Watching Economic Activity

A house is being built on the vacant lot behind our yard. As an economist we analyze GDP but don't often get to observe it being created.

The housing market I think is a challenge for free market economists. It is a market where reputation should be very important - houses are an experience good, and because of their durability it may be years before you see if a house was really poorly constructed. Houses are also high value items, and so a builder could make a relatively large profit by reducing quality. In a development of even 20 modestly upscale homes, shoddy construction could yield a fairly nice profit for a developer who could then fold their company and leave no asset trail for homeowners to pursue. And yet reputation does not seem to be very important in the market - we don't see homes labeled with brand names. How many homeowners know who built the house they own? There are some national builders now, but the market is extremely decentralized and localized. This seems to be strongly at odds with our theory of markets and the role of reputation.

The small role reputation plays in homebuilding puzzles me. I don't have a satisfactory answer. I discussed this with Randy Holcombe once and he pointed out the importance of owner maintenance. If an owner doesn't maintain the house, quality will deteriorate, but it would be hard for potential buyers or others in the market to know if poor initial construction or a lack of maintenance explains the dilapidated state. This may play a role, but it seems the same argument applies with cars and we see brand names and reputation play an important role there. Indeed, auto makers will tout the resale value of cars in ads. If maintenance was an issue, builders could design minimal maintenance homes, or offer extended maintenance bundled with the initial purchase to credibly demonstrate to subsequent buyers that the home has been maintained.

I suspect (and one day would like to try to demonstrate more formally) that the existence of public sector building codes plays an important role. Home buyers know that there are building codes, and thus that the local public sector is certifying quality. This I suspect results in a lulling effect among buyers - they don't worry about who built the house they want to buy because they figure it must have passed code inspection and be well built. But building code enforcement is quite lax in many areas, and thus the public sector promise of quality may not be very reassuring. And the existence of codes probably increases the marginal cost of assuring a higher quality of construction than offered in the local building code.

Carolina Homes is building the house on the lot behind us. I hope for the new owners that they are a high quality builder. We've had one hurricane and one tropical storm in the last 3 years in Deep South Texas, so poor construction can lead to problems.

One on One Volume 2

Natalie and I got ourselves Tony Horton's One on One Volume 2 dvds for Valentine's Day. There are some excellent workouts in there. My favorite is probably Cardio Confusion - Mason's Choice. I like the Hummingbird yoga workout as well, since this yoga is really more like a stretch routine than the other yoga workouts.