David Leonhardt argues in today’s New York Times that housing should probably be thought of as a luxury good that will appreciate as long as incomes grow. He contrasts this with basics such as food and clothing, the prices of which have tended to fall as prosperity grew.
I'm afraid this might be getting things exactly wrong.
“Perhaps most persuasive is a statistic that Mr. [Robert] Shiller sent me when I asked him about this debate,” Leonhardt writes. “It shows that the share of consumer spending — and, by extension, of income — devoted to housing has not fallen over time. It has hovered around 14 or 15 percent for the last 60 years. The share of spending devoted to food, by contrast, has dropped to 13 percent, from 25 percent.”
He takes from this a relatively bullish outlook on housing, siding with Karl Case, Mark Zandi of Moody’s Analystics and Virginia economist Tom Lawler against the likes of Barry Ritholtz, who sees a protracted slump in housing prices.
The ratio of median house price to income is about 3.4, compared with a prebubble average of about 3.2. Given the economy’s weak condition and the still high number of foreclosures, prices may well fall more in the next year or two. They look especially high in places where rents are comparatively cheap, like San Diego and San Francisco. And maybe income growth will remain weak for years, holding down home-price growth.
But if you can imagine staying much longer than a few years, you should take some comfort in the fact that the bubble seems mostly deflated. Sometime soon, prices should begin rising again. They may not quite keep up with incomes, but they will probably outpace the price of food and clothing.
But what if these long term trends have reversed? There’s good reason to believe that the share of spending households devote to food will not continue to drop. This is not just because income growth may remain extremely weak for most of the population for quite some time.
It’s also because of the fundamentals of feeding the growing population of the earth, coupled with rising demand for meat from a growing global middle class, probably indicates coming food inflation.
The causes of food inflation are easy to understand. The areas of the world where the population is growing fastest are also rising out of poverty. As they rise out of poverty, their food consumption habits will change in ways that tax the food supply out of proportion with the growth of population. Put simply: wealthier people eat more meat, and raising livestock requires more grain than simply feeding the population with grains. The ability to expand the food supply is limited by crowding in Asia and a lack of water in the Middle East, two of the areas of the world with the fastest growing population.
This is one reason that people like Michael Burry are buying agricultural land. Jim Rogers advises young women to marry farmers, since they will at least be able to provide for their families when food shortages arise. The bids for Potash, the Canadian fertilizer company, is also a play on global demand for food.
As food becomes more costly, the willingness and ability to spend more on housing should decrease. In short, housing prices may continue to fall not because “it’s different this time” but because it is not different. Housing and food prices have a lengthy history of inverse correlation. With food prices headed upwards, housing might be headed down.