House Lust and Social Comparison
It is vital to listen to what people are saying during a rapid expansion of prices, to understand just what is animating them. In his 2007 book House Lust: America’s Obsession with Our Homes, Daniel McGinn sees psychological factors at work. The book was published at the beginning of the world financial crisis of 2007–9, right on the heels of the most rapid increase in house prices during the record-setting US national home-price boom of 1997–2006.
McGinn chose the title House Lust because he believed that the emotions displayed in conversations during the boom market just before the 2007–9 world financial crisis and recession reflected a true lust: a lust for status, and maybe power, that sometimes drives people to ruinous actions. During this lustful period in US history, people relished stories of higher and higher home prices, and of the people who benefited from them, a bit too much to be rational.
McGinn defines and explains some impulses and motives that are not in most economists’ vocabulary. He describes the “high-five effect,” which is the “vicarious thrill of cheering on a winner.” Most people enjoy seeing their own recent success with their real estate investments, and, so long as they are invested and not envious, they enjoy their friends’ and neighbors’ successes too. They are happy to share in their neighbors’ victories, giving each other “high fives,” the celebratory gesture that athletes give to each other after a big win, in a moment of seeming joy.
McGinn also describes an “Our House Is Our Retirement Plan” effect: the story that a house is necessary to successful living because it is a recognizable store of value. The narrative in the recent boom fueled house prices by implying the dictum that one should “stretch” or “reach” to buy a house. Buy the biggest house you can afford, because you will be glad that you did so when the house’s value goes even higher. McGinn also describes an “It’s So Easy to Peek in the Window” effect, caused by the Internet and social media, that allows housing voyeurs to get information about neighbors’ and celebrities’ home specs and prices as never before. McGinn observed:
And in many neighborhoods, if you’d judged the nation’s interests by its backyard barbecue conversation—settings where subjects like war, death, and politics are risky conversational gambits—a lot of people find homes to be more compelling than any geopolitical struggle.9
The Internet adds force to the narrative in today’s housing market. People are naturally curious about the amount of money that others make in their jobs, but they can’t find such information on the Internet (except in the case of government jobs), and it is considered vulgar to ask. However, McGinn notes, websites such as Zillow and Trulia, both founded in 2006, allow you to find out right away (for free) what anyone’s house is worth.
Social psychologist Leon Festinger described a “social comparison process”10 as a human universal. People everywhere compare themselves with others of similar social rank, paying much less attention to those who are either far above them or far below them on the social ladder. They want a big house so that they can look like a member of the successful crowd that they see regularly. They stretch when they pick the size of their house because they know the narrative that others are stretching. McGinn’s “You Are Where You Live” effect confirms the power of the real estate comparison narrative. As of the early 2000s, when the housing boom was at its peak, there was no other comparable success measure that one could just look up on the Internet.
The History of Homeownership Promotion
In another element of the real estate narrative, history shows a succession of advertising promotions for homeownership itself, not just for the sale of individual properties. In the United States, these promotions began with the “Own Your Own Home” campaign, launched by real estate agent Hill Ferguson in 1914 under the auspices of the National Association of Real Estate Boards (precursor to the National Association of Realtors today). The Own Your Own Home campaign, like the savings and loan association movement that preceded it in the United States and the even earlier building society movement in the United Kingdom and Europe, was an attempt to help people build up some savings.
The Own Your Own Home campaign set out to change the widespread presumptions that borrowing is disreputable or dangerous, that people should never go into debt, and that they should accumulate savings to buy a home with an all-cash offer. In a 1919 display ad placed in numerous newspapers, the campaign stated:
Don’t let the idea of a mortgage scare you. Some people think they’re a disgrace. But if they’re good enough for the biggest corporations and the United States government they needn’t frighten you.11
Note that the purchase of a home was not cast as part of the more modern concept of “saving for retirement.” A ProQuest News & Newspapers search reveals that retirement was virtually never mentioned in advertisements for homes until the 1920s, and the idea did not take off until the 1940s. In the earliest part of the twentieth century, people didn’t think of saving for retirement, as they in many cases did not think they would live long enough to spend much time in retirement. Rather, savings were put aside as a safety measure against illness or other misfortune.
The savings bank movement and the Own Your Own Home movement were a moderate success. The homeownership rate rose, and even today low-income people in the United States and other advanced countries tend to have some savings, mostly in the form of home equity.
Next came the Better Homes in America movement launched in 1922 by Marie Meloney, the editor of a woman’s magazine, the Delineator. Real estate groups continued to pay for advertisements advocating homeownership throughout the rest of the twentieth century. In the years leading up to the 2007–9 world financial crisis, the National Association of Realtors placed numerous ads including the words “Now is a good time to buy or sell a home.” After the financial crisis, it launched a new campaign, “Home Ownership Matters.” These campaigns emphasized that homeowners tend to be successful and patriotic people. The campaigns not only helped support patriotic ideals but also created a clearer rationale for buying a home, thus enhancing the narrative.
The desire to impress the neighbors is part of the social fabric, but it comes with a psychic cost. Marketing people often find themselves in the position of trying to help people get past their guilt about showing off, which may involve buying land or ostentatious houses. Before the Great Depression, many ads touted purchasing undeveloped land as investments. For example, a large newspaper display ad from 1900 with the headline “A Princely Spot Is Orangewood” offered five-acre plots near Phoenix, Arizona, that could be used either to build a home or to plant an orange grove. The ad featured recent auction prices of oranges from the region as well as text about how fashionable the area was.12 In response to complaints about such marketing, the individual states of the United States put into place over the period 1911–33 a series of “blue sky laws” prohibiting the selling of “speculative schemes which have no more basis than so many feet of ‘blue sky.’ ”13
Mr. Ponzi and His Other Scheme
In 1926, Charles Ponzi, who is said to have invented the Ponzi scheme in 1920, was released from jail. (Also called a circulation scheme, a Ponzi scheme is a fraudulent investment fund that pays off early investors with money raised from later investors, creating a false impression of profits to lure yet more victims.) Soon thereafter, Ponzi went back to jail for violating Florida’s blue-sky law. During the Florida land boom, he began selling small parcels of Florida land to investors without disclosing that the land was under water, in a swamp.14 Ponzi’s name, and the story of unwitting investors buying land in a swamp, went viral with his circulation scheme, and it remains famous even today, but his name is not so attached to the swamp narrative.
In reaction to such abuses, the United States imposed stronger laws on the subdivision of land for sale to small investors. State laws defined land sales as securities sales, even if the sale was a simple transfer of property, thus making the sales subject to securities
regulation. In addition, regulation of the sale of land was reinforced to prevent such abuses.15 As a result of the scandals and the ensuing legislation, people began to think that investing in undeveloped land based on prospective future use was irresponsible and disreputable, that land needed to generate real income before reputable brokers could sell it. Thus advertising turned to offering investments in going businesses and owner-occupied homes, which continued to feed the real estate narrative.
As people continued to think of home purchases as investments in land rather than reproducible and depreciating structures, the potential for home price bubbles persisted. At the same time, real estate investment remained the simplest of speculative investments. Most people never find the time to get involved in a risky specialized investment, but many people own a home at some point in their lives, and so they typically do not have to work hard to learn about real estate as a speculative investment.
City Land and Stories
Changing narratives do not explain some major swings in home prices afflicting certain cities and sparing others. There is evidence that booms in some cities but not others can be explained merely in terms of supply constraints. For example, undeveloped land available for building is more available in some cities than in others, and there could be a time when a city that once had plenty of land for building finds that its land has been exhausted.
When a city’s population is expanding, even if the city is not particularly attractive and has no particularly favorable narratives, there will be some people who want to move there. For example, there are always potential immigrants, often from poor or unstable countries, seeking a foothold in advanced countries, and they may choose cities based on arbitrary factors such as proximity to their home country or the existence of a subpopulation speaking their language in the destination city. If land is readily available for purchase there, new houses will be built, and the immigrants’ demand for housing may have minimal impact on prices. But if such land has run out, these immigrants will have to outbid others for existing houses, and home prices will rise. In that case, only the wealthier buyers will be able to live in that city. People who are already living in the city but have no special interest in it have an incentive to sell their houses and take the proceeds to another more affordable house in another city. The supply constraint thus results in higher prices and a wealthier population in that city.16
Supply constraints also help to explain the differences in home prices across cities and through time. Economist Albert Saiz used satellite data to construct estimates of the amount of available land around major US cities. He found that cities that are boxed in by bodies of water or steep-sloped terrain (which is less suitable for building) tend to have higher home prices.17 There is also a tendency for people who already own homes in a city to try to block further construction of homes, particularly of affordable housing. They have an economic incentive to do so, for limiting housing supply boosts home prices. The effects of such an incentive may differ across cities. But beyond such conventional economic explanations, there is also evidence that changing narratives play a role in housing booms.
The years leading up to the 2007–9 world financial crisis saw record-breaking increases in home prices in some countries, notably the United States. According to the S&P/CoreLogic/Case-Shiller home price index, home prices in the United States nationwide rose 75% in real (Consumer-Price-Index inflation-corrected) terms between 1997 and 2005, while the Consumer Price Index for Rent of Primary Residence, corrected for Consumer-Price-Index inflation, rose only 8%. This boom in home prices far exceeded anything that could be attributed to increased unmet demand for housing services. This housing boom in the United States and other countries was a major factor in the world financial crisis of 2007–9. Home prices fell dramatically and defaults on mortgage payments surged, plunging mortgage lenders into serious financial difficulty, a crisis that then spread to the rest of the financial sector and the world. By 2012, in the aftermath of the crisis, real US home prices fell to a level that was only 12% above that of 1997, before taking off again in a new boom that continues as of 2019, though the boom shows some signs of weakening and actual price declines in some US cities. US real home prices were up again 35% from 2012 to 2018, while real rents were up only 13%.
The Rise of Flipping
In trying to understand the housing boom leading up to the Great Recession of 2007–9, looking at the usual suspects, such as interest rates, tax rates, or personal income, is not very helpful. Instead we should examine the shift to a more speculative narrative in which people thought of their homes more as speculative investments in land—a narrative that lenders welcomed.
The seeds of the world financial crisis were planted decades earlier. A new meaning for the word flipper went viral in the United States in the 1970s and 1980s. At that time, a flipper was a sharp operator who buys a speculative investment and then “flips” it, selling less than a year after purchase, to make a quick profit. The term then became popular during a different kind of housing boom: a condominium conversion boom. Owing to the very high inflation at that time, the tax advantages of homeownership over renting significantly increased, because one could deduct the interest paid on a mortgage (very high because of the inflation) from gross income but could not deduct rent paid. Though high nominal mortgage interest rates deterred some from homeownership, for many others the expected appreciation in home value due to inflation offset the high interest rate.18
To meet the demand, developers began buying apartment buildings, evicting the renters of the individual apartments and selling the apartment units as condominiums. Renters, some of whom had lived in their apartment for many years, complained bitterly. To assuage them, the operators offered renters a contract to buy, at the time of conversion, their own apartment at a discounted price. The contract allowed them to resell the contract to people interested in buying it. Many renters chose to “flip” their contract to speculators, who in turn flipped the contract again. Flippers attracted a lot of public attention, and many admired them as entrepreneurs who saw the opportunity quickly enough to cash in on it.
By the 1990s, the term flipper was commonly used to describe people who bought shares in initial public offerings (IPOs) and resold them quickly. People often described the flippers in admiring terms, as people who understood that IPOs were typically underpriced on the offering date. When the share price popped up soon after the IPO, the flippers made a quick profit. A famous 1991 article by Jay Ritter showed that the initial IPO price pop tended to be followed by weak performance over subsequent years, so the optimal strategy appeared to be buying IPOs at the offering and then flipping them.
Then, in the early 2000s, during the enormous home price boom, the term flipper became attached to people who bought homes, fixed them up a little or a lot, and sold them quickly. Once again admiring stories were told of their successes. While most people were not enthusiastic enough to actually flip houses, they may have imagined that they were engaged in “long-term flipping” simply by purchasing a primary residence as a long-term investment. Thus they engaged the speculation narrative.
Mansions and Modesty
Exuberant real estate narratives did not stop with the 2007–9 world financial crisis. In October 2012, the Wall Street Journal launched a new section in the newspaper. Called “Mansion,”19 it was a response to a section in the Financial Times titled “How to Spend It,” but “Mansion” focused on housing. Notably, 2012 was the same year that home prices in the United States started rising sharply again after the 2007–9 world financial crisis. It was also the year in which the police finally cleared the Occupy Wall Street movement, which had started a year earlier, from Zuccotti Park in New York City. The movement had been attracting much attention to the slogan “We Are the 99%,” referring to the majority of the population who cannot live extravagantly, in a public assertion that these people matter.
The “Mansion” section seemed to scream that the top 1% mattered ev
en more. It featured lush photo spreads of lavish homes and their pretentious occupants in a tone of gushing admiration. But the section also reported on anxieties about ostentation and about fears of public disgust at such extravagance. For example, a 2017 article in “Mansion,” “Tech CEOs: Lie Low or Live Large?” discussed in detail the quandary that heads of technology companies face in deciding how big a home to buy. The article made clear that the choice of a home is part of a delicate balancing of forces in a career-optimization strategy. Hence “Bay Area real-estate agents say their clients are becoming reluctant to buy fancy homes, for fear of spooking investors wary of distracted or high-living founders.”20
The Donald Trump Narrative and Urban Investors
Offsetting the modesty narrative was the Donald Trump narrative, which led to his election as president of the United States in 2016. The Trump narrative proved that many people are not at all “spooked” by those who “live large.” On the contrary, as Trump openly states in his various coauthored books, it pays to let people know that one is rich. Here the housing boom narrative is co-epidemic with the conspicuous consumption narrative discussed in chapter 11. Vast numbers of people have taken interest in the Trump narrative, which encourages the idea that the display of wealth is an amazing, affirmative career strategy—and the polar opposite of Occupy Wall Street idealism. The Trump narrative epidemic contributed to the upward turn in home prices in the United States starting after 2012.
Narrative Economics Page 25