Do You Really Own Your Home? Fix It Up With Some Property Rights!

If you’re anything like me, you spend 30% of your day sleeping, 10% cooking, and approximately 60% watching people renovating and selling houses on HGTV. What’s better than sitting back on your functional but not-so-pleasing to the eye sectional sofa in your cramped house to watch people create the open floorplans and tile patterns of their dreams? Many of the channel’s hit shows feature people searching for or creating their dream house, and who better to make that dream come true that the quirky and lovable Chip and Joanna Gaines. The show’s hosts introduce prospective buyers to two or three homes that are well below their maximum budget, leaving plenty of room for renovations. After a bit of cajoling, the family chooses one home and design plan, and the work begins in earnest; breathing new life into a house that has otherwise been neglected. At the end of the show, the remodeled house is revealed, and that episode’s featured family is given a grand tour of the house that is now theirs to enjoy! However, as these families are quickly discovering, the house might not be as much “theirs” as they thought.

How much work would you put into this Fixer Upper?

(Photo credit: chumlee10 on Flickr)

This recent article details how many of the people featured on the show thought they were designing their dream home, but are now sharing that dream with frequent visitors. A large proportion of the homes remodeled on the show are now being featured as vacation destinations on websites including Airbnb and VRBO. The reasoning for this is pretty simple; the homes have become immensely popular with viewers of the show who want a first-hand look at how the house came together, and the rentals provide extra income for the home’s owners. While the home owners from those first seasons aren’t breaking any rules or laws by renting their houses out, the producers of the show aren’t exactly thrilled. Two questions arise out of this disagreement. First, can the producers actually forbid these homeowners from renting out space in their own homes; and as an extension, what other things might you not be allowed to do to your own property? Lastly, how does all of this play out in terms of the incentive to improve your home in the first place?

The producers of Fixer Upper can easily prohibit families from renting out the houses featured on the show, simply by adding a clause in the contract. As mentioned in the article, they have begun doing exactly that. It’s likely that the main reason they’ve chosen to do so is to protect the brand of the show. The show is based around the Gaines family helping other families create a dream home at a price they can afford. It takes away from the mystique of the show if viewers start thinking too much about how those families then have to rent their dream homes out to strangers, renovate additional rooms, and generally not live ‘happily ever after’. On the ‘flip’ side (pun intended), homeowners wouldn’t be willing to sign-up for the show at all, if the contract were to become too overbearing. Plus, there’s literally no way to contract over every single thing that could ever be done or not done to a house. As a result, those things which were not explicitly controlled for in the contract are in what’s known in the property rights literature as the “public domain.” The rights, such as whether the house can be rented our, remain in a sort of limbo until one side or the other claims the right for themselves. In this case, homeowners from the earlier seasons began claiming this right, but the show’s producers decided to take it back by working it into future contracts.

If you sit down and think about it, there are a lot of things that you can’t technically do to your own house/property, at least not without getting explicit approval. For example, most places require you to meet minimum codes of safety to prevent accidents such as fires. Even if you have fully paid off your house, you may not be allowed to add on an addition, add a fire pit, or even paint the house a different color if you belong to certain homeowners’ associations. In fact, there are many different groups, from public to private, that can limit your ability to remodel or even sell your own house. Generally, these rules and laws are put into place using the argument that making these changes have external benefits or costs to your neighbors or others. They are intended to nudge you in the direction of making the ‘socially optimal’ decision of how much to renovate. In some cases these rules are worthwhile, while in others they may be excessive. To examine this further, let’s consider how these restrictions could have a real impact on your decisions when fixing up your dream home.

Deciding to renovate a house is a large undertaking, but it’s not an all or nothing proposition. The couples on Fixer Upper are presented with a plan to make several large changes to improve the livability and design of the house they are purchasing, but there simply isn’t enough budget to fully renovate every room of the house. These un-renovated rooms aren’t featured on the show, since they aren’t new and stylish like the rooms that are fixed up. The interesting thing to think about is, how much more would people invest in their renovations, if they had more rights over their property. For instance, in most places in the U.S. you can be forced to sell your house under the rule of eminent domain. You are required to be compensated, but perhaps not as much as the minimum you would actually accept if you were to engage in voluntary negotiations. Knowing that your property could be bulldozed in order to create a highway for public benefit alters your calculation of how many long term investments you really want to make. It’s harder to justify putting on a new roof that should last 30 years, or renovating a spare bedroom. It’s possible that the optimal level of renovations is something more than what people are currently undertaking. People would almost certainly make more investments in their homes if their property rights were more secure. However, detailing and providing those rights comes at a cost itself, which may mean that we’re already having housed ‘fixed up’ the efficient amount. Although, if Chip and Joanna Gaines are the ones doing the remodeling, I think we can all agree that having more wouldn’t be such a bad thing. 

Home Prices in San Francisco… Decreasing???

In April, 2016, Business Insider published this article which had a headline that was sure to garner some attention from anyone who knows anything about the high cost of living in San Francisco. The article itself is a fairly incomprehensible amalgamation of quotes and data points, so I wanted to take some time to try to unravel its economic points here.

The main thrust of the article seizes on the observation that “house prices fell 1.8% year-on-year in March, the first such drop in four years.” The first takeaway from this is that it may be an indicator that the extremely hot San Francisco housing market is cooling down. To investigate whether this is the case, you should probably be asking yourself, what economic reasoning would produce this result. A decrease in prices could be the result of a decrease in Demand, an increase in Supply, or some combination of the two. I’ll examine the likelihood of either of these scenarios based on the information provided in the article, and then entertain a few other possibilities which should be explored.

A decrease in demand (whether due to people exiting the San Francisco housing market, a change in taste for San Francisco housing, or some other undisclosed reason) would, ceteris paribus, result in a lower quantity of housing demanded as well as a lower equilibrium price for the average unit.

This is a possible cause, and receives support from the quote in the article where the Chief Economist for Redfin talks about the reduction in listings which were subject to a bidding war. However, the article then immediately switches gears by implying that San Francisco has an “undersupply of housing coupled with a healthy demand.” If this is truly the case, then that “healthy demand” would be maintaining or even increasing the level of demand, leading to the opposite result in terms of price and quantity changes.

If Demand isn’t the main cause of lower prices, then surely it must be due to a change in Supply. More specifically, lower prices would be caused by an increase in Supply, which would also lead to an increase in quantity supplied.

Whether we consider this increase in supply to be newly built homes, or simply an increase in the number of homeowners who are considered in the market to potentially sell their homes, an increase in Supply would contribute to lower home prices. However, the article once again contradicts itself, noting that “there simply aren’t enough homes for sale…” and “many sellers are sitting this year out.” The quotes would suggest, if anything, a decrease in Supply, which would actually result in higher equilibrium prices.

So if we can’t be sure whether year-over-year decrease in housing prices is attributable to a change in Demand or Supply, how should we proceed? One option is to consider whether the market is truly in a long-run equilibrium state. It may be that the market is still adjusting to find the correct price for these homes, and therefore does not meet the assumptions used above. Another thing to note is that the data-point used to generate the article in question is simply that -- one data-point. In order to determine whether market forces are contributing to a true and sustained decline in home prices in this area one would want to examine many more data points and possibilities. Long-run trends in home prices and other contributory factors should be examined, to determine whether a slight decreases in one month compared to that same month one year before are truly indicative of a changing market. For instance, it could be that the homes that happened to be sold the previous year were larger and/or higher quality than those sold this year, which would lead to a lower average sales price, even if overall prices were still increasing. All in all, I’m not as confident as the author of the article is to conclude that “[h]omebuyers are so fed up with San Francisco’s crazy housing market that prices are now falling.”

Rent Hike in Wyoming – A Study in Market Forces

I came across an article recently about a large forthcoming increase in the cost of rent in Jackson Hole, Wyoming. The article, “Rent hike has tenants reeling,” was published in the Jackson Hole News & Guide. It details a clear and devastating plan by the landlords of the 294-unit apartment complex to raise rents by more than 40% in the coming months, and is accompanied by worried quotes from current residents who feel they cannot afford such steep increases when their leases are set to renew. The article’s main focus revolves around two issues which local residents are having a hard time stomaching. The first is the rise in rents. The second is that “the drastic rent increase at Blair Place comes in the midst of an exceptionally tight housing market. Available rentals have all but dried up, while costs for construction have skyrocketed.” Surely, the article suggests, the landlords must realize that the lack of available housing is enough for local residents to handle, without piling on higher rents. This main premise, however, fails to consider some simple economic principles at work.

To understand why higher rents may be exactly what are needed in the Jackson Hole area, let’s imagine some Supply and Demand Curves:

 We can see that the graph includes a standard downward-sloping Demand curve, indicating that more rental units are demanded the lower the price per rental unit gets. However, with the Supply curve, we have a typical upward slope until 183 units (the number of 2-bedroom units available in the apartment complex in question), but then at 183 the Supply curve becomes vertical. This is because, at least in the short-run (and with the prohibitively high construction costs mentioned in the article), the available stock of 2-bedroom apartments in this area is fixed. (For simplicity, we are looking only at this particular apartment complex, but a similar graph could be drawn for the entire Jackson Hole area).

The article goes on to describe how an influx of tourists has driven up demand for these available housing units (either from more workers wanting to live in the area, or from the tourists themselves wanting to rent the units). We can use the following graph to get a good idea of what this increase in Demand may look like:

We see that the increase in Demand creates a new equilibrium price at $1800. If the Supply curve remained upward sloping (perhaps if more 2BR housing units could be built quickly and cost effectively), the price would not increase as much. However, in the short-run, if we were to limit the price of housing so that it wasn't increasing by almost 50%, notice that the quantity demanded would exceed  housing units available to be rented, this high level of demand drives up the price substantially.

The article in question, however, also specifically points out that there is not an overabundance of apartment rental units to be found in Jackson Hole. Complaints describe how this limited availability is an extra and potentially undue burden on local residents. The problem is that the increased prices are a result of high demand and short supply. Imagine, for instance, if a price ceiling were enacted to maintain a maximum price of $1,250 per 2BR apartment. As can be seen in the following graph, the quantity demanded at this artificially low price would be enormous, and there would be many individuals who simply could not find an apartment to rent in the area at this price.

Some may worry that the market is not in a competitive equilibrium, but rather that the apartment complex has some monopoly power over the market. If this were the case, standard economic analysis would indicate that the monopoly would restrict the number of housing units they are renting out and raise the price, in order to increase profits. Under such a scenario, residents would have reason to complain of limited availability of housing and high prices. 

However, the info-graphic provided along with the article shows that this apartment complex is unlikely to have much monopoly power. It notes that only 6.2% of the units in Jackson are at the Blair Place apartment complex. If the market is competitive, then Blair Place would not be able to continue to find renters to voluntarily sign a lease at their property.

Ruling out monopolistic restrictions on quantity supplied (which would also assume there is not a large amount of collusion between apartment providers in the area), there is simply not much room to complain of higher prices. What better way to allocate the limited quantity of rooms than through a revealed willingness to pay?