Stuck at Home
A vibrant local economy needs a good supply of housing for sale at lots of price points. But that's not what's happening right now.
In July 2005, at the absolute peak of the real estate boom here in Southern California, I did what lots of other people were doing: I bought a house for a very expensive price with an adjustable rate mortgage. The price was far more than I ever imagined I'd pay -- probably triple what the same property would have cost in, say, 1998.
Before long, interest rates started creeping upward and home prices flattened out. Soon, I was paying more in mortgage. Yet if I had to sell, I'd probably get less than I paid. All of which means I'm stuck making high payments on a very expensive house. I have to make a very good income to keep doing this but moving would make it worse.
Across the country in Upstate New York, a friend of mine recently lost his job. He thought about moving back to Long Island where he grew up, but he quickly realized he was on the other side of the home-equity divide from me. His house was worth about half of what I had put down on my house. Moving back to Long Island would mean paying four or five times the value of his current home for a new house. He was stuck, too -- in a very cheap house, without a job.
The ebb and flow of the housing market determines a lot about the economic viability of regions. It is an article of faith among economists that for a region to prosper, the housing market must be in equilibrium. A large supply of housing must be available at a variety of price points to accommodate the local population and especially those who work in the community.
Yet, increasingly, this isn't what is going on. The fabled "Big Sort" -- the sorting out of America's metropolitan areas into winners and losers -- has birthed a new phenomenon: the "Big Stuckness." People who ought to be more mobile are stuck.
In "hot" regions -- especially on the coasts -- housing markets can easily become overheated. But when they cool down, the base price is much higher than ever before, creating a kind of permanent unaffordability. In "cold" regions, especially in the interior of the nation, the housing market never gains any momentum, and thus local residents never accumulate much equity.
Sometimes, of course, the fact that people are stuck in a house -- and the way they're stuck -- can benefit the local economy. Here in Southern California, millions of people can afford to work at middle-class jobs because they bought their houses for a fraction of what they would cost today. So they sit on their expensive homes and stay in the local workforce even though, based on their incomes, they can't afford to live in the region.
In Upstate New York, hundreds of thousands of people -- maybe millions -- are content in their inexpensive homes. They're reluctant to move, even though economic theory would suggest they should.
Overall, though, the benefits of the Big Stuckness are temporary. In my town, the teachers, police officers and nurses sitting on $800,000 houses are gradually selling out to people who can pay the sticker price -- affluent retirees or commuters to nearby towns where wages are higher. The people taking their place in the job market can't live here. Truthfully, I'm not sure where they'll live.
And in regions like Upstate New York, the downside of living in a depressed economy usually outweighs the upside of affordable housing, especially for young people looking for opportunity. Because the young don't own houses, they're mobile. It's their aging parents who are stuck.
You'd think that the disparate economics of home ownership around the nation would create a kind of equilibrium. Sooner or later, it would seem as though California and Boston and Washington, D.C., would become too expensive,
and so business activity would drift inland to the other side of the Big Sort.
Surprisingly, however, this doesn't seem to be the case. Some jobs do leave New York for Scranton, or Los Angeles for Montana, but they're such footloose jobs that soon they are in Ireland or India. Meanwhile, the real economic engines in the winning regions pretty much stay put no matter how high home prices go. For those who drive the economy, the benefits of being in a winning region are so great that the cost of housing becomes secondary.
In the meantime, a lot of us are stuck right now -- in a house so expensive we can barely afford to stay or a house so cheap we can't afford to leave.