Housing Prices Are High — and Potentially Illusory
Home Is Where the Heart (of Darkness) Is
I once received a strange compliment from a reader who said a column I had written made him say “Oh s***!” This was good because I’d shown him that there were serious problems on the horizon (in the commodities market, shortly before it crashed in 2008). Unfortunately, a recent look through the statistics on US housing just made me say exactly the same thing — and I don’t think it’s positive.
Many aspects of the economy are still being buffeted by the ripples from the pandemic, which makes precedents hard to apply, and should make everyone cautious as to their judgments. Housing market data is also, inevitably, reported with a lag. That said, the latest numbers on monthly sales of existing homes in the US show they are selling at an annualized pace barely above 3 million. Barring one bad month in the aftermath of the Global Financial Crisis, this is the worst figure in 27 years:
Worse is to come. “The slide in home sales is far from over,” says Nancy Vanden Houten, lead US economist at Oxford Economics. “Keep in mind that recorded sales of previously owned homes are based on contracts signed a month or two earlier. Since those contract signings, mortgage rates are up another half-percentage point and it’s doubtful that the squeeze on affordability from higher rates has been offset by declines in home prices.”
As might be expected when 30-year fixed mortgage rates have just topped 8% for the first time since 2000, demand for home loans has taken a dive. The index kept by the Mortgage Bankers Association suggests fewer Americans are applying for mortgages than at any time since 1997. As these numbers are highly seasonal, the index is shown as a 50-week moving average:
The collapse in mortgage demand and in transactions comes with house prices still very high. Generally, these things would soon weigh on prices, to allow the market to clear. The S&P CoreLogic Case-Shiller 20-city index of house prices shows prices beginning to dip last year but then rebounding over the last few months. Note also that while the US market looks overheated, it’s a problem that seems to afflict a number of the large English-speaking economies. House prices in Canada have also bounced of late, as monitored by the Federal Reserve Bank of Dallas, and have risen even more than in the US. Meanwhile, prices in the UK (an economy in far greater trouble than the US or Canada), also look more overheated, particularly in London (which is buoyed by international demand that perceives the city as a haven):
Prices have continued to rise even as transactions have tanked. If we look at a ratio of the Case-Shiller index to existing home sales, it has more than doubled since the end of 2020. This is far greater than anything seen even at the top of the housing bubble that preceded the GFC. The implication is that we should brace either for a sharp increase in transactions or a big drop in prices:
The protracted period of zero interest rates in 2020 and 2021 allowed many homeowners to lock in very low borrowing costs. They are not under any pressure to sell, and have an incentive not to do so as they would have to take on a much higher mortgage rate to buy a house. With few transactions happening, current prices may be illusory. Wait a few more months, and for more people to give in and sell, and the market could clear at a much lower price. Meanwhile, many houses, and loans linked to them, sit on the books of their owners and those who financed them at unrealistic prices.
Homebuilder shares have fallen in recent months, after they had registered their highest level relative to the rest of the market since the eve of the GFC. This rally is on a much smaller scale and builders have been nowhere near as over-extended as in the bubble that peaked in 2005. It’s still a discouraging precedent:
There are reasons for optimism despite the obvious similarities to the GFC. The mortgage market is not as opaque as it was back then, when many investors were left with no idea whether their counterparties were sitting on losses. Mortgages are not being extended to subprime borrowers in the way they were then. And the travails of housing can be seen as part of a “rolling recession,” which has already brought down prices of lumber and home improvement stocks.
But it would be unwise to take that argument too far. The constipated market, with the sudden surge in mortgage rates taking many houses off the market, will have to resolve itself somehow. US consumers have stayed remarkably enthusiastic and active. That might be hard for them to maintain if and when house prices correct.
The Morals of Techno-Optimism
Marc Andreessen, one of history’s most successful venture capitalists, tried to recapture the moral high ground for the tech sector last week by publishing a 5,000-word manifesto for “techno-optimism.” It hasn’t worked out that way. Even those who sympathize with him take exception to his more outlandish assertions. More or less everyone finds the high prophetic tone annoying.
You can find Andreessen’s manifesto in full here. Of the many critiques it’s already provoked, I’d recommend Marc Lashinsky in the Washington Post saying the whole thing is so over-cooked that it will actually damage the tech industry’s reputation, while Fortune magazine described it as a “hallucination of a manifesto,” Wired magazine (not exactly a tech-skeptical publication) said it had missed the point on many things, Axios in an initial response said he’d hurt his own cause and Vice called him “unhinged.” Most impressive, for me, was Felix Salmon’s long piece for Axios over the weekend, which is headlined “Silicon Valley’s Perversion of Philanthropy.”
So, Andreessen has succeeded in getting technology and growth on to the agenda, but failed miserably in getting people to come along with him. The most effective manifestos give a clear and uncomplicated course of action — most famously Marx and Engels’ Communist Manifesto or, at much greater length, the novels of Ayn Rand. Aggressively stated certainties usually appeal. What has gone wrong with Andreessen’s techno-optimism?
It’s worth taking the time to read it. I think there are probably three issues.
It speaks volumes that the opening words of text in support of optimism are “We are being lied to.” The tone of grievance in which he complains that we are “told to be angry, bitter and resentful about technology” is unappetizing. There’s certainly a backlash against the big tech groups, but that tends to happen to any group that amasses great power. They’re still hugely respected in the market, and few fail to grasp that technology has helped the economy to grow. It’s telling that someone like Andreessen felt it was necessary to defend his point of view. That speaks to the polarization and decline of civility in our discourse (which the brilliant technology behind social media might have something to do with).
While only the foolish could deny the positive role of scientific advances in our lives, Andreessen overstates his case:
We had a problem of isolation, so we invented the Internet...
We have a problem of poverty, so we invent technology to create abundance.
The internet has not solved the epidemic of loneliness, and there’s still a lot of poverty around. Technology is a tool that can help do good things, but powerful tools can be dangerous in the wrong hands, and they need to be used well. That requires human judgment.
A final problem is that the tone is designed alternately to inspire and enrage, and comes over as hopelessly overblown. For example:
We believe Artificial Intelligence is our alchemy, our Philosopher’s Stone – we are literally making sand think.
We believe a Universal Basic Income would turn people into zoo animals to be farmed by the state. Man was not meant to be farmed; man was meant to be useful, to be productive, to be proud.
Techno-Optimists believe that societies, like sharks, grow or die.
All of these arguments are defensible. They’re not couched in a way likely to persuade the dubious. Human society is much, much more complex than a shark.
Silicon Valley is driven by libertarianism, of a kind most recently championed by Ayn Rand. This offers the classic defense of individual rights and free markets. But despite first appearances, Andreessen is inspired by another tradition completely: utilitarianism.
In its most simple version, promulgated by Victorian liberals, utilitarianism says that actions should be judged by their consequences, and that we should do whatever creates the greatest good for the greatest number. That implies — very controversially — that it’s sometimes OK to sacrifice somebody if this is more beneficial to everyone as a whole.
Modern versions of the philosophy go further. Utilitarians aren’t bothered by individuals’ rights but by the welfare of as many people as possible. That means that people who don’t exist yet, or who might never exist, need to be part of the equation. That makes arguments for action against global warming stronger; but it’s also reasonable to take the side of those of us who actually exist in the here and now.
Andreessen’s embrace of the philosophy reaches an extreme at two different points. One is where he quotes the economist William Nordhaus to argue that his actions are inherently philanthropic:
Creators of technology are only able to capture about 2% of the economic value created by that technology. The other 98% flows through to society in the form of what economists call social surplus. Technological innovation in a market system is inherently philanthropic, by a 50:1 ratio. Who gets more value from a new technology, the single company that makes it, or the millions or billions of people who use it to improve their lives? QED.
This isn’t Ayn Rand arguing that it’s good to be selfish, but classic utilitarian reasoning. If he’s arguing that nobody should be ashamed of being a successful entrepreneur, he’s dead right. If, as it appears, he’s arguing that successful entrepreneurs needn’t feel obliged to help others, that’s very hard to swallow.
There is an obvious link here to “effective altruism,” a modern and extreme view of utilitarianism, which holds that we should always act so as to do the maximum benefit for others. That means donating a kidney to someone you’ve never met; and it means making a lot of money to maximize the amount you can then give away. But even if you’ve done good by building your fortune, on this argument, you still need to give it away. Sam Bankman-Fried says he is an effective altruist, and he is currently facing trial on charges of theft on a massive scale; if guilty, that means he’s a hypocrite, but doesn’t necessarily mean there’s anything wrong with the theory behind effective altruism. For stronger arguments against effective altruism, even that it’s as bankrupt as Bankman-Fried’s crypto company, read this blistering piece from Bloomberg Opinion’s Clive Crook here.
Andreessen’s second extreme is in his defense of artificial intelligence:
We believe Artificial Intelligence can save lives – if we let it. There are scores of common causes of death that can be fixed with AI, from car crashes to pandemics to wartime friendly fire. We believe any deceleration of AI will cost lives. Deaths that were preventable by the AI that was prevented from existing is a form of murder.
So, if you’re a regulator or politician who explores ways to mitigate the possible ill effects of AI, you’re a murderer. It’s almost as though Andreessen knows of no examples out there of technology that was introduced too fast and caused harm. A sensible version of utilitarianism that balances risks and benefits might help anyone wrestling with the dilemmas of AI. Andreessen’s defense as it stands, that we should maximize the number of lives, is an example of utilitarianism being reduced to absurdity.
Andreessen attacks central economic planning that “elevates the worst of us and drags everyone down” while markets “exploit the best of us to benefit all of us.” Markets are an “upward spiral” compared to the “doom loop” of planning.
It’s not controversial that markets allocate capital better than planners. The events of the last two centuries compel such a conclusion. But that doesn’t mean markets are perfect. History makes that clear too. We should approach markets much as Winston Churchill approached democracy: “by far the worst way to run a country, apart only from all the other ways that have ever been attempted”.
Markets need consistently applied rules, as a democracy does, or they will distort outcomes. Left to their own devices, they allow over-concentration and monopolies, and shower capital to excess on some places while starving others that could use it better. This is better than central planning, but it’s far from perfect; markets are powerful tools, they must be used carefully, and those who trade in them must follow rules that must be enforced.
Andreessen cites the great libertarian philosopher Friedrich Hayek, saying “Hayek’s Knowledge Problem overwhelms any centralized economic system. All actual information is on the edges, in the hands of the people closest to the buyer. The center, abstracted away from both the buyer and the seller, knows nothing.” This was a devastating argument against communist planning, but also argues against modern capital markets.
A decade ago the finance academic Amar Bhide published a less over-egged manifesto: A Call for Judgment. Central to his argument was that modern markets, in their enthusiasm to create standardized financial products that could be securitized and traded had also failed Hayek’s test. In this video, you can watch Bhide explain this to me, in the surrounds of Borough Market on the south bank of the Thames. To make anything liquid enough to trade, he argues, “you have to impose on them a certain collectivization.” Once mortgages have been securitized, the lenders end up knowing nothing bar a few stylized facts about their borrowers. To quote Hayek, the market “abstracted away from both the buyer and the seller, knows nothing”. That way led the abject market failure of 2008.
This doesn’t mean we should give socialist planning another try. But Andreessen, and those of us who agree with most of what he says need to concentrate on fixing the problems with markets, and making sure they work well, to win over the pessimists. They don’t need to be defensive, but they will be taken far more seriously if they acknowledge that markets aren’t perfect. Nothing, ultimately, can do a better job of allocating capital than free markets, but they could still do a far better job of it than they do at present.
Morrissey, the former lead singer of The Smiths, is performing this week at the United Palace in Washington Heights, New York, a few minutes walk from my apartment. Should I go? The arguments against are that he will, by all accounts, become a parody of himself and that he’s now giving support to some hideous racist politicians on the far-right fringe of British politics. In favor is the fact that The Smiths were the ultimate student band for my generation of students and that it’s not just a question of nostalgia. Re-listening to The Smiths today is a reminder of just how good and fresh their music is. Making lists of their best songs was a pointlessly difficult student exercise, as there are so many to choose from. But after playing them on shuffle, I’d recommend these 10 to start, for anyone who’s unfamiliar: Panic; Bigmouth Strikes Again; The Headmaster Ritual; Asleep; Unloveable; Half a Person; Sheila Take a Bow; Unhappy Birthday; Heaven Knows I’m Miserable Now; and Reel Around the Fountain. Feel free to offer alternatives, and have a good week despite everything.
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