(cc photo by Clinton Steeds)

Better-insulating your home can save money and is good for the environment. So why doesn’t everyone do it? David Leonhardt explains: “Even so, we are still trying to figure out which weatherization projects we should do. The whole package would probably cost $4,500 and save us something like $400 a year. We may not stay in the house nearly long enough to justify the investment.”

The rationale of a “cash for caulkers” idea is that a short-term government subsidy to have this kind of work done would work as stimulus, and also solve some other problems, while getting around this issue. But the problem of people under-insulating their homes is really something that deserves a long-term solution. After all, the weird thing about Leonhardt’s explanation is that while he may not stay in his house the 15-20 years or so it would take to really make the full weatherization package worthwhile, the house will almost certainly still be there. In principle, having money-saving improvements to the house made ought to increase its resale value and be worth doing no matter how long Leonhardt stays in the house. In reality, when people are shopping for houses the question of how energy efficient it is tends to be an extremely low-salience issue and exactly the sort of thing someone is likely to overlook.

One potential solution to this would be to make an “energy audit” of some kind a necessary part of the process of selling a home. Make the basic factsheet include some information about both the relative and absolute energy efficiency of the home. That way people who invest in efficiency would have a better chance of getting rewarded for it.

As everyone emphasizes, the cheapest form of renewable energy is really energy efficiency—just not wasting as much energy. A cousin of this point, however, is that the truly cheapest thing of all is to just do with less. So for example, American houses actually use slightly less heat energy per square meter than do European houses. But since American houses are much bigger than European houses, we use far more energy in home heating than do Europeans. The Danes are substantially more efficient than the average Europeans, so they use less energy per square meter than we do despite living in a much colder climate. But on top of that, the average Danish house is about half the size of the average American house.

Since home-related energy use is a big deal and housing is a big component of household finances, the large size of American houses is a really important aspect of the American way of life. And it is worth asking how valuable our super-sized homes really are. It’s definitely a good thing that our modern houses are much bigger than houses were circa 1900. That brought about substantial reductions in overcrowding and real benefits in human welfare. It seems to be the case, however, that we’ve crossed over into territory where further increases in house size are driven by positional arms races. People aren’t looking for bigger houses, in other words, they’re looking for houses bigger than their friends’ houses in a way that’s not producing much of any net gains in welfare.

If that’s right, then we’re really wasting a disturbing quantity of resources not only building the very large homes but also heating them. Housing spending has the long duration properties of investment goods, but it’s not really productive the way a factory or an office building is. It’s just a very big, very expensive, very durable consumer good. Which is fine, insofar as it’s really leading to satisfied consumers. But it seems that it isn’t and if we all crowded into Danish-sized houses we’d quickly adjust, feel just as good about ourselves, and then go buy more non-housing stuff (or if we actually moved to Denmark, spend the money we’re saving on housing paying very high taxes in exchange for generous public services).

(cc photo by Nesster)

One curious consequence of runaway income inequality in the United States is that it’s produced a bumper crop of research (not sure I’m remembering it right, but I think Marx talks about this in The German Ideology) aimed at explaining away runaway income inequality. At any rate, Reihan Salam tweeted out this paper from Enrico Moretti the other day:

A large literature has documented a significant increase in the return to college over the past 30 years. This increase is typically measured using nominal wages. I show that from 1980 to 2000, college graduates have increasingly concentrated in metropolitan areas that are characterized by a high cost of housing. This implies that college graduates are increasingly exposed to a high cost of living and that the relative increase in their real wage may be smaller than the relative increase in their nominal wage. To measure the college premium in real terms, I deflate nominal wages using a new CPI that allows for changes in the cost of housing to vary across metropolitan areas and education groups. I find that half of the documented increase in the return to college between 1980 and 2000 disappears when I use real wages. This finding does not appear to be driven by differences in housing quality and is robust to a number of alternative specifications. The implications of this finding for changes in well-being inequality depend on why college graduates sort into expensive cities. Using a simple general equilibrium model, I consider two alternative explanations. First, it is possible that the relative supply of college graduates increases in expensive cities because college graduates are increasingly attracted by amenities located in those cities. In this case, higher cost of housing reflects consumption of desirable local amenities, and there may still be a significant increase in well-being inequality even if the increase in real wage inequality is limited. Alternatively, it is possible that the relative demand of college graduates increases in expensive cities due to shifts in the relative productivity of skilled labor. In this case, the relative increase in skilled workers’ standard of living is offset by higher cost of living. The empirical evidence indicates that relative demand shifts are more important than relative supply shifts, suggesting that the increase in well-being inequality between 1980 and 2000 is smaller than the increase in nominal wage inequality.

You can think of the baseline dispute about inequality as being that on the left we think it would be a good idea to try to redistribute some wealth and income away from folks at the top and either give more money or more services to the rest of the population. On the other side are folks who think the reverse. And this housing issue, like the case of the expensive refrigerator, strikes me as something purporting to debunk concern about inequality that in fact is just offering an example of why the right is correct to think that redistribution would be a good idea.

The way I read this research result, if we take a bunch of money away from rich people it will cost them relatively little in welfare since almost half of the excess income of the rich is going to bidding up the price of housing in the kinds of places where rich people can find jobs. If they all had less money, they’d all live in equally good houses; the houses would just be cheaper. But the money acquired through taxation could be used to provide services—better transportation infrastructure, better teachers, healthier food, more medicine—that have real value to the middle class and the poor.

Great piece by Michael Laris in The Washington Post about ambitious real estate development gone bad in Loudon County, on the fringes of the DC metropolitan area:

They said it would be a new Reston or Columbia, 35 miles west of Washington — the biggest development in Loudoun County’s history, with more than 15,000 homes filling communities with such names as Greenfields and Broad Run Village.

Now a real estate shopping spree that made the company Loudoun’s largest landowner at the height of the nation’s housing bubble has been jerked into reverse, with a key lender moving to foreclose on more than 4,100 acres Greenvest companies pieced together for the project. The land is scheduled to be auctioned off Tuesday morning outside the historic red-brick courthouse in Leesburg, provided there is no bankruptcy filing or last-minute deal.

Part of the tragedy of our recent boom/bust cycle is that we really don’t seem to have amassed a huge amount of worthwhile stuff during the overinvestment phase. The dot-com boom at least led to the creation of a lot of bandwidth and web-related human capital that folks continued to use even once the madness of Pets.com wore off. Some of what happened in the housing bubble is at least somewhat like that—immense condo oversupply developed in DC proper but the trends indicate that it’ll be filled sooner or later and the country really does have relatively few housing units existing in walkable urban areas.

By contrast, it’s not as if when you turn the clock back to 1999 that there was some objective shortfall of largish homes in sprawling suburbs in the United States. And nobody really wants extra ones. Even in Spain where they disastrously overbuilt beachfront property you can imagine the prices resetting and people using the homes. But there are only so many households in the United States, and both the demographic (fewer families with kids) and energy (more expensive) trends point toward somewhat less demand for this sort of thing in the future.

It strikes me as noteworthy that the trend toward bigger-and-bigger houses has continued apace over the past 20 years even though by 1990 the problem of overcrowded housing had become the exclusive province of the very poor. Part of the story is that we have a number of policies—ranging from odd tax incentives to land use regulations and beyond—in place that encourage people to live in big houses. This is not a very efficient use of valuable energy and land resources, and it arguably intensifies the problem of providing an adequate standard of housing to the relatively small remaining minority that can’t afford decent shelter.

(cc photo by chego101)

Katharine Worth writes up a new study that used regression analysis to assess the relationship been home prices and the Walk Score of the neighborhood in which they’re located. The conclusion was that “[a]fter controlling for all of these other factors that are known to influence housing value, our study showed a positive correlation between walkability and housing prices in 13 of the 15 housing markets we studied.” In other words “there is a real and measurable pent up demand for homes in walkable neighborhoods.”

Some additional thoughts. One is that though Walk Score is a fun tool, the methodology is far from perfect, and you would almost certainly see a stronger walkability/value correlation if you had a better metric for walkability. Another is that car use is associated with a lot of currently underpriced negative externalities and obviously this would look different if those were priced properly. In a more speculative vein, it also strikes me that American history has left us with a weird situation in which our cities tend to be walkable in inverse proportion to the quality of their weather. Boston or Chicago in the winter are terrible places to walk a quarter of a mile and then wait for a bus. In a city with the climate of San Diego or Los Angeles, things would look different.

But one way or another, this sort of regulatory mandate really doesn’t seem to be the best possible way to achieve the goal of making housing more affordable. Suppose that instead we:

— Reduced or eliminated rules mandating the construction of parking as part of new developments.

— Permitted the construction of taller structures.

— Relaxed maximum lot occupancy rules.

— Permitted the construction of smaller apartments.

That, it seems to me, would increase the supply of housing units in the city. That ought to, ceteris paribus, reduce the market price of housing thus rendering housing more affordable. It would also generate additional tax revenue and some of the revenue could be spent on subsidies for struggling families to help them afford housing. Last, it would increase the proportion of the metro area’s residents who live in the District of Columbia as opposed to the suburbs, which would be good for the environment. Adding an additional inclusionary zoning regulation on top of existing supply constraints, by contrast, seems likely to further constrain supply. Amidst a real construction boom, it’s true, these rules would result in the creation of new affordable units. But absent such a boom it simply discourages new development, meaning the city will have more vacant lots, more surface parking lots, more abandoned structures, and fewer housing units than it otherwise might.

There’s a fascinating difference here between the west coast and the northeast. The areas right around New York and Boston got very pricey, but pretty quickly the counties turn red again. On the west coast, by contrast, the blue extends quite far into the hinterlands.

That said, the weather is clearly much better on the west coast than on the east coast, so arguably it makes sense that west coast housing should be more expensive relative to economic opportunities.

Judged realistically, this should also open up possibilities for virtuous circles. Some people prefer to be surrounded by a lot of space, and others prefer the amenities associated with a denser urban environment, but nobody likes to live in a block with a vacant lot or around the corner from a broken-down shell of a former building. More people shifting into walkable urban neighborhoods allows those neighborhoods to capture more of what’s appealing about walkable urbanism.

It’s really remarkable how much political clout the big banks retain notwithstanding everything that’s happened. And it certainly makes you pessimistic that regulatory changes currently being contemplated are going to stick. How much clout are these guys going to have once the financial crisis is a few years in the rearview?

Which naturally raises the question: Why? Prices aren’t back down to their baseline level. Felix Salmon says “If housing kept track with CPI inflation, the Case-Shiller index would be at 125 now; in fact, it’s at 140.” What’s more, there’s still lots of unsold inventory. Common sense says prices need to keep falling until all the recently-built, currently-vacant houses can be sold off.

Sales of new homes in the United States posted their largest monthly gain in eight years in June, the government reported on Monday, a sign that the housing market is bottoming as buyers take advantage of lower prices.

It’s true that this was a big month-to-month change, but if you look at it overall sales volume was still quite low; lower than at any month in 2003 or 2004 or 2005 or 2006 or 2007 and also lower than January, February, March, April, May, June, July, or August of 2008.

Five bedrooms, four-and-a-half baths, brick-and-stone exterior, built 1968. Real estate photos show sunny kitchen, big entertaining spaces, pleasant yard, lots of bookshelves, one wall-mounted deer head.

I suppose it’s an interesting sign of the times in the United States that Rove believes a house he paid $799,000 for in 2001 ought to fetch $1.585 million in 2009. Here’s the Case-Shiller index for the Washington, DC metro area:

The price increase Rove is looking for is larger than the average one across the metro area. Of course some people’s houses should experience a higher-than-average price increase if, for example, the neighborhood in which it’s located has become objectively more desirable. When I first moved to town I rented a basement apartment in a nice townhouse on Harvard Street between 13th and 14th. That’s a much better place to live in 2009 than it was in 2003, and even in 2003 it was a much better place to live than it was back in 1998 when the owner originally bought it. But I don’t really think you could make that kind of claim for Kent where the Rove house is. That’s a nice upscale neighborhood, but it’s always been a nice upscale neighborhood.

Tucson, Arizona (My Photo)

Via Planet Money, Arizona fire departments plagued by alarms in vacant houses:

“Neighbors can hear the alarm so they call us, but when we get up to the home, it’s vacant, locked up and we’re unable to access them,” said Kevin Pool, assistant chief with the Surprise Fire Department.

If you think about the transition that pretty much every old-time American city experienced in the 1970s, you know that rising vacancy rates can really devastate a neighborhood. But in terms of coping with that kind of scenario, a traditional urban neighborhood seems to have some significant advantages over a suburban or exurban one, notably including the fact that the quality of the underlying housing stock in old rowhouse neighborhoods was generally much higher than what you see in newer suburbs. There’s a real question as to what may become of new exurban slums in areas where the supply of houses simply exceeds the number of people who want to live there.

Via the Economics of Contempt, here’s one book I’m glad I didn’t buy, David Lereah’s 2006 classic Why the Real Estate Boom Will Not Bust – And How You Can Profit from It: How to Build Wealth in Today’s Expanding Real Estate Market.

The author, it seems, is (or was) senior vice president and chief economist of the National Association of Realtors. The book was also blurbed by David Berson, chief economist at Fannie Mae, who said:

An important book, whether you agree with the author (as I do) that housing will remain an excellent investment or are convinced that home prices are poised for a plunge, David Lereah lays out a compelling vision of housing as a continuing positive investment—and how you can profit from real estate if you already own the home you live in, are looking to move from rental housing to an owner-occupied home, or want to use real estate as an investment.

Since the crisis hit, there’s been a lot of talk about complicated financial engineering and the ins and outs of different kinds of derivatives. But it’s worth recalling that at root there was a pretty basic and easy to understand mistake. We had developed an economy where, over a period of years, incomes were more-or-less flat and yet consumption was rising. Consumption was rising because people were going into debt. And people were able to go into debt because of rising asset price values. It was convenient for some people to believe that this was a sustainable trend but it was not, in fact, sustainable. The price of an asset like a home needs to bear some kind of relationship to people’s ability to pay for houses.

Prices of U.S. single-family homes fell 18.7 percent in March from a year earlier, while prices in the first quarter dropped at a record pace, according to the Standard & Poor’s/Case-Shiller Home Price Indices released on Tuesday.

Remember, of course, that we already had a huge pile of data indicating that economic performance in Quarter 1 was absolutely horrible, so this should come as no surprise. But when it comes to housing (rather than say, unemployment) there really is a need for prices to come into line with fundamentals, so there’s a case to be made that steeper falls are better since they mean we’ll hit the bottom sooner.

Housing construction hit to a record low in April as a steep drop in apartment building offset a rebound in single-family construction. [...] In a disappointing sign for the future, applications for new building permits dropped 3.3 percent to a new record low annual rate of 494,000.

That said, I don’t really see this as “disappointing” or much of a “sign for the future.” The supply of new housing ought to be fairly fundamentals-driven. There are so many people in the country, the population is growing at such-and-such a rate, and demographics are shifting like so. Back during the housing boom, too many houses were built. Consequently, new housing starts need to stay depressed for as long as it takes for people to fill the houses. The “Hangover Theory” of recessions isn’t true as a general matter, but as applied to the specific case of the housing sector it seems like a pretty close approximation.

I read a good portion of Andrews’ book, from which the article is excerpted, before misplacing my copy somewhere. The book does an excellent job of weaving the personal narrative together with Andrews’ policy reporting in a manner a bit reminiscent of Jason DeParle’s book.

That includes the following: one GS-15 salary, plus benefits; one Paris apartment, plus parking; travel and moving expenses; education costs for children of up to $60,000; and $170,000 for International Cooperative Administrative Support Services, an expenses-sharing mechanism used by agencies for overseas staff.

I think there’s probably something to be said for the idea of a comprehensive review of housing allowance policies. In many cases, I think we pay senior civil servants too little. The government needs to be able to recruit top notch scientists, lawyers, economists, etc. so ought to be able to pay people something vaguely competitive with the private sector. At the same time, it seems to me that you could probably recruit well-qualified people for a job like this one even without the free Paris apartment.

The Miami real estate situation got totally crazy for a while. But Miami’s not Detroit; no reason to expect the city to enter long-term economic decline. If price/rent ratios start dropping below their historical level, they’re good investments, especially in the supply-constrained “near the ocean” locations.

(By the same token, not time to buy houses in New York)