Falling Home Prices Could Be a Good Thing
nytimes.com
nytimes.com
> So instead of looking at homes as investments, what if we regarded them like a TV or a car or any other consumer good? People might expect home prices to go down instead of up. Homebuilders would probably spend more time talking about technology and design than financing options. Politicians might start talking about their plans to lower home prices further, as they often do with fuel prices.
The article is going over a paper[0] that asks what would happen to house prices if houses were treated as disposable consumer goods instead of a means of storing wealth. It also points out, correctly in my opinion, that such a shift would be monumental (if only because everyone would have to do it at the same time).
0 - http://realestate.wharton.upenn.edu/research/papers/full/802...
In Japan, people expect houses to be worthless after a decade, and they rebuild their houses frequently. This is partly because the poor quality of houses built in the first decades after WWII has created a bias against older homes that is probably no longer justified. Many buyers tear down homes and replace them -- this happens everywhere, but it is more common in Japan. People who have owned their home for a few decades will have it torn down and rebuilt every 20-30 years, and they will continue to live in the new one without any intention of selling the land.
On the other hand, while homes are worthless after a decade, land is extremely expensive. This leads to 40-year mortgages or to people building homes on land they lease for decades, and having them torn down when the lease ends.
I don't expect that kind of situation to develop in the US, nor do I want it to, but it's always good to learn about other approaches to home ownership, because it demonstrates that considering a home as an investment is not natural or inevitable.
In the US, your primary residence is usually your largest asset, and by its very nature, it becomes an investment that you want to protect. The depreciating nature of real estate in Japan is okay because they're a nation of savers. They have other investments to draw upon in retirement. This is not true in the US, and your home is essentially a forced retirement vehicle (unless you're just stripping out the equity all of the time, in which case you're screwed).
TL;DR It'd be fine if we pushed down real estate asset prices if people saved more and needed less income in retirement.
Land in Japan is not really an investment. Investments are made with the purpose of selling them at some point in the future to realize gains. That's not how Japanese people approach land ownership. It's not how Americans really approach it either -- many Americans will say that their home is an investment but also say they want to live in it until they die, which means they will never realize any gains.
However, here's a Telegraph article which is only a year old, reporting Sweden's average mortgage term is 140 years [2].
[1] http://archive.fortune.com/magazines/fortune/fortune_archive...
[2] http://www.telegraph.co.uk/personal-banking/mortgages/sweden...
http://www.telegraph.co.uk/personal-banking/mortgages/sweden...
Why should it be an asset in the first place?
We're just arguing over how we squeeze the ballon; the size of the ballon stays the same (for the most part).
http://www.fanniemae.com/portal/research-insights/perspectiv...
"The Baby Boom generation possesses enormous home equity, which by some estimates exceeds $6 trillion. Despite this mountain of housing wealth, many Boomers will face financial insecurity in retirement. According to one study, between 30 and 40 percent of Boomers will have insufficient income at age 70 to adequately replace their pre-retirement earnings. The extent to which Boomers and preceding generations might be able to draw upon their housing wealth to enhance financial security in retirement hinges on multiple factors, including:
* the amount of home equity that older adults of different socioeconomic subgroups hold today and will likely hold in the future
* seniors’ willingness to tap housing assets in retirement
* the barriers that older adults might face in extracting home equity to finance retirement spending."
"For most households, a majority of their wealth derives from owning a primary residence, and the authors find that the proportion of households aged 65 and over who own their homes has held up quite well despite the housing bust and subsequent homeownership decline. Whereas the overall homeownership rate has fallen to multi-decade lows in the wake of the housing crisis, the proportion of older adults who owned their primary residence was 78.2 percent in 2012, slightly higher than it was in 1998 or at the peak of the housing bubble in 2006."
Wealth and cash flow are two very different things. I can't tell you what the future holds for sure, but a few things.
If they have significant equity in their home, chances are good that they have significant equity in other places as well. I don't have data to back this up, with the exception of my role on the board of a my employer's 457b plan.
Timing, more than anything, has more to say on any matter in retirement that we give credit. One doesn't know when cancer hits. One doesn't know when COPD hits, and you have to move to Arizona. One doesn't get to pick when the market bottoms or tops.
Housing is a lousy investment from a purely numbers point of view. I became an owner very reluctantly and it has cost me dearly. Taxes have gone up 15% every year. While they house ages it breaks and I am on the hook for everything. $75 in weed/bug stuff today... next week it will be something else, and the week after. I've spent multi-thousands on this thing outside of mortgage that I will never recoup... also time and it pisses me off.
My sweat equity will never be recaptured, really. I am only 36 once, and I spent a good three months last year remodeling a bathroom (due to mold) and missed a ton of good run days, time with family. BUT I saved a bunch of money doing it myself!!!! Don't care, laying tile sucks ass. never again.
I can't wait until home ownership becomes a relic of the past.
Whatever makes you think you don't pay for those things when you rent? Sure, rent can be cheap if the landlord considers it "free money" while waiting for the property to increase in value, but if home ownership becomes a relic of the past, you can be damn sure rents will be more than enough to cover taxes, bug sprays and every other expense, plus some margin.
We need some way of replacing the customization that is possible when you own. Rentals tend to be fairly generic.
It does seem likely millennials get screwed in any outcome but what else is new, the savvy ones already account for that.
Aren't expenses lower in retirement? I can imagine these people being in trouble if they can't get, say, 70% of their pre-retirement income. Even in that case, they will be fine if they deflate their lifestyle accordingly.
Can't deflate necessary healthcare expenses.
Seriously, the area a house is built on is a limited resource. In the US not so limited in theory but in practice quite limited due to building permits and limited availability of working infrastructure (good schools are financed by local affluent clusters). This allows claims on location to act as a store of wealth similar to currency (issued in moderation) or bitcoins (minted in moderation) particularly as long as the population seeking housing grows.
Japan is a very different place due to much more flexible building permit system, an ubiquitous infrastructure, a shrinking population and a confidence bursting bust in the past.
Both situations are sort of mostly stable. An issue in the US is that the housing prices have disconnected from income through labor. What makes this really a problem is that housing is not the only asset where appreciation has disconnected. When this corrects the question is whether it simply corrects or whether the correction follows the path Japan has taken in the past. There are more people in the US but there is also vastly more land and Japan has shown that a society can change its mind about real estate as an asset.
(outcomes don't correlate all that well with resources)
Ask the people who shafted every other form of retirement savings?
This is the case in the UK; the government and industry have systematically dismantled both the state and private pension schemes for the vast majority of the people. Interest rates are held low, the stock market is incredibly volatile. Now they are coming after the one asset that people have left. Of course people are upset about that.
It's not just that. Imagine that you've just taken out a 40 year $500,000 mortgage. How happy are you going to be if next year your house is now worth $250,000 but you still owe $490,000 on it?
As far as I can tell the best solution to this is to expand the housing stock in the presence of moderate inflation, so that nominal housing prices stay the same while real housing prices fall.
The US has a huge debt problem in general and moderate inflation helps with that too -- if the government creates new money it's that much less they have to borrow or tax and it reduces the real value of the national debt and everyone's mortgage, student loans, etc.
But the "best solution" to this is not for the government to somehow prevent people from buying non iPhones so my AAPL stocks don't go down. The best solution is for me to recognize that placing highly leveraged bets on the stock market is extremely risky and that I just lost money because I made a bad bet.
What you are describing is socialized losses, privatized gains. Why is that a good thing?
To fix this, there are going to be losses. The question is, who should primarily suffer them? The homeowners who reasonably relied on official policy, or the banks who promoted and benefited from that policy?
> What you are describing is socialized losses, privatized gains.
It isn't. The losses would otherwise be suffered by a majority of American families, which sounds pretty "socialized" to me. Those are also who would receive the gains from inflation.
The best place to actually put the losses would be the government, except "the government" doesn't actually have any money, it just spends your money which it takes through taxes or inflation. And the money has to go to homeowners/borrowers rather than come from them, so what you would effectively need is a tax on creditors, which is what inflation is.
It's essentially the same logic as the 5th Amendment Takings Clause. If the government is going to take your property they should compensate you for it. Normally this doesn't apply to things like zoning changes for pragmatic reasons -- the taken value would be too large for the government to afford and then they could never make zoning laws. Which is nothing but a pragmatic injustice. If we can avoid that we should, and in this context inflation would allow us to do it.
Inflation is a type of tax and you're just making the equivalent argument to "all taxes are theft".
The best place to actually put the losses would be the government, except "the government" doesn't actually have any money, it just spends your money which it takes through taxes or inflation.
Yes. So homeowners and banks have been exploiting renters like myself. Because "the government" is at fault, you'd like the government to continue exploiting renters like myself in order to prevent the homeowners from suffering a loss.
It's essentially the same logic as the 5th Amendment Takings Clause. If the government is going to take your property they should compensate you for it. Normally this doesn't apply to things like zoning changes for pragmatic reasons...
While the takings clause might apply to downzonings, since downzongings restrict property rights you previously held, they definitively do not apply to upzonings. Your property rights simply do not include the right to prevent others from competing economically.
I'm going to speculate that you hold a leveraged long position on real estate, and you want the government to protect your investment?
The problem is it isn't current homeowners. Current homeowners are the ones who have paid twice as much for their home as it ought to be worth because there was no other option.
And if you just let nominal housing prices fall, the banks get to keep their unearned gains. The homeowners still owe them the full mortgage amount.
It also doesn't work, because people won't be willing (or able) to sell a house for less than what they owe on the mortgage, so the property becomes unsellable, which keeps it off the market and keeps prices higher longer. Or we get a huge number of defaults and relive the housing crisis, and then the banks keep the foreclosed homes off the market as they did last time.
> Yes. So homeowners and banks have been exploiting renters like myself. Because "the government" is at fault, you'd like the government to continue exploiting renters like myself in order to prevent the homeowners from suffering a loss.
How does it continue to exploit you? Are renters creditors?
You are being exploited the same as homeowners because high housing prices result in high rents. Reducing real housing prices will reduce real rents to your benefit. Reducing nominal housing prices is politically and economically intractable, so the alternative to inflation is that you continue to pay real high rents.
> While the takings clause might apply to downzonings, since downzongings restrict property rights you previously held, they definitively do not apply to upzonings. Your property rights simply do not include the right to prevent others from competing economically.
And yet from a practical perspective the result is the same; the property value has gone down (and the mortgage debt hasn't). Which makes causing that to happen politically infeasible, leading to our current predicament.
> I'm going to speculate that you hold a leveraged long position on real estate, and you want the government to protect your investment?
I want real housing costs to come down. Do you have a better idea, that won't be defeated politically by existing homeowners?
Some homeowners will default and the banks will suffer too.
Or we get a huge number of defaults and relive the housing crisis, and then the banks keep the foreclosed homes off the market as they did last time.
The reason banks did this is they wanted to pretend bad homes and bad loans were still valuable, in order to use them to satisfy capital reserve requirements. There's a very simple solution to this problem.
You are being exploited the same as homeowners because high housing prices result in high rents. Reducing real housing prices will reduce real rents to your benefit. Reducing nominal housing prices is politically and economically intractable, so the alternative to inflation is that you continue to pay high rents.
This is simply not true. The housing bubble was manifest in the price vs rent ratio, which skyrocketed. The only way to reduce rents is to produce more housing. If that tanks the price of existing houses, I don't really care.
I want real housing costs to come down. Do you have a better idea, that won't be defeated politically by existing homeowners?
My mistake, I thought you were discussing whether this is something we should do. I didn't realize you were merely discussing what is politically possible.
I don't believe that fixing the US is politically possible. In spite of this being the Flight 93 Election [1], I think the odds that Trump will save us are close to zero. I don't plan to be here for the end.
[1] http://www.claremont.org/crb/basicpage/the-flight-93-electio...
And then we relive the housing crisis.
> The reason banks did this is they wanted to pretend bad homes and bad loans were still valuable, in order to use them to satisfy capital reserve requirements. There's a very simple solution to this problem.
And what is that?
> The only way to reduce rents is to produce more housing.
Of course it is. That is the only way to reduce real housing prices in general. But if you propose to tank the nominal prices of existing houses, more people will oppose you than you can defeat. Meanwhile you can produce more housing without existing homeowners fighting you that hard if it means their nominal home prices don't go down.
> My mistake, I thought you were discussing whether this is something we should do. I didn't realize you were merely discussing what is politically possible.
What we should do is constrained by what is possible.
Sometimes you have to swim upstream and convince people to do the hard thing because it really is necessary, but convincing millions of homeowners that they should vote for a policy that will cause them to go underwater on their mortgages is just never going to happen. So we need some way to reduce real housing costs without causing that to happen. Inflation is one way; I'm open to alternatives.
> I don't believe that fixing the US is politically possible.
It isn't a question of whether it will be fixed, it's a question of how bad things have to get first before people develop the will to fix it.
The thing is, this is exactly what happens with everything else that an American consumer purchases with a loan: cars, boats, RVs, everything that is purchased with a credit card.
As has been said before, a house is just a wooden box that you leave out in the rain for 30 years. But yet we expect that this box will become more valuable over time...
In other words you are asking the government to steal value from people who own debt and give it to people who owe debt. That is neither fair nor an obvious win in the long run.
As a matter of policy, there are multiple stakeholders: those owning debt want deflation, those born without wealth want inflation so that there are enough dollars in circulation to match the growth in population.
Value of your dollar holdings= (value of all dollars) * (number of your dollars / number of all dollars).
You assert that nobody is promising the value of your dollar holdings will remain constant. I agree that this assertion is true, but it's also obvious that failing to maintain the "value of all dollars" is a good way to impoverish all dollar holders, possibly permanently. Convincing people that you aren't going to allow them to maintain the value of their dollar holdings is a good way to encourage them to sell dollars.
They were a nation of savers (15+ years ago).
Dec 2014: "Japan’s savings rate turns negative for first time"
http://www.bbc.com/news/business-30603313
Chart:
http://i.imgur.com/X3uwYCp.png
The Japanese Government had to shift to Yen debasement to deal with their debt because there was no longer enough of a savings base to sell their immense debt requirements into. The Japanese famously own most of their debt, previously funded by that high savings rate. The consequence of that debt and Yen destruction, is the Japanese standard of living is being hammered.
Their savings rate has fallen from ~15% in 1990, to basically 0%-2% now. This is happening simultaneously while their consumer economy struggles along as it has for decades. What happened? They've debased the Yen so much, and Japan has fallen so far behind on economic growth (they climbed above the US on GDP per capita by 1988, were 50% higher by 1995, and will soon be 50% below the US), that the high cost of living in eg Tokyo now consumes too much of their incomes to be able to save like they used to.
Today, Japan's GDP per capita is comparable to where it was in the early 1990s. In that time, China has increased its GDP 20 fold, South Korea and the US have roughly tripled their GDP. South Korea should catch Japan on per capita GDP in the next decade at the rate things are going (30 years ago there was 6x gap between them). Japan's GDP per capita is about 20%-25% lower than it was in 1995.
Some people blame the lack of population growth on Japan's inability to grow its economy. Germany has tripled its economy with zero population growth. Austria has tripled its economy with 10% population growth. Sweden has had sub 20% population growth over 30 years, and tripled their economy (South Korea has performed similarly on both metrics). There are far too many examples of low population growth countries substantially boosting their economies, for that to be the primary issue (especially given Japan's population growth was a mere 10% between 1980 and 1995, despite a huge leap in economic output).
Hysterical deflationary economists have proclaimed for two decades that Japan was suffering vicious deflation. The fact is, they haven't actually suffered much deflation, their CPI has been more flat than down meaningfully the last 30 years. Chopping the Yen to pieces to deal with debt, is rapidly inflating away their economic position in the world, while the lack of falling prices is crushing their standard of living (prices have stayed expensive, while real disposable income has fallen, eradicating savings).
[1] http://freakonomics.com/podcast/why-are-japanese-homes-dispo...
It would be nice to have the "disposable" attitude without actually rebuilding all the time. Making as few people as possible profit from rising rent/home prices means it's easier for governments to take policies that prevent that.
Policies which, ultimately, improve society as a whole because less economic output is going directly into the pockets of people who are doing nothing except owning a good.
A theory I heard about economic growth in Japan is much simpler: Population growth has stalled, so economic growth has as well. Lack of labor means it's hard for companies to increase economic output without improving their processes.
[0] says downtown NYC is upwards of $2k, hitting $3-4k in certain areas (1 bedroom). My impression is that there's not much of a way of avoiding this.
A quick search on suumo.jp, and I can only find a handful of 1 room apartments (1 bedroom, under 750 square feet) over $3k in all of downtown Tokyo. Having moved many times within the city limits, I would say that, for a 1 bedroom, you could expect to pay $1-1.5k in really nice areas, for something not far from the station.
But you can easily find cheaper places if you're willing to be a bit further from the station (nobody wants to be a 12 minute walk from the station), or if you're willing to live near the less fun stations on the Yamanote. But the apartments are still in good shape. Just a bit less convenient.
And if you're good living in a shitty apartment (building over 40 years old), you can easily get your rent way down.
I just signed for a place (50m2, 2 rooms + dining/kitchen, built 3 years ago) near Ueno for $1500 a month.
[0]: https://www.timeout.com/newyork/blog/map-of-average-rent-by-...
I'm not familiar with Tokyo neighborhoods, but it sounds like you are comparing apples and oranges. Manhattan is not the same as NYC--there are four other boros. Not all of that has subway access but huge swaths of the Bronx, Brooklyn, and Queens do. I live in a one bedroom in Queens, 3 blocks from the subway, for less than $1500/month.
This scared the [expletive] out of me until I read it and saw it was mostly theoretical, as I just purchased a home in the Boston area.
I think as you say the main issue (or challenge) here is that it would be a monumental change in perception, and that the perception itself is not insubstantial. In other words, people value homes because homes, land, neighborhoods, cities, and general living arrangements are valuable; not simply because they expect the monetary value to go up. Regulation of that system therefore might be an uphill battle against reality.
In addition, I've had many great conversations with friends in my generation (millennials and whatever the heck children of the mid-80's are called) and the consensus is that we don't actually think of owning a home as an investment much anymore. It's risky, it's unknown whether the value will go up or down in the short or long term, it's costly in a different way (time, energy, maintenance, stress), and it's more about control of your living situation and quality-of-life than anything.
In other words, me and my generation are buying homes if and only if we want to own a home, not because we're bent on investing in our future with property. We understand, for the most part, that you need a diverse strategy for investment and the home isn't by any means a sure bet.
Like everything the cost of infrastructure is changing and the rate of change will increase - self driving cars will be a big factor, telecommuting, internet shopping etc. Water and electricity are others - electricity is probably also changing due to Tesla and others.
You could say the cost of land is directly due to the network it is embedded in. If the cost of network construction decreases then land prices will decrease.
edit: and of course social relationships are the other network effect - inner city lifestyles are an example of this
Yes and because the state builds the network we should tax land. Land speculators spend nothing when they see their land rise in price, it's all other people.
So to phrase it differently to hopefully meet in the middle: the land is the cost, but I'm not talking about how much it costs to buy some mud, wherever that may be. The cost is the cost per acre at a given location.
You also reference future changes. Perhaps, but we are in the here and now.
We are at peak land value because it was built on credit issuance to the boomers, who are about to start selling down. This is why we have ever lower rates and QE, to counteract this force.
it will be soon - all jobs are becoming IT jobs, and thats why we're on hacker news for the future not investment advice.
> who are about to start selling down
yes, this is going to be interesting when this happens. Have you heard others saying this? I've said it a few times and have been met with blank stares.
What, exactly, do they plan on changing?
A house costs a relatively large amount of money to build, and is usually purchased by people without a lot of savings, hence the appearance of mortgages/MBSs. The consequence is that housing becomes a capital good, with an associated yield, and, as with all other capital goods, its price will rise while the long term interest rate is falling, as it has been for the past ~35 years.
As far as I can see, there's not much we can do about this, unless we ban mortgages. And I doubt that's going to happen, as younger people really do need a way to finance the purchase of a house with only an income.
We kind of already know the answer to this: "Rental cars get trashed." The same applies to housing: neighborhoods with mostly renters as opposed to owners are rarely as well-kept, clean, or as safe as those with primarily owner-occupied units.
Treating housing as disposable also creates a significantly heavier environmental burden which isn't entirely obvious at first:
- Cheap, short-term repairs and cosmetic fixes create more landfill waste. Estimations are 45 percent of landfill waste comes from "Construction & Demolition" or as the industry calls it: "C&D". When it comes to diverting C&D waste, it's usually only the older high-quality material that can be diverted and/or reused; the rest goes in landfills[1]
- Disposable housing neighborhoods targeted as toxic sludge waste-grounds[2].
More disturbing is that a nationwide trend to start treating housing as a "disposable consumer good" already seems to be underway. REITs got their own sector in the stock market late last year[3]. Invitation Homes (bankrolled by Blackstone) has recently unveiled a Ponzi-type scheme to buy up dilapidated houses, smack on cheap cosmetic fixes, rent them out at top-of-the-market prices... all in the name of creating "stock wealth". Invitation Homes IPOed last week. For more on what we can come to expect, see this[4].
In other words, we can expect continual upward pressure on rent not for the quality of the housing being rented, but for the landlords charging tenants more for their liability insurance.
No... it's not the supply of housing that needs to be optimized; it's environmental stewardship resultant from even the tiniest bit of unencumbered land ownership that we should be solving for. My theories around how to do this have been evolving on ecosteader.com.
[1]http://www.ecy.wa.gov/beyondwaste/bwprogGBCandD.html
[2]http://www.alternet.org/books/how-corporations-dump-their-toxic-sludge-areas-filled-poor-people
[3]https://secure.marketwatch.com/story/stock-markets-new-real-estate-sector-gives-reits-a-home-2016-05-11
[4]http://www.latimes.com/business/la-fi-blackstone-lawsuit-20140506-story.htmlYou bring up cars and TVs - for new cars, the thing actually being sold is not so much the car, it is the financing. This is less true than it once was[1], but it's still true.
[1] GM divested GMAC.
A/the reason to buy (in noncoastal or otherwise un-bubbly areas) is to save a couple hundred a month in rent. It's limited to people with good credit, so you trade a down payment and fees for a "discount" month over month.
There is only so much developers can to to push costs down. I've always bought homes a generation behind the current developments - that's been the happy valley between price and features for me. I also spend well less than 2x salary purchase price.
But so long as government policy actively pursues wage suppression, housing is much less of an investment.
They set a 2% target and miss it more often than not.
PS: Medain income was $4,237 in 1950 which works out to $42,195 today. So, it's not like the average american is all that much better off.
Beyond square footage there are also expectations on the innards of the residence - e.g. try to find a new construction listing that does not have "designer appliances", "hardwood floors", "cat-5/6 wiring" and a ratio of bathrooms/bedrooms closer to 1.5-2/1 vs 3-4/1 that was common decades ago.
then comes the status of living in certain neighborhoods, having a house of certain style and size, let alone kitchen outfitting.
people have been marketed into the poor house
US home prices in the US have an interesting history with several incentices to make homes more affordable resulting in higher home prices. 120 years ago most non farm houses where bought with cash, resulting in cheap and affordable housing being the norm.
PS: Like with cars the trend is for people with above average incomes buying new homes which means the used market tends to have older upsale housing instead of affordable new housing.
Regarding perverse incentives - the home mortgage deduction is one of the worst. Take money from renters to subsidize homeowners, and drive up housing prices in the process.
Oddly enough, home solar hot water heaters are a better investment than a lot of the more expensive insulation methods. Double pain windows for example are slightly better than 50's style storm windows which also had 2 set's of glass, but not by a huge amount. At least compared to having 80% of home heating needs in Maine covered for under 10k.
Some of this cost is required by poorly written efficiency requirements. But a 50's style house updated to be highly efficient might cost 120k and sit on 10k of land, but that's a long way from 200+k.
The cost of square footage is low compared to its price. Concrete is expensive per SF but that's about it. In the past it took a lot of labor to put up lathe and plaster walls and real hardwood floors, but today it's mostly screwing up drywall and rolling out carpet.
>safer due to many construction regulations
Not a lot has changed in this regard for single-family homes. Roofs are tied down, better protection against sheering forces, and materials that resist fire, and none of these add much to the cost.
>more energy efficient (at least per sq/ft)
Windows can get expensive, but overall insulation doesn't contribute much to the high cost of housing.
It is all those incremental costs multiplied by the increase in average size (2 - 2.5x) and it ends up substantially affecting construction costs.
When wages go up, mortgage lending goes up (and by a multiple). The banks hoover up all productivity gains.
NYTimes might want house prices to go down but they have to take on the banks if they mean it.
Incredible that anyone could disagree with this, really, but downvote away.
Anyone denying the effect of banks is missing an important point. I suggest looking at positivemoney's articles or videos on youtube for an explanation of this process, it's pretty clear.
Credit sets the price. Banks issue as much credit as they can, leaving workers with enough to eat / heat / clothe themselves and no more.
I cannot understand how anyone can think otherwise. This is how we create money.
Where is all the money going in SF with all the highly paid devs? A big wedge to the landlords. Because all productivity gains flow into land because that is what the banks use to create new debt.
But you don't have to live in SF. You live there because that's where employers who will pay high wages are. Therefore, you decide to live there instead of working remotely or living somewhere with a lower cost of living.
Landlords are not the problem (although, they are a symptom). Tech employers who demand you live in SF are the problem. And as long as employees continue to flock there despite the real estate cost, employers will continue to push the externality of housing costs onto them.
When non-tech workers complain its too expensive to live in SF, everyone says "market forces". When tech workers complain its too expensive, its a housing crisis.
People choose to live in specific cities for reasons other than their current job.
>you decide to live there instead of working remotely
Not everyone gets to work remotely.
>or living somewhere with a lower cost of living
Not everyone can do a shitty commute for years on end without becoming depressed.
Living near lucrative jobs where the employer doesn't care about your housing costs is not a right.
I think you're close, but take a look at "Progress and Poverty" by Henry George. The problem is the failure to capture rents through taxation.
However banks do not provide a service as banks are not intermediaries. The create new money as credit.
https://bankunderground.co.uk/2015/06/30/banks-are-not-inter...
I'll have to chew on that a bit. Thanks.
Our culture is such that we cannot make basic distinctions between rents in general and productive work. I suspect we'd have to fix that, then let the existing accounting mechanisms sort it out.
It blew my mind that this is how money is created.
What would be the downside of banks having to buy this money from the government instead of creating it for free?
Funny how money creation isn't on the curriculum, isn't it?
What about the power the government derives from taxing your real estate? Don't forget that either.
That's a big claim, and possibly I've misunderstood it. I live in England and I had no trouble at all getting a mortgage with a 10% deposit.
It's actually the same in most or all western countries.
We can change the tax code, and home prices don't have to drop suddenly like they did in 2008 and put people underwater. They could simply plateau.
It's pretty easy to see in places like Vancouver, and while it's not as bad in many other places, it's still insidious.
I see us being on the cusp of a change in attitudes and the way we value housing.
Sounds like fun! Do you know what kind of boat (e.g. motor boat, sail boat, yacht) and how much he paid for the boat?
Looking at sail boats, they're surprisingly expensive for a reasonably sized one (e.g. seafaring).
Exactly, it 'sounds' like fun. Years ago I had a colleague who did this. He tried to make it work and finally gave up. He did it to try and save money, so his sail boat was on the smallish side and everything he did ended up being a chore.
Even while it acknowledges the hypothetical nature of its arguments, the article doesn't consider negative factors - like the massive number of middle class middle-aged homeowners, whose mortgages will be underwater in case home prices were to drop. Is there going to be bailout of all of them? If not, we are looking at a repeat of 2008. If yes, who foots the bill?
Maybe, this idea would have been interesting at the beginning before homeownership was entrenched with the personal wealth. Now? Not so sure.
This makes very little sense to me - San Francisco is surrounded by water on three sides and borders other towns/cities on the 4th, so how does one account for the demand of new housing once the existing housing is built?
In other words, let's say we increase density sufficiently, so that we flood the market with new homes (apartments for SF) and drive the price down to 281k. As time passes and population increases, with a fixed land supply, you'll need to build denser. But you have people already living in the homes you'll need to tear down. How do you force enough of them to move so that you always maintain enough housing stock to keep prices low?
It has been done with marginal success in non-market economies. For example, in USSR, when new apartment buildings were to be built where older ones currently stood, government simply ordered people to relocate to "improved" new apartments, usually located in undesirable areas of the city. This is hardly fair.
A US version of that could use eminent domain powers, but I somehow doubt the people of the city would support that.
Another question is whether people will want to live in that level of density. Eventually, you'll have price stratification based on height and access to sunlight. In NYC, you already see sunlight or lack of it as a significant pricing factor. Street noise is another factor.
That said, it doesn't mean there isn't some sort of sane middle ground. SF could use more development, just like the westside of LA, but it won't result in $281k price point.
It depends on what proportion of the city owns their home. If most people are renters, of course they want the price of housing to go down! If there's one good rallying cry against capitalism as an effective means of societal advance, it's rent seeking and the conflicts it causes.
I bring it up every time this topic comes up, but NYC is not the only way to make a "big city". Tokyo is nice, high density, but there are trees all over the place. All for 1/5th the rent of SF.
A well designed big city is not one that just has taller buildings. It has better service distribution, so there are, overall, less cars. There aren't just a grid of avenues (that's too convenient for cars!), but many roads that are smaller.
Building development is not allowed to block out sunlight from other buildings. Street noise is handled by making only a couple large avenues, with most streets being extremely small and low-traffic. Yes, it makes traffic worse for some people. Don't have as many people driving all over.
What happened is that the revolutionary anti-capitalists of the 1960s and 1970s passed into law such a thicket of tenant protections, that being a tenant gives you most of the benefits of ownership. If the building was built before 1979, the tenant even gets rent control, that prevents their rent from rising with the cost of maintenance. This is regardless of the tenant’s ability to pay increased rent.
The way the law was written, new construction is exempt from rent control. The old tenants union therefore opposes all new construction, especially new construction that destroys rent-controlled units. No new construction, in the presence of increased demand, raises prices.
You still need to displace people for new development. Renters, just like owners do not want to move to make room for "new comers". Even if the move is close in proximity.
EDIT: Another example - Santa Monica, CA. Renters hold the legislative power (64.1% renter population), but the opposite of what you describe happens - the renter-elected city council members oppose growth and renter-led coalitions block development of great projects.
Sources: https://en.m.wikipedia.org/wiki/Santa_Monica,_California http://la.curbed.com/2015/8/21/9928090/pretty-expoadjacent-o...
Well, you should go there and see for yourself how much better it is. I have done that, and I can tell you without any hesitation that I would rather be poor in Tokyo than in San Francisco or any other major city in the US.
You can get across Tokyo on a train for the equivalent of a few dollars, there is universal health care, rent and home prices are lower, and Tokyo is more cosmopolitan. Unless you are looking for software engineering jobs, Tokyo is a better place to live. And on top of all of that, the population of the Tokyo metropolitan area is almost as large as the entire population of California.
* Get rid of Prop 13. It discourages property owners from selling or re-developing their property leading to higher prices.
* Get rid of the mortgage interest deduction. It is a subsidy to homeowners which causes higher prices.
* Get rid of zoning regulations that prevent property owners who want to re-develop their property from building higher density.
* Institute a land value tax. Instead of the current property tax structure which charges people who are under-utilizing land less than people who are utilizing it more efficiently, charge them the same amount to encourage the land to be used for the most valuable use.
We're struggling with this. Dean Baker has at least the start of a theory. His BookTv is here, soon ( it was on air yesterday, so they haven't posted it yet ):
https://www.c-span.org/video/?421857-2/dean-baker-discusses-...
Divert the demand to other geographic locations, and then you'll see the supply loosen and prices soften.
Why should they do that when the best engineers want to live in the Bay Area? The talent can come to them.
The major tech companies aren't stupid. If they could benefit significantly by opening offices in the midwest or anywhere else they don't currently have offices, they would have done it by now.
I'll give you an anecdote .. Google has an engineering office in Waterloo and Amazon has one in Toronto. Both have quite a few former expats who wanted to be closer to their Canadian families. There is demand.
"Vacant land sales are rarely observed in the United States,..."
I haven't gone through the economic model described in the paper, but it appears to be a traditional, static, linear thing that has a few issues.
If you want to live somewhere with fewer regulations, there are plenty of opportunities. Just avoid these things:
http://kotv.images.worldnow.com/images/6723723_G.jpg
And probably:
http://www.precisebuildings.com/images/uploads/build/400/dsc...
And keep in mind these may be your neighbors:
http://worldonline.media.clients.ellingtoncms.com/img/croppe...
The second is a building for raising commercial chickens. In my experience, they smell worse than cattle feedlots but better than hog packing plants.
The third is an oddity: many people seem to store their wealth in the form of junk in their yards. Not sure how that's supposed to work, actually. You'll occasionally hear of someone in a metropolitan area being forced to clean up, or having the city do it for them. This is not the case in the regulation-free rural areas.
Millennials are starting to get priced out of entire cities, and it's generally the ones with the most jobs available.
It's starting to look like "millennial" will become an insult meaning someone with no job and no money, hilarious given that it applies to an entire generation.
Most of these residents are also old. It's literally the boomer generation fucking over everyone trying to move in for their own benefit.
And ignore all the environmental bullcrap that existing home owners will try to astroturf. People won't hurt environment by gathering in one place that they did by spreading up.
The job growth is in knowledge, which benefits from being close by. For example, last week I walked from the office to Eventbrite to learn what they're doing. No way you're getting the same benefit from watching a video. To promote the best opportunities, we're going to have to reform our existing cities.
If you're trying to build a new community, it's going to require some other benefit. Like Peter Thiel and his seasteading.
I'm not in Cali or NYC either.
[1] http://www.zillow.com/agent-resources/download/todays-first-...
"Devastating" the housing market to make it possible for younger Americans to buy homes again will only decrease wealth inequality since the ones who own homes are generally wealthy.
It's not like the houses will suddenly go away if housing prices drop. They are hard assets, nothing is destroyed by the lowering of housing values besides speculative worth.
Sure some people would lose a lot of money but it would largely hurt the wealthy and help income equality along with leveling the gap a bit between those generations and poorest one in our history
I beg to differ. Wealthy will be fine because they have diversified assets. The ones truly hurt would be people in their 30's, who have just started putting down roots (first home, family etc) and would have invested a chunk of their savings in the downpayment. So wealth inequality might reduce a bit between top 20% and bottom 20%. But it will increase between 1% and the rest.
> ...nothing is destroyed by the lowering of housing values besides speculative worth.
Household balance sheets for middle-class, whose main asset is their homes, are destroyed. Now suddenly you are left with, say, a mortgage of 400K vs a house worth only 250K.
> ... help income equality along with leveling the gap a bit ...
Nope - the boomers would still fare better since their mortgages should have been paid off by now (generally), and they have a decent rich safety net. Ones screwed are genX and genY as I explained above.
The boomers have more invested in the houses so more to lose. Having a home paid off just means even more money invested in your home, not less. Gen X and y will be hurt but not as much because defaulting on a loan will mean the liability goes back to the bank. Strategic default has been a thing since Britain abolished debtors prisons, and if you lose enough value in something you don't own there's always the option to walk away. If you own your house you absorb 100% of the loss of your asset with no way out.
The banks will be forced to make concessions to those with mortgages or face 100% of the value loss on their own balance sheets, so the effect on those who don't completely own their property will be muted and shared between with the lenders
No idea how you sell that idea to voters though.
Also, at current prices, we are spending a fortune on primitive old houses, and the current obsession with "neighborhood character," some people spend another fortune and only manage to redecorate the interior.
We really should be tearing down and rebuilding. Not preserving merely the façade of the neighborhood.
One thing that is true in most conditions, though, is that in comparing alternatives where a young person buys more house than they need (which used to be quite common) against renting a modest and reasonable "young adult" apartment, renting is likely to come out ahead.
I took a gig in Houston in 2011, knew it was a bubble going in, and rented. I probably paid $200 more per month to rent vs. buy. Apres la deluge in 2016, I was in great shape; it cost me roughly $12k as insurance against having to sell into a down market.
[1] https://upload.wikimedia.org/wikipedia/commons/e/ef/Producti...
home prices and jobs kind of come together, not always but mostly. its sort of like wishing no one would eat at your favorite restaurant so you wouldn't have to wait in line, only to see it go out of business.
millennials will have to do better than wishing people ahead of them get dragged down so they can jump ahead.
It's not about millennials "jumping ahead" either. This generation came of age during the worst recession since the great depression. They are on track to be the poorest generation in American history. The combination of funding cuts to state universities and rising housing costs in places with jobs available gives millennials less choice and more debt than any generation alive in the US.
This is a generation that is the best educated but poorest in our nation's history, coming right after one of the richest and prolific generations. The implications are clear. The previous generation maintaining the status quo. They voted for the funding cuts and NIMBYism that resulted in the lack of housing and student loan debt of the current generation.
I am not a boomer, but they have been in charge for a while and have really messed things up.
the housing crisis happened and cities were broke.
"Two, schools have already been hit hard with horrible admin teams and the rise of open-enrollment."
has nothing to do with the fact that schools would be hurt by falling tax revenue.
"Three, jobs don't have as much of an affect on home prices as they once did."
even if true, doesnt change the fact they are still linked. san francisco would become a whole lot affordable if the tech industry closed doors tomorrow. however, those wanting to go to san francisco for a job but couldnt afford the housing would find themselves with a less compelling need to go to san francisco.
i agree boomers messed up things quite a bit, but that has little to do with the fact that falling house prices have been proven to be bad for nearly everyone.
the housing crisis happened and cities were broke.
We identify five main channels through which the housing market affects state
and local tax revenues: property tax revenues, transfer tax revenues, sales
tax revenues, and personal income tax revenues.
We find that property tax revenues do not tend to decrease following house
price declines.
We conclude that the recent contraction in state and local tax revenues has
been driven primarily by the general economic recession, rather than the
housing market per-se.
If housing values dropped again we would hopefully be safe from all that this time. People are largely living in places they can afford and banks don't have half the US GDP tied up in risky housing bonds and bad loans
That's equally true of housing as well. Come on up to Michigan, I can walk you though entire neighborhoods filled with homes that are all functionally obsolete and valueless.
Homes actually get worse -- a home can have negative value. If an empty lot costs $60k, it's not uncommon for a house on an equivalent lot to be only worth $50k, because it's assumed you'll have to spend $10k to properly demolish and dispose of the existing home before the lot becomes usable. In this scenario, the homes value is effectively negative $10k.
Homes don't hold their value, land and zoning does. And with prices as crazy high as they are today, the actual home cost is almost an afterthought. I suspect if land and zoning actually became affordable, more people would opt to toss and rebuild their old homes with new modern ones, similar to Tokyo residential development.
Not anymore. Contemporary houses only last about 40 years.