Why has regional income convergence in the U.S. declined? Housing costs
marginalrevolution.com
marginalrevolution.com
I'm frankly surprised that we have not seen more real estate bubbles pop over the years. It's clearly unsustainable, yet somehow the market keeps going. Ask your parents if they could afford to buy their home today, even with their best yearly income. Most of them will say no if they lived in the city for a couple of decades or more. I know so many who bought their house for $70k-$100k in the 70s and now see their neighbors sell for $1m-$1.5m. It's insane.
If we could get housing interest rates up to 8% you'd see a large decline in housing prices. If it got up to 1970's and 1980's rates it would be around 17%. This would dramatically reduce the price of a typical house and become a darling market for people who have can pay in cash.
Real estate shouldn't be an investment, it shouldn't raise in value, and it shouldn't be possible for a huge chunk of the population to fund the financial sector through mortgage interest. It's a tax on everyone designed to funnel wealth upwards towards a sector of capital owners that get paid for doing very little.
Regulations and taxes should be arranged such that it is very expensive to own real property that isn't for your own personal or business use. If you want to act as a gatekeeper for real estate, at least a large chunk of the profit should go to the state for the benefit of the public. If it's expensive and not beneficial to own things so others have to pay you to use them, the market will shrink dramatically and more people will actually be able to own homes.
Investments, including land, are owned on the backs of consumption foregone in the past.
All investments are not owned on the back of consumption foregone in the past.
Unless you believe that someone with 100 million dollars is "foregoing consumption" when they invest (particularly in real estate).
One is consumption; the other is investing.
There is a case to say that big money that buys land does something to make it more valuable, and hence there was care and investment. But most of the time, land is something bought long ago, that has benefit basically forever.
Land also has the chicken-egg problem capital doesn't have. The first one that built a house didn't consume his capital, the first one that got the property rights didn't consume capital whatsoever.
I am closer to your position than to the other commenter in this thread, just wanted to distinguish that land can capital do have some differences worth thinking about.
My apologies on the prior post; I meant to imply that buying unimproved land in the "right" place is a great long-term investment.
This is an economical impossibility. Land becoming more valuable is unavoidable, because of the weather, of the people that surround you, the availability of jobs. Rent is high in SF because people are moving to SF and finding high paying jobs. Its not an unrelated effect.
So if there is land more valuable than others, and you taxed away all the value of the land (lets supposed that rent is taxed at 200%, hence all rents drop to 0), you are now going to see something new: people buying land. Now instead of renting, the only operation left is buy and sell. Provided it is cheap at first, because investors would all dump their properties, it will be impossible to get later on. Its an extreme case of rent-control.
Yet those returns (10x-20x) are lower than having invested the purchase price in the S&P500 (with dividends re-invested), which returned a 21x to 30x total return over that same time period (depending on which exact spot you chose to be the "70s")
https://dqydj.com/sp-500-return-calculator/
The house also provided a place to live, so you need to goose the house effective returns a bit there, but that place to live also came with overt property taxes, maintenance expenses, etc.
indeed. there are also more transaction costs involved in real estate, too. driving around to look at properties, real estate agents, significant paperwork, etc.
In contrast, the capital gains from owning a home are exempt for a certain amount, and "imputed rent" (the savings from not having to rent a similar house at current rates) is untaxed, like any other cost-saving purchase. [1]
(One small advantage the other way is that you don't have to pay "property taxes" on mutual funds, though you do have to pay management fees, which, even for index funds, are of similar magnitude.)
[1] IIRC the original income tax did cover imputed rents of sufficient magnitude.
In my view, the tenant is paying the property taxes on the space they rent to live in, so the mutual fund investor (who is also a tenant) is paying property taxes, just on their housing not on the funds.
It's rolled into the rent, but there's no reason to me to think that the landlord is paying it when the tenant is the one bringing the money into the system.
So you have checked with every property owner and verified this?
I actually rent now, from my father (because he makes bad real estate decision despite having his real estate license). After talking with my landlord, who I know well and often talk to, I learned that in this area there are laws about how low rents can be. In his specific situation he is not allowed to rent the property for less than 125% of the price of his mortgage payment which must include the property taxes. Apparently, this is to insure there is money repairs.
So as for houses in Omaha I am fairly certain you are factually in error. I suspect other jurisdictions have other things going on in general, but it seems reasonable that most people do simple things like take their expenses into account which includes tax.
Also, do you think property taxes and maintenance expenses aren't passed on to renters in the form of higher rent?
1) Mutual funds get hit with a lot more taxable events (any rebalance or dividend), and only a small fraction of that can be shielded.
2) Even if you could borrow to invest, stocks fluctuate a lot more and you would be subject to margin calls.
3) You are implicitly paying maintenance/insurance costs as a renter, true, but only as a renter do you benefit from division of labor and tax-deductibility of such expenses.
4) For the specific time history: It would have been difficult in the 70s to buy something like an S&P index mutual fund; Vanguard started then but you're unlikely to have heard of them. Then again, you wouldn't be borrowing at 5% either!
Of course you can [0], and it's even cheaper than mortgage interest (because it's much easier to margin call a stock a portfolio than a house!).
Which is subject to depreciation recapture upon sale, so it's more of an immediate cashflow benefit than a long-term structural benefit. (It can also be seen as a form of "hand-out" to renters, but it's unpopular to complain about that, so few people do as compared to those who object to mortgage interest deduction.)
So technically you're using low-cost mortgage lending (2.15% rates are possible) to invest and get 5-7% returns on average, plus writing off the interest payments.
100 years ago being north of Virginia meant trading milder summers for worse winters. But, summer with high humidity and no AC can be brutal.
New York City and San Francisco beg to differ...
San francisco is on the flat part, look at a topo map from San francisco to San Jose and compare elevation with population density.
The unwillingness of voters to expand the housing supply is one the greatest social ills of our time. I can accept and understand that those who benefit don't want to address the issue. But, there are countless many who don't benefit from it at all.
Why is this not a great national issue of enormous debate? Why is there so little visibility? everytime i see a list of voter related issues, housing is never mentioned.
Shelter is a fundamental human need - it's at the very bottom of maslow's hierarchy of needs. If humanity can't even get past this bottom layer, we're not going anywhere.
The entire concept of real estate is wrong. You hear it all the time. Whenever real estate prices go up, people react like it's a good thing - it's not. For society to make progress, prices must come down. It's not just for those who don't have a home. Property owners should benefit too, with lower tax bills. Of course prop 13 creates more perverse incentives than i can count... I could go on, but we've already discussed this millions of times.
To be clear, I think it's unconscionable that we prioritize these concerns when rents are so high, but average people absolutely do benefit from restrictions on housing supply as long as they are secure in long-ago mortgages and grandfathered rent control.
One of the NIMBY talking points is that upzoning creates a profit incentive to destroy rent-controlled buildings and replace them with higher-density market-rate buildings. Rent-controlled lease holders actually become more secure in their positions when the neighborhood downzones.
This is really about seniority/tenure in an area, and if there's any serious reform, it will likely be to further protect those with grandfather status from newcomers.
The problem is that, based on how things work, a significant amount of our assets are tied up in real estate. If you're a homeowner and your home's value tanks compared to the rest of the market, you're screwed! You can't move to another place because you've lost all of the money that you put into your home.
It gets even worse if you need the money: Think of elderly who sell their homes and use the profits to pay for assisted living.
Or, look at how we pay for education: We use our homes as collateral for education loans!
Good question, but I think the answer is that it's simply not a national issue. In New York City, you can bet that it's a campaign issue across local politicians, and it's in the news weekly. Also, it's not true that one 'can't build' in NYC due to regulations. While there are regulations (as one would expect of a highly densely populated city), there's plenty of building. The price of land, however, is obscene.
Meanwhile, that $1M condo that's one bedroom apartment you purchased in Manhattan (in Manhattan it's probably small) or even the $800K 2 bedroom you purchased in Brooklyn (in a cheaper part of Brooklyn, like Bed Stuy or Bushwick), you could live like a Sheikh in a place like Omaha, NE or (perhaps) Dallas, TX.
Hotpots like SF, NYC, Boston and so on - the smaller, dense cities with jobs and no land left - no so much.
It's not a national issue. Everyone wants to live in California because you get nice weather, high salaries and cannabis edibles rain from the sky. You're a victim of your own success.
Ultimately I think trying to slow down or deflate the bubble might make things worse for more people than just letting it pop.
Rich people buy real estate because it steadily rises in value. Not the other way around. If motorcycles had the same price development, they'd buy motorcycles instead.
The interesting question is why real estate prices behave like this.
And that's where people buy housing as investment.
I dont think thats whats going on. Concentration of work in cities is a global effect, and although china erupting cash over the world might change some numbers,it wouldnt explain the migratory movement from rural to cities.
The easiest and most classical explanation of housing prices in the US is that construction took a huge hit in 2008, and getting the whole system to produce more housing for the demographic growth is lagging. I remember seeing some data about that happening.
A more esoteric one is that we are living in a world with a curious monetary policy, with low interest rates but no inflation, and that as money gets more expensive, housing demand will lower and so will its prices.
The many tax breaks and loopholes for real-estate investors resulted in overbuild in many parts of the country... these were the parts that were hit hardest in the crash of 2008.
Not only was this a big misallocation of capital which robbed other industries of investment for decades, but the response to the crash was to prop up real-estate prices through other drastic measures.
These massively inflated prices enriched many of the landlords in urban areas, greatly increasing their political clout and ability to push for regulations that protect their incomes and harm the public.
Meanwhile, transit systems and roadways declined, further increasing the value of urban real-estate because of the great inefficiency of getting to and from a city if one lives outside of the city.
So now, real-estate-fueled urban price inflation has altered mobility patterns creating further economic distortion. Software engineers in SF make high salaries but live a lower standard of living than those in other cities:
https://www.codementor.io/blog/best-cities-software-engineer...
Who is benefitting from all of this? The landlord class, builders, and construction companies.
When you see a politician wearing a hard hat chances are that politician is helping enrich those interest groups at the expense of everyone else.
Of course that might be an oversimplification. Housing has been an investment class as long as it's existed and yet there hasn't been an affordability crisis like this since at least before WWII. What's different now?
I'm not elderly, but that's a few reasons why they wouldn't downsize.
I get the complaint that people were being taxed out of their homes and that's not good, but in the end it just shifts the tax burden from the old to the young.
If the main reason somebody pays less taxes is that they bought the house before you were born, that feels like age discrimination.
It's actually theft by corporate (or family chain) long-term property owners from everybody else; it doesn't favor individuals of particular ages (especially since the parent-child residence exception was adopted.)
Or there are just cases where the developer is complaining about having to build parking, but if they had built the building as they wanted the parking would have been a total nightmare, not only for residents but also for everybody else in the neighborhood. In other words they're being forced to consider the actual cost of their actions instead of pushing them off on the community and pocketing the profits like in the good old days.
I don't know the explanation for this, but IMHO it's one of the absolute worst trends of the early 21st century. It's also the opposite of what the Internet was supposed to do. I'm supposed to be able to live in some tiny town in West Virginia and have a broadband Internet line and work alongside people in NYC. Technically it's possible but the culture has shifted radically toward hyper-concentration of all innovation and advancement into a few places.
The problem is that over that long a period of time, inflation may have halved the purchasing power, meaning your gain is a paper one, you spent a lot of years fixing and maintaining the house, paying taxes and insurance, working on the yard, maybe did some remodeling, etc. If you'd instead invested in the stock market any surplus over renting, you often would have come out ahead.
Most people would find a way for that surplus to turn into lattes, vacations, new cars, and large TVs rather than into shares of VTSAX, so for them, homeownership is a good idea, not because it's a better investment than equities, but because it's a better savings vehicle than nothing.
I'm a homeowner and very happy about that fact for our family (for lifestyle reasons), but even in a steeply rising market (Cambridge, MA), my other investments have performed much, much better (even including the 2007/2008 crisis).
(I didn't write it, but I generally agree with it and I like that it's very concise, fairly approachable, and you can readily act on the advice.)
The sibling comment's Mr. MM recommendation is better than nothing but not as good as a real book IMHO.
Huh? There's no limit on how much you can put into a Roth IRA each year, as far as I've ever heard.
If you have a low current marginal rate and a lot of money to stash away for retirement (that might be a semi-uncommon combination), it's absolutely something to look into. I have a high marginal rate, so I haven't done it.
This is complicated and weird. I might hold off until I understand it better.
Don't get hung up/paralyzed into doing nothing for fear that something slightly better might be available if you did hundreds of hours of research. The most important thing is to get started, IMO.
Backdoor Roth / direct contribution is capped at $5500 a year.
So in a perfectly optimal world of all the right situations, you could put up to $40,500/yr into a Roth IRA.
Currently, I'm getting about $15k into my Roth IRA annually (got lucky with the properly structured 401(k) plan at work) and I feel pretty fortunate about that.
Why do you assume there is a surplus over renting? If renting gives you that much if a surplus versus buying the equivalent property either your local market is seriously out-of-whack or you have a really sweet deal from your landlord.
That's before considering the optional upgrades that people tend to do to owned houses that they don't do when they are renting. (A functional kitchen with white appliances and laminate counters in a rental is a functional kitchen. Same kitchen in a house is a drive to install granite countertops, subway tile, pendant lights, and stainless steel appliances. Scratched wood floors and 5-year old beige paint are fine in a rental, etc.)
If that is the case, landlords are leaving money on the table.
> That's before considering the optional upgrades that people tend to do to owned houses that they don't do to rentals. (A functional kitchen in a rental is a functional kitchen. A functional kitchen in a house is a drive to install granite countertops, subway tile, and stainless steel appliances. Scratched wood floors and 5-year old beige paint are fine in a rental, etc.)
That is a separate issue, though I think someone who is not disciplined enough to avoid vanity upgrades to their property is probably not disciplined enough to maintain a significant investment balance either.
Edit:
Just took a quick look at Cambridge on realtor.com, and I would classify that as a textbook out-of-whack market. The rents are stupid low compared to the sale listing prices. In contrast, rents in my part of northern New Jersey are roughly the same, but sale prices are less than half. Hell, even Manhattan isn't that out-of-whack. I don't think you should be taking that as typical.
Maybe they are, but I doubt as a large class they're all similarly stupid. I think it's because their available rent is capped by desirable tenants buying property because of low interest rates. "Desirable" in this case meaning those who consistently pay rent on time and therefore likely have credit scores of 750 or better so can readily get a 4% or lower mortgage, which drives bidding wars for properties, which increases purchase/listing prices, which increases the surplus for just renting.
I agree with your edit that our local market is out of whack. It's what's kept me from buying investment property at all.
This is often not true.
I know its a popular belief with alot of millennial but anyone who has looked at a rent buy calculator quickly realizes for many areas (not the bay area / inflated housing markets beyond what the fundamentals support) buying still makes more sense than renting.
For instance, I'm considering a $325k purchase in an area where the equivalent rent is $1700/month.
https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
Even with correcting the variables, the break even point is ~$1400/month if I sell in 5 years.
That is ~$3600/year in savings over 5 years or about the cost of replacing my car in the next 5 years.
2) It includes maintenance in that calculation as well as investment returns and a number of other items.
3) Please stop wasting other people's time because you are lazy. Its quite rude.
One thing this calculator also cannot take into account is risk: if you lose your job, or get hit by an economic crisis like the one on 2008, you have an added catastrophe. But even discarding that, there are always situations where its better to buy.
Of course. But if you invest your money you take the same risks also. There is a limit to how much risk you can really avoid long term.
Cash compensation for most percentiles has stagnated since the 80s. There's a lot of mooted reasons for that -- increasing fringe benefit costs, demographic changes, Cowen's technological plateau, decline of labor unions, etc., etc., etc. -- but the upshot is that we have a ratio where the numerator has continued its growth pattern but the denominator has not.
Growth covers a multitude of sins.
I agree that a more Georgist tax policy is in order, but fixing Prop 13 is pretty tough. It gets older residents really really riled up when changing Prop 13 is mentioned.
Really, it should have applied to one's primary residence, and that's it. Maybe the primary office of a small/medium business.
It just so happens that NIMBYs have huge economic gains from restricting the market from supplying what people want.
[citation needed]
The gulf is not the east coast nor the west coast.
I'd say it's because our postwar experiment with living far away from each other failed. It was a bad idea and it created spaces that were unpleasant to live in. Those of us who were born in such places, and have a choice in the matter, are getting out.
Certain skills are in high enough demand that people with those skills get to choose where to live. We choose places that don't look and feel like crap. We choose places that lots of other people choose. This makes them expensive. The arc of human history is towards urbanization, and those of us with in-demand skills are its primary agents simply because we have the most choice in the matter of where to live.
Of course it doesn't help that the places we choose believe they are already full.
I just watched this and it was electrifying: https://www.ted.com/talks/james_howard_kunstler_dissects_sub...
I live in the Bay Area, and I've seen families forced to move further and further from the area to afford a reasonable house and good education for their kids. The problem is, now they have to commute for hours, driving in sub-optimal conditions to get to their jobs.
Imagine if BART charged a flat $1 fare? Or if the Caltrain ran every 15 minutes from 5AM to 1AM and charged $1/ride? Then living far away wouldn't be that bad. But we're getting squeezed from both sides here: sky high housing costs, and terrible commutes on gridlocked "highways".
Or if the Caltrain ran every 15 minutes from 5AM to 1AM and charged $1/ride?
Perhaps regional economies are simply settling down and catching up to the economy at large (I'm not implying that wage divergence is good or fair - it just seems to be what is happening based on BLS data).
There are many kinds of restrictions, some you probably agree with. Most of the restrictions are popular with liberals, conservatives, Democrats, and Republicans.
Restrictions like:
* must build parking per housing unit
* zoning restrictions to limit density
* long approval processes for construction
* many blocks to construction approval even after complying with all the restrictions
In 1960, San Francisco population was 740,000. 50 years later in 2010 it's 808,235. The east bay and peninsula have been as reticent about housing.
Despite wanting to live in SF and ending up in San Mateo once they get there they don't want anyone to build anything - no more density. Despite wanting to live in the mission/noe valley/haight and ending up in the less dense sunset once people get there they vote against more housing.
The solution is more housing. Transit oriented development (denser zoning and no parking requirements near transit), allowing people to convert illegal inlaws to legal apartments, converting garages into apartments, and allowing people to add stories to their homes are all possible good moves. Maybe there are some of those you don't like, but each one we don't do is less housing and higher costs.
And when you do vote for more housing you are getting:
* cheaper housing
* less climate change
* less pollution
* less homelessness (because homes)
* less inequality (housing costs are a regressive expense)
* a more prosperous city (you personally will have more money)
* a more interesting city (you personally will have more interesting restaurants and things to do)
But does it work in practice? Check out Tokyo: https://www.ft.com/content/023562e2-54a6-11e6-befd-2fc0c26b3...
(SF resident)
https://en.wikipedia.org/wiki/John_Arrillaga
> In the 1960s, Arrillaga and business partner Richard Peery bought California farmland and converted it into office space.[4] They became two of Silicon Valley's biggest commercial landlords with more than 12,000,000 square feet (1,100,000 m2).
> His daughter Laura Arrillaga-Andreessen is married to Marc Andreessen, the successful entrepreneur
Marc Andreessen is worth a billion dollars at 46 years of age. John Arrillaga is worth $2.5 billion at ~81 years old.
With Andreessen Horowitz now the preeminent VC firm in the US, it's extremely likely Marc Andreessen is going to far out pace Arillaga's real estate wealth via his investment returns in companies.
Simply put, Marc Andreessen found a far more lucrative and faster way to make money than John Arillaga did. Andreessen's current position is worth more than a couple billion in real estate. The biggest companies on earth are all tech companies now. The most profitable companies on earth are all tech companies now. Andreessen has a seat at the center table of the greatest corporate wealth boom in world history (just MSFT+AMZN+GOOGL+FB+AAPL = $3 trillion).
Further, Andreessen isn't necessarily entitled to that land wealth. For your premise to even be considered, we'd need to know more details about their marriage. How do you know Andreessen won't be richer - courtesy of his growing tech wealth - than John Arrillaga before John passes away?
The money isn't in tech? Just ask Gates, Bezos, Zuckerberg, Ellison, Page, Brin, Powell Jobs, Ballmer, Allen, and Dell how that works. Now compare them to the dozen or so richest real estate tycoons in the US.
There is most obviously a negative implication there, and it isn't subtle: that the VCs (in this case Andreessen specifically) are harming non-wealthy people in places like SF by intentionally driving up land values for their own benefit. The countless front page stories on HN in the last few years about this specific topic, make it more than a little bit clear there's a negative association in place.
And if you want to get really close to a very serious legal charge, here it is: it's being blatantly implied that Andreessen is conspiring with very wealthy land owners, knowingly against at least some of the interests of his own investments through Andreessen Horowitz, for his own personal gain. How is it against the interest of said investments? The claim is he's involved in intentionally driving up the value of real-estate, which drives up the cost of living in eg SF, which makes it more expensive to retain and lure talent, which harms his investments (lowers their odds of success in numerous ways, lowers their margins by raising costs, etc). That's an extremely serious accusation.
You are defending a person who doesn't need defending. Or are you defending your side of the (non-) argument and can't accept being wrong? (Only as wrong as presuming slight, the description of the business strategy could have been a compliment)
You are hanging onto uncommon cases and what-ifs. What if this mega rich Venture Capitalists doesn't have to his family's real estate wealth and doesn't have any of his own? Doesn't matter, you are yelling and arguing with me like it affects me. I just swooped in and pointed out one fallacy, now I am swooping out because this doesn't affect me.
The GP is asserting that real estate is a significant additional revenue stream for tech VCs. You're asserting that real estate returns aren't important because they're dwarfed by the tech returns.
You can both be correct. Being good at tech investing doesn't exclude other investments from consideration or scrutiny, nor diminish their returns.
The parent is intentionally targeting Andreessen's reputation by insinuating several negative things that must inherently go along with the top level comment and the parent's comment.
As such, I'm further claiming this: to assault someone's character in that manner while providing absolutely zero supporting evidence, is disgusting. That is, show me the proof that Andreessen is making huge sums of money in real estate as implied; show me the proof he's entitled to any of the land wealth through marriage. He's being stoned as guilty by association as it stands, with zero evidence to the contrary having been supplied.
If a large amount of supporting evidence can't be supplied, to match the seriousness of the character attack, well how can such a thing be allowed to stand or go unchallenged in a civilized forum?
I don't care if he's a billionaire. I don't care if he's a venture capitalist. I don't care who he is. I would defend you just the same, under the same circumstances.
Relax with your charged language, you're really twisting the meaning of these words. Because you're so vehement about your defense, I am tempted to think you are being paid to defend Marc or you yourself are Marc.
Companies like the Irvine Company did this masterfully.
I don't know what Canada is going to do with the 30% of its population who hasn't gotten rich in the real estate boom as they get older, have no savings, no pension, and when they can no longer physically work are priced out of rent due to the ever increasing levels of immigration from wealthier nations. Maybe we can just hook them up to machines that feed them basic nutrition and pain killers with a VR headset on.
For some unknown, and Stupid reason, I personally think it is unethical to invest in Real Estate. Previously you would have to live in area like Seoul or Hong Kong to understand that. Now I guess people in London, Vancouver or San Francisco may understand a little bit more.
Here's the moral framework you might be unconsciously subscribing to:
1) They can take off any time. A new job? A market crash? No problem, just pack your stuff and leave. 2) Someone else is doing all the maintenance and dealing with building codes and paying all the taxes, etc.
Because of the inherent risk in owning a home and the effort required to maintain it, it will always be cheaper to buy than rent. If someone likes their neighborhood, but isn't willing to commit and put in the work, they deserve what's coming for them.
That's decidedly untrue. In many markets you can make the case that conservative assumptions result in a cheaper buy option. However, the Bay Area in particular throws that calculus in reverse for many neighborhoods and property types.
Your argument seems to rely on the premise that buying is monteraily cheaper in the long run as long as you're willing to put in nominal sweat equity and risk. And that labor buys you some sort of citizenship that money, for the same amount of tenure, does not. The Bay Area market does not reward that puritanical ethic.
So yes, I'll concede that in the temporary situation that buy is more expensive than rent, and there's a market correction coming, it's savvy to rent, but those aren't the folks that cry "Gentrification!".
And yes, owning a deed to your place or, even better, owning a business in the neighborhood, counts for more than just "having been there".
Of course that would run into the problem that people love to push for giveaways from the government but want it to be slightly obfuscated so they can tell themselves stories about how they never got anything from anyone. Witness the uproar over "you didn't build that."
Rent seeking is a fact of life, I can accept it. But the hypocrisy and self righteousness of some rent seekers just drives me bananas.