A Quick Visit to the Housing Market

With so much going on, I managed to miss the release of data on existing home sales for March. According to the National Association of Realtors, it was down by 3.3 percent from February and 1.0 percent from March of last year. Sales were down in all four major regions, but the drop was sharpest in the Northeast with a 8.5 percent month-over-month drop and 12.2 percent year-over-year. Interestingly, the West, which is largely California, is doing best. The one-month decline was just 1.3 percent, and sales were up 1.3 percent year-over-year.

For those who think this is a relatively mild war-related hit, think again. Existing home sales are reported based on when the sale is closed. These sales were almost all contracted in January or February, before the war started. The release shows that the housing market was weakening even before the war led to a jump in mortgage interest rates and a surge in gas prices. The data for April is almost sure to look considerably worse.

This is likely to be a big negative in second quarter GDP growth. Home sales generate considerable income for those involved in the sales process — realtors, mortgage issuers, surveyors, and then movers. Also, home buyers typically spend money on remodeling, new furniture, and appliances. The downturn we saw in March, and the bigger one we will likely see in April, are not recession stuff, but they are not helpful in an already weak economy.

Not all the news on the housing front was bad. The Realtors reported that the median home price was up just 1.3 percent year-over-year. With wages rising around 3.5 percent, houses are becoming more affordable. This is a similar story to what the Case-Shiller house price index shows. Adjusted for inflation, house prices are down a bit more than 2.0 percent since their peak in the spring of 2022. With real wages up around 4.0 percent over this period, housing is gradually becoming more affordable. There is a similar story with rent, with rental inflation trailing the overall inflation rate in the last year. Rents also did not rise anywhere near as much as sale prices in the last six years.

This graph is useful since it shows the extent to which the problem of affordability is largely a pandemic story. Inflation-adjusted house prices jumped by more than 25 percent in the period from the start of the pandemic until the spring of 2022. Prior to the pandemic, real house prices in 2019 were roughly at their 2004 level, while the real median wage had risen by 10 percent. There were cities like San Francisco and New York, where housing was already unaffordable, but for the nation as a whole, house prices were not hugely out-of-line with income. (The pre-pandemic rise was largely due to a prolonged falloff in construction, following the collapse of the bubble in 2007-10.)

The real problem came when the pandemic created a surge in demand as the number of people working remotely soared. Once we got past this surge, real house prices began heading downward. The fall would be quicker if tariffs had not pushed inflation higher and led the Fed to slow its course of lowering interest rates. And now the war has again pushed interest rates higher, which will further slow new construction.

Those who point to zoning restrictions as an obstacle to more affordable housing are right, but these restrictions did not prevent us from having more affordable housing in prior decades and would not prevent it now, if we had decent macroeconomic policy. But even in an optimistic scenario, it will take many years for increased supply to bring real house prices back to pre-pandemic levels, and ideally somewhat lower, since the 2019 levels were already high by historical standards.

While we wait for more supply, I have my big three short-term measures:

+ A progressive property tax,

+ A vacant property tax, and

+ Restrictions on Airbnbs.

All of these should be relatively simple to administer. In the case of a progressive property tax, we already have an assessed value on record. It’s only necessary to change the assigned rate. If the overall tax rate is 1.0 percent, a progressive structure can make it 1.5 percent on values over $1 million, and say 2.0 percent on values over $1.5 million.

For folks freaking out because they have a home worth $1,050,000 — remember, it is a marginal tax. You will pay the extra 0.5 percent on just the $50k, not the full $1, 050,000. That comes to $250 a year. Go cry somewhere else.

There is a similar story with the vacant property tax; we already have an assessed value on the books, just double the tax rate if the property has been vacant more than six months. Several cities already have a vacant property tax in place. This won’t have a huge impact, but it gives people trying to sell their house an incentive to lower the price or rent it out. In either case, it should reduce the number of properties sitting vacant.

The restriction on Airbnbs both preserves housing for renters or owners and also preserves neighborhoods. Having lived in a highly touristed town, where many houses had been converted, I can say it is nice to have neighbors.

That’s not just to socialize, but if your car breaks down and you suddenly need a ride, or there is a health emergency, it is good to be able to go next door to someone who will help you out. Airbnbs are fine (used them many times myself), but there is a real logic to limiting their number. Cities can also make a few bucks by auctioning off the permits.

Anyhow, there are more things that cities and can and should do to increase housing supply, and especially the supply of affordable housing, but the short-term three can provide some immediate benefit and raise a few bucks for public services, while we wait for increased supply to bring down prices.

This first appeared on Dean Baker’s Beat the Press blog.