Why are things this bad?

In January of 2021, there were more real-estate agents than houses for sale in the United States. According to classical economic analysis rising interest rates should depress housing prices, because it depresses demand. Nobody wants to buy a house at 7, 8, or 9% interest and beyond. However, this also means that no one wants to sell their house. So the interest-rate effect on demand has an equal effect on supply. Therefore, the only market participant willing to sell houses are the home builders. 

So, the solution is simple: build more houses.

Housing is a wonderful economic engine. Consider all the things required to build a single home, let alone an apartment building: lumber sawed, milled, and delivered; copper mined, refined, smelted, made into wires and pipes; gypsum mined and made into drywall; bricks made; or vinyl siding created; fiberglass insulation; door hardware; various different appliances; flooring; it takes a ton of raw materials each of which gathered, refined, processed, and installed. That’s before we consider the actual assembly of the home, the architects and engineers planning, the preparation of the site, plumbs, electricians, carpenters, roofers, masons, and the government workers who inspect, certify, and assess.

It’s an enormous undertaking, each steps of which provides plenty of people with work and therefore income. 

The Endowment Effect

If the benefit to the economy and society is so great, why don’t we just build more housing? There’s a simple explanation: self-interest.

Those same people who refuse to sell their home now because it would be silly for them to trade a 3% interest mortgage for a 7% one, are also the same people who want to keep their own homes worth inflated. Which doesn’t sound that bad on its face, but it’s what’s driving the current crisis. People, who have absolutely no interest in selling this expensive asset are also extremely interested in preserving the value of that asset. If they do not plan to liquidate the asset anytime soon, why does it matter at what the current valuation stands? The price of anything matters only when things come to market.

If you intend on living in a home until you die, do you particularly care if on any given day it is worth $100,000 or $105,000? You’re not going to see any of the money either way. If you buy a share of ABC company for $1, do you care if it becomes worth $10? Yes. Why? Because shares are easy to sell. You can do it on basically any weekday. Let’s suppose you were barred from trading for 3 years after you buy the share. In year 2, the value drops to $0.01.

Do you particularly care? Should you spend your days worrying about this value? You’re welcome to let your hair turn grey over it if you so desire, but the rational choice is to forget about it until the 3 year ban is lifted, since there’s nothing you can do anyway about it.

Luke Data Engineer

Luke A man on a crusade against apathy. I created this website on April Fool's Day 2024, after noticing the sharp uptick in garbage writing on the internet. My day job is as a data something. I also do consulting work for small-business' trying to modernize their data situations and make a buck off them. I write a lot about technology, economics, my own antics, and opinions.  If my writing has entertained, informed, aggravated, or made you reconsider anything, then I consider this blog a fantastic success.

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