Speaker 1: And he goes to his parents showing how it's a
Speaker 1: great investment and if they'll only give him, you know,
Speaker 1: three hundred and fifty thousand dollars, it will be a
Speaker 1: great investment. Blah blah blah. The apartment is about one
Speaker 1: point two million dollars. And the kicker, of course, is
Speaker 1: that the apartment is five hundred square feet. Hi, and
Speaker 1: welcome back to Bloomberg Benchmark let show about the global economy.
Speaker 1: It is Thursday, September twenty nine, and I'm Keith Smith,
Speaker 1: editor for Bloomberg News here in New York. I am
Speaker 1: joined today by my co host, Dan Moss, Executive editor
Speaker 1: for Economics, Hi Kate. Today we're going to be talking
Speaker 1: about home price inequality. Now, it's no surprise that in
Speaker 1: some metro areas of the United States, like New York
Speaker 1: and San Francisco, home prices are incredibly expensive. What you
Speaker 1: might not know is that the growth of house values
Speaker 1: in those areas has significantly, and we mean significantly, outpaced
Speaker 1: other parts of the country. It's true over the past
Speaker 1: thirty years, apparently, prices in the twenty most expensive markets
Speaker 1: have risen much faster and much much faster. Like Dan
Speaker 1: was saying in prices in the twenty least expensive markets,
Speaker 1: according to a truly A report that was written by
Speaker 1: Ralph McLaughlin. For those of you who don't know, Trulya
Speaker 1: is an online aggregator of real estate listings across the US. Now, Dan,
Speaker 1: what I found really really interesting about this report is
Speaker 1: that it confirmed this theory that I've had about New York,
Speaker 1: specifically Manhattan for a while. In New York is so
Speaker 1: unique to me in that it's a city of successful
Speaker 1: wealthy people, but not just that those people had to
Speaker 1: have been raised by successful wealthy people, and that I
Speaker 1: think makes it really unique and completely cut off to
Speaker 1: people who, let's face it, just didn't grow up with
Speaker 1: financial stability. It's another take on this term inequality, which
Speaker 1: seems to be everywhere at the moment. But before we
Speaker 1: get to New York and spoiler a look, we're going
Speaker 1: to talk about your apartment as well. Before we get
Speaker 1: to New York and where he can still make it here,
Speaker 1: let's focus first on the country as a whole to
Speaker 1: talk about housing inequality. We have Robert Shiller on the
Speaker 1: line joining us from New Haven, Connecticut. Robert's really the
Speaker 1: gold standard when it comes to home prices. He's the
Speaker 1: name behind the Case Shiller Index, the authority on housing
Speaker 1: prices in America. He's a Nobel laureate, the second we've
Speaker 1: had on the show, and currently Sterling Economic Professor at
Speaker 1: Yale University. He probably even owns a house. Robert, thanks
Speaker 1: so much for joining us. My pleasure, Bob. So I
Speaker 1: want to get your thoughts on this trilier report. Do
Speaker 1: you buy the idea that the most expensive areas in
Speaker 1: the US are growing much much faster than the least
Speaker 1: expensive that that seems to have an element of truth
Speaker 1: to it. You have to specify the time and of
Speaker 1: all that. I'm thinking. For example, San Francisco is among
Speaker 1: the most expensive cities, and it has been growing lately,
Speaker 1: but it's slowed down on a little bit in our
Speaker 1: latest numbers. It's a complicated picture, of course. Historically the
Speaker 1: most expensive places must have grown faster than others at
Speaker 1: some point in history. But it's a complicated story. You know.
Speaker 1: It's expensive places don't necessarily grow fast. I think maybe
Speaker 1: it is happening now, but I'd have to carefully study
Speaker 1: how accurate that statement is, and with a one year
Speaker 1: time interval, So the truly report was actually looking at
Speaker 1: a thirty year time horizon, and they were looking at
Speaker 1: areas specifically like San Jose and San Francisco into the
Speaker 1: Bay Area of course, and then New York and a
Speaker 1: couple others, and that it was that those had grown
Speaker 1: at such an exponentially larger, larger pace, faster pace. I
Speaker 1: should say, Oh, you're talking Silicon Valley. Yes, I can
Speaker 1: certainly believe that because there was a technological revolution in
Speaker 1: the last thirty years and they're the center for that.
Speaker 1: So I certainly believe that. And how about the New
Speaker 1: York question, Well, New York is an expensive city, but
Speaker 1: lately it hasn't been growing, not over thirty years. I
Speaker 1: think it has grown substantially, but not as much as
Speaker 1: people might think. New York has emerged as the financial
Speaker 1: center that it is, uh since uh the early nineteenth century,
Speaker 1: so it's had two hundred years. So you know, you
Speaker 1: figure out what's the excess return on New York real
Speaker 1: estate over two centuries, it's going to be something like
Speaker 1: one percent a year. Nothing to get that excited about.
Speaker 1: So people often make that mistake in judging differences between cities. Well,
Speaker 1: talk about the long view. How do you account for
Speaker 1: this difference between perception and what your dater is indicating. Well,
Speaker 1: I think people are fascinated by the housing market and
Speaker 1: they love to tell stories, but that doesn't mean they
Speaker 1: ever look at data and do calculations. The cities that
Speaker 1: have achieved high levels are not surprisingly glamorous cities, cities
Speaker 1: that celebrities live in, and the stories about those cities
Speaker 1: feel people's imagination. It's not surprising. We're human, most of
Speaker 1: us aren't financial analysts. So in terms of real estate,
Speaker 1: are these cities even part of the United States national economy?
Speaker 1: Are they really part of an economy that is comprised
Speaker 1: of sy Singapore, Dubai and neighborhoods in London? Well, uh,
Speaker 1: the problem with real estate, it's a very diverse thing.
Speaker 1: There's always a story practically for all of these. When
Speaker 1: you say London, London has more stories written about it
Speaker 1: than just about any other any other city, and it
Speaker 1: has been a world financial center of great distinction. So
Speaker 1: it seems plausible to investors from wherever, China, India, Russia,
Speaker 1: wherever they're coming from, that's the place to put money.
Speaker 1: And it's also London has a reputation for political stability,
Speaker 1: and lack of usurpations. So all those things come together
Speaker 1: to a story for London. I'm not surprised that there's
Speaker 1: a vulnerability to bubbles in London real estate. Let me
Speaker 1: jump in here and bring it back to the US
Speaker 1: for just a second and kind of trying to tie
Speaker 1: this together with income growth, I mean, in in your
Speaker 1: own research and the way you've seen kind of the
Speaker 1: way prices have evolved over the past thirty years. Is
Speaker 1: there a strong correlation between income growth in a particular
Speaker 1: area and the home prices or do they tend to
Speaker 1: be decoupled. We find a correlation and forecasting we've found
Speaker 1: especially useful employment growth that means more people coming into
Speaker 1: the city, and you can find a fairly good correlation
Speaker 1: between in home price increases across cities and employment growth.
Speaker 1: So here's what happens. Some industry starts expanding in a city,
Speaker 1: They start hiring and bring people in. There aren't enough
Speaker 1: houses for all these people, so they start bidding against
Speaker 1: the residents, and you know, some of the residents will
Speaker 1: end up if they're lower income, they can't win the bid,
Speaker 1: so they end up moving in with their parents or
Speaker 1: something like that. But that stimulates the construction industry, and
Speaker 1: the construction industry then increases the supply, and eventually prices
Speaker 1: tend to come back down or at least slow their appreciation.
Speaker 1: So that's a typical cycle of cities there. Their growth
Speaker 1: is irregular through time, and you see bursts of home
Speaker 1: price increases that will later very likely be reversed. Now fault.
Speaker 1: That line about people moving in with their parents is
Speaker 1: a good one. There's been a lot said and written
Speaker 1: about that. Lightly Kite is a MILLENNIAU all herself and
Speaker 1: has an interesting personal story, and Bob, i'd like you
Speaker 1: to comment on whether you think that is part of
Speaker 1: what's going on right now. And before I get into
Speaker 1: my personal story, I'd like to get some numbers, because
Speaker 1: it's not just me. Right. One in three adult children
Speaker 1: in the US they receive monetary support of some kind
Speaker 1: of their parents. And that's not just on the other
Speaker 1: end of the spectrum of you know, the millennial sleeping
Speaker 1: on their parents couch. It's the millennial receiving you know,
Speaker 1: a rent subsidy from mom and dad so that they
Speaker 1: can live in Manhattan and pursue their dream of whatever.
Speaker 1: So one thing that I find interesting living in New
Speaker 1: York is that there are very very few people I
Speaker 1: know that have not received some kind of parental subsidy
Speaker 1: along the way to get here. Me personally, I was
Speaker 1: only able to move into my first apartment because my
Speaker 1: parents were willing to co sign my lease and to
Speaker 1: give our listeners a little peek into what the glamorous
Speaker 1: life is like in New York. This was a maybe
Speaker 1: three hundred fifty square foot studio if I'm being generous,
Speaker 1: in Hell's Kitchen for sixteen fifteen a month, and what
Speaker 1: that required was excellent credit and I'm talking like seven fifty.
Speaker 1: My income had to be forty times the monthly rent,
Speaker 1: and the guarant tour had to be eighty. So the
Speaker 1: only way I could have moved into that apartment was
Speaker 1: with my parents co signing at least, And I thought
Speaker 1: that was fascinating. When I spoke to my friends, I
Speaker 1: was actually receiving some of the least amount of support
Speaker 1: some of them were getting, you know, I mean, I
Speaker 1: have one friend whose mom pays for half her rent. Like, so, Robert,
Speaker 1: can you tell me about how is the parental subsidy
Speaker 1: issue impacting rents in places like Manhattan? It's interesting you
Speaker 1: mentioned that my own son is not getting He has
Speaker 1: an apartment in the New York near Manhattan. Um, maybe
Speaker 1: he didn't go to Manhattan. Maybe it's cheaper a little
Speaker 1: bit further out, but I think that yeah. I mean,
Speaker 1: it's it's natural that this would happen because people have
Speaker 1: an instinct to promote their own children. And I think
Speaker 1: it's probably since time and memorial, right, they were doing
Speaker 1: that in ancient Rome too. Our bet now, just to
Speaker 1: bring it back to this issue of inequality, and Bob,
Speaker 1: you know this better than anyone. It's a term that
Speaker 1: has a lot of buzz right now. Picketty didn't specifically
Speaker 1: discuss millennials and Manhattan real estate in his book, but
Speaker 1: to the general idea of inequality, is this a manifestation
Speaker 1: of inequality? Wealthy parents beget kids getting a foothold in
Speaker 1: a major city, which begets the opportunity to work for
Speaker 1: fantastic companies like Bloomberg. Is this fueling this inequality zeitgeist? Well,
Speaker 1: I think that it's it's stronger than it was in
Speaker 1: the past. That it's the millennial generation that I'm not
Speaker 1: an expert on this, but my impression is they weren't
Speaker 1: asked to do any household chores when they were children.
Speaker 1: Used to be you did, But most parents today are
Speaker 1: are preoccupied on getting their kids an advantage, So you
Speaker 1: don't want them to do Most people don't want them
Speaker 1: to do a household chores because that takes away from
Speaker 1: their studying and they've got to get into a good
Speaker 1: high school or a good college and a good job
Speaker 1: after that. And parents, Uh, I think that's the sitegeist
Speaker 1: right now, and so renting them an apartment in New
Speaker 1: York sounds perfectly believable for for now, and I'm bet
Speaker 1: it's much stronger than it was fifty or a hundred
Speaker 1: years ago. Is that a good thing for economic mobility
Speaker 1: in the country? Well, I think, Uh, what's the alternative?
Speaker 1: Carl Marks okay, and with angles in eight wrote the
Speaker 1: communists they didn't want to know about, but they want
Speaker 1: to abolish the family. It didn't happen. I think this
Speaker 1: shows that they were stronger on rhetoric than rhetoric than
Speaker 1: they were on observing reality. Uh, there's a parental instinct
Speaker 1: to want your children to do well. And once we
Speaker 1: get past the marginal living, what do parents want to
Speaker 1: do with their income is to help promote their children.
Speaker 1: But of course the idea of parental support is is
Speaker 1: certainly nothing new, obviously, But I think what I find
Speaker 1: interesting is and it's universal, but it's not universal that
Speaker 1: parents can afford that, right, So like only a certain
Speaker 1: kind of parent and a certain kind of person can
Speaker 1: is able to afford to spend that kind of money
Speaker 1: on their kids. So I think I think that's what
Speaker 1: we're talking about a little bit about the economic mobility question,
Speaker 1: because it's not universal that everyone can move to New
Speaker 1: York and have half their rent paid for by mom
Speaker 1: and dad, right, right. And it's getting as you know,
Speaker 1: Thomas Picquety showed that it's getting worse. I think it's
Speaker 1: getting to the point where if you are in what
Speaker 1: he calls the Tope one, there's almost no way to
Speaker 1: spend the money on yourself. That's why you've ended up
Speaker 1: lavishing it on your children, and that we would hope
Speaker 1: they would do more on philanthropy, but somehow the children
Speaker 1: get favored. What you described would certainly pick true in
Speaker 1: some parts of the United States, but in others. I'm
Speaker 1: thinking about New York City. To live the life that
Speaker 1: you've described, you need a bit more than that wouldn't you.
Speaker 1: I haven't done the calculations you think going out to
Speaker 1: eat and going to show. I mean this figorite. We
Speaker 1: can try to figure it out. But in all seriousness though,
Speaker 1: I mean, there's been a lot said and written about
Speaker 1: income disparity in various parts of the country. New York
Speaker 1: Times had a big piece on this last Sunday, and
Speaker 1: the extent to which this might be entrenched. The phenomenon
Speaker 1: that we're talking about in say New York City or
Speaker 1: San Francisco, has measured over the past thirty years. Again,
Speaker 1: just to press you on this, it is fueling this
Speaker 1: sense of inequality and political and economic discomfort. I think
Speaker 1: that it's the trouble of our times, and it's reflected
Speaker 1: in the election campaign recent election campaign. I think if
Speaker 1: you read Toma Picat, I'm trying to pronounce it right.
Speaker 1: He's French, okay. Uh. The A lot of what's in
Speaker 1: his book is a discussion of the literature at the
Speaker 1: at different times in history, notably the so called Gilded Age,
Speaker 1: around when inequality was especially add and he argued that
Speaker 1: it affects their their whole sense of life and living
Speaker 1: and even romance. You know, a lot of novels of
Speaker 1: that time would talk about marrying into wealth because that
Speaker 1: was perceived as the only way you could arrive inequality
Speaker 1: being so high. Now, Kate, you have some more stories,
Speaker 1: some of which might surprise our listeners, but they may
Speaker 1: not surprise Bob. It's beyond parents um being sort of
Speaker 1: hassled by their children to contribute to a down payment,
Speaker 1: and it's beyond rental subsidies, and it's beyond your own
Speaker 1: experience of least guaranteurs. You know, people who are doing
Speaker 1: spreadsheet presentations for their parents about liquidity and rates of
Speaker 1: returning if only they can help them with the down
Speaker 1: payment exactly. And I think that's I mean, it almost
Speaker 1: seems like a parody. It is. I mean, are you
Speaker 1: saying that they're optimistic about housing as an investment. Yes. Absolutely.
Speaker 1: I was talking to a friend last night, and I
Speaker 1: should mention that he he owns an apartment on the
Speaker 1: Midtown East. He doesn't actually live in it, though, and
Speaker 1: he was talking about how he views New York real estate,
Speaker 1: and he is not American. He views New York real
Speaker 1: estate as the ultimate investment that he could possibly make
Speaker 1: with his money, because it is to him always growing
Speaker 1: you're never gonna you're hardly ever going to experience a
Speaker 1: loss in New York City real estate. And then it's
Speaker 1: liquid and more. Look what I should say, then, let's
Speaker 1: say a hedge funder private equity. So if he wants
Speaker 1: to park a million dollars, what better way to do
Speaker 1: it than Manhattan real estate to him? So it's not
Speaker 1: like dad kind of borrowed the car. He sits his
Speaker 1: parents down and does a spreadsheet presentation based on rights
Speaker 1: of return as a wife of persuading his parents to
Speaker 1: cough up a down payment. Bob, you're gonna love this.
Speaker 1: So the guy who bought that apartment, he was able
Speaker 1: to afford it on his own, but I know another
Speaker 1: person who I mean, I guess he didn't really afford it.
Speaker 1: But anyway, so he wants to buy an apartment in
Speaker 1: the West Village. And for our listeners who aren't in
Speaker 1: New York, West Village is I think one of the
Speaker 1: most expensive neighborhoods in Manhattan. It's beautiful, it's you know,
Speaker 1: tree lined. When you think of New York, this is
Speaker 1: the neighborhood you're thinking of. Probably, So anyway, so he
Speaker 1: wants to buy an apartment in in that neighborhood, and
Speaker 1: he goes to his parents and he comes up with
Speaker 1: a power point presentation showing how it's a great investment
Speaker 1: and if they'll only give him, you know, three hundred
Speaker 1: and fifty thou dollars, it'll be you know, they'll make
Speaker 1: their money back. It'll be a great investment. Blah blah blah.
Speaker 1: The apartment is about one point two million dollars, and
Speaker 1: they agree, and it's just this investment that they view.
Speaker 1: And the kicker, of course, is that the apartment is
Speaker 1: five hundred square feet. And I think that was kind
Speaker 1: of like what Dan and I are talking to. Is
Speaker 1: there just I mean, how many families have the liquidity
Speaker 1: and the cash that they can just look at a
Speaker 1: presentation say okay, yeah, that makes sense for me to
Speaker 1: give to my kid. I just have to imagine that
Speaker 1: that's not a universal phenomenon. It can't be. No, it's
Speaker 1: not you're talking about. But that's who New York is now.
Speaker 1: But this feels like it's of it does, and I
Speaker 1: think making it more universal, that's to me what it
Speaker 1: New York has become. Because that's the only way you
Speaker 1: can buy a home in New York. By the way,
Speaker 1: our numbers for New York metro area show a one
Speaker 1: point seven increase in home prices over the last year.
Speaker 1: Now is that New York, Brooklyn, all the borrows or
Speaker 1: is that just Manhattan. Well, in fact, that is the
Speaker 1: emphasizing in Manhattan really because we're talking about I don't
Speaker 1: think we represent the co ops. Well, maybe it's not
Speaker 1: the only number that you could look at. I think
Speaker 1: New York, you know, the tens to go through periods
Speaker 1: of strength and weakness, and New York was weakened by
Speaker 1: the financial it being a financial center. Of course, London
Speaker 1: is still going up. And I can't really explain all
Speaker 1: these things. But I'm wondering what the spreadsheet that this
Speaker 1: person showed and what the time horizon was. But I
Speaker 1: have a spreadsheet showing US home price, not Manhattan, US
Speaker 1: home prices back to eight and it shows that between
Speaker 1: eighteen ninety and nine, home prices in the US did
Speaker 1: a little better than increase with inflation. But there's often
Speaker 1: been an idea that it's done well. It seems to
Speaker 1: be apocryphal, but it does. Of course. I mean, of
Speaker 1: course New York has become an expensive city, and that
Speaker 1: happened over a long time, and it gave people, you know,
Speaker 1: one or two percent a year return on capital gains.
Speaker 1: I find it a little strange that people are so
Speaker 1: excited about it at various times, but that's human nature,
Speaker 1: I suppose, so, Bob, again taking the long view, and
Speaker 1: you're very good at this, looking at these cycles over
Speaker 1: the past hundred hundred fifty years, seeing what you see now,
Speaker 1: discussing what we're discussing now in the big picture. How
Speaker 1: does this end for our economy? Well, I hope there
Speaker 1: isn't an end for our economy. Um, the bubble and
Speaker 1: burst that we saw that peaked in two thousand and
Speaker 1: six was a huge historical anomaly. We've never seen anything
Speaker 1: that dramatic. There was the the bubble in Florida in
Speaker 1: the mid nineties, but that was more isolated. So I
Speaker 1: don't know what to make of of these Uh why
Speaker 1: are we likely to have that happen again? I don't maybe,
Speaker 1: but right now it's not really happening. It's not that
Speaker 1: dramatic on a broad scale. Maybe in certain places. Robert,
Speaker 1: this has been a fascinating conversation. Thank you so much
Speaker 1: for joining us. We've enjoined it immensely. Benchmark Will be
Speaker 1: back next week, and until then, you can find us
Speaker 1: on the Bloomberg Terminal and on Bloomberg dot com, as
Speaker 1: well as on iTunes, podcast, and Stitcher. While you're there,
Speaker 1: take a minute to rate and review the show so
Speaker 1: that more listeners can find us and do let us
Speaker 1: know what you thought of the show. You can talk
Speaker 1: to and follow us on Twitter at at Daniel Moss
Speaker 1: d C and at by Kate Smith, and you can
Speaker 1: follow our guest as well. Robert can be found on
Speaker 1: Twitter at at Robert J. Schiller. We'll have to get
Speaker 1: your spreadsheet friend and here. I don't think he's going
Speaker 1: to want to come in here after the show. See
Speaker 1: you next week.