Bialystock's Law and the Housing Bubble

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you’ve got it, flaunt it!" — Max Bialystock

The housing
bubble is now deflating in major urban regions. It has not yet popped,
but it is going to in bubble areas — not a collapse, but a serious
reversal of fortune. The dreams of easy wealth are going to fly
away, as usual, for people who could have sold but hold on as the
market falls, always planning to sell "when the market comes
back up." I have explained this process elsewhere. I don’t
want to go over the same material. Three words apply:

woulda, shoulda"

If you live
in a bubble zone, and you can cash out now, do it. I
mean ASAP — you would be wise to do so.

If you think
I am exaggerating, then a once-in-a-lifetime buying opportunity
is about to get away from you. I
have located this beauty for you
: a 610 square foot home for
a mere $11,250,000.

Act now! At
only $18,443 per square foot, the supply won’t last!


I received
an email recently from an eminently sensible woman. She has spent
her career as a teacher. She has understood one of life’s most important
and most widely resisted challenges in America: the necessity of
adjusting one’s lifestyle to the aging process. Specifically, she
has understood this principle as it affects the housing market.

As I shall
explain, she will die richer than she otherwise would have. This
will be a benefit for her children, who will inherit more wealth.
But, because of the inflation-driven housing boom, the sensibility
of her strategy is not widely perceived today. I hope you will perceive

She has two
problems that face millions of middle-aged Americans: the empty
nest and aging parents. She found a way to solve both of them with
one decision.

Birth rates
in the United States began falling in 1959. The 1958 peak of almost
four children per family has declined to about two per family. So,
the empty nest syndrome occurs earlier in life than it did in the
era of those people who were born 15 years ahead of me: the large-family
generation that came of age in the gap between the end of World
War II and the Korean War.

our parents are living longer than our grandparents did. While our
children have moved out, or soon will, our parents are not moving
in to fill the rooms that our children have left behind. They could,
of course, but the nuclear family is the norm in countries with
money to purchase this historically incomparable luxury.

Parents don’t
want to move back in as subordinates.

Their children
don’t want them to.

In traditional
societies, the nuclear family exists only because old people die
off earlier. The empty nest occurs later in life — larger families
— but the grandparents depart earlier.

Today, Americans
have to buy our nuclear family structure.

The three-bedroom,
two-bath home is an architectural anomaly, biologically speaking.
We don’t need it to house two married adults. Two bedrooms would
suffice: a bedroom and a guest room. One bedroom would suffice if
visitors stayed at a local motel, even if the house owners paid
for the room. Socially speaking, the three-bedroom, two-bath house
for a single nuclear family is a token of historically unprecedented
wealth. It is also a very expensive consumer good.


If we regarded
housing as a production good, we would look for minimal square footage
to rent as newlyweds, buy more square footage in the form of bedrooms
when the children reached school age, and return to minimal square
footage as soon as the children marry. (Employment being what it
is for entry-level young adults these days, keeping one spare bedroom
until they get married is probably a sensible use of square footage.)

The existence
of retirement facilities testifies to the reality of this strategy.
At some point, the cost of maintaining a home rises. The difficulty
of maintaining ourselves also rises. So, we sell off square footage
and move into a rented retirement space, either with meals provided
or some medical care: the assisted-living option.

This shift
in lifestyle transfers capital from the ex-home owners to investors
in assisted-living centers. The children could become assisted-care
providers, the same way that middle-aged families have done in almost
every society in history. Empty space historically has been occupied
by aging parents, but not for long. The capital invested in housing
was too precious to be squandered.

Not so today.
Middle-aged children buy privacy by consenting to or even applauding
their parents’ move into a professionally managed retirement facility.
The parents also prefer it this way. They want to maintain their
privacy. They got used to the empty nest lifestyle. They don’t want
to surrender it. So, they sell their extra square footage and use
the money to pay for fewer bedrooms, coupled with professional care.

So, the housing
cycle looks like this today:

  1. Rented space
    as singles, usually with roommates (house)
  2. Rented space
    as newlyweds (apartment)
  3. Starter
    home: 2 bedroom, one bath, minimum
  4. Larger home
    as children get older: 3b/2ba
  5. Larger home
    as social position rises: 4b/2ba
  6. Rented space:
    meals provided
  7. Purchased
    space, side by side

The step 5
house is America’s pre-eminent mark of conspicuous consumption.
Its residents do not use the square footage for production. The
empty space is a mark of social prestige. The home is used to impress
occasional guests. It becomes a free motel for friends. As a social
phenomenon, it is based on that central and nearly universal social
motivation, "If you’ve got it, flaunt it!"

Step 5 became
the premier consumer good of the second half of the 20th
century in the United States. It survives as a social artifact,
but it is draining the wealth of the occupiers. When the housing
bubble pops, step 5 housing will prove a poor investment decision.

Step 5 housing
should be converted to step 1 housing. The empty nest home owners
should move to smaller facilities, and rent the 4-bedroom house
to 4 singles. They should hike the rent to compensate for damage,
especially if they rent to males. The house then becomes a capital

Zoning laws
often make this allocation illegal.

Who are the
big winners of these zoning laws? Latin American families that have
lots of members (supposedly) who pay rent into the collective pot.
If any zoning bureaucrat asks, they are all cousins, and therefore
are not violating the zoning laws: one family per household. This
is why, in the 1990 recession in California, when housing prices
fell, they did not fall in the barrio. They rose to what was then
considered madness: $100 per square foot. (Ah, the good old days!)

Because a single-family
dwelling is more than utilitarian, socially speaking, it commands
a price beyond its square footage and amenities. This is why homes
have gotten larger for over six decades. The starter homes at Levittown
in 1946 were considered fabulous bargains at under $7,000. The suburbs
began there. As families’ income rose, their housing expectations

The problem
today is this: Our expectations have been funded by easy credit,
which in turn has been provided by central banks, domestic and foreign.
These expectations have led to the widespread use of debt.

debtors are terrified of rising mortgage interest rates and falling
equity in the housing market. They have become a gigantic special-interest
political voting bloc that Congress dares not challenge. So, Congress
goes along with the Federal Reserve’s policy of monetary inflation.
This of course subsidizes the mortgage debt market, which grows.
Housing prices rise. The housing bubble grows larger and more pervasive.

We are now
trapped in a huge debt/money spiral, which is political to the core.

Our retirement
years are threatened by this spiral. We will face rising prices
and fixed incomes. Americans are acting against their own long-term
interests as home owners who are deeply in mortgage debt. They see
their homes’ equity increasing, but only at the expense of a depreciated

Will Rogers
said in the Great Depression, "America is the first nation
to go to the poorhouse in an automobile."

America and
much of the Western world has now become the first society that
will go to the grave in debt for housing.


began my career as a home owner by using the technique adopted by
the lady I mentioned earlier, Linda Taylor.
It was one of the
smartest things I ever did.

This strategy
works when you are starting out. It works even better when you are
moving out of the work force.

Mrs. Taylor
has an elderly parent who lives in a mobile home park.

That created
an opportunity. She had "inside information." A mobile
home in the park was repossessed by a bank. It was a 1,400 s/f doublewide.
It was listed by the repossessing bank at $40,000. Here is her account
of what happened next.

The bank
took their time making a decision, but finally accepted our offer
of $28,000 on a 2002 with 1400 sq ft. It is in a lovely, well-kept
newer park where 85% of the people are retired. The park people
do the plowing, shoveling and tend the houses for people who go
away for the winter. It has skirting, a deck, and a good-sized
storage shed (all the sheds in the park must be alike).

My mother
and husband thought that I would offend the bank when I offered
that amount, for the asking price was $40K, but I stuck to my
guns. I also offered 30% down and only wanted a 5-year loan. We
close on March 14th.

This isn’t
the whole story of how she did it, but it’s enough to give you the
general idea.

She bought
clean, livable housing for $20 per square foot. She will have to
pay rent, but she won’t have to do any yard work. She will be close
to her mother. So, she will maintain her family’s privacy. Her mother
will retain her privacy, yet in case of an emergency, her daughter
is nearby.

What she has
lost is social prestige. A mobile home park is considered an option
for poorer people. This may be true of some parks. It is not true
of all parks. But with few exceptions, a mobile home park is considered
socially a step down. So, prices for park space are not bid up.
For people who are looking to save expenses, avoid debt, and minimize
rental costs, a middle class mobile home park is a great solution.

In a housing
boom, you would miss out on capital appreciation. But at the end
of a housing boom, you would miss out on capital depreciation. She
bought low: a repo. She offered a low-ball price. I recommend offending
bankers. Never make a banker an offer that you think will not offend
him. Let the bank eat its mistake. That’s not your job.

The worst of
the capital depreciation loss was suffered by the previous owner
and the bank. Even if the mobile home drops in value, it’s merely
a rental expense. And it will not drop to zero.

Can the park
rent go up? Not by much. Remember, the bidding process to get into
a mobile home park is lower than bidding to get into a conventional
home. The park owner cannot raise rents above what is bid to get
in. That will tend to be comparatively low.

The economic
cost of clean, safe housing for an empty-nest family is far lower
in a mobile home park. My friend has substituted economic thrift
for social prestige. She is not motivated by social prestige. So,
she can take advantage of the results of this reduced social prestige.

Recently, I
saw an interview with novelist and social observer Tom Wolfe. The
interviewer asked him if he thinks that the central driving force
in American culture is the desire to raise one’s social position.
He said yes.

For those who
get out of the social climbing rat race, it’s possible to live comfortably,
safely, and quite nicely for far less than most people are paying.


Decide what
you are really buying. If it’s prestige, buy in an older neighborhood
where quietly well-to-do people live.

If it’s clean
square footage, buy in a non-bubble region, on a middle-class street.
If you don’t mind a small lot, buy a nice repo doublewide in a middle
class mobile home park. This is your best deal financially.

If you are
buying capital appreciation, buy a step 3 home in a middle class
neighborhood. Buy what young families want to buy. In a recession,
there is far less selling pressure on step 3 homes. Those moving
down still want to live there.

I live in such
a home. It’s a tool of production. We use the space for our offices.
It is easily rented, and I bought it cheap in 2005: 4 bedrooms,
2 baths, and a 2-car garage for $90,000.

I like anonymity.
I don’t want to stand out. I don’t want to be the victim of envy.
I am making a social statement, one that is contrary to my wealth.
This buys me invisibility. I like invisibility. I call it economic

I am breaking Bialystock’s Law.

Go, and do
thou likewise.

8, 2006

North [send him mail] is the
author of Mises
on Money
. Visit
He is also the author of a free 17-volume series, An
Economic Commentary on the Bible

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