The Almighty Mortgage

I've been thinking lately about mortgages, and the extent to which the fact that nearly every building and piece of land in your average American city or suburb these days is mortgaged impacts the economy and society.

Once upon a time a real estate mortgage was much like a car loan is today (or much like I treat a car loan at any rate) in that you saved a lot of money on the front side, you took out a loan for a fairly short term (in 1952 my dad's parents bought their house with a ten year loan) and you tried hard to pay off the loan early so that you could get control of your income back.

As the price of land and the frequency of moving has increased in urban and suburban areas, people have increasingly come to assume that they will always be making mortgage payments.

Now, I don't even count as an amateur economist, but imagine that you owned your home outright, and that land values were much lower (so your property taxes wouldn't eat up almost 10% income -- after income tax and social security and Medicare tax -- funny how that t-word keeps coming up, eh?). Here in the Darwin household, about 40% of my income goes to mortgage, property taxes and homeowners insurance (which would also be less of a deal if we weren't all so in debt for our homes).

Now, one of the things that got me thinking about this was looking at the huge portions we got when someone brought us Eat Out In the other night. (Having babies gets one all sorts of perks.) My first thought was, "Well, with the amount they charge, there ought to be a lot of food." But then as I thought about it, I realized that the cost of food is really pretty negligible for a restaurant. Their big costs are facilities (rent, equipment, furnishing, etc) and staff. Restaurant food is expensive not because you get a lot of it, but because the cost of facilities and labor (which in turn is expensive because all those people either have mortgages or are paying rent to people who have mortgages) necessitate a high meal cost, and so they give you plenty of food to make you feel better about paying so much.

Health experts of widely blamed restaurants for contributing to America's obesity problem, from supersize shakes at McDonalds to the huger portions served at many mid and even upper range restaurants. However, I wonder if this drive towards larger portions is in great part driven by the rise in property values and the accompanying increases in labor costs and facilities costs. When McDonalds asks you to supersize for 65 cents more, the extra cost of shake and fries is probably only five or ten cents. The big advantage for them is that they have fifty cents more on your order to help pay the $7/hr the guy at the drive-thru window is making, and the $3000/mo they pay in lease on their building. It costs them almost nothing extra to give you the extra food, and they don't have to simply raise prices on the same amount (though they do that as well, goodness knows).

Ironically, the same attempt to pay for facilities and labor is what drives the push towards higher end food that can be seen in everything from McDonalds all breast meat nuggets to Starbucks and Macaroni Grill. Upping the quality of the food ups your costs at a lower rate than it ups your ability to charge for the product. So while a $1 hamburger may have cost $0.25 for the meat, bun and wrapper, a $3.95 burger costs $0.65 for meat, bun, lettuce, tomato, bacon and wrapper. So the margins go up, plus you're applying the margin to a larger dollar amount, which means more margin dollars. Most importantly, it doesn't necessarily take your kitchen staff much more time to make the $3.95 burger than the $1 burger -- so your labor and facility costs remain the same.

That is one of the reasons Starbucks makes so much money. They found a way to get people to pay $3.25 for a cup of coffee when previously people picked up coffee for $0.50. The incremental cost of materials for a latte over a cup of percolated sludge is less than the incremental difference in the price, so Starbucks has more money to sink into nice facilities to attract customers and shareholder profits. (Sadly, the person behind the counter doesn't seem to get much more money from Starbucks than from 7-11, except the ability to say he works at a coffee house rather than a convenience store.)

I'm not sure there's any sort of prescription that can be drawn out of all this. Essentially what it seems to mean is that in an expanding economy land values go up (because more people want to life in the same amount of space) and then your economy shifts so that the cost of goods is increasingly determined by the cost of labor and land (with the former being inflated by the latter) more than by the cost of raw materials.