Market prices are information, not just allocations

We'll not solve Black housing wealth problems by just making up valuations of housing in Black majority areas.

The central conceit of progressivism is that if we shovel all the smart people into government and give them enough – lots – of power then they'll be able to solve our problems for us. There are several possible responses to this idea. Hayek got his Nobel for pointing out that all those smart people just won't be able to gain enough information in real time to be able to do the management in any detail. Kantorovich got his issuance of the same gong for pointing out how you'd run the calculation if you did have the data and a few millennia of time. Even he agreed that no one knew the prices you should feed in at the start of course.

Another might be that the clever people doing this task might not quite grasp that others were trying something else and the two will conflict. As with the usual thing of people trying to build houses for the homeless at the same time as the other half of the bureaucracy is insisting that no one build anything anywhere. There is even the possibility that government isn't the solution to a particular problem. Say, sorting out Mom's apple pie, or how to get innovation rolling again.

At a more conceptual level there is that idea that, maybe, if the power is handed over, it won't be the clever people who end up with it. The Federal Government having lots of lovely influence over who may buy what from whom – otherwise known as trade policy – didn't do much good when it was Peter Navarro wielding that power. The man's not stupid, he managed to get into that office in the White House, he has a PhD, it's just he was and is entirely wrong on his supposed point of expertise.

Then there's the worry over the current administration:

The median Black American family has thirteen cents for every one dollar in wealth held by White families.

Today, on the centennial of the Tulsa Race Massacre, the Biden-Harris Administration is announcing new steps to help narrow the racial wealth gap and reinvest in communities that have been left behind by failed policies. Specifically, the Administration is expanding access to two key wealth-creators – homeownership and small business ownership – in communities of color and disadvantaged communities.

An entirely reasonable problem to want to solve. It's hardly a secret that Black Americans have been left holding the ordure stained end of the stick rather too often this past couple of centuries. We probably would like to do something about this. Reparations in the sense of making things better is not just a valid goal it's probably a necessary one. Reparations in the sense of cutting large checks is something we'll discuss another time.

But then we get to what they're suggesting as the solution:

Additionally, the Biden-Harris Administration is taking on discrimination in home appraisals. A 2018 Brookings study found that homes in majority-Black neighborhoods are often valued at tens of thousands of dollars less than comparable homes in similar—but majority-White—communities. And the crisis is worsening: a recent study found that the gap between the appraised value of homes in predominantly White neighborhoods compared to comparable homes in predominantly Black and Latino neighborhoods nearly doubled between 1980 and 2015. The impact of these disparities in home appraisals can be sweeping, limiting homeowners’ ability to properly benefit from refinancing or re-selling their homes at higher valuations and thereby contributing to the already-sprawling racial wealth gap.

President Biden is charging Secretary of Housing and Urban Development Marcia Fudge with leading a first-of-its-kind interagency initiative to address inequity in home appraisals. The effort will seek to utilize, quickly, the many levers at the federal government’s disposal, including potential enforcement under fair housing laws, regulatory action, and development of standards and guidance in close partnership with industry and state and local governments, to root out discrimination in the appraisal and homebuying process.

This home is owned by someone black so we'll lower the appraised value is discrimination, sure enough. This home is in a lower value area than that one over there isn't. And they really are, from their own links to the evidence, suggesting that second:

Contrary to what is often presumed, neighborhood racial composition was a stronger determinant of appraised values in 2015 than it was in 1980. Results suggest this is primarily due to contemporary appraising practices. Specifically, the use of the sales comparison approach has allowed historical racialized appraisals to influence contemporary values and appraisers’ racialized assumptions about neighborhoods to drive appraisal methods. These findings provide strong evidence that persistent racial inequality is driven in part by perpetual devaluing of communities of color and they suggest further regulation is required to foster equity.

To unpack this a little. The claim is that housing in traditionally – or majority – black areas is worth less than those in equally traditionally – or majority – white areas. OK, seems like a valid observation. America is still rather racially divided in who lives where.

The solution, apparently, is to just value the housing in those traditionally, or majority, black areas as if they weren't. This violates those first three precepts of real estate valuation of course, location, location, location. It also betrays a startling lack of knowledge of how the world actually works.

For the mechanism is assumed to be the valuers. That “sales comparison approach” is deemed to be the problem. The appraiser has a look at the house, considers the area it is in and then mutters something about how she thinks that someone would be willing to pay this much money for it. That's what the process is, that's what is being complained about. The appraiser is assessing what they think the market price might be. They are not setting it, anyone is free to pay whatever they want for a house. In fact, right now, this very week, there are complaints that houses are selling for more than appraised value. Anyone selling one is equally free to accept any offer they are happy with.

The appraiser is measuring, not setting. But the solution is that the appraisers should ignore actual market prices and, in the name of equity, proclaim that houses in Black areas are worth the same as those in white. Which is to entirely miss how prices work.

The price of something is what someone is willing to pay for it. That's it. There is no other to it. Economic plans which discard this as a guiding principle simply do not work. For the concept is basic to what a price is.

Consider what happens if this is brought to pass. At the moment buyers of that 3 bed bath and a half ranchstyle are willing to pay $200,000 in this area and $350,000 in that. Now we're to insist that both are worth $350,000. OK, what then? The one formerly worth $200,000 doesn't sell. Never – because we've not changed the buyer's evaluation of the price. Something that cannot be sold isn't now worth only the original $200,000 – it's worth nothing. For it cannot be translated into a pile of Benjamins, can it?

It gets worse when we consider refinancing. A bank knows these underlying values. If the bank is told that it must refinance the $200k market value house at $350k it won't. Whatever the appraiser says it ought to do, whatever the Feds shout about, lending more than the security available just isn't something a bank or mortgage house is supposed to do. And if they do then they're going to get into real trouble with their own regulators. An insistence that refinancings must be considered at above market values is going to mean that end of refinancings.

The mistake being made here is the belief that an allocated value, if different from the market value, can still be a useful value. It can't – because the market value is the one at which people are willing to exchange that whatever it is for piles of cash. Insist that more cash must be added to the pile and the transaction simply will not happen.

All of this being true whatever the cause of the difference between what the current value is and whatever someone thinks it ought to be. Whether it's the out and out racism of housebuyers or financiers, that historical relegation of majority black areas to the wrong side of the tracks or even just happenstance. Allocating some non-market value just because that's what it damn well ought to be doesn't work. Because prices are information, they're not just allocations.

It's even true if we believe that there shouldn't be that price difference in the first place. Changing prices by fiat does not work.

So much for the central conceit of progressivism therefore. We have our reasons to wonder whether it will work even if all the bright people do go into government. We can imagine what it'll be like if it ends up being the dullards who try to use the power of the state to rule our lives. But when it turns out to be the deluded – Navarro on trade or who the hell thought up this house price idea – it's unlikely to work out well, is it?