walkitout (walkitout) wrote,

Buying, Renting and What a Place to Live "Should" Cost

One of the basic ideas of economics is that if something is in high demand and the price is rising, someone will figure out how to make more of it, thus applying some downward pressure on price. Variations on this include: if there is a huge amount of stuff out there not being used, someone will figure out something it is good for and that will apply some upward pressure on price. You know, supply, demand, everything is a bleeping commodity. Blah, blah, bleeping, blah.

When there was debate about whether we had a housing bubble several years ago, one of the arguments that we had a bubble was based about historical housing prices, but I'm going to ignore that here. Another of the arguments involved what it cost to build houses. The price of adding a new element of supply is an important part of valuation, but the way people were calculating the price of adding a new element of supply was incredibly stupid: they were doing square foot to-build costs plus lot cost (if that), and rarely including things like the cost of getting permission to build -- or, for that matter, finding a buildable lot. This is an important distinction between the Zoned Zone and Flatland: Flatland is surrounded by agricultural land, and includes communities still stupid enough to extend community services like water, power, education, roads and so forth at a discount to the builder (that is, the community as a whole bears some or all of the cost of extending services to new subdivisions). The Zoned Zone may not be surrounded by cheap land and it has definitely gotten a lot smarter about whether it will extend services and, if it does, what it will charge for them.

There are a whole lot of complicated interactions in real estate, which is one of the reasons it is tremendously difficult to really demonstrate a bubble has gotten going: maybe there really is a lot more demand driving prices up (altho demographic analyses and indications that many sales are of second, third and so forth homes countered that argument handily in this most recent instance). Maybe prices are going up because a particular neighborhood/city/region is newly desirable (altho the fact that prices were going up everywhere countered that argument handily in this most recent instance). Maybe prices are going up because supply has stopped expanding for some reason -- houses are harder to build or whatever (but _that_ sure wasn't the case).

But I think the thing we should really try hard to remember as individuals who don't want to get caught next time is this distinction between Flatland -- where prices go up comparatively slowly, but sprawl is like late-stage cancer -- and Zoned Zone. It is a good distinction. When prices go up in a space-constrained place (which with increasing fuel costs, everywhere will one day be), you can't miss it. But in Flatland, prices go up some, but if you just drive a little bit further, things are cheap again.

And _that_ distorts our ideas of what a place to live "should" cost like nothing else in the world.

It's worth noticing that a lot of the people who sold at the top and rebought recently are busy pointing out that they shortened their commute by 30 minutes.
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