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The "something else" is money laundering (i.e., all-cash purchases with zero oversight). Thankfully, the US government is finally starting to crack down on this stuff:

http://www.nytimes.com/2016/01/14/us/us-will-track-secret-bu...

But so far it's only in other cities. I'm hoping this will spread to the rest of the USA and then we won't have so many foreign criminals buying land with suitcases full of ill-gotten cash, driving up prices.

Hopefully as the USD strengthens against the Yuan and Ruble, you'll start to see less international property laundering. Maybe even some will start to sell, putting supply back onto the market and lowering prices.

Strengthens against ruble in addition to 126%+ increase it booked over the past 24 months?

https://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&...

Yes. I should have said continues to strengthen.

With the continually dropping oil prices, the ruble isn't going to get better anytime soon.

I am not sure this is how that works.

Which part?

Chinese investors are putting money into SF real estate with the goal of exporting capital to safer havens.

Were China to choose to depreciate their currency (especially at a faster rate than they are currently) this could lead to an acceleration in attempts to export capital.

It's not clear which way this linkage works (at least to me)

The Chinese launderers are putting into SF property. In August 2015, 35% of new property in CA was bought by the Chinese (80% in Irvine alone).

If the Yuan weakens to USD, the Chinese have less buying power in the U.S. for laundering, and existing launderers will be incentivized to pull out (sell).

To be fair only some economists thought QE would be inflationary. Many understood it would not. And why would you call real estate a currency and not an asset class? Most of your comments indicate you think it's a highly attractive asset class vs really a currency.

Currency is a class of asset. A currency is an asset that maintains value, is highly liquid (fungible), and can serve as a unit of account. Of the three criteria, “real estate” as described by the OP only falls short in the third instance. Hence it is as “currency-like” as certain more traditional components of the monetary supply.

This is unusual since real estate is typically not very liquid, or at least wasn't considered to be liquid ‘enough’ and typically earns rates of return (net of maintenance) and had high opportunity costs (much how cigarettes in POW camps can only serve as currency if the prisoner decides not to actually smoke them, homes owned by those who dwell in them are not available for liquidation).

What real estate and currency have in common, both being asset classes, is that they're a store of value. Currency has other properties (medium of exchange, unit of account) that Real Estate does not. People aren't meaningfully trading real estate as a medium of exchange or using it as a unit of account. So it's not even close to a currency.

OP might mean that Real Estate has become a leading store of value, on par with currency, due to the factors he outlines.

Real estate is highly liquid? Compared to what?

You'd be hard pressed to find many economists (or other well-informed individuals) who would consider real estate a currency. Though at some point we're just debating semantics.

Edit: Also, real estate is extremely non-fungible, as individual instances of the asset class are not easily interchangeable.

And unless you have dozens or hundreds or thousands of acres, you can't subdivide it effectively. Let's say your property is worth $100,000. How do you get only $50,000 worth of value out of it? You have to sell the whole thing, do you then convert the remaining $50k to some other real estate? I suppose you can take out a second (third/fourth/fifth) mortgage on it for the desired value, but then you're stuck paying back that loan. So the property hasn't really provided you any direct value, just collateral to back your debts.

It's a value store, but hardly a currency.

Home equity loans, friend!

Exactly. The house/real estate isn't the currency, it's the asset backing the currency.

When we had the gold standard in the US, gold was not our currency. It was the asset backing our currency (strictly speaking, you weren't going to go into a corner store with $0.10 worth of gold to pay for your bottle of coke, though I suppose you could've). Gold is simply too impractical to use as the currency directly. You have to back something like that with certificates. IN the case of a commodity like gold it's easy to accumulate those certificates into an amount that's actually worth exchanging for raw gold. But with real estate? How am I going to practically claim 100 sq ft of prime lakeside real estate?

Quite amusingly the Weimar Republic quelled hyperinflation by rebasing the deflated currency on a limited asset... land. The new mark stabilised (until the Wall Street Crash, at least).

It is my understanding that vacancy rates have plunged and that a given property is never on the market for very long before a sale is achieved. This makes it unusually liquid for a real estate market.

Erm...

* QE was tremendously inflationary for all asset prices, including real estate prices which are not called "consumer prices" but it's not that easy to buy the argument behind it. Certainly for a lot of folks, real estate is their biggest expense, and it's very frightening to rent and not buy while housing prices go up all around you and you try to guess how far the cost of owning will become detached from the cost of renting. We can call people scared into buying overpriced houses "investors", but to me it's a bit of a stretch.

* Grandparent calls real estate, of all the asset classes inflated by QE, the new currency.

* You then, without agreeing with the grandparent, say QE isn't inflationary, as "understood" by many economists long ago. But if we stop calling houses "currency", is QE really not inflationary then? (I seriously don't think I fully understand it, BTW... So an honest question.)

Well we have to remember that when the stock market goes up 30% this year (or falls 30% this year) that's not inflation or deflation. That's a marketplace at work. Real estate is also an asset class that rises or falls. But those changes aren't inflation. That's market forces at work (supply and demand)

> I think there is something else going on in real estate.

It is supported, subsidized, and protected by the government at almost any cost, with the result that average-income people can no longer afford a home in desirable areas.

If people were really being priced out eventually San Francisco would fizzle out as a centre for innovation and the interest would move elsewhere. It probably isn't going to happen any more than high prices in New York failed to price out banks and bankers.

It's not the rich that gets priced out.

Of course not: that's the very definition of ‘rich’ — having greater spending power than others.

> It probably isn't going to happen any more than high prices in New York failed to price out banks and bankers.

And is backed by a permanently growing population, where land is finite.

> I think there is something else going on in real estate. This is the only asset class with significantly above average gains for decades

Home prices only started rising, in real terms, after WWII [1]. This appears to be driven by people wanting to drive more income to buying land, i.e. treating land as a superior good. Growing government intervention is also likely a cause. I'd caution against extrapolating two generations encapsulating post-World-War and -Cold-War booms too far.

[1] https://www.dallasfed.org/assets/documents/institute/wpapers...

Not to simplify it but chances are there is more gold in the ground, real estate is the one commodity that is truly finite. Granted, people can always build on unbuilt land but that in turn requires infrastructure, etc to support a new community or residence.

For this reason, it being finite, I wish the US government would set some restrictions on allowing business and foreign investments to purchase residential real estate. It is hard enough (San Francisco seems like a large part of the rest of the US on steroids) for working people to purchase these days...having empty homes bought by non-residents just sit waiting until the prices are forced (due to said) to rise is only going to exacerbate the situation.

> real estate is the one commodity that is truly finite

This is untrue in both the literal and figurative senses. In the literal sense, real estate isn't just land, other properties of land, such as mineral or air rights, can also be created, bought, and sold. You can build up and sell condominiums. You can build down. You can dredge land out of the ocean. Eventually you'll be able to build out in space.

In the figurative sense, people make this claim to assert that real estate is becoming rare, and therefore intrinsically valuable. While certain markets definitely are this way, like NYC penthouses, the asset class as a whole is much like it's brethren in this regard. Value is in the eye of the beholder, trends develop rapidly and can bolster or devalue individual properties at breathtaking rates.

I wish startups could tackle actually making affordable home ownership a reality. This is a much larger problem for our generation than what people care to admit.

Specifically, I'm wondering why there are no cheap modular houses (like in movie ex machina). Houses that are mass produced, cheap and relatively easy to ship and assemble but configurable.

Evolve the idea of what a home is.

Elio motors is offering a small 84MPG vehicle for $6,800. 30 year old Volkswagen Westfalia Campers maintain a high resale value to this very day. Why are all mobile homes so huge? How much money do people spend on rent, leases, mortgages, and buying homes?

I'm sure college students would love a compact mobile home vehicle. Developing countries would likely eat such a thing up.

The CEO of Zappos lives in a trailer park of Airstream trailers and Tumbleweed tiny mobile houses with a shared kitchen, living room and other common areas designed to encourage a true neighborhood / community.

  Or just consider a house as infrastructure. 
  Real estate is assumed to be limited, but that's mostly 
  the result of nimbyism and the gaming of developments 
  sold off on the real estate market as "investments". The 
  whole trend of gentrification will likely play out in 
  less expensive regions of North America and developing 
  countries, and presumably there will be large dense 
  affordable housing somewhere someday and these areas tend 
  to be fertile for creative businesses and cultural 
  experimentation. New York is long stagnate, and it's 
  amazing how much San Fransisco suffers from real estate 
  leaching off of the working population and tech economy.

A home isn't limited to being a house.

https://www.youtube.com/watch?v=MvgN5gCuLac

> Evolve the idea of what a home is.

I see what you did there... Now lets try that on my wife.

> I wish startups could tackle actually making affordable home ownership a reality.

You're looking at one of the oldest, most capital-intensive markets in existence. It's practically the polar opposite of technology. Not a whole lot startups can really do.

> Specifically, I'm wondering why there are no cheap modular houses (like in movie ex machina). Houses that are mass produced, cheap and relatively easy to ship and assemble but configurable.

Well, that's easy to answer. In most real estate transactions, the cost of the underlying land is going to be the dominant factor, the house is just a value-add, the equivalent of buying a soda with your meal.

Modular houses themselves are at a disadvantage because it's not the cheapest way to put homes on land. Modern stick-framed houses are so cheap to put up these days that once you factor in the R&D, transportation and specialized installation costs, factory-built modular homes are at a severe disadvantage. Construction workers are literally everywhere, the labor is so cheap that it's practically a non-factor.

Also, it's easy to over-build. If developers create a glut, nobody's going to make money for a long time. Prices don't really come down during a glut because the developer would rather let the house sit than sell at a loss. So you get a lot of empty housing stock sitting around.

> You're looking at one of the oldest, most capital-intensive markets in existence. It's practically the polar opposite of technology. Not a whole lot startups can really do.

Well, prefab homes are a thing and they even use the word 'modular' liberally http://opinionator.blogs.nytimes.com/2013/05/23/prefab-lives... mobile homes are a thing, and are fairly dominant in low-income areas (which kinda sorta impacts the market acceptance of prefab homes). But no one has quite cracked the prefab for multi-family market.

http://www.telegraph.co.uk/news/picturegalleries/worldnews/1...

Multifamily and prefab.

> In most real estate transactions, the cost of the underlying land is going to be the dominant factor, the house is just a value-add, the equivalent of buying a soda with your meal.

That's really only common in desirable cities with older housing stock.

A land to total value ratio is considered typical-to-high at 30%. Anything more than that gets extra scrutiny from lenders, who don't want to write residential-class loans on minimally-improved properties.

There have been attempts at container housing http://www.popularmechanics.com/home/how-to/g172/shipping-co...

My understanding is that it's the internals (plumbing, gas lines, heating and A/C, natural gas lines, fireplaces and chimneys) that are hard to modularize.

There's an interesting article by a guy who wrote an entire book on prefab housing http://opinionator.blogs.nytimes.com/2013/05/23/prefab-lives...

Should home ownership really be the goal?

I've been spending some time recently thinking about alternative options to the rent/buy dichotomy.

Buying a house is in this weird category of quasi-investment that is difficult to offset. In no other market do we encourage consumers to take on debt when making an investment in a commodity. Most consumers are not able to hedge this risk so fluctuations in the housing market can wipe people out and ruin lives.

Renting a house is a whole different problem. The rental market can be very discriminatory, especially against people with poor credit. The friction and lack of information in the rental market prevents many renters from being able price in more than a couple of variables (usually just location and size). The upside of this is that there if little incentive to make certain types of improvements (especially improvements that decrease the utility costs)

It seems that there should be a better way to deal with housing that protects individuals against the risk of mortgages and property bubbles while still aligning the interests of home-owner and home-user.

A heaving, throbbing, contradictory, twisted mass of local, state, and government regulations make modular housing like you describe a pipe dream in the USA.

Those purchases “by business or foreigners” transfer cash to the seller and be up in the economy anyway. Homeowners who sell do so because it is in their interest to do so, the restriction you propose would be Pareto-inefficient.

Or is it? The money flowed in real estate will most likely immediately get used to buy other houses and there by inflating homes even further. I don't think anyone sells their home and uses the proceeds to buy some stock - the proceeds goes almost always immediately to buy other home. It's like you live in a village, a traveler pays you $100 for a goat which was suppose to be only $10. Then you realize goat is so valuable so you use your $100 to buy two goats from neighbor for $50 each. Now your neighbor realizes what's going on and he uses his new money plus some more buy more goats - all in anticipation that everyone needs goat and prices will keep going up. The virtuous cycle starts and sooner or later major portions of people's money keeps changing hands in form of million dollar goats. Very little of that money might actually get used for other purposes like building the hospital or school because those things don't deliver investment returns like a goat does.

> chances are there is more gold in the ground, real estate is the one commodity that is truly finite

If 432 Park Ave taught us anything it's that one can always build up.

There may be another link between QE and housing: I suspect a large motivator of QE was to avoid deflation, which could have caused a large number of foreclosures. So the notion of QE propping up home prices might have been the intended effect.

Edit: this also seems in accord with your notion of housing as a currency. If dollar inflation is tied to home prices, then to allow prices to drop is to deflate the dollar - something our government won't allow. So home prices have to be protected as a form of anti-deflationary measures.

I agree that one intended effect of QE was to reinflate the housing market. One problem was homes being way overvalued. After prices somewhat balanced out, the problem was a lack of credit available for most people wanting to buy into the market. So many changes have happened over the past few years to the U.S. and global economies that I seriously question the understanding behind modern inflation and deflation. We have been fighting a deflationary spiral since 2008 and it seems like we have almost run out of ammo.

I like your theory a lot. What are your thoughts on why gold isn't playing this role?

Gold is actually down.

I think gold prices are impacted by its industrial use as well. So when that component drops, prices goes down. Another component of gold investment is to compensate for inflation which is also down except in real estate. Yet another component of gold investment is to hedge against short term loss in stock markets which was also down because of tremendous gains in S&P. The real estate is a different beast: There is no industrial component and no short term hedges. Also unlike gold, real estate can generate passive returns in form of rents.

Gold is the instrument of choice for growth investor with inflation fears (i.e. it's rumored to hold its value when inflation speeds up). It is not free to own in large quantities, as one must incur additional storage and security costs.

Real estate is the instrument of choice for income investor with inflation fears (i.e. if all goes bad, you can still rent it out, and that rent will still bring something). Through successful lobbying it's relatively cheap to own if you buy in a state with low property taxes.

There's a gold etf that's easy to own.

Yeah, I guess I skipped over the fact that a home has property taxes and insurance/maintenance costs that would add up.

I think the key is the optionality of real estate for income purposes. In a down market real estate can still generate some monthly cashflow, the only way one could do it with gold ETF is lend out the shares to short-sellers.

> I think there is something else going on in real estate. This is the only asset class with significantly above average gains for decades. It does go down once in a while but it comes roaring back in relatively short time. Even when dropping, it rarely goes below 25% protecting most of the principal. This is about the only item that had massive inflation in past 7 years.

This is incorrect. The median new house price in the US hit a pre-recession peak in March 2007 of $262,600. In Nov 2015, the price was $305,000. An investment in a theoretical "median real estate" fund would have returned 16.4% over the 7 year period. [1]

An investment in the S&P500, say through SPY or the Vanguard ETF (if it had been available pre 2009) would have returned 27.9% over the same period, or 53.1% if you had reinvested your 5.0% annualized dividends. [2]

At a more granular level (using Zillow data) - the median housing price in San Francisco over the same period increased from $786k to $1.12m for a return of 42.4%. Cambridge, 47.0%. Manhattan, 66.6%.

San Diego? 3.5%. Boise? -12.6%. St. Louis? -22.9%. Detroit? -49.6%. Did you know that the median sales price of a house in Detroit is currently $38.4k?

---

> In economics, you can make anything a currency which cannot be manufactured easily and is available in quantity that is very hard to grow. Economists are puzzled why the tons of money poured in to system through QEs isn't producing any inflation. I think QEs are indeed producing massive inflation but it all goes in to real estate. Funds like Blackstone eventually ends up with significant chunk of QE money and guess what is their major investment activity these days? The easy "inexpensive" money is the best way to inflate real estate.

Economists are (for the most part) in agreement that QE is not causing inflation due to a lack of aggregate demand. Here is an article [3] in which Brad DeLong (UC Berkeley, Keynesian-adherent) agrees with Joseph Stiglitz (Nobel Laureate, voted 4th "most influential" economist in the world today) when he makes the following assertion:

The economics of this inertia is easy to understand, and there are readily available remedies. The world faces a deficiency of aggregate demand, brought on by a combination of growing inequality and a mindless wave of fiscal austerity...The only cure for the world's malaise is an increase in aggregate demand. Far-reaching redistribution of income would help, as would deep reform of our financial system -- not just to prevent it from imposing harm on the rest of us, but also to get banks and other financial institutions to do what they are supposed to do: match long-term savings to long-term investment needs. [4]

---

What does this have to do with the higher real estate prices in urban centers? I believe that what is truly happening is that many are flocking to a decreasing number of cores (usually around universities that churn out well-educated but low-paid graduates) for fewer aggregate job opportunities in select sectors: finance, tech, entertainment, business services (consulting, HR, accounting, etc.), and services (food, drinks, nail salons, etc.). This has happened in a relatively short amount of time as the employment market is generally more fluid and less regulated than the housing market, which is restricted and regulated in the extreme in high-demand, high-price markets. It takes 2-3 years for an org to restructure its work force, but it takes decades to make meaningful changes to the way a city is built.

[1] https://www.census.gov/construction/nrs/pdf/uspricemon.pdf

[2] http://dqydj.net/sp-500-return-calculator/

[3] http://www.huffingtonpost.com/brad-delong/global-economic-de...

[4] http://www.huffingtonpost.com/joseph-e-stiglitz/world-econom...

What's your take on the NYC market? I work in tech and am moving there soon and was thinking about buying property.

SF/Oakland prices seemed way too correlated with tech salaries for me to feel comfortable buying anything there, but NYC feels better in that sense...

This is incorrect.

You are simply not adding in rent. A $262,600 house would generate $1400 monthly rent, ~$117k in rent for the 7 years (not raising rent).

My point is that housing is not the only asset that has seen considerable appreciation since the recession, and that not all housing is created equal.

I agree that factoring in rent bumps up the rate of return quite a bit in high-demand urban centers.