Inequality and the Housing Market

May 30th, 2014 at 4:34 pm

I wrote the other day that there’s an important regional dimension to the recovery of the housing market, and that localities that are doing well “look to me to be the ones with more income and job growth.”

Well, along comes the always interesting David Dayen with a post showing the growth in home sales broken out by the top 1% most expensive homes vs. the other 99%.  The results, from Redfin Research, corroborate my impression.

Last year, home sales grew 36% for the most expensive 1% and 10% for the rest.  This year–through April–home sales of the bottom 99% are down 8%, while the top 1% of home are moving to the tune of 21%.

Luxury sales are crushing it in pricey neighborhoods in LA and NY, but lagging where jobs, incomes, and wage growth remain weak and credit for most households remains tight (rising mortgage rates are a factor here as well).  And remember, there’s still a non-trivial share and number of underwater mortgages out there, specifically 17% (about 8 million).  That’s down from 25% in 2011, but it ain’t nothin.’  Home price appreciation will help get some of these mortgages back to the surface, but there’s a good rationale for not giving up on principal reduction policies.  Particularly important in this space is for the GSE’s to allow principal reduction on the home loans they back.


Source: Redfin Research

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11 comments in reply to "Inequality and the Housing Market"

  1. Robert Buttons says:

    Principal reduction is immoral. It rewards those that borrowed over their heads and punishes those that worked, saved and lived in a frugal manner. Further it creates a moral hazard and promotes bad behavior in the future. If we want to decrease inequality in 5 min, wnd the regressive payroll tax.

    • Smith says:

      Principal reduction is not immoral. What is immoral are people who complain about principal reduction without a basic understanding of how the process in a rational society and economy should work.

      Obviously there is a total failure on the part of progressives to address the concern, aided and abetted by the callous Democrats, Obama and Geithner included, who presided over the greatest foreclosure crisis since the great depression (nearly 1 foreclosure for every 2 new building starts)

      Principal reduction is not available for people whose mortgages are merely underwater, seeking the windfall a reduction would entail from lower monthly payments and capital gains in the event of a sale.

      Anyone thinking about this for a second should realize principal reduction only follows from a loss of income leading to foreclosure conditions which can only be avoided by a reduction in principal. Under normal conditions, even during an economic downturn, loss of income and impending foreclosure leads to the sale of the home. Because the downturn was caused by a housing bust, all too often, this can’t happen. Principal reduction becomes a way to deal with the crisis to every party’s benefit. The homeowner keeps their home, at market value. The bank is not left with a distressed property which remains a hidden liability because they delay writing down the true cost of foreclosure. The homeowner who worked, saved, and lived frugally benefits because their own home doesn’t further decrease in value due to foreclosures.

      Moreover, the person with the principal write down would gladly trade positions with those whose income was maintained at a level enabling them to keep up payments. One would expect to find loss of income and/or lower income levels of those with principal reductions matched or exceeded any possible future windfall. If a portion of those with income reductions were disadvantaged in eligibility due to savings, then the proper response would be to expand eligibility, not eliminate a beneficial program because of basically nutty ideas about social insurance. Why is principal reduction that much different from unemployment insurance, food stamps, EITC, medicare, and social security. All of these programs are designed for the many to pay the few (even social security is financed by multiple workers for every recipient). By the logic of moral hazard, these people should have saved more instead of relying on government largess if they lost their job, went hungry, earned too little, got sick, or got old without enough saved for their retirement.

      The housing crisis deepens and prolongs the output gap, and the additional unemployed and lost tax receipts collectively costs much more than principal reductions. The reductions come out of the bank’s pockets, not you the taxpayer, and it actually helps increase the value of everyone’s home, so the argument against is very fiscally unsound and illogical.

      The moral hazard is not to the person who lost their job and almost lost their home. The moral hazard is to everyone else who did too little or nothing to help.

    • Larry Signor says:

      “Principal reduction is immoral.”? How would you categorize bank and corporate bailouts? Are they earned benefits in your Universe? Economics is not a morality play. It is a science that that offers academic guidance based on data and econometrics (when practiced by the best). Moral hazard is much more egregious among the rentier set than the lower middle class. I am puzzled by your last sentence. Do you mean to say we should eliminate the pay roll tax as in Social Security? Or the income tax? And if so, why?

      • Robert Buttons says:

        Bailouts are immoral. Here is some economic science for you: Principal reduction props up the artificially high housing prices. This creates value for the homeowners(relatively rich people). In doing so, some of the diverted tax money comes from the non-homeowners (relatively poor people). Those same non-homeowners now need to pay MORE for housing—which is even more money transferred to current (relatively rich) homeowners.

        The ramp up in home prices (keeping those of little means out of the market) was predicted by Prof. Krugman: “To fight this recession the Fed needs…soaring household spending to offset moribund business investment. [So] Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.”

        • Larry Signor says:

          Where to start? You have told a stylistic story with no data to support it. How are we to determine if there exist “…artificially high housing prices.”? We are able to quantify a decline in equity, but we cannot know the top.

          If homeowners are “relatively rich people”, why are we having this discussion. They just took a 7 trillion dollar hit, if they still have homes.

          “…diverted tax money…”. Not accurate. As Jared, Atif Mian, Amir Sufi, SM (, have pointed out, converting debt to equity is an actuarial transaction between the debtor and the lien holder. No government money involved, so the folks who rent would possibly experience a lower rental rate than if these displaced homeowners entered the rental market.

          As for your out of context quote of Dr. Krugman, I refer you to Lawrence Summers:

          Notice I did not address your first two sentences because I did not understand them.

          • Robert Buttons says:

            Homes (and especially MBS) are essentially capital goods. You are proposing policies that reward capital. When we bailout housing and housing entrepreneurs, where does that cash come from? Well some of it comes from tax money, much of which is from income tax. We are taxing labor to support capital. Now you are seeing the source of inequality.

      • Robert Buttons says:

        Payroll tax (1) is regressive (2) (like all income taxes) punishes work. Time to end it–which will give each worker making less than $117,000 a 15% raise.

  2. jeff says:

    Isn’t this the basic problem with trusting ‘the market’ ?

    The market is portrayed as an exercise in democracy, but if a few people own everything then it is distorted to cater to their needs. The market can actually act to consolidate oligarchy.

    • Robert buttons says:

      HUD, GSEs, FHA, fed buying MBS, govt price controls on interest rates. Where are the market actors?

      All the above market INTERVENTIONS drive up home prices and drive down affordability. We are told the solution to affordability is more intervention.