In case you missed it, there has been a lot of press lately about the notion that the reason that Seattle housing prices are so high is because, “speculators” are roaming around the city snapping up land, parking wads of capital everywhere and leaving all these homes empty. Once again Sightline is late to the party, but at least they showed up. Dan Bertolet wrote a nice post taking down this nonsensical view.  I wrote a post about this a while back and even went on the radio to dispute it and wrote about it at Forbes. It’s not happening! But as I point out in my posts, this narrative allows some people to still accept the fact of supply and demand, but argue that someone is gaming it. Sure, they say, there really is short supply, but it is because somebody is taking supply off the market. Or, another argument goes, all the money pouring in is making people who own land push their prices up and up and up, and the speculators (knowing some secret we all don’t with money we don’t have) are paying those prices. Speculation, doesn’t work like that, and housing and real estate investment is almost never speculation.

Here’s the definition of speculation from the Merriam-Webster dictionary: “[speculation is the] assumption of unusual business risk in hopes of obtaining commensurate gain.”

If you take a big risk, like betting $1000 on a long shot horse at the race track, and the horse wins, you’ll win a lot of money. If you guess that tomorrow everyone will love the color blue, and you buy a million blue things, and they do love blue, suddenly, you’re making lots of money.

Americans have a very paradoxical and unforgiving view of speculators: we admire and resent them. When a person spends lots of money on an idea and loses big, we take a kind of satisfaction in that. “Thought he was a big shot. Now look at him.” Failed speculation makes us feel like we made the right bet taking our paychecks and sucking up to our stupid boss.

When someone invests in  an idea that everyone thought was a bad, but turns out to be good, we think of that person as a hero. What a genius! She figured out we all really wanted blue things, and we did, and she made a billion dollars. But there is still resentment there. “I could have told you that. She had family money and went to Harvard. She was born on third and thought she hit a home run.” When her business fails, lots of people stand around and say, “Well, that’s what happens when all you care about is money,” as they fondle their blue thing she invented.

People are out and about and everywhere in Seattle decrying “speculation” as being the reason why housing prices are so high. Nonsense. The reason prices are high for anything, blue things or any other thing, is because lots of people want that thing and there are few of those things. Housing is scarce, lots of people want it, so it’s expensive. That’s a long settled point and not worth arguing about again here. And we’ve already explained that in order to have even a blip of an effect on housing prices, speculators would have to buy enormous amounts of land and housing, on the order of thousands of units. It’s just not happening.

Let’s be absolutely clear: real estate investment, whether in the form of development of property with high potential of financial yield or regular old townhouse and apartment development requires borrowed money. When people lend money they tend to be very demanding about getting their money back. This is even more true for institutional investors like pension funds and banks which aggregate capital to create return for their depositors. In reality, housing and real estate financing is set up to specifically discourage speculation. 

So anyone who understands the world of housing finance and economics knows that it isn’t wild speculation in real estate but limited supply and high demand that drives housing prices. As Bertolet deftly points out, the extent to which there is in investment in real estate by larger financial interests is because it is scarce and delivers a return. If you have some problem with people making money buying real estate, open the supply spigot and build housing like crazy; prices will fall and so will the investment by bigger entities like pension funds.

But finally, speculation is the life blood of innovation. Some people in Seattle are so small minded, envious, and just plain confused, that they insist on characterizing people who speculate as bad, greedy people bent on destroying life as we know it. This is just wrong. Consider the story of the transatlantic cable. Telegraph messages, phone calls, and even today, internet connections don’t happen magically in the ether or even via satellite. There’s a bunch of cable running under the Atlantic Ocean. How’d it get there? A speculator made it happen, and his name was Cyrus West Field, and he lost a lot of money on what even by today’s standards seems like a stupid project: unspooling a cable thousands of miles under the ocean. But he did it. And eventually he made money. Without the occasional speculator with lots of money and a crazy dream, many of the things we take for granted wouldn’t exist.

Your homework is to watch the story of how this all happened.