Missing mortgage contract innovation

From WSJ 

"Many Americans who want to move are trapped in their homes—locked in by low interest rates they can’t afford to give up. 

These “golden handcuffs” are keeping the supply of homes for sale unusually low and making the market more competitive and pricey than some forecasters expected.   

The reluctance of homeowners to sell differentiates the current housing market from past downturns and could keep home prices from falling significantly on a national basis, economists say."

What's going on? US 15 or 30 year fixed-rate mortgages have a catch -- you can't take it with you. If interest rates go up, and you want to move, you can't take the old mortgage with you. You have to refinance at the higher interest rate. It's curiously asymmetric, as if interest rates go down you have the right to refinance at a lower rate. 

As a result, yes, people stay in houses they would rather sell in order to keep the low interest rate on their fixed rate mortgage. They then don't free up houses that someone else would really rather buy. (In California, the right to keep paying low property taxes, which reset if you buy a new house also keeps some people where they are. And everywhere, transfer taxes add a small disincentive to move.) 

This is a curious contract structure. Why can't you take a mortgage with you, and use it to pay for a new house? Sure, mortgages with that right would cost more; the rate would be a bit higher initially. But fixed rate mortgages already cost more than variable rate mortgages, and people seem willing to pay for insurance against rising rates. I can imagine that plenty of people might want to buy that insurance to make sure they can live in a house of given cost, though not necessarily this house.  Conversely, fixed-rate mortgages that did not give the right to refinance, where you have to pay a penalty to get out of the contract if rates go down, would also be cheaper up front, yet people aren't screaming for those. 

Infrastructure and jobs

William Gropper, Construction of the Dam, 1938

To many on the left, it's always 1933. Building "roads and bridges" will "create jobs," soaking up the mass army of unemployed desperate for work that they seem to see. 

Driving around though, I notice that we build roads with big machines, not lots of people. And construction jobs are high-skill jobs, not people with shovels. "Shovel-ready" itself is a misnomer. Nobody uses shovels on a construction site anymore, they use a backhoe. Neither you, reading this, nor I, nor an unemployed Wal-Mart greeter or bartender could do much of anything useful on a road construction site. 

On a lark, I went to the Bureau of Labor Statistics to see just how many people are employed on roads and bridge construction. 

	Latest	Feb-Mar change
Total nonfarm	144,120.0	916
Construction of buildings	1,689.3	17.8
Heavy and civil engineering construction	1,062.9	27.3
Water and sewer system construction	183.8
Oil and gas pipeline construction	134.9
Power and communication system construction	211.3
Highway street and bridge construction	338.3
Specialty trade contractors	4,714.2	65.0

For perspective, total nonfarm employment is 144 million people, up nearly a million in the last month. That's a lot, usually 200,000 is a good month. Well, we're recovering fast from the pandemic. In case you didn't hear the pounding of nails, building construction employees 1.6 million people, with 4.7 million more in the trades. (We're not so much building new housing as building in new places.) 

Total unemployment is 9.7 million right now, down from 23 million at its peak. 

Roads and bridges employ 338,000 people. The total is a half of this month's gain alone.  We could use some water construction here in California, though it's not going to happen, and with only 184,000 people employed there looks to be room to expand. 135,000 are building oil and gas pipelines. Uh-oh.

San Francisco bans affordable housing

"San Francisco bans affordable housing," is the spot-on conclusion of a lovely post by Vadim Graboys (link to twitter). 

The post is titled "54% of San Francisco homes are in buildings that would be illegal to build today" with an interactive graph of those homes. 

Or, put another way, "To comply with today's [zoning] laws, 130,748 homes would have to be destroyed, evicting around 310,000 people."

The latter statistic is fun, but actually severely understates the damage of San Francisco's (and Palo Alto's!) zoning laws. The only reason current homes are illegal is that they were built under slightly less restrictive zoning laws. So that measures how much zoning laws have gotten stricter over time. It does not measure the much larger number of homes and apartments that were never built.

Techsodus/Techsit politics.

The tech industry is fed up and leaving San Francisco in particular, the valley and California in general. Covid, like a war, speeds things up. If you're a young economist you could do worse than study this latest chapter in the (likely) decline of great cities (SF, NY, LA? Chicago?) and the movement of people and industries to friendlier, safer, and more welcoming climates. If you're a young political economist, whether they bring with them the politics that destroyed the places they left behind -- slash and burn progressivism -- will be equally interesting to watch. 

I ran across a great essay on this saga by Mike Solana. 

The latest fashion is to claim it's immoral for tech founders and companies to leave, after they have "extracted" so much wealth here. Mike skewers this new fashion, pointing out that tech companies and their founders created wealth here.  Microcode is not mined like gold. 

I take extreme issue with the notion that industry leaders have taken something from the “community,” ...This is precisely the opposite of reality. ... They are the network. Technology workers do not “extract” value from the region, they are what makes the region valuable.

...the Bay Area’s nativist, anti-immigration political climate has certainly not created the tech community, which is populated largely by immigrants, be they from out of the state or out of the country 

But he really digs in on the culture and politics that is going to send this golden goose packing to Austin: 

 the technology industry has brought tremendous tax revenue to the Bay Area. The budget of San Francisco literally doubled this decade, from around six billion to over twelve billion dollars. With our government’s incredible, historic abundance of wealth, the Board of Supervisors has presided over: a dramatic increase in homelessness, drug abuse, crime — now including home invasion — and a crippling cost of living that can be directly ascribed to the local landed gentry’s obsession with blocking new construction. ...

"Landed gentry." That's really good.  

Podcast with Ed Glaeser

A podcast conversation with Harvard's Ed Glaeser, a if not the top economist who does urban affairs.   Does Zoom mean we all work from home? Will cities bounce back? Will San Francisco and New York fade and smaller cities grow? What problems are the policies causing and can cities reverse downward spirals? How to help unfortunate people who live in cities? Join us for a fast paced discussion with a leader in the field.

This is a follow up to a previous podcast on cities. 

Update: Courtesy Marginal Revolution the SF Chronicle on "rampant brazen shoplifting," (solve for the equilibrium, as MR likes to say) 

a man wearing a virus mask walked in, emptied two shelves of snacks into a bag, then headed back for the door. As he walked past the checkout line, a customer called out, “Sure you don’t want a drink with that?”

The Walgreens is shutting down -- which hardly matters as the shelves were bare anyway

Also in the Chronicle, Burglars switch to homes in S.F. as tourists, and their cars, stay away  on a spike in residential burglary, even while people are in their homes. 

Ed and I talked about a spiral, crime, high taxes, people leave, businesses leave, amenities leave, which can be irreversible. 

Supply and demand in local economics

Act 1: If housing is too expensive, allow the supply curve to operate.

In a surprising bit of excellent economics,  Conor Dougherty  writes "Build Build Build Build..."in Sunday's New York Times.

The story starts with the usual way of doing business (meaning, not doing business) in California:

A developer had proposed putting 315 apartments on a choice parcel along Deer Hill Road — close to a Bay Area Rapid Transit station, and smack in the view of a bunch of high-dollar properties. ... Zoning rules allowed it, but neighbors seemed to feel that if their opposition was vehement enough, it could keep the Terraces unbuilt....

Mr. Falk could see where this was going. There would be years of hearings and design reviews and historical assessments and environmental reports. Voters would protest, the council would deny the project, the developer would sue. ...

Spoiler: Where did this all end up?

Today, after eight years of struggle, his career with the city is over, the Deer Hill Road site is still just a mass of dirt and shrubs, and Mr. Falk has become an outspoken proponent of taking local control away from cities like the one he used to lead.

Mr. Dougherty comes to a most un-Times like view of the problem.

America has a housing crisis. ...One need only look out an airplane window to see that this has nothing to do with a lack of space. It’s the concentration of opportunity and the rising cost of being near it.... There is, simply put, a dire shortage of housing in places where people and companies want to live — and reactionary local politics that fight every effort to add more homes.

Nearly all of the biggest challenges in America are, at some level, a housing problem. Rising home costs are a major driver of segregation, inequality, and racial and generational wealth gaps. You can’t talk about education or the shrinking middle class without talking about how much it costs to live near good schools and high-paying jobs. Transportation accounts for about a third of the nation’s carbon dioxide emissions, so there’s no serious plan for climate change that doesn’t begin with a conversation about how to alter the urban landscape so that people can live closer to work.

Real estate ups and downs

In a delightfully YIMBY "Americans Need More Neighbors" the New York times gets it almost all right.

Housing is one area of American life where government really is the problem. The United States is suffering from an acute shortage of affordable places to live, particularly in the urban areas where economic opportunity increasingly is concentrated. And perhaps the most important reason is that local governments are preventing construction.

It goes on, even noting flagrant progressive hypocrisy

Increasing the supply of urban housing would help to address a number of the problems plaguing the United States. Construction could increase economic growth and create blue-collar jobs. Allowing more people to live in cities could mitigate inequality and reduce carbon emissions. Yet in most places, housing construction remains wildly unpopular. People who think of themselves as progressives, environmentalists and egalitarians fight fiercely against urban development, complaining about traffic and shadows and the sanctity of lawns. 

It noticed the sordid racial past of zoning restrictions

... many residents said they were surprised to learn that single-family zoning in Minneapolis, as in other cities, had deep roots in efforts to enforce racial segregation. Cities found that banning apartment construction in white neighborhoods was an effective proxy for racial discrimination, and the practice spread after it was validated by the Supreme Court in 1926. 

Heavens, it even allows for the freedom to spend money, as long as it's not subsidized

People should be free to live in a prairie-style house on a quarter-acre lot in the middle of Minneapolis, so long as they can afford the land and taxes. But zoning subsidizes that extravagance by prohibiting better, more concentrated use of the land. 

Usually I would expect the NYT to jump on the opposite bandwagon and prohibit such houses.  The NYT even realizes that more market-rate apartments is the best way to provide more low priced housing

OK, the Times being the Times, it has to argue for some vast new subsidy,

 Governments need to provide subsidized housing for people who cannot afford market-rate housing. 

But here too, it gets a lot right. The bulk of the long oped is not about repeating the disaster of public housing projects, or more "affordable housing" mandates. It's just about build -- move the supply curve to the right. Berating its own a little more, it recognizes substitution and depreciation

...advocates for affordable housing should be jumping up and down and screaming for the construction of more high-end apartment buildings to ease demand for existing homes. Those new buildings are filled with people who would otherwise be spending Saturdays touring fixer-uppers in neighborhoods newly named something like SoFa, with rapidly dwindling populations of longtime residents.

Today’s market-rate apartments will gradually become more affordable, just as new cars become used cars. 

Meanwhile, in progressive political reality, and lest you get too optimistic, the Wall Street Journal, in a spectacularly mis-titled article, covers New York State's new rent control law. The title is "New York Passes Overhaul of Rent Laws, Buoying Wider Movement to Tackle Housing Crunch"  It's not an overhaul, it's a massive expansion, and it will not tackle the housing crunch, but it will make it spectacularly worse.

The New York legislation brings increased power to tenants in roughly one million rent-regulated apartments in New York City. It makes it more difficult for the owners of those apartments to increase rents, while enabling more tenants to sue landlords for rent overcharges. Also, tenants around the state will have more protections against eviction.

Proposals to limit rents are advancing in a number of state legislatures, including in California, where a statewide cap on rent passed the California Assembly in May, and in Oregon, which passed the nation’s first statewide rent control in February, limiting annual rent increases to 7% plus local inflation.

The times will probably get its way on housing subsidies, already a popular idea here in California. Imagine a subsidy for any house or rent above 30 percent of your income, plus a continued block on new construction.

It's interesting that economists spend a lot of attention on the minimum wage, and less on rent control plus housing supply restrictions. I guess nobody has made a big stir with a diff in diff regression claiming that rent control doesn't shrink housing supply. Perhaps someone should, just to ge the outrage going.

And, if you're wondering about the wealth tax, it's here. A limit on rents is a pure tax on the landlord's  property, transferring its value to the current renter, but destroying much of that value along the way.