Within group inequality

In graduate school, I took a class on income inequality in the United States.  One of the things that I learned in that class is that "within group inequality" has been the major contributor to the overall increase in inequality.  What that means in non-economist language is that even if you only look at a group of people who are all of the same race, gender, education, age, etc., inequality has grown enormously.  While the average college graduate makes a lot more than the average high school dropouts, there's still a huge variation within each group.

The Washington Post had an article today on "housing envy" that illustrates an aspect of this phenomenon.  Real estate prices have taken off so much in this area that people with the same incomes (the article focuses on several pairs of coworkers) are in enormously different situations depending on whether they were lucky enough to have bought real estate more than 4 years ago.  People who moved to the area more recently, or were too early in their careers, or just not motivated to buy, are pretty much screwed.  Either they can't afford to buy, or their mortgage payments eat up a huge portion of their income, or they've taken a risky gamble with an interest-only loan.

We're on the lucky side of that divide.  Eight years ago, my suburban-raised husband dragged my NYC-raised self into a realtor's office and eventually we bought the house we're still living in.  That choice has had huge consequences for our family -- it's meant that I'm able to support the family on just my paycheck and that I only lose about an hour a day to commuting (round-trip), much of which I can spend reading on the metro.  And if we were willing to move away from the coasts, it could buy us an awfully nice quality of life, or even let us both freelance.

As the saying goes, it's better to be lucky than good.  But I think it's bad for society for luck to matter so much.  At least Virginia's property tax laws don't further benefit long-term owners over new buyers the way California's do.

Comments

[dave s]

I bought in Arlington in 85 - just before the price run-up previous to this one. My house could now sell for, I guess, five times what I bought it for. No one in my 1985 income status can buy into Arlington now - it's all DINKs and empty-nesters with equity from somewhere else. And that's bad for Arlington, bad (ultimately) for support for its schools. What can be done?

People are paying a lot more for their dwellings than the housing services themselves are worth - they are buying on the Greater Fool theory (I may be a fool to pay this price, but there's be a greater fool than I after me) and this speculative premium is a lot of what is moving things. And when folks lose confidence that the Greater Fool will be there for them, the rocketing-up prices we now see will stop.

What can help? Building a lot more condominium apartments, partly. Condos should not cost much more than their cost of construction, because they consume so little land. And, though not as much fun as a single-family house (yard for the kids, your own tomatoes, etc) they provide some competition. Loosening zoning to let more apartments be built. Look at the extent to which things like historic districts function to keep new housing from being built. It would be a good thing to change the mortgage interest exemption to a 50% tax credit on, say, the first $30,000 of interest, to limit the subsidy for ultra-expensive homes and target it to the people who are buyers of more modest homes.

[dave s]

oh, yeah, DINKs - Dual Income No Kids. sorry.

[LPF]

It's just sad. We really love DC and thought that we would stay here forever, but it's just not practical anymore. I really wonder if most of our friends—or at least those who have or want kids—will still be here in five years. I wish we had bought 8 years ago, or even two years before we bought our townhouse when we were considering a new-build townhouse. It would have put us that much further along the equity lottery path. We'll miss it here.

[Angry Pregnant Lawyer]

Everyone I know is moving out to Loudoun County. And even the outer exurbs are really expensive now.

What really bugs me are the people who say it's "smarts," and not luck. The Post's message board that accompanied the article you link to had some really unbelievable comments on it. Made me want to throw things at the computer screen.

[jen]

The housing market right now feels exactly like the high-tech stock market did in 2000. I was working at a high-tech consulting firm in 2000, and I clearly remember how everyone had Excel spreadsheets to calculate the value of their (not yet vested) options: the numbers were typically around $200K. Almost no one from that company actually vested in time to cash in on the value of their options. Instead, all it did was make us all feel falsely rich and cause us to make some really bad money decisions. When you're expecting $150K in ten months, even if you tell yourself it's not real money yet, it still starts impacting your decisions. I can't tell you how many people started families, or (like me) encouraged their spouses to give up paid work. These are long-term decisions to say the least. Many of those same people were moving back in with Mom and Dad, spouse and new baby in tow, by 2002.

Now you hear people talk about how they're "sitting on a gold mine" because their house appraises high, but to me it just sounds like 2000 all over again. Instead of ritualized weekly update of the Excel spreadsheet, this time around people do obsessive web searches on sales in the neighborhood. But just like those ephemeral options, it's not real money: the only way you can get that equity out of your house is by selling and not buying another house. Because everyone feels rich ("Our house has gone up 150% since we bought!") we're dumping tons of money into renovations, vacation homes, etc., often financed on home equity. I don't believe we as a country would be making these types of decisions were it not for the feeling of artificial wealth we've currently got.