The interrelated phenomena of rapidly escalating house prices, rising residential property taxes and the need for affordable and accessible housing is the 21^st century version of King Gordius’ knot. The cumulative result of our tangled institutional imperatives is that citizens occupying the bottom half of the economic food chain cannot afford accessible shelter on the open market. Even affluent citizens are being impacted negatively.

How can that be possible when trillions of dollars in federal subsidy over the past 50 years have resulted in 70 percent home ownership? There are three reasons why the impact is so widespread and why it is critical to address fundamental shelter dysfunction.

First, many existing homeowners could not afford to buy the home they now occupy or buy a comparable house if they wanted or needed to move. This is especially true for the growing cohort of older citizens. Just paying the property taxes is a stretch for many.

Second, if interest rates go up by a percentage point or more as predicted, many homeowners with variable interest mortgages, balloon payments and weak credit will loose their equity.

Finally, when the house price bubble bursts, many mortgages will be underwater and many municipal governments will be without revenue to support their activities. (Because of recent hyper inflation in house prices, a downturn is seen as inevitable by most housing analysts not employed directly or indirectly by the shelter industry.)

The problems related to housing are complex, and a solution is critically important to all citizens. SYNERGY/Planning calls the complex interaction of escalating house prices, rising residential property taxes and the lack of affordable and accessible housing the “Shelter Conundrum.” [See End Note One.]

Traffic Congestion and the Shelter Conundrum

Like traffic congestion (aka, immobility and lack of access) the Shelter Conundrum (SC) is rooted in dysfunctional human settlement patterns and dysfunctional governance structures. Unlike congestion/immobility/ isolation, the SC knot will take more to untie than citizen education and understanding. [See End Note Two.]

In the case of traffic congestion and regional immobility, dysfunctional transport is perpetuated by actions of a small but powerful group of interests that benefit from Business As Usual. These actions perpetuate broadly held Myths that influence the market. [See End Note Three.] 

The Shelter Conundrum is also generated by a complex of individual and organization actions which are assumed to be in the best interest of the actors. However, unlike transport dysfunction, no single alliance of interests provides the motivation to perpetuate the myths. There are far more forces, groups and interests at work, many working at cross purposes.

Further, there is no single solution such as a fair allocation of location-variable costs that would go most of the way to solving the mobility crisis. The Shelter Conundrum (SC) will require many more actions, although the fair allocation of location-variable cost strategy will help and is a first step toward a solution.

There is one other fundamental difference. Because almost everyone suffers from traffic congestion, almost everyone is prone to raise a stink about the need for a “solution.” With the Shelter Conundrum the focus is not on fundamental causes but on the effect: Rising residential property taxes and lack of affordable and accessible housing. Ironically, most citizens see rising home prices as a benefit because they think they are getting richer and richer.

As with any complex tangle, the only way to solve the Shelter Conundrum is to pull it apart and examine each of the components. In this column we will examine house price escalation. In subsequent columns we will address sky rocketing owner-occupied residential property taxes and the lack accessible and affordable housing in more detail.

House Price Escalation

There are several aspects of house price escalation that demand attention: 

• The unprecedented rate of increase

• The reasons behind this increase

• The myths that perpetuate individual and organization activities which result in residential price escalation

Unprecedented recent house price escalation. One usually hears about residential price escalation in the context of rising residential property taxes and the lack of affordable and accessible housing. Even without those problems, unprecedented rise in house prices is by itself a problem.

Robert J. Shiller a professor of economics at Yale has prepared a national home price index that spans the period from 1890 (sic) to 2004. He found that when adjusted for inflation, houses increased only 0.4 percent per year over the last 115 years. More important, the majority of that increase occurred in the past 8 years. With the exception of a smaller price run up during World War II there has never been a price increase anything like the one we are now experiencing. [See End Note Four.]

According to Shiller, when adjusted for inflation, home prices have been flat since 1955 except for two small boom/bust cycles. One was in the 1970s, reflecting the REIT boom/bust, and the other in the late 1980s/early 1990s, reflecting the Savings & Loan debacle. [See End Note Five.]

The rapid and unprecedented rise in house prices is a quintessential demonstration of the Fallacy of Composition: What is good for one is not good for all.

It is great if your house goes up in value. It is not bad if you and your neighbors enjoy an up tick. But when the prices for the whole community, subregion and region goes up, few really benefit unless they can bail out and go to a place where housing is much cheaper.

Unless people whose houses have increased in value can move, they cannot prudently cash in on the price increase. If they refinance or take out a second mortgage to pull out equity and the price falls, they are underwater.

If they move to a place where prices are lower, by definition that is place where fewer people want to live based on market considerations. There is usually a good reason for the lower price of real estate; fewer jobs, poor climate, isolation, air pollution, etc.

For years it was advantageous to retire and move. Now traditional retirement destinations have become expensive because they attract year-round residents who enjoy the climate, jobs taking care of the elderly, etc. In addition, more older citizens are retiring in place--the place they moved to years ago for a better job, etc. These are the places that have the fastest-rising housing prices. A onetime (empty nest) downsizing is a partial escape hatch but too few are willing to make the adjustment when they can. Those that do have been bidding up the price of smaller, well located/well built housing units.

One could become a full time house flipper, buying and then reselling to move up in the market. That does not contribute to what the vast majority consider a quality life. Living in an RV or on a sail boat are also “options” for a few.

The only groups who really benefit from rising prices and housing churn are agents who live on commissions and fees. This is not a small group, but it is a tiny minority of those impacted by volcanic house price increases.

The vast majority of citizens would be better off if there were little house price escalation except to reflect improvements in size, function or context of the dwelling.

One of the goals of Property Dynamics will be to make this clear to citizens. (See Joseph Freeman's column outlining the concept behind Property Dynamics: "Rain Dance," Jan. 4, 2005.)

How dramatic is the house price rise in the Virginia portion of the National Capital Subregion? Quite dramatic. Here is a table based on data provided by The Washington Post over the past 30 days.

The Post has not published data in the same format for rest of the Virginia portion of the National Capital Subregion but anecdotal data suggest similar price rises in places such as Warrenton-Fauquier.

These numbers document unprecedented change in house prices. If anything like the rates of escalation over the last five years had existed in the prior 30 years, a home in 1970 would have had the value of a Cracker Jack prize. We know that was not the case.

The conditions are especially ripe for hyper inflation in homes in the National Capital Subregion, the largest, fast growing job market in the United States due to the rampant government spending to buy our way out of terrorism and oil dependency.

Causes of unprecedented home price escalation. The easy answer to why this escalation exists is the unprecedented number of affluent citizens at the top of the economic food chain with no other place to invest. For many the stock market is seen as just another gambling venue. The tech stock market bust reinforced this impression. That was, and is, important, especially for the thousands of AOL Millionaires, Microsoft Millionaires, etc. in this and every hot housing market in the United States.

There are other contributing factors. One of the easiest to pinpoint is the low mortgage interest rates and the actions of Fannie May and Freddie Mac to force feed mortgage money into the expansion of home ownership, supposed source of prosperity. The corruption at the top of these agencies masks the larger problem of subsidizing the construction of the wrong size houses in the wrong locations. (A house in a dysfunctional location is not a quality home.)

High-end home buyers have so much easy money that they have not only driven up primary residence prices but have done the same for second homes, which will have a devastating impact on Countryside resources 20 years from now.

The consequences of cheap money from low interest rates is similar to those of cheap money during the REIT bubble in the '70s and the Savings & Loan bust in '80s. Both bubbles were focused on raw land and commercial real estate but they triggered recessions and drove down house prices up, and then down. This time the cheap money is leveraging housing price hyper inflation.

A “shortage of land” is often cited by “the shelter industry” as a reason for escalating house prices. The cost of land has gone from 20 to 25 percent up to 50 percent of the price of a finished house according to some builders. This creates a field day for land speculators. The problem is directly related to municipal controls inside the Clear Edge, as we will document in the third column in this series. (See the backgrounder “The Role of Municipal Planning in Creating Dysfunctional Human Settlement Patterns.”)

The myths. As one would expect, there is a cluster of myths that cause citizens to make housing decisions that are not in their best interests. For instance, there is a powerful mystique surrounding making money in residential real estate. It is a myth. More money has been made selling books on making money buying and selling residential real estate than has been made from the actual sales. A few professionals make money. A very view amateurs strike it rich from time to time and those are the ones that everyone hears about. Like the lottery, there are many small losers for every big winner in real estate speculation.

As documented by the 0.4 percent per year average increase in housing over the last 115 years, there is little room for wide-spread speculative gain. What is amazing is how, despite universal availability of calculators that run Internal Rate of Return and Alternative Investment calculations, the myth of the real estate investment bonanza persists.

A house is a home, not a profit center. Those who turn a house into primarily a business deal undermine the social and physical value of having a home, especially one where children are in the equation. (We explore this issue in The Shape of the Future.)

A window on why speculation in residential housing is so rampant is provided by the relationship between house price and real estate tax assessment: If the assessment does not go up the owner is insulted. If it does go up he claims his house is over assessed. However, almost no one will sell a house for its assessed value.

One cause of these irrational perspectives is ambivalence toward government and government spending. Another is the reality that the house is the major source of wealth for most citizens in the bottom 80 percent of the economic pyramid. Too often, families treat the purchase of the family home as a speculative investment decision. The focus on speculative investment is a hangover of a national policy, to be addressed in the next column, that made sense in 1820 but does not in 2005.

As suggested in “Wild Abandonment,” Sept. 8, 2003, citizens abandon homes and neighborhoods because they “wear out.” It may nothing more than fire alarm batteries, furnace filters, leaking pipes, worn out appliances, a moldy shower, a faulty circuit breaker or overgrown/barren landscaping. With no time or ability to “fix” the problem, people get frustrated and wrap up cleaning, safety improvements and repair into sale price and move on. (These issues will be addressed by Property Dynamics.)

Columns to Come in This Series

The next column will deal with the ramifications of property tax on owner-occupied residential real estate. This has become a political football. We will explore fundamental tax reform, not just political posturing.

In the following column we will revisit the topic of affordable and accessible housing building on the perspectives developed in “Affordable, But No Bargain,” Feb. 17, 2003, and “The Housing Dilemma,” July 14, 2003. We will demonstrate that the availability of affordable and accessible housing currently rests on the trickle down theory. That does not work when housing prices are wildly escalating and human settlement patterns are growing ever more dysfunctional.

1. The house price/residential property tax/affordable and accessible housing problems could be made even more complex by considering housing for the homeless. Then the problem would be on a par with other intractable problems of the day: affordable, comprehensive healthcare and social security.

2. Once citizens get beyond the smoke screen generated by the Road Gang contingent of Business As Usual, they understand that traffic congestion, immobility and lack of access is a human settlement pattern issue. It can be solved by creating functional patterns and densities of land use. These transportable patterns happen to be those most valued in the marketplace, so the solution is basically one of citizen education, not draconian controls or government spending.

3. For a summary of the transport dysfunction causes and cures see the four part series of columns “Self Delusion and Fraud,” June 7, 2004; “Death and Taxes,” June 21, 2004;  “The Perfect Storm,” July 12, 2004;  and “Out of Chaos,” July 26, 2004. Also see more recent columns addressing aspects of the transport issue: “Spinning Data, Spinning Wheels,” Sept. 20, 2004; “Dying Young in Traffic,” Nov. 1, 2004; “The Skycar Myth,” Nov. 15, 2004; “From Myth to Law,” Nov. 29, 2004; “The Commuting Problem,” Jan. 17, 2005; “Interstate Crime,” Feb. 28, 2005; and “Take Me Home, Congested, Nonurban Road,” April 11, 2005.

4. As we have noted The Washington Post has done an increasingly good job providing data on commercial building price and location. (See “Where the Jobs Are,” May 24, 2004,  and “Land Conservation Quandary”, March 28, 2005. Recently, The Post has published useful data on housing as well. See Special Real Estate Section March 23, 2005, titled “Higher Prices, Tougher Choices: Smaller Houses, Farther Out Are Frequent Compromises” which summarizes The Posts' data on home sales by Zip Code. Also see Whoriskey, Peter, “Property Owners’ Burden Rising: Home taxes Cover Larger Share of Government Costs,” April 12,  2005 which has valuable assessment data. In addition see Deane, Daniela, “In Real Estate Fever, More Signs of Sickness: Some Economists Warn of Housing Bubble,” April 17, 2005, that covers the reference to and graphic from Prof. Shiller’s work.

5.  Both the REIT bust and the Savings & Loan debacle primarily impacted raw land and commercial real estate but also had an impact on housing. There has not been a real nation-wide residential bust since World War I. Housing analysts employed by the building industry use this fact to discount the possibility of one ever occurring, even with the unprecedented recent price inflation.