In recent decades, and especially in recent years, the belief has spread in the world that house prices are bound to rise. This idea, which is at the core of a sad truth, distances the younger generation from the dream of an apartment or leads them to invest in huge debts, which will be eliminated only after they become grandparents. Given this reality, it may be hard to believe that for more than a century, between 1890 and 1995, housing prices in America did not rise at all, according to the index.
Between 1947 and 2000, the price of housing in America, according to the index, moved within a narrow range of 20%, and in 2000 it stood exactly at its price in 1980. Also in terms of income, the changes in the second half of the 20th century were not great. In 1960, the ratio between the annual median household wage and the median house price was 4.86. Until 1999, the price ratio fell to 4.12. But as of early March 2022 the ratio was almost 8. A survey conducted in 2021 by the PEW Survey Institute found that 49% of Americans thought that the availability of affordable housing was a real problem in the communities in which they lived; 70% thought that young people now have a more difficult problem buying a home than their parents had.
Examining these data raises a great difficulty. Technologies in recent decades have improved dramatically and with it productivity in the economy in general. Even construction materials, until recently, did not rise much above the index. Vacant land is not in short supply in America, and despite population growth the number of people per square kilometer in 2020 was less than a quarter than that of China, less than a sixth than in Italy and Germany, about a tenth of the density in Belgium and less than one percent of India.
All this even before taking into account the fact that it is possible to build to a height. To illustrate, if the entire U.S. population lived in the same population density as New York City, it would be entirely in the Hawaiian Islands or the state of Maryland. For comparison, the area of Manhattan is large but slightly larger than that of Tel Aviv (59 sq. R), but about a quarter of Manhattan’s residents live in Tel Aviv, 450,000 compared to about 1.63 million).
The great jump in real estate prices began in America precisely when population growth began to decline. Between 1960 and 2000 – the years of price stability – America’s population grew by one percent or more each year. The percentage in 2022. The housing crisis, which mainly affects the younger generation, is therefore not related to problems of area, population growth or a decrease in productivity. What, then, are the real causes of this ongoing pain?
Housing price, like any product, is determined by its supply and demand. What has gone wrong since 2000 is that the price has broken a hundred-year-old stability trend and skyrocketed, even though the rate of population growth, including immigration, has dropped by almost half.
“Money flowed like raging water”
The housing supply is of course due to the number of units being built. According to the Government Statistics Bureau, in the six years between 1996 and 2001, the years before the big real estate bubble, an average of 1.6 million new residential housing units were built in America (construction starts) each year.
The big real estate bubble begins in 2003. What happened in those years was well described by a congressional inquiry commission, in a report released in 2011. “Money flowed into the economy like raging water from a broken dam,” the report said, “low interest rates and then foreign investors will fuel the boom.” Contractors, architects, real estate agents and loan brokers have earned on Main Street (the regular economy) while bankers and investment houses earn even more… Homeowners have withdrawn cash from home (in the US you can get a new mortgage based on the new value – H.S.), through which “They sent their children to college, paid medical bills, designed new kitchens, went on vacations, bought cars and paid bills with credit cards.”
Since building new homes is a much slower process than lowering interest rates, the result was clear. “As money flowed powerfully into this new opportunity, prices began to rise sharply. Which brought in more and more new buyers and encouraged more and more new home construction,” the report said.
Encouraging the entire economy to consume at the expense of rising house value was part of the Federal Reserve’s response to the dot-com crisis in the stock market. Former Fed Chairman Alan Greenspan commented on this in a congressional committee: “Home sales, boosted by low mortgage rates, have remained strong. Mortgages not only helped the demand for homes, they were also significant in stabilizing the economy after the dot com crisis … they allowed homeowners to withdraw money from homes. About half of these withdrawals went to private consumption and half to home improvements and renovations. Expenditure on capital provided very significant support for private consumption at a time when property prices (ie shares in the 2001 crisis) fell sharply. Without it, the economy would have been much weaker in the face of the decline in the value of households’ assets. “
Then the bubble burst in 2007
The increase in the availability of credit and the fall in its price together with the dramatic rise in prices have led to a huge increase in demand. These naturally led to the massive construction of new homes. In the four years between 2003 and 2006, construction starts increased on average to about 1.92 million homes per year, 20% above the multi-year average of the end of the 20th century.
Then the bubble burst in 2007. Many borrowers stopped paying the mortgages on the homes they bought, and six million homes were confiscated by the lending banks. Most of them were sold to Wall Street funds at a loss. The bursting of the bubble had a rapid and severe impact on construction companies and others in the industry and many went bankrupt.
With the crisis, the number of construction starts also fell sharply. In the three years between 2009 and 2011, only about 580,000 units were built on average each year. In the ten years between 2008 and 2017, the number of construction starts averaged about 885,000 units per year. This is compared to an average of 1.37 million in the decade between 1990 and 1999 – a decrease of about 35%. This continued slowdown, which is a direct result of bubble damage and its explosion, has led to a cumulative shortage of homes. A shortfall as of the end of 2021, stands at about 3.8 million housing units, according to estimates by the chief economist of the mortgage giant, Freddie Mac. This is a good demonstration of the long-term destruction and devastation that the instability and distorted allocation of resources that are a direct result of a financial bubble and the inflating of artificial demand, produces in the real world. Especially when it comes to a local product that requires time and expertise to manufacture.
When the corona arrived and the Fed lowered interest rates to zero again and printed $ 1.4 trillion for mortgage purposes this shortage led to a re-explosion in prices.
But it was not just the sharp fluctuations between peak demand and deep lows that affected the supply in the residential housing market. Local planning and building laws also have a profound impact. Real estate is, of course, a local product, and in the United States there are many and very different planning laws.
At one end stands a city like Houston in Texas, the fourth largest city in America. The city has some of the simplest and easiest building laws in the United States. You can apply for a building permit online, and feedback will arrive in an average of about two weeks. The corresponding fees will increase at least ten times.
10 days in Houston – 30 months in Israel
If the application meets the known and simple rules in Houston, the building permit comes out within 10 days. In Israel, on the other hand, the average time it takes to obtain a building permit is thirty months, and in the city of Haifa, which holds the record for issuing permits, it is about 20 months.
Simplicity and speed in Houston, coupled with convenient state tax laws and warm weather, have led to a dramatic increase in business and the population that has migrated to the area. Since 1990, the Houston area has grown at almost twice the rate of U.S. population growth and has more than doubled its population, from nearly 3 million to over 6.6 million today.
During the Corona years, traffic increased to Houston. An analysis of 262 urban centers found that between May 2020 and April 2021, Greater Houston issued 52,029 residential building permits that year – the highest number in America. In Haifa, on the other hand, in 2021, according to the CBS, construction began on 573 apartments.
Although Houston excels, the gap between it and the national average is not very large. According to a study by KPMG, the median time to obtain a residential building permit in America is 60 days, and its median cost is about $ 1,500. The rate of construction in Houston also matches the rate of growth in jobs in the area. From May 2020 to April 2021, one building permit was issued for every two new jobs (120,900 jobs). With simple building codes, and a fast, efficient, and inexpensive system for issuing building permits, it is no wonder that in the Houston area homes are also relatively inexpensive.
In 2022, the typical house in the area will cost about $ 262,000, about a third less than the median house in the United States, according to the Zilo real estate website. Moreover, 64% of transactions in 2021 were made for less than $ 150,000.
At the other end of the scale is San Francisco Bay, California. About 75% of the area’s 18,000 square kilometers are open spaces that are not available for urban development. About 1.75 million private housing units are spread over the rest.
Houses are not like shoes
Residents of the Bay Area love the suburbs, the open spaces, and the lack of building density. But to the same extent the area’s franchisors love the office space and the high – tech taxpayer business. In the decade between 2008 and 2019, many office spaces were added in the area, followed by many jobs, but not residences. These grew at the rate of one house per 6 new jobs.
In the heart of Silicon Valley, Santa Clara County, for example, jobs grew by 33 percent while the number of building permits increased by only 7 percent. In 2010 the authorities in the area agreed on a thirty-year plan with the aim of bringing about a correlation between the increase in jobs and the increase in housing units. By 2017, 42% of all job allocations in the planning had been added by 2040, but the number of building permits approved was 30% smaller than what was supposed to be approved during this period. The impact of these trends on real estate prices as well as road congestion, and commuting times were drastic and the typical house price in the area now stands at about $ 1.6 million, four times the median house in America and six times the median house in Houston, Texas.
But not only the median house costs much more. The rental price in San Francisco is more than twice as high as in Houston, as are the tuition fees at kindergartens, the price of a gym membership, public transportation and many of the grocery products. Even the price of beer is about 32% higher, fuel at 45%) and even clothes at 20%.
The Bay Area is not very unusual in California. It is estimated that the government will lack about 3.5 million housing units by 2025, while 75% of the areas designated for construction are defined as an area for the construction of individual housing units (private homes).
In an attempt to solve some of this problem, the Sacramento legislature recently passed a plan that allows for the construction of an additional housing unit for rent or for family members on plots where one such unit already exists, in most areas of California. The plan is laden with restrictions, limitations and complicated regulations, and there is still no doubt that in the coming years California will undergo a real increase in the supply of housing units.
Homes, unlike shoes, have a fairly “hard” demand. After all people usually do not live in three houses at the same time. Therefore, supply is a key factor in determining the price of real estate. Wherever this supply went wrong, usually because of government policy and the barriers it produces or because of bubbles that disrupted the production system, the impact on prices was severe and long-term. In this equation.