Huh?
- Posted by ryan on March 27th, 2008 filed in In the News
New Census estimates are out for metropolitan areas. In an attempt to educate its readers, the New York Times goes to an economist at the Dallas Fed for comment:
“Last year, job growth in Texas was triple that of the nation, so it wouldn’t be surprising to find that people are choosing to move here, because there are jobs,” said Fiona Sigalla, an economist with the Federal Reserve Bank of Dallas.
In addition, house prices there have been stable compared with other areas, Ms. Sigalla said, adding, “We have lots of available land and fewer regulations, so we have a homebuilding boom sufficient to keep home prices at bay.”
Let’s diagram this sentence. First, circle the parts that are hilarious. Second, underline the portions that are nonsense. Third, draw a square around the parts that while true, should cause a real economist to explain that perhaps the party might not go on forever (see also: Phoenix). Fourth, draw squiggles indicating concern that this person is a part of the policy-making process. Finally, make stabbing motions at the paper, indicating that this piece of information, deemed important by Times editors, likely made the average reader substantially dumber.
March 27th, 2008 at 2:57 pm
In addition, house prices there have been stable compared with other areas, Ms. Sigalla said, adding, “We have lots of available land and fewer regulations, so we have a homebuilding boom sufficient to keep home prices at bay.”
Umm, you misunderstand. Of course, so might the average reader. Texas house prices have been stable– completely unlike Phoenix. They didn’t go up in the bubble either. The economist’s point is that in Texas, unlike in other places, supply increased rapidly with demand, keeping prices about the same. Since they didn’t go up much, they shouldn’t go down much either. Restricted supply causes enormous price sensitivity and changes from small amounts of demand change– see oil.
March 27th, 2008 at 2:59 pm
The entire point of the economist is that there wasn’t a party in Dallas, that “see also: Phoenix” is an invalid statement. Prices being stable in this case refers not just to prices not falling yet (as in, say, Seattle, which saw the boom but hasn’t seen declines yet), but to not participating in the boom in house prices in the first place.
I grant that most people are going to misinterpret it.
March 27th, 2008 at 3:02 pm
E.g., see Virginia Postrel’s article on Ed Glaeser’s research for a bit of discussion on how home prices in Dallas and elsewhere never went up because the supply increased so rapidly, unlike in most of the rest of the country.
March 27th, 2008 at 3:08 pm
I know what she was trying to get at, but it still doesn’t make sense. Supply did respond incredibly rapidly in Phoenix, which also had an economy that relied heavily on the construction industry to provide employment. That’s not sustainable, and just because prices didn’t soar in Dallas doesn’t mean they can’t come down.
March 27th, 2008 at 3:30 pm
Supply did respond incredibly rapidly in Phoenix, which also had an economy that relied heavily on the construction industry to provide employment. That’s not sustainable, and just because prices didn’t soar in Dallas doesn’t mean they can’t come down.
Doesn’t mean that they can’t come down, but there are reason to expect a certain relation between home prices and rents, and between home prices and construction costs in areas whose populations are growing. Ed Glaeser also has some research on this topic.
I grant that Phoenix, like Vegas, showed a very high rate of housing starts per 1000 people, as this table shows. However, that’s very misleading because of the population growth rate. With Nevada showing a population growth rate of 3.6% and Arizona 2.8%, starts needed to be significantly higher to increase supply rapidly enough in the short run. Texas had similar levels of housing starts with only a 1.9% growth rate. When you adjust for population growth, Las Vegas and Phoenix were building significantly less housing than Austin, Dallas, Houston, or San Antonio.
A building starts rate of 9-12 per 1,000 current residents is one thing when you’re growing by 1.9% per year (and even then it does not cover population growth), but when you’re growing by 2.8% or 3.6%, the extra population growth compared to the growth in housing is quite significant.
March 27th, 2008 at 4:28 pm
Two things. One, what’s up with that table? He’s only counting single unit permits, which doesn’t make any sense. Two, units per current population doesn’t make a bit of difference. Otherwise, Detroit’s prices would be through the roof.
Forget growth rates. The question is to what extent did each place accommodate new demand. Numerically speaking Dallas has added more people and permits per year than Phoenix. The market might have been slightly tighter in Phoenix, but it would be wrong to paint them as wildly different.
March 27th, 2008 at 9:21 pm
I’d fail this assignment. Can you clarify specifically what’s so bad about that paragraph?
(Last I’ve seen at aggregate data is that Texas is slightly undervalued housing wise, and hasn’t been hit as hard in the housing downturn. “Fewer regulations” is dubious, but the driving/land issues in Texas is big, no? Everything is bigger in Texas….)
March 28th, 2008 at 10:53 am
This doesn’t seem unreasonable to me - highly elastic supply is a good way of minimizing the price effect of demand shifts, both positive and negative. It’s not that the party can’t go on, it’s that the party was only ever some grandparents playing canasta, so nobody will really notice when it stops.
March 28th, 2008 at 10:59 am
Hmm…upon further consideration, I spoke too soon. Supply growth may be highly elastic for housing in Dallas, but supply contraction is incredibly inelastic. A demand contraction will still have massive effects - it won’t be prices of the same stock returning to normal, though, it’ll be a glut lowering prices far below what they were a decade ago. I don’t know the specifics of the Dallas housing market all that well, of course, living 2000 miles away and all, but that’s a plausible narrative.