How housing became the world’s biggest asset class
economist.com
economist.com
There's a lot of information, history and a broad perspective on how things work in various countries.
Housing politics is key to so many things:
* The economy - allowing people to live in productive places is a benefit to them, and all of us, because they put their talents to more productive use. California, where the housing crisis is worst, also has the highest poverty levels of the US when cost of living (which is mostly housing) is factored in.
* The environment - cities are more environmentally friendly than sprawling suburbs.
* Equality and "social justice": the history of how people of color have been frozen out of the housing 'ladder' in the US is not as well known as more blatant and vicious examples of racism, but it is a huge reason why certain disparities have persisted.
I'm not sure that is true, 50% of the world lives in cities but cities produce 70% of the worlds emissions.
https://www.citylab.com/life/2012/04/why-bigger-cities-are-g...
I think in the statistic you cite, 'city' includes both the urban part and the sprawling suburbs. You'd also want to compare apples to apples: someone living a very green life in a "western" city is still likely to live a more carbon-intensive life than someone doing subsistence farming.
Instead, San Fran is one of the NIMBYest cities on the planet and so all those people are forced to come in from further afield.
I prefer the more European style of 2-8 stories, like here: https://goo.gl/maps/poabxNny8r8Jq46v7
But I think the broader point stands.
4 floors is mildly inconvenient on foot but 8 floors is becoming a real chore for people over 40.
Oh, wait!
Rome is a city with less than 4 million inhabitants, they become almost 6 millions during a normal workday.
New York City may produce more emissions than Papau New Guinea. But I don't think moving people from Manhattan to Vermont would lower emissions. Just the opposite in fact.
Further, the definition of "city" can include a lot of sprawl in places like Houston, Phoenix, and even Beijing and Tokyo.
Even further, can you cute your source? I'm skeptical of both numbers. And it would be very easy to cherry pick either side of these numbers.
For example, a lot of concrete is pored in cities to build mid/high rises. Concrete produces a fuck-ton of carbon. Is this amortized over the expected lifespan of the building? Where is the carbon cost accounted for? A lot of the carbon is emitted in rural areas. But is it all just lumped into the city because that's where it's used? That seems unfair. A lot of rural wealth comes from natural resource extraction used to build and power cities...
Most power plants and factories are outside of cities. Yes, they mostly power the city and produce goods for the city -- but their providing a lot of income/wealth to rural areas...
Is it the case that you get to cherry pick which urban center is a real city based on how green it is?
I wouldn't be surprised if Dallas is "less green" than small towns in Italy, even adjusting for income/wealth. I would be surprised if the same is true when you compare to inner Tokyo (Shibuya).
One thing that would be interesting to know -- high rises can use a ton of energy to heat & cool. And the taller they get, a significant portion of the building is just stairs and elevators. I wouldn't be surprised if density gets "less green" at a certain maximum. Manhattan & Shibuya could very well be past that point.
Sure, but how does that compare to the energy needed for lots of smaller buildings, which can provide the same floor space to the same number of people? I suspect the high rise is more efficient: it has far less surface area on the outside. The more surface area that borders the unheated/uncooled outside, the more energy you need to expend.
>And the taller they get, a significant portion of the building is just stairs and elevators.
Again, how does that compare to smaller buildings? Once you get past 1 floor, you're going to have to use space for stairs and elevators. You can't have a city with 1-floor buildings; the sprawl would be ridiculous.
>Manhattan & Shibuya could very well be past that point.
Have you been to Shibuya? Buildings really aren't that tall in Tokyo, especially in Shibuya. Remember, Tokyo (and pretty much all of Japan) is a highly tectonically active area, with frequent earthquakes. Manhattan has no earthquakes and has a huge layer of bedrock under it; it's basically the most idea place on the planet for building skyscrapers, except for being close to the sea (because of hurricanes, but these are rare because it's pretty far north). There are some reasonably tall buildings in Tokyo, but nothing like the 100-story behemoths in Manhattan.
50% of population: https://ourworldindata.org/urbanization#how-urban-is-the-wor...
70% of emissions: https://www.c40.org/why_cities
This is based on the concept of a "consumption emission", which is an interesting concept. The point being that cities (especially western cities) have seen their emissions drop due to de-industrialization, but consumption has increased (hence your statement about carbon footprints correlating to wealth/income). To say that cities impacts are smaller when they just outsource all of their carbon impact is disingenuous.
GGP suggested that suburban living is greener. How does the 50%/70% support his point if cities include the suburbs?
Of course, they do not, but still....
Everything is near and there is public transport.
So how they would use more carbon is very hard to see.
This trope of environment === greenhouse gases in the atmosphere is dangerous.
The housing crisis is relative. It's a crisis when your relative moves in.. All joking aside, _every_ major metro has an affordable housing crisis.
Tax land, not labour.
And then if you're really feeling like reform:
Tax assets instead of income for individuals, and tax both for corporations. Only tax income for small businesses.
We should have a flat consumption tax for all. And a single one time child tax. It is in effect a double tax, but still will be lower impact than the cacophony of various taxes we have now...it can be used to fund education. Currently funded by property taxes.
a single flat consumption tax will stabilize economy. I suspect that it would also curtail consumption and carbon foot print. A tiered consumption tax might be punitive but not a terrible idea even though it ought to be a back up or a emergency measure during crisis situations.
Food, shelter, medical and educational expenses should be taxed after a minimal deduction.
Try a lot of thought. Like Henry George. Ricardo. Einstein. Friedman.
And then reconsider.
Esp re what those people have said?
I suppose you have no opinion? I see no point in continuing this exchange. Cheers.
anyway, i suspect your "idea" is bad from the start... you say tax consumption... AND THEN tax the (just?) born... do you even darwin bro?
You are giving the disenfranchised the shaft from the outset.. who do you think would like this? who do you surround yourself with to get to this line of thinking? Rhetorically, I'm done.
Perhaps if I expanded that as ‘pay taxes for the consumption of your own child’? And pay a fee before having kids. This could be in the form of a community trust or an investment fund at county, state or country level.
We pay different kinds of taxes but children are negative taxes. As in, cost of rearing children is mostly subsidized by the govt with taxes.
My suggestion was that every consumption good needs to be taxed. When income, property, inheritance etc are not taxed and only sale of goods is taxed, everyone pays a tax according to their lifestyle.
Example: a sleeping cot is taxed much lower than a yacht or a house. Parents save and pay for their children’s education. The retirees live off retirement plans.
In my last sentence I mention that food, shelter, medical and education are only taxed after minimal deductions. Which means, everyone essentially gets a kind of UBI for essential needs before their consumption in these survival categories is taxed.
Obviously if one is ‘disenfranchised’ there is charity. Currently we consume too much using credit lines and debt. The key is to restrict consumption and eliminate waste/scarcity...have more local governance than regional governance.
That would cause an incentive to consume and a disincentive to save. I don't think that is the direction we want to push our financial system in.
Farming would already be discouraged if farmers could build skyscrapers over their fields and collect the rents from those buildings. Since nobody wants to live in a skyscraper in the country, this never happens.
If it is discouraged - with taxation, that land will be yielded to more productive use.
Nobody creates land but somebody gets to "tax" it. Either we can let that revenue stream fill up government coffers or it can go into private pockets. It's our decision.
Well put. If I suggested privatising air and that you needed to pay the owner to breathe it, that would be seen as ridiculous, and rightly so. Meanwhile, land is an equally natural resource and equally essential to human life, but private land is just accepted as "the way it is".
People in fact do pay for 'special' air in the form of air purifiers, air conditioning, heating, etc.
Land is both scarce and unsubstitutable.
IMO land ownership is a big negative externality, as others can't utilise that land and land is a finite resource. As with all negative externalities, they should be taxed heavily.
If you build a 5 storey house on it you pay the same amount as the guy next door who has an asphalt car park.
In my city (and several others) you can overlay a current map of "above/below poverty line" on top of a 1930's map rating neighborhoods by "risk".
Those rated low quality/high risk due to "threat of infiltration of foreign-born, negro, or lower grade population" in the 1930s line right up with the largest swaths of below-poverty-line neighborhoods today.
https://www.citylab.com/equity/2015/04/after-nearly-a-centur...
Back in 2007, there was a report of some guy spending an astronomical $800,000 USD for a house somewhere outside of Silicon Valley, like in Tracy, I think. This was bonkers back then.
But now, nobody bats an eye anymore, and thinks it’s perfectly normal to spend that much on a house in previously economically depressed areas.
QE has impoverished us all (except for the fat bankers).
What is the black swan event that will finally trigger the stock market melt down? The price of SPY has gone exponential. A look at it, and it appears to defy gravity. But yet, everyone is celebrating on the streets it seems, as if the good times will finally last forever.
if you're looking for a 'black swan' economic collapse event, look for a lot of outstanding debt and the possibility of an interest rate spike on that debt
Student Loans. You need to make as much money as a doctor to afford housing. So did everyone become a doctor in the past 10 years?
Personal Auto Loans, although this seems rather localized.
Business Loans used for stock buy-backs, so executives could pay themselves a nice bonus. Can some of these businesses really pay back those loans?
Municipal bonds used for funding construction in areas with no economical viability.
Plenty of people who aren't doctors can make doctor money now. Just look at tech.
> Plenty
Plenty of tech folks make north of six-figures and often do better than most, but neurosurgeons make $800k, and plenty of mid-level medical types can pull $300K+. I personally know a dentist making "in the ballpark of 400" (his words) in the Washington DC 'burbs.
There are certainly IT/CS gigs paying north of $600K -- they're discussed all the time here on HN -- but those don't really exist outside of SV and maybe a handful of other areas, and generally require a pedigree that, while not a Med School, are still fairly non-trivial.
Your ITT-Tech trained Active Directory Admin isn't going to make anything near GP or Dermatologist money -- most tech, even with real degrees and certs, wont.
Lots of doctors make under $200k. I would say the majority do, because the majority don't own their own practices (partly nor in whole). Most doctors in the US are just salaried internists.
I think more than 10% of SWE with experience in the US are making that much or more when you account for compensation that is not pure salary.
I live in a big US city. We have one large tech employer which pays engineers ~125-150k (they max out at 200k for principals in specialized areas). At almost every other company in town, the going salary for a developer is 80-100k.
The latter type of job is far more representative of engineering jobs in the country. We told everyone "go do STEM and make bank at Google!" Meanwhile there aren't enough of those top-end jobs to go around, and a lot of folks who didn't go to a name-brand university or have friends in the right places work for (comparatively) little money.
An Anesthesiologist makes over $250,000 annually. Try making that as a senior tech.
A Physician’s Assistant makes over $170,000 annually. Easily beating an average senior software engineer. And they’re not even medical doctors.
Nurses make over $125,000 easily, especially with their mandatory overtime schedules baked into their union agreement.
And here’s the kicker: because women make up a larger share of medical professionals, then you have a situation where doctors end up marrying other doctors or nurses. Which is good for them, but guess what they do? They buy up the expensive houses. And then they buy their second or third houses, thus pricing normal people out of that also.
Maybe in California, but most of the US is not union and most nurses do not make anywhere close to this. $30-40/hr is much more typical. That salary is far about the top 10% of nursing salaries (which is $106k).
Only in a handful of cities.
Also, the income difference is less than a factor of two for the same person. 57% of people in San Francisco have a college degree, versus 45% of people in Kansas City. So part of the difference in median income is due to the difference in education, not the difference in local salaries.
That’s not a thing. The debt taken on for a stock buyback would depress the stock price as much as the purchase would increase the price.
I purchase multi-family rentals to be short the US dollar. My assets slowly gain value (while cash flowing) as the Federal Reserve continues its stimulus efforts (currently called Not-QE), which in turn devalues the currency.
Rents are unlikely to decrease substantially, even if house prices do, since they've historically been much less volatile.
If rates go negative, house prices will likely increase A LOT. You're in for a HUGE windfall.
If rates stay low, house prices will likely track inflation. Even if they track inflation, you're leveraged. You still have a very high yielding bond.
If rates go up, you're stuck with the property, but you still have a decent yielding bond.
Another merit is positive cash flow is now. If I were to continue to enjoy financial deals like I negotiated for our first 4 doors, $600K is all that is needed for control over enough assets to bring in $8K a month in cash flow.
In the US, currently cash flow/investment returns can be received with a lower tax base than earned income, again making it more powerful. Subject to change, of course, but I work with what exists now and hopefully let the future work out how it will.
Well, it is obvious when it will crash. It will crash when it becomes less worth it for people to pay those prices.
When other cities become hot-spots of high-paying jobs, people will leave San Francisco for those jobs and the price of housing will decline.
But everything bounced back. With the support of TARP and other government assistance programs.
That's the difference here: The recovery.
We have shifted to an economy that increasingly favors rent seeking in every field and land is quintessentially that. Even without that trend, land reform meets enormous resistance under any circumstances but given that shift, even more so now.
Note that we know people will endure housing conditions seen everywhere at all time up until the 20th century, and unless the people hurt[1] by this do something remarkably effective, that state of affairs is guaranteed to return: there is no invisible hand guaranteeing even one family per room let alone per unit.
[1] disproportionately wage earners and the young but also all paying rent and mortgage interest.
So why are homes so expensive in urban areas, including now tier 2 and tier 3 cities, and not just NYC, DC, and SF?
Look at our population growth. In the 'good times' of the 1960s, we had 180M people. Now we have double that in two generations, or the difference between Boomers and Millenials approximately. In 1960, places like SF and Arlington, VA weren't rural farmland, they were still urban areas. We now have higher density in the large cities due to jobs having moved there, so we probably have 3x the number of people desiring homes in the same area as we had in 1960.
And families are smaller now. In 1960, you'd have a family of 5 in one house. Now you need two houses for the two 2.5 / person families.
So essentially we've probably got 4x the demand for the homes close to working centers, along with rising base prices due to far more women in the workforce. Add perpetual low interest rates, underreported inflation, and I'm surprised houses aren't at SF levels in every city yet.
https://en.wikipedia.org/wiki/Demographic_history_of_the_Uni...
The cost is directly related to the fact that it is defectors illegal to build new homes in the most economically vibrant zip codes.
Go back to the 70's, San Francisco was losing population. By the 90's it had dropped from a peak of 775K (1950) to 670K (1980). It's now ~880K, so only 14% higher than 70 years ago.
This is probably true. In the short-medium term housing will not be allowed to crash for the simple reason that homeowners vote. The soundness of the economy in general will be sacrificed to pump house prices.
This feeds a feedback loop that makes housing an even more attractive place to park capital, further driving up housing costs.
Of course eventually this gets so unbelievably ridiculous that we have some kind of revolution. Look for $2m starter homes before that happens.
There are two things you can influence either supply or demand. You're reducing supply but keeping demand the same or allowing it to grow. The answer is to increase supply and reduce demand.
The thing is, the places that are supply constrained have optimized themselves into being in extreme demand. They know they don't have enough housing but that doesn't stop them from building more commercial real estate to enable new businesses. Those businesses could have been founded somewhere else but why bother when the most suitable city still has enough room for you (but not for the employees)?
I don't understand why there aren't more employees demanding to move the company out of the state.
Saying land/housing prices are outpacing many other productive investments seems like a stretch. If you look at the performance of large US REIT ETFs versus market indices like the SPY the rent seeking behavior by real estate investors doesn't look so profitable.
And beside serious investors, for the typical individual, a home loan allows them to leverage funds that are unimaginably beyond what they could raise for investment with vastly more safety. Not that I suggest it would be better if half the population could and did buy stocks on unlimited margin or the like.
I just want to point out that even on this one particular issue, we gradually made policy and decided and made it such that one kind of loan is vital and the other insanely too risky. That at this point, this is so ingrained that it's hard to imagine any alternative. But I suggest we should probably try.
[1]: https://investor.vanguard.com/mutual-funds/profile/performan...
[2]: https://investor.vanguard.com/etf/profile/performance/vnq
This is a very important point. Buying real estate is the most accessible way for an average-income household to get leverage - at least in the US where heavily leveraged financial products like CFDs are not easily accessible (at least to my knowledge). But in my opinion this another argument against investing into real estate because lots of uninformed buyers are in the market with increasing amounts of leverage leading to rather dramatic boom and bust cycles (like in the housing crisis of 2008).
you are wrong and you do not know history. it will crash and then it will recover and then it will crash again. real estate is cyclical.
States, money and firms are now in a tight gridlock. Way more than before.
So will just pumping out more money. Fear the day "they" decide to flood the real market with money and not just stocks and shares.
Homeland wars do amazing things to economies.
The median first home purchase is at 33 currently.
Combine those two facts and you have demand for a first home peaking between 2035-2040. Add on top of that the older boomer generation peak dying or otherwise vacating homes and the effects of significant immigration backpressure and you have yourself a housing crash which will likely get priced into the market before these peaks happen.
That could well be round two as it is far enough in the future, the first round being the current global political breakdown and long running bull market reaching a tipping point.
In high cost areas most of the value is in the land, not the house.
The key is: 1) companies first (with tax incentives they'll do or move anywhere). 2) jobs next 3) Where jobs go, people follow.
When will it all end? Not sure, but the way I see it, there's 3 ways things can play out...
1) It will not end, and we continue to accept runaway inequality, where housing/healthcare/education etc. become more and more unaffordable in comparison to normal wages. Only owners of capital will be protected (i.e. stocks/assets continue to get propped up).
2) We somehow turn ship and slowly fix our fiscal problems (not going to happen so long as we have deficits). This would mean accepting economical stagnation for a long while to essentially pay off our accrued debts
3) We let things start crashing
So far 1 is playing out...
US home ownership rate is 65%, gotta be quite a few winners in there besides the bankers.
> In 2018, 396 homes were sold [in Silver Lake, Los Angeles], with 60% not intended to be primary residences.
[1]: https://www.latimes.com/opinion/story/2019-10-23/airbnb-shor...
And you can’t just tax them on it, because they’ll just push that as increased rents on their tenants.
They must divest, and release the housing unit, and sell it to someone that will actually live in it. And they cannot be allowed to do some other shenanigans to circumvent the spirit of this law.
Imagine if entire neighborhoods could create such ordinances. Prices would surely begin to trend downward, providing access to home ownership in desirable areas, allowing those with normal incomes to purchase starter property and begin families.
I wonder why this isn't ever discussed.
How do you even purchase a starter home, when the starting price is $700,000?
And in the meanwhile, you have to continue to pay your $3,000/month rent.
The only sustainable way to deflate housing cost is to increase supply.
But for the rest of us, it has made life a living hell on Earth. A survival of the fittest.
Life is now a reality of Mad Max sitting behind the steering wheel of a Prius, driving for pennies a day, if you can even make a profit after all the hidden expenses.
Life is now a fierce competition for resources, where you can’t even make your rent, or afford to start a family, or even to have children.
Meanwhile, the rich just laugh at you: “Here’s a dollar for your tip, see I believe in trickle-down economics.”
The lucky ones were those in the right technology companies, or those with the right medical or professional certifications.
Because of QE, there is now more homelessness. Even with people who shouldn’t be homeless.
The rents are much higher, and have kept pace with expensive mortgages. The landlords raised the rents just because they can. The rents in some areas can easily exceed $3000/month. This squeezes the rest of us that couldn’t afford a house before 2007. And after the crash, nobody was getting any mortgages, after they locked down all borrowing. And now, the higher rents eats up our earnings, that reaching that 20% down payment is an elusive dream. How do you even save for 20% of a $700,000 house ($140k), while paying your rent and bills?
The price of a house seemed to have gone up on average about $50,000 per year, for the past 4 years! Can most people even save up this much money a year? The same house that was listed for $500,000 just 4 years ago, in 2016, is now listing for $700,000 today. And there wasn’t even any renovations done on it.
Because of QE, the interests are so low, that it jacked up prices for everything: housing, stocks, education.
If you had $100,000 sitting around in cash after 2008, and was daring enough to plow that money back into the stock market and sit on SPY, then today, that net worth would be $270,000. Not bad, you would’ve made a cool quarter million.
The problem is that the capitalist class had $10 million dollars sitting around in cash, and if they aggressively plowed all that money into stocks, then they would’ve netted $27 million instead!
And some may have done that with their own money. But the way the capitalist class did it instead, was through their companies, with the share buy backs. They took public money, easily printed by the Fed, at low interest, to buy back shares to reduce availability, to force a supply and demand run. The stock goes up, it looks nice on the quarterly balance sheet, and they pay themselves a very very nice bonus. Which they then use to buy up real estate assets, in the form of LLCs and special corporations. They were the fox guarding the hen house!
This is the key thing that is driving inequality. And with the refusal of cities and governments to build more housing, to meet public demand, then it forces this situation on the rest of us. The rest of us are forced to compete, when the game is rigged against us.
So to the question of who are the winners in this QE fiasco? It is certainly not the normal people. It is the capitalist class. The rich, the wealthy, and those that own the corporations, and make all the rules.
When will the normal people rise up with their pitch forks and torches, and realize what the capitalist class has done to them?
Oh well, I guess they’re too busy drowning their sorrows in their iPhones, Facebooks, YouTubes, and instagrams, to bother seeing what has been done to them.
Nobody thinks SPY is going to keep increasing forever. The conventional wisdom is we're looking at a recession in the next 1-2 years.
Another way to look at it is that a gambler can’t do anything to affect the roulette wheel, but a recession can be brought about or deepened by all sorts of human action.
QE has been horrific for banks. Net interest income has collapsed. it's less pronounced in the US, but in Europe where central banks have taken rates to 0 (or below) bank profits have all but been wiped out. Take a look at the share price of any European bank since 2008
Think about the Euro crisis as another example. Zero rates and ECB buying all the sov and fin debt bailed out banks that would have gone under.
If 30% of the banking system collapsed, then surviving institutions would probably have profitability consistent with historical rates.
But keep everyone alive, and bring rates to zero, and you squeeze margins both with excess competition, and compressing the diff between the rates they lend and the rates they borrow.
When the population decreases.
On top of that, I anticipate growing displacement due to climate change. This is not the time to slow down home construction.
I mean I'm sure some wealthy folks are but it's definitely not something that you "wouldn't bat an eye at".
The difference is: Even if no one can afford housing: There doesn't have to be bust. For example: if there's only 9 houses on the market, there only need to be 9 people willing to buy in at that price. So, essentially, with a severe housing shortage, only the richest 0.1% need be able to afford the houses on the market and they can still maintain an extremely high prices.
Meanwhile the coping mechanisms are in full effect:
1. longer and longer commutes causing ever more CO2.
2. multiple generations living together
3. roomates bunking together, not having families, not having kids
4. decreased spending in other areas as every last dollar goes to housing
5. ever more louder cries for rent regulations which makes it even hard to build more supply thus resulting in a death spiral.
The answer to when the big crash happens is in the population data. At some point population starts to decline.
As with everything, the boomers will ride in the sunset with bags of gold. In 30 years housing will be fundamentally different in the US and just about everywhere in the Western world. Outside of the major cities it won't even be much of an investment anymore.
If you buy a house today for $500k on a 30-year you'll spend close to a million dollars before you own it if you ride the loan out, and adjusted for inflation, you will probably take a loss on it. Possibly a large loss. Unless we see mass immigration the market 30 years from now is simply going to be smaller.
What's the basis for that conclusion?
Just like the last 30 years, some markets will decline, while others will appreciate. Not sure why you think things will be so drastically different.
I think the boomers will trigger a sell off but as long as population grows due to immigration, there will probably never be a glut.
There is no indication I can see that these trends will reverse. If anything it seems like the rates of decline may accelerate more rapidly like they did in Japan.
Perhaps when the boomers die off the next generation will open the borders so someone can pay for their entitlements. Perhaps.
It really depends where your $500k house is located. "Location, location, location" is the saying for a reason. If your home is in an area with continued economic opportunity and growth and it has not been destroyed by climate change related severe weather events, it doesn't matter that much what the macroeconomic housing market is doing; your property will be in demand.
While certainly the US population is aging and slowing in growth rate, I have not seen any predictions for a population decline by 2050 or even 2100.
You are right that further urbanization is expected and buying outside of cities may not be a good investment.
If inflation doubles to ~5% (which is closer to the historic norm), interest rates will also rise to ~6% (again, a historic norm). Suddenly, people who could swing an $800K mortgage, can now only do $600K (keeping payments the same). That will have a huge impact on housing prices.
I doubt it will crash (50%+ drop in price), but no doubt we'll see some sort of slow burn, where houses drop 10-20% over a 5-10 year period.
Once income catches up with prices, we'll see a recovery.
What is with Americans who continually fail to understand that there's a world outside of America?
The link is about global housing, not just the US. That means an explanation can't rely on US-specific excuses.
What's your explanation for how US quantitative easing drives up house prices in Sydney, Hong Kong, and London but doesn't affect Singapore, Berne, or Munich?
QE is not a US-specific phenomenon, either in origin (other central banks have engaged in it) or in effect when the US does it (given the US dollar’s global role.)
<<cries in a Hong Kong dialect of Cantonese>>
1) Realize that this was back in 2007, when most people only dreamed of making $100,000 USD annually.
2) And housing prices were exceeding $500,000 USD in most of the state of California, because of all the shady house flippers borrowing on the ARM (adjustable rate mortgage) loans. So $800k was a significant percentage higher than most already over-priced mortgages at the time.
3) In order to qualify for a normal 30-year fixed-rate loan to buy a $500k house with 20% down, then you’d need to make an annual salary combined of $120,000. And since most people didn’t make that much, then you’d have to be dual-income to afford that mortgage.
4) And there was a saying at the time: House rich, but home poor. Meaning that these people bought an expensive house, but they were too poor to fill it with any furniture.
This is already having a huge impact on working in western Europe, and the more prevalent it becomes the more normal it will be to work from home, reducing the demand for proximal residence.
2007 was not about high housing prices. It was about ridiculously easy mortgages and everyone was able to afford a house outside their genuine payback limit.
The symptoms can appear similar, with different causes.
Tech people crying foul about "the bankers" making them poor them is hilarious. Easy money is big reason the industry is booming; it's made you rich (by any reasonable standard).
With the caveat that in the short-term, government laws and ordinances can affect that.
Not sure how that relates to the Ricardian theory, but while prices are technically "driven" by the people paying them, this does not seem like a useful observation to me. This isn't "if you keep buying every next more expensive iPhone, Apple will keep raising the price". You can't just not buy/rent property. It is a basic necessity. While prices vary between regions, that is still hardly a choice. Most places, jobs are scarce and transport is a disaster - you can't just go live somewhere else because your job is here (and most jobs are in high-rent areas).
This means that no matter how high* prices get, people will have to find a way to pay (even if that means basically starving for the rest of their lives) and landlords are aware of this, so they keep raising the prices with the argument that "people clearly have the money, so it's fine".
In theory, it makes sense for a finite resource to increase in price with increasing demand, but prices are increasing a lot faster than demand is and housing isn't as finite as land is (we can build up). This points to the supply side (landlords and developers) being the problem, not the people just trying to survive.
/s
eg: living in fancy inherited house with no mortgage but way out of your price range based on income. The "real" cost of the house then isn't what it's worth but what your taxes come out to be...
Someone with a house they pay low taxes on but is worth several millions is unlikely to sell so housing prices will keep shooting up and exclude many people who simply weren't lucky enough to be born to richer parents.
The rest of us will be renters.
I'm sure substantial transfers do happen, but I've never met anyone that was so lucky.
So the transfer is from boomers to doctors, banks, and schools.
But I agree that in the anecdotes I hear about, kids of boomers rarely get property free-and-clear.
Eh, I did some work for nic.org. Assisted living is a real estate game, and the market reports are identical to apartment market reports. The medical bills go to Medicare and private insurance. Doctors aren't getting rich off Granny reverse mortgaging her house. Unless said doctors own an assisted living facility, preferably in one of the 30 major MSAs. I vaguely recall Florida being particularly attractive.
It's been a few years since I've looked at it, but if you needed nursing home care, the typical advice was to spend down your assets in a hurry to qualify for medicaid. And in some circumstances, medicaid could put a lien on your home for post-death repayment of services.
The overall median would include 20-30 year olds that have only a deposit, 30-40 that are still paying it off, etc. They're not handing down anything for another 20+ years.
On the flip side, people late in life can incur immense medical costs, and it's easy to zero out equity entirely in that case.
Inflation is not good measure, because income also increases. House price affordability or price to income ratio is more relevant than inflation.
Housing Affordability Index https://fred.stlouisfed.org/series/FIXHAI
Home Price to Income Ratio https://www.longtermtrends.net/home-price-median-annual-inco...
Also medium term affordability fluctuates so when a boom ends you often get 10 years of flat prices so its a drop after inflation.
We've seen a shift of preferences towards externalizing the risks of asset ownership to third parties. Many people today prefer to purchase a stake in a real estate conglomerate, and contract out the maintenance and labor, rather than own an apartment building outright and operate it themselves. It's an attractive option for the owners, but carries the risk of creating bureaucracy for the renters.
I think if we continue in this direction, we'll see a resurgence of co-op style ownership, where no individual can afford to purchase the 4 story brownstone in Brooklyn, but a board of 4 shareholders can.
If you want to buy a house for yourself to live in, you might be purchasing a vanishingly-small set of "living-rights" shares from a conglomerate. You won't have to pay for your hot water heater, but you won't have the right to repair or fix it yourself.
Life, Liberty, and the Pursuit of Happiness -- that's all you get. For everything else, you gotta pay.
I value property rights, so I own property. Freedom and security don’t really factor into it.
Take a look at the mortgage rates: https://www.thetruthaboutmortgage.com/wp-content/uploads/201...
(ignore the weird domain, there's plenty of similar sources).
Fact is that rates used to be as high as 18%. Recently they've gone as low as 3.5%.
Real estate is hugely debt-driven, and the standard mortgage contract is set for 30 years. Thereby 'housing costs' isn't really reflected in just the price of a home, as say, the price when you buy a banana, which you buy instantly with cash. Instead, housing costs are dominated by the financing costs, which you pay for over the course of 30 years.
Those housing costs have price as a major factor, sure, but it's multiplied by interest rates. You can't leave that out of the historical context. And if you do, housing costs have in fact not increased quite as sharply as people think.
To illustrate, a $100k home with 3.5% vs 18% rates over 30 years, will cost $160k vs $540k.
In fact, a $333k home at 3.5% rates, will require total payments equal to a $100k home at 18% rates, both around $540k. In short, prices could have tripled since the height of the mortgage rates until the bottom, and yet, you'd have made exactly the same total and monthly average payments.
We often get shown price to income graphs getting worse and worse. But that doesn't capture the reality: monthly payments aren't getting nearly as bad, as interest rates have dropped hard. Higher prices are easier to pay off.
That's not to say that housing isn't getting more expensive, it is. But if you correct for inflation (i.e., average income growth) and correct for much lower financing rates (lowering monthly payments), it's not nearly as bad as is often presented.
An easier way to look at this is the percentage of money we spend of our income on housing. You can see it's on the rise, but really, it's not as extreme as some would think. None of the doubling-tripling kind of figures about housing you see in the media.
https://www.pewtrusts.org/-/media/data-visualizations/infogr...
Then lastly, we're just looking at how much we spend, not at how much we get in return. Suppose phones got more expensive, nobody would bat an eye, the phone today is 10x the phone of 20 years ago. What about housing? Here too the data is a bit tricky to get, I'd love to see more research on this. But there are some figures about average home size:
e.g.: https://thefioneers.com/wp-content/uploads/2019/03/Average-H...
The average home size grew from 1500 to 2500 square feet, while the average household size decreased. In short, in part 'housing' is not getting more expensive itself, but rather we're purchasing more of it, thus spending more on it. If you correct housing costs (i.e., bring it back to a $ per unit of house size), the growth is also much lower.
If you take all this together, then housing is still getting more expensive, but most places are not all that much worse than many years ago. That's not to say we should ignore this as a policy issue, I think it demands lots of attention. But I do think the media narrative and vox populi currently is blind to the other side of the story and only has one message: extreme prices, unseen crisis, lost generation, no hope, etc.
But depending on interest rates and property taxes, these might be almost the same thing, or very close. Once you consider the portion of the mortgage that goes to the principal, and if you assume some amount of inflation and increase in value, the 1 million dollar home might be cheaper, even if you consider that you could have invested the money in S&P (in this particular example the market would have to be in a fairly ideal state to favor the mortgage, but still, it's close, and you get to make holes in the walls without anyone bitching about it).
Homes are this expensive because, for better or worth, they're worth it. That's the problem. As long as they are worth it it will keep going up (and rentals as well as infamously AirBnB are making sure they're always worth it unless you push out an INSANE amount of supply, where incremental boosts in house building, rent control and affordable housing initiatives may make things worse rather than better.
A big RE mogul used to say "Its better to buy a cheap house with expensive credit than an expensive house with cheap credit. You can refinance the latter"
It is absolutely a possible outcome -- the default situation for most for hundreds of years.
The US housing market is open to bidding from the richest people in the world. Wealthy people in other countries see US housing as a good way to store value, and are driving up housing prices. To answer your question: while Americans will be priced out of the housing market, wealthy people from across the globe will continue to buy into it.
So it mostly comes down to relative wealth & population sizes versus desirability of an area, and then spillover effects into surrounding areas. But unless China crashes I would expect this to be an increasing source of demand over time, especially if you live in a pro-immigration country that needs to paper over domestic government budget shortfalls.
People import luxury cars from China and are able to drive them with Chinese plates in Washington State?
This I would not have guessed!
Rent is probably cheaper than ownership, except for the investment component. Because the market isn't efficient here, and because of the asset growth, owners can get a positive return even if rent doesn't pay the full mortgage.
So, your landlord is cash flow negative? Why would anyone buy property to rent it out if this were the case universally?
> owners can get a positive return even if rent doesn't pay the full mortgage
Having your home go up $200K in value makes taking a $1K monthly loss easy.
Also, if the value of appreciation really is that high I don't think it is correct to leave that forfeited value out of the "renting is cheaper" equation.
Second, in the case they are different kinds if properties, comparing them on cost alone isn't valid.
If your rent is exactly 5%, then the landlord is cashflow neutral, and the property appreciation is what the landlord gains. If your rent is below 5%, it's a good deal, and if it's above 5%, you're getting shafted by your landlord.
That said, unless the local real estate market is strong I don't think it makes sense as an investment to break even on the rent. It's a lot of headache and risk to bet on a >5%[1] average annual appreciation. I don't think that is a reasonable rate to expect in many (most?) real estate markets.
[1] My personal ballpark for a reasonable return.
but TLDW; the unrecoverable cost of rent is just the rent money, and a lot of people compare it with a mortgage incorrectly. A mortgage is not 100% unrecoverable, but some portions of it is unrecoverable (the interest). The other unrecoverable cost of owning is the initial downpayment.
The 3% capital cost is the combination of the above interest payment and the lost income opportunity from the downpayment. Whether you buy out right with cash, or get a mortgage, you still end up paying a price either way (via interest, or via lost opportunity to deploy the cash downpayment).
Still, the majority of homes are still either bought by people who plan to live in them, or by landlords who will rent them to people who will, so obviously some people can afford them.
Turns out, doctors, a subset of lawyers, various other high end professions including, yes, software engineers, make a lot of money, and there's quite a few of them. Add couples and families and you don't need everyone in the home to be able to afford it, either. Roommates can split the bills. DINKs end up with much more disposable income that can seem astronomical to more traditional families. Older people may have been able to accumulate wealth that seem impossible to 20something or even 30something years old. You can add a lot to that list of examples.
Even when you take away all of the outliers (like rich Chinese investors), turns out a shitload of people can afford these places (which is why if you want to use supply to reduce prices, you need to build a LOT before it goes down enough to reach the lower and lower middle class).
Also consider that 50% of your income (in an investment, no less!) when you have a family income of 250k isn't the same as when you have 50k. I'm fairly privileged, and if I gave up 50% of my income to housing (with a large portion really being a stored investment), it would still make a ton of sense financially.
For sure it shouldn't be that way: even if you were a rich selfish bastard, its easy to see how the people you're displacing are going to come back and be a pain in your butt (see San Francisco), so it's in everyone's interests (not just for social justice) to fix this problem. Still, it's this expensive because it's still worth it and there's still a ton of people who can afford it.
It really dawned on me when I last looked at the status of my mortgage and my savings. When I bought my place less than decade ago (so not as expensive as the market is today, but still when the market was red hot as the interests were at an all time low), it was a non-trivial percentage of my income, the downpayment was most of my savings, and we were definitely running the numbers to see what would happen if my wife or myself lost our jobs. It was tight. A few promotions, job changes, and favorable economic conditions later and I could almost pay cash if it was still at the same price it was back then. Early 30s me thought it was an insane amount of money, but 40something me wouldn't have much issue with it. That's the kind of economic reality and competition we're dealing with here.
Yup! I noticed that in the SF market. With all the tech, biotech and finance jobs here, there are a lot of households with incomes in the $500K range or ~$25K per month after tax income.
A $1.5M mortgage is ~$6K, maybe $8K total including taxes.
That's only 33% of take home income for this hypothetical household.
So to make a dent in the market price you need to have more supplies than there are tech folks. That's a lot.
None of this is free.
Houses should be outpacing inflation under these conditions.
2 bedroom, shitbox, shoe-box apartments are being sold for $1,000,000 in Sydney that are being condemned less than 10 years after they were built because of the shocking quality of their construction.
ABS News: a legacy of defects: https://www.abc.net.au/news/2019-08-18/how-bad-could-the-apa...
Quantity over quality: https://www.openagent.com.au/blog/quantity-over-quality-the-...
``` Over 66% of Australians live in the greater metropolitan area of Australia's 8 capital cities with Sydney being the largest (around 4.9 million), followed by Melbourne (4.5 million). ```
https://mccrindle.com.au/insights/blog/australias-capital-ci...
I started shopping for a home a few years back, and I noticed something interesting: prices had adjusted so that the total cost of owning (including mortgage interest, taxes, maintenance costs, etc.) was almost exactly the same as the total cost of renting! It didn't matter what I did; the choice had been reduced to "Do I want to make a leveraged bet on the housing market, or not?"
I did. That bet was basically a wash when I sold last year. After final calculations... I paid within $100 a month of market rent for the place.
The only way you can get out of the trap is to acquire enough cash to simply buy outright (and then hope you never get the itch to move). And, of course, then that money is locked out of the investment market.
I did that a long time ago (not in the US) and owned the place until a few years ago, when I radically misjudged the market and ended up selling it at the bottom. Oops.
Now I own a nicer and much more valuable place, with a mortgage; I may be able to keep it and pay it off, or I may have to sell if I ever want to move.
For me personally, the lesson was that I want to own outright, or if I can't do that then rent, and I think I can do that for the rest of my life subject to some obvious limitations.
Mostly because of the mobility trap presented by a mortgage.
We do not have a national healthcare system as most of the world does. We are not forced to have healthcare. Yes there are provisions of Patient Protection and Affordable Care Act that charge a tax penalty if you are not covered or exempt.
Housing itself is cheap to build. Location, however, is expensive. And that’s also what makes people win or lose in Monopoly.
I’ve written about it extensively: a book (https://www.unitism.com), articles (https://www.progress.org/authors/martin-adams), etc.
Once you know those things, you can rig yourself similar safeguards around other asset classes (automatic payroll contributions, tax sheltered accounts with early withdrawal penalties, etc).
Not really. There are no margin accounts with terms as favorable as the typical mortgage loans. (Some examples of terms mortgages have that margin loans don't: the absence of margin calls, the low interest rates, the relative diversity and transparency of rates from potential lenders, etc.)
Unlike the US, mortgages typically have 5 year terms (can range from 1 to 10). The amortization period is still 25 years (on average), but you refinance every 5 years.
If you put 20% down on a house, which then loses 10% of it's value, you can't refinance without coughing up enough cash to have the loan be 80% of the appraisal.
As you said, at least in the US you can choose to ride out a crash if you have a 30 year fixed mortgage.
https://www.cbsnews.com/news/adjustable-rate-mortgages-make-...
* The housing loan is non-recourse (you can't lose more than your home), while brokerage is not.
* A housing loan's collateral value is only determined at purchase, not hourly. You can't get "margin called" on your house if its value declines.
All said, I'll give you that people are oddly leverage-adverse when it comes to brokerages and actually take on more risk (to achieve a given expected return) than they need to if they were willing to use light (10-20%) leverage.
I think it's because of the mind trickery that makes the first thing a solid "buying a house" investment and the second thing a "gambling on the stock market" game. You can easily see that trickery at work: just confront someone who bought a house on credit with the fact that he just put all his money into a highly leveraged single investment, which combines two of the usual "don'ts" from the "Investment for Dummies" book. You will usually earn blank stares.
Not saying that doing such an investment doesn't make sense in certain circumstances (use the house yourself and plan on staying there for decades), but one should be very clear about the risk profile of it.
Want to start a business with that money? Better have a rock solid business plan. Investing elsewhere? No chance, a bank won't lone that money for you to play with on the stock market, and the rate you would get would wipe out any gains from something safer like a tracker fund.
For anyone that is not content living in the same area for the rest of their life buying is a poor decision. But it is the only way most people can access a loan that size and leverage in that way.
I've resigned myself to the fact you have to buy (in my country at least), and I will just make sure it can be rented easily when I want to move.
Some European countries are much more renter friendly and I would consider renting exclusively there. Germany and Berlin seem more appealing in that regard with the rent control that was put into place recently.
With the way the market is it is likely that mortgage principal + interest + maintenance is actually less than rent...
Add to that property taxes continue to accumulate on buildings. There are quite a few ways to drive a house to worthless. I used to live in a region where houses were <$10k because they were condemned shells in crime-ridden areas.
A house provides a basic human necessity (shelter) and can be insured. It stands to reason that it can be mostly financed with very long-term, cheap, debt capital. Other than mass-scale depopulation, not much will cause a house to dramatically lose value, especially to a first-lien lender.
Stocks are a different animal. Even assuming a company performs well, which it may or may not, there are all sorts of crazy things -- trade tensions, interest rates, valuation changes, investor sentiment for/against various sectors, completely leaving aside rational changes in value due to company performance -- which cause price swings far detached from company fundamentals. US equity markets went up ~30% in the past year. They could fall as well. If anything like this happened in housing, you'd literally get riots in the streets.
I don't think it's an accident that the financial system provides so much credit for housing. Yes, it should probably be a little more expensive (thank Fannie and Freddie for that) and yes, maybe we could use a little more equity, 20%, or 30%. But suggesting houses should be 100% equity-financed like most stock purchases? Doesn't make sense.
I agree 90% is extreme. However, the nice thing about owning a home is that even if it loses value, more often than not, other homes will also lose their value.
Say you buy a 1 bedroom place for 500k, and 5 years later you have 2 children and need a 3 bedroom place, but your home lost value and is now only worth 400k. The good news is that the 3 bedroom place also probably lost value. So even though your home decreased 20% in dollar value, the 3-bedrooms also did too, so your house (as far as in-kind value) is worth the same.
In fact, in some cases you could go further and say it's good if your real-estate loses money. Suppose that you bought that 500k place, and had 100k left in your bank account afterwards. Now 5 years later the real-estate market sinks 20% and your home is worth 400k. Suppose you didn't invest your 100k and it's still all cash. When the housing market sinks 20%, your in-kind trade value plus your existing cash is actually worth more than if the real-estate market did the opposite.
For the above reasons, it's better to think about your primary residence as planting a flag in the area that you want to live rather than a financial investment.
Owning a house is expensive, even after your mortgage is fully paid off. People like to simplify the model so they can feel good about owning a "paid" piece of land.
This conventional wisdom has been increasingly getting less true over the last decade. Valuation increases of 5-10% per year on a regular basis are also "volatility".
Harder to have the same confidence that the stocks I picked will survive a downturn as well as my home.
I put 3% down when I bought my house. That's 30x leverage.
The difference is that my lender wouldn't call the note on my house if the value of the home dropped below the principal still owed. Not if they want to see the money, anyway.
On the other hand, with a leveraged position in the market, if the value of your portfolio falls to a certain level, you either need to post more capital or your position is liquidated. If you are capital constrained, there is literally nothing you can do in the case of a leveraged position - your broker forces you out.
Regardless, if you keep making your payments, there is no way for a bank to force you out of your mortgage or call for additional capital due to a decline in value. This is the big difference.
it's the same coin, you're just looking at it from a different angle. The timeframes are certainly different between foreclosure and margin calls, but the concept is the same - the lender sees you as more risky than they originally intended, and chooses to liquidate you. In a foreclosure, you "prevent it" by constantly paying the interest. In a margin call, you are not paying until you hit the drop in valuation, and you have to pay to top it back up.
Now imagine a 20X ETF that invests in a single property, with high maintenance costs, extremely low liquidity, zero diversification, and high transaction costs. That is basically what some of these mortgages are.
It is absolutely intoxicating when the asset price goes up and I am not surprised in the least that people love it as an investment. Even if it explodes, you walk away and your losses are minimal. You only risked 5% of the price and sure you made some payments along the way, but the risk asymmetry completely rewards being as reckless as possible.
I see this argument all the time but once you do the math, it comes down close to the same with the house being leveraged and index funds without leverage (also known as the 5% rule)
> Paying your mortgage feels more urgent than contributing to a brokerage account
Of course it does, because if you spend your monthly brokerage allowance on a fancy dinner and booze, nothing too bad will happen. If you spend your mortgage payment on booze and steaks, you lose your house.
That's not a "mind trick", that's a real problem with serious repercussions. Housing is not just an investment for most people, it's THE investment, with life-changing, family destroying consequences if you don't keep it afloat.
Making it appreciate is very problematic.
But policy should never treat it as an asset. For policy, it should be a consumable good that only happens to take a very long time to consume.
nobody is "making it appreciate" - it's a natural consequence of people desiring a home, and the supply not keeping up (whether by physical constraints, or by political/policy constraints).
> political/policy constraints
You just found exactly who is making it appreciate
Also getting kicked out of your owned house generally takes six months not six hours as you imply here. Which again is longer than you will get if you rent which is also not zero time.
If you paid cash for a house, you're losing the risk free rate of a treasury bond (or the rental rate). That's a cost most people don't count, but only because they dont know how to do financial valuations properly.
With it often comes property taxes. There's the time and cost of maintenance. There's the friction of being able to easily relocate for a better paying job.
Worst of all, past performance is no indication of future returns. That is, it's possible your property won't appreciate, at least not sufficiently. For example, think Detroit. Or beachfront property in say 25 yrs. Or McMansions. Will smaller less consumption-minded families in the future want them?
Housing works as an investment because everyone is in on the scheme. The gov. The banks. Everyone. And it's still a roll of the dice.
It's worth pointing out that hedging inflation is a valid goal for investing, whether or not the investment involves real estate.
This is all very general, and doesn't apply to every area equally, but it is a very rare situation where selling after less than five years makes sense on its own. Renting is a great option for people planning to move again in that time frame.
As a renter, you may not pay directly for property tax and repairs, but they do come out of your rent, unless your landlord's business is unsound. Maintenance costs the renter time and hassle too, although depending on the work done, perhaps less.
Certainly, relocation friction is higher, although some turn that into an opportunity to be an absentee landlord in a way that's more satisfying than subletting.
That is, if we raised everyone's property taxes by 0.2% or so, approximately speaking, no one's rent would go up.
Yes, but what the landlord is paying may be very different from what you'd be paying if you bought.
For example, I know a landlord charging $3,000 per month for a place that would rent for $5,000 (rent control) or have carrying costs of $6,000 if purchased today.
He does just fine since he bought 15 years ago, so his mortgage is $1,500 and his property taxes don't go up more than 1% per year.
So yes, rent must cover the cost of ownership, but not the cost of ownership today.
Leverage is the biggest benefit, I would imagine. Although paying half as much in rent sounds really nice these days :).
Glad it worked out for you.
Yes, absolutely. A 20% downpayment of $40k suggests a $200,000 purchase price. A 6.5% annual return over 25 years suggests the house is presently ~$950,000, because that's usually how people frame things (appreciation on the value of the asset, not their equity), unless they say otherwise. (Correct me if I'm wrong.)
So the house appreciated $750k, which is theirs to pocket. And based on the $40k downpayment, that's a ~13% annual return. But even if you base it on the purchase price, nobody cares about a lower annual return if you have a higher absolute figure you would't have been able to achieve otherwise.
(If you're not paying a mortgage, you're paying rent, and rents are typically approximately the current price of houses plus maintenance. There's a ton of variance, of course.)
We live in an intensively capitalist society, for better or worse. If you're not in debt, using money to make money, you're losing. Houses can be a risky investment, and for most people a mortgage is just what you have to do to maintain an average standard of living, especially in your later years when you can draw down equity and any appreciation. But if you don't have a mortgage you're at a serious disadvantage.
Rich people, or people who have the time and energy to trade derivatives, don't need home mortgages because they have other ways to make leveraged investments. For the vast majority of people, the first and only opportunity is a home mortgage.
This is why I think it's insane that we're building low-income housing with exactions and public expenditures. It's like buying Cadillacs for everyone too poor to buy a car on their own. You either buy older buildings (used cars) and refurbish, or better you get banks to finance construction of new properties in which they and the low income residents can have a property interest, similar to Singapore and (I think) some places in Honk Kong. The property interest may have constraints (can't sell for 5-10 years, some appreciation has to be rolled back into the program, etc), so it would take some public expenditures to cover the gap. But you're still playing the capitalist game, leveraging assets, and digging into the pockets of global wealth (not just the local tax base). Of course, the potential for abuse and bad planning is immense, but there'd have to be a ridiculous amount of abuse to burn money faster than buying Cadillacs for everybody. And when you consider the wealth building potential for residents (no longer just a handout, but the opportunity to build assets, like the middle classes), it makes even more sense.
A couple of years ago there was some press about some non-profits doing this in Oakland and elsewhere in the U.S. But the programs are just too small to matter, and the constraints far more onerous. If you don't permit such properties to eventually enter the free market and "gentrify", you risk creating ghettos. Do it right in a place like the Bay Area you need billions on the line.
- Incredibly low liquidity—takes months of effort to buy or sell
- Very complex to buy/sell (usually requires lawyers, lots of inspections, documentation, etc)
- High fees to both buy AND sell it
- It's taxed every year, regardless of whether you actually earn any money on it (aka: sell it)
- It's constantly falling apart, and requiring upkeep maintenance
- It's completely undiversified: subject to not only one country, one state, one city, one neighborhood, but a single tiny plot of land at one specific location that could be hit by any sort of natural disaster, get bad neighbors, have the local economy collapse, etc. Its pool of potential buyers is also limited to this very tiny location.
- Returns are relatively low, roughly in-line with inflation
- It's almost always leveraged (often good, but that cuts both ways, and you have to pay the interest on it regardless of what happens)
Sounds like a wonderful deal, eh?
> It's taxed every year, regardless of whether you actually earn any money on it (aka: sell it)
Property tax is generally lower than your imputed rent. In the US at least, there is a huge advantage of being shielded from capital gains taxes (up to $500k if married)
> Returns are relatively low, roughly in-line with inflation
This is market dependent. SF Bay is something like 5.4% nominally over the past 30 years, which crushes inflation. Housing prices in the Bay Area in fact imply heavy future price appreciation. [1]
Also, the high leverage position (which you point out cuts both ways) does drive expected returns above inflation. Especially with, in the US, interest being somewhat tax deductible.
Also strongest advantage of owning a house over renting is the stability you get. My rent can always go up, potentially above my ability to pay; my ownership costs (esp. in CA with prop 13 limiting property tax rise) only barely goes up. (and far less than inflation)
[1] https://medium.com/@usaar33/why-you-shouldnt-buy-a-home-in-t...
Yes, but this is cherry-picking. In the US as a whole, RE typically matches the inflation rate. Some physical and temporal locations over- (or under-) perform. But in aggregate, that's the reality. There's no way of knowing ahead of time which market will out-perform. Investing in Bay Area real-estate today very well could continue to out-pace inflation. But that seems as big a risk as dumping $1M into Tesla stock today.
From:
https://www.zillow.com/homedetails/3203-Benton-St-Santa-Clar...
Neighborhood home value
95051 home values have fallen 8.3 % over the past 12 months. One-year prediction
Zillow predicts the home values in 95051 will fall 9% in the next year.
http://www.stock-market-crash.net/wp-content/uploads/2012/06...
And AFAIK, generally rents are lagging behind house prices and are more sticky. If you're a prospective buyer and houses are loosing and are projected to loose hundreds of thousands of dollars each year, that's pretty big incentive to stick around in your rental and wait.
And "forever" often turns into couple of years because of health problems, job opportunities, personal events, and so and so.
The only reason why houses cost as much as they do is historically low mortgage rates https://www.macrotrends.net/2604/30-year-fixed-mortgage-rate... . And if this (mean reverting) trend is to revert any time soon...
I don't know what actually is going to happen. And maybe FED will eventually decide to hyperinflate the crashing credit bubble which would be great for people with big mortgages. But people that live in oblivion thinking that's the safest investment ever, are completely clueless. But maybe they'll be lucky. :)
Meanwhile here I am in my little city with barely more than 100k people spending less than 1/3 of my income per month with the help of a stable government job. I could get more if I wanted simply by working at the largest employer in town. So why move?
I wish. The problem with housing is that the returns are not low, they're reasonably high and really safe.
You can buy a property in basically any city, sit on it for 5-30 years, and be guaranteed to beat inflation by at least a small margin -- often a wide one. Sometimes this is true, even if you never maintain the place, even if you level the existing structure, and it's just an empty grass lot.
I wish housing was not a good investment. If housing could depreciate the way a car does, that alone would solve like 40% all problems in the housing market today.
[1] https://en.wikipedia.org/wiki/Case–Shiller_index#/media/File...
ETA: I wonder why this is such a common belief? Is it because most HN (myself included) readers live in booming real-estate markets like NYC and SF? Those markets have done very well in the past 10 years. But remember: places like Detroit, Atlanta, Chicago, and Cleveland also exist.
As others point out, houses can be easily setup in and around the metros to give a steady 3% return not including appreciation. Considering dense living is the future and the house will materially remain through a market downturn, why wouldn't you diversify your portfolio with a few?
FWIW, broad-market index funds hold REITS, which give you a market-weighted chunk of the RE market. No need to "diversify" into RE. Doing so only skews your portfolio to be overweight in RE.
An actual high yield savings account right now gives around 2% nominal interest which is less than inflation.
The economist chart of house prices from the article certainly seems to show them outpacing inflation recently. Looking at an index since 1900 is a bit misleading since public policy changed dramatically in the 1950s-70s to constrict supply and juice demand.
The inflation rate in 2019 was 1.76% [1]
> The economist chart of house prices from the article certainly seems to show them outpacing inflation recently. Looking at an index since 1900 is a bit misleading since public policy changed dramatically in the 1950s-70s to constrict supply and juice demand.
Ok, then look at it from 1970... The results are even worse
Housing in SF was pretty much flat from 1990-1998. It went down by ~30% in 2008 and took 10 years to match the peak in 2006.
Why do you think houses are going for 2 m$ in the bay area? Because the expectation that it goes up is already priced in. Also a good reminder that the return of the past are not an indication of future returns.
Buying in the bay area is de facto a speculative investment as rents are comparatively way cheaper. The only incentive for buying at those prices is the hope to sell it for even more to someone else later (see also, the greatest fool theory).
Every coping strategy has it's limit. You can't commute more hours than there are in the day. YOu can't have more than 3 people living per room (at least not legally). Once you move in with your parents, you can't do it again. etc. I think we've reached that limit in the bayarea (at least the core bay area) so we can look forward to housing returns of roughly inflation.
Even with the severe dystopian restriction on supply, it will just force more and more people out of the bay area.
Maybe some of the outskirt areas still have room to go up, like Tracy, antioch, brentwood, etc. some of those places haven't yet been gentrified.
Housing is NOT always a good investment from an economic perspective. It depends on the location, market events and most importantly what price you bought it at.
Sure, agreed, but let's think that through a minute. So your housing has 'only' beaten inflation by ~25%, and that if you sold it today, you would have 'only' gotten 7 years of effectively-rent-free living?
Imagine if you had actually had to rent a house during that time. I don't know what rates are in NJ, but you would have spent about $1200/month in rent (or ~$100k over 7 years) to have done something like that in Michigan.
The common "bad" scenario I hear about is one like yours, where you got 7 years of housing, and the appreciation "only" covered almost all of that maintenance/upkeep, but didn't also cut you a free-money bonus check on top of it.
That's where the "housing is always a good investment" line comes from. Yes, you had to take out a loan and front all the other money out-of-pocket yourself (and not everyone can afford to do that). But if you get it most-to-all of it back when you sell the house, then even in your "bad" example, you came out ~$100,000 ahead of any regular person who had not owned.
But yes, if you are wealthy enough to afford a 20% downpayment on a house, you are wealthy enough to potentially have opportunity costs from other investments at your disposal. Agreed.
So they are able to afford what they normally can't afford because of the tool (i.e., lower down payment) which helped make homes unaffordable.
So essentially, it is a HELOC. But it's at the same rate as your home loan, which is usually quite a lot lower than the margin rate if you borrowed to buy shares. Of course, this offset loan cannot go higher than the equity you've already paid back, so unlike a margin loan (which can go up to 10x!?).
Not in NJ. Property taxes quickly eliminate any illusion of free. Factor in maintenance, including time, and you're barely breaking even.
Owning provides a sense of stability and community. But investment in many areas is highly overrated.
It’s a very idiosyncratic risk you’re taking buying a home. Looking at a primary residence as an investment is silly in my opinion. Treating it as consumption makes more sense.
Where? In high demand areas? Sure. Supply is limited in NYC or SF. But those areas are becoming outliers where buying in (so to speak) is less available.
Or what about trying to sell in 2009 or 2010? People weren't foreclosing because they were in the black.
I’d say that upkeep and taxes on a house will be much greater than the management fees on a similar investment. In addition you have to deal with multiple government agencies (health dept, municipal tax dept) if you want to continue to live in or sell your house.
Much of the new houses I see being built are prefab hardeeboard which will look atrocious well before the mortgage is paid off.
We should really just get 3D printed high-density concrete houses down and be done with it. This is a solvable problem but everyone with the 1.2mm loan will freak out when you can get a better quality apartment that won’t rot for 200k.
And, so long as you don't any old house on the market, but instead take your time, do your research, and expect to hold it for longer than 10 years, your risks are substantially lower. Which is true for a lot of investing. Time in market is king. And it doesn't matter how long you spend in the market if you buy ignorantly for well over market value.
Does that not apply to most investments? The stock market, aftre all, only works as an investment because everyone is in on an elaborate confidence game.
I don't think this is true?
As far as I can tell, there is no reason for housing prices to increase on their own. I suppose you can make the argument for increased population growth but we haven't reached the point where this is a problem, at least in the US.
On the other hand, businesses exist for the sole purpose of making money. Literally everyone in the company is (supposed to be) working towards the goal of increasing profits.
I've talked to people who bought a house at $200K, then sold at $300K 5 years later. Crazy return right?
Then you account for maintenance, opportunity cost of the down payment, transaction fees, etc. Then you realize the actual return was 8% when the market has returned 12% since then.
Suddenly it doesn't seem like such a great return.
* Very few high paying companies in the area and they were less likely to move due to owning.
* They made about 3.3k/year in appreciation for 20 years. That's on the order of a 13 hour per month side gig.
* Any gains definitely erased by the amount of labor they put into things such as mowing the lawn, shoveling snow, having the washing machine hose disconnect and leak water down into the basement. All of these little things added up to many man hours across.
In addition, we have affordable margin loans, mortgage interest tax deduction, property tax deduction to juice the system, not to mention additional legsilation like 1031 exchanges, prop13, etc.
Many of these were put in place as public policy promoting homeownership driven by the idea that homeownership would be less costly / beneficial to society compared to long term tenancy. That thought doesn’t seem to necessarily be wrong per se. but if you help out demand side legislatively while restricting supply legislatively, sometimes you’ll get cases of imbalance like we see in the coastal cities.
Given what we’ve observed in the last couple of decades around the world, a managed system like Singapore where property appreciates at a ~2% rate a year (and if demand suddenly shoots up, they’ll add transfer taxes or stamp duties or inject supply into the market) seems much more stable for society.
On the flip side, it also makes it harder to sell when it is booming.
The potential return is intrinsically higher from 0 to 1 for PE, than it is from 1 to N in public markets
https://www.bloomberg.com/opinion/articles/2019-04-18/privat...
There are apocryphal stories of studies purporting to find that the best performing investment accounts are those that belong to people who are either dead or had forgotten about their account:
* https://www.marketwatch.com/story/why-the-buy-and-play-dead-...
* https://twocents.lifehacker.com/the-best-investors-literally...
Generally, even if one invested lump sums right at market peaks, just before crashes, you'd still get a decent returns as long money was not withdrawn:
* https://awealthofcommonsense.com/2014/02/worlds-worst-market...
Though the best strategy for most people seems to be to just put away a little every money in a total market passive index fund:
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
I believe that the purpose for homeownership in the US was primarily to foster a competitive housing environment. That way landlords wouldn't control the majority of the housing market and people could help keep housing prices down per month by being able to have the ability to qualify for housing just as easily as tenancy.
Build more housing? Build more land? One-child policy?
Or were you talking about just shooting people?
For some people. Others really don't care one way or another about a sense of home-ownership, they just buy because "it's what you're supposed to do, financially".
It's just a meme that needs to die.
A primary home is an asset, not an investment.
Home prices were stable (in real dollars) until Greenspan kicked off this train of asset bubbles in the 1990s.
so weird that this venn diagram only has one circle on it
A house is something you own. It can appreciate or depreciate, but it does not generate value. You might get lucky and realize a capital gain by selling it after it appreciates (if it appreciates and you can time the sale correctly), but it does not create value.
An investment is ownership of something that generates value.
All investments are assets, but not all assets are investments.
Even with that fictionally higher standard and procedurally generated definition of "investment", renting out a part of the house is generating value.
The stock is still generating value. The house is not generating value unless you go out of your way to rent part or all of it.
You could just as easily rent out bicycles or hammers, but no one would go so far out of their way to class a bicycle or a hammer as an investment.
All assets generate a return, some just do so badly (or negative returns). Anything that's not an asset is a consumable (like food).
And how is the rent "income" not offset by an equal rent expense?
yes, in a sense. The fact that you're not getting paid a rent from somebody else doesn't mean there isn't value. You could think of it as opportunity cost - owning a property but not getting rent from it.
> And how is the rent "income" not offset by an equal rent expense?
it is exactly offset-ed if you lived in that property.
negative expected value = gambling
every other money game is a synonym of either of those
If the value of your stocks tank, you have nothing to show for it...
Money in your house ends up abusing the inability of people to reason about compound interest and inflation.
Making 2x inflation per year on your house is not a terrible rate of return, but it leaves you at the backend believing you've doubled your money when you haven't, and you lose much of that to property taxes. At the beginning when you own 20%, your property taxes are 1% of the assessed value of your house, which is going to be between 3-5% of the purchase price. And that's at the beginning before inflation and compound interest.
Then 6% for the purchase and sale... and now taxes if you don't roll it into a new house...
And then there's home improvement. I figured out at one point that renting an apartment for a few hundred bucks more a month for a nicer kitchen/bathroom was cheaper and potentially less disruptive to my life than having someone tear apart my kitchen for weeks at a time and the dust and noises and people around all day.
If one isn’t living in the house then it’s not a home and they aren’t a homeowner, they’re in the property management business.
My point is that obtaining a mortgage on a house is not necessarily an investment, particularly if one plans on living in it. Yet I often hear from homeowners that their home was a “good investment” despite never having realized a gain on it, and never planning on selling it.
If they buy a house, they can no longer "cheat" themselves out of the savings and instead their home becomes a type of forced long term investment.
This is a common sentiment that, I think, misses the point and makes a lot of the discussion around housing costs unproductive.
I'm a homeowner and I've seen the resistance to new construction. The concerns are often
* more traffic
* more students at schools that are already overcrowded
* more noise
* etc.
Also proposals to build more houses often are planned on property that is already occupied. In a nearby area they want to tear down an existing school, in other areas they want to take away open space that is used as walking/running/biking paths.
Now I'm not going to pretend that homeowners are otherwise pure and virtuous and not even slightly concerned about the price of their house. But that's rarely the only concern.
I don't say that to shut discussion down - maybe homeowners are still wrong to have these concerns. Maybe they just need to deal with more traffic and trust that the schools will address overcrowding as needed.
But that conversation never happens. It is _always_ greedy homeowners who worry only about their house price at the expense of everyone else. As long as the conversation is framed that way, I don't think it will ever move forward.
Homeowners: This is going to overcrowd the schools!
School superintendent: Actually we've run the numbers, we have plenty of capacity and we welcome the additional tax revenue.
Political ads: This is going to overcrowd the schools!
Voters: This is going to overcrowd the schools!
I've never seen any ads saying "Protect our property values!" It's "always" about the schools, or the roads, or something else noble. I'm sure in many cases the concerns are legitimate but even when they're not, they're still the concerns.
"we've run the numbers" is a poor response. Our local school has a playground covered with "temporaries" and a class size of 25-30 per teacher. School overcrowding is not a hypothetical concern.
Homeowners want their home prices to rise in the way anyone wants any investment's value to rise. But it doesn't mean they don't have other reasonable concerns.
I'd like my car's value to rise by restricting people from bringing new cars to town too.
If you read the special report and associated opinion piece, a major point of it is that treating a home that you own as an 'investment' rather than something that you consume has been a colossal problem for many places.
Maybe every city shouldn't be chasing constant huge growth? And that for cities that do chase constant huge growth, they should plan and build the infrastructure for it before inviting a bunch of people and property developers in?
We have lots of schools here that are the "right size". But that's in-part because we have ~0.3% population growth year-over-year, instead of say the 3.0+% YoY pop growth that somewhere like Seattle often sees. Population growth isn't a bad thing, but it should be built and planned for, not just dumped into a place and expected for everything to "just work out OK".
> Perhaps schools should just be temporaries
That's a really unsafe idea, for a whole host of reasons : https://www.nytimes.com/2014/04/01/nyregion/pushing-to-rid-n...
That has nothing to do with housing or school buildings and everything to do with teacher funding. A classroom with 30 kids can have 3 teachers if the district chooses, with no impact on housing issues.
You'd need to hire more teachers, yes, but not more teachers per taxpayer...
Land was much more available 50 years ago, cheaper, and less complex to develop (fewer teardowns, existing infrastructure, etc). A school district that has only developed 20 acre greenfield campuses will have to develop new expertise and capabilities to develop a tighter infill school, and it might cost 5x or more for the same capacity.
Decreased housing affordability means that the price of every employee is much higher, so you either stretch them farther or do without. This is fine for high margin industries like tech and finance; low margin industries either pay lower real wages or improve efficiency with systems. Two big industries where those do not apply are health and education, which have (not coincidentally) inflated at a higher rate than real estate. Lots of specialized labor that's not automatable - expensive.
Then, because school districts are of varying quality (real and perceived), and usually assigned by geographic districts, changing ANY boundaries, especially in high demand areas, can have real effects on property values (again, real and perceived). Enough people will vocally object to boundary changes, even if it means a new school, that it's an annoying headwind to any attempt to increase school capacity.
It's a chicken and egg problem. If the the schools are at capacity, you can't responsibly add more housing, but if you're not adding more housing, why would you add school capacity? Schools are possibly the most local of local interests, and it's easier for any given community to shunt the problem elsewhere, especially if their houses are increasing in value while they stall.
Replacing a 2-storey school building with a 4-storey school building should not require purchasing new land, so the cost of land shouldn't matter much. (The temporary school closure would be a problem, but not insurmountable - it happens). The boundaries would be unchanged. A 4 storey building might cost somewhat more than twice a 2-storey building, but that should be more than offset by the fact that in addition to the number of taxpayers having doubled, they've also gotten much wealthier over the last several decades, so there's plenty of funds available.
Each teacher would need a cost of living bonus to offset the higher price of the area, but that's equally the case in a high-price low-density neighbourhood as in a high-price high-density neighbourhood. If your 3000 taxpayers can afford to pay 100 teachers enough to live in an expensive low-density neighbourhood, then your 6000 taxpayers can afford to pay 200 teachers enough to live in that same neighbourhood when it has higher density. And if the added density reduces land values, as many complain it will, then it will only get more affordable per-teacher than it is now.
Plus, traffic could be dealt with by better planning so you didn't have to funnel everyone through 2 intersections to get to work every day. But people instead want to add more lanes because more people automatically means more traffic.
It's less the property values as much as "I liked it when I moved in and don't want more people moving in"
https://www.strongtowns.org/journal/2017/3/16/everyone-knows...
Some key points:
A well connected grid is more robust to failure.
Allowing people to, say, open businesses near where people live lets everyone drive less - or maybe even walk or bike! But this is by and large no longer a 'done thing' with big american suburbs.
I've seen people spend 15 years tying up renovations for a church in the courts.
I heard of another case not too far from me where someone assaulted a neighbor because they didn't like the new (very modernist) front porch remodel.
I think a large fraction of NIMBYism is a reflexive pushback against any change to the area in which one lives.
[edit]
FWIW, I also have no doubt that there are investors who intentionally stoke those emotions to get favorable policies.
Homeowners generally don't fight nearly as hard against new office buildings. The bay area, for example, wouldn't have a housing problem if we built apartments like we build offices, and our traffic problem would decrease.
The problem is that the home value model of homeowner motivation fits the data much better than any other model.
Show me a bay area "homeowners for better public transit" rally and maybe I'll change my mind.
No one in our area wants more office space. I don't know that there's much of a demand for new office space, the buildings we have are full of vacancies.
I think it's pretty similar to most other places that were built low density that now have high demand. We need to change the rules to allow high density, and we need public transit.
>No one in our area wants more office space. I don't know that there's much of a demand for new office space, the buildings we have are full of vacancies.
I... kinda do? back in the days after the crash, I would rent industrial spaces as workshops for my business. I had 1/4 of an industrial condo down the way from the hacker dojo at one point. It was a lot of fun, and only possible 'cause there was a lot of space and it was cheap. I mean, yes, yes, I should have bought. but my point is just that having space is... pretty nice.
That, and at work I'm crammed into this open office; they allocate more space to my car in the parking lot than they allocate to me - I think we'd all enjoy a few more sqft.
https://www.nytimes.com/2018/03/20/business/economy/reno-gro...
Both of these cities (and metros) are low density (1,049.64 people per sq. km). They're filled with complaints about traffic and growth.
NIMBYs don't want to build up. In Boise, condos are almost exclusively limited to 6 stories, max. Three quarters of downtown is parking lots or roads.
Folks from outer burbs (Meridian and Eagle) don't want to lose parking, and transit is terrible. A bus runs the 5km between Downtown Boise and the airport every 40 minutes.
I think the housing crisis is uniquely painful in the States because of the weird confluence between investing and culture around urban cores, inner burbs, and outer burbs.
I've been half-seriously looking at houses in Bend or Klamath Falls where I could work full-time remote, but there aren't a lot of houses that I could afford in Bend! It's nothing like the Bay Area, but the percentage of $1m+ houses was really surprising to me, and when you look at the price history, it's a very recent phenomenon.
Bend is very different from K-falls, these days. And yeah, the prices here bounce around a lot - they were the fastest in the US going up before the previous bubble popped, then they cratered, now they're skyrocketing again. I'd consider waiting...
Whereabouts is your house? South central Oregon off the grid brings this story to mind: https://magazine.atavist.com/outlaw-country-klamath-county-o...
Thanks for the link! Haven't read the whole story in the link yet, but it's definitely not the first I've read about the Tableland. I'm halfway between Chiloquin and Sprague River so that's practically my back yard. The stories abound. I haven't decided just how true some of them are yet.
I'm just close enough to civilization to buy power from the grid, but nothing else. I'm going to wait at least a year or two to see if Musk's Starlink project delivers. If it lives up to its full potential I might be able to work from the boonies.
It's not just Californians - lots of people from Portland and Seattle too: https://twitter.com/EastSlopeEcon/status/1217860613247946752...
Second there is an all too common ugly undercurrent of bigotry viewing it as bringing "undesirables" that they worry will lower it or negatively effect their lifestyle.
There's a lot of evidence for this in the '70s; this was super tied up with wanting an ethnically and economically homogeneous neighborhood. it explains a lot about where VTA goes (and why we have VTA in the south bay and not BART) The evidence for this is not as strong now.
Do you have references? my impression is the opposite.
Do you think having a bus stop out front would make the average suburbanite want to pay more or less for their house? My guess is quite a bit less, but I also don't have references to back up my impression.
(I mean, I think this is changing in the most urban areas. But I think that in the case of the homes of a majority of Americans, nearby transit lowers the sale value of a home rather than raising it.)
it can be hard to tell the difference. most changes that the owner of a detached home would oppose are intrinsically undesirable to this kind of person. because they're undesirable, they tend to devalue the affected properties.
I don't think it's wrong for homeowners to oppose things that they don't want in their neighborhood. presumably they bought the house because they liked the neighborhood the way it was. everyone is entitled to advocate for their own interests. the problem is when they get an outsized say in what actually happens.
Which is why transit expansion should go hand in hand with increased density. When you allow more density near existing transit stations, it makes it more useful. SB50 is a proposal to do just that, and yet the NIMBYs who fear increased traffic are preventing that bill, which would improve traffic by focusing development on areas near transit.
* more students at schools that are already overcrowded
More housing built leads to more property tax revenue, which leads to more resources to expand schools and build new ones. If the existing property tax rate isn't keeping up with school expenses, then the property tax rate is too low. Conveniently, the NIMBYs who fear overcrowded and overburdened schools are also the ones who refuse to repeal Prop 13 that keeps property taxes too low.
See the pattern here? Property owners make these arguments as reasons against increased density, yet prevent the solutions from being implemented. When you really dig in, NIMBYs overarching interests are in keeping their property value high, and in feeling entitled to freezing their neighborhood to the exact feel it had when they moved in. All the other reasons they give are bullshit.
https://urbanize.la/post/sb-50-could-bring-sweeping-changes-...
(a) People are scared of change, and particularly change that doesn't benefit them directly but offers potential risks (this is a rational outlook, of course)
(b) Our society tends to operate in a low-trust manner, with this trust level dropping by the year. Maybe once upon a time, communities would feel satisfied that if the schools get crammed, we can expand the school and hire teachers. That if the roads are crammed, we can build infrastructure to alleviate traffic. Nowadays people have no trust that our institutions can handle the rate at which infrastructure is needed.
Putting together (a) and (b), as an individual the most rational policy is one of change nothing. The neighborhood was already great, why are you trying to rock the boat? What if you ruin everything?
> But that conversation never happens. It is _always_ greedy homeowners who worry only about their house price at the expense of everyone else. As long as the conversation is framed that way, I don't think it will every move forward.
On HN maybe, every local forum or town-hall I've seen it's the other way around.
You may be right! I spend too much time in HN and reddit, and no time at all in forums and town halls. Perhaps my view is warped.
You make it sound like there are roving gangs of housing developers walking the streets at night and knocking things down to put up houses. Nobody's trying to build housing on land they don't own.
>It is _always_ greedy homeowners who worry only about their house price at the expense of everyone else.
Maybe it's not just their house price, but when they're blocking housing because they don't want to have to share the roads with other people or because they're worried about noise somehow then it is selfish. They're preventing younger people from living and advancing their lives because they're afraid that they will somehow be inconvenienced by being in proximity to other people.
Given that makes sense that home owners and local governments wouldn't be very keen on increasing density. There is basically nothing in it for them and a lot of negatives.
A lot of developers want to build high-rises and blocks, because it makes more sense - but it's a constant fight. I've heard projects that have taken as much as 15 years, from start to first shovel in ground.
It's a fight because you're getting bombarded with complaints and protests, from the people that already own houses in the area. Usually it's something in the lines of:
- People will lose sunlight. Could be 5 mins of sunlight in the morning, but they don't care - they'll protest.
- New buildings don't match the aesthetics of the neighborhood
- Visual pollution (a bit more harsh than the above complaint)
- More traffic
etc.
These homeowners are 50-60 year olds that want to keep their suburb feel in the middle of a city. They want their large gardens.
Of course, because of these actions, their homes are now worth 10-20x of what they paid, 30 years ago.
To my point above, property taxes are intertwined with the debate about homeownership because Proposition 13’s low property tax rate increases wealth inequality (since landowners instead of governments capture the value of increased rents), increases wealth inequality (since governments are forced to increase regressive sales taxes and fees instead of property tax), increases wealth inequality (since the US income tax often does not capture increases in imputed rent and capital gains), disincentivizes cities from zoning for more housing (since the property taxes from new housing no longer pays for the infrastructure costs), and encourages NIMBYism (since homeowners have to purchase the land at a high price and then become extremely risk-averse). In addition, Proposition 13’s unfair asssesed value system further encourages NIMBYism (since landlords and homeowners get to benefit from displacing the poor without having to pay any higher property taxes) and encourages long-term property speculation without investment (since long-term property owners have low holding costs despite being in expensive locations). In another state, where homeowners have to pay taxes for the privilege of excluding others, homeownership would not be harmful to society.
No, it didn't.
It's the lower of the actual fair market value or the value at time of qualifying event (mostly purchase and other non-exempt transfer, but certain improvements also are included at their full value) plus 2%/year. The actual rate of inflation is not a factor.
> The actual rate of inflation is not a factor.
Incorrect. The change in base year value is less than or equal to inflation. Proposition 13 allowed annual adjustments to the base year value by “the inflationary rate not to exceed 2 percent” (California Constitution XIII A http://leginfo.legislature.ca.gov/faces/codes_displayText.xh...), which the legislature implemented as the lesser of “the California Consumer Price Index for all items” and 2% (RTC 51 http://leginfo.legislature.ca.gov/faces/codes_displaySection...). See the most recent letter to assessors for the actual numbers (https://www.boe.ca.gov/proptaxes/pdf/lta19050.pdf). But I take your point that I should have said “adjusted by up to 2% per year” instead of “adjusted for inflation” above, since it usually isn’t fully adjusted for inflation.
In the very long term housing can not increase in value quicker than wages (roughly inflation). And, if we were to actually make any progress in the industry of providing shelter, housing should actually lag inflation.
You have the risk of the location becoming undesirable (lots of places in the US with stagnant or declining property values), you have the risk of bad tenants, you have the risk of being liable for the tenants in case something happens (even though you have insurance, they can always sue you), you have the risk of maintenance issues in the house requiring costly repairs. Etc.
You must have a place to live and you are going to be paying for that. Why not own it so that your payments actually accrue capital while you're at it?
I've run the number in the past and in some markets it's clearly cheaper to own than rent (typically where there is slow but steady increases in prices - mid-west US). For other markets, you need 3-5% asset price increases just to break even with renting after 10 years (bay area).
He was just gambling on real estate appreciation and using me to cover most of his carrying costs; I would rather gamble on stocks.
By making the rent slightly lower, the landlord is sure to get a renter to cover most of the costs. But if the economic situation declines (or interest rates rises), he can just bump up the rent to cover the increase.
What exactly is stopping House Flipping BigCo from doing what you're proposing at scale?
Also you need to assess the rental conditions for each property on a case by case basis, and contract everything out to property management.
A lot of REITs invest in medium-large sized complexes to avoid the potential headaches. I’ve lived in a few of these and found them to be quite well managed.
It isn't an efficient market. Efficient markets have very little to no alpha. Real estate has been my best side job ever. Currently looking at a 40% annualized returns since 2015. All thanks to the same principals used to invest in public fixed income and equities.
If your using leverage then you're playing a very risky game and just as the upsides are very high, the downsides are equally higher if not more.
Properties that rent 7%+ are very high risk areas where you could easily loose much of the principle. And, you need to look at the percentage return on the total investment after all expenses. After all that, you need to multiply it by .7 because it's considered income.
There are people who this for a living, who know far more about it than anyone else. They run REITS.
I mean, just look at the total returns for REITs. yes, there's some that have dividends as high as 5% up to even 10%, I even have some of them in retirement portfolio but I expect they'll loose some of their principle as any REIT with such a high dividend probably would. Just read any financial review and you'll see that anything with a dividend above 10% is highly suspicious or Risky.
Edit: visiting the OP with JS turned off also works for some.
Hope that doesn't sound like I'm having a go at you, and I may be wrong in my understanding of this landscape but thought I would mention.
That turned out differently for things like mobile apps.
(Source - worked at Qpass for multiple years.)
News organizations probably understand "how the internet works" better than you do. (Not too surprising since their livelihood depends on it.)
Lots of research and many many real-world attempts clearly demonstrate that small-scale individual transations do work effectively. The cognitive cost of a user having to choose to buy each small product outweighs the value and adds so much friction that most users simply don't buy it.
Subscriptions have their own challenges, but overall, they have shown to be a much more effective model than microtransactions.
No business is obligated to build an entire transaction system that works the way each particular customer wants it. If you don't want to buy the product the way they choose to sell it to you (in this case, with a subscription) then you can simply choose not to buy it.
You have no moral right to claim "I'm going to take this for free because they didn't sell it to me the way I like."
Consider the synchronous chain. Me: Myprofit=future_profit-cost1 Prev owner: profit=cost1-cost2 Prev owner 2: profit=cost2-cost3 And so on...
Also consider a parallel behavior where I can simultaneously buy and sell multiple properties though debt.
It would be fun to model this whole chain and understand what this recursively unfolding process actually does with capital. Is it a capital sync? What behavior does it incentivize? Does it guarantee expansion/recession cycles?
And it does guarantee recession and expansion, as explained here by ray dalio https://www.youtube.com/watch?v=PHe0bXAIuk0
I think most people underestimate this. There are some many people who can't pay their mortgage while they thought the house was an asset.
Some people prefer to own their home because a renter cannot modify the home (usually). They may also prefer the stability.
There's no universal answer really, since a lot of individual circumstance come into play making this choice.
If we could make all that money go to productive ends, society would be just much fairer.
Houses (and apartments) are so poorly designed. In my mind the floors should be like an hair hockey table that vacuums itself up. Appliances should be built into the house and should handle each job when something becomes dirty. The dishwasher should be smaller and wash each item as soon as it’s been used. Same for the dreaded washer & dryer... the fact that they are two different devices greatly perturbs me.
Rant over.
The way house investors view mortgages is as a very cheap leverage. So investing in housing will always be fundamentally skewed, because every single person can so easily get cheap leveraged investment in a house, so housing as an investment can perform much more poorly compared to other investment as still beat them by far because of the mortgage. This is so skewed up that a house now has an extra value: as a 'token' to get a cheap loan. This extra value is paid by everyone buying a house.
The way the average family looking to buy a house is completely different: they are looking to compete in the housing market with other families with similar financial abilities, to purchase a house. When you offer all sides of the competition the ability to enter a cheap loan, the side that doesn't take the loan loses the house. But if all sides didn't have the possibility to take a loan and pay more for the house, they would all pay less. Allowing buyers to take mortgages sets them off in a prisoner dilemma against every other buyers, and they all come out losing. If you outlaw mortgages, everyone interested in the house itself wins.
Moreover, once you have lured a family into strangulating themselves with a mortgage, they are now prone to financial stress that will cause them to take loans with much worse terms than a mortgage, therefore nullifying all the possible gains they had from taking the cheap loan. So while investors fully benefit from the cheap credit of the mortgage, families often follow up with mistakes and bad loans which, in total, make the mortgage costly loan.
The more you think about it, the more you should realize the winners from the concept of mortgages are real estate companies, investors and banks, and the biggest losers are the average family which are forced to take it from the Nash Equilibrium of a prisoners dilemma.
Moreover, if mortgages didn't exist, overall spending across the economy would rise, which will be a good thing.
in the united states, literally the exact opposite is true. you can get a mortgage with almost nothing as a down payment. By agreeing to take on PMI, private mortgage insurance, you can get federal loans with something like a 3-3.5% down payment
If the only way to purchase a home was with cash I suspect that nearly every home would be owned by a real estate investment company. Who else would have the cash to purchase a home? You already are seeing this happen on the west coast. I'm very skeptical that consolidating ownership of land into even larger businesses would be accompanied by fair and equitable renter's rights. I believe that the entire stock of housing in cities being owned by large, far away entities would have a negative impact on living standards and mobility.
I'd say that a big commercial landlord has some edge over an individual landlord by being able to operate at scale, and thus lower the cost of maintenance. This would be reflected as lowered rents.
What does this mean exactly? Even these days (i.e. post-2008), you can get a loan on a primary residence with 3% down. Closing costs are comparatively minimal. Where does the other 37% come from?
The inverse has already happened - the US gov't backs mortgages, allows 30 year terms, etc. All that does is drive up prices because everyone's purchasing power increases.
During the fantastic industrial expansion which characterized the growth of the world's great cities, industrial capital dominated, other than in very small pockets. Workers flocked to cities, whose planning boards were in favor of expanding stock -- so incentivized by industrial capital.
At some point during the last generation, the power consensus flipped: industrial interests waned, and financial interests exploded. In our new economy, financial capital holds all the cards. Predictably, planning has followed where the incentives are.
Making the world turn simply doesn't as many workers as it used to -- especially in cities. Industries that do require cheap housing stock for labor typically opt to build on the outskirts of town. So entrenched are financial interests.
The answer is to change the incentives. Tax the crap out of real estate, and the people who hold real estate. Let them put their vast wealth into sectors which actually build and invent new things to make our lives better.
So much of the price of housing is related to the cost of a high value location - city center, near a transit stop, in a metro area with good jobs, near a nice natural feature, near a beach, etc.
Mobile housing that can dock somewhere cheap at night but take you into a city while you are still sleeping or allow you to commute from the comfort of bed or a desk or couch alleviates that cost by making it possible to both live and work in these high cost locations while avoiding paying for the price of land there.
Second is the added value of being able to go on vacation or visit friends while bringing your house with you.
Set a destination, go to bed, and wake up several states away in your friends driveway. Makes a trip to Chicago for the weekend much cheaper if you only need to pay for a lot to park and the cost of charging your presumably electric vehicle. As opposed to renting an Airbnb or hotel.
Third reason - climate change. If we start seeing major property value losses to coastal areas, people will start to see a lot of value in the idea of having their home be mobile.
That's correct.
> What If I don't want to sell my property no matter the price?
That wouldn't be possible. You could set an extremely high price, but then your tax bill would also be extremely high.
https://en.wikipedia.org/wiki/Baumol%27s_cost_disease
Basically there haven't been major productivity increases in construction.
https://www.rba.gov.au/publications/rdp/2018/pdf/rdp2018-03....
It uses the approach from here:
* Introduce laws that make it harder to (legally) build housing. Note that much of New York would be illegal to build today, for instance.
* Use these laws to create scarcity. Ensure that there's never quite as much housing as people who need homes.
* Make massive amounts of debt available for said housing.
You now have an entire class of people who want to be sure their house only goes up in price, and that there is only just barely enough housing built to stop their region from collapsing. After all, who wants to be underwater on a mortgage?
I don't know how to break this on a policy level. Few people vote for the politician who says "I want your house to go down in price" so we get insane levels of rube-goldberg devices to make housing "more affordable" while also making it ever more expensive.
The more debt you make available, the more housing soaks it up. Sweden recently made the maximum mortgage length 105 years!
On the bright side, if you look at stuff that no bank will lend on (dilapidated structures, etc) there are some good deals to be had.
Berlin plans to freeze rent prices for 5 years in March [1]. But who knows, maybe that will push up prices long term.
[1] https://www.ft.com/content/f2f1354e-30a8-11ea-9703-eea0cae3f...
Not all that much - not everyone works in software, and not everyone who does will be most productive from home, and not every one of those will want to work from home.
My work can be done from home and my employer is quite flexible - I still gladly spend the time and pay for my commute because I'd rather not be at home all day.
Looking back on my earlier career I can sympathize.
There are some perks to WFH, but it can be bad for people who don't have a drive to seek human interaction with reasonable frequency.
I currently sleep and relax in the same room. I do not want to add working to the list of things I do there.
Later in my career, now that I worked remotely, I am much more independent and don't have as much interest in synchronous communication with my co-workers.
I mean, your coworkers can drive you absolutely bonkers, but being alone all day can drive you crazy in a different way.
So now you're working out of your small apartment. Maybe you have a housemate or two for better or worse. Besides maybe an onsite meeting or two, you only know your colleagues and manager by messaging and video call. There's no luncheon chit-chat. No softball league. No after-work beers. No random hallway conversations. No impromptu conversations with your manager.
I work pretty much fully remote now by choice and I'm very good with that. I can't really imagine having done it early in my career.
I do know lots of developers who'd like to work from home periodically, sometimes up to a few days a week. But they still like to be able to come into a physical office, have their own seat/desk, etc., the rest of the time.
I don't see why if you could both live green and have space you wouldn't choose to do so. It doesn't seem to be a popular opinion here.
All of the big city problems are caused by centralization. I certainly don't see why HN isn't embracing this perspective or at least entertaining it. I see cases brought against centralization of technologies every single day here.
Luckily it's not up to you guys and it will naturally happen as we advance in technologies that allow us to spread out.
Ironically y'all are developing it via Zoom, Slack, Figma, and any other collaboration tool that further allows us to asynchronously and remotely collaborate.
What's the alternative? Abandoning the people that already live there and all the progress we've made in transportation in the last century.
The writing is on the wall, the technologies and ideas are pointing in that direction. The current solutions are falling apart and covered in shit.
Hopefully remote work, low orbit sat internet, solar efficiency, electric & autonomous cars will all lead to further
Low orbit sat. internet: internet access should be a fundamental right to all humans, there are still areas all around the world, including the US where there's little to no service because it's not economically viable to put a tower up or run lines.
Solar panels: if the internet is a right, then electricity definitely is. The ability to generate your own energy doesn't only embrace green ideals, it embraces American ideals.
Electic & autonomous cars: America is huge, and we all want to be connected w/o being crowded. If we can travel and stay connected with each other in a clean and safe way we should do it. Trains are part of it, but let's not throwaway a century of progress.
Source: I live in a small town. I have fresh air, I can see the stardust, and I paid $75k for my 3 bedroom house.
The thread I replied to referenced American housing so I chose that perspective both in terms of location and financial status.
> there's better ways to get internet besides orbiting routers
Carriers refuse to put up towers in low populated areas that won't make money.
Utility companies and ISPs will not run fiber for the same reasons.
Current satellite providers only offer geo-sat orbit and only have a couple satellites. This adds up to terrible latency and god awful bandwidth limits.
Starlink on the other hand has a potential to be faster than fiber in some scenarios.
Haven't heard from Loon. Facebook gave up. What's the way you suggest? Honestly satellites sound the most practical of those lol.
Having 1000000 people being able to afford $1m flats is better than 1000 of them
It would be like if someone was dying of dehydration, they drink a couple drops of water but are still dehydrated, then conclude oh well, I guess water is not what I need.
If you're not going to address the quantities involved how can you possible conclude that it's not working? I know less about Toronto but to use San Francisco as an example, there were something like 150,000 new jobs added in the last decade and 20,000 new housing units built. Of course it's not solving the problem yet, it doesn't mean that we don't need more housing, exactly the opposite.
I said the migrations caused overcrowding, and it caused it only in specific cities.
Decentralization causes more issues than it solves; it's extremely inefficient both from an energy and tax perspective (lots more infrastructure to serve the same people) and it ruins farmlands and existing biospheres. Density is very environmentally friendly, both in terms of energy use per person and in the fact that it limits the impact of human development.
Up until the 1980s, the variation in earnings and cost of living was around 20%. Meaning someone in rural Missouri could earn on average roughly 80% of a New Yorkers average wage. That wage premium has now skyrocketed, as has housing.
Allowing capital to concentrate in so few cities is why we have a few high performing metros and a ton of depopulated ones. And why we have Bay Area residents bidding six to seven figures for SFHs that would be condemned elsewhere.
I don't have access to a breakdown now, but I would guess the difference is < 50%.
The county median incomes NYC counties: Manhattan (New York County) is $67k, Brooklyn (Kings) is $25k, Queens is $26k, Bronx is $18k, and Staten Island (Richmond County) is $32k.
https://en.wikipedia.org/wiki/List_of_United_States_counties...
Nothing is missing, what you describe is the scarcity that the parent poster is talking about.
(owning) housing also isn't necessarily cheap relative to the jobs available in these areas.
I doubt that, and even if they are I'm not sure it's a wise choice. Housing is cheap here compared to other areas, but it's not that cheap (unless you're buying stuff I'm not sure you'd want to buy anyway).
It's not hard on a bay area L4+ salary to have a spare 40-50k several times a year (20% of a 200-250k property), especially if you are snowballing with profits from multiple other properties.
> buying houses in Ohio every couple of months, simply because they can
Yes I am absolutely doubting this.
> Snowballing with profits from multiple other properties
Like, as in buying properties in Ohio then managing them? If it's in SF I can kind of see it since you can go to the property on short notice, but if you're in SF you aren't buying and maintaining rental properties in Ohio unless you have family here or someone to help out on the ground or unless you seriously enjoy throwing money in the trash. It's far too much work and rental property management companies don't really help except to find tenants. It's hard enough work when you're actually in the same location.
I'm sure there exists people who do it (I don't think I've doubted that it's possible or that somebody somewhere does it) but I'd challenge it as a smart investment choice for sure.
If you want to clarify here because I think that there's some ambiguity between your comment and the OP comment I responded to, please do and I'd love to chat about that.
I have an extended family member that at his peak time owned about 90 homes in NE Ohio. He lived there his entire life, knew everyone and knew their parents too.
A distant landlord from California will get eaten alive, with the help of the local government. You need to move mountains to get things done when you live in a neighboring town, let alone a coastal state.
For people getting the engineering jobs, salary is $50-70k. The cost of living is hilariously low, so it’s a lot more money than it sounds like.
This really, really bothers me. The fact that we let our elected officials blame everybody else except them is part of the problem.
They’re interesting in preserving their power (via ask-first permitting and other laws and red tape). They’re not at ALL interested in increasing the supply of housing. Don’t believe them and vote out every single one that lies to you.
The fact that they're "elected" should be a clue as to why they act the way they do. They believe (rightly or wrongly) that acting any other way will lose them the next election.
This is a simple but excellent way of putting it
Let's just stop flocking to overpriced places.
It's that simple!
You didn't have to go further than that. Suburbs to me only make sense once you have kids. I'm planning on moving back to chicago this summer and my girlfriend and I are looking to move to a triplex (currently looking at around ukrainian village/wicker park, maybe lincoln park) for a few years until we have kids and then i still might put it off until we have a 3rd or one kid reaches kindergarten age.
And if others are complaining, well, they're probably not in the same situation I am.
Every big company at hubs which tried to move to cheaper locales beyond at most the network's fringe has found it a failure. That is an empirical bit of evidence that there is real value to the location. Essentially it is more expensive than it could be if the city kept up with housing development but the willingness to pay and failure to substitute means the value is real. You personally may or may not get sufficient of worth from the value just like any other tool.
There is a minimal critical mass to enabling them to be effective and we're not at it because laws.
https://en.wikipedia.org/wiki/Streetcar_suburb
Cars enable more suburban development, but their throughput on highways sucks compared to mass transit, which also minimizes their spread in some cases.
A fair few might go for one who says "I want your kids to be able to afford a place of their own someday", though.
I get that land ownership incentivizes the development of the land by rewarding the owner, but what happens after all the land is gone and someone is born into a world of such legacies?
they obtain the portion that their parents purchased. Or if they are productive enough, they buy out land from somebody else less productive.
There's no natural right for somebody to be able to own land.
https://i0.wp.com/money.visualcapitalist.com/wp-content/uplo...
Any comprehensive housing plan has to be rooted in building more AND cutting out all of this global Capital chicanery. I see lots of advocacy for the former and little for the latter.
If it's legal for a non-global-capitalist to replace their 1 unit single family home with say a 2 unit duplex (and if the regulations are sufficiently streamlined that they can do so in a cheap-enough and timely manner), many individuals will do so on a home equity loan or similar type of loan and then rent out the second unit for extra income.
When enough individuals with 1 unit single family homes own duplexes with rental units, this applies negative pressure to rental prices (because supply and demand does exist in the rental space)
When rental prices are depressed, this will (slowly and over the long run) apply negative pressure to the inherently-speculative purchase price for a housing unit. Aside from "prize units" like skyscraper penthouses, your average rental unit sells at a speculative price based on rental income and perceived future appreciation. When you depress the rental income, you also depress the perceived future appreciation.
You CAN fight speculation with free market economics, but it requires more than luxury condos, it requires ordinary people with ordinary properties in ordinary neighborhoods who can take a loan to make their land more productive.
Not all of them, just whoever wants to. It becomes a natural balancing act, as rent swings higher, so do the incentives to replace a single family home with a duplex (or heaven forbid, a 3-unit or 4-unit home, which I may add all use single family construction techniques and have similar costs per sqft to construct). I mean, that's how free market economics is SUPPOSED to work, if a commodity is overvalued then more people enter the market to sell and bid the price back down. What we have now is some abomination where there's a limited quantity of housing with a growing number of elite bidding it up and up and up.
> seems like an insane proposition relative to the government just building housing and charging rent pegged to their wages, no?
I mean, that sounds great to you, and it also sounds great to me, but in the united states atleast I'm sure a large percentage of the population would view this as blasphemy.
To be specific, this is politically infeasible in most or all of the country. Most places can't even agree that "building housing" should be legal at all, much less building done by and managed by the government and all the policy implications built around financing that operation.
Furthermore, in the places where this is needed most, cost of construction is already high (part of the reason why rent is so high, see my section on supply and demand), which means a municipal government could only afford to build a very few number of units. So either way the first step is to lower the costs of housing, both by making it legal to utilize land more efficiently and by streamlining regulations that hamper construction.
I would call this article deliberately misleading.
It tries to make the point that new luxury apartment construction is bad for rent prices:
>And ideally, developers say, building more units for wealthy tenants means they’ll move out of their smaller apartments, leaving them available to lower-income renters. An analysis out of the Joint Center For Housing Studies of Harvard University found this isn’t happening.
The article then links to an analysis that contradicts their point by saying: >> expanding supplies of new luxury apartments pushed up vacancy rates, helping to slow rent growth.[2]
The article tries to convince the user that these units are sitting empty: > one in four new luxury units built after 2013 remain unsold, according to the New York Times.
That's an odd way to say three out of four of the new luxury units have been sold.
[1] https://www.vice.com/en_us/article/z3bnme/tons-of-new-apartm... [2] http://www.jchs.harvard.edu/sites/default/files/Harvard_JCHS...
It's not that housing is scarce in absolute terms. There's a ton of housing in rural or suburban areas. There's even a lot of housing in cities - just not the "desirable" cities. And what are the "desirable" cities? Almost without exception, they are places where tech workers tend to cluster - SF, NYC, Seattle, Boston, Austin, etc.
We should try to alleviate this problem by lobbying the leadership of big tech companies to open more branch offices in middle-tier cities, and also to increase support for remote workers.