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Comment by hkmurakami | Hacker News Reader

It seems that we made a pact with the devil by positioning housing as an investment asset. By doing so, we've encouraged people to commit a very large fraction of their net worth into a rather illiquid asset, tying their financial fates to the future assessment of that asset. As a result, protecting the price and appreciation of this asset has come to overshadow the other crucial roles that housing plays in our society.

If I bought shares in AAPL at $50 (now $100+) and someone comes along asking that AAPL let them buy some shares for say, $65, I'm obviously not going to be happy since the value of my investment is under threat. This is the kind of reaction we've unfortunately promoted for ourselves. It didn't have to be this way, as other countries have shown us. But now that we're here, it's hard to imagine a way to turn back time.

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>It seems that we made a pact with the devil by positioning housing as an investment asset.

That was certainly a mistake, but the much larger mistake was made (and continues to be made) by the FED (and other central banks at the FED's insistence). FED efforts to prop up the housing and equities markets through QEinfinity, Operation Twist, the FOMC, and countless other FED mechanisms designed to prop up markets (and owners) at the expense of everyone else have led us to the situation we are in now. If not for FED chicanery, housing prices would fall precipitously to meet real demand. People would be able to afford a place to live and speculators would realize that homes are places to live and not investments.

>If I bought shares in AAPL at $50 (now $100+) and someone comes along asking that AAPL let them buy some shares for say, $65, I'm obviously not going to be happy since the value of my investment is under threat.

If nobody was willing to to pay more then $65 for your Apple shares, then in a free market, like it or not, your shares are worth only $65. Just because they were $100 at one point and you "arent happy" that they arent still worth $100, doesn't mean the government should step in and offer $100 when the market only offers $65. That's the problem we have now. In the fantasy world that the FED is trying to propagate they can continue to offer $100 no matter how low the actual demand for your stock is. In reality, all their efforts to prop up your stock have eliminated free markets, dried up "real" liquidity, and massively disrupted equity, bond, fx, and all other markets. The longer they try to extend and pretend the worse the problem gets. For example, the bank of Japan owns over 60% of all ETF's in Japan. 60%!! Things are not going to end well.

Get outta here with your free markets. In free markets, those that lose big get up off the table. In our TBTF markets, the bigger your loss, the greater the odds that your national Treasury will backstop you.

Have you helped out your local banker today?

> If not for FED chicanery, housing prices would fall precipitously to meet real demand.

Maybe in some places, but I don't think that would happen in Silicon Valley. As the article says, the population of Palo Alto doubles during work days. A lot of those people would rather live there than commute from wherever.

Silicon Valley is not a creation of the Fed.

Where do you think VC money comes from? Massive profits from bond, equity, and real estate profits courtesy of the FED. Cheap money borrowed at 0% thanks to the FED.

Some of us older people were around to see a very similar situation in the 90's (although not nearly as bad). Greenspan debuted ~0% interest rates and the Clintons fully embraced the Reaganomic/trickle-down philosophy (now called "wealth effect"). They opened the borders via NAFTA and deregulated Wall Street via Rubinomics. It all fell apart when the tech bubble burst in 2000. Instead of fixing the problem, Bush doubled down on the same broken policies, which led to the collapse of the late 2000's. Again, Obama and the FED doubled down, trying to fix the broken, cheap money policies with even more cheap money. Here we are 8 years later and markets have basically ceased to exist. Central banks own far more bonds and equities in many counties then private parties do, and they are only increasing their buying. Growth is non-existent even by the manipulated, mostly-worthless metrics employed by the central banks. The insane wealth of Silicon Valley is not only a creation of the FED, its a good barometer for how out of whack our economic system is.

And ZeroHedge assured me society would collapse in 2009...guess enough people don't subscribe to InfoWars

Society is crumbling rather then collapsing. How long the process will take is anyone's guess, but you have your head buried deep in the sand if you don't see the deterioration.

>Silicon Valley is not a creation of the Fed.

Silicon Valley itself isn't but the exaggerated SV house prices, exaggerated levels of VC funding and exaggerated valuations are all a function of the fed's ZIRP policy.

Right. It's a creation of the DoD [1]. The Fed just supplies the extra money for VC's and home loans.

[1] https://steveblank.com/secret-history/

Re:AAPL

There's a market for $AAPL shares at $100+. Some people are happy paying this price. Some people think this is too high.

There's similarly a market for Palo alto houses at $2.5m. Some people are happy paying this price. Some people think this is too high.

When someone comes along asking AAPL to sell them shares of $AAPL for $65 when there's a market for them at $100+, you as the holder of other analogous $AAPL shares won't be happy since such an occurrence will diminish the value or your investment.

When someone comes along asking a city for as additional housing stock at $X << $2.5m, you as the owner of an analogous investment asset will respond to the threat of your investment coming under siege. Non-investment aspects of housing's role in society will be greatly diminished in the homeowner's mind, when the home represents 20-50% of their net worth (given that their minds have been conditioned to treat housing as an investment asset).

You're missing the point. When there isn't a market for $AAPL shares at $100, but the government steps in to offer $100 to prop up the price of $AAPL stock, there is a problem. That is the issue with housing prices, stocks, bonds, debt, and everything else on the world stage. This central bank interference destroys price discovery and disrupts prices everywhere, including Palo Alto, even if they aren't directing bidding on homes there.

That, and also no one needs AAPL stock in order to live, but everyone needs housing. So the price distortions in housing affect society more severely than price distortions in AAPL stock.

> That, and also no one needs AAPL stock in order to live, but everyone needs housing

If housing should be protected from 'distortions', please explain how foreclosures help? I'm not being snide - my economics knowledge is basic, kindly explain it like you would to a high-school graduate.

People generally don't have enough capital to pay cash for a house so they need to borrow some of the money. Such loans are typically secured by the value of the house. If the borrower doesn't repay the loan the lender needs to be able to liquidate the asset to make themselves whole, hence foreclosure. If this were not done, mortgages would be much more expensive because they would be much risker investments.

> If this were not done, mortgages would be much more expensive because they would be much risker investments.

So foreclosures protect mortgages, rather than housing directly, right? My take on ancestor was than housing was very important so "price distortions" need special intervention to protect housing as a societal need. I'm probably overthinking it.

> So foreclosures protect mortgages, rather than housing directly, right?

Yes. But making credit more easily available makes housing more accessible.

People don't need AAPL shares to survive.

They do need housing. And food, and clothing, and a reasonable assurance of stability in their lives.

Start taking that away, and social fabric starts unravelling quickly.

The "technically correct" way to fix this would be to remove the investment potential of housing by taxing away land value (the grand old panacea of the Land Value Tax[0]).

I think this is a good idea, but it's a disruptive one, and one unlikely to happen soon. But in the meantime, we might as well fix the policy that's in direct contradiction to this ideal:

1) Repeal prop 13. Full stop.

2) Intervene with exclusionary zoning on a state level. Zoning is, after all, a state power that is entrusted to cities. (Jerry Brown is already doing good work in this department[1])

3) Implement split-level property taxes a la Pennsylvania. There's work that demonstrates that this partial LVT had real benefits for Pittsburgh when it was under effect: [2]

[0] https://en.wikipedia.org/wiki/Land_value_tax [1] http://www.latimes.com/politics/la-pol-sac-jerry-brown-housi... [2] https://www.lincolninst.edu/subcenters/property-valuation-an...

The thing about getting rid of prop 13 is you'd price out a lot of residents that bought a long time ago for something they don't have a whole lot of control over. If you thought that gentrification is bad now, churn in residents would got through the roof. Not to mention that you wouldn't solve the issue of shorter-term investments in land, or investments that include new constructions.

Honestly, the real issue in the bay area is there isn't enough housing, period. To solve this, build more housing, or build more infrastructure to enable people to live further away, or both. However, residents in the bay area have always been opposed to things like that.

We shouldn't just repeal it. You abuse it's existence and the appeal to drive investment in property. Have the repeal not affect existing housing... and not affect housing built for some short period afterwards. In places where developers have sway with local government or have carte blanc from counties to build, there will be immense efforts, because the benefits to the property owner will be huge, meaning they can charge a premium. And after 5 years or whatever is appropriate, you will have removed the penalty in tax revenue cities take with residential and residential services. Maybe add a provision for city councils to more easily approve bond measures to fund housing development, and kick start building properties where value will go up.

You could simply revert people to market rate taxes over a decade, 10% a year.

s/residents/home owners have always been opposed to that. Renters would be thrilled about it, but home owners love seeing their home values skyrocket. Multiply this if they've been in the area for a while, and again if they're currently renting out their place(s).

A lower-end but not ghetto apartment in SJ is around $2200 for a 700sqft 1bedroom. This would not be in a place walking distance to a train station or to a downtown area. The mortgage on a 4 bedroom 1200sqft house valued at 800k (i.e. What most people would call a normal average single-family home) would be about $2800/month (assuming you had the 125k or so down payment). You can then rent 3 of the 4 bedrooms and end up making money on the house you live in vs flushing >$2k a month.

This is why normal people can't get ahead out here and end up moving away. The way things are is massively skewed toward home owners and property investors. Building more apartments won't necessarily help, since all the apartments built after the rent-control cut off are getting renovated or demolished to be replaced with brand new units which are "luxury" ($2800/month and up for a 1br).

Apartment places almost always have units available where I've looked. It's not like you can't find a place out here, just not a place for under about $2k a month. Apartment places would much rather rent out 85% of their units at exorbitant prices vs 100% at half that. I don't believe that adding more housing (which won't be under rent control and will undoubtedly be "luxury" housing) will lower average rents. I don't know what it would take to get the Bay Area back to rents in the $1000/month for a 1br range. I'm not even sure that it's realistic anymore.

Does anyone have a link to or know of a place built in the past 15 years in Santa Clara, Cupertino, Palo Alto, Mountain View, San Jose, Saratoga, Los Gatos, etc with units under $2k a month? My pessimistic side just thinks that adding more new apartments will just drop the price on the high end, so that $3k/month loft in the glass tower in downtown SJ might only be $2800 next 11-month lease term, or maybe only go up by 12% a year instead of 18%.

We need to do something drastic if this is to be again under control, but I suspect that due to the very large sums of money involved, the entrench interests are attempting to prevent that by whatever means necessary, and we're basically screwed until this bubble bursts, if that even happens this time.

> The thing about getting rid of prop 13 is you'd price out a lot of residents that bought a long time ago for something they don't have a whole lot of control over.

One thing to consider is that the removal of Prop 13 would drive prices down, so in the tax burden wouldn't be as high as it would be, when compared to today's market rate of housing.

> If you thought that gentrification is bad now...

It's important to note that gentrification only happens to poor/disenfranchised neighborhoods, whereas the burden of removing Prop 13 would fall upon all, including the affluent. This is an important measure for fairness.

> To solve this, build more housing, or build more infrastructure to enable people to live further away, or both. However, residents in the bay area have always been opposed to things like that.

Largely because policy like Prop 13 shields them from the consequences, which has led people to remain in the same property interminably (even when they may wish to move), and to push for restrictive zoning policy.

Repealing prop 13 would provide the cash needed to build more housing and infrastructure.

Landowners in SF are going to hate any effort to deal with the housing crisis because they profit so handsomely from it. They'll fight any attempt to fix it tooth and nail - with lobbying, bribery, public relations, etc. That's what the Howard Jarvis Taxpayer's Foundation and prop 13 was all about in the first place.

Really, the only solution to that is to single out the leeches and demonize them until they stop. There's no way they will ever be on our side and there's no way they will stop fighting while they still have the power to protect their entitlements.

One of my biggest issues with Prop 13 is that it suggests that you should have a claim a municipal government in perpetuity. Huge amounts of the value of land in towns and cities comes from the services provided by the city government, and I think Prop 13 pretends this couldn't possibly be true.

I also think it would be an absurd argument to make. If those people had no desire for services, they would have bought/built houses well North of the bay area, or South of San Francisco in some place like moss landing. And I don't think it's worth preserving that delusion at the cost of perverse incentives, waning tax revenue, and a massively illiquid housing market.

Granted, this is not all that's needed to fix the problem (even moreso in CA, which has some really bad barriers), but I don't think moving in the wrong direction will get us where we need to be.

Given that a full repeal may be difficult politically, I wonder if Prop 13 could be limited to owner-occupied houses.

Seems like that would hold true to its original purpose of not taxing someone out of their home, make investment in property somewhat less appealing, and provide a more predictable funding source for schools.

Prop 13's effects for primary-resident housing have been less problematic than its effects for commercial land and purely speculative real estate, but it isn't good-- if we allow this subsidy strictly for housing, we'll still run out of developable land (just not quite as quickly.)

Too, the policy that reassesses the site upon re-sale takes away mobility for Bay Area residents-- this lock-in is extremely destructive for the housing stock (not to mention transportation), and will continue as long as Prop 13 exists in any form.

The idea that "being taxed out of your home" is a bad thing is extremely overblown (remember that any person to suffer this malady is suffering from overly valuable land). Rather than the heavily distortionary effects of Prop 13, better approaches would be:

* Building more. That's what the folks who suffered high property taxes in the 1970s should have done. The property tax burden for each housing unit would be driven down.

* Community land trusts offer the possibility of stability for residents who want to be completely removed from the rises and falls in housing value.

* For the "poor widow" situation, a direct subsidy on an as-needed basis (food stamps for property taxes, as it were) is a better solution than what Prop 13 does.

It's a double whammy when you also consider that property taxes are generally based on real estate value. City and local governments are dependent on that income and have little incentive to see real estate values (and thus tax) go down.

That would depend on the price elasticity of the existing housing stock in response to each additional unit of housing that is supplied to the market. It's conceivable that the marginal decrease in tax revenue from the existing stock would be more than offset by the additional tax revenue from the one additional unit.

Also governments get tax not on the value of a single property but the cumulative value of the properties (emphasis on the plurality) .

If my 1M house gets replaced with 10x 250k units the government has 2.5x its tax base. See how affordability and solid tax base can coincide?

Local government costs also go up as population increases.

The relationship is not usually linear, though. With density comes efficiency in services. Though some of that efficiency is eaten by the additional cost of doing the work.

Not really teachers are linear with population size. An overpass is vastly more expensive than a stoplight and still cheaper than a subway system.

So, yes for small changes to population size a city need not spend more an can simply degrade services slightly, but doubling population size quickly gets really expensive.

I would have thought that the linear system was still more expensive than the dense system (within some reasonable limits). Consider the single family home as the null case, everyone lives in single family homes as far as the eye can see, the distance that family must travel to get to the core of a city is greater than any other existing family (that is new homes are on the outer ring of the city and thus progressively further and further from the core). So that family consumes more road miles daily. Vs if you grow in density you do not create anymore miles of road because those people only have to travel a shorter distance. And when the inevitable overpass comes, instead of needing overpasses from 1/2radius of the city you may only need them for 1/4 etc because the people are already in the core and do not need to come from as far.

just some thoughts on efficiency of density vs dispersement

But tax rates generally adjust for increasing housing prices. In my old hometown, when housing prices went up 20% in one year, tax rates decreased by ~15%, so overall the increase was about inflation. Otherwise you'd see city budgets double in only a few years in really hot markets.

Of course this doesn't work in California with Prop 13, but I've seen it in other areas.

That's not the case, to a large extent, in California, thanks to Proposition 13.

The longer a property is held, the lower its assessed value relative-to-market. In cities with buy-an-hold populations (and Palo Alto tends to resemble this), that means a large part of the assessible property value is severely underassessed.

Mind: this means that surplus value of urbanisation goes to the property owner rather than to help provide city services.

The double-whammy is actually the opposite of what you suggest, and may well be a triple:

1. Prop 13 keeps property taxes down, meaning ...

2. There's an additional upside (and less downside) to inflating property values and ...

3. There's growing opposition to providing new and higher-density housing, as this would remove pressure from housing prices, and leave existing homeowners with a lower property value, itself useful for loan collateral, HELOC, etc.

Knowing long-time California natives who've been chased entirely out of the state, I'm starting to think the situation may become untenable. Or, perhaps, it's one more in line of economic population displacement, which began with Spanish missionaries displacing the aboriginal natives, American Anglos the Mexican successors to the Spanish, and now various new money, some domestic, some foreign, chasing out the 1950s - 1980s immigrant class, at least from the Bay Area.

Housing is a taxpayer subsidized, inflation proof savings plan for the average citizen. It is also levered.

Open this chart of historical mortgage rates and click 'max': https://fred.stlouisfed.org/graph/?g=NUh

Since 1981, rates have declined and tax treatment has become more advantageous to existing owners.

With the current ZIRP/NIRP/QE regimes around the world, the leverage available to the average citizen has never been greater. That leverage has gone directly into housing.

If the leverage trends continue (see 'helicopter money'), housing (along with all other asset classes), will get further out of reach.

Have you actually talked to many Bay Area homeowners? The primarily reason that many long-time residents oppose new denser housing developments has little or nothing to do with property values. The real reason is concerns over quality of life, such as traffic, noise, pollution, school overcrowding, etc. You're not going to convince them to support higher housing density without addressing those concerns.

Personally I think denser housing developments in some neighborhoods would be a good idea. But the infrastructure improvements need to be constructed first, not as a reactive afterthought.

I'm not sure that nimby behavior can be explained by a desire to maximize the cash value of a single family home. Keep in mind, owners typically own the land their house sits on as well. If I were allowed to purchase a SFH in palo alto, tear it down, and replace it with a four story apartment building, I would probably profit, even at these sky high prices.

This does come up in San Francisco as well. I live in one of the SFH zoned parts of SF, though we are all packed in there, houses are small, not free standing and backyards are small. A friend who lives nearby owns a SFH that is technically zoned R-2. This means that he could technically tear down his house and build two flats. This isn't just theoretical, it has been done on his street. I do believe that the value of the two flats would be considerably greater than the dollar value of his SFH (especially if nobody else did it, but even if it were widespread). He could still live in one of them, with the same square footage he currently has, and with the profits, he could pay off his mortgage and have an impressive chunk of change left over.

Hostility to greater density is a complex issue, but I really don't think that a drive to maximize the dollar value of real estate assets is the major factor here. If people were purely interested in maximizing this dollar value, I think they'd be agitating for the right to build, rather than the right to prevent their neighbors from building.

I think that a lot of bay area nimbys are long time residents who bought when it was less expensive and are well heeled enough that they don't really need the money, and anyway, where would they go? If they cashed in by tearing their house down and making a ton of dough, they'd try to move to... well, a medium density suburb with nice, old, historic houses, pleasant year round weather, a university nearby, a city with a good opera and ballet a moderate drive away, and... oh wait, yeah, palo alto - just. as. it. is.

To me, there's yer trouble.

You'd have to get the property rezoned for multiple family occupancy.. Good luck with that.

I ran into a claim some years ago saying that homeownership is policy because homeowners do not riot.

Homeowners don't riot. Neither do married people.

But while there is good evidence that marriage transforms rioters into non-rioters, giving houses away doesn't seem to have much effect on the recipients.

Logically, if you want to tamp down rioting and your metric is homeownership, you should be trying to oppress non-homeowners, not trying to get houses to the people that don't have them.

Well put. Most discussions around here take a simplistic position, "build more to drive prices down". And then wonder why it doesn't happen when the solution is so obvious. Because it is not only about new buyers but also about folks who have invested everything they have into a market that was already in place before they invested.

Which countries do you think handle housing well? Any references would be appreciated.

I myself know little about the subject, but since I followed the discussions I noticed the Singapore has been mentioned several times.

https://en.wikipedia.org/wiki/Public_housing_in_Singapore

    > The majority of the residential housing developments in Singapore are publicly
    > governed and developed. As of 2013, 80% of the resident population live in such
    > accommodation.

It's been an often used example because it is a market economy, no use pointing to a "socialist" country because nothing unexpected if they let government take care of housing.

I can only point to this example though, since it always seems to come up in these discussions, I cannot evaluate it.

EDIT: Aaaand it's come up in this thread too. Just search for "Singapore" to find the comments.

Japan.

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