Home equity

One of my sources of generation-x economic/political angst is the spiral in housing prices. Many folks from older generations won the home equity lottery in the last decade or two, with their houses becoming dazzlingly more valuable than they were when they were purchased. I resented this during the early '90s, when folks my age were mostly underemployed and paying high rents: in my crude economic analysis, it seemed that the young were paying for those equity lottery winnings in the form of high rents. In more recent years, folks my age have started taking home ownership seriously, but the costs in down payments and monthly mortgage payments give me vertigo.

Okay, the San Francisco bay area real estate market is particularly nutty, which exacerbates my anxiety. But I think the principle still holds.

When I talk to members of older generations about this, they seem to assume that steep increases in housing prices will continue throughout my lifetime. I'll eventually have a collosal chunk of home equity, too, if I buy a house. So it's okay. But this seems like a perpetual motion machine. Where does the money come from? It doesn't seem possible that this could be sustainable.

Brad DeLong demonstrates that an understanding of economics provides some explanation, but only in a way which raises its own questions.

Many people who have refinanced have now boosted their own consumption spending because they feel (and are) richer. But why haven't those who will buy your house in thirty years and their parents cut back on spending by an equal amount as they strive to accumulate the bigger nest egg that they will need? This is also a mystery -- why the effect of rising housing prices on consumer spending is so large. (There are a number of people working at the Bank of England right now whose job it is to be puzzled by this mystery).