Bryan Caplan  

Million Dollar Babies: Economic Fact versus Popular Fancy in L.A.

Me in the Economist... Another Reason Why Reading Eco...

I just got back from another vacation in Los Angeles. As they say, it's a "city of contrasts," but the most interesting contrast is rarely mentioned. On the one hand, even pretty ordinary Angelenos - especially the elderly - reside in homes worth about a million dollars. On the other hand, the people of L.A. - and its self-absorbed local media - never stop complaining about how bad they've got it. Any resident I talked to for more than five minutes starting ranting about crime, gangs, natural disasters, health care, and, above all, "illegals." And these same issues dominate every newscast and the front page of every newspaper. Los Angeles media make the New York Times look like the Julian Simon Sentinel.

Unfortunately, vacation is so exhausting that I didn't have the energy to set L.A. straight. But now that I'm home, here's what I'd like to have said:

Angelenos: Turn off the news. Cancel your newspaper subscriptions. If you want to really understand your city, all you need to do is take a look at housing prices. If your house is worth a million dollars, then life in your neighborhood is excellent, and will continue to be excellent for a long time. The problems you keep complaining about are minor drawbacks for people who live in cheaper areas. If your home is worth a million dollars, these problems barely affect you at all.

What makes me so sure? People don't pay a million dollars to live in a hellhole. They don't pay a million dollars to live somewhere that is going to be a hellhole in ten years. If popular opinion and local media imply otherwise, they're wrong. In fact, they're so wrong that they don't deserve your time.

A useful comparison: Once a GMU grad student got a job offer in South Africa. He could have bought a glorious mansion there for $80,000. The drawback was that, by buying that house, he would have painted a big target on his back saying "Kidnap me." He didn't go, and who can blame him? There's got to be something horribly wrong with a place where mansions go for $80,000.

Lest I be misunderstood: I am not making an "If you don't like it in L.A., leave," argument. If things were as bad as Angenelos keep telling me, they wouldn't have attractive exit options. Their homes would be worth peanuts. They couldn't afford to sell their homes and move somewhere good.

My argument, rather, is: "The fact that you stay, despite your enormous real estate values, shows that you do like it in L.A. Most people in this country would be happy to trade places with you. So stop complaining and appreciate what you have."

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The author at Newmark's Door in a related article titled Caplan on LA residents writes:
    Bryan Caplan uses economic reasoning to prove that a lot of LA residents are just crybabies. [Tracked on January 8, 2007 8:54 AM]
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shecky writes:

As a resident of L.A., I agree with you. Funny thing is, I don't watch TV news or read the local papers. I never hear such sentiments as I don't hang around folks like that. I do hear it from some online nativists (though not necessarily residents), how L.A. is a hellhole. While my modest 3 bedroom one story house isn't a million dollar home just yet, it certainly is worth much more than it was when I bought it several years ago. Crime doesn't seem too bad for such a large city. Gangs are pretty easily avoided. Natural disasters are rare. Health care... well, L.A. may be over-doctored, but I can live with that. And the illegals... have never caused me problems. And have performed some minor services for me on occasion. After living several places around the country, and traveling extensively, I can say there are few places where I'd rather live. We all know it has it's problems, but if L.A. truly is a hellhole, this country is really screwed by comparison.

Have you considered hanging around some different people?

John Salmon writes:

I'm not in favor of a tough policy towards the illegals, but they are...illegal. No scare quotes needed.

shecky writes:

Whenever I hear people refer to "illegals", it usually means Spanish speaking folks, as the legal status is almost never known. Thus, scare quotes may be quite appropriate.

John T. Kennedy writes:

"I'm not in favor of a tough policy towards the illegals, but they are...illegal."

They're violating the law, but so are lots of other people. Why aren't all lawbreakers called illegals?

(-_-) writes:

They are called fugitives generally, illegals is short for illegal immigrants.

(-_-) writes:

They are called fugitives generally, illegals is short for illegal immigrants.

A South African Economist writes:

I came across your blog through a link from another.

May I simply point out that as an Economist - and one that deals specifically in property - I would love to find out where a 'mansion' can be bought for $80 000 in South Africa?

The recent property boom as experienced over the past three years has increased property prices to such a degree that one would struggle to find a one bedroom apartment for anything near $80 000.

One may reliably assume a large 4 - 6 bedroom house would be listed, at current prices, for nothing less than approximately R2m - R4m, depending on location (or $250 000 - $500 000 in American currency).

It is of my opinion, as having been a resident of this country for 27 years (and in the city of Johannesburg) that there is nothing 'horribly' wrong with South Africa at all, and the plain and simple truth of rising property prices pointing to the simple economic fact of demand.

The developed world should keep in mind that as when comparing apples with apples, and pears with pears, that they should do the same with countries. The economic growth and potential for South Africa has surpassed world expectations and I applaud the progress we have made over the past decade.

Lord writes:

A bit of exaggeration. Median home prices for LA are about $550k. Now if you don't want to live in a hellhole then $1m should do it, and most nicer places approach that.

Mark Seecof writes:

Of course, many (most?) LA homeowners could not afford to buy their own houses at the bubblicious current prices (on their incomes, I mean--rather than by trading some other bubble-priced houses). That's why they don't sell out and leave--for the most part they don't "feel the wealth" you impute to them. You might suggest they take their housing profits and relocate. That isn't really so easy--they may not wish to move away from other family members, they may fear to hunt for new jobs...

Mike Linksvayer writes:

Are declining real estate prices a leading indicator for an area going to hell, so to speak?

Has anyone looked at historical real estate prices in places that have gone to hell economically, politically, or socially?

Mark Seecof writes:

On second thought, let me make a stronger statement: it's too easy for a tourist like Bryan Caplan to dismiss Angelenos' concerns about their local problems. After all, tourists come to enjoy the highlights and leave before they suffer any local problems worse than the airport- rental- car- tax- ripoff. Someone who parachutes in, visits a few clubs and museums, then goes home to write snide letters about the foolishness or ingratitude of Angelenos--who clearly don't know how good they have it--displays a lot of arrogance.

Perhaps where Bryan Caplan lives, having a "million- dollar home" proves you live on easy street. But I think it's more likely that Caplan is simply judging LA by the yardstick of Northern Virginia. A million-dollar home implies much more affluent surroundings there than in Los Angeles.

According to the US Census (all of my numbers come straight from the Census' website), in Los Angeles County the median household income (2003) was $41,486. In Fairfax County, Virginia, it was double that: $82,481 (2003).

In Los Angeles County, 17.7% of households fell below the Federal poverty line in 2003. In Fairfax County? 5.8%.

In Los Angeles County, 48% of households owned homes in 2000. In Fairfax County? 71%.

Finally, in Los Angeles County 54% of the residents spoke a language other than English at home in 2000. In Fairfax County, only 30% did.

Now, here's the kicker: in 2000, the median value of owner-occupied housing units was $209,300 in Los Angeles County and $233,300 in Fairfax County. Nearly the same.

Since then prices have bubbled up in both areas. I don't have exactly comparable numbers for LA and Fairfax Counties. LA County is almost exactly the Los Angeles-etc. MSA. Fairfax County is just one portion of the Washington- Arlington- Alexandria-etc. MSA. In 2000 the LA MSA median home value was $209,300 (as noted above), and the Wash-* MSA median home value was $178,900. The Nat'l Assoc. of Realtors reports more recent numbers: "Median Sales Price of Existing Single Family Homes" by MSA. In 2005, the Los Angeles MSA median price was $529,000. The Wash-* MSA median price was $426,000. If we assume the ratio between the Fairfax County median home price and the Wash-* MSA median home price was the same in both 2000 and 2005, then the 2005 median home price in Fairfax County was about $554,000. (If you have better numbers please share them.)

Anyway, it looks to me like median home prices in Los Angeles County and Fairfax County are still nearly the same, despite vast differences in other socio-economic indicators.

So if you think comparable housing prices mean comparable social conditions, you are all wet!

On income-related measurements (and on the leading cultural indicator, language at home) Los Angeles County makes numbers 50%-200% worse than Fairfax County.

Perhaps Prof. Caplan would like to reconsider his comments.

Jadagul writes:

Mark Seecof: I think Professor Caplan would tell you that you're proving his point. If Fairfax is so much nicer a place to live, why don't Los Angeles residents move to Fairfax, since house prices are roughly the same? Presumably, there's some (large) value to living in Los Angeles that your statistics aren't capturing. I don't know what it is, although I have some guesses; but the fact that L.A. real estate is that valuable proves that it exists.

Mark Seecof writes:

Oh, my. Look, even among the minority of Angelenos who "own" rather than rent their homes, few have enough equity to buy a house elsewhere without a mortgage. To pay a mortgage they would need a job. But think! The median income in LA is half of that in Fairfax, VA. You mustn't assume a random Angeleno can just whistle and get a nice job in Fairfax. Most Angelenos don't move because they really can't do better elsewhere.

Caplan recognizes that Angelenos can't do better elsewhere, so they don't plan to move, but he says they should stop worrying about local problems, because high housing prices prove they don't actually have any local problems. His thesis is absurd. My numbers prove it.

The only thing LA's high housing prices demonstrate is that speculators can run up housing prices in a region under certain circumstances (such as a truly large influx of newcomers willing to live 10-20 jammed into a house built 40 years ago for a family of 5 or 6).

Contrary to Caplan's repeated assertions, there's no reason to assume that high current housing prices guarantee either high future housing prices or a lack of social problems in future. In fact, recent history (the late-80's SoCal house-price bubble, and subsequent crash) suggests that housing prices need not remain high.

So don't tell the minority of English-literate Angelenos whose newspapers Caplan skimmed during his visit that they shouldn't worry about social problems. They have plenty to worry about. Things are not so bad that they couldn't get worse: look at Miami.

And don't tell them to move, because they cannot trade an overpriced house in LA for an overpriced house in Fairfax unless they could trade a job in LA for one in Fairfax, too. (Actually, between 1995 and 2000, 755,000 more people left California for other states than arrived from them (I don't know how many from LA). California's population growth came from international immigration, much of it illegal. Affluent people with children were the most likely to leave; presumably they had the most incentive, or ability to move. Source:

Suppose Caplan had written in 1999 that investors should stop reading the Wall Street Journal because high share prices proved that business was good and would remain good for a long time. Would he have been right then?

Mark Seecof writes:

Oops, typo! Sorry! I meant to write "LESS-affluent people with children were the most likely to leave..."

Bob writes:

i don't know

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