15 May 2007

The Loneliness of the High-Priced Home Buyer

"No one goes there anymore. It's too crowded."
- Yogi Berra

Around the world, people are talking about a housing bubble. It may be that the rise in housing prices is a function of a fundamental economic trends that are bigger than the housing market.

In some parts of the country, people can talk about weather. In San Diego, there is not much weather to talk about. No snow or tornadoes, hail is rare, rain is infrequent (about 6 inches since last July) and heat waves, while increasingly common, are still the exception to the rule of mild temperatures. So, our small talk trends towards real estate prices.

Median home prices vary by zip code, from $375,000 (for people willing to commute about 2+ hours each day) to $3.3 million, but average more than $500,000. This suggests a mortgage payment of about $3,000 a month, or a gross income of nearly $60,000 a year just for the property taxes and mortgage. Sadly, San Diego is not hugely different than many metropolitan areas around the country.

It's easy to believe that this isn't sustainable and home prices have indeed nudged downwards in the last year. But it may be that we'll look back at this as an affordable time for housing. Or, more accurately, a time when stand alone homes on lots could be had for cheap.

Every decade, a higher percentage of folks live in the city and that's a trend projected to continue for a few more decades. As demand increases, prices for real estate will rise. It is quite likely that even suburban neighborhoods will see more high-rises. I'd argue that there are at least three reasons for this - all related to specialization.

Specialization in work means that a person is more likely to live in or near an urban center. A person whose expertise is creating the glass stunt men can leap through in movies is unlikely to base his business in Grimes, Iowa. The same is true for specialists who do things like arrange clinical trials for drug testing or write ad copy or calculate amortization tables. As the work force becomes more specialized, and the number of specialists with whom one needs to collaborate is more extensive, the draw to work in the city is stronger.

Specialization in consumption also draws people into cities. It is difficult to find sushi in Ronan, Montana or calypso band concerts in Bellingham, Washington. Large towns and small cities have a great allure, but offer little variety. Food, concerts, museums, and stores struggle to market even main stream products in a sparsely populated region. As people become more discerning consumers, more demanding of options to support vegan or gluten-free diets, or love of French film or metal-rock, they find themselves drawn to metropolitan centers.

Finally, one principle that guides the design of public places is that people are drawn to people. It is not just that people come together at the fair or into downtown in order to find food or entertainment. We are drawn into groups because we find people fascinating. As much as we hate congestion, lines, and high prices, people like to be around people.

And this last impulse, too, may be a product of specialization. As our production and consumption habits seem to separate us more from others, it may be that we feel a stronger pull towards them, a visceral need to connect with those from whom we would otherwise feel disconnected. Physical separation coupled with the isolation of mind and culture may simply be too much for the soul. It may be that we're drawn to live amongst more people as an antidote to the isolation that would otherwise overtake us as specialists.

Forecasting a fall in home prices
Ivine Housing Blog

Forecasting steady or rising prices
The Daily Reckoning


Life Hiker said...

City living is great, but our urban centers have become too big.

What good is specialization if you and the person you need to work with are each only an hour away from your meeting place...if you leave home at 5:45 a.m.?

I've recently been to NYC, Charlotte, Atlanta, and Phoenix. All have their plusses, but all are so badly congested that life must be scheduled by traffic patterns. Sad.

Seems to me that we need more medium size cities that provide both the amenities and a bit less transportation-driven angst. Real estate prices would be more reasonble in such places.

Ron Davison said...

agreed - which is one reason I put out this theory of various reasons for the fact that people put up with so much congestion.

David said...

Very insightful. I'd be interested on your view as to how Internet connectivity will change this. I think substantial conventional commuting or business travel is destined to be replaced by collaborative tools that will provide the means of being around people without being around them physically. As Chris Anderson suggests, the "long tail" may reach out to me in Bellingham or Montana.