Prices on the real estate market in Los Angeles County confirm elementary economic theory. The economically illiterates seem surprised. See “Rent Rose by 10 Percent Across L.A. Country After Fires. That’s Illegal,” Washington Post, January 23, 2025. The Wall Street Journal writes (“After the Fires, Bidding Wars and Cutthroat Demand Take Over L.A.’s Rental Market,” January 16, 2025):
Renters are facing bidding wars and inflated prices, with some offering to pay above the listed rent or multiple months upfront. Landlords are taking advantage of the situation, raising concerns about price gouging.
On a free market in ordinary times, both suppliers and demanders are “price gougers.” Note that the expression has no analytical usefulness (it does not help understand the social world) and no relevance to an ethics of reciprocity between free individuals. The suppliers try to get as high a price as possible given the constraint of competition. The demanders on their side try to get as low a price as possible given that many of them are bidding it up like in an invisible auction.
On a free market, every price is the result of “gouging” from both the suppliers and the demanders. It is in emergencies that we see this more clearly. The supply of some good or service (say housing) is suddenly reduced—by the fires in Los Angeles County. Consumers, whose demand has not changed, face fewer apartments for rent or houses for sale than they want. The ones who attach more value to housing in the affected market—say, people whose employment place is in the vicinity or who have children in a local school—will bid up rents and house prices. Others will prefer to move to a smaller place or with their parents or friends, or to move farther away. In the short run, the supply of housing is fixed, so a rise in prices is how, in a free market, the available supply gets distributed. The consumers are the ones who bid up the prices. The suppliers obtain a windfall, as consumers get one when building activity is high (or when economic conditions suddenly favor their own businesses).
In the longer run, price increases will bring new housing suppliers in the market. By trying to profit from higher prices, “gouging” suppliers will gradually increase supply and push prices down. Note the crucial role of free-market prices: they signal both the intensity of demand among consumers and the cost of supply in terms of what the required resources (industrial land, labor, etc.) would produce elsewhere in the economy. (See the always interesting Ryan Bourne and Sophia Bagley’s “Gov. Newsom’s Price Controls Will Slow LA’s Recovery,” Substack, January 15, 2025.)
To the price mechanism, two alternatives or a mix of them exist: a permanent shortage—meaning the price is good but the shelves are empty—or some authority giving orders. A third alternative is tribal poverty. On price controls and shortages, think of the old Soviet Union, where the non-nomenklatura buyer faced a 10-year waiting list to buy a car, or the Stockholm housing market, where the waiting for a rent-controlled apartment is 8 to 10 years.
When market prices are capped by government, a free black market partially takes over for consumers who prefer to have the good rather than forego it and for suppliers who choose to sell at a higher price—especially since, at the previous price, they have more customers than what they have to sell.
To understand these conclusions, only basic economics is needed. Business people get an intuitive understanding of supply and demand, or else they don’t remain long in the market. But there is nothing like actually learning the elementary theory of supply and demand: a demand curve slopes downward, a supply curve (generally) upward. Quantity demanded is read along the demand curve, and quantity supplied along the supply curve. When an emergency situation decreases supply, it’s the consumers who are doing the “gouging,” that is, the bidding; if there were no consumers, no price would be bid up. Imagine an auction where no buyer shows up.
The Washington Post story mentions the California Attorney General who, from the height of his economic ignorance and with power signs in his eyes, supports another system than individual liberty:
On Wednesday, California Attorney General Rob Bonta (D) announced charges against a real estate agent for allegedly attempting to price-gouge a couple who lost their home in the Eaton Fire. … The charge could carry a fine of up to $10,000 and one year in jail.
“These predators are looking at the disaster with dollar signs in their eyes,” Bonta said at a Jan. 16 news conference.
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DALL-E is not very literate either (I had to put the supply-demand graph myself on the screen and I could not persuade the robot to write “supply,” not “pupply”)
READER COMMENTS
MarkW
Jan 30 2025 at 10:32am
Even in the short run, housing supply really isn’t fixed. For a high enough price, a lot of spare bedrooms could come into the market.
Pierre Lemieux
Jan 30 2025 at 11:10am
Mark: Good point! I agree and, while writing, I wondered whether I should elaborate on this. (One can always elaborate on virtually every single word.) I would have noted that it depends on how short is the short run. Except for temporary accommodation with family or friends, the supply of housing is literally fixed 24 hours after the supply shock. Perhaps after a few days, if the price is high enough, some will have readied a spare bedroom and advertised it for rent. And so forth.
David Seltzer
Jan 30 2025 at 12:39pm
Pierre: Timely post. I related the following story to Jon Murphy on a call yesterday. My friend’s parents live in L.A. They evacuated. Fortunately their home didn’t burn. They went to a hotel to get a room. The price(s) for hotel rooms increased within minutes from $400 per night to $1000. Why? a bidding war broke out on the spot for a few remaining rooms. Wall Street aphorism: There are two sides to a market kid! As an aside. During the recent housing run up, Homes in our neighborhood often sold for prices substantially above published asking prices. It was not uncommon to see several people at open houses bidding up prices. Homes often sold the same day they were listed.
Jose Pablo
Jan 30 2025 at 2:36pm
It was not uncommon to see several people at open houses bidding up prices. Homes often sold the same day they were listed.
People are naturally drawn to stories like these that capture public attention (not criticizing David, just acknowledging this after your comment). And yet, such anecdotes are ultimately irrelevant. The only thing that matters, in terms of the number of families housed, is that the home was sold. The price at which it was sold or how quickly it changed hands is entirely inconsequential in the short run. And higher prices can only be beneficial in the long run—at least if the goal is to increase housing availability.
Moreover, if the selling family remains in the area, even the sale itself has no impact on the number of families accommodated locally. The secondary housing market is beneficial primarily because:
a) It provides a reliable price signal that helps other economic agents make informed decisions.
b) It ensures liquidity, reducing the risk and burden associated with building or owning a new home.
Interfering with housing prices or the liquidity of the secondary market can only make it more difficult for new homes to enter the market. And yet, the Attorney General seems to think he knows better…
David Seltzer
Jan 30 2025 at 7:14pm
Pablo: Thanks for your comment. The travesty of AG Bonita’s threats; they restrict choices of private individuals who agree to exchange. Subjective preferences be damned in Rob’s mind. Prices are inconsequential in the short run? Not to the buyer or seller. New housing construction for single family homes is about seven months. New subdivisions are completed in about sixteen months. As I’m sure you know, resources are allocated via price mechanisms. Prices signal current market conditions that inform choice decisions of individuals. People who can’t afford housing in Palo Alto, for example, geo-arbitrage domestically or internationally.
Jose Pablo
Feb 3 2025 at 5:25pm
Prices are inconsequential in the short run? Not to the buyer or seller
Not to the buyer or seller, but certainly to the housing market’s ability to accommodate people (which should be the relevant variable). At any given moment, the housing market can house (and will house) the same number of people, whether prices are incredibly low or extraordinarily high.
And yet, news of high prices or short time on the market creates the illusion that fewer people can be housed because housing is ‘less affordable.’ This, for instance, is the mistaken belief held by Rob Bonta (and many others).
[And of course, you are right, in the medium term, high prices should increase the ability of the housing market to house people … but you don’t even need that part to expose the problems with Bonta way of reasoning]
Jose Pablo
Jan 30 2025 at 1:01pm
I believe cases like the one involving the California Attorney General illustrate (once again) the concept of “that which is seen and that which is not seen.”
Market prices are visible—they are “seen.” But if you suppress them in some way, the market still needs to clear. That doesn’t change. As a result of this need, an alternative form of pricing—one that is less visible— has to emerge. It will be making lines, rely on personal connections with the owner or the public official allocating housing, or simply already be an existing tenant.
These “unseen prices” ultimately leave the same number of people unable to secure housing, as shifting from one pricing mechanism to another does not change the available supply—at least in the short run, assuming supply is perfectly inelastic.
What the Attorney General fails to recognize (surprisingly he should be smarter than that) is that there is another couple—let’s call them Couple B—who is also in need of housing and willing to pay more for the apartment. Perhaps, like Couple A, they too have lost their home in the fire. The Attorney General is not advocating from one more couple having a house. He is advocating for Couple A getting the house instead of couple B.
Unfortunately, most voters only see Couple A. They do not see Couple B. Even more concerning is that the political system incentivizes the Attorney General to side with the more visible Couple A rather than the unseen and now homeless Couple B.
The real tragedy is that the Attorney General may very well have read and understood Bastiat’s argument. Yet, when faced with political incentives and personal interests, he chooses to act otherwise and cause harm in the pursuit of his own benefit. You can not expect any improvement in housing market efficiency without changing the incentives of the political system.
Andrea Mays
Jan 30 2025 at 1:51pm
It is interesting how much visibility the AG and DA’s search for price gougers is getting, compared to the search for and prosecution of looters.
Pierre Lemieux
Jan 30 2025 at 2:43pm
Andrea: Interesting point! These statocrats are the worst looters.
Monte
Jan 30 2025 at 9:07pm
The almost impenetrable barrier of emotion is often the failure point of logic, including that in support of price gouging. Even in a free society such as ours, people just can’t get past the moral indignation of it. The following snippet from Cochrane’s, In Praise of Price Gouging, sums up our collective attitude towards it rather succinctly:
In spite of price gouging having the salutary effect of controlling irrational behavior, surveys consistently show a strong majority of people favor laws prohibiting it, particularly in situations involving natural or man-made disasters. On the other side of the ledger, we have consumers who, out of fear, panic-buy even when there’s no threat to supply (ie. toilet paper). Shouldn’t we have laws against that, too?
I’m going along with Russ Roberts on this one: “Decrying price gouging, or worse, keeping prices from rising during a crisis, is the worst kind of virtue signaling.”
Indeed.
Monte
Jan 31 2025 at 11:56am
OTOH, if you’re a business owner, you may choose instead to lower prices during a natural disaster. There apparently is a large body of evidence on the economics of fairness that poses a strong challenge to the traditional self-interest hypothesis.
Pierre Lemieux
Jan 31 2025 at 3:41pm
Monte: The problem is that if a seller sells below the market equilibrium price, he will soon have nothing to sell at all (both because he can’t replace what he has sold for the price he has sold it for, and because some of his customers will resell at higher prices what he has sold them). What then when the proverbial poor old lady comes to buy emergency supplies?
Monte
Jan 31 2025 at 9:07pm
I wholeheartedly agree, Pierre. But businesses who charge excessively high prices during a crisis risk imperiling their reputations and losing customers:
Pigs get fat and hogs get slaughtered. You can preach the logic of price gouging to consumers until you’re blue in the face, but logic almost always take a back seat to their sense of fair play.
Evan
Jan 31 2025 at 1:33am
There’s suddenly very high demand for home building in the area. I wonder if the California government is going to instate price controls on the manufacturing of homes as well.
Unironically, it was price controls on the home insurance market that drove providers to withdraw en masse from the state in the last two years, forcing homeowners into the Cal Fair plan, which is now teetering on the brink of bankruptcy due to being generally so poorly conceived and run. And that was more expensive for homeowners than the mandated price levels so the controls had absolutely no benefit to anyone.
I suppose insurance is a little different — the supply should be tremendously elastic — but the fact is that price controls do harm regardless of the specific market conditions.
Pierre Lemieux
Jan 31 2025 at 3:43pm
Evan: Indeed. Government intervention begets government intervention.
Craig
Jan 31 2025 at 11:16am
I wonder if the government will engage in property tax gouging? Or will they immediately adjust?
Comments are closed.