American Dream, Downsized

In my apartment building people of various income levels are stacked on top of each other. The architect and the teacher occupy one-bedroom apartments on the floor above me. They are considered middle-class and, for that matter, so am I. An affluent, well-traveled couple lives in a two-bedroom apartment on the top floor. A poor Chinese immigrant family of five is crammed into the converted storage room where half a dozen bicycles were once kept, their children often turning the foyer into a makeshift playground strewn with plastic toys.

This is typical of the way we live in urban areas around the world: people of various classes live right next to, if not on top of, one another. We share the same address, practically, but occupy a very different sense of space. And just like those in the middle of my building, the middle class everywhere is feeling the pinch.

For the first time in human history there are more people living in urban areas than rural, and cities have grown like amoeba into megacities--so crowded that they have become virtual countries with complex ecosystems unto themselves. Tokyo leads the pack with 31 million residents. Seoul has 23 million, followed by New York and Bombay.

Living space, unless one belongs to that tiny percentage called the upper class, is shrinking as the human population continues to grow. While the rural poor leave open sky and rolling plains to flock to the edge of the metropolis--they crowd into ramshackle slums in the third world, or one-room units in the first--the middle class is clinging to its precious status by contending with far smaller living spaces than those of previous generations.

I remember when a middle-class family could own a Victorian home in San Francisco. Now such a home would be divided into three or four units, each remodeled and sold to an upper middle-class couple.

Case in point: I went with some friends to look at a two-bedroom house the other day. It's a bungalow that was once the home of a working-class family in the 50s. Now, with skyrocketing prices and a prime location, it's out of reach for my friend, who is a single lawyer. The little house was going for a little over $1.3 million dollars. "My American dream," she said with a sigh, "has just been seriously downsized."

Of course, the further you go from the city, the more space you can afford. But there's a catch: if you want more space you'll likely have to exchange it for your time. The price tag for a front yard and back garden can be a four-hour commute every day.

Shrinking along with the American dream of home ownership is the size of the family. Fewer adults are having children. Once a rural necessity, having children in an urban setting is no longer as vital. In megacities like New York, Tokyo, Paris and Hong Kong, the birth rate is on a steep decline. After all, having a child could mean sliding from the middle class to the standard living of the poor, with a crib in the walk-in closet, a garden on the fire escape. Hong Kong, which has the highest human density in the world, also has one of the lowest birth rates: 0.93 per couple last year. A room of one's own may be all the space one has, if one is lucky.

Today a condo is what most in the middle class can hope for in places like San Francisco or New York. I suspect that in another generation or two, middle-class homes in American cities will look like those of Tokyo today--which is to say, the size of a train compartment.

That Japanese minimalism has become the dominant style in the modern world is no fluke. Bigger was once said to be better, but what's chic and ultramodern today--what fits--is smaller and streamlined. The laptop takes no space at all, the iPod is the size of a credit card, the stereo system that once occupied a generous portion of a living room is now so flat and ridiculously thin that you can hardly see it behind the rhododendrons, and the TV that once took too much space on top of the sideboard now hangs on the wall like a mirror. "I used to dream of a house with a nice backyard," a friend of mine quipped, "but now I am just happy with a flat and a flat-screen TV." It's no surprise that Ikea, the global furniture store that takes maximization of living space seriously, is doing so splendidly.

Last night, two homeless men had a row near my apartment building. There's a little space between two columns in front of a boarded-up store that's protected from the wind, a much-coveted place to sleep. The man who regularly made a bed there found someone else in his digs. "This is my space!" he screamed at the crasher, and several well-dressed young people who walked by snickered.

To young people, "MySpace" as a phrase has a totally different connotation, evoking the virtual neighborhood where real estate is still plentiful and cheap. In 2050, nervous demographers tell us, there will be 9 billion of us. It is probably why so many of us now, feeling the onset of collective claustrophobia, spend an inordinate amount of our time logging in.

http://www.irrationalknowledge.com/12-22-2005/why-you-cant-afford-a-house-in-a-blue-state/

Why You Can’t Afford a House in a Blue State
Filed by: Justin on Thursday, December 22, 2005 @ 3:05 pm

I have the misfortune of living in Massachusetts, one the bluest states in the nation. Housing prices have been increasing even though Massachusetts is the only state in the nation with a declining population. Once you understand this you will understand why people are “voting with the feet” and moving to red states.

The short explanation for the skyrocketing housing prices is the Law of Unintended Consequences. As this article in the Economist explains, housing prices are rising fastest in the northeast and in the west coast (read: blue states) due to government limitations on the development of new housing. There are several reasons for this.

Housing Bubble

Low interest rates may be driving up housing prices. It may also be the case that the 1999 tax law that gives a $500,000 deduction on capital gains taxes for your primary residence is also driving up housing prices. But there are other factors at work.. This article is about those other factors.

Environmentalism or Affordable Housing?

Stanford economist Thomas Sowell has written a great article describing the impact of open spaces zoning laws (laws that forbid all development, including housing) on housing prices. Last march housing prices rose by $2000 a day in San Mateo, even though San Mateo has seen its overall population drop as young people are gentrified by the high cost of living.

Open spaces laws are interesting because they throw two liberal goals into conflict: environmentalism and affordable housing for the poor and working class.

Public Schools

There are two reasons why public schools have driven up the cost of housing. The first reason is money. Towns know that new houses cost money because you have to build new schools. Businesses bring in money from taxes and do not require many services. Towns preferentially zone for commercial rather than residential use in order to maximize tax revenues and minimize expenses. The Washington Post has a good article on the subject here.

The second reason is more uncomfortable: race (as we have persistently argued, the real reason behind race issues is actually culture). The quality of a school is not determined by funding; the quality of a school is determined by the degree of commitment the parents have to education. That is why Washington DC public schools are among the worst in the nation despite being some of the highest funded. Neighborhoods act a filtering process. Families get sorted out based on socioeconomic standing. Everyone that has ever shopped for a house knows this: “This is a nice neighborhood and the schools are great - can we afford it?”

The unintended consequence of “free” public schools is that housing prices are increasing. Housing is the gatekeeper to education. Economists talk about inelastic demand - demand for things for which there are few substitutes. Private schools are expensive when you are already paying taxes for public school. We could eliminate this reason for expensive housing by decoupling public schools from housing. But by definition that would require vouchers, which the left will not accept.

The Two Income Trap

Given that there isn’t enough housing in neighborhoods with good schools to go around, imagine the following two scenarios.

The one income world: Imagine if the only people in the housing market were in one income families. Then couples would bid for housing based on the husband’s salary. There isn’t enough housing to go around, so some families will lose this game of musical chairs for good housing.
The two income world: If one of these “losing” families became a two income family then they could easily win the bidding war. But since there still isn’t enough housing to go around, they would just make another single income family the new “loser”. As more and more women join the workforce, the price of housing rises.
The houses in the two income world are identical to the houses in the one income world, but they cost a lot more money. This is the two income trap. Women have joined the workforce in numbers and Americans are working harder than ever, but real purchasing power has not increased.

A Blue State Problem

As the Economist article mentioned above stated, expensive housing is largely (although not exclusively) a blue state problem. At this point it should be clear why. Conservatives are less likely to have two income families, have a stronger respect for property rights, and are less likely to support overboard environmental policies that forbid development while working families struggle to afford housing.

Property rights do not protect the rich, although they do make it tougher for the rich to work the system to their advantage. Think about all those wealthy homeowners in San Mateo – I’m sure they are liberal enough to be staunch environmentalists, but it doesn’t hurt that these laws are driving up the value of their homes. The liberal response to the corruption of government power is bigger government (and hence, more corruption and rent seeking). The conservative response is smaller government. And hence cheaper housing in red states, and people voting with their feet and leaving the blue states.

This article in the Wall Street Journal makes similar points and is well worth reading.

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