It is fascinating to hear people speak of the housing market in the United States, particularly concerning the current prices for houses. The majority seems to believe that rising home prices is a good thing as it creates greater wealth for those who have homes. Housing prices are observed like stock indexes, the greater the growth and increase the better. But would falling home prices be a bad thing?
What if a company announced tomorrow that they had developed a new technology that allows them to build homes for 1/100th of the current cost, and this company would start selling mansions across the country for the price of a new car, around $30,000. Wouldn’t this be a good thing overall for society? Think about all of the people struggling to pay their monthly rent, families saving for a down payment to buy a small $200,000 house, minimum wage workers who can’t find enough hours of work to be able to save any of their earnings, or even homeless people. For all of these people and many more, comfortable housing would now be affordable. The dream of home ownership would no longer equate years of expensive schooling followed by a decade of working and saving for the privilege to buy a modest house. Everyone willing to find a job of almost any means could share in the dream of home ownership.
Now in this scenario some people would be upset, mainly everyone who bought a house in the years prior to this new technology who had a large mortgage that was eating up their paycheck. The new technology would probably cause many in the current housing industry to lose their jobs. Home builders who were unable to adapt to the new technology would go out of business and real estate agents would not make as much in nominal terms on the sale of a house, however they wouldn’t need to since the price to buy their own home would now be a fraction of what it was before. This is a natural process of technology – it is hard to find a professional typewriter salesman these days.
This is an extreme example, but even on a smaller scale what is so bad about home prices being reduced by 10%; or stated another way, why is a 10% increase in home prices a good thing? It is understandable that someone who owns a house wants their individual home to go up in value. However, if everyone’s house goes up in value, the way it is reported on the news, there is no real added value gained.
Often the news states how rising home prices is good because it makes homeowners feel wealthier and more likely to spend, and can lead to homeowners borrowing off of the value of their home to spend more on consumer products. Sure if the value of their house doubles they can take out a second mortgage and go on a spending spree, but this is not a good reason for house prices to increase. This is simply just the home owner trading in their equity for an IOU to the bank that needs to be repaid out of future earnings. Put in another way, the homeowner is sacrificing future consumption so that they can spend more today.
Even for the more responsible homeowner, what’s the big deal if home prices are increasing by 10% a year? This simply means that if you were to sell your current home, you would have to buy another home that is going to be more expensive than it otherwise would have been had prices not been consistently rising.
Houses should not be compared to stocks. Unlike stocks, your home is a necessity. The mortgage is a financial instrument that allows more people to purchase their own home than otherwise could. The cheaper home prices are, the less people have to work to afford one. The more people who can afford a home, the richer a society becomes. Wealth is not about how many dollars are in your bank account, but how much those dollars can buy.