Effects of a homebuying subsidy on home prices

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As for short term/long term. My default assumption is that the plan is long term, because it would be batshit crazy to roll out a government housing subsidy program to lower house prices solely for the short term.
 
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superrific said:
It is, by the way, far from clear that student loans are making education more expensive. I mean, maybe a little bit, but not by that much. There's an effect called the Baumol effect, which predicts that service-intensive goods will increase in price relative to more tradeable goods. Basically, the idea is that a university professor's productivity hasn't changed much over the years. The professor still teaches three or four courses a year, and class size is relatively constant. However, you have to keep paying the university professors more to keep up with salaries in industries with rising productivity; otherwise, fewer people will be professors. Well, when salaries increase because of productivity gains, that doesn't raise prices -- but when salaries increase without productivity gains, as in universities, the Baumol effect forces the relative cost of university education up.

Economists have found that the price trajectory of university education isn't very different from, say, veterinary services. That suggests it's not credit driving prices, but rather the Baumol effect. I don't want to overstate my case; loan availability probably does affect prices to some degree, but it's far from clear that it's the primary culprit.

In the Bay Area, I would not expect the subsidy to make any difference at all. That's because the elevated prices there are more a function of restrictive building codes than anything. So the inventory won't really change, and there will just be a bit more money chasing the same amount of houses. It might make financing more available, though.

When you say that you can't get close to the level of affording a home, are you talking about down payment issues or monthly payment issues?
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Yeah, I don't see it helping any for those of us in the Bay. I think here, it's all of the above: some don't have enough for a good down payment, some it's the mortgage, for a lot it's both.

For those of us who moved here after 2010, buying a home is incredibly difficult.
 
When my parents bought their first home after the Big War they had some kind of GI Bill thing where the down payment was about nothing and the fixed interest rate was below market. Use this model
I mean hell-throw in subsidized insurance since house insurance is now getting so bad
No you could tie this into 5 years of public service employment if you wanted to........ You would be following a model long accepted for veterans-and not "giving $" to anyone exactly
 
Ddseddse said:
I assume the subsidy will be capped by home price (it should be at least) so that there will be a hard cap on "buying more house" because of the subsidy.

But, regardless, without the cap ii still works.

If I buy a $225,000 house because I can afford it under the subsidy instead of the $200,000 house I was going to, BY DEFINITION, the $200,000 house is empty inventory on the market, and therefore depressing prices for homes in the $200k category.

I honestly think you may be over-complicating this.
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1. What if the seller just decides to sell the $200K home for $225K? That is to say, prices are not determined externally. They are affected by the subsidy itself. What constrains price-increases in ordinary markets is the possibility (or actuality) of new entry if profit margins rise. So if Tyson decided to double the price of its chicken, then other sellers would come in and undercut that price. They'd be happy with slightly less of the increased profit margin, and then someone would undercut them, etc.

But if new entry is limited because of the factors that influence housing supply, then that won't be true. This is exacerbated by the difficulty in determining the right price for a house. Most house prices are relative. So if everyone just rachets up their prices, then yesterday's $200K house will be today's $225K house. Buyers won't think, "damn, this $225K house is too expensive; it should only cost $200K and I won't buy except at that price." They will think, "well, houses are expensive. Even this starter house costs $225K. Well, I guess we can scrape by."

2. It's hard to overthink things in economics and finance, because tiny changes can affect everything.

For instance, Japan's economic performance in the 90s-00s mystified economists. The central bank kept cutting interest rates, and the economy did not respond at all. The interest rates were negative, and still nothing was happening. There were Keynesian explanations for this phenomenon (the "liquidity trap") but they didn't seem adequate.

Then some Japanese economists said, "maybe the problem is that you're modeling consumers wrong. In the west, people trade consumption for savings. When interest rates are low, people don't save as much, and instead they spend. But in Japan, people tend to manage their finances differently. They have a wealth target. When interest rates are low, they don't save less. They have to save more, because their existing savings aren't earning as much return and thus they are falling behind in their plan to hit a wealth target. So lower interest rates don't spur demand; they reduce them."

And that is an interesting theory. To my knowledge, it has considerable explanatory power (as long as we recognize that there are people in the West who save on a wealth target model, and some people in Japan who trade savings for consumption). And the stakes of that tiny little detail are huge. It affects the entire macroeconomy. It affects monetary and fiscal policy. It affects business responsiveness. It affects everything, all because of our assumptions about how people save money.

3. If you buy the $225K home instead of the $200K home, it does not by definition make the $200K empty inventory. All that has happened is that demand for that $200K house has dropped a bit. It will still be filled. Depending on how much excess demand there is, the price might or might not change.

For instance, back when I was looking for houses in the first few years of this century, I found a house that was underpriced relative to the market. I jumped on it. But so did like 8 other people. So there was a 9 person auction contest for the house. I finished third, which I was proud of -- it meant my assessment of the value was pretty good (since winners usually overpay -- it's called the winner's curse). But anyway, if I had bought a different house instead, there would have been 8 buyers, not 9. The seller would have gotten pretty damn close to the same price, if not exactly the same.
 
Ddseddse said:
As for short term/long term. My default assumption is that the plan is long term, because it would be batshit crazy to roll out a government housing subsidy program to lower house prices solely for the short term.
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It is. But the long-term effects won't show up in the short term. Then, what often happens in American politics is that people conclude that the policy is stupid because they don't see the long-term effects in the short-term. This is how we almost got an Obamacare repeal -- Obamacare became unpopular because the short-term effects weren't positive. Once it got established, people started to see the benefits and the repeal was unpopular. But if Obama hadn't won in 2012, I doubt Obamacare would have survived.
 
My apologies about this thread. I think I've used this in part as an opportunity to knowledge-bomb, rather than focus on specific issues. In part that's because the real answer to the specific issues are "we should build a model and look at what it says." Anyway, I've got to run.
 
mpaer said:
Would love to hear from some on this Board who are informed about potential " Strategory " to increase Housing Starts... I spent some time with a Contractor this past weekend who said " Well if we give new Homeowners $25,000-I can promise you contractors will lean in on charging $25,000 more for starter homes "
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If it's ONLY for first time buyers, it dents the impact. Because those contractors do not know, by default, who is a first time buyer.
 
superrific said:
3. If you buy the $225K home instead of the $200K home, it does not by definition make the $200K empty inventory. All that has happened is that demand for that $200K house has dropped a bit. It will still be filled. Depending on how much excess demand there is, the price might or might not change.
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In every case the physical structure that didn't get bought in the first instance (in favor of the nicer, more expensive house in reach because of the subsidy) WILL ALWAYS NO MATTER WHAT BE CHEAPER THAN IT WOULD HAVE BEEN. You add add and subtract pent up demand all day long willy nilly to this equation and it will not change this basic fundamental fact of economics. You are way too smart not to know this.

EDIT: I mean that's the literal definition of an efficient market.
 
It's part supply chain disruption dyring the pandemicL orices of lumber shot up, But when lumber prices dramatically decreased, housing prices did not decrease. Wonder why.

Mortgage interest deduction infates prices but that is a subsidy almost everyione qagrees with, except apt renters.

Hedge funds and private equity buying up lots of real exstate past few yearsa is also a factor.

Trump tax cut for wealthy also factors in.
 
No mention of land prices? Depending on location, houses that would have been considered starter homes years ago now sit on a lot that is sometimes worth 2,3 times the value of the house. Owners just renovate and add on. If/when sold, the house is torn down and a mini mansion or 2 replace it depending on lot size..
 
A big thing to make it better is to get the damn corporate real estate investment companies out of the home buying and land buying business.
 
Ddseddse said:
In every case the physical structure that didn't get bought in the first instance (in favor of the nicer, more expensive house in reach because of the subsidy) WILL ALWAYS NO MATTER WHAT BE CHEAPER THAN IT WOULD HAVE BEEN. You add add and subtract pent up demand all day long willy nilly to this equation and it will not change this basic fundamental fact of economics. You are way too smart not to know this.

EDIT: I mean that's the literal definition of an efficient market.
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1. Most "basic fundamental facts" that you learn in Econ 101 are not, in fact, facts at all. They are theories based on models. In the case of Econ 101, those models are incredibly simplistic. It's what makes the math easy, so you can study it with simple algebra and no calculus.

Economics is maybe the most Dunning-Kruger discipline of them all, due the number of people who take freshman econ and nothing else. A lot of people out there thinking they possess some sort of great knowledge, when in fact they just don't appreciate the complexity.

2. I already addressed this issue about demand in the discussion (on the other thread perhaps) of ordinary markets versus non-ordinary markets. What you write above is usually true for markets with linear demand, like food. But demand for houses is extremely lumpy. For the most part, people only buy one, and it lasts them a long time.

So the difference in housing and food markets is not unlike the difference between classical electrodynamics and quantum mechanics. It's not as pronounced, but quantum mechanics basically starts with the question, "what if electric charge isn't infinitely divisible but is actually quantized"? Everything changes, right? Like, everything. I don't know if everything changes with housing, but I can tell you that housing and food just aren't the same, and you can't really analyze housing with the tools from econ 101.

3. What you are describing is not the literal definition of an efficient market. In fact, it's not a definition of an efficient market at all. It is the consequence of market efficiency. An efficient market is one with no barriers to entry, infinite divisibility of supply and demand, perfect information, no market frictions, unlimited resources and market actors are rational. To the extent that market has those characteristics, it will tend to have the result you claim, which is that lower demand will lower prices. But in markets where those assumptions don't apply -- for instance, health care, where prices really don't depend on demand much at all -- then the relationship you describe as ALWAYS THE CASE just isn't.

4. When you're talking to me about economics, and you think that I'm failing to comprehend a simple truth, it is much, much more likely that I understand it but also understand that the world is actually more complicated than the "basic fundamental fact." I'm not infallible, but this really is a situation where you are seeing the tip of the iceberg and then criticizing me for not recognizing how tiny the iceberg actually is.
 
grimes70 said:
No mention of land prices? Depending on location, houses that would have been considered starter homes years ago now sit on a lot that is sometimes worth 2,3 times the value of the house. Owners just renovate and add on. If/when sold, the house is torn down and a mini mansion or 2 replace it depending on lot size..
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Yes, I mentioned that in the other thread. This is one of the factors that makes housing a non-ordinary good. Houses just aren't fungible, because their value depends so much on location and location is hyper-local. Take NYC, for instance. There is no way to increase the supply of one-bedroom apartments in Greenwich Village. You can't build anything more there, and any apartment you build in Battery Park City or Williamsburg isn't a Greenwich Village apartment.
 
No market is purely efficient, that being said the efficient market hypothesis is an incredible powerful tool precisely because it's so predictive.

Now you're telling me using it to evaluate the proposed subsidy program is off limits because "it's complicated" but not giving me any insight to how specifically it's complicated.

Quantum physicists show their work.

Until I get something more substantial I'm lumping your insight in the "secret esoteric wisdom the uninitiated are incapable of understanding" junk drawer and sticking with the tried and true model that works so well.

Do you even know any real life real estate agents? I mean all they ever drone on about incessantly is "inventory" and specifically where the price is based on inventory.
 
Oh heck This thread has gotten into various pissing contests about economic theory and gotten bogged down. I am going to be a jerk and repost essentially in hopes of a reply
When my parents bought their first home after the Big War they had some kind of GI Bill thing where the down payment was about nothing and the fixed interest rate was below market. Use this model
I mean hell-throw in subsidized insurance since house insurance is now getting so bad
Now you could tie this into 5 years of public service employment if you wanted to, School teacher. Firefighters.....or not . .. You would be following a model long accepted for veterans-and not "giving $" to anyone exactly
 
Ddseddse said:
No market is purely efficient, that being said the efficient market hypothesis is an incredible powerful tool precisely because it's so predictive.

Now you're telling me using it to evaluate the proposed subsidy program is off limits because "it's complicated" but not giving me any insight to how specifically it's complicated.

Quantum physicists show their work.

Until I get something more substantial I'm lumping your insight in the "secret esoteric wisdom the uninitiated are incapable of understanding" junk drawer and sticking with the tried and true model that works so well.

Do you even know any real life real estate agents? I mean all they ever drone on about incessantly is "inventory" and specifically where the price is based on inventory.
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The efficient market hypothesis is a hypothesis about financial markets. It isn't about physical goods. It also isn't predictive at all -- in fact, it's the opposite of predictive. It literally says, "you can't predict asset prices."

Are you really accusing me of not showing my work? ME? ME???? I will grant that my posts are not peer-reviewed publications, but I would wager that I show my work way more often than anyone else and quite possibly more than everyone else (save a couple of the lawyer posters) combined.

And are you really saying that I have given no insight into how it's complicated? Did you read any of my posts, in which I carefully explained how it is complicated? I discussed lumpy demand and non-fungibility. I mentioned the hyper-locality of the market. We discussed short-term versus long-term effects. On the other thread, you said that you wanted my thoughts because it would be fun to learn. I guess that was aspirational. I mean, this is just a ludicrous accusation. It's Trumpian.

As for "inventory," I addressed that. It supports my point, not yours. Ask your real estate agent friends what inventory means. It's not actually the number of homes in an area. It's the relationship between the homes on the market and the number of buyers. If there are 1000 homes on the market in Hillsborough, that's a huge amount of inventory. In Los Angeles, it's extremely tight. So if you increase the number of potential buyers, increasing the number of homes doesn't necessarily add inventory.

I think this conversation between us has run its course. We are coming at this with very different perspectives, and also you seem to be angry.
 
mpaer said:
Oh heck This thread has gotten into various pissing contests about economic theory and gotten bogged down. I am going to be a jerk and repost essentially in hopes of a reply
When my parents bought their first home after the Big War they had some kind of GI Bill thing where the down payment was about nothing and the fixed interest rate was below market. Use this model
I mean hell-throw in subsidized insurance since house insurance is now getting so bad
Now you could tie this into 5 years of public service employment if you wanted to, School teacher. Firefighters.....or not . .. You would be following a model long accepted for veterans-and not "giving $" to anyone exactly
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There's a poster engaged in a pissing contest with me. I'm trying to explain things as I understand them. Most of what I have posted is responsive to your question, though it is perhaps more detailed than you were looking for.

The GI Bill was more or less deferred compensation for war service. I have no problem doing that in peacetime also. It's an idea that has been championed for a long time -- i.e. a mandatory "public service" period resembling mandatory military service requirements in countries like S Korea or Israel, except that it would be for civilian purposes. This has been discussed since the 1980s. Do you remember Americorps? That was sort of a prototype of a national service requirement. But it was never popular, and the idea of mandatory service has never caught on. It's not hard to understand why for anyone who knows Americans.

One problem with Americorps is shared with the Peace Corps -- namely, that it's actually not that helpful for young idealistic people to show up for a couple of years, do some stuff, and leave. Inner city schools don't need Yale grads to come in and teach science for a couple of years. They need Yale grads to come teach science for a couple of decades. What happened with Americorps is that its resources got so tied up in training. It takes at least a couple of years even for smart people to become effective teachers, and then they were gone as soon as they became effective.

I was a pretty bad professor my first year teaching. I didn't know how to connect with the students. For the years prior to teaching, my peers were primarily lawyers who clerked at the Supreme Court. From there, I had to learn how to explain concepts to students with far less experience and considerably less ability. My job wasn't to teach the A students at Harvard. It was to teach all the students at a Tier 2 law school. It required an adjustment. So too with the ambitious students in Americorps. Most Ivy League grads can be effective HS teachers, but it's quite a transition from hanging out with Columbia students to teaching kids in inner-city Buffalo.
 
At the end of the day, a stimulus driving the creation of more starter homes means less expensive starter homes than there otherwise would be without the stimulus, all other things being equal.

As homes are bought and sold many times over the years, this will advantage multiple generations of first time home buyers.

Nothing you have said in this thread to the contrary.
 
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