Wednesday, October 29, 2008

A stable middle class requires stable housing prices

Awhile back, I tried to convince a Dennis Mangan contemplating leaving California that Johnson County, Kansas was worthy of his consideration. Half the county's 350,000 people 25 or older have at least a bachelor's degree, and the poverty rate is half the national average while median income is 150% higher. He showed no interest, but I'm not deterred. Throw financial stability into the mix as well:
Overall growth in Johnson County has slowed to a trickle, a level not seen for 16 years, new numbers released by the county clerk’s office show. ...

Real estate valuation increased 2.36 percent compared with an increase of 7.12 percent a year ago. ...

Reappraisal growth for existing homes stood at 0.74 percent in Johnson County, a significant dip from the 10.64 percent home-value increase posted eight years ago, just before the Sept. 11, 2001, terrorist attacks.

Okay, so now's probably not the best time to buy in sober markets. But Dennis takes care of himself, so he's going to live for a long time. He should focus on the long-term! S&P/Case-Shiller data today shows continued double-digit percentage declines in home valuations. I'll take a marginal increase over this:
Both the 10-City and 20-City Composites have been in year-over-year decline for 20 consecutive months. Of the 20 regions, 13 of them had their annual returns worsen from last month's report. As seen throughout 2008, the Sun Belt markets are being hit the most. Phoenix and Las Vegas are both reporting annual declines in excess of 30%, and Miami, San Francisco, Los Angeles and San Diego are all in excess of 25%."

Nine of the 20 regions have record annual declines. Phoenix and Las Vegas are now returning -30.7% and -30.6% versus August 2007, respectively. Each of the California markets -- Los Angeles, San Francisco, and San Diego -- are down more than 25% from their values 12 months ago. Miami and Tampa, the two Florida markets, are down 28.1% and 18.1%, respectively.
Housing doesn't create additional real value over time like other investments do. Without a rapid increase (or decrease) in both human capital and population, housing valuations shouldn't see double-digit year-over-year increases (or decreases). If they do, they're not reflecting an underlying reality, only the illusion of an increase (or decrease) in real value.

When people presume the illusory increases in value are real, they end up spending money they don't have. Loans from the future have to be paid back. Taking them out is going to inflict pain, especially when so many of those who took them assumed they were getting stipends, not taking out loans. And it's not just homeowners who plunge into the red as a result--state and local governments do as well, as property tax revenues drop in tandem with housing valuations.

Steve Sailer has recently written about this on multiple occasions. His parsimony in the face of illusory gains served him well. Fortunately for most of the people in my neck of the woods, there were never any wild illusory gains to begin with, so we were financially responsible by default. Consequently, fewer than 1 in 1,000 homes in JoCo are being foreclosed on (and the stodgy upper Great Plains states have fared even better), compared to more than 1 for every 200 homes in California. Score one for Jack Cashill over Thomas Frank.


agnostic said...

What's the Matter with Kansas is by Thomas Frank.

There's a Jeopardy question in there somewhere. "Who is Thomas Frank Rich?"

Audacious Epigone said...

Damnit, I did that the other day in conversation, too. I guess I'm getting old.

agnostic said...

Nah, you're just getting more... creative.

Anonymous said...

Been to KC and the greater area several times for business in that last year. Fine place to live and plenty of culture. The Atkins gallery barely scratches the surface.

Fat Knowledge said...

state and local governments do as well, as property tax revenues drop in tandem with housing valuations.

That isn't true where I live. When average housing prices go up by 100%, then the property tax rate goes down by 50%, so the total amount of taxes collected stay the same.

I keep hearing what you said on the news, so I don't know if having property tax rates vary is an abnormality or if most people just aren't aware of how the tax rate varies.

Audacious Epigone said...


That's prudent of your county. The same holds when property valuations decrease, then? I bet that's unpopular (but still a wise policy). There is no property tax neutral provision here, though.

Fat Knowledge said...

The same holds when property valuations decrease, then? I bet that's unpopular (but still a wise policy).

Yes, that is how it works, but I don't think it is that unpopular as people are more concerned with how much taxes they pay then what the rate they are paying is.

With this system, your taxes go up when the increase in your assessment is greater than the average increase in assessments for everyone. Since they only do appraisals every other year (some houses one year, other another), you get in trouble when your assessment goes up, but others don't. It averages out over time, but it can hurt in the short run.

tommy said...

From a non-human perspective, Kansas would be a rough transition for a Californian. Living most of my life in the Pacific Northwest, I've never cared for the rather flat, dull terrain I've experienced driving through Kansas, Nebraska, and Iowa.

A Californian would adapt well to the sweltering Midwestern summers, but might have trouble adjusting to the frigid months of winter. For someone living in the coastal Northwest, both the summers and the winters are too extreme. We prefer that mild, dreary, forested, and hilly domain near the Pacific. I can only imagine that most of the Midwest would prove equally unattractive to a native Californian.

It could be worse. I lived in northern Texas during part of my high school years. That's an utterly desolate scene. (Though you do get to see some tornadoes up close!)

tommy said...

I lived in Independence, Missouri (in the greater KC metro area) for a time. It isn't too bad. Lots of Mormons, though.

Stopped Clock said...

There are quite a lot of Californians moving to Kansas and other nearby states already precisely to get away from the high cost of living in California. A lot of white, conservative Californians already live in a dry, flat, hot environment so it wouldnt really be that big of a change except that they'd have to get used to more rain and snow. I think central Californians might be less likely to leave, though, than people from LA, San Francisco, and the small towns like Bodega Bay.

Audacious Epigone said...


I used to live in Redmond. Climatically, I prefer the Pacific Northwest to the Great Plains (although the KC metro area is on the eastern edge and shares much with the Ozarks region) in every way. Don't forget allergens--the Plains is the worst region in the country for them. The winter's relentless northwestern wind is what makes our winters so miserable--Denver often 'feels' warmer, even when it's 15 degrees colder.

The Reorganized LDS is based in Independence, and Mormonism has a lot of history in the city.


In addition to surrounding Southwestern states, Texas is getting a lot of former Californians. Here's a NYT article on a family that came to KC.

Black Sea said...

By coincidence, a couple of weeks ago ı wrote a post in which I tried to envision the stastically average American. I located her in Olathe, the seat of Johnson County, for the following reasons:

Olathe is near the geographical center of the contiguous 48 states (the positions of Alaska and Hawaii distort the US center too much). Olathe is an urban area, but not an enormous one, near to Kansas City, with a metropolitan population of 2.2 million. I've never visited Olathe, but I have visited Kansas City, and if there was ever a city that felt like the average American city . . . .