Well, after hinting in comments that I have an opinion about housing prices (and I realize that’s a massive shock to my readers), I can’t very well not write about it, now can I?

When we last left our intrepid glib dilettante, he was ranting about people whose pricing model is independent of customers: price = overhead + profit.  (He wasn’t writing in the third person when we left him, but this is his blog and he can change narrative voice when he pleases.)  We learned — from the example of an e-b0ok reader — that we can better model prices as being set by the seller’s idea of what their customers will pay, and that this annoys people who feel they shouldn’t have to pay that price*.

House prices (real estate prices in general, really) are an interesting example of where this happy fantasy model breaks so spectacularly that just about everyone’s forced to put it back on the shelf — temporarily, at least.  If I’m looking to buy a house, there’s no way I can get away with the “overhead + profit”  model.  The houses I’m looking at are priced largely by the location of the real estate they occupy, the value of which is massively external to anything that’s gone into the house itself.  If the house is near a highly-decorated school and a beautiful park**, it’s likely to be expensive.  If the house is in Detroit, it’s likely to be cheaper than a new pair of boots.  I decide what I’m willing to pay for a house, what features I want and what I can live without, and I examine my options.  (This is in fact what I do every time I buy something, but when buying houses it’s made particularly explicit.)  I’m not going to start complaining that the house for which I’m making an offer was far cheaper to build than the seller’s asking price if it’s in a really nice part of town.

On the other hand, once I’ve bought the house I’m free to be an ignorant dipshit again.

Y’see, now that I’ve bought a house — which counts as an investment, natch, because real estate only ever goes up — I have a good idea of “overhead”: overhead is what I paid for the house.  I can go back to my overhead+profit pricing model, since all the external factors are neatly tied up in the big number labeled “principal” on my mortgage.  The “value” of my house, under this model, is what I paid for it plus a modest profit.  Therefore, if I put in granite countertops and stainless steel appliances and paint the bathroom and build a deck, I can remain morally certain that the value of my house is going up — never mind the fact that when I was buying the house, I didn’t give even half a fuck about how much the seller paid for it.

Now, a funny thing happens: the housing bubble implodes.

• The renter/owner divide (Megan McArdle)

I think that most of the people supporting the mortgage plan really do feel like falling home prices is an obvious catastrophe.  I also think that most of them own homes.  Because, of course, if prices stay high, where is the money coming from to support them?  Well, from people like me, who do not currently have a home to sell, but would like to acquire one in the not-terribly distant future.  Keeping people and banks from selling at a loss requires that I buy a house which is overpriced.  With the exception of Detroit, all 10 cities broken out by the Case/Shiller house price index show that as of December, home prices were still at least 15% higher than they were in January 2000; their 20-city composite index was still up over 50%.

(I’d considered ranting about Obama’s mortgage plan, but other people who’re better at this sort of thing than I am did it sooner and more eloquently — hit those “economics” links on the sidebar for some examples.)

Since the housing market — in good times and in bad — is so critically dependent upon the prices people are willing to pay, this bit should come as no great surprise:

One of the things that I think is badly understood is that the government cannot do much to prevent house prices from falling.

That’s not quite true — the government did a spectacular (if temporary) job of keeping the housing bubble inflated — but in this case it’s plenty good enough.  Staving off foreclosures and giving people your money and mine so that they can keep paying their mortgages will allow homeowners looking to sell to list their houses way above what people will pay for a little bit longer, but it won’t change the fact that buyers are no longer willing simply to plunk down half a mil on a cookie-cutter house in the suburbs.

The fact that [foreclosing banks] can’t get much reflects the fact that the areas with the most foreclosures are the areas with the most marginal buyers–i.e., the areas with the most marginal demand.  Real estate declines are lumpy; the houses with the best locations hold much of their value, while the places on the fringes, the exurbs and the gentrifying neighborhoods, plummet.

[...]

Playing with mortgage terms cannot prop up prices, because it cannot create more homebuyers, nor convince them to pay more than they want for a house.

To put it another way:  if the current occupants cannot afford their house at anything close to the price they paid for it, the chances are that no one else can, either.

Particularly if our wealth is being redistributed to cover for those who got in over their heads on mortgages and credit default swaps.

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* They are of course free to not pay that price.  Since we’re talking about Kindles, not taxes, no-one from a three letter agency is going to kick in your door and shoot your dog if you refuse to shell out for one.  But these people still want whatever it is they’re unwilling to pay for, so they whine about it on the internet.

** And likely at least three Starbucks locations, one of which will inevitably be inside a bookstore.