothing new–probably has been this way for 40 or 50 years in terms of “which people go to particular high schools” based on where they live.
But the problem is not “housing shortage” per se. Part of the problem is low incomes, part of it is use of building codes / zoning / lot size to make it so low income people can’t live in many places by pricing them out of the market for single family houses of considerable size / location / school district. And if you buy the house you simultaneously need a reliable car just to drive to the store or to work.
I never hear much about the effect of very low interest rates on house sizes. If your payment varies enormously with the interest rate that would allow you to purchase a larger home, all else equal, no? I realize that low interest rates will tend to inflate asset prices and offset this effect to some degree, but would like to see some data that compares the two somehow.
My current home is not huge since it was built in the early 60s. Even so, after my kids leave home it would be nice to move to a smaller house. Problem is, those smaller homes are few and often in bad neighborhoods.
For the NIMBYs in my area, houses like the one I’m already living in are far too small and not allowed.
What is happening in the housing market is that builders are almost only building upscale homes. Virtually no one is building starter or small homes except for upscale apartments or condos.
So when you compare today’s average new home to the average new home of
20 or so years ago you are making a very biased comparison. So yes, the space per individual is growing. But it is largely because the smaller, starter homes are not being built. Probably three reasons for that. One is zoning restrictions. Two is the value of land in desirable communities. In highly desired suburban communities the land is too expensive to build a small home on the lot. The third is that the young people, natural buyers of starter homes, do not have the income to qualify for a mortgage. That is probably the main reasons that builders focus on the upscale market. I lived in Lexington, MA where for about 25 years when old, small homes come on the market, builders buy them and immediately take a wrecking ball to them so they can build a $1 million new home. An empty lot is worth a half million dollars, so it does not make economic sense to build inexpensive homes on them. To find inexpensive land you have to go at least 50 miles from Boston.