Unemployed Houses: A Recalculation Story
The U.S. housing vacancy rate–an unemployment rate for home–is at its highest level since at least 1965 (see figure). Why? Is it sticky prices? Lack of aggregate demand? Structural?
For labor, the recalculation story says that employment is a by-product of patterns of specialization and trade. Old patterns are constantly becoming unsustainable, and new patterns are constantly being created. When old patterns become unsustainable faster than new patterns are created, we have higher unemployment. Important trends over time include the increased specialization of the labor force and the shift away from labor as a variable input to production and instead toward labor as an organizational capital input.
The allocation of land and of housing units is also a by-product of patterns of specialization and trade. Technology affected these patterns. Riverboats, trains, and automobiles altered patterns of land use. The Internet may do so as well.
The Stevenson-Wolfers theory is that since 1970 marriage has been driven more by consumption complementarity than by production complementarity. I think that one can see a similar trend in location. I know of many young women who want to move to New York City because of the way they would like to live, not because of the work opportunities it provides.
Suppose that the choice of housing and location nowadays is based less on the production complementarity of being close to particular work zones (more people can work from home or from satellite offices, thanks to the Internet) and more on the consumption characteristics of the housing unit. In that case:
1. Because people have different consumption preferences (including preferences related to locational amenities), housing will become more specialized. The problem of matching housing characteristics with consumer preferences will be more challenging, just as the problem of matching worker skills with occupational demands has become more challenging.
2. If people care relatively more about consumption complementarity and relatively less about work complementarity in their choice of location, then the correlation between housing vacancies and unemployment may be reduced.
3. People may be less eager to obtain inexpensive housing, because moving to a location far from one’s preferred amenities is perceived as a big sacrifice. This may slow the process of adjustment in the housing market.
So, when you overbuild houses in Nevada or condos in Florida, you cannot lure very many people with lower prices. Most unoccupied houses have close to zero marginal value to the vast majority of consumers, just as most unemployed workers have zero marginal product to the vast majority of firms. A long, difficult adjustment process is required before unoccupied houses can be matched with people who want to live in them, just as a long, difficult adjustment process is required before unemployed workers can be matched with firms that can put them to productive use.
Jul 29 2010 at 11:37am
This is increasingly true.
I telecommute fulltime. No one at work cares where I live. So I live near where I play.
Jul 29 2010 at 11:40am
I think this is a really interesting point Arnold, and like much of your recalculation argument, it’s very consistent with Austrian capital theory. Any piece of capital, like a house, or any piece of human capital, gets its value not just from its own productivity but from its complementarity with other inputs to produce desired/valued output.
Zero MP workers fit this story because they don’t complement existing workers nor can their skills produce what’s now in demand. A house, in and of itself, might have some versatility as capital, but if the value of the physical house also depends upon the complementarity of the location in the minds of potential buyers, then the house’s versatility is far less, causing the problems you have described.
So much of the damage done by the Fed and housing policy was to create unsustainable capital structures that will take a long time to unwind.
Jul 29 2010 at 12:16pm
Younger folks who want to live in Manhattan, or close to it, often need to band together. Nice one-bedroom apartments can cost up to $5,000 per month; 2-bedroom apartments up to $8,000. Someone who could spend $1,000 per month or more on rent in Florida or Nevada would not need to accept such cramped conditions. The price level can determine the size of the household.
Jul 29 2010 at 1:06pm
Zoning laws add to the problem of the zero marginal utility of a vacant house. Vacant homes can only be used as residences. If municipalities would change their zoning laws to allow commercial and light industrial uses, vacant homes (or the land if the house is razed) could be business locations. The change would allow infiltration of new businesses, which would increase demand for nearby housing to be used as other businesses and as residences.
Jul 29 2010 at 1:26pm
That’s why I moved to Springfield, MA. I like to be close to where the action is. It has nothing at all to do with my job….
Jul 29 2010 at 1:28pm
A long, difficult adjustment process is required before unoccupied houses can be matched with people who want to live in them, just as a long, difficult adjustment process is required before unemployed workers can be matched with firms that can put them to productive use.
It’s fashionable these days for workers to speak of ‘reinventing themselves,’ and so perhaps some of the McMansions w. their 4-car garages can be re-tasked as 4-unit apartment buildings.
And as caveat bettor indicates, some of the units are moonlighting.
While I’m not generally sold on the laissez-faire brand of libertarianism, I think they’re onto something w. radical zoning deregulation. Would be especially nice if first target were rules against multi-family housing or the even more elitist minimum square footage requirements. Of course the far-right wing of libertarianism seems to want to replace the municipality with some kind of exclusive private club. My sincere hope is that that particular business model turns out to be fatally flawed.
Jul 29 2010 at 3:11pm
I think you’re right. I wonder what would happen to the housing market in the near future when the Baby Boomers starts to retire. There has been conflicting theories about the resulting adjustments of the housing market. Nevada and Arizona, for example, will not only attracts older people on price, but also consumption complementarity such as the weather, amenities, community, etc.
Jul 29 2010 at 3:27pm
In theory, much of the exurban housing built in the Sand States of California, Arizona, Nevada, and Florida could be repurposed as snowbird winter homes for affluent Baby Boomer retirees in the north and in Canada.
A big problem, though, is that since so many of these homes were sold with subprime mortgages, the neighbors tend to be a little subprime. Who wants to buy a house in a dodgy neighborhood that is half-emtpy and let it sit empty half the year, only to return in November and find a meth lab has been operating in it?
These kind of problems can be solved, but the solutions will take a while to work out.
Jul 29 2010 at 10:06pm
Generally speaking, people would stay where they can work and make living affordable. However, the choice only stays with them as long as they are employed. During this economic crisis, people lost their job. They can hardly afford the food and health care for their family, forget about the nice house. They have to move to a smaller house, but in California for example,a dad himself can not be able to take care of his family even if he has to work two or three unskilled jobs. At this moment, any type of jobs are rare. Since they can not find a job anywhere, a way out is moving to a place where housing is cheaper. Even though they can not find a job, they don’t have to pay as much as if they were to stay at the same place. Therefore, if they have some saving money, they can last longer until they find another job.
Of course this does not apply to those who has a very high pay job that can afford $8000 every month for an apartment. However, should they rethink if they can be able to afford that in the long run?
Jul 30 2010 at 7:12pm
I’ve been thinking that the explanation for the large number of vacant houses is simply that due to bad policy we overinvested in housing — too many units got built when prices were being driven up by cheap/subsidized credit.
Is that not right?
Jul 31 2010 at 11:15am
Should I be reading the above as:
Most unoccupied houses, at any price,..
Most unoccupied houses, at the prices offered,..?
Also, weren’t nearly all Las Vegas and Florida condos built distant from production and close to consumption?
Aug 1 2010 at 12:24am
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Aug 1 2010 at 2:55pm
I cite Sumner who says our troubles are part recalculation driven, but significantly amplified by too-tight money. Boushey (http://wonkroom.thinkprogress.org/2010/07/29/boushey-equal/) has a nice chart that shows that while job loss was proportionally greater in the obviously overdone sectors of construction, (probably finance and autos, too) total jobs lost in other sectors was much greater. What is the recalc story there?
The low-mobility story is also valid (many are trapped by zombie mortgages) as evidenced by the increased number of job openings as a percent of unemployment (from Krugman http://krugman.blogs.nytimes.com/2010/07/29/beveridge-worries/). But again, outside of the three big bad sectors, what other jobs are relocating around the country in large numbers?
Aug 1 2010 at 6:17pm
I disagree that the unwinding has to be a long and difficult process. It has proved long and difficult because the government chose to intercede on the part of those owed money (the investors)and those owing money (people who should never have been given mortgages to begin with).
Had the market been allowed to work as it should prices would have dropped even more on homes, losses would have been liquidated and people needing housing would have been able to buy at very low prices. The market would have cleared and we would have regrouped and gotten back on track a long time ago. Those in government decided to try and protect their investor friends from losses and their voting friends from losing their houses. Everybody else got screwed.
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