Housing as the ultimate marker of poorly functioning (free) markets

Alexis Madrigal considers generational access to housing and the high real estate prices in some markets:

There are obviously many reasons that coastal housing markets have gone so bonkers. But it is an ironic twist that residential property, which once served as the bedrock for American capitalism, has become the most obvious sign for young people that something is deeply wrong with the markets.

What exactly has gone “deeply wrong” with these housing markets? Madrigal lays out a number of factors. But, I wonder if we could extend the analysis a bit further from “housing markets” to “economic markets” more broadly. Here is what two opposing sides might say:

One side: these housing markets with high prices have never truly been free. For decades, federal policy has privileged single-family homes. Local policies have made particular choices, often toward protecting property values and limiting density. Open up these markets to true competition. If affordable housing is needed, limit regulations and let all the money of potential buyers drive new development.

The other side: housing markets have not been regulated enough. The federal and local policies have tended to privilege certain actors – like the white middle-class and connected developers – over the needs of many working-class and poor residents as well as non-white residents. Policies aimed at providing more housing for all need more teeth and the ability to compel protected wealthier residents to accept development near their own homes.

As a sociologist who has studied this for over a decade, I tend to side with the latter argument: (1) markets are rarely ever completely and free and (2) the scales have been tipped toward whiter and wealthier residents for a long time. Perhaps the true lesson of these high-priced housing markets is that calls for regulation and oversight only go so far when property values and who neighbors are is truly at stake.

When your friends laugh at your new McMansion

A Reddit thread starts with the experience of a user who bought a new home for his family:

Hi! Long time lurker.

My wife and I are buying our first home for our small but growing family. We are moving to Laredo, Texas so our price range gets us quite a house.

we found one we really liked, and decided to put an offer on it. We think it’s beautiful, although I will admit a bit ostentatious.

I showed a friend, and they laughed and called it a “McMansion” and I googled what that meant and have to say I’m a bit embarrassed and find it kind of insulting.

I previously lived in SF, where I paid the same price for a 700sq ft studio, so I am struggling to see what was so much better about that, and my friend still lives in a studio there.

I guess my point is: are large newer homes all considered “McMansions?” Should I care what others think of it? I’m just concerned as perhaps this is just a bad investment as well.

Example: http://imgur.com/a/0zDiF

Three quick thoughts:

  1. The difference between the San Francisco and Laredo, Texas housing markets are substantial. What is common in one – and at what price point – is unlikely to match the other.
  2. The Internet is probably not going to provide much positive validation for buying such a home. Most comment boards I have seen regarding McMansions have ridiculed them, usually picking on their architecture as well as the type of people who buy them. There are a few defenders of McMansions in this thread. But, they are hard to find overall on the Internet.
  3. The pictures of the home provided through the link would probably put this into the McMansion category for many people. It appears to be a large house, the front facade is out of whack in terms of proportions, and the features are meant to impress (front columns, big entryway, shiny surfaces).

Can McMansions count as affordable housing in some markets?

A New Jersey fair housing group highlights a recent report that argued thousands of homes $300,000 and up counted as affordable housing.

On the face of it, this seems absurd: expensive large suburban homes might count as being within the reach of many Americans? Yet, there is the matter of the particular housing market that may affect such calculations. The priciest markets tend to be on the coast and whether one is examining the median sales price or the average list price (and this does matter – the median suggests half the homes sell for above and below that price and all 15 on this list are around $300k or higher), a $300,000 home might be difficult to find.

Now, whether such a home is within the reach of many in the region is another matter and it is likely not. Even with higher incomes in these metropolitan regions, there are still plenty of workers and residents who don’t see as much of a relative bump in their salaries. McMansions might be some of the cheaper homes available in pricier markets but that does not mean they are attainable.

Do any of these more expensive regions have interest in suggested plans to alter McMansions (see here and here) to make more cheaper housing? This would likely face opposition from nearby owners who would fight tooth and nail against any efforts to introduce multi-family housing.

Zillow off a median of 8% on home prices; is this a big problem?

Zillow’s CEO recently discussed the error rate of his company’s estimates for home values:

Back to the question posed by O’Donnell: Are Zestimates accurate? And if they’re off the mark, how far off? Zillow CEO Spencer Rascoff answered that they’re “a good starting point” but that nationwide Zestimates have a “median error rate” of about 8%.

Whoa. That sounds high. On a $500,000 house, that would be a $40,000 disparity — a lot of money on the table — and could create problems. But here’s something Rascoff was not asked about: Localized median error rates on Zestimates sometimes far exceed the national median, which raises the odds that sellers and buyers will have conflicts over pricing. Though it’s not prominently featured on the website, at the bottom of Zillow’s home page in small type is the word “Zestimates.” This section provides helpful background information along with valuation error rates by state and county — some of which are stunners.

For example, in New York County — Manhattan — the median valuation error rate is 19.9%. In Brooklyn, it’s 12.9%. In Somerset County, Md., the rate is an astounding 42%. In some rural counties in California, error rates range as high as 26%. In San Francisco it’s 11.6%. With a median home value of $1,000,800 in San Francisco, according to Zillow estimates as of December, a median error rate at this level translates into a price disparity of $116,093.

Thinking from a probabilistic perspective, 8% does not sound bad at all. Consider that the typical scientific study works with a 5% error rate. An eight percent error rate suggests the estimate is right 92% of the time. As the article notes, this error rates differs across regions but each of those have different conditions including more or less sales and different kinds of housing. Thus, in dynamic real estate markets with lots of moving parts including comparables as well as the actions of homeowners and homebuyers, 8% sounds good.

Perhaps the bigger issue is what people do with estimates; they are not 100% guarantees:

So what do you do now that you’ve got the scoop on Zestimate accuracy? Most important, take Rascoff’s advice: Look at them as no more than starting points in pricing discussions with the real authorities on local real estate values — experienced agents and appraisers. Zestimates are hardly gospel — often far from it.

Zillow can be a useful tool but it is based on algorithms using available data.

Purchasing a home in 25 different American cities

Here is a quick look at the estimated incomes it would take to buy a home across American cities:

HSH Associates, a New Jersey-based publisher of mortgage industry data, took a stab at what it would take, incomewise, for buyers in 25 metro areas to be able to purchase a median-priced home, based on the demands of principal and interest payments.

Coming out on top (or on the bottom, depending on how you look at it): Cleveland, with an income of just $22,348 needed to put a set of house keys into your palm…

In calculating its ranking, HSH took the National Association of Realtors’ third-quarter median home price data, as well as its own figures on average interest rates for 30-year, fixed-rate mortgages, to estimate what homebuyers in 25 major metros would need to earn to purchase the median-priced home, he said…

At the top of the expense range was San Francisco, with an income of $125,072. Skipping around the middle of the list, HSH pegged the base line salary for Chicago at $37,078 (11th place); Minneapolis, at $37,115 (12th); Baltimore, at $46,623 (16th); Seattle, at $63,145 (19th); and New York, at $71,255 (22nd place). The full list is at hsh.com.

Quite a difference across cities. There are a lot of factors involved here including the availability of housing, the quality of housing, jobs available in the metropolitan regions, and incomes. Even then, there are huge differences within specific regions.

While these figures aren’t surprising, it is also a reminder of the difficulty of making cost-of-living calculations for the entire United States. On one hand, it might seem obvious to adjust for region or city because of the big differences in housing costs, which typically comprise a sizable amount of expenses. On the other hand, people do have some ability to move so they aren’t necessarily locked in to certain expenses. Yet, the ones who can best weather these cost-of-living differences are already wealthier and have more options.

North Dakota: “Little Housing Boom on the Prairie”

A booming oil industry in North Dakota has contributed to the state leading the United States in housing growth in 2012:

According to recently released Census data, North Dakota led the nation in housing growth in 2012, increasing its supply of housing by 2.3% in just one year. Overall national growth was 0.3%.

While much of this growth has been focused on the oil patch, the entire state has seen strong economic growth, job creation, and accompanying strength in the housing market. Cities located hours outside the oilfield are reporting shortages of housing and tight markets for existing housing. Shortages of housing have also been reported in small towns throughout the state, as job-seekers move to the region looking to find work in the state’s growing oil and ag industries. A review of the new Census data bears out such reports. North Dakota is home to 8 of the top 100 counties nationwide for housing growth, including 4 of the top 10. Williams and McKenzie County, in the heart of the Bakken development, placed number one and two nationally, respectively, but counties far outside the oil patch also showed strong rates of growth.

The new shift towards more permanent housing construction will probably come as a relief to communities and officials throughout the state, who have been scrambling to find solutions to shortages. While temporary housing for oil workers has boomed throughout the oilfield, local officials have begun to explore limits on such “man camps”, citing their negative effects on local communities, impact on permanent development, strain on infrastructure, and safety concerns. The state has also seen rising rates of homelessness, and faced challenges finding enough workers to fill job openings- often due to lack of places for those interested in moving to the region to work. As estimates of the amount of recoverable oil in the Bakken continue to climb, larger, out of state developers have begun to enter the region, looking to take advantage of what may be a longer, more sustained expansion. With 21,000 job openings currently unfilled statewide and the potential for tens of thousands of wells remaining to be drilled over the next three decades, the pressure for more housing growth to meet the needs of expanding businesses is likely to continue.

It makes sense that housing is following the people and money to North Dakota. But, it is unclear what this means in the bigger picture:

1. Is this housing meant to last, meaning that it is intended to be there 50 years from now when the oil boom may or may not be there? What happens in these communities if these new subdivisions are ghost towns in ten years?

2. Are there any sort of housing innovations in North Dakota? Since this is a unique situation, it seems like a ripe opportunity for some new ideas.

3. Is this housing industry money (real estate, builders, construction jobs) benefiting people in North Dakota or does this involve a lot of out-of-town/state businesses? Growth may often be viewed as solely a good thing but we can also ask who is benefiting from the housing boom.

Defining what makes for a luxury home

Here is how one data firm defines what it means to be a luxury housing unit:

Although upscale housing is selling better in some cities than in others, a monthly analysis by the Altos Research data firm for the Institute for Luxury Home Marketing says that overall, that segment of the market is gaining momentum and prices are rising…

Q: “Luxury home” is probably one of the most abused phrases in real estate-ese. How do you define it?

A: A price range that’s considered the high end of the market in one place might be something that’s average in another. So, “luxury” is local: Our organization generally defines it as the top 10 percent of an area’s sales in the past 12 months. But for the purposes of the research that we do with Altos for our monthly Luxury Market Report, we’ve taken the ZIP codes within each of 31 markets that have the highest median prices, and for about five years we’ve tracked the sales of homes in those (areas) that are $500,000 and above.

There are two techniques proposed here:

1. The highest 10 percent of a local housing market. Thus, the prices are all relative and the data is based on the highest end in each place. So, there could be some major differences in luxury prices across zip codes or metropolitan regions.

2. Breaking it down first by geography to the wealthiest places (so this is based on geographic clustering) and then setting a clear cut point at $500,000. In these wealthiest zip codes, wouldn’t most of the units be over $500,000? Why the 31 wealthiest markets and not 20 or 40?

Each of these approaches have strengths and weaknesses but I imagine the data here could change quite a bit based on what operationalization is utilized.

Interestingly, the firm found that luxury sales rebounded quicker than the rest of the market:

The interesting thing about this recovery is that the luxury segment, that group of affluent households, was able to recover fairly quickly. They shifted their assets around, and a lot of them were able to see opportunities in the down market. By 2010, there were almost as many high-end households as before the downturn, not just in the United States, but internationally, as well. This group focused on residential real estate as a pretty desirable asset — for them, a second or third home turned out to be a portfolio play.

This shouldn’t be too surprising – when an economic crisis hits, the wealthier members of society have more of a cushion. While the upper end is doing all right, others have argued the bottom end, those looking for starter homes, are having a tougher time.