A Growing Problem in Real Estate: Too Many Too Big Houses

Quick math for the rest of you out there: That means they paid 1000 in 2009 and now pay ~3500 in 2019.

Also, yes, I feel you there. Our rental agreement states a mandatory 10% increase if you rent from year to year. I've no idea why the company is this stupid though. The rents around us are falling or staying steady these days. So we just move to the block over every year and the old place stays empty for 3 months before then being rented out for the same or less than we paid. I'm sure there is some tax thing involved here that makes it so they don't have to care all that much.

Also, yeah, we don't have a lot, and we can just move houses in about a weekend in my 4-door.

That was part of the motivation for buying my first house. The rent was going up $50/month every 6 months, and the mortgage was going to cost only $100/month more than the rent. I figured in a year I'd break even, and in 2 years I'd be ahead.

I’d like to invest in rental property, but would never want to be a landlord. My mother rented out a house and the renter trashed it.

Not saying you're wrong but at least where I've lived, I could very easily find a new place to live in 60 days. I think usually landlords give the terms of a new lease much less than 60 days away from the end of the current lease, and most people usually don't decide to move or stay before they know how much their current place is going to cost.

There is no such thing unless your home is paid off.

If you have a mortgage and are hit by a catastrophic life event that leaves you without a job and depleted of your emergency fund, your home is gone.

The way to do it is really to find a small set of good, reliable tradespeople, give them your business for all your repairs and improvements, and pay them well. There aren't many of them, though, and they'll cost you. Finding that small set of reliable contractors is part of what your rent goes to.

My dad used to do a lot of the home maintenance himself. Sometimes it worked fine, and sometimes (like the time he tried to replace the roof himself right before a thunderstorm, without having a giant tarp) it was pretty disastrous. In any case, it's not really realistic in today's world (where you usually need two incomes to survive) with today's homes (which are giant, complex, and built to a labyrinth of building codes that you are probably violating when you do improvements yourself).

Personally I loathe doing any kind of maintenance work. I hate dealing with drywall, paint, wiring, pipes, and whatever else you have to deal with when maintaining a home.

Leaving my boots out isn’t worth half a million dollars and my spare time. I’m not muddy often enough to even consider where I leave my footwear. I worked in agriculture during college. It was literally never an issue.

My bicycle is in a secure storage room near my car and motorcycle. A security guard checks on them regularly, even when I am out of the country.

I have hobbies that I pursue outside my apartment. I even rent a garage with a friend for one of those hobbies.

Why does home ownership have to be made easy for most people? From where I’m sitting home ownership and “the American Dream” appear to be incredibly wasteful and not particularly appealing.

There’s a long list of things I would rather do than home improvements, regardless of how easy those improvements are.

Can’t we all just make the decisions that are best for ourselves?

I don't think for a minute that owning a home costs less month-to-month over renting - with maintenance and upkeep, repairs and new appliances periodically, it's probably a break-even at best. But, at the end of it in 20 or 30 years I can sell the house and have that money (to buy a smaller house, or move into something senior-citizen appropriate, or a condo or whatever). With renting, that's not the case.

It also helps that I live in the Midwest, where property prices are not insane. I just sold my first house (made almost $30k over what I paid 18 years ago), and now I'm buying a 5-bedroom, 3k sq ft house in a nice neighborhood... for $230k.

Is it for everyone? No. But there's no way I'd rent, at least not at this stage of life.

For example, "Social Benefits of Homeownership and Stable Housing" (https://realtoru.edu/wp-content/uploads/2014/06/Homeownershi...)

"Research has consistently shown the importance of the housing sector on the economy and the long-term social and financial benefits to individual homeowners. The economic benefits of the housing market and homeownership are immense and well-documented. [...] In addition to tangible financial benefits, homeownership brings substantial social benefits for families, communities, and the country as a whole."

(Yeah, I know everyone is going to hate the "NATIONAL ASSOCIATION OF REALTORS" bit. But the citations and such seem reasonable. An older version is at https://www.nar.realtor/sites/default/files/migration_files/...) "Reexamining the Social Benefits of Homeownership after the Housing Crisis" (https://www.jchs.harvard.edu/sites/default/files/hbtl-04.pdf):

"Turning to the policy implications, federal homeownership promotion effects have been at least partially justified by claims that homeownership creates better citizens, results in healthier neighborhoods, and provides a range of other social benefits. Thus, it is important to assess the validity of those claims. This is not to say that other good reasons for supporting homeownership do not exist, only that if homeownership is not generating the claimed social benefits, we should stop using them as a justification.

"The updated literature review presented above does provide support for several social benefits of homeownership. Even after taking self-selection and other confounding factors into account there is considerable evidence that positive homeownership experiences result in greater participation in social and political activities, improved psychological health, positive assessments of neighborhood, and high school and post-secondary school completion. The jury is still out, however, on several other claims including improved physical health, and both the cognitive abilities and positive behaviors of children."

If you can assume historical returns, renting is a financially superior choice. Well, assuming my math was correct. Both are big assumptions admittedly.

The reason is that when you buy, while you are effectively saving by having your money go towards your home, over the long term on average home prices don't increase.

On the other hand if you invest that down payment, it will compound.

Note that the result is not the same if you buy a place with cash and rent it out to others, because in this case you can reinvest your returns. However if you buy a place to live in, for most people they need a mortgage and their theoretical savings can not be reinvested.

Or in other words, O(c^n) is a superset of O(n) for c > 1.

You'll have property taxes as well, which could be meaningful depending where you live. I was talking to one of my neighbors the other day who has lived in his home here in Seattle for over 40 years and he told me he is taking out a equity line of credit against his fully owned home to pay the property taxes as they've increased beyond what his retirement income can cover.

Once the home gets older you get into more than just maintenance as well; you get into replacement. Replacing the appliances, roof, windows, mechanicals, etc can be lead to some very serious expenses. The same neighbor needs to replace his roof, which he also can't afford until he gets the credit line.

Property taxes on 3 bedroom place in san francisco are going to be at least $1,000 a month. Even when you've paid it off, it stays expensive.

Only for exactly 12 months though. After that, your rent could double for all you know, and there’d be nothing you could do. You can move, of course, but now you’ve been forced to upend your life.

I live in a rent stablized apartment, and I feel lucky not just because my current price is lower than market rate overall. But of course, that’s not a scalable economic solution.

But you don’t know what you are going to be paying in year 2,3,4,5 etc.

Our rent went up from $1300 in 2012 to $1700 in 2016. It’s now $1900/month.

Besides that, I don’t have people making noise all around me and everyone had the apartment mandated Comcast bundle including the wireless router where we had 10-15 wireless signals interfering with ours.

However, the reason I made my original comment is I feel that so often, at least in the US, the downsides of home ownership are completely minimized (I think people usually vastly underestimate maintenance costs, both in time and money) while the downsides of renting are blown out of proportion (the "you're just throwing money away" false comparison).

Don't know if it is still the case, but last time I was in an apartment (early 2000s) there were also limitations for Internet and Television. DirecTV was popular at the time, I was the first to put a dish in a bucket on the balcony. The apartment managers said I had to take it down and use Comcast. Fortunately, when presented with a printout of the FCC rules they reneged and dishes started popping up all over the complex... Which didn't do great things for the brochure :)

I'll give an analogy: my dad used to hoard toilet paper, preferring to "own" large stockpiles of it rather than just get it as necessary from the store. Why? Because he grew up in WW2, in an occupied country, and had to shit in the river and wipe his butt with stones. This doesn't even compute for my American-born generation: to us, the supermarket is always there, and if you need toilet paper you go buy it.

Similarly, if you can assume that another rental will always be there when you need it, there's no need to own. And in dense urban areas with lots of landlords, that's a pretty valid assumption. Somebody refuses to rent to you (which has happened), just rent from somebody else. I'd rather own financial assets like stock - which I can take with me anywhere, and which usually have a much greater monopoly position than the landlord - and then use the income thrown off by them to rent accommodation.

Would I be fucked if there were a financial crisis or breakdown in social order? Yes. But if I were to own a typical 1/4 acre suburban detached home, I'd still be fucked - because you're still renting water & sewer access from the city, electricity from the utility, Internet from Comcast, food from the grocery store, etc, not to mention that your ownership only extends to your ability to pay the bank monthly. If you want to actually be secure & independent, you not only need your own land with a sturdily-built home, you also need solar panels, well water, a septic system, and obscurity. And you need to own it free & clear with no debts.

A similar logic applies to people who take Uber instead of owning a car, or who pay monthly for a SaaS instead of buying software outright, or who get food delivered rather than owning cookware and cooking themselves. As long as they can count on the service always being available, it works.

I don't see how the risk of being evicted (is this something people worry about?) is any greater than the numerous possible disasters that could strike a place you own in ways renters don't have to worry about.

This kind of semantic babble only serves to cloud people's judgment. For some people, owning makes more sense. For others, renting makes more sense. Not sure what is hard to understand about that.

However, after doing the math I think I will rent for my entire life since it makes much more sense financially (much to my surprise)

At any point that I feel like it, I can pick up and move. Whether it is to a place across the street or on the other side of the country.

I wouldn't have nearly that much freedom if I had the misfortune of owning my own place.

According to Trulia[1] the median sale price for two-bedroom homes increased from $1.010M five years ago to $1.407M today, which corresponds to an annual return of about 6.8%. Assuming that trend continues, the actual spread would be more like -4.3% for ownership (2.5% cost minus 6.8% appreciation) vs. 3% for renting, or 7.3% altogether in favor of ownership. You'd only come out ahead by renting if you can find an investment returning more than 7.3% per year.

[1] https://www.trulia.com/real_estate/San_Francisco-California/...

If the cost were 0.5% I don't think it would be worth paying, that would buy a lot of seismic reinforcement.

It very often costs a lot more than $600 to maintain a home for a year. The warranty service only makes money if they can spend less than that on the home. As a result, the biggest and most profitable warranty companies are the ones that promise the most and spend the least.

What you describe does exist, it's called property management, and they generally take some %age of your rent.

Irony: one of the few reasons I continue to put up with the hassle of homeownership is that it affords me the freedom to play music as loud as I like, as late at night as I please, without irritating my neighbors.

YMMV in other places, but that's why we're in a non-walkable boring suburb with dumb, giant yards making the distance to the nearest pools and parks (and everything else) further than they need to be.

Yet, it's cheaper to live in the empty house than renting something smaller or getting into a elder facility care house.

obviously they hire people to maintain the place.

To be honest, I didn't even need 700 sq m to raise kids in. Some people are just so rich that enormous homes like that make sense to them. But then they are so out of touch that they don't realize that very few people even want lives like that.

Tools

2. As a status symbol

3. If you have kids (and grand kids), you want a place to host them all at the same time (and this location happens to be popular with the kids...)

They eventually came to the realization that they want a smaller place though...

That's not really relevant in this case. All of the neighborhoods mentioned are low density distant suburbia. There are few jobs nearby and little incentive for growth there for working people. Housing costs are already pretty low for normal-sized houses in this area.

The US is huge and most of it has very low density. Unfortunately, with the transition to a service economy, automated agriculture, and the outsourcing of most manufacturing, fewer and fewer jobs exist outside of urban centers.

So you get insane housing costs in the increasingly few areas where there are lots of jobs, meanwhile other areas just languish. For the price I paid for my small Cape Cod house here in Seattle, in the small town I grew up in, I could buy a 4,500 square foot 5 bedroom / 5 bathroom mansion on a lake with a pool, two kitchens, study, game room, theater, etc. I just couldn't find a job there that would let me afford it.

There's also the issue that house prices are insane:

> Earlier this year, the council banned a 1,590 square metre, £40m, mega-home

To some people, a "McMansion" is any single family house they happen to dislike. Those are the kind of things working-class people buy on credit. (Homes in the 1200sqft to 2400sqft range). These are basically cheap disposable housing, they are popular because all people have to have somewhere to live, and this is usually the cheapest possible housing available that's still slightly comfortable to inhabit.

This article is not talking about those. This article is talking about actual McMansions or just real Mansions, homes in the 5000sqft to 8000sqft+ range. They're like 2x to 4x bigger than a typical house (even when using American sizes for 'typical house'). No regular person owns these, you have to be entirely in the "wealthy" category to even begin to look at them.

The subjects of the article:

> Ben and Valentina Bethell spent about $3.5 million in 2009 to build their dream home: a roughly 7,500-square-foot, European-style house with a commanding view of the Blue Ridge Mountains.

> Robin and David Saltman moved from New Jersey to Ponte Vedra Beach, Fla., where they spent more than a year custom-building their dream house with a pool on the ocean.

> George and Diana Hambleton […] selected the materials for the roughly 4,200-square-foot house, including reclaimed barn wood and Wisconsin flagstone.

(Being able to buy ownership of a business, via stock or other means, is why wealth is concentrating in the first place.)

As one dies, so dies the other—they all have the same breath. Man has no advantage over the animals, since everything is futile. All go to one place: All come from dust, and all return to dust.

Free markets are nearly optimal for commodities, restaurants, and similar sorts of goods, as well as many competing small businesses.

They grind along for IP, utilities, and some sectors of education, as well as large businesses.

They break down almost completely for large-scale finance, real estate, medicine, and other sectors of education.

Curiously, much of this was predicted by Adams in Wealth of Nations (read his sections on real estate; they sound downright dystopian). Even more curiously, China has privatized all the sectors where free markets work, kept public all the ones where they don't, and their economy exploded. The US economy exploded with free markets when it was driven by essentially commodity manufacturing. As IP, finance, and real estate became more important, it began to fall behind.

A house, especially a luxury house, should be considered a purchase and not a store of value. The actual physical materials of the house only depreciate over time. Sometimes the underlying land can go up in value if it's in a desirable area, but that's not the case here.

This doesn't make sense?

Firstly, the point at which the capital was withdrawn from savings was the time the house was built - savings turned into a physical capital asset. That house has lost value, but that doesn't affect liquidity.

Secondly, there's a global capital glut to start with - that's why interest rates are so low and people are building McMansions.

But also because done the right way, it could help alleviate real hardship elsewhere.

However, from the point of view of the housing market they are comparable. They're both an annual cost to holding real estate... and in the UK it is very low.

In all countries there are plenty of older homeowners with a surplus of space. Most people don't want to move out of their home if they don't have to, even if it is now larger than they need. However it's even more so in the UK because the system incentivises people to stay put.

I agree with you that the UK needs property taxes to be paid for by the owners. This would help reduce speculation and encourage utilisation of the existing housing stock. But as another post has mentioned, objections include "think of the old people who are worth $1m+ in property but would have to move out because they have low income"....boohoo...

Property taxes don't necessarily fix the issue though, because the property value is usually re-evaluated on sale, so the property tax increases drastically at that point.

That is awful, why would you ever want to introduce such a regressive policy? Higher density construction generally costs more than low density construction. Each floor adds more cost because you need proper ventilation, elevators, stairs, etc. Therefore an apartment will be taxed more despite having the same number of square feet/meter. Despite this, apartments still make sense economically if the land value is high but if you're burdening them with yet another heavy tax then people will shift to single family homes instead.

Then there is the fact that you should never tax someone for improving their house. Oh you installed solar panels on the roof for $30,000? Lets tax that! The solar panels are no longer a net gain. Homeowners no longer have a reason to improve their homes. Imagine someone working on his house in his free time. At that point you're taxing someone's free time. How backwards is that?

Stop taxing property value. It's regressive. It's a moral hazard. It doesn't work.

If you want to tax something, then tax the land those buildings are sitting on.

Bonus content:

And since for some reason grandmas are the most important members of a gentrifying city we can even take a look at what happens when they get priced out from a property tax vs a land tax.

Grandma sells her overpriced home because she can't afford the property tax: She can't move into an apartment because the apartment is taxed even more than the home she left.

Grandma sells her overpriced home because she can't afford the land tax: She can move into an apartment because the apartment is taxed less than the home she left.

(what I've seen way too often)

It’s also not new - it’s been going on since the end of the Second World War pretty much.

I'm kinda curious what you mean by this?

I just did a brief (didn't look at all areas) google maps tour of the area, and while I know that isn't in any way the best to assess an area, I was struck by a few things:

1) Things seem pretty quiet - little vehicle traffic, but also few people walking about, even in the "city proper".

2) Buildings seem fairly diverse; some newer, some older. Most in seemingly decent shape; a few in need of repair.

3) Some interesting shops and restaurants (saw one small restaurant called "Planet Bollywood" - heh).

4) Housing neighborhoods and such seemed and looked nice.

I guess what I'm trying to get at is that I didn't see anything that looked like "blight"; maybe I didn't look in the right areas, or maybe my concept of blight is different?

When I think of blight, I think of empty lots with weeds chest high, trash dumped, broken down and/or burned out buildings, etc - stuff in extreme states of disrepair or needing condemning and removal/cleanup.

I didn't see anything like this; but again, I didn't look everywhere. Where I did look, the worst I saw was perhaps some buildings that needed some basic upkeep and maintenance (at least, from the outside).

It really is a lack of houses. It's true that some residential buildings are not being used to full capacity. It's true that we are far too centralised around London in some respects. However, those are still relatively small effects compared to building ~100,000 too few new homes every year for decades as demographic and lifestyle changes are rapidly increasing demand.

You're right that the planning system really doesn't help, nor does the ease with which the big housebuilders routinely manage to bypass it so they can build and sell the high-end, high-profit properties without providing the balancing low-end, lower-profit ones and supporting infrastructure at the same time.

It also doesn't help that our education system has pushed people away from practical trades. There are nowhere near enough good independent tradespeople for individuals to conveniently build, adapt or extend their own homes instead of buying the over-priced, mass-produced junk that big housebuilding firms typically offer these days. In some places elsewhere in Europe, people designing and building unique properties for their own needs happens all the time. In the UK, it's still rare enough to be a conversation starter if you meet someone who's actually done it.

Of course the problem now is that a significant number of people have treated property as an investment vehicle, intentionally or otherwise, and stand to be financially ruined if there is a big crash. Meanwhile, prices have literally become prohibitive in many cities and other relatively popular locations for the younger generations who are flying the nest and looking for their first home or wanting somewhere a step up the ladder to settle down with a partner and perhaps start a family.

The only way I can see to cool the market without causing economic disaster is a slow erosion based on building a more realistic amount of housing stock so market rates naturally fall over time. But of course the big builders and mortgage lenders really don't want that, and the system is stacked against the little guy who wants to go independent for the reasons above, so without disrupting at least one of those groups, nothing changes and the problems just get worse.

Council tax actually is relatively progressive when you consider that council tax benefit is also part of the system. Very few areas have a large number of band H homes - parts of central London do, but even there you might be surprised how small a number you’re talking about - there are only c15k in the City of Westminster for example, the borough which includes the whole of Mayfair and Belgravia.

Checking the numbers, Bethell is 78 so bought / built a 700m² house at 69. Their monstrosity of a house has 4m ceilings from the pictures. The Hambleton built their house at 82 and 68.

People have a lot of kids there.

Additionally again, education outside of pure learning like we're limited today on the internet will be more immersive with VR/AR and your need to go to a physical location will differ.