A Tale of Two . . . Chairs

"Hedonics," Defined

After almost 13 years, I finally popped for a new (home) office chair yesterday.

The chair I retired -- actually, handed down to son #2 -- was an ergonomically correct, (then) state-of-the-art job purchased from a Relax the Back store in Manhattan for almost $800 in early 1998.

Truth be told, it was an engagement gift from my then-fiance (not very romantic, unless you consider functionality romantic -- which I do).

While still serviceable, the gas lift had worn out, leaving me literally deflated and my rear end only about a foot off the ground.

Chair #2

I replaced it with a Chinese knock-off of the trendy Herman Miller Aeron chair pictured above.

Office Max had it discounted from the usual $175 to only $99.

Based on my "challenges" assembling various Ikea products, I braced for a long evening parsing instructions, puzzling over seemingly missing and mismatched parts, etc.

Instead, I found the instructions to be clear and concise, and assembled everything in 20 minutes, tops.

Chair Buyers vs. Chair Makers

Using only these two chairs as a microcosm, what can you say about how the economy has changed the last 13 years?

A couple observations come to mind:

--Cheap, overseas manufacturing is a mixed blessing.

As consumers, we definitely benefit from cheaper, imported goods.

As taxpayers and U.S. citizens, though, the loss of U.S. jobs undermines our well-being -- especially if your job used to be manufacturing office chairs.

Call it "the Wal-Mart effect" in a nutshell.

--Prices of many goods, especially manufactured ones, have experienced marked price deflation.

In fact, the $800-to-$99 price drop understates the deflationary effect.

That's because $1 in 1998 is worth about half that in 2010.

--Advances in product quality and features make apples-to-apples price comparisons difficult.

Not only is my Office Max chair dramatically cheaper than my old one, it has features the other one lacked: lumbar support adjustments, tension settings, etc.

How do you track price changes when products actually become better over time?

This challenge has given rise to the pseudo-science of "hedonics."

Hedonics Example

To take another example, consider a circa 2010 car, selling for $25,000, that has anti-lock brakes, power steering, and front and side air bags as standard equipment.

Now compare it to its 1995 counterpart -- lacking those features -- that sold for $15,000.

The $64,000 question: did car prices go up the last 15 years, and if so, how much?

At least nominally, they did, because $25,000 is more than $15,000.

On the other hand, the 2010 car buyer got more for their (less valuable) $25,000.

The answers to the foregoing are far from clear, and the stuff of what economists spend their time arguing about (no doubt sitting in their $99 Chinese knock-off chairs).

"Pride of Renter-ship"??

Renting vs. Buying: How Interchangeable?

Carla Zeineh, 22, and her husband recently began shopping for a home in Irvine, Calif., and discovered that with a 5% mortgage rate, her monthly payment on a $350,000 two-bedroom home with 20% down could be less than the $1,800 month that they pay in rent on their two-bedroom condo.

Nick Timiraos, "Renters Lose Edge on Homeowners"; The Wall Street Journal (2/25/09)

Besides figuring out how to save the financial system, the other Holy Grail at the moment seems to be calling the bottom in the housing market.

In turn, that has unleashed a search for various "metric's" -- or valuation yardsticks -- that will accurately identify when housing is truly cheap, and therefore likely to stop falling.

So once again the cost of owning vs. renting is back in the limelight -- this time, with commentators noting that the pendulum has swung back towards owning. (In fact, owning has traditionally been more expensive than renting, but in a growing number of markets, the premium is now much smaller.)

It's certainly good news -- to prospective Buyers, if not prospective Sellers -- that housing is more affordable. However, underlying the owning-renting comparison is the flawed assumption that renting is a close, if not perfect substitute, for owning.

In economic-speak, rice and potatoes are close substitutes; apples and oranges are, well . . . apples and oranges.

I'd argue that renting a two bedroom apartment vs. owning a two bedroom home -- the example cited in the Journal article quoted above -- is more like comparing apples and oranges, for two reasons. (Note: for purposes of this post, "condo" means "owned, "apartment" means "rented" -- both are multi-family housing.)

Pride of Renter-ship??

One. Different housing stock.

I work with clients looking for small, single family homes, as well as clients looking for condo's. However, I seldom work with clients looking for both at the same time.

Single family homes have more privacy, no shared walls, and -- if they're located in the Midwest -- a yard and a garage. Because of zoning laws (everywhere except Houston), the single family house is located in a lower density neighborhood surrounded by other single family homes.

By contrast, the condo is likely on a busier street, clustered with other higher-density housing.

Cutting the other way are such factors as convenience and upkeep; condo's offer more of the former, and require less of the latter. It's also true that higher density locations offer better proximity to public transportation, stores, and restaurants.

Two. Different profiles.

Of course, the difference between owning and renting extends to more than just choice of housing stock.

Renters tend to be more short-term oriented, financially less well-established, and, especially today, more risk-averse.

It can also be the case, particularly in the Midwest, that owners -- at least until recently -- enjoy subtly higher social status than renters (they're certainly treated better by the tax code!). Just as it's said that no one ever washed a rental car, few renters invest the kind of TLC in their rental space that owners lavish on their homes.

For all these reasons, the decision to own vs. rent is a more qualitative one that goes beyond simple economics.

Which is not to say that economics are irrelevant.

In my (Realtor's) experience, whether renters decide to become Buyers likely depends much more on their individual economic prospects -- and their expectations of future housing prices -- than housing's cost relative to renting.