In an article on consumers’ expectations for home prices, Robert Shiller writes,
with the median home price under $200,000, according to RealtyTrac…
Pointer from Mark Thoma.
My question is: Where are these homes that are priced at less than $200,000? My niece in LA, my daughter in DC, another daughter in NY, and my third daughter in Boston would sure like to know.
This gets back to the issue of widening differences in income and housing costs within and across metro areas. I mentioned that issue last month, when I cited Joel Kotkin’s finding that much of the population growth in recent years has been in the far suburbs.
Suppose that housing cost is 25 percent of income, and suppose that close to the center of a city housing cost is 5 times what it is in the outer suburbs. That means that the cost of living is 1.25 times as high close in as it is far out. Yes, you should adjust for commuting time and cost, the value of different amenities, and so on. But that is a huge difference.
Consider that, at a national level, economic experts soberly analyze changes in trend productivity growth of 0.5 percent per year. To measure productivity changes, you need to have accurate measures of real GDP. To measure real GDP, you need to have accurate measures of “the” rate of inflation.
But what if inflation is 5 percent higher in downtown LA than it is 30 miles away? Which is the accurate measure of inflation? Even a slight mistake in aggregating across different areas could completely change the picture for national productivity growth.
I find myself thinking that the multiplicity of economies within the U.S. really matters. For example, I could imagine that the minimum wage would have a much bigger effect on employment in the locations with those sub-$200,000 houses than in higher-cost areas, where employers probably have to pay above the minimum, anyway. I can imagine that downward stickiness of wages matters a lot if you have inflation differentials across areas of 5 percent or so.
In trying to view the U.S. economy, I am tempted to drop the macroeconomic lens and replace it with the international trade lens.
“Suppose that housing cost is 25 percent of income, and suppose that close to the center of a city housing cost is 5 times what it is in the outer suburbs. That means that the cost of living is 1.25 times as high close in as it is far out.” Really? Suppose in the suburbs cost of living is $50k and housing cost is 25% of that = $12.5k. If housing cost is 5x higher in the city center or $62.5k, and other components of the cost of living are the same ($37.5k) then the cost of living in the city center is $100k or 2x what it is in the outer suburbs.
Each of us experiences our own unique inflation rate due to our individual spending pattern and thus our own real income. There is no reason to believe that the sum of these real individual incomes will equal or even be closely approximated by the sum of individual nominal incomes divided by a national inflation rate.
Right; and I’d go even further and add that in addition to personal preferences, we all have our own particular sets of developed talents and comparative advantages with real exchange rates in the dynamic marketplace.
If your comparative advantage is lifting heavy objects, then you are in much worse shape than a similarly situated person a century ago.
Likewise if your job requires lots of face-to-face coordination in the middle of a congested urban area, then while your skills may be more valuable, your costs in terms of real estate and commuting time may have increased even faster, leaving you feel as if you have experienced steep inflation and a quick drop in one’s standard of living and ability to save.
If you are able to do something unique that makes you a lot of money, and in a way that doesn’t require any face-to-face interaction or travel, then you can buy a grand estate in the country for just a few hundred K and live like a king.
But more and more economic activity is concentrating in a decreasing number of major-hub cities, raising desirable real estate to the sky and the very edge of affordability all over the developed world.
That makes it very hard to form families, and deterred family-formers probably feel as if the standard of living has dropped a lot since the time of their predecessors.
DC, NY, and Boston are huge cities. Those houses are everywhere in cities that aren’t huge.
Get out of your bubble. Get out of the major urban areas.
http://www.trulia.com/real_estate/Omaha-Nebraska/market-trends/
Apart from all your other points, that’s EXACTLY why there should NOT be a national minimum wage. It’s irrelevant in urban/metro areas where the cost of living generates higher-than-MW competitive wage compensation at the low end, and it’s harmfully too high in those areas where a competitive wage would be less than the MW.
Aggregation is a problem. This includes aggregating into large metropolitan areas and even their “suburbs” vs their “central cities”. The variability within each is still considerable.
+1 for DF Linton. I just built a 2200 sq ft house for 245,000. Many houses in my neighborhood can be built for less than 200,000. And if you buy a preexisting house, you can get one for around 80/square foot. 200,000 can easily get one in the 2500 square foot range.
http://www.proprofs.com/quiz-school/story.php?title=how-thick-is-your-bubble
This is why its crazy to raise the national minimum wage.
It would drive jobs from cheap areas to richer areas. (Or prevent them from leaving.) This also sends the wrong signal to people: “You should stay in SF even though you don’t make any money!”
But I suspect that many of the chattering class and the college grad unemployed person living in exciting, expensive urban area rather see it as a feature not a bug.
Cities raising the minimum wage makes much more sense.
A wise man once wrote. “From a PSST perspective, all GDP is trade. Some of it is intra-border and some of it is cross-border.”
From your Jan 18.2013 post
The Recession and World Trade
How does Shiller define a home? In dense, expensive cities, more people rent. So the median of home prices underweighs large cities (where owning a house is relatively rare), and overweighs small towns (where it is common).
But as someone else said, DC, LA, and Boston are among the costliest places to live in the USA.
“For example, I could imagine that the minimum wage would have a much bigger effect on employment in the locations with those sub-$200,000 houses than in higher-cost areas.”
Yes. I thought it was understood (at least by the kind of people who read libertarian economics blogs) that local minimum wage increases have the least impact and are the least damaging and national increases are the worst.
“This is why its crazy to raise the national minimum wage. It would drive jobs from cheap areas to richer areas.”
But that is exactly why many proponents (unions particularly) favor uniform national minimum wages — to make it harder for lower-cost areas to compete by offering lower wages:
“It should be recalled that it was precisely because of wage differentials between the states that proponents of the initial minimum wage in 1938 made their case for uniform standards. Southern states where wages were lower than in the North opposed the minimum wage, and Northern states hoped that a uniform minimum would stop industry and jobs from moving down South.”
http://laborpress.org/sectors/finance/4478-the-minimum-wage-and-the-new-federalism