Bialystock's Law and the Housing Bubble

“If 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:

“coulda, 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 it.

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.

Meanwhile, 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:

Rented space as singles, usually with roommates (house)Rented space as newlyweds (apartment)Starter home: 2 bedroom, one bath, minimumLarger home as children get older: 3b/2baLarger home as social position rises: 4b/2½baRented space: meals providedPurchased 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 asset.

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 rose.

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.

Home-owning 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 dollar.

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.


I 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 camouflage.

So, I am breaking Bialystock’s Law.

Go, and do thou likewise.

March 8, 2006

Gary 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.

Copyright © 2006

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