It will become easier to buy a house
economist.com
economist.com
"In the past two decades house prices have doubled in real terms"
Then saying: "Most empirical work shows that a 1% rise in the housing stock leads to a 2% fall in prices and rents, all else being equal. On that basis, a mass-downsizing would imply a cut in prices of about 5%."
When things have doubled in price, getting 5% off isn't really much help, especially when, as they noted, purchase taxes have gone up considerably.
A $150k loan in 1999 at 7.6% would cost you $1,059/mo in mortgage payment. A $300k loan at 4% today will cost you $1,432/mo - a 35% increase over the original price, not the 100% you'd expect. Meanwhile, you aren't paying 2x per square foot - you're getting roughly twice as much house as you did before for that price, for only a 35% increase in payment!
[1] This is a smallish dataset, but the trend holds outside of the pre-2008 runup. I don't have that data immediately on hand, though. https://www.clevelandfed.org/newsroom-and-events/publication...
Having twice a big a house doesn’t help if you can’t afford the 35% price increase.
houses of the size typical decades ago can no longer be built
When you add over-wide roads laid out in pedestrian-hostile patterns, additional zoning restrictions on commercial buildings, etc., the end result in many places developed in the past few decades (including almost every recently developed neighborhood in the USA) is to depress density, increase per-unit housing prices, force most residents to travel by car, etc.
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Edit: your other comments indicate you live in San Jose. It seems that minimum home size is not regulated there, but there are many other exclusionary features of San Jose zoning. https://www.spur.org/sites/default/files/publications_pdfs/S...
Most municipalities in the US has some kind of minimum dwelling size, sometimes varying by zone. They can be anywhere from a few hundred square feet to about a thousand square feet (or occasionally bigger). Like other local laws, they vary widely in the details.
You can check local municipal zoning codes for whatever specific community you are interested in. San Jose is one of the rare places which apparently does not have such a rule. Though sometimes building codes enforce minimum sizes when zoning laws per se do not – I don’t care enough to go read through the San Jose building codes.
For more general discussion, if you do a web search for “minimum house size” you will get millions of results.
So if we have people that can't buy houses, but all houses that do get built get bought, the problem has to be that we are not building enough houses.
Ive done the math for Food as well, the prices arent 'going up' like people claim.
The only thing that has went up, is inflation.
But I don't want twice the floor space in an exurb. I want a modest apartment or condo near transit.
Missing middle housing is all about the disruption of the boom/bust cycle of housing and long time erosion of middle class earnings, plus a decreased supply of tradespeople that has ballooned up skilled and semi-skilled labor. We have a glut of mediocre college educated people and a shortage of people who do things -- my brother in law is an electrician, his billing rate is up to $150/hr, and he has a 6 week backlog of work.
It's not economical to build a house anymore like it was in the mid-90s -- even if you own the land. We're being flooded with medium density, carve-out rental housing developments because you need that scale to make money, mostly through trading of tax expenses.
Those developments suck because they don't integrate with the street grid, waste space and are universally low quality buildings. When you pass the 15-year mark and interest/tax write downs go away, they will naturally turn into low-income as the landlords profitability melts away. Around that point, these developments flip over to a succession of shittier operators.
a 35% increase
Your rates also seem off. http://www.freddiemac.com/pmms/pmms30.html claims the average rate in 1999 was 7.44% and in 2018 it was 4.54%. The fed also just raised their rates in December and plan to do more raising in 2019 so expect these numbers to rise.
Beyond that, it doesn't matter if the price per square foot is the same if they aren't building smaller houses. Points like this is like tricks we pull to keep inflation down. All that matters is how expensive is a house that can put a roof over the head of the number of people I need to. We have 3 kids and we were looking for 4 bedrooms. Newer ones in our area are massive 3,000+ square foot structures we can't afford. So we're stuck in a 50 year old 1900 square foot house that we can afford. With a 50 year old house comes all sorts of annoyances such as asbestos, lead paint, and orangeburg pipes.
My family was short on bedrooms growing up, so we doubled up. Nothing wrong with that.
I’d rather have a slightly lower-quality property than shared bedrooms unless the situation makes that infeasible.
Demand for space per occupant has risen. It doesn't make sense to expect our parents' price tags when we're demanding larger properties.
Historically, the concept of separate bedrooms is very, very recent.
The expected size of bedrooms has also risen dramatically in the last few years. Some are even bigger than the living rooms of houses built in the 1970s.
The temptation when we read stats like "the real price has doubled in 20 years" is to interpret it as "the real payment per comparable unit has doubled", when no such thing is true.
I don't know what your market is like, but mine has had a lot of new townhome development in the 1-2k sq ft range. The idea that we're only building 4k sq ft behemoths just isn't true in my part of the country, at least.
I'm not sure I'd trust a house that hadn't survived at least one World War and all the weather since.
- high ceilings and windows. Predated Parker-Morris: if you can find one those are absolutely the best. Modern houses are horribly shrunken by comparison, especially when we sell by bedroom count rather than area
- good sound insulation
- solid brick construction (although no cavity wall insulation)
Minus points:
- very leaky of heat
- lead piping embedded in concrete floors
- ancient electrical system (already reworked a few times)
- perilously steep staircase
- bathroom had been retrofitted in the 50s. Yes, the house was built without an inside bathroom, I think it only just had an inside toilet.
I understand your nitpicking. It was almost a deal breaker for me when we bought our new home. But we have a zoned system regulating the single unit we would have had regardless. There's no temperature difference now between floors. And with the ability to shut off the upstairs until bedtime, we use about 1/3 more energy to heat/cool 3.5x the space.
I grew up in a home built in 1954. It didn't survive a World War, but it's had its fair share of powerful tornadoes, blizzards, and the like and has been relatively unscathed since its inception (minus a new sewer line). With timber framing!
You can get a (not so great deal) loan with much higher limits.
Your pretax monthly income is $5833. 36% of that is $2100. The maximum a lender will loan you will result in a monthly payment of ($2100 - your current debt obligation).
For example, if you have $1k/mo in debt service, you have $1100 margin left in your debt-to-income ratio for a mortgage. At 4%, that's a maximum mortgage amount of roughly $145k.
If you have all $2100 to allocate to the mortgage, that allows a mortgage in the $300k range, varying with property tax and insurance rates.
https://www.bankrate.com/calculators/mortgages/new-house-cal... is a handy tool for figuring out how much mortgage you can afford. https://usmortgagecalculator.org/ is another good resource.
Either you have no down payment, you have a large pre-existing debt, or you have some other monthly cash drain.
at 70k annually you make ~5.8k a month.
36% debt to income ratio is normally acceptable, so you can afford 5.8 * .36 = 2.08k a month in payments.
That's a 400k loan at 4.5% interest with a 30 year term.
To be safe, and include insurance, taxes, other - you should be able to get a loan for 350k fairly easily.
That you're capped at 175 implies you have some other form of monthly debt in the $1100 range. Child support? College loans? Other?
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I'll edit this to add: I don't personally recommend taking the maximum loan you qualify for. It's a good way hamstring your ability to continue to save and invest, and it makes it more likely that an abrupt job loss or change of financial circumstances puts you in a bad spot.
I've looked at this data before and you are correct, but something sits uneasily for me. I think the thing everyone feels as "everything is more expensive" is that cost per square foot anywhere near an economic nexus has exploded since the 80s. The aggregate numbers that make the cost appear stable include tons of expansion in commuter zones.
My parents were successful professionals, as is my family now. But I know what my parents paid for a 2000 sqft house 10 minutes near an economic hub and a top 20 university in 1985 and that was easily affordable on just one of their incomes. My family now faces a situation where to buy something equivalent in terms of size+centrality both incomes are required.
Everyone wants to live in a prime central location with plenty of space and good schools. Who wouldn't? It's a naive reading, but that phenomenon feels very much like a simple econ 101 supply constraint.
I'd be very interested in some further reading on it if you're aware of any though.
To be somewhat more precise, what we commonly describe as "buy a house" is actually much more than that. I can buy an amazing house-shaped structure in rural Wyoming for $200k. What I can't buy for that price is a stake in an environment where I want to base my career and family life for decades. The latter is what is crushing millennials.
We can either build more housing - which is a solution in some cases, but has constraints because of the realities of physics, and/or some people choose to live in a less prime location. That doesn't necessarily mean rural Wyoming - it maybe means a less accessible, attractive, or high-fashion suburb, or a midrange city.
IMO, it's helpful to view first houses as a stepping stone to another house - that $300k house in a nice part of town close to transit is a lot easier to get into when you have $100k of equity in your smaller house in a less nice part of town. My perception is that a lot of first-time buyers tend to have this idea that they must either buy in the perfect location or nowhere at all, then find that they can't meet the prices needed for that location, then just decide that owning is impossible. I don't know how true that is, but that's how this continuing discussion on my generation's home ownership seems to come across to me.
If a slice of land can only be used to build a home for one family, and that slice of land is near things people want, it drives up the price of housing. If you were able to build a multiplex or condo tower on that land, the land would probably cost even more, but spread over more dense housing the price of land per square foot of housing would be much lower than for the single family home.
A second problem that's harder to address than waving a city planner's wand is infrastructure. Density requires transit (roads or otherwise), electricity, schools, sewers, water, etc. If municipalities don't plan for that it makes growing hard.
For example the UK's GDP per capita has increased by ~120% since 1993. Median incomes in the UK have likely doubled or nearly so since the early 1990s. A lot of that is inflation, just as is the case in the housing price increases.
The US median family income has nearly doubled since the early 1990s - before you account for inflation.
If you take the median new home sale price in the US, and adjust it at 3% annual inflation over the last 15 years, housing prices are not much higher than they were in 2003. There has been maybe at worst a 10-15% real increase in housing prices in 15 years. Factor in the relative scarcity of construction since the great recession, due to fear, and that one issue alone can easily account for 100% of all real housing price gains re the national median.
The primary problem of the last 15-20 years for the average person, both in the US and most of Europe, are that the central bank inflationary (currency & debt debasement) programs are outpacing the rate of income gains. The US saw an epic standard of living debasement with an extraordinary destruction of the dollar from 2001-2008. That's the US Government spending + Fed causing that harm.
Google these: Czech GDP, Poland GDP, Russia GDP, Colombia GDP, Bolivia GDP, Turkey GDP, Indonesia GDP
Now, did Czech GDP really increase by ~300% (lol) in seven years, from Jan 2002 to Jan 2009? From $67b to $235b. No, obviously not. You'll see similar hilarious GDP gains in most every other nation at exactly the same time - when priced in dollars.
That's a representation of the destruction of the US dollar over that time, by the US Government and the Fed. You can also see it represented in eg oil, gold and many other commodities priced in dollars. So you can imagine the destruction of the US standard of living that occurred at the same time, which has now given us Trump as President and an endlessly pissed off electorate. The US isn't unique however, France is partying right now to that exact same situation, decades of real stagnation against horrific government and central bank policies that are wiping out average people.
Good luck seeing wages keep up with the destruction the monsters in DC have been causing via real inflation. Most of the real estate price gains over the last 20 years in the developed world are fake, they're nothing but inflation. The problem is that wages are not keeping up with that inflation.
I know that in some countries renting is the default mindset and it seems like within the UK priorities are shifting among that age bracket. I'd assume that's partly due to them not seeing property ownership as a realistic goal thanks to the price of them.
As a Guardian opinion piece [0] points out: "Abandoning the hope of home ownership represents freedom for many millennials: it frees up cash that would otherwise go towards buying an asset into living in the present. That can mean renting a more comfortable room (or flat) in a nicer area, it can mean the difference between having enough money to go out or not, and it can even mean hiring a cleaner to make the overpriced rented flat a good deal nicer.
Home ownership is almost universally seen as a life goal, or a milestone of success. It needn’t be – not owning a home can be a real benefit for many younger adults. It gives us the freedom to move with work, and try to build savings for other purposes – insurance against getting laid off, for travel, or even for a 'fuck-off fund'."
[0] https://www.theguardian.com/commentisfree/2018/jun/20/millen...
And since most people prefer the flexibility of rent to the headaches of ownership, rents tend to be significantly higher than the non-equity part of the mortgage, so ownership is a more efficient way to invest and live at the same time, precisely at the cost of that flexibility of consumption.
I'm really skeptical of this claim without good market data, because whenever I've looked at this for my own personal reasons the headline monthly cost of renting is 10-20% higher than mortgage payments.
You have to allow for emergency expense, yes, but if you rent you also have to allow for emergency moving at 1 month's notice (assured shorthold tenancy, yay) and you can't modify the house or have pets.
Not to mention the pension aspects. If you don't own a house when you retire you're going to have to pay a big variable expense from a fixed income, so buying housing is a volatility hedge. Also you have to take pension income, pay income tax on it, and then pay rent.
In sane markets, yes. However, in markets experiencing property bubbles the opposite is often true.
I recently moved to a new city where prices have doubled in the last 10 years as a result of foreign buyers sending prices skyrocketing, and we currently rent a house worth $1.8m (valuations are public here). Assuming 20% down and a 30 year mortgage at 4% interest, we'd be looking at a monthly mortgage repayment of ~$6.9k with ~$4.8k of that being interest if we were to buy the house. Instead we rent it for $3.2k a month and happily save the $1.6k we'd otherwise be paying to the bank.
Friends look at me crazy when I tell them I have no interest in buying, but until the math is flipped and I start losing money by renting I'll happily let the landlord worry about maintenance and continue to enjoy my free time.
I graduated in 2013 and have lived in high (Boston) and growing (Portland, OR) CoL areas, my next move will likely be either Seattle or the Bay Area. Despite healthy savings for a down payment in a "normal" CoL area when calculating a 15-20% downpayment for homes that interest me and my partner it seems like we are on a treadmill, hustling harder and going nowhere.
Rising interest rates are a concern when shopping for a mortgage, but we'll be ready to transition our funds from the market to a HYSA when the time is right. I lost ~5% percent last year but don't have any intention of drastically changing my asset allocation unless something big happens in the next 6 months.
Approximately same security, higher yield than savings accounts. (Asuming you're not going through the gymnastics / risk to balance across reward savings accounts)
* VMRXX - Vanguard Prime Money Market Fund, ~2.4% yield, fully taxable
* VUSXX - Vanguard Treasury Money Market Fund, ~2.2% yield, no state tax
* VMSXX - Vanguard Municipal Money Market Fund, ~1.6% yield, no federal tax
* VCTXX - Vanguard California Municipal Money Market Fund, ~1.5% yield, no federal or California tax
I own my home, but if the market drops I will purchase another property and rent it out. Also will probably gift my kids a downpayment so they can get in the market too.
My point is, because there are a lot of people ready to jump in, I don't see a significant pullback coming
We're not trying to time the market per se since we're on track to reach our target for a solid downpayment and enough reserve funds to avoid being "house poor". The market has never gone down while I've been invested so this is all new territory, we're just trying to get as much info as we can before pulling the trigger, also there is some uncertainty regarding our long term location so that has a chilling affect as well.
I believe that any correction will be stabilized by this kind of behavior.
It's cool and internationally minded, like the seigneurial system in early French Canada but now.
They'd vote to reclassify their house as a crypt to permanently take it off the market, die surrounded by their possessions and ensure their children and children's children inherit nothing.
San Fran I cant comment on because I can only discuss rational markets.
Doesn't this imply a bad future? Also since San Fran is cold, I can see it losing its geographic appeal.
Cold compared to where? (Maybe your reference is Honolulu and Miami?) What part of SF are you talking about?
The lowest low temperatures of the year where I live in SF are among the highest anywhere in the country. We use a heater around this time of year, but it would be reasonably comfortable to go without.
It is sunny most of the time, I would say at least 250 days/year. The typical day throughout most of the year is “warm”: the kind of weather for wearing jeans and a long sleeved shirt (so the sleeves can be rolled up or down), but no sweater.
It is seldom “hot” (occasionally temperatures in the 90°F range), and average high temperatures in the summer are cooler than most of the continental US. We don’t use AC at all.
Again, which part of SF are you talking about?
* assuming you don't want to live in CA, Seattle, Portland, or other similarly expensive areas.
And regarding the closing conclusion. I really don't understand why many people are so against inheritance tax. Assuming it needs to be paid at some point, what better time than when you're dead?
Now they are against the tax for even the very rich because they desire fairness or they are afraid of a slippery slope decision.
From what I'm aware property is generally treated the same as, or more leniently than other assets. Your comment seems to be saying the opposite? Or am I misinterpreting?
https://www.ons.gov.uk/peoplepopulationandcommunity/housing/...
That (and frankly only that) is the real threat to one way house price bets - at least imo - other views gratefully accepted
oh ... developer hegemony ...
Anyone who is hitting their late 20s/early 30s and living in SF, for example, knows how many "going away" parties you end up going to of friends who've been here a few years, married/thinking of kids, and planned their escape so they have a chance of buying a home in less expensive metro.
This article wasn't about housing in the US, it was about housing in the UK.
I believe the US is one of the few OECD countries where housing is actually affordable, 3-4 times median income across the whole country IIRC.
These are our landlords. Making the older generation a class of rentiers who maintain their standard of living off the backs of the young. Want to buy? Too bad. How about you pay rent at the equivalent rate of a mortgage instead?
Below that, you have 20-50 year olds. Above that, you have 50-80 year olds. Let's pretend 80+ doesn't exist for the sake of argument.
Perfect random distribution would be 50%.
But it's not random. A 50 year old obviously has more wealth than a 20 year old (unless the 20 year old's parents die early and they inherit a wad; which is unlikely given that most don't inherit much, and their parents don't die when they're young).
I actually looked for figures like those given by the economist on a whim previously, but couldn't find any readily available data. It's nice to see them now. Too bad there's no comparison to what that distribution would have looked like in the past.
I can't find exactly the article I'm thinking of above, but these two have a similar gist:
https://www.theguardian.com/society/2016/dec/27/home-ownersh...
https://www.theguardian.com/money/2015/nov/17/generation-ren...
Isn't this the natural way of things? People work and raise children ("living off their backs"), become too old for modern jobs and start living off the backs of the young. Hasn't it always worked this way?
My experience is they don't. They want the money, but not the responsibility.
That's the only dead-sure way our for our generation (in Europe) to get into the same financial situation our parents have been in.
With the new tax changes + increases in the interest rate, the downsizing phenomenon will not make as much sense in the U.S. given incentives to hold onto the property and the inability to buy a proportionately valuable downsized house.
Regarding state property taxes, I think they are treated as a local tax - so it wouldn't affect NY or SF given that their state income tax is likely to be higher. Your point is true in other geos though.
The figure for 25-34 year old families is 25%. Twenty years ago the figure for the same age group was 45%; it was a clear majority less than 10 years before that. That's what the UK housing debate is about.
Rent and utilities are ~40% of my take-home pay, my car + auto loan + student loans are another ~20% (student loans being the largest chunk). I put the rest towards food, extra payments on my >4% student loans, and savings in a HYSA.
At my current rate of savings, it would take around 3 years to save up for a 5% down payment (looking at the median home price for the county I live in). Given that I'll probably want to take some vacations, will have to pay for at least part of my own wedding, might have an unexpected medical emergency, etc, I estimate I won't be able to save enough for a house until my late twenties at the earliest. That's also assuming that I won't drain my emergency fund for the down payment.
I know some people who job hop between FAANG and other large tech companies. Each offer is better than what they would have received as a raise should they have chosen to stay with their company. That's just a product of high demand and low unemployment, and also in some cases, being better at tech interviews than actually writing software.
I can't speak for renting in the bay area, but in my case, people cycle through apartments because either the landlord is attempting to jack up rent, not managing the property correctly, or to move closer to a new job.
I also can't speak for mid-30s, but the general sentiment in my circles around the mid-20s is that almost no one feels financially prepared enough to settle down, buy a house, and have kids. And that's mostly people in tech. The people I do know who have children or own a home (I don't know anyone my age who has both) are all in lower CoL areas.
We consider this a huge improvement from renting with roommates. The concept of being able to support children is basically a fantasy, fiscally speaking.
And we're among the fortunate professional class.
Prices will dip based on more supply which will start a price supressing feedback loop for a bunch of people hitting retirement age.
Simple as that.
http://www.farrellfritz.com/can-zoning-stop-property-owners-...
I’m a cynical gen-x (still with elementary school kids) who bought a suburban house before marriage. Of course it’s now almost paid off.
Why? What are the actual expenses that make it cost more than $1000 per month per a child?