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