Americans still think they can make money flipping houses
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The whole idea of fearing loss of value was completely different: Nowadays houses are bidding chips and people want to make the numbers go up to feel rich. In the past sharp losses of value meant the area was no longer desirable so that people were not moving in and so wages would no longer support prices in that area. Either things were modest and relatively stable or unstable and sinking.
The current attitude toward housing is based on the recent explosion of house prices which is driven by financialization, extremely low interest rates, and demand outpacing supply where there are jobs. Economic, political, and demographic changes are very likely to wipe all of that out in a relatively short period.
Though that’s true in the literal sense, there are only a handful of instances in American history where they was empirically the case.
Not to mention you don’t specify a locale which is the most important thing in real estate, heck, these days perhaps a neighborhood.
Even if only 10% of the jobs are taken by a single company or industry, losing that is sufficient to stop price growth.
If you do a search for long term housing price data you will see that until the burst of inflation in the mid 1970s house prices were mostly flat. There was still inflation and wear, but the prices remained about where they were. In this environment where house prices are flat and houses wear out the asset becomes known for its depreciation.
The big thing about locales is their vulnerability. It really is the case that back then some undesirable people moving in to a community could start a cascade of people moving out. In that case prices went from flat to falling fast. If you really did pick a great locale then your reward was prices remaining flat.
https://fred.stlouisfed.org/series/MSPUS
Not to mention you can collect or save on rent which also goes up with inflation
Land behaves very different from other assets, because there is a finite amount of it, and it generates economic rent. And the increase in land value generally comes actions not of the owner, but of others, and of the government deciding what is allowed on the land (which happens at the local level, where a small cabal of landowners can exert great influence over a small number of officials making decisions).
And unlike speculation on, say, lumber futures, speculation on land by buying it and hoarding it is actually a huge economic damper. Real estate speculation, by holding a property underdeveloped until it can be sold for maximum profit, creates a land bubble because it withholds productive use of that finite resource that everybody is trying to get.
The best way to solve this would be to, IMHO, tax away all the economic rents that land generates. This removes the speculation, and ensures that every piece of property that is being underutilized will get transferred to someone who can better use it. This will keep housing prices down, because more houses will be built in high demand areas. It's a tax that would greatly improve economic efficiency, housing affordability, and our overall productivity. (It does need to be paired with zoning reform, though).
We also need to reinvigorate our construction sector's productivity, and reduce the shocks to it from the boom bust cycle, but that takes different policy.
These are the mechanisms by which the housing market has been driven to absurdity. But that reason why were here is that politicians and by extension the electorate on whose behalf they govern, decided to turn housing into a retirement plan. We then created enormous government programs to encourage people to partake in this scheme, which only robbed the future to pay the present. And now that many families have substantial wealth tied up in housing, it will be nearly impossible to voluntarily undo this mess.
There is no perfect system. That doesn't mean you don't implement systems. You just police them better to make sure that kind of problem doesn't happen any more.
Applied to any useful purpose, though, there are externalities and there is the unexpected. If you include those externalities in your model, you not only have a more complicated model, but you probably have an even larger surface of externalities.
When was this ever true?
If you literally abandoned a house and let it rot then yeah maybe in ten years it will have lost value because it will need a lot of work, but other than that I think it's never been the case they're depreciating in any meaningful sense.
There's basic ongoing maintenance yeah, but I don't think that counts as deprecation in any sensible way does it? If you keep your oil paintings in a mouldy cupboard they'll rot, but we don't say art is a deprecating asset because of this. You just make sure they don't rot and clean them every now and again.
Houses can stand for hundreds and hundreds of years. As they get older they get more valuable because people like older buildings for aesthetic reasons.
Is this really true in general? I mean sure I can find examples of it being true, but it's kind of assumed that many of the old houses in my parent's neighborhood of San Diego are teardowns whenever a buyer comes interested.
The house fundamentally is in a "moldy cupboard". Its entire purpose is to provide shelter from the "mold".
Inflation would only be an 30x increase from 3k to 90K
I don't think your house is representative of the US housing market. I once lived in an apartment in a 17th century masonry building in Alsace, and it didn't seem to give my landlord nearly as much grief as my parents' 1960s-era suburban home in Houston did to them.
The original construction costs will probably have been recouped after 370 years of continuous occupancy, though. :)
Now add on to that interior details, floor coverings, appliances, and such many of which are lucky to last 10 years and the numbers start to add up.
From a building sciences perspective, if possible, I almost always recommend a standing seam metal roof due to a 40-50 year lifetime (and you can mount solar panel racking to the standing seams without penetrating the roof).
I think it will be more interesting with "basic structure integrity" at the century scales. Do we really know economic impacts when tract housing/wood structures are tested well? I'm thinking past time scale of the electric and plumbing overhauls at the 50-100 year marks. There is a ton of housing out there that is less than a century old.
Houses can be constructed better, as well. The house I grew up in is now over a century old and it's the same roof, because it's concrete.
People don't generally want to enter 50+ year long commitments for physical assets/money.
> Now add on to that interior details, floor coverings, appliances, and such many of which are lucky to last 10 years
Interior stuff pretty much lasts forever if the house is kept at a stable temperature range & humidity. I have 1 nice hardwood door inside my house installed 12 years ago. It looks and works like brand new. You can basically pick things for inside your house that will last forever.
There's a pretty common trend on HN and in general to embellish house upkeep costs. I think it's mostly people who rent doing it, because they have no idea what it actually costs or aren't handy enough to do simple repairs.
When I was looking for a house in Seattle, many of the $800K bungalows were sold with the expectation that the buyer would level the existing house and build something new. During the same time frame in the rust belt (particularly Detroit) , however, many housing parcels were sold for less than the value of the structure due to the undesirable location of the land.
And yet, I own many worthless things that also exhibit that property (like a picture my niece drew of me and my cat). There is a totemic quality to possessing something, but that is almost always personal and independent of the thing's market value. Outside of "collectible" properties (structures with historical significance like castles or Frank Lloyd Wright houses), houses have a market value related to the imputed rent they produce and potential productivity of the land.
You don’t say that your oil painting has depreciated because it was damaged in a house fire. Property in Detroit has been ‘damaged’ by social decline.
Look around the globe, for how long have all central banks been doing nothing but printing money? Printing money to economy just like adrenaline injection to body, it for sure helps in some scenarios but it also kills if you don't know when to stop. All the central banks delayed the crisis by printing money and got away by manipulating the data to make CPI looking low. It would be probably okay if they did that only one time or two.
So here we are.
Falling interest rates have been great for people as more people own homes than at any other point in history.
But printing trillions more last year was a flaw. At least got physical proof that MMT doesn’t work.
Edit: for example, Sri Lanka's outcomes are exactly what have been predicted by MMTers, and Sri Lanka took exactly the opposite of what MMTers have been recommending forever:
https://twitter.com/fadhelkaboub/status/1516630826896744451?...
I don't know what it is about MMT but it always seems like people are intentionally not listening to what people say, and then inserting other words in their mouth. Marxists like Henwood are particularly prone to doing that, for example. Critiques of MMT seem to be based on intentional misunderstanding and misrepresentation.
I'm not sure about elsewhere, but rates of home ownership in Australia have declined since the 1980's [1], neatly coinciding with a decline of interest rates [2] and a rise in house prices as a proportion of income [3].
[1]https://www.aph.gov.au/About_Parliament/Parliamentary_Depart... [2]https://www.rba.gov.au/statistics/historical-data.html [3]https://www.aph.gov.au/about_parliament/parliamentary_depart...
Not in the US, and this article is about Americans.
Seriously, you seem to think there's something profound about "total population numbers go up, all the numbers go up"?
However, even if the bank needed to have deposits or collateral on hand, to stop the "printing money" aspect of new loans, this same thing could happen because homes are collateral on mortgage.
Really I think it mostly driven by the supply demand mismatch, and in particular a belief that local governments will not allow the supply to meet demand.
There's a great recent Fed paper that shows the absolute huge correlation between prices and the supply/demand mismatch. It further shows that demand volatility has been higher than supply volatility so recent effects are explained by that demand volatility.
The only way to solve this is to out build demand and shock prices down. IMHO.
The reserve rate was taken to 0 during covid...
Really there is nothing magic about loans. Handing a bank 1,000$ and thinking you still have that money rather the the bank owing you 1,000$ is how money is created.
https://fred.stlouisfed.org/series/TOTRESNS
Banks did not want to lend out money and lowering the reserve percentage is one of the few tools they have to try to encourage banks making loans. It just so happens that it didn't do cause an uptick in loans
On the other hand, if they didn't need cash on hand to offer loans any random small bank could loan a 1 trillion dollars to someone. They can't because they don't actually have that money.
Consider a bank with 3 billion dollars total and 2 billion in deposits. They only need to care about reserve requirements on 2 billion and can use the other 1 billion for anything because it's their money. In effect cash on hand are assets and deposits are debt. Reserve requirements are just a question of how much leverage they can legally have.
So it’s the land and location you’re investing in which is certainly not a depreciating asset. Where I live it’s an old town that doesn’t have anymore room to build and way more people want to live here than there could ever be homes. So prices continue their rise even if you invest very little in the home. Saying that, you’re right that owning a house means taking care of it which costs money.
Houses are for families to live in. The primary asset houses should provide are the family and the work they do, not the house. But if a house costs so much money that the family can't really take risks, then the house just becomes a debt prison.
You can build 8-15 new houses in about a month for what it costs for one outside of LA.
The first part is still true. The thing is that it's bounded by a smaller and smaller percentage wages, and it's always the highest wages that determine this.
Housing prices being bound by seller capacity to pay means that there are not enough houses. If housing prices were determined by the cost of the houses, then we would have finally reached the point where there is adequate supply b
First of all, we should separate the value of the house from the value of the land, which is determined by its location. In my country, brand new houses in Ostrava (a rust belt city where I was born) cost about half as much as brand new houses around Prague (the capital), even though they are of the same size, on same sized lots, built from the very same materials by the very same Ukrainian gastarbeiters according to the very same technical standards etc.
This isn't just pure gamble, but reflection of the fact that Ostrava isn't particularly attractive for employment even for the natives, while Prague is a major hub attracting professionals from the entire Slavic half of Europe and even some Westerners. An order of magnitude, if not more, people want to move to Prague than to Ostrava. This must have an effect on the land value.
Second, the quality of the house matters. A wooden Japanese-style house depreciates quite fast. A modern brick house built to strict specs will outlast you and your kids, so the material depreciation is much slower. It might even be slower than pure inflation.
I'd say this is fairly true in the US. When you compare houses and the amount of similar quality property of say San Francisco or Austin to rural parts of say... Texas or Wyoming, you're going to find that at the same price point (a reflection of market value estimation), you get a lot more in Wyoming or rural Texas in terms of land and the quality of house than in the metropolitan areas described. When you compare metropolitan areas, housing and property is often significantly more expensive in areas where there is more opportunity for the working class or even businesses.
If I don't get a house this year I'm giving up on using real estate and moving onto my boat. I wish more people would do things like this.
First, since so many voters are invested in the housing market, it's almost political suicide to do anything about it now. Protection and even increasing property prices has become an explicit political goal on every level.
Second, as you see more and more corporations enter this market and become stakeholders, this trend is only strengthened as corporations are the true constituents. And no it doesn't matter which party is in power. The corporations have bought both of them.
I'd say the biggest difference between now and 30+ years ago is the level of disposable income people have such that second homes, vacation homes and bigger homes have become way more common.
Side note: this is written in 2019. Can we update the title?
First, terminology. "Flipping" houses has a completely different meaning. The author mentions buying a house and "flipping" it 5 years later. That's not what flipping is. Flipping is short-term and typically means rehabing a property. Done quickly, you can make a profit on this if you're good and can control your costs and keep to short time frames. People do pay a premium for finished products and/or just don't want to deal with the headaches of massive renovations.
Second, the author makes the same mistake every pro-stocks author makes and completely ignores leverage and borrowing rates. 1-2 years ago you could get a 30 year fixed mortgage as low as 2.5% with an 80-95% LTV. Try getting that on any portfolio. Houses don't have margin calls either.
Third, this was written in 2019. A lot has happened since then. The 2006 to 2022 housing situation is radically different.
Fourth, the national average of house price growth over that period isn't really meaningful. This isn't stock-picking as the author alleges. Just narrow it to greater metro areas with low unemployment, a growing population (even modestly so) and relatively low state public debt (ie not Illinois) and the picture is radically different.
Fifth, real estate tends to be a very good hedge against inflation. We're seeing that now. Inflation has skyrocketed and so has housing in the last year. That's not an accident. There are some systemic problems here but that's a separate topic. As someone who is trying to protect the real value of your assets, you only really care that it is could happen or is happening not necessarily why.
Lastly, property tends to be much better at generating an income than any other asset class. Gross yields of 8-10% aren't that uncommon. Getting a dividend yield like that is going to be much harder and will have much greater capital risk.
The econ of the article's analysis is rubbish. She compares indexes that exclude dividends, cherry picks time periods, doesn't seem to command basic econ understanding.
There are lots of good reasons to critique house flipping, like she could have: - Given statistics on average returns of house flippers. - Show how naïve investors and flippers get burned. - Even a piece of ancedata about one couple getting burned is at least real news.
But she doesn't do any of that.
The first form of banks we had we had had depositors deposit money for safekeeping. Banks would then lend that money out to earn interest. We then basically decided this was too conservative a strategy so we have fractional reserves, meaning if you have $100,000 in deposits you might be able to lend out $1 million. A lot of Crypto Andys see this as a problem. It's not, particularly because depositor funds are guaranteed by the government (up to a limit) in the US at least.
But in recent decades we say the rise of mortgage-backed securities ("MBS"). Banks will take those mortgages and package them into what are effective bonds and then sell them to the market. This is now completely off the bank's balance sheet so they're not even really the lender anymore. They're basically just the agent who collects the repayments that get packaged up and go to the MBS holder.
Non-payment of a mortgage will give the bank some options depending on your state but there are a lot of varying consumer protections here too (eg non-recourse states mean the bank can typically seize the property being the collateral for the loan or go after you for any outstanding debt but they can't do both).
But if the loan is underwater (meaning the loan value exceeds the asset value) the bank can only really do something if you stop making payments. There is meant to be due diligence here done by the banks to make sure the entire package of property being an MBS isn't underwater. Obviously this failed spectacularly in the subprime era.
But one house being underwater isn't generally a problem.
This is entirely wrong. Fractional reserve banking is what allows lending. How do you envision a bank with $100k lends out $1m? What fractional reserves mean is the opposite: if you have $1m of deposits you can lend out $900k and only be required to keep $100k of reserves to meet withdrawal demands. This is the “fractional” bit of fractional reserves.
Honestly HN please, go and learn the basics before penning comments that lack basic understanding.
From https://en.m.wikipedia.org/wiki/Fractional-reserve_banking
Fractional-reserve banking is the system of banking operating in almost all countries worldwide,[1][2] under which banks may hold liquid assets representing only a portion of the deposits that they are liable to pay.[3] These liquid assets, known as reserves, may include cash in the bank or balances in the bank's account at the central bank. The country's central bank determines the minimum amount that banks must hold in liquid assets, called the "reserve requirement" or "reserve ratio". Most commercial banks hold more than this minimum amount as excess reserves.
When a loan is made by the commercial bank, the bank is keeping only a fraction of central bank money as reserves and the money supply expands by the size of the loan.[5] This process is called "deposit multiplication".What OP said is completely wrong.
The solution to housing is reducing subsidies and removing supply side restrictions. However these are not politically popular in a world where people want housing prices to go up.
There are many arguments against urban sprawl which is direct consequence of such approach.
I'm tired of the snide dismissals that we Americans make to any comparison between our country and others. Oh, well, our country is special and exceptional, heterogeneous and large, so we have nothing to learn and cannot possibly change things here. Even if you arrogantly assume America is the best at everything and leads the world in so many ways, much can still be learned from the way others live their lives and structure their homes, businesses, and societies. You can compare apples to oranges. They're both fruit! Biologists compare species all the time to learn more about the species and to better ourselves with that knowledge. We can learn about and from other countries and peoples while disclaiming some of the differences. At the very least we can acknowledge that it works elsewhere and that what they do could be done here in at least a limited fashion or successful manner. Even if we're red apple fruits and they're bloody oranges, they're both fruit and both countries.
False. Value can increase if gdp increases without changing the %income spent on housing.
If house prices double while salaries double, affordability is the same but dollar value still went up.
Any time income growth is higher than inflation, you can buy more goods with your income
This is why people can buy more goods and services in 2022 than in 1 AD.
If income growth always lead to equal currency devaluation, economic development would be impossible.
In growing economies, income growth exceeds inflation rate. If the value of a purchase tracks income and not inflation, the real value goes up.
In the USA, real GDP per capita (adjusted for inflation) has increased 30+% since 2020.[1]
In a world where productivity is somewhat slowing after massive growth, people are taking to rent seeking activity and the disincentives aren’t there to encourage productive behavior.
Why buy and sell when you can buy, charge rent, and pass down to your kids?
The financial industry is moving away from the northeast to the south, primarily Florida, Texas, and the Carolinas.
High rents, taxes, and property prices make people and businesses run away.
Before, your neighborhood's voters were homeowners who benefit from rising property values; after, they're renters who benefit from falling rents.
I've heard that Germany has more of this renting situation but no idea about the politics of housing supply over there.
In Seattle, for instance, municipal elections are on odd-numbered years. As a result, get out the vote operations that tend to increase renter turnout during presidential elections don’t have much impact on local elections.
We had a vote in the 90s that reduced housing supply considerably, “Citizens Alternative Plan.” It was a February special election with 23% turnout. 15% of Seattle voters downzoned the city.
This, however, does not mean it is causal. Just because it's the case at the moment does not mean it would be the case if homeownership dropped 50%.
There are many studies on homeownership and voting. I recommend the book “The Homevoter Hypothesis” if you’d like to start informing yourself about these issues!
4% inflation per year (the most common estimate I see in the US) means 3x over 30 years doesn't even break even (1.04**30 ≈ 3.24).
I often wonder how much people obsessed with home prices rising (in the US at least) take this into account. How much housing mania is fueled by people getting excited about gains that aren't as real as they think?
* Jan 2007 price (inflation adjusted to 2022): GBP 243,199
* Jan 2022 price (actual): GBP 273,762
So it seems that in the UK at least the prices do seem to grow ahead of inflation. And the starting price we're talking about here is after a long, sustained housing bubble and was already quite unaffordable for many. Further still I think many people's wages have kept pace with inflation.
So looking at the raw price changes doesn't tell the whole story, but the whole story is still quite grim.
[0] = https://www.statista.com/statistics/751605/average-house-pri...
[1] = https://www.worlddata.info/europe/united-kingdom/inflation-r...
Inflation: 243,000/177,000-1=37%
House: 274,000/177,000-1=54%
In 2007 the yearly wage for a 22-29 year old was 20,000 pounds, in 2021 it was 26,000:
https://www.statista.com/statistics/802196/full-time-annual-...
26,000/20.000-1= 30%
If you try with an higher income, let's say 30-39, respectively 26,000 and 33,000
33,000/26,000-1= 27%
I think we can say that average houses have appeciated almost double average wages in these 15 years, which is the essence of the crazyness about houses being not affordable to most, and - as you said - it's not like in 2007 houses were cheap, data for a longer period show even more how young people then could actually buy a house and now it has become impossible:
https://landregistry.data.gov.uk/app/ukhpi/browse?from=1990-...
> Further still I don't think many people's wages have kept pace with inflation
But yeah either way - houses were expensive, and have only gotten more unaffordable as inflation outpaced wage growth and house prices outpaced both. Wild.
I agree that most people investing in real estate aren't hoping for the underlying asset to significantly appreciate in value. Real estate pays significant dividends (more than stock), and you can be confident that it will provide a hedge against inflation.
Owning real estate also has a lot of tax advantages over stock (you can write off upkeep expenses and you can do a 1031 exchange, for example).
Yes you can make money, but that doesn't mean you will. It is a complex job and not for everyone.
Well yes, of course that is an issue. But most flippers I’ve seen in my neighborhood only own the property for a max of 3 months. They make cosmetic changes and maybe some core changes (new roof, hvac), then turn around and sell it in less than a week.
Most flippers are not holding onto property for 5 years. That’s just regular people living in houses.
My Instagram timeline has become filled, for some reason, with local (not to me) agents insisting that there is no bubble and now is the time to buy. And they’re all really unprofessional looking and sounding and seem to be worried about one thing: their business.
Many Americans are so tired of the rat race that they are lured by the glory of being able to get off the treadmill and riding off to the sunset. Bubble economies help fuel that dream
The other part of that is that I don't think most realize how much work something like that takes—it basically is a full-time job. I've got an endless list of projects for my own home and I'm not doing anything close to knocking down walls or updating the kitchen.
There are training classes you can take to get your agent's license, so entering the field is pretty straightforward. There are usually a lot of part-time agents who make enough off each sale to justify staying in the field. And a very few who have worked their way up to selling high-dollar properties and make quite a lot of money. It's customary for a sale to have 6% realtor fees, split between the selling and buying agents. So the more a house sells for, the more they make. A falling market will drive some agents out of the field.
Yes and no.
This was a chapter in Freakonomics which showed how since their fee is a small fraction of the value, changes in prices would not affect them so much (within limits), i.e. the 3% fee on - say - 1,000,000 is 30,000, if the house price gets to 900,000 the 3% fee is still 27,000, but in order to be able to sell at the full price, they would need more time and have more expenses, so the real incentive for the agent is to sell quickly and find a new house to sell.
If you prefer, selling 5 houses at 850,000 is still better than selling 4 at 1,000,000 for the agent.
If number of sales go down then the agents will suffer.
http://pricetheory.uchicago.edu/levitt/Papers/LevittSyverson...
There are certainly “corner-cutters” in real estate just like any industry. But to make real estate a sustainable career, it really does take a lot of hard work, hustle, and integrity. Most long-term agents live off of referrals and repeat customers. Or have enormous marketing costs, which also takes skill to manage.
1. “30% rule”: if your principle+interest+tax payments exceed 30% of your income for the duration of the debt, than your family will always remain poor and unlikely understand why
2. “200 month rule”: a holdings true worth is only what can be extracted from renting it for 200 months... the rest is 100% BS...
3. “Check regional population trends age profile”: Most speculative investors understand there is a >17% population decline happening over the next decade, and will focus on urban centers for risk mitigation. In my opinion, inner-city senior care homes are a good investment for the same reason.
4. “Never trust anyone not legally obligated to respect your interests”: Make sure a bonded financial-adviser fiduciary type appropriate to your needs is signed on with your legal representatives. Opinions from Bankers, random investment advisers, and golf buddies can have ulterior motives (toxic assets, TV hyped pump-and-dump scams, and cult stock-swarming scams).
Dirt backed holdings are not what most people assume, and watching the equity get clawed back by banks again never ceases to amaze. The real insult was the 3 million foreclosed American homes still making payments in the last credit-crunch, reacquired with taxpayer bailout money, and then rented back by wall-street funded holding firms to the same families at another address. No one went to jail, nothing changed legally, and like any successful con it will likely happen again soon.
People mainly buy the houses they live in in order to have a place to live, full stop. Investment properties are a completely different concept and most Americans aren't involved in real estate investing whereas most Americans are involved in buying personal homes. It also totally makes sense people who are very unfamiliar with financial instruments (like young people) don't have any idea about what sort of return they have. Everyone's familiar with houses though - TFA says 2/3rds of Americans own their house.
Like, duh, you aren't going to make money just buying a house to live in - If I sold my house at a big profit because the housing market overall increased I'd still have to live somewhere so my "profit" would just go into the increased cost of my new house and I'd be out closing fees and agent fees on both ends.
I think a house you buy to live in is a bad investment and I own much more stocks than I have equity in my house. I've put thousands into my house in the last several months especially and it only seems to be getting more and more expensive every year I own it. I'm thinking I might have to reduce my monthly savings for the first time ever.
However, I have to live somewhere and I like the security of owning my house and I like that I can customize it and nobody tells me I can't have cats. I have the money to pay extra for that. It's not an investment though, at least not a financial one.
I guess the article is based on a survey where the question was "For money you wouldn't need for more than 10 years, which ONE of the following do you think would be the best way to invest it?" and the top answer is "real estate."
So yeah, that doesn't AT ALL mean that people who answer "real estate" think that the house that they live in will make them rich. Some might think that, but most people think buying an investment property means that the buyer will buy low and rehab it to flip or rent it to collect income. The entire premise of this article just doesn't make sense.
It starts with reporting a survey on Americans' beliefs (specifically that they can make money flipping houses). This is fine and normal news.
Then it transitions to novel research where the not-explicitly-questioned ground truth is "no: real estate flipping can't make money". How about cite some economists about bad future returns. Or at least some bank analysts?
Instead, CBSNews's "analysis" that real estate doesn't make money starts with this gem:
"Sadly, real estate is no better an investment today than it was in the previous century—and that's to say, mediocre at best. For people with a bit of money to put away, the stock market will almost always give the best return.
Between 2006, the peak of the previous housing bubble, and 2019, average home prices have increased just 13%, according to the S&P/Case-Shiller Home Price Index. In that same time period, the S&P 500 rose 125%. In other words, stocks did 10 times better than real estate."
The author assumes:
- That returns to housing measured from the past peak is an unbiased estimate of housing returns.
- That returns to stocks measuring up to today (one of the biggest stock bull runs) is an unbiased estimate of stock returns.
- And that past returns from these periods will predict future performance.
- To put the cherry on top, she compares two price indexes, not total return indexes. Dividends (rents) are totally excluded from the series.
None of this is pointed out by the article itself, or even questioned. The most basic first-year-econ-undergrad mistakes are being made here. Which is unsurprising since this analysis seems like a journo LARPing as an economist to finish a writing assignment.
What are the tax incentives (in the US)?
On a federal level, all I can think of is mortgage interest tax deduction, but that was greatly neutered in 2017 TCJA, and less than 10% of Americans can benefit from it. And that is a tax incentive to borrow money to buy a home, not a tax incentive for home owners.
Only other one is 1031 exchange, but that is rarely needed for typical homeowners and is available to all real estate owners.
On a state/local level, I guess there are some locales with property tax adjustments, but other than that, I cannot come up with any.
... but most places don't have the stones to tax imputed rent [1]: Belgium, Iceland, Luxembourg, the Netherlands, Slovenia, Spain and Switzerland being exceptions.
I have one condition though. If I should pay tax on imputed rent, then Google and Facebook should pay taxes everytime someone clicks on a sponsored link that takes them to their own property. Every time I bring up this idea that companies must pay taxes on funny money they spend within the organization, people yell at me. Microsoft should pay taxes Windows licenses that they use internally. No, you can't give yourself a "discount" and say well we charged ourselves zero dollars so we owe no taxes. Pay taxes on the market rate. Either make it free of cost for everyone or pay taxes when you use things internally.
Why? Taxes should be the minimum required to provide for the core services of government. Big governments are dangerous. Also taxes have deadweight loss.
Could they just say we "licensed/sold" it at a loss, and therefore take a tax deduction?
If that didn’t exist there wouldn’t be 30 year mortgages. How that distorts the real estate market is a big open question but my guess is it drives up real estate prices.
Of course that has been a continuous policy decision for almost 100 years so it’s nothing new.
You shift the demand curve, but not the supply curve, so now more money is chasing the same asset, so buyers pay more and sellers benefit. Same as student loans.
You also increase money supply when taxpayers “eat” the loss for defaulted loans, lowering the purchasing price of the currency in general.
Finally, the decision makers can overshoot or undershoot how much to move the demand curves, resulting in a misallocation of society’s resources. Again, see student loans and even home loans.
Market rates are very different. There are a host of middle men making massive profits on loans. This is why there is an industry around it.
If you offer non-profit loans at break even cost, this is much lower than a company with higher overhead and a profit margin
I do not see how anyone could know this, since it requires predicting economic conditions 30 years in the future. The government is guessing just as much as a non taxpayer funded lender would, except the government does not have to worry about running out of cash.
1) The government doesnt need to make a profit 2) The government has access to capital at a lower rate.
Put together, it should be clear that they could buy or back a mortgage at a rate below breakeven in the private market.
I can’t take an article seriously when it purposefully ignores what’s happened in the last three years because it negates the point it’s trying to make.
If you can buy a house (to live in) without a mortgage, or with a very low rate, you not only reap the capital gain, but save on paying someone else rent.
This isn't a repeat of the 2008 financial crisis, in which financial institutions overloaded on mortgage-backed securities fueled by easy access mortgage loans without thorough loan application vetting. The deluge of foreclosures isn't likely to occur and people are likely to hold onto their houses and maintain firmer home prices during this slowdown.
But most people think that this is an accurate description of their local market, and I'm not so sure that it is.
Seattle: Severely limited land area mass surrounded by water with robust business sector. Single-family homes will become rarer across time with local pushes to develop multi-family domiciles. And, if you buy waterfront, your security increases substantially.
Colorado Springs: Mountains impede development slightly with large military presence, but you can build suburban developments for as far as the eye can see in most directions.
Prior to a slowdown, people see prices increasing and apply it too strongly to future results. But, one of these areas will be far more insulated from price fluctuations than the other.
Low mortgage rates create a shortage of affordable housing by increasing demand. For example:
-Speculators buying things and selling them for higher price later, that is a rational thing to do.
-Normal folk who simply want a home rarely think long term, 50 years into the future, during which rates may vary and only look at what they can afford to pay monthly, right now.
In a high interest rate, high inflation, high wage growth world houses are a BAD INVESTMENT because of erosion of value by inflation. What happens to bad investments? Their prices collapse, investors seek targets elsewhere. The only people who buy affordable housing in a high inflation environment are people who don't mind the deprecation in value and have a steady income to afford it.
There are some people that take advantage of uninformed sellers buy a house cheap and put some paint on it and mark it up significantly, but there are bad people in every industry.
This paragraph makes it sound like a hit piece: >>Between 2006, the peak of the previous housing bubble, and 2019, average home prices have increased just 13%, according to the S&P/Case-Shiller Home Price Index. In that same time period, the S&P 500 rose 125%. In other words, stocks did 10 times better than real estate.
-Seletivly picks a period of the biggest housing crash in history and there is still increase.
-that would be the amount it increased with no value add.
-if you buy, hold, and rent you will make significantly more. If you are talking a 13 year period you are probably doing this. You buy with mortgage, have tenants pay mortgage, mortgage gets paid off plus profit. This stat leaves of monthly profit plus the fact you only had to 20% down, so you cash on cash return of just appreciation is closer to 75%. Also about 30% of your mortgage would get paid of if you had a 30 year mortgage, and almost all of a 15 year mortgage.
Real estate can grow with cpi and still be a good investment. You just can't be leech and have to add value to the economy. I.e Let some live there and build improvements. It is more hands on,but definitely better returns then the stock market.
Like many things you can do everything yourself, or contract to others to do the things you are not good at, or don't have time for. Arguing realtors are useless is like saying accountants are useless, or lawyers are useless. I also did not re-roof my house. But of course you could get terrible accountants, lawyers or roofers, and you could possibly be terrible at stuff yourself. Some people think programmers are useless and some are, but that's not sufficient to try writing it yourself if you aren't one.
Sure, because you (or your agent) managed to sell 10% more than asking price.
Try re-evaluating this 6% if all offers were 85-90% of asking price, and confirm that it is not really that much.
A good agent (as opposed to a bad one) will help (a lot) in a number of other things (bureaucracy, managing and dealing with the details, counsel - if needed - about other professionals such as lawyers and technicians, possibly help in finding a suitable contractor for renovation works, and similar) but they won't be able to raise or lower the price sensibly, the price is mainly due to the market (locally and at that exact moment).
And is the inspection done after, by the buyer?? Why isn't it done by the seller and included in the ad? That's mandatory here. Sounds like a recipe for disaster and conflicts.