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walkitoutPrior to the really bad inflation of the 1970s and the traumatizing efforts to reduce that inflation of the 1980s, my parents bought a suburban ranch house. My father worked as a union electrician, mostly in new high rise commercial construction in downtown Seattle, so he wasn't a one or two guy shop. He had a nice wage, some benefits, and an organization (to which he paid dues) which did the negotiations for him. Sweet deal, because his real wages stayed level or rose, while his real costs (payments on the house) dropped like a rock as inflation ate away at the debt he owed. My father was smart enough to understand that selling that house to buy a bigger house for his growing family was Stupid; he built on a second floor with two more bedrooms and a bathroom instead, doing a lot of the work himself and hiring people he knew for the parts that required additional hands or skills he was weak in.
The experience of my family was not uncommon. I know dozens of people whose parents "lucked out", buying a house with a 30 year fixed rate mortgage of 6% or lower in the late 1960s, and then refusing to move or refinance thus enjoying fantastically low housing costs (I suspect by the late 1980s they were paying more in property taxes than they were on the note payments). They ultimately paid off the mortgage early, because they were paying so little interest that the tax deduction didn't get them anything.
For most of my life, I thought of this as Awesome, and a reason not to fear inflation.
But for people who had to sell and move, the 1970s were awful and the 1980s worse. House prices did all kinds of bizarre things. People moved from California to Seattle and brought an enormous amount of money from the sale of their house in California thus raising prices in Seattle because what they thought was a screaming deal was in fact a seller taking horrible advantage of them -- but then that became the new normal and everyone was paying higher prices for housing. That didn't happen to my family, but I knew a lot of people who felt the impact, and at least into the early 2000s, California plated cars in Seattle were at a high risk of being keyed because of the long-standing resentment this phenomenon incurred.
Very high interest rates encouraged all kinds of mortgage "innovation". The efforts to bring down inflation in the 1980s resulted in extremely volatile interest rates. ARM mortgages tied to those rates meant people who had one of those mortgages had no idea what their payments were going to be.
One of the reasons entrenched inflation isn't "safe" is because everyone starts to "expect" more of it and then plan accordingly. This tends to lead to an acceleration in inflation, and then fleeing to alternative stores of value/forms of currency. It's not easy to identify at what point inflation becomes a problem, but it's safe to say that if people are really happy to take on debt, because they expect it will be inflated away and their wages will be adjusted to keep up with the general rise in prices, you've got a serious problem.
The long-run manifestation of 1970s inflation, I suggest, is the idea of the family house as something you pay way too much for (expecting it to be reduced by time), because you'll be able to afford the payments better later as your wages rise (expecting your real wages to remain stable), and then retire and live off the results (using the house as an alternative store of value). There was a point in time when this strategy was brilliant, but here's the thing about inflation expectations: they tend to hang on around a little too long. When prices are stable, people don't take seriously the beginning of a rise in prices because they expect them to drop again (and they may ignore a drop because they expect a rise again). When prices are rising, they expect them to keep rising -- you have to make them fall for a while, or do random things for a while, to get their attention. When prices are falling, they expect them to keep falling (that's the worst, because then no one wants to do _anything_, and everything grinds to a halt).
We beat inflation expectations out of grocery stores and car dealers a long while ago. But we didn't beat them out of housing, so people kept buying too much house, thinking it was a safe store of value (prices will ALWAYS rise! and the debt will become more affordable over time).
I think some of the housing bubble was baked in by the inflation expectations of our youth, reified as a "financial management" strategy, and then everyone complained that the "real" problem was stagnant wages. Someone must have noticed this, right?
Right?
ETA: http://www.unc.edu/depts/econ/byrns_web/Economicae/typesofinflation.html
"For example, investors who speculated that California real estate prices would continue on an upward trend that had lasted from 1946 into the 1980s were often bankrupted when housing prices plummeted in the early 1990s."
You know, it's one thing if you _realize_ what you are doing is betting on an inflationary rise. It's a whole other thing when you think you are pursuing a conservative financial life plan.
Still reading this one:
http://www.stanford.edu/~piazzesi/inflationAP.pdf
But it looks promising. It takes into consideration generational cohorts, which is promising. I left out of the above story all the people from pre-war generations who lost their shirts because inflation wiped out the value of their bonds (something presidents like Truman were terrified of seeing happen, because they'd seen it in _their_ youth).
The experience of my family was not uncommon. I know dozens of people whose parents "lucked out", buying a house with a 30 year fixed rate mortgage of 6% or lower in the late 1960s, and then refusing to move or refinance thus enjoying fantastically low housing costs (I suspect by the late 1980s they were paying more in property taxes than they were on the note payments). They ultimately paid off the mortgage early, because they were paying so little interest that the tax deduction didn't get them anything.
For most of my life, I thought of this as Awesome, and a reason not to fear inflation.
But for people who had to sell and move, the 1970s were awful and the 1980s worse. House prices did all kinds of bizarre things. People moved from California to Seattle and brought an enormous amount of money from the sale of their house in California thus raising prices in Seattle because what they thought was a screaming deal was in fact a seller taking horrible advantage of them -- but then that became the new normal and everyone was paying higher prices for housing. That didn't happen to my family, but I knew a lot of people who felt the impact, and at least into the early 2000s, California plated cars in Seattle were at a high risk of being keyed because of the long-standing resentment this phenomenon incurred.
Very high interest rates encouraged all kinds of mortgage "innovation". The efforts to bring down inflation in the 1980s resulted in extremely volatile interest rates. ARM mortgages tied to those rates meant people who had one of those mortgages had no idea what their payments were going to be.
One of the reasons entrenched inflation isn't "safe" is because everyone starts to "expect" more of it and then plan accordingly. This tends to lead to an acceleration in inflation, and then fleeing to alternative stores of value/forms of currency. It's not easy to identify at what point inflation becomes a problem, but it's safe to say that if people are really happy to take on debt, because they expect it will be inflated away and their wages will be adjusted to keep up with the general rise in prices, you've got a serious problem.
The long-run manifestation of 1970s inflation, I suggest, is the idea of the family house as something you pay way too much for (expecting it to be reduced by time), because you'll be able to afford the payments better later as your wages rise (expecting your real wages to remain stable), and then retire and live off the results (using the house as an alternative store of value). There was a point in time when this strategy was brilliant, but here's the thing about inflation expectations: they tend to hang on around a little too long. When prices are stable, people don't take seriously the beginning of a rise in prices because they expect them to drop again (and they may ignore a drop because they expect a rise again). When prices are rising, they expect them to keep rising -- you have to make them fall for a while, or do random things for a while, to get their attention. When prices are falling, they expect them to keep falling (that's the worst, because then no one wants to do _anything_, and everything grinds to a halt).
We beat inflation expectations out of grocery stores and car dealers a long while ago. But we didn't beat them out of housing, so people kept buying too much house, thinking it was a safe store of value (prices will ALWAYS rise! and the debt will become more affordable over time).
I think some of the housing bubble was baked in by the inflation expectations of our youth, reified as a "financial management" strategy, and then everyone complained that the "real" problem was stagnant wages. Someone must have noticed this, right?
Right?
ETA: http://www.unc.edu/depts/econ/byrns_web/Economicae/typesofinflation.html
"For example, investors who speculated that California real estate prices would continue on an upward trend that had lasted from 1946 into the 1980s were often bankrupted when housing prices plummeted in the early 1990s."
You know, it's one thing if you _realize_ what you are doing is betting on an inflationary rise. It's a whole other thing when you think you are pursuing a conservative financial life plan.
Still reading this one:
http://www.stanford.edu/~piazzesi/inflationAP.pdf
But it looks promising. It takes into consideration generational cohorts, which is promising. I left out of the above story all the people from pre-war generations who lost their shirts because inflation wiped out the value of their bonds (something presidents like Truman were terrified of seeing happen, because they'd seen it in _their_ youth).
Feminist mistake?
Date: 2013-03-31 03:45 pm (UTC)Now, at the time I thought this was egregiously shocking and disturbing. I still find it disturbing. But I have not nearly enough knowledge of economics or anything else relevant in order to decide if the statement has any merit. I have done a little bit of searching and have always been on the lookout to see if this is an idea that others take seriously, but haven't seen it and am not even sure how to look.
You have more knowledge here. Have you ever seen such a claim? Does anyone reputable discuss such a claim and argue it one way or another?
Let's Be Less Provocative With Subject Lines, Shall We?
Date: 2013-03-31 08:09 pm (UTC)Just to be clear:
(1) Increasing percentages of married women (who were mothers, even) entered the workforce throughout the decades we are discussing.
(2) While divorce was also increasing, the effect was to create more households with two incomes than the immediately prior years had seen.
(3) Households will tend to spend whatever money/income they have, thus, households that had more money to spend in general would tend to spend more of it on housing. To the extent that the result of more workers in the family meant more income/money in the family, this probably pushed housing prices higher than they might have gone otherwise.
The story you relay has a couple components that I don’t think actually played any meaningful part.
(1) Feminism: Feminism in the time frame under discussion was an idea pursued and embodied primarily by white women with resources. Friedan’s book was all about careers for women (not jobs). The Second Wavers were frequently not (yet) married. The second earner women were, however, primarily NOT white women with resources -- they were women (white and of color) who were trying to make things work in an extremely difficult (high and volatile price levels) environment.
(2) “They claimed that the trouble all was because of laws changing so that lenders were legally required to consider the wife's earnings in the loan application. Once that happened, the normal price for a home then rose to the expectation that it took two wage earners to afford.”
This is confused, probably at multiple steps along the way, so I’ll lay out my understanding of what happened and why.
It was very common for women, married or otherwise, with children or otherwise, to work during WW2. It was not uncommon for unmarried women, or married women who did not yet have children to work even after the war was over. The expectation was that when they got pregnant they would quit work and stay home with the kids. Lenders would not allow the income of the employed wife pre-kids to count, because the expectation was that it would go away. The massive societal pressure for a woman with children to stay home was mentioned, at least briefly, in Friedan and I have heard it from plenty of other people adults at the time as well. NOT counting that income made sense, even though having that income enabled young marrieds to save up for a down payment. An unmarried woman with a job was desirable for similar reasons (and to pay for the wedding and generally setting up in life together).
The cohort of women who was employed during the war or after the war before being married or at least before having kids did indeed quit work while their many children were young. But after they had had 2-4 children, and the youngest had reached 1st grade, it made a whole lot of sense for her to go back to work during the day, at least part time. Women with a part time job spent less time spending money and more time making money, so a lot of husbands were very happy with this, especially after a couple rounds of money-tightening induced recessions temporarily took away their jobs. Other husbands viewed having a wife who was not employed as a sign of their Manly Ability to Provide and thus objected.
Please see the next comment for the rest of my discussion; LJ has a comment length limit.
Re: Let's Be Less Provocative With Subject Lines, Shall We?
Date: 2013-03-31 08:10 pm (UTC)There absolutely were laws involved, but they lagged the lenders’ policies. By a lot:
http://articles.chicagotribune.com/1988-05-14/news/8803170147_1_mortgage-loan-business-private-mortgage-insurance-va-mortgage
And by “lagging”, I mean that MOST lenders had already changed the way they did things by the time the law got involved, so any impact on housing inflation that may or may not have resulted likely preceded the change in the law.
Housing inflation really looks different from the CPI, but my original post asserted that inflation expectations are slower to go away in housing than anywhere else, and it was those no-longer-appropriate inflation expectations that caused housing to get so expensive. Now that I’ve thought about it a little longer, I actually think there was another factor as well. When Volcker was so determined (and I’m not complaining about this, just observing) to bring inflation down, interest rates on mortgages went absolutely nuts -- they’d been high already, but they got crazy. For a solid decade, house payments were huge IN REAL TERMS as a result. People got used to it. (People can get used to a lot of things. Quite cool, altho sometimes has perverse effects down the line.) When inflation dropped, they didn’t take the money they were used to putting towards housing and start spending it on other things: they kept assuming they should spend a godawful fraction of two incomes on housing.
Want to blame someone for the housing bubble? Blame whoever under FDR had the brilliant idea to create the 30 year fixed mortgage, essentially buying houses on the installment plan. People bought houses based on the monthly payment, which meant it ballooned when interest went up (not on people who already had mortgages -- that’s a whole other sad story that led to credit cards because banks would have gone under, not to mention a lot of poorly thought through lending to developing countries, as banks were trying to compensate for all the money they were losing on those fixed rate mortgages). Once interest rates went down, they were used to a big payment, so all the extra money could go to principal, that is, they could afford a much bigger house.
Turns out that this time around, people are responding to the drop in interest rates by shrinking the term of the loan. Which objectively is incredibly stupid from the perspective of the borrower, but is so good for the system as a whole I cannot bring myself to complain.