Are Private Equity Firms Really Driving Home Prices?
Summary
Private Equity in Housing: The podcast discusses the controversial role of private equity firms in the residential housing market, arguing that they are often blamed for driving up home prices by increasing demand.
Market Misdiagnosis: Dr. Bob Murphy suggests that blaming private equity for high housing prices is a misdiagnosis, emphasizing the need to understand broader economic factors such as supply and demand dynamics.
Speculation and Prices: The episode explores how speculative buying by large entities can stabilize housing prices by buying when prices are low and selling when high, thus dampening price volatility over time.
Rent vs. Buy Dynamics: The podcast highlights the economic forces at play when private equity firms buy homes to rent out, noting that this can increase rental supply and potentially lower rental prices, while also affecting home purchase prices.
Government Influence: Local zoning laws and Federal Reserve policies, particularly the Fed's purchase of mortgage-backed securities, are identified as significant factors influencing housing prices, rather than just the actions of private equity firms.
Austrian Economics Perspective: The discussion includes an Austrian economics viewpoint, emphasizing the role of entrepreneurship and market processes in resource allocation, challenging simplistic critiques of capitalism.
Henry George's Land Tax: The podcast critiques Henry George's proposal for a single land tax, arguing that it could misallocate resources by discouraging entrepreneurial foresight in land use.
Policy Implications: The episode suggests that addressing housing affordability requires a nuanced understanding of market forces and government interventions, rather than blanket bans on private equity participation.
Transcript
This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Hey everybody, welcome back to Human Action Podcast. Today I'm going solo again and I'm going to respond to a short clip taken from a recent Tucker Carlson live presentation where he was uh you know giving his reaction to the legacy of uh Charlie Kirk and he had a series of guests I think Megan Kelly uh Scott Adams and then Chenuger and then there was a a priest at the end who I hadn't heard of before and it's in particular the the third guest. Chanker's uh brief appearance is where this clip's going to come from. Let me give the disclaimer here. I appreciate very much what Tucker was doing. His opening remarks before he brought I think Megan Kelly was the first guest before he brought her out were very moving. Like I was I was really like I didn't want my car ride to end. I I wanted to keep listening to it. Um, and so this episode for me here obviously should not be construed as, oh, I'm taking a shot at Tucker Carlson or something in this guest. And I appreciate Chunk Ugger calling on the show and trying to, you know, build bridges and so forth, right? So, I loved everything about that. There was a brief clip here though that I think is something that is important in terms of free market economics to understand because I see this coming up a lot. This issue that we're going to go over here in this episode, right? So that's why I am not I hope merely being pedantic here. I think this is important. Specifically, it has to do with uh private equity getting into residential housing. And the point of this clip that we're going to play here in a second is that Chang Ugger and Charlie Kirk agree that oh that's bad and you know presumably Tucker does as well. And I think they're misdiagnosing the problem. All right. So I'll go ahead and now I g that that much of a preamble. Let me just play the clip and then I'm going to go through and explain why I think they're missing the mark. >> And and so I I don't agree with everything that you Megan and and Scott said about Charlie. >> I'm sure. >> Right. But but I think that's what makes it more interesting. Uh so the willing that the willingness to talk to us even though we were so entrenched uh on different sides right and so then when we started the conversation what wound up happening it surprised us. So did we still have our disagreements about the black pilot line this that and the other thing? Of course we did. Right. Uh but when we started talking about corporate rule he agreed. And I remember like I want to go back and watch the first interview we did with him at the RNC there because I was kind of shocked by it. It's like really you're also worried about corporations having too much power and and right because that Tucker you can understand that was a that was a left-wing position for a long time in this country. it was >> but but the battle has been joined and so that is an incredible development in American politics that mainstream media I think has chosen to ignore because it's inconvenient for them. Uh then we got into a specific topic um which was banning private equity from buying residential real estate. And the idea behind that is private equity is the biggest bankers in the world. Basically they they're the uh biggest financial institutions and they've started to buy all of our homes. Now that creates a huge uh number of problems. Number one it drives up housing prices. That is why they are artificially high because so much more demand has come into the market. And I I went to Wharton business school. So this is not complicated though. This is econ 101, supply and demand, right? And so uh secondly, what the number one uh wealth creation asset that the American family has is their homes. That is how we created the greatest middle class the world has ever seen. and they're taking that from us and they're going to turn us all into renters and then we're going to be indentured servants to them. Okay? And the way that they are doing this is they are uh giving collectively billions of dollars to our politicians. So this issue connects actually the the money and politics issue connects to everything connects to corporate rule compar connects to capitalism by the way which I want to get back to connects to Israel because it isn't about Israel or any other particular lobby being uh evil or dastardly or in charge. It's the money that's in charge. And so if uh big pharma, Fizer, Johnson and Johnson, etc. give money to our politicians. Well, then they pass absurd laws like we're not allowed to negotiate drug prices, >> right? >> What in the world in capitalism you're not allowed to negotiate prices, right? >> I know. >> So, and we talked about that and he said, "You're right. That that is absurd." And we on the right already believe that that it's absurd and that it's against capitalism. >> Okay. So, pretty straightforward. So, let me First of all, acknowledge I understand why this is so popular, no pun intended, in the populist movement. This idea that, oh yeah, private equity getting into um residential real estate is a terrible idea. Who could possibly before this except, you know, the fat cats? This is obviously making it harder for young men to get married and buy a house and so forth, right? I understand all that. And I want to say they're misdiagnosing the problem. All right. So, let me just do some some quick hits here. So, number one, in that little clip there, Jack Uger didn't exactly spell out what is it that he wants to be done because if it's just flat out this should be illegal, and it wouldn't surprise me if that is his move because on a separate podcast where I made some similar points to what I'm going to do here, but on this one, I'm going to focus more on the Austrian side in particular near the end here just to tease you folks. I'm gonna go through what is one of my favorite things that Murray Rothberg did in man economy and state but save that you know I keep keep that keep you in suspense there. Um I had done another episode on a separate podcast going through this when it blew up on Twitter now 3 weeks ago or so at this point as I'm recording where a lot of people they were calling it black rock. It's actually black stone that is now heavily in in this space and that was making the rounds. People were talking about that and it was clear there a lot of people were just like, "Yeah, why why is that even legal? How can this be? Why would anybody want, you know, some big fund to be able to go around and buy residential homes? That's crazy. That should that should be just illegal. There ought to be a law." Okay. So, so I'm saying that's one thing. Again, in this little clip here, CH Uger didn't allow he wanted to talk about other things. That's why I stopped the clip there. I'm not leaving out further analysis from him. But suppose they do ban it, right? So you could see the irony given what else he was talking about there to say, "Oh, what? You're not allowed to negotiate drug prices? I thought this was capitalism." It's like, "Oh, right. A bunch of people aren't allowed to pull their money and buy a house. I thought this was capitalism." Okay. So, so there's that element there where he's railing against the government infringing on capitalism. What the heck is this? I thought this was a free country. I'm saying, "Right." And so it would be a bit weird to say and that's why we're going to define this this entire class of corporate structure is not allowed to buy housing. Okay, going further here again we're just doing kind of like drivebys at this point before I really get into the the depths of the analysis but it seems pretty straightforward. He said right ZCON 101. I mean everybody knows home prices are really outrageous lately and young people can't afford to buy homes even though you know their parents could or great or their grandparents for sure. It was in terms of like metrics about like the average man's salary, you know, how how much of that in order to buy a starter home, you know, things like that. It's definitely housing is clearly more unaffordable or less affordable now than it used to be, unquestionably, right? But the but the issue is why. And to just say, oh, econ 101, if we allow these private equity firms to come in and buy homes, well, duh, the demand's higher, so that means the price is up. That's why that's why home homes are so much more expensive. And not to be too uh glib here, but right that's econ 101. You need to go a little bit further when it's something like this with stocks and flows and inventories to say, well, that's kind of a superficial analysis, right? At best, this new type of buyer coming in and taking some homes off the market could explain a one-time level shift or so long as the inventory held by this other entity or, you know, type of corporate structure continually grew such that they owned a larger and larger fraction of the existing housing stock. That could explain steadily increasing prices, but clearly that's that can't happen forever that they're or put it to you a different way. What's the point of buying a house unless you're going to sell it down the road or rent it out? Okay, let's defer I'll come back in a moment to the renting it out part because that's a big part of the story and that's what a lot of people have in mind. That's actually what Blackstone's business model primarily is. They're they're not flipping. They're buying residential homes, renovating them perhaps, and then renting it out for like, you know, college housing and and stuff like that. Okay. So, but let me defer that because that's more complicated. But just on its own terms, just the raw, hey, basic economics here. If somebody comes in and buys something, yes, other things equal. If that's where you stop the analysis, that will make the price higher than it otherwise would have been. But let's not stop the analysis there. Let's think it through. Why would someone do that if they're not just living in it, right? People don't have a problem, right? If somebody wants to live in a house and they buy and live in it, right? That's fine. Okay. The issue is, oh, no, no, they're doing it as an investment. Okay? So, again, one type of scenario is these investors are buying homes because they think they're going to have a higher price down the road or they're going to renovate them. you know, oh yeah, that thing needs a needs a uh a new porch. It needs, you know, modern kitchen. We'll put an island in there, put some uh nice marble countertop, blah blah blah, and fix place. We'll pour in $30,000 and that'll push up the re the resale price by 50,000. We get a nice return on our investment, all that kind of stuff, right? So, that's another reason they might do it. So, there's nothing intrinsically harmful about any of that if that's what they're doing. Now, if you want to just say, "Yeah, but what if they just buy it and never sell it?" Well, if they're not renting it out, and again, we'll come back to that in a minute, then why would they do that? That's like if Yeah, if some billionaire playboy likes to just buy houses just to bulldoze them for fun, yes, that would make homes more expensive for everybody else, but I don't really think that's a a real issue here. Okay, so let me put it to this way. You could say that just about anything, right? like, well, what if private equity firms just started, you know, buying up television sets and that would just make them more expensive. Now, no one could buy a TV. And you say, well, why are they doing that? Aren't they going to sell the television sets, right? And so then if you start the analysis when they sell, you can say, oh, look at the private equity is making homes more affordable than they otherwise would have been because look at they're selling. It's econ 101. When you sell, prices go down. Okay. So now let's integrate that and put the length of buying and the selling and over time if some outside entity is in the business of buying and selling homes, residential homes, how are they making money in the long run doing that? Clearly the only way to succeed in that endeavor, again we're going to come back to the renting it out in a minute. Let's just focus now on the buying and the selling is if they buy low and sell high in general, right? Otherwise, they're going to be losing money. And so, what's interesting if you think through the logic of that again, other things equal, it's true. When they buy, they tend to push the price up, and when they sell, they tend to push the price down. And so if you just imagine a graph in your head of home prices, you know, they're they're going up over time with general price inflation and, you know, population growth and things like that, right? Unless the government liberalizes zoning regulations or whatever, you can imagine um and plus with positive immigration and so on that home prices tend to go up over time. Okay? But they don't just go up at 6% every year forever. No. Sometimes they go way up. Sometimes they go up a little. Sometimes they even crash. Right? So home prices, even though they drift upward, they're volatile, right? It's like a not a sine wave going up, but you get the idea, right? And so if now if that is if that's just like the fundamentals in terms of the actual uh residents the people who are going to live in the homes if they're the ones who are only buying and selling there's no outside investors right at this stage of the analysis that price graph is going to be whatever it's going to be and I want to say if you introduce speculative buyers large entities with a lot of poolled capital that come in and they have experts and algorithms and maybe AIdriven stuff, whatever, and they spot properties that they think are undervalued by whatever their metrics are, and they go in and make a bid, right? And they they get that house, whereas the young couple who's trying to get their starter home, they don't, right? And that's all Shank Uger is focused on. Oh my gosh, that young couple could have gotten that home except now this private equity firm comes in and buys it and it made it more expensive. Okay, that's true. But again, why are they doing that? Because they thought it was relatively underpriced. And the point of doing that if you're in the business of buying and selling is to then unload it later when you think it's when the market's too hot and you say, "Yeah, I think prices are going to come down soon and so I want to unload now." Or actually more accurately, if you think prices aren't going to rise quickly enough in terms of the rate of return on the tied up financial capital that you could earn a higher return elsewhere, right? That's actually the the the trigger, right? That if you could sell a house right now for I'm just going to use nice round numbers for the arithmetic. If if there's a home right now for the for 100,000, even though that's not realistic, right? there's 100,000 and you think next year you could sell it for 103,000 but you could just put your money into one year T bills and earn 5%. It would be silly. You should just sell the house now for 100,000 go buy T bills and earn 5%. Rather than keep your money, your financial capital tied up in this property that you think is only going to go up 3% over the course of a year. Okay, so that's really the the metric. Okay. So, if that's the the situation, right, think of what that means. That in general now, we're saying when prices are relatively low relative to fundamentals, the speculators come in and they buy the properties up and they push the price up. And then when it looks like it's nearing not necessarily a peak, but it's tapering off, that's when they come in and sell and start flooding the market with inventory. So, that pushes prices down. And so now if you're picturing again that original thing I asked you to imagine of an upward sloping graph that's you know got ups and downs but again it's just trending up over time the amplitude of that wave is going to be dampened because of the speculators because now superimposed on that fundamental curve that goes way up and way down and way up and way down even though it's drifting up over time. you've now got this outside force that comes in and pulls the price up when it's at its trough and it pushes the price down when it's at its peak relative to the you know fundamental path without speculation. Okay. And so this is just an application to housing of the more general phenomenon. I'll put a link in the show notes page for meises.org. Years ago I wrote an article said of the social function of speculators or I think I said of stock speculation. All right. So, I made the same point that I just did here in that article referring to share prices of corporate stock. And you might wonder, you know, you watch a movie like Wall Street or something or the the Danny Devito movie Other People's Money and you might think, oh yeah, there's people out there that actually contribute to the economy. They're going into factories and building stuff and there's farmers growing food and then there's a bunch of guys just sitting around watching computer screens and moving money around. They're not really doing anything. And I want to say in the confines of a private property society where everything's voluntary, yes, they actually are. Or at least if they're successful, if they're profitable, then they are contributing value to society just as surely as somebody digging up or or somebody coming up with a good marketing campaign or somebody writing a novel. You can say, "Oh, all he's doing is assembling letters." That's not physically producing anything, right? So, I will link to that if you want to see the argument spelled out a little bit more there. But it's the same thing here in housing. And again, notice it only works if you're profitable. If you get it backwards and you rush it like, you know, prices are rising and you think, "Oh, they're still going to go up for another few years. Let's get in." And actually, that's right. When the bubble pops and you lose a bunch of money, well, then you hurt things, right? you actually kept the bubble going a little bit longer than it should have than it would have if you hadn't gotten involved. Right? So it's again with this stuff just like in any type of venture if you're successful if you're profitable other things equal that's a sign that you're providing value to the consumers in the messian framework entrepreneurship that is successful and profitable means you perceived when others didn't that ah yes these resources these inputs in a sense were undervalued by the rest of the market so I'm going to buy them up at their current price, transform them into goods and services that I sell down the road and I'm going to earn a higher rate of return there than other people perceived was possible. And so that's, you know, that that forms my entrepreneurial profit and it shows that I did a good job for the consumers. I grabbed those resources that would have been squandered in other lines and diverted them into something that the consumers wanted more. Okay, so similar story with housing there. Uh let me before I move on to the buy verse rent again just this taking Jank Uger's just hey this is duh econ 101 and somebody's buying it that pushes up the price that makes it more or less affordable right so how could anybody be for that notice you could make a similar argument about used car dealers now I recognize used car dealers have a certain reputation they're about as popular as lawyers and politicians But I think everybody can appreciate the existence of car dealerships owners, right? Even though there's a sense in which, hey, if I'm trying to buy a car and I'm not just considering new models, but I'm also considering used vehicles, the fact that there are these companies out there with lots of capital, more money than I have access to who are also bidding on used cars, that makes them have a higher price. It's harder for me, you know, when Jim down the street his, you know, his wife gets pregnant again and they realize, "Oh, we got to we got to get out of this vehicle to get a van because now we have so many kids. We got to get out of our car seat." You know, I can make an offer on that vehicle that he's driving right now. But it's not fair if Jim's auto down the road is also bidding on his car. Well, geez, that's not fair, right? They're not even using it. They're just putting it on the lot. I was going to drive the thing. This is crazy. They're they're artificially withholding inventory from the driving public. You I mean, you got look at you got these fat cat corporations with a bunch of pulled capital that are just holding thousands of cars off the mark. You ever been like in a plane and just flown over when you're coming over city? Just look and see when you drive over the car dealerships, it's just how many empty cars are sitting there where there's plenty of people out there taking the bus to work. when they would love to be driving that vehicle, right? This is crazy. This is capitalism for you. Look how messed up this, right? I hope you folks see where I'm going with that. And you get the analogy that it would be very superficial to conclude from that that oh yeah, let's ban used car dealerships as a service to the car driving public. And you realize why that doesn't follow. Because yes, in that moment, if you don't have a car and you're trying to buy a car and then there are people at any given time who are getting out of their vehicles and they because they need something else or whatever or they're retired and you know they're slowing things down and maybe the husband and wife had two vehicles and they're going to just, you know, they're going to get rid of one of them because now they don't drive as much. whatever the reason. Yes, if you all of a sudden snapped your fingers and took the used car dealers out of the equation, that would lower the instantaneous demand for used cars and their equilibrium price would probably fall. That's true. And so if you just looked at the people right then, you know, that month who are trying to buy a used car, that would help them. But going forward, it does not follow that that new rule of saying it's illegal to have used car dealerships would benefit drivers or motorists in general. And the reason, of course, is you know who it hurts even in that moment is the people selling their used cars because now they get a lower price. And back when they bought the car, when it was new, part of the equation, you know, part of their consideration was, "Oh, I'm not going to drive this thing until it collapses on me. I'll drive it for a bit and then maybe three years from now I'll sell it or whatever, five years, whatever." You know, obviously depends on your driving habits and the kind of vehicle it is and so forth. But the point is, you know, there's resale value and that's partly what makes you pay what you pay in the beginning. And then you could say, "Okay, but yeah, once everybody adjusts to the new situation, maybe that lowers the original price of a new vehicle, too, right?" And so, oh, so doesn't that help the new car buyer? Well, again, not necessarily. If you're just lowering prices on the front end and on the resale, you know, when you when you sell it off, it might still end up not helping the average car buyer because now, you know, there's going to be fewer cars produced, right? the car manufacturers, if the price of a new car drops, they won't make as many vehicles. Okay? So, I'm just showing as you go through the ramifications of this that it's pretty complicated and it's not enough just to say, "Oh, yeah, if I just focus right now on the people trying to buy this." Oh, and I just say, "Oh, if there's a corporate buyer, that's going to make the price higher. That's bad. I don't like high prices for the buyers right there." That's near end of story. Okay, but that's pretty superficial. So, in terms of housing, like what happens with the car dealership analogy there, among other things, you know who's helped by having private equity come in and buy up residential real estate? The people selling homes. They now have another buyer so they can sell for a higher price. Okay. So it's it's ironic too that you saw in there the part of what Changer got into was he said oh and you know for a lot of middle class families their home is the you know the savings vehicle that's the where they they accumulate their wealth and so forth. Well okay so if you pass some law that now all of a sudden makes home prices fall well then you've kind of blown up that theory, right? I could just flip it and say the last thing in the world we'd want to do is turn off the demand for homes because look at all these middle class families. That's their only asset really. Sangoo just admitted that they were banking, no pun intended, on their home going up in price over the years. They bought in at a high price. So if we cut them off at the knees now, what that'd be devastating. Okay. So again, with all this stuff, I'm not proving anything per se. I'm just showing his glib analysis there is clearly not the full story. Okay. Why don't I jump into now this issue of the renting versus the buying? Because again in fairness the critique especially coming from the populist right people concerned about you know the world economic forum and Klaus Schwab saying you'll own nothing and be happy you know and the vision they're painting that whatever the year 2050 the average American's going to live in a 8 by8 little apartment with their virtual reality goggles on getting their UBI checks from the government they don't own any property whatsoever the you know the food is all grown in labs cuz it's fake meat and stuff like that. And again, they're getting a bunch of drugs and whatever to keep them docile. The robots make everything. And uh if they need to go somewhere, they don't they barely ever leave their apartment, but if they did need to go somewhere, they just call some flying Uber, you know, a fleet of these vehicles that's owned by some giant corporation. Nobody even owns cars anymore, right? So that's a pretty bleak picture. And so given if you think that's what some of these multi-billionaires end goals is, then it seems one component along that way is oh yeah, these big huge institutions coming in and buying up residential real estate and then converting it and then it's like a corporate owner who rents it out and so more and more people instead of owning a home end up just renting, right? So, I appreciate all that, but as with a lot of this stuff, when cultural conservatives rail against the free market, you know, getting upset at payday loans and um other types of short-term credit and things like that, fast food restaurants and all this is crazy. Walmart coming in and putting out the M. A lot of this stuff is due either to, you know, specific government regulations you can point your finger at to say, well, that's kind of, you know, causing this outcome that it's making it hard for the mom and pops to compete and things like that. Not to mention just the tax code and regulatory burden that it's easier for big companies with tax attorneys and all sorts of uh CPAs and whatever to to deal with all the paperwork. But besides that stuff, some of it too is just, you know, oh, if it's a bad culture, that's not capitalism's fault, right? If people want to buy trashy magazines or something and not arudite novels and great literature, it's not capitalism's fault that it's really good at producing smutty magazines or whatever, right? That's not the fault of the free market. that just you can say, well, people, you know, have corrupt habits. Or if people want to spend their money buying cigarettes rather than Brussels sprouts, it's not capitalism's fault that more of the land is devoted to tobacco, right? That that's what capitalism serves the consumers in that respect. Okay? So some of it is that um but on this narrow issue of oh the corporations can just come in and force people to rent again you you got to look at the market forces and just so very quickly how does that work? If let's say Blackstone or something comes into an area and right now everybody owns and very few people rent or if they do rent it's like there's high-rise apartments and stuff like that. There's not homes for rent and so there there is a market. There are people who um for various reasons do not want to buy a house and yet they might want to live in a house not live in an apartment building. And so it caters to them to have homes that they can rent and that's a service that Blackstone and others provide. And what you know what are the economics of that? Well, you if you're the private equity firm and you would say, okay, I can buy a house for a certain outlay and then I think I can rent it out for such and such and I just look at what's the rate of return on my investment and you know given the risk involved like hey if the tenants are bad you know they might trash the place just in general somebody might move out I might be vacant for a month or two until I get somebody new in there. So you got to take into account all that kind of stuff, right? So you you you forecast well what happens to the market maybe you know the the just price appreciation just on the value of the property itself not just the flow of rental income that I'm going to get right there's all sorts of factors you can take into consideration but ultimately it's the trade-off between how big a check do we have to write in the beginning to buy the property and then what's the flow of net cash that we're going to get that's going to throw off you know accounting for maintenance and things like that that you might outsource it to other companies, property managers and stuff like that. Okay, so accounting for all that stuff, you just say, "Yeah, for the amount of money we have to spend up front to acquire these properties, possibly with borrowed money, you got to figure out the interest and whatever." And then the flow of rental income. What what does that look like compared to if we took our capital, our financial capital in the beginning and instead of deploying it into residential housing, we deployed it into something else. You know, we could buy corporate bonds. We could go put it in the Japanese stock market. We could go put it in Bitcoin. There's all kinds of stuff you could put your money in. And you just look at the risk and reward, right? And so if Blackstone and these other private equity places get into residential housing with the intention of renting out, what happens? Yep. Is they're buying up the homes that pushes up the purchase price of the housing stock, but it pushes down the rental price, right? in a given area, if Blackstone or other companies get in there, start buying more properties off the market in order to then rent them out. Now, if you're a renter, you're getting more and more supply. There's more and more units available. So, other things equal econ 101 is the supply of rental housing goes up, the unit price goes down. And like, so if you're saying, "Yeah, I want to I want to rent a place that's in a nice neighborhood. you know, three bedroomedroom, two bath, um nice yard perhaps, uh you know, not too far from movie theaters and things like that. Okay. Um and I'm willing to pay such and such a month. Is there anything like that? And I'm saying as Blackstone and others get into this, there's more and more properties that check out your boxes and are affordable to you. Okay? And so, but that doesn't mean, oh, so therefore, looking out a few years, eventually private equity will own every single house and everyone will just rent because no, again, just think through the logic of that. The more they do that, the more they push, the more units they buy, other things equal, that pushes up the purchase price, right? Because there's a dwindling supply of homes available for purchase outright, right? some new people coming in who want to just buy a house. That supply is dwindling because more and more of it's being devoted to rental uses. So that makes the purchase price go up and the rental amount is going down. And so at some point on the margin, Blackstone or these other, you know, their competitors are going to say, "Oh, there's this property that, you know, the owners are leaving. They're re they're going down to Florida or something and so they're selling their home in Minneapolis and we would have to pay a million dollars for it and we would only get when all is said and done a flow of whatever $50,000 a year in rental income and that's not worth it for the risk involved, right? Because you have to deal with the tenants and stuff like that. So no, we would we would rather spend our million dollars in some other investment than doing that. Okay. And so that's the natural feedback mechanism at which point they would back off of buying up homes and turning them into rental properties. Okay. Just like with any other application of free market capitalism. Again, I'm not being naive here. Don't bite my head off in the YouTube comments on this episode. I understand we don't live in a free market. I get it. But my point is, okay, so if you don't like the current situation and here I'm certainly not endorsing Blackstone as an as a real world player, I'm sure I actually don't know too much about them, but it wouldn't surprise me if they're doing all sorts of stuff that violates my libertarian sensibilities. Okay, so I'm not defending them per se. I'm just saying to rail against the very notion of private equity owning homes because oh that makes things more exp that's that's crazy if you want to go through and point out specific government interventions and you know crony deals between these big companies and the government that allows them to get an unfair advantage in the residential housing market. Great. And then the ideal solution would be let's get rid of those. Or if you want to say it's impractical. We can't get rid of all those eight things that are the true culprits here is a next best thing. Let's just ban it all together. Okay, you could you could say that at least that would be coherent. I would just say it's kind of weird if you're going to go to the government say, "Hey, can you make it illegal for these cronies that are paying you behind the scenes and that's why you did all these sweet deals for them and regulations and things to benefit them? Can you just make it illegal for them to take advantage of the deals you guys cooked up behind closed?" Like what? Okay. So, I hope I've made that clear. Let me now um talk about Rothbard. So, one of my favorite parts of man economy and state is when he tackles Henry George and his proposal for what's called the single tax or the single land tax. So the idea is Henry George was an economist and uh it's funny on some areas you know a lot of leftists would like him but he was really good for example on free trade or he's I forget the exact wording but he's got a great line that I would use all the time when I was teaching at the undergrad level to say something like um what protectionism does to the nation in peace time is what our enemies do to us in wartime something like that. Okay. And the idea is, you know, you go to war with another country, if their navy is better than yours, what do they do? They try to surround you and blockade you. They stop imports getting into your country. And also, they might try to stop exports from getting out. But the main thing is don't let other countries send stuff into your country. We're going to starve you out. You know, like put up a siege. And everybody seems to recognize in wartime that hurts your country. If the enemy's navy stops supplies from getting into you, that hurts you. And Henry George's point was, but during peace time, what happens is your own government, if it falls prey to protectionist fallacies, puts up big tariff or tax um import restrictions that staunch the flow of imports into your country on the grounds that this is good for the economy. And so like you could flip it the other way and say, "Well, how come when um you know, weren't weren't the German Ubot doing British industry a favor by sinking all the shipping that was going in, you know, during World War One and two, right?" Okay. So, George, Henry George was good, you know, he he understood the problem with various types of taxes. He also understood why an income tax was destructive. Okay, it, you know, reduces the return to labor, things like that. Okay, and so his proposal was, why don't we just have a single tax on land and specifically the unimproved value of the real estate, right? So, if you bought a parcel of land, it just, you know, was bare and then you build a shopping mall and then you could sell the whole package for more, Henry George wouldn't want to tax you on what you added. Or even if you went in and you know dug a canal or something, you know, you irrigated, you did those, planted a bunch of trees, right? If you did things to transform the land in ways besides just building, you know, physical construction on it, he still would say, "Oh, you improve the value of the land." So, I'm not talking about that. No, he wants to just tax what he thinks is the raw just location site value because there he thinks that's not something you did as the owner. That was just as the community grew up, right? As population density increased, that's what made just the raw price just for having an acre or whatever 100 yards by 100 yards in that prime location. that is not due to your efforts. That's just, you know, the community's contribution or whatever. And so he thought if you're going to tax something, it makes sense to tax that because you're not, he said, among other things, you're not discouraging anybody's effort, right? You wouldn't want to say, oh, if if somebody buys a raw piece of virgin land, chops them down the trees, and builds a huge shopping mall or, you know, puts up a casino or whatever. I don't know how Henry George felt about casinos, but, you know, put up some gorgeous hotel, whatever, if it's in some nice vacation spot, put in a bunch of golf courses, let's say, you know, bring in water to to make it, you know, nice greens and whatnot, okay? And you you took something that you bought for a million dollars and you transformed it into a billion dollar property, Henry George understands if you were to tax 20% of that gain, well, that's going to discourage efforts to improve the property. you might not spend as much build, you know, you might not have as many holes in the golf course. You might not make the hotel as luxurious if you know that, oh, I got to give 20% of the gain to the tax man, right? So, he Henry George understood that. And he said, but if we just tax the raw unimproved land as, you know, its value as real estate at that location as such, that's not discouraging anything, right? Someone's gonna own the land one way or the other. It's not that people, oh, what's the point of buying it? just leave it uninhabited. That's not the issue on the margin. Right? So Henry George's point was given that people are going to own the land, it's going to have a price. If you just see as that price goes up purely because of population density and stuff like that or just people getting wealthier in general and so they're able to afford more to spend on raw land, that's what we're going to tax because again it's not going to discourage anybody on the margin. Okay? So that's his proposal and Rothbart spent some time knocking that down and it was it was interesting because it really makes you understand the Austrian perspective to show what's wrong with that. So here I'll just so if you get man economy and state you know they got the free PDF at mises.org. There's also my study guide. So we'll link to both of those in the show notes page. Again all free PDF you can get. Um, so here, let me just very briefly explain what Rothberg pointed out there. He, so he agreed with Henry George's critique of every other type of tax, but Rothberg disagreed and said Henry George is wrong if he thinks this single, you know, land tax isn't going to distort anything. And one issue is that um there's a benefit for someone to uh locate a property and keep it vacant. Right? So it's very counterintuitive. That's why I just love this analysis. All right. By the way, what I'm going to be saying, I think is consistent with what Rothbart said. I might be say I haven't read his particular analysis in a while. So the way I say this might not be the the way his argument went. But certainly his analysis made me think like this and that's what was going to cause the words to pop out of my mouth this way. So um you might think the worst case scenario is somebody buying property and then keeping it off the market because you might say there's no way you can argue that that's socially beneficial. Nobody is allowed to use the resource if you're keeping it vacant. And it's not like, you know, it it's not like a like a car or something or or even better, it's not like um like a candy bar, right? That's sitting in the shelf in the gas station where you could understand, oh yeah, you don't you don't want to make the price so low that the whole inventory the shelves just get empty that day. you could kind of understand that. Yeah, it makes sense that when they set the prices of the candy bars that they just want to kind of have a flow over time or, you know, imagine clothes in a clothing store on any given day, most of the inventory stays inside the store, right? There's a flow that comes out and it would be wrong to look at the clothes sitting on the, you know, the racks in a in a clothing store and think that's the excessive waste of capitalism. Like look at all these clothes sitting there when there's people on the streets that are cold, right? Like a a very crude socialist might say that, but most people would recognize, no, there's marketing involved and you know, you need to have a place to go. It's more efficient that way that everyone knows if you need to get a shirt, you go to this building over here and there's a bunch of shirts there for you to choose from. And for that to work, it can't be that whenever you go there, there's one shirt left, right? There's got to be a lot of shirts for you to with different variety and sizes. Okay? Otherwise, it doesn't really work. It's not saving on everybody's time by coordinating on Yeah, we all go to this place, this giant room, and we all need a shirt, right? So, you kind of get that. But notice there, you might think that logic doesn't apply to land qua land because it's not like you might think somebody's going to take the land and go do something with it and then it's gone just like somebody can eat the candy bar and then oh once somebody eats it it's gone. And so the issue was just the price is going to channel it to the person who values it the most. And that's why the gas station owner isn't gonna just keep, geez, the candy bars aren't moving and just keep lowering the price until he sells out that day. That would be goofy. He's fine if some candy bars remain when he closes up for the night and then comes back the next day, right? Because he knows he can charge a higher price and that rations them so that people that, you know, in a sense really want the candy bar when they are on a road trip and pull over, there they are for them. the higher price kept them out of the hands, out of the midst of the people who actually didn't like them that much or didn't value them that much. Okay, so that's kind of the story with a consumable perishable commodity that once you consume it, it's gone. But with land that's kind of just providing this endless flow of services, you might say, "No, it is a pure waste." if a month goes by and it's not used because that's just now one fewer, you know, acre month of land service that humanity didn't get to enjoy all because this greedy land owner, uh, you know, landlord kept it off the market selfishly. Okay. So, Rothbber tackles that head on and he says, "No, that's not correct." Because realistically, practically, the way things work, people don't swoop in and sign contracts to use that parcel of land for one night and then leave. It's longer term contracts, right? And that makes sense because if you're going to use land, you got to have some stability that, let me put you this way. If you own a piece of land and you were thinking, okay, I can try to just rent it out for 12 months in s succession for one month intervals, right? So, in other words, as February is approaching, I say, "Hey, everybody, I've got this acre of land. There's nothing on it right now. It's just this raw acre, and I'm going to rent it out for the month of February, and I'm going to do I hear $500, do I hear $400?" Right? And that's what you're doing. what you're selling is the right to use that land for the month of February. You see, nobody's going to What are they going to do with it? I mean, you got some frat guys could buy it and throw a big party on it or something, play splatball, but you get the point. No one can buy it and build something on it for heaven's sake. Okay? Whereas, if you say, "Oh, there's this parcel of land that you can use and I'll let you rent it out for five years with the option to leave the contract early." you know, now we're talking. Now it might make sense, you know, if it's agricultural, you know, if it's relevant for that, you might try to farm on it or have your cows graze on it or whatever. Okay, you get the idea. So the point being given that land works like that just technologically, then you can see it might make sense particularly like if there was a business there before that went out of business and now there's just this giant like like office space. You're driving around town and you see this empty building and there's a big sign that says, you know, office vacant, call and it gives a phone number and you might be driving by, it's there for a week, it's two weeks, three weeks, might be six weeks and there's man, this a failure of capitalism. And Rothart's point is no, the owner based on the offers they might have gotten, people calling in, whatever, has not found the right renter yet, the right tenant for that space. and he is estimating as an entrepreneur that no rather than just take the best offer I have right now I will make more money in the long run if I keep it off the market and keep searching holding out for a better offer and you know once you frame it like that and you realize well I mean that's clearly what the person's doing and when you frame it like that that makes total sense just like if you're trying to sell a house I' I've made this point elsewhere just to say it here you this issue of liquidity. If you say my house is worth $350,000, what does that mean? It doesn't mean next Tuesday you could sell your house for $350,000. No, what you mean is if I cleaned it up, if I maybe painted some stuff here and there, I got a realtor, we had a bunch of open houses, maybe we waited for the time of year when my realtor told me, "This is probably when you want to do it." and then you know so it might take you three to six months to find the right buyer and then I could probably sell it for $350,000. That's what you mean. Whereas if you own a bunch of corporate stock and you say I have $350,000 worth of these companies, you could have that money in your brokerage account by the end of the week, right? Because corporate shares of stock are much more liquid than residential homes. Okay? So you know G given that right that's notice there what you did with your house is even if you like had to move to another city like say you got a job offer and you had to take it right away and so you flew out to the new city and you're out there working and meanwhile you're trying to sell your house back where you used to live and it might take you three months and so one might be driving by your house and say that house is vacant. This is a failure of capitalism. There's homeless people living under the bridge and this jerk flew out to Phoenix to take some new job and meanwhile nobody's living in this house. That's crazy. And I mean, you could think that, but you could also see in terms of getting resources and their most valued use for something like a residential house, it makes sense to wait and find the right buyer. or you know just with human labor especially like high-skilled labor. Some uh you know project manager engineer at a Fortune 100 company gets laid off, he's not going to take a job flipping burgers down the street next Tuesday, right? He's going to stay off the market and look around for better offers because he knows I have a very particular set of skills, right? That it he could go flip burgers. is able to do that, he probably runs circles around the 18-year-olds at that job, but it makes more sense for him to search for a better buyer of his labor services. Okay? And so, similarly with real estate, even raw um unimproved real estate, and that's really what Rothburn's point was. He said the way you improve a parcel of land isn't merely by physically transforming it like if you know if it's soil putting fertilizer in it and irrigating it and stuff like that but also and you know building things on it that's obvious but Rothber's point was no if you're a better entrepreneur than others in your community and you know this other guy might spend um like put it this way. Let's say um there's this raw piece of land and the current owner doesn't know what to do with it. He's get he's puts it up for sale. And so then this other guy comes along and he says, "Oh, I want to sell that or I'm willing to pay $50,000 for that because I'm going to do such and such with it and it would make sense. I could have, you know, I'll bid 50,000 for that." And then someone else comes along and and has more better foresight. No, what that guy wants to do with it. I mean, he doesn't need to know what the guy has in mind, but this guy just needs to know, I'd be willing to pay 60 for that 60,000 because and he might have some other plan in mind and he might realize, I need that parcel of land. I can't have someone else getting it and putting a shopping center on or doing whatever they're going to do because I need it for something else. I think you know maybe you know that um some big company like Nissan is getting ready to open up a plant in your town and the other guy didn't know that or maybe he knew it and he didn't fully understand the implications the way you do. Again with all this stuff you have to assume you're right otherwise it doesn't work in which case yeah you suffered losses because of your entrepreneurial mistakes. Okay. But I'm saying if you're right and you realize, oh, no, no, when Nissan sets up shop a year from now and there's more demand for land in this region, that parcel of land's going to go for $100,000 because they're people are going to need to build a house on that or, you know, maybe an apartment complex for all the new workers that are going to come into this town because of the new plant. And I'll easily be able to sell that parcel of land for 100,000 at that point to the apartment developer. But right now, the apartment developer doesn't believe Nissan's coming the way I do. And so, the apartment developer is not going to pay 100,000 for it right now. They're not even going to pay 51,000 for it. So, right now, if I don't come in, this guy over here is going to spend 50 on it and put up a shopping center. Whereas, I know, nope, that's not the best use of it. That because I know I if I kept that thing vacant, I could sell it for 100 a year from now. So, I'm going to bid whatever 55 to make sure I get it and then I'll hold it off the market and then sell it for 100 a year from now. Okay. So, I'm I'm making up a contrived story, but that's the idea of what Rothbart was saying. And so in that analysis, Henry George just looking at the raw facts, not knowing like the counterfactuals of what would have happened had it not been, he's just going to say, "Oh man, this guy bought the property for 60,000 and then did absolutely nothing to increase its value." And then a year later, because Nissan moved in, then he sold it for 100,000. So the community, you know, the local authorities should tax him a very high percentage of that $40,000 gain because he didn't lift a finger to do that. That was just the Nissan people coming in and the workers coming in and needing housing. That's what drove the price up, right? And so we're going to tax the But if the guy knows, oh yeah, if I spend 60 on this and then turn around and sell it for 100 a year from now, I'm going to get most of that gain taxed away. Well, then my after tax return is peanuts. So, I'll spend my $60,000 on corporate bonds or something. I'm not gonna buy do that, right? And then that misallocates the resource. It gets devoted to something for the present when in a sense really what it quote should have been devoted to is being held off the market for the more important use down the road to house all the workers coming in. Okay. So that's the analysis there. And again, you notice how that's a very Austrian perspective, taking into account not just the static equilibrium, but also understanding differing uh visions of the future and how the successful entrepreneur sees things that others missed and you know the dynamic market process and you don't want to reduce the incentives for that. Okay, let me now as perhaps will surprise you since I'm an Austrian. Let me show you some data. Okay, that you might say, "Okay, Bob, fine. You know, you got your philosophical stuff and your pedantic stuff." Okay, but why why are homes so expensive and let me just show one thing in particular. So, an obvious ex thing is local housing zoning laws, right? that if local and state governments have severe restrictions in place and being able to build more housing, well, that other things equal and make it more expensive. But there's also the Federal Reserve. So, I'll go ahead and just let me just show you two charts. So, here is showing the Fed's holding of mortgage back securities. And you can see, you know, it goes way up. So it was zero going into the financial crisis of 2008, right? The Fed didn't own that until then. That would have been unheard of. People would have thought, what you can't have the central bank buying mortgage back securities. That's way too specific. That's opens the door to corruption and distortion. What are you doing? Well, they did in 2008 bail out their buddies. So you see that huge surge, another surge like late 2012, 201 going to 2013 up through 2014 which was you know QE2 and actually no that was that was QE3 that one. Um and then you see it started tapering off and going down under when Powell came in at first and then it zoomed way up after 2020 the COVID crisis. open up the floodgates and then it peaked at in early 2022 and has been drifting downward since. Okay. So even though we like to joke and say, you know, money printer go burr actually Jay Powell as Fed chair, I think he, you know, maybe it's because he's his investment banker background or whatever, but he understands we can't just keep printing money like this that eventually the markets are going to turn on us. So we got to show them, okay, when there's not an immediate crisis in our face, we do try to shrink the Fed's balance sheet. All right. So anyway, um that's what the Fed's balance sheet holdings of mortgage back securities look like. And then let me show you CPI adjusted home prices. Right? So what this chart is, this is the case Schiller US National Home Price Index, but what I've done is divide it by just a standard consumer price index. And so this is, you know, like quote inflation adjusted as it were. And so you can see that that peaked back in May 2022 and then it fell and it came up a little bit, but it's still, you know, bouncing around as when I made this chart. But you can see how that roughly corresponds with what the Fed's been doing. All right. after the you know there was the the crisis home prices collapsed after 2006 but I'm saying once things where you started recovering you can see that there's at least a general connection there whereas if you're chancer it's going to be hard to look at this chart and say oh yeah see what happened was um res or private equity got greedier and greedier all from 2012 and they got super greedy right after when COVID hit and then you know private equity decided maybe they watched uh story about Ebenez or Scrooge or something and they decided that they weren't as greedy after 20 May 2022 and so that's why home prices started coming right like it's again to explain I've used this analogy before to explain price inflation is due to corporate greed is like blaming an airplane crash on gravity. Well, yeah, gravity's involved, but when you want to know what how come that plane fell out of the sky and all these thousands of other planes didn't to just say gravity doesn't really work, right? And so, also, if you want to know what's up with home prices, how come sometimes they're zooming way up and then they crash and they zoom up again and then they tapered off? It's not enough just to say, "Oh, yeah, cuz private equity got involved." that again other things equal that would explain like a one-time shift or a gently rising price level as they kept expanding their inventory. You say, "Well, are they just going to expand indefinitely?" Like, why are they doing that? Right? So, okay, I think I have given you enough fodder here for you to consider. Again, I'm glad Chancer went on Tucker's show. I loved just about everything in that episode, but that particular element of bristling at uh private equity getting into home owners or residential ownership of homes. Again, it it's not just that I'm nitpicking on, oh, I don't think you quite have the analysis right, but given that there's all this energy and anger, I think we should be more careful about what's causing this so that we can actually address the real causes and not just focus on at best the symptoms. Okay, thanks for your attention everybody. See you next time. Check back next week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on misces.org. [Music] [Applause] [Music] [Applause]
Are Private Equity Firms Really Driving Home Prices?
Summary
Transcript
This is the Human Action podcast where we debunk the economic, political, and even cultural myths of the days. Here's your host, Dr. Bob Murphy. Hey everybody, welcome back to Human Action Podcast. Today I'm going solo again and I'm going to respond to a short clip taken from a recent Tucker Carlson live presentation where he was uh you know giving his reaction to the legacy of uh Charlie Kirk and he had a series of guests I think Megan Kelly uh Scott Adams and then Chenuger and then there was a a priest at the end who I hadn't heard of before and it's in particular the the third guest. Chanker's uh brief appearance is where this clip's going to come from. Let me give the disclaimer here. I appreciate very much what Tucker was doing. His opening remarks before he brought I think Megan Kelly was the first guest before he brought her out were very moving. Like I was I was really like I didn't want my car ride to end. I I wanted to keep listening to it. Um, and so this episode for me here obviously should not be construed as, oh, I'm taking a shot at Tucker Carlson or something in this guest. And I appreciate Chunk Ugger calling on the show and trying to, you know, build bridges and so forth, right? So, I loved everything about that. There was a brief clip here though that I think is something that is important in terms of free market economics to understand because I see this coming up a lot. This issue that we're going to go over here in this episode, right? So that's why I am not I hope merely being pedantic here. I think this is important. Specifically, it has to do with uh private equity getting into residential housing. And the point of this clip that we're going to play here in a second is that Chang Ugger and Charlie Kirk agree that oh that's bad and you know presumably Tucker does as well. And I think they're misdiagnosing the problem. All right. So I'll go ahead and now I g that that much of a preamble. Let me just play the clip and then I'm going to go through and explain why I think they're missing the mark. >> And and so I I don't agree with everything that you Megan and and Scott said about Charlie. >> I'm sure. >> Right. But but I think that's what makes it more interesting. Uh so the willing that the willingness to talk to us even though we were so entrenched uh on different sides right and so then when we started the conversation what wound up happening it surprised us. So did we still have our disagreements about the black pilot line this that and the other thing? Of course we did. Right. Uh but when we started talking about corporate rule he agreed. And I remember like I want to go back and watch the first interview we did with him at the RNC there because I was kind of shocked by it. It's like really you're also worried about corporations having too much power and and right because that Tucker you can understand that was a that was a left-wing position for a long time in this country. it was >> but but the battle has been joined and so that is an incredible development in American politics that mainstream media I think has chosen to ignore because it's inconvenient for them. Uh then we got into a specific topic um which was banning private equity from buying residential real estate. And the idea behind that is private equity is the biggest bankers in the world. Basically they they're the uh biggest financial institutions and they've started to buy all of our homes. Now that creates a huge uh number of problems. Number one it drives up housing prices. That is why they are artificially high because so much more demand has come into the market. And I I went to Wharton business school. So this is not complicated though. This is econ 101, supply and demand, right? And so uh secondly, what the number one uh wealth creation asset that the American family has is their homes. That is how we created the greatest middle class the world has ever seen. and they're taking that from us and they're going to turn us all into renters and then we're going to be indentured servants to them. Okay? And the way that they are doing this is they are uh giving collectively billions of dollars to our politicians. So this issue connects actually the the money and politics issue connects to everything connects to corporate rule compar connects to capitalism by the way which I want to get back to connects to Israel because it isn't about Israel or any other particular lobby being uh evil or dastardly or in charge. It's the money that's in charge. And so if uh big pharma, Fizer, Johnson and Johnson, etc. give money to our politicians. Well, then they pass absurd laws like we're not allowed to negotiate drug prices, >> right? >> What in the world in capitalism you're not allowed to negotiate prices, right? >> I know. >> So, and we talked about that and he said, "You're right. That that is absurd." And we on the right already believe that that it's absurd and that it's against capitalism. >> Okay. So, pretty straightforward. So, let me First of all, acknowledge I understand why this is so popular, no pun intended, in the populist movement. This idea that, oh yeah, private equity getting into um residential real estate is a terrible idea. Who could possibly before this except, you know, the fat cats? This is obviously making it harder for young men to get married and buy a house and so forth, right? I understand all that. And I want to say they're misdiagnosing the problem. All right. So, let me just do some some quick hits here. So, number one, in that little clip there, Jack Uger didn't exactly spell out what is it that he wants to be done because if it's just flat out this should be illegal, and it wouldn't surprise me if that is his move because on a separate podcast where I made some similar points to what I'm going to do here, but on this one, I'm going to focus more on the Austrian side in particular near the end here just to tease you folks. I'm gonna go through what is one of my favorite things that Murray Rothberg did in man economy and state but save that you know I keep keep that keep you in suspense there. Um I had done another episode on a separate podcast going through this when it blew up on Twitter now 3 weeks ago or so at this point as I'm recording where a lot of people they were calling it black rock. It's actually black stone that is now heavily in in this space and that was making the rounds. People were talking about that and it was clear there a lot of people were just like, "Yeah, why why is that even legal? How can this be? Why would anybody want, you know, some big fund to be able to go around and buy residential homes? That's crazy. That should that should be just illegal. There ought to be a law." Okay. So, so I'm saying that's one thing. Again, in this little clip here, CH Uger didn't allow he wanted to talk about other things. That's why I stopped the clip there. I'm not leaving out further analysis from him. But suppose they do ban it, right? So you could see the irony given what else he was talking about there to say, "Oh, what? You're not allowed to negotiate drug prices? I thought this was capitalism." It's like, "Oh, right. A bunch of people aren't allowed to pull their money and buy a house. I thought this was capitalism." Okay. So, so there's that element there where he's railing against the government infringing on capitalism. What the heck is this? I thought this was a free country. I'm saying, "Right." And so it would be a bit weird to say and that's why we're going to define this this entire class of corporate structure is not allowed to buy housing. Okay, going further here again we're just doing kind of like drivebys at this point before I really get into the the depths of the analysis but it seems pretty straightforward. He said right ZCON 101. I mean everybody knows home prices are really outrageous lately and young people can't afford to buy homes even though you know their parents could or great or their grandparents for sure. It was in terms of like metrics about like the average man's salary, you know, how how much of that in order to buy a starter home, you know, things like that. It's definitely housing is clearly more unaffordable or less affordable now than it used to be, unquestionably, right? But the but the issue is why. And to just say, oh, econ 101, if we allow these private equity firms to come in and buy homes, well, duh, the demand's higher, so that means the price is up. That's why that's why home homes are so much more expensive. And not to be too uh glib here, but right that's econ 101. You need to go a little bit further when it's something like this with stocks and flows and inventories to say, well, that's kind of a superficial analysis, right? At best, this new type of buyer coming in and taking some homes off the market could explain a one-time level shift or so long as the inventory held by this other entity or, you know, type of corporate structure continually grew such that they owned a larger and larger fraction of the existing housing stock. That could explain steadily increasing prices, but clearly that's that can't happen forever that they're or put it to you a different way. What's the point of buying a house unless you're going to sell it down the road or rent it out? Okay, let's defer I'll come back in a moment to the renting it out part because that's a big part of the story and that's what a lot of people have in mind. That's actually what Blackstone's business model primarily is. They're they're not flipping. They're buying residential homes, renovating them perhaps, and then renting it out for like, you know, college housing and and stuff like that. Okay. So, but let me defer that because that's more complicated. But just on its own terms, just the raw, hey, basic economics here. If somebody comes in and buys something, yes, other things equal. If that's where you stop the analysis, that will make the price higher than it otherwise would have been. But let's not stop the analysis there. Let's think it through. Why would someone do that if they're not just living in it, right? People don't have a problem, right? If somebody wants to live in a house and they buy and live in it, right? That's fine. Okay. The issue is, oh, no, no, they're doing it as an investment. Okay? So, again, one type of scenario is these investors are buying homes because they think they're going to have a higher price down the road or they're going to renovate them. you know, oh yeah, that thing needs a needs a uh a new porch. It needs, you know, modern kitchen. We'll put an island in there, put some uh nice marble countertop, blah blah blah, and fix place. We'll pour in $30,000 and that'll push up the re the resale price by 50,000. We get a nice return on our investment, all that kind of stuff, right? So, that's another reason they might do it. So, there's nothing intrinsically harmful about any of that if that's what they're doing. Now, if you want to just say, "Yeah, but what if they just buy it and never sell it?" Well, if they're not renting it out, and again, we'll come back to that in a minute, then why would they do that? That's like if Yeah, if some billionaire playboy likes to just buy houses just to bulldoze them for fun, yes, that would make homes more expensive for everybody else, but I don't really think that's a a real issue here. Okay, so let me put it to this way. You could say that just about anything, right? like, well, what if private equity firms just started, you know, buying up television sets and that would just make them more expensive. Now, no one could buy a TV. And you say, well, why are they doing that? Aren't they going to sell the television sets, right? And so then if you start the analysis when they sell, you can say, oh, look at the private equity is making homes more affordable than they otherwise would have been because look at they're selling. It's econ 101. When you sell, prices go down. Okay. So now let's integrate that and put the length of buying and the selling and over time if some outside entity is in the business of buying and selling homes, residential homes, how are they making money in the long run doing that? Clearly the only way to succeed in that endeavor, again we're going to come back to the renting it out in a minute. Let's just focus now on the buying and the selling is if they buy low and sell high in general, right? Otherwise, they're going to be losing money. And so, what's interesting if you think through the logic of that again, other things equal, it's true. When they buy, they tend to push the price up, and when they sell, they tend to push the price down. And so if you just imagine a graph in your head of home prices, you know, they're they're going up over time with general price inflation and, you know, population growth and things like that, right? Unless the government liberalizes zoning regulations or whatever, you can imagine um and plus with positive immigration and so on that home prices tend to go up over time. Okay? But they don't just go up at 6% every year forever. No. Sometimes they go way up. Sometimes they go up a little. Sometimes they even crash. Right? So home prices, even though they drift upward, they're volatile, right? It's like a not a sine wave going up, but you get the idea, right? And so if now if that is if that's just like the fundamentals in terms of the actual uh residents the people who are going to live in the homes if they're the ones who are only buying and selling there's no outside investors right at this stage of the analysis that price graph is going to be whatever it's going to be and I want to say if you introduce speculative buyers large entities with a lot of poolled capital that come in and they have experts and algorithms and maybe AIdriven stuff, whatever, and they spot properties that they think are undervalued by whatever their metrics are, and they go in and make a bid, right? And they they get that house, whereas the young couple who's trying to get their starter home, they don't, right? And that's all Shank Uger is focused on. Oh my gosh, that young couple could have gotten that home except now this private equity firm comes in and buys it and it made it more expensive. Okay, that's true. But again, why are they doing that? Because they thought it was relatively underpriced. And the point of doing that if you're in the business of buying and selling is to then unload it later when you think it's when the market's too hot and you say, "Yeah, I think prices are going to come down soon and so I want to unload now." Or actually more accurately, if you think prices aren't going to rise quickly enough in terms of the rate of return on the tied up financial capital that you could earn a higher return elsewhere, right? That's actually the the the trigger, right? That if you could sell a house right now for I'm just going to use nice round numbers for the arithmetic. If if there's a home right now for the for 100,000, even though that's not realistic, right? there's 100,000 and you think next year you could sell it for 103,000 but you could just put your money into one year T bills and earn 5%. It would be silly. You should just sell the house now for 100,000 go buy T bills and earn 5%. Rather than keep your money, your financial capital tied up in this property that you think is only going to go up 3% over the course of a year. Okay, so that's really the the metric. Okay. So, if that's the the situation, right, think of what that means. That in general now, we're saying when prices are relatively low relative to fundamentals, the speculators come in and they buy the properties up and they push the price up. And then when it looks like it's nearing not necessarily a peak, but it's tapering off, that's when they come in and sell and start flooding the market with inventory. So, that pushes prices down. And so now if you're picturing again that original thing I asked you to imagine of an upward sloping graph that's you know got ups and downs but again it's just trending up over time the amplitude of that wave is going to be dampened because of the speculators because now superimposed on that fundamental curve that goes way up and way down and way up and way down even though it's drifting up over time. you've now got this outside force that comes in and pulls the price up when it's at its trough and it pushes the price down when it's at its peak relative to the you know fundamental path without speculation. Okay. And so this is just an application to housing of the more general phenomenon. I'll put a link in the show notes page for meises.org. Years ago I wrote an article said of the social function of speculators or I think I said of stock speculation. All right. So, I made the same point that I just did here in that article referring to share prices of corporate stock. And you might wonder, you know, you watch a movie like Wall Street or something or the the Danny Devito movie Other People's Money and you might think, oh yeah, there's people out there that actually contribute to the economy. They're going into factories and building stuff and there's farmers growing food and then there's a bunch of guys just sitting around watching computer screens and moving money around. They're not really doing anything. And I want to say in the confines of a private property society where everything's voluntary, yes, they actually are. Or at least if they're successful, if they're profitable, then they are contributing value to society just as surely as somebody digging up or or somebody coming up with a good marketing campaign or somebody writing a novel. You can say, "Oh, all he's doing is assembling letters." That's not physically producing anything, right? So, I will link to that if you want to see the argument spelled out a little bit more there. But it's the same thing here in housing. And again, notice it only works if you're profitable. If you get it backwards and you rush it like, you know, prices are rising and you think, "Oh, they're still going to go up for another few years. Let's get in." And actually, that's right. When the bubble pops and you lose a bunch of money, well, then you hurt things, right? you actually kept the bubble going a little bit longer than it should have than it would have if you hadn't gotten involved. Right? So it's again with this stuff just like in any type of venture if you're successful if you're profitable other things equal that's a sign that you're providing value to the consumers in the messian framework entrepreneurship that is successful and profitable means you perceived when others didn't that ah yes these resources these inputs in a sense were undervalued by the rest of the market so I'm going to buy them up at their current price, transform them into goods and services that I sell down the road and I'm going to earn a higher rate of return there than other people perceived was possible. And so that's, you know, that that forms my entrepreneurial profit and it shows that I did a good job for the consumers. I grabbed those resources that would have been squandered in other lines and diverted them into something that the consumers wanted more. Okay, so similar story with housing there. Uh let me before I move on to the buy verse rent again just this taking Jank Uger's just hey this is duh econ 101 and somebody's buying it that pushes up the price that makes it more or less affordable right so how could anybody be for that notice you could make a similar argument about used car dealers now I recognize used car dealers have a certain reputation they're about as popular as lawyers and politicians But I think everybody can appreciate the existence of car dealerships owners, right? Even though there's a sense in which, hey, if I'm trying to buy a car and I'm not just considering new models, but I'm also considering used vehicles, the fact that there are these companies out there with lots of capital, more money than I have access to who are also bidding on used cars, that makes them have a higher price. It's harder for me, you know, when Jim down the street his, you know, his wife gets pregnant again and they realize, "Oh, we got to we got to get out of this vehicle to get a van because now we have so many kids. We got to get out of our car seat." You know, I can make an offer on that vehicle that he's driving right now. But it's not fair if Jim's auto down the road is also bidding on his car. Well, geez, that's not fair, right? They're not even using it. They're just putting it on the lot. I was going to drive the thing. This is crazy. They're they're artificially withholding inventory from the driving public. You I mean, you got look at you got these fat cat corporations with a bunch of pulled capital that are just holding thousands of cars off the mark. You ever been like in a plane and just flown over when you're coming over city? Just look and see when you drive over the car dealerships, it's just how many empty cars are sitting there where there's plenty of people out there taking the bus to work. when they would love to be driving that vehicle, right? This is crazy. This is capitalism for you. Look how messed up this, right? I hope you folks see where I'm going with that. And you get the analogy that it would be very superficial to conclude from that that oh yeah, let's ban used car dealerships as a service to the car driving public. And you realize why that doesn't follow. Because yes, in that moment, if you don't have a car and you're trying to buy a car and then there are people at any given time who are getting out of their vehicles and they because they need something else or whatever or they're retired and you know they're slowing things down and maybe the husband and wife had two vehicles and they're going to just, you know, they're going to get rid of one of them because now they don't drive as much. whatever the reason. Yes, if you all of a sudden snapped your fingers and took the used car dealers out of the equation, that would lower the instantaneous demand for used cars and their equilibrium price would probably fall. That's true. And so if you just looked at the people right then, you know, that month who are trying to buy a used car, that would help them. But going forward, it does not follow that that new rule of saying it's illegal to have used car dealerships would benefit drivers or motorists in general. And the reason, of course, is you know who it hurts even in that moment is the people selling their used cars because now they get a lower price. And back when they bought the car, when it was new, part of the equation, you know, part of their consideration was, "Oh, I'm not going to drive this thing until it collapses on me. I'll drive it for a bit and then maybe three years from now I'll sell it or whatever, five years, whatever." You know, obviously depends on your driving habits and the kind of vehicle it is and so forth. But the point is, you know, there's resale value and that's partly what makes you pay what you pay in the beginning. And then you could say, "Okay, but yeah, once everybody adjusts to the new situation, maybe that lowers the original price of a new vehicle, too, right?" And so, oh, so doesn't that help the new car buyer? Well, again, not necessarily. If you're just lowering prices on the front end and on the resale, you know, when you when you sell it off, it might still end up not helping the average car buyer because now, you know, there's going to be fewer cars produced, right? the car manufacturers, if the price of a new car drops, they won't make as many vehicles. Okay? So, I'm just showing as you go through the ramifications of this that it's pretty complicated and it's not enough just to say, "Oh, yeah, if I just focus right now on the people trying to buy this." Oh, and I just say, "Oh, if there's a corporate buyer, that's going to make the price higher. That's bad. I don't like high prices for the buyers right there." That's near end of story. Okay, but that's pretty superficial. So, in terms of housing, like what happens with the car dealership analogy there, among other things, you know who's helped by having private equity come in and buy up residential real estate? The people selling homes. They now have another buyer so they can sell for a higher price. Okay. So it's it's ironic too that you saw in there the part of what Changer got into was he said oh and you know for a lot of middle class families their home is the you know the savings vehicle that's the where they they accumulate their wealth and so forth. Well okay so if you pass some law that now all of a sudden makes home prices fall well then you've kind of blown up that theory, right? I could just flip it and say the last thing in the world we'd want to do is turn off the demand for homes because look at all these middle class families. That's their only asset really. Sangoo just admitted that they were banking, no pun intended, on their home going up in price over the years. They bought in at a high price. So if we cut them off at the knees now, what that'd be devastating. Okay. So again, with all this stuff, I'm not proving anything per se. I'm just showing his glib analysis there is clearly not the full story. Okay. Why don't I jump into now this issue of the renting versus the buying? Because again in fairness the critique especially coming from the populist right people concerned about you know the world economic forum and Klaus Schwab saying you'll own nothing and be happy you know and the vision they're painting that whatever the year 2050 the average American's going to live in a 8 by8 little apartment with their virtual reality goggles on getting their UBI checks from the government they don't own any property whatsoever the you know the food is all grown in labs cuz it's fake meat and stuff like that. And again, they're getting a bunch of drugs and whatever to keep them docile. The robots make everything. And uh if they need to go somewhere, they don't they barely ever leave their apartment, but if they did need to go somewhere, they just call some flying Uber, you know, a fleet of these vehicles that's owned by some giant corporation. Nobody even owns cars anymore, right? So that's a pretty bleak picture. And so given if you think that's what some of these multi-billionaires end goals is, then it seems one component along that way is oh yeah, these big huge institutions coming in and buying up residential real estate and then converting it and then it's like a corporate owner who rents it out and so more and more people instead of owning a home end up just renting, right? So, I appreciate all that, but as with a lot of this stuff, when cultural conservatives rail against the free market, you know, getting upset at payday loans and um other types of short-term credit and things like that, fast food restaurants and all this is crazy. Walmart coming in and putting out the M. A lot of this stuff is due either to, you know, specific government regulations you can point your finger at to say, well, that's kind of, you know, causing this outcome that it's making it hard for the mom and pops to compete and things like that. Not to mention just the tax code and regulatory burden that it's easier for big companies with tax attorneys and all sorts of uh CPAs and whatever to to deal with all the paperwork. But besides that stuff, some of it too is just, you know, oh, if it's a bad culture, that's not capitalism's fault, right? If people want to buy trashy magazines or something and not arudite novels and great literature, it's not capitalism's fault that it's really good at producing smutty magazines or whatever, right? That's not the fault of the free market. that just you can say, well, people, you know, have corrupt habits. Or if people want to spend their money buying cigarettes rather than Brussels sprouts, it's not capitalism's fault that more of the land is devoted to tobacco, right? That that's what capitalism serves the consumers in that respect. Okay? So some of it is that um but on this narrow issue of oh the corporations can just come in and force people to rent again you you got to look at the market forces and just so very quickly how does that work? If let's say Blackstone or something comes into an area and right now everybody owns and very few people rent or if they do rent it's like there's high-rise apartments and stuff like that. There's not homes for rent and so there there is a market. There are people who um for various reasons do not want to buy a house and yet they might want to live in a house not live in an apartment building. And so it caters to them to have homes that they can rent and that's a service that Blackstone and others provide. And what you know what are the economics of that? Well, you if you're the private equity firm and you would say, okay, I can buy a house for a certain outlay and then I think I can rent it out for such and such and I just look at what's the rate of return on my investment and you know given the risk involved like hey if the tenants are bad you know they might trash the place just in general somebody might move out I might be vacant for a month or two until I get somebody new in there. So you got to take into account all that kind of stuff, right? So you you you forecast well what happens to the market maybe you know the the just price appreciation just on the value of the property itself not just the flow of rental income that I'm going to get right there's all sorts of factors you can take into consideration but ultimately it's the trade-off between how big a check do we have to write in the beginning to buy the property and then what's the flow of net cash that we're going to get that's going to throw off you know accounting for maintenance and things like that that you might outsource it to other companies, property managers and stuff like that. Okay, so accounting for all that stuff, you just say, "Yeah, for the amount of money we have to spend up front to acquire these properties, possibly with borrowed money, you got to figure out the interest and whatever." And then the flow of rental income. What what does that look like compared to if we took our capital, our financial capital in the beginning and instead of deploying it into residential housing, we deployed it into something else. You know, we could buy corporate bonds. We could go put it in the Japanese stock market. We could go put it in Bitcoin. There's all kinds of stuff you could put your money in. And you just look at the risk and reward, right? And so if Blackstone and these other private equity places get into residential housing with the intention of renting out, what happens? Yep. Is they're buying up the homes that pushes up the purchase price of the housing stock, but it pushes down the rental price, right? in a given area, if Blackstone or other companies get in there, start buying more properties off the market in order to then rent them out. Now, if you're a renter, you're getting more and more supply. There's more and more units available. So, other things equal econ 101 is the supply of rental housing goes up, the unit price goes down. And like, so if you're saying, "Yeah, I want to I want to rent a place that's in a nice neighborhood. you know, three bedroomedroom, two bath, um nice yard perhaps, uh you know, not too far from movie theaters and things like that. Okay. Um and I'm willing to pay such and such a month. Is there anything like that? And I'm saying as Blackstone and others get into this, there's more and more properties that check out your boxes and are affordable to you. Okay? And so, but that doesn't mean, oh, so therefore, looking out a few years, eventually private equity will own every single house and everyone will just rent because no, again, just think through the logic of that. The more they do that, the more they push, the more units they buy, other things equal, that pushes up the purchase price, right? Because there's a dwindling supply of homes available for purchase outright, right? some new people coming in who want to just buy a house. That supply is dwindling because more and more of it's being devoted to rental uses. So that makes the purchase price go up and the rental amount is going down. And so at some point on the margin, Blackstone or these other, you know, their competitors are going to say, "Oh, there's this property that, you know, the owners are leaving. They're re they're going down to Florida or something and so they're selling their home in Minneapolis and we would have to pay a million dollars for it and we would only get when all is said and done a flow of whatever $50,000 a year in rental income and that's not worth it for the risk involved, right? Because you have to deal with the tenants and stuff like that. So no, we would we would rather spend our million dollars in some other investment than doing that. Okay. And so that's the natural feedback mechanism at which point they would back off of buying up homes and turning them into rental properties. Okay. Just like with any other application of free market capitalism. Again, I'm not being naive here. Don't bite my head off in the YouTube comments on this episode. I understand we don't live in a free market. I get it. But my point is, okay, so if you don't like the current situation and here I'm certainly not endorsing Blackstone as an as a real world player, I'm sure I actually don't know too much about them, but it wouldn't surprise me if they're doing all sorts of stuff that violates my libertarian sensibilities. Okay, so I'm not defending them per se. I'm just saying to rail against the very notion of private equity owning homes because oh that makes things more exp that's that's crazy if you want to go through and point out specific government interventions and you know crony deals between these big companies and the government that allows them to get an unfair advantage in the residential housing market. Great. And then the ideal solution would be let's get rid of those. Or if you want to say it's impractical. We can't get rid of all those eight things that are the true culprits here is a next best thing. Let's just ban it all together. Okay, you could you could say that at least that would be coherent. I would just say it's kind of weird if you're going to go to the government say, "Hey, can you make it illegal for these cronies that are paying you behind the scenes and that's why you did all these sweet deals for them and regulations and things to benefit them? Can you just make it illegal for them to take advantage of the deals you guys cooked up behind closed?" Like what? Okay. So, I hope I've made that clear. Let me now um talk about Rothbard. So, one of my favorite parts of man economy and state is when he tackles Henry George and his proposal for what's called the single tax or the single land tax. So the idea is Henry George was an economist and uh it's funny on some areas you know a lot of leftists would like him but he was really good for example on free trade or he's I forget the exact wording but he's got a great line that I would use all the time when I was teaching at the undergrad level to say something like um what protectionism does to the nation in peace time is what our enemies do to us in wartime something like that. Okay. And the idea is, you know, you go to war with another country, if their navy is better than yours, what do they do? They try to surround you and blockade you. They stop imports getting into your country. And also, they might try to stop exports from getting out. But the main thing is don't let other countries send stuff into your country. We're going to starve you out. You know, like put up a siege. And everybody seems to recognize in wartime that hurts your country. If the enemy's navy stops supplies from getting into you, that hurts you. And Henry George's point was, but during peace time, what happens is your own government, if it falls prey to protectionist fallacies, puts up big tariff or tax um import restrictions that staunch the flow of imports into your country on the grounds that this is good for the economy. And so like you could flip it the other way and say, "Well, how come when um you know, weren't weren't the German Ubot doing British industry a favor by sinking all the shipping that was going in, you know, during World War One and two, right?" Okay. So, George, Henry George was good, you know, he he understood the problem with various types of taxes. He also understood why an income tax was destructive. Okay, it, you know, reduces the return to labor, things like that. Okay, and so his proposal was, why don't we just have a single tax on land and specifically the unimproved value of the real estate, right? So, if you bought a parcel of land, it just, you know, was bare and then you build a shopping mall and then you could sell the whole package for more, Henry George wouldn't want to tax you on what you added. Or even if you went in and you know dug a canal or something, you know, you irrigated, you did those, planted a bunch of trees, right? If you did things to transform the land in ways besides just building, you know, physical construction on it, he still would say, "Oh, you improve the value of the land." So, I'm not talking about that. No, he wants to just tax what he thinks is the raw just location site value because there he thinks that's not something you did as the owner. That was just as the community grew up, right? As population density increased, that's what made just the raw price just for having an acre or whatever 100 yards by 100 yards in that prime location. that is not due to your efforts. That's just, you know, the community's contribution or whatever. And so he thought if you're going to tax something, it makes sense to tax that because you're not, he said, among other things, you're not discouraging anybody's effort, right? You wouldn't want to say, oh, if if somebody buys a raw piece of virgin land, chops them down the trees, and builds a huge shopping mall or, you know, puts up a casino or whatever. I don't know how Henry George felt about casinos, but, you know, put up some gorgeous hotel, whatever, if it's in some nice vacation spot, put in a bunch of golf courses, let's say, you know, bring in water to to make it, you know, nice greens and whatnot, okay? And you you took something that you bought for a million dollars and you transformed it into a billion dollar property, Henry George understands if you were to tax 20% of that gain, well, that's going to discourage efforts to improve the property. you might not spend as much build, you know, you might not have as many holes in the golf course. You might not make the hotel as luxurious if you know that, oh, I got to give 20% of the gain to the tax man, right? So, he Henry George understood that. And he said, but if we just tax the raw unimproved land as, you know, its value as real estate at that location as such, that's not discouraging anything, right? Someone's gonna own the land one way or the other. It's not that people, oh, what's the point of buying it? just leave it uninhabited. That's not the issue on the margin. Right? So Henry George's point was given that people are going to own the land, it's going to have a price. If you just see as that price goes up purely because of population density and stuff like that or just people getting wealthier in general and so they're able to afford more to spend on raw land, that's what we're going to tax because again it's not going to discourage anybody on the margin. Okay? So that's his proposal and Rothbart spent some time knocking that down and it was it was interesting because it really makes you understand the Austrian perspective to show what's wrong with that. So here I'll just so if you get man economy and state you know they got the free PDF at mises.org. There's also my study guide. So we'll link to both of those in the show notes page. Again all free PDF you can get. Um, so here, let me just very briefly explain what Rothberg pointed out there. He, so he agreed with Henry George's critique of every other type of tax, but Rothberg disagreed and said Henry George is wrong if he thinks this single, you know, land tax isn't going to distort anything. And one issue is that um there's a benefit for someone to uh locate a property and keep it vacant. Right? So it's very counterintuitive. That's why I just love this analysis. All right. By the way, what I'm going to be saying, I think is consistent with what Rothbart said. I might be say I haven't read his particular analysis in a while. So the way I say this might not be the the way his argument went. But certainly his analysis made me think like this and that's what was going to cause the words to pop out of my mouth this way. So um you might think the worst case scenario is somebody buying property and then keeping it off the market because you might say there's no way you can argue that that's socially beneficial. Nobody is allowed to use the resource if you're keeping it vacant. And it's not like, you know, it it's not like a like a car or something or or even better, it's not like um like a candy bar, right? That's sitting in the shelf in the gas station where you could understand, oh yeah, you don't you don't want to make the price so low that the whole inventory the shelves just get empty that day. you could kind of understand that. Yeah, it makes sense that when they set the prices of the candy bars that they just want to kind of have a flow over time or, you know, imagine clothes in a clothing store on any given day, most of the inventory stays inside the store, right? There's a flow that comes out and it would be wrong to look at the clothes sitting on the, you know, the racks in a in a clothing store and think that's the excessive waste of capitalism. Like look at all these clothes sitting there when there's people on the streets that are cold, right? Like a a very crude socialist might say that, but most people would recognize, no, there's marketing involved and you know, you need to have a place to go. It's more efficient that way that everyone knows if you need to get a shirt, you go to this building over here and there's a bunch of shirts there for you to choose from. And for that to work, it can't be that whenever you go there, there's one shirt left, right? There's got to be a lot of shirts for you to with different variety and sizes. Okay? Otherwise, it doesn't really work. It's not saving on everybody's time by coordinating on Yeah, we all go to this place, this giant room, and we all need a shirt, right? So, you kind of get that. But notice there, you might think that logic doesn't apply to land qua land because it's not like you might think somebody's going to take the land and go do something with it and then it's gone just like somebody can eat the candy bar and then oh once somebody eats it it's gone. And so the issue was just the price is going to channel it to the person who values it the most. And that's why the gas station owner isn't gonna just keep, geez, the candy bars aren't moving and just keep lowering the price until he sells out that day. That would be goofy. He's fine if some candy bars remain when he closes up for the night and then comes back the next day, right? Because he knows he can charge a higher price and that rations them so that people that, you know, in a sense really want the candy bar when they are on a road trip and pull over, there they are for them. the higher price kept them out of the hands, out of the midst of the people who actually didn't like them that much or didn't value them that much. Okay, so that's kind of the story with a consumable perishable commodity that once you consume it, it's gone. But with land that's kind of just providing this endless flow of services, you might say, "No, it is a pure waste." if a month goes by and it's not used because that's just now one fewer, you know, acre month of land service that humanity didn't get to enjoy all because this greedy land owner, uh, you know, landlord kept it off the market selfishly. Okay. So, Rothbber tackles that head on and he says, "No, that's not correct." Because realistically, practically, the way things work, people don't swoop in and sign contracts to use that parcel of land for one night and then leave. It's longer term contracts, right? And that makes sense because if you're going to use land, you got to have some stability that, let me put you this way. If you own a piece of land and you were thinking, okay, I can try to just rent it out for 12 months in s succession for one month intervals, right? So, in other words, as February is approaching, I say, "Hey, everybody, I've got this acre of land. There's nothing on it right now. It's just this raw acre, and I'm going to rent it out for the month of February, and I'm going to do I hear $500, do I hear $400?" Right? And that's what you're doing. what you're selling is the right to use that land for the month of February. You see, nobody's going to What are they going to do with it? I mean, you got some frat guys could buy it and throw a big party on it or something, play splatball, but you get the point. No one can buy it and build something on it for heaven's sake. Okay? Whereas, if you say, "Oh, there's this parcel of land that you can use and I'll let you rent it out for five years with the option to leave the contract early." you know, now we're talking. Now it might make sense, you know, if it's agricultural, you know, if it's relevant for that, you might try to farm on it or have your cows graze on it or whatever. Okay, you get the idea. So the point being given that land works like that just technologically, then you can see it might make sense particularly like if there was a business there before that went out of business and now there's just this giant like like office space. You're driving around town and you see this empty building and there's a big sign that says, you know, office vacant, call and it gives a phone number and you might be driving by, it's there for a week, it's two weeks, three weeks, might be six weeks and there's man, this a failure of capitalism. And Rothart's point is no, the owner based on the offers they might have gotten, people calling in, whatever, has not found the right renter yet, the right tenant for that space. and he is estimating as an entrepreneur that no rather than just take the best offer I have right now I will make more money in the long run if I keep it off the market and keep searching holding out for a better offer and you know once you frame it like that and you realize well I mean that's clearly what the person's doing and when you frame it like that that makes total sense just like if you're trying to sell a house I' I've made this point elsewhere just to say it here you this issue of liquidity. If you say my house is worth $350,000, what does that mean? It doesn't mean next Tuesday you could sell your house for $350,000. No, what you mean is if I cleaned it up, if I maybe painted some stuff here and there, I got a realtor, we had a bunch of open houses, maybe we waited for the time of year when my realtor told me, "This is probably when you want to do it." and then you know so it might take you three to six months to find the right buyer and then I could probably sell it for $350,000. That's what you mean. Whereas if you own a bunch of corporate stock and you say I have $350,000 worth of these companies, you could have that money in your brokerage account by the end of the week, right? Because corporate shares of stock are much more liquid than residential homes. Okay? So you know G given that right that's notice there what you did with your house is even if you like had to move to another city like say you got a job offer and you had to take it right away and so you flew out to the new city and you're out there working and meanwhile you're trying to sell your house back where you used to live and it might take you three months and so one might be driving by your house and say that house is vacant. This is a failure of capitalism. There's homeless people living under the bridge and this jerk flew out to Phoenix to take some new job and meanwhile nobody's living in this house. That's crazy. And I mean, you could think that, but you could also see in terms of getting resources and their most valued use for something like a residential house, it makes sense to wait and find the right buyer. or you know just with human labor especially like high-skilled labor. Some uh you know project manager engineer at a Fortune 100 company gets laid off, he's not going to take a job flipping burgers down the street next Tuesday, right? He's going to stay off the market and look around for better offers because he knows I have a very particular set of skills, right? That it he could go flip burgers. is able to do that, he probably runs circles around the 18-year-olds at that job, but it makes more sense for him to search for a better buyer of his labor services. Okay? And so, similarly with real estate, even raw um unimproved real estate, and that's really what Rothburn's point was. He said the way you improve a parcel of land isn't merely by physically transforming it like if you know if it's soil putting fertilizer in it and irrigating it and stuff like that but also and you know building things on it that's obvious but Rothber's point was no if you're a better entrepreneur than others in your community and you know this other guy might spend um like put it this way. Let's say um there's this raw piece of land and the current owner doesn't know what to do with it. He's get he's puts it up for sale. And so then this other guy comes along and he says, "Oh, I want to sell that or I'm willing to pay $50,000 for that because I'm going to do such and such with it and it would make sense. I could have, you know, I'll bid 50,000 for that." And then someone else comes along and and has more better foresight. No, what that guy wants to do with it. I mean, he doesn't need to know what the guy has in mind, but this guy just needs to know, I'd be willing to pay 60 for that 60,000 because and he might have some other plan in mind and he might realize, I need that parcel of land. I can't have someone else getting it and putting a shopping center on or doing whatever they're going to do because I need it for something else. I think you know maybe you know that um some big company like Nissan is getting ready to open up a plant in your town and the other guy didn't know that or maybe he knew it and he didn't fully understand the implications the way you do. Again with all this stuff you have to assume you're right otherwise it doesn't work in which case yeah you suffered losses because of your entrepreneurial mistakes. Okay. But I'm saying if you're right and you realize, oh, no, no, when Nissan sets up shop a year from now and there's more demand for land in this region, that parcel of land's going to go for $100,000 because they're people are going to need to build a house on that or, you know, maybe an apartment complex for all the new workers that are going to come into this town because of the new plant. And I'll easily be able to sell that parcel of land for 100,000 at that point to the apartment developer. But right now, the apartment developer doesn't believe Nissan's coming the way I do. And so, the apartment developer is not going to pay 100,000 for it right now. They're not even going to pay 51,000 for it. So, right now, if I don't come in, this guy over here is going to spend 50 on it and put up a shopping center. Whereas, I know, nope, that's not the best use of it. That because I know I if I kept that thing vacant, I could sell it for 100 a year from now. So, I'm going to bid whatever 55 to make sure I get it and then I'll hold it off the market and then sell it for 100 a year from now. Okay. So, I'm I'm making up a contrived story, but that's the idea of what Rothbart was saying. And so in that analysis, Henry George just looking at the raw facts, not knowing like the counterfactuals of what would have happened had it not been, he's just going to say, "Oh man, this guy bought the property for 60,000 and then did absolutely nothing to increase its value." And then a year later, because Nissan moved in, then he sold it for 100,000. So the community, you know, the local authorities should tax him a very high percentage of that $40,000 gain because he didn't lift a finger to do that. That was just the Nissan people coming in and the workers coming in and needing housing. That's what drove the price up, right? And so we're going to tax the But if the guy knows, oh yeah, if I spend 60 on this and then turn around and sell it for 100 a year from now, I'm going to get most of that gain taxed away. Well, then my after tax return is peanuts. So, I'll spend my $60,000 on corporate bonds or something. I'm not gonna buy do that, right? And then that misallocates the resource. It gets devoted to something for the present when in a sense really what it quote should have been devoted to is being held off the market for the more important use down the road to house all the workers coming in. Okay. So that's the analysis there. And again, you notice how that's a very Austrian perspective, taking into account not just the static equilibrium, but also understanding differing uh visions of the future and how the successful entrepreneur sees things that others missed and you know the dynamic market process and you don't want to reduce the incentives for that. Okay, let me now as perhaps will surprise you since I'm an Austrian. Let me show you some data. Okay, that you might say, "Okay, Bob, fine. You know, you got your philosophical stuff and your pedantic stuff." Okay, but why why are homes so expensive and let me just show one thing in particular. So, an obvious ex thing is local housing zoning laws, right? that if local and state governments have severe restrictions in place and being able to build more housing, well, that other things equal and make it more expensive. But there's also the Federal Reserve. So, I'll go ahead and just let me just show you two charts. So, here is showing the Fed's holding of mortgage back securities. And you can see, you know, it goes way up. So it was zero going into the financial crisis of 2008, right? The Fed didn't own that until then. That would have been unheard of. People would have thought, what you can't have the central bank buying mortgage back securities. That's way too specific. That's opens the door to corruption and distortion. What are you doing? Well, they did in 2008 bail out their buddies. So you see that huge surge, another surge like late 2012, 201 going to 2013 up through 2014 which was you know QE2 and actually no that was that was QE3 that one. Um and then you see it started tapering off and going down under when Powell came in at first and then it zoomed way up after 2020 the COVID crisis. open up the floodgates and then it peaked at in early 2022 and has been drifting downward since. Okay. So even though we like to joke and say, you know, money printer go burr actually Jay Powell as Fed chair, I think he, you know, maybe it's because he's his investment banker background or whatever, but he understands we can't just keep printing money like this that eventually the markets are going to turn on us. So we got to show them, okay, when there's not an immediate crisis in our face, we do try to shrink the Fed's balance sheet. All right. So anyway, um that's what the Fed's balance sheet holdings of mortgage back securities look like. And then let me show you CPI adjusted home prices. Right? So what this chart is, this is the case Schiller US National Home Price Index, but what I've done is divide it by just a standard consumer price index. And so this is, you know, like quote inflation adjusted as it were. And so you can see that that peaked back in May 2022 and then it fell and it came up a little bit, but it's still, you know, bouncing around as when I made this chart. But you can see how that roughly corresponds with what the Fed's been doing. All right. after the you know there was the the crisis home prices collapsed after 2006 but I'm saying once things where you started recovering you can see that there's at least a general connection there whereas if you're chancer it's going to be hard to look at this chart and say oh yeah see what happened was um res or private equity got greedier and greedier all from 2012 and they got super greedy right after when COVID hit and then you know private equity decided maybe they watched uh story about Ebenez or Scrooge or something and they decided that they weren't as greedy after 20 May 2022 and so that's why home prices started coming right like it's again to explain I've used this analogy before to explain price inflation is due to corporate greed is like blaming an airplane crash on gravity. Well, yeah, gravity's involved, but when you want to know what how come that plane fell out of the sky and all these thousands of other planes didn't to just say gravity doesn't really work, right? And so, also, if you want to know what's up with home prices, how come sometimes they're zooming way up and then they crash and they zoom up again and then they tapered off? It's not enough just to say, "Oh, yeah, cuz private equity got involved." that again other things equal that would explain like a one-time shift or a gently rising price level as they kept expanding their inventory. You say, "Well, are they just going to expand indefinitely?" Like, why are they doing that? Right? So, okay, I think I have given you enough fodder here for you to consider. Again, I'm glad Chancer went on Tucker's show. I loved just about everything in that episode, but that particular element of bristling at uh private equity getting into home owners or residential ownership of homes. Again, it it's not just that I'm nitpicking on, oh, I don't think you quite have the analysis right, but given that there's all this energy and anger, I think we should be more careful about what's causing this so that we can actually address the real causes and not just focus on at best the symptoms. Okay, thanks for your attention everybody. See you next time. Check back next week for a new episode of the Human Action podcast. In the meantime, you can find more content like this on misces.org. [Music] [Applause] [Music] [Applause]