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Comment by osigurdson | Hacker News Reader

I used to think that if average income cannot afford the average home, the market must necessarily correct. I’m wrong about this obviously but I still cannot understand why. I understand that wealthier people have vacation homes, but the only reason for a wealthy person to purchase an additional non-vacation home is to rent it out to someone less wealthy. Since the less wealthy person couldn’t cover the mortgage to begin with, the investment will be cash flow negative. The only hope is price appreciation which logically should never materialize.

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Housing can not be both an investment and affordable.

This might sound like a complex or intricate statement, but it is deceptively simple.

If you graph housing price over time, is the graph increasing or decreasing? If it is increasing then housing is a good investment and therefore becoming less affordable, if it's decreasing then housing is not a good investment because it is becoming cheaper and therefore more affordable.

It is supply and demand. As long as supply is restricted homes will increase in value, and if homes increase in value, that's a pretty good indicator supply is not increasing.

This is in aggregate, of course.

Homeowners want their homes to appreciate in value, and many, particularly old people, are using homes as their main vehicles of investment, so of course any policy to increase supply is bad for them. This creates an incredibly powerful political force.

How do you fight that political force?

This can be solved with subdivision, sure grandmas land is now worth 3M. But we will build a mid rise apartment building on it that regular people can afford.

Why do we need to lower our expectations now? Single family homes are what most people want. Why jam people into apartments if they don’t want to live in them? All houses should be cheap imo - it is just a few cheap sticks and some plastic after all.

Some cities obviously have no room to expand so the only option is higher density. Where that is not the case, build single family homes en mass until anyone can afford one. I’m a home owner now but would rather see people be able to afford what they want than to see my own 2x4s appreciate.

To clarify the issue isn't really shortage of single family homes by itself but single family homes nearby amenities (jobs etc...) Which while one can build massive freeways (Los Angeles, Atlanta etc...) eventually you'll run out of land a circular radius or end up having to build ever larger freeways to reach those suburbs.

I'm not sure if the massive freeways will really be needed. If a significant portion of people can work from home, I don't see much reason for it. I think the ideal future for many is single family homes in a resort like setting. If you are already where you want to be, there are fewer reasons to drive to other places.

That’s miserable for kids because they will always be too far from their friends at school and will be stuck at home with nothing but video games and tiktok.

When I was in school most of my friends lived in the inner suburbs and had good access to public transport so they could all meet up in the city and do things, while I was further out in an arguably richer area but without public transport so I was stuck inside missing out.

Many people don’t actually want single family homes. In my 20’s I was regularly on the lookout for efficiencies but I could rarely find them. It wasn’t about cost I just liked the layout more.

That is fair, no issues as long as we are building what people want - not what city councillors believe is best for everyone other than themselves.

I don't think I buy that without a bit more justification. On an individual case, or when analyzed very locally, there can be wild departures from the aggregate case, but if housing is rapidly increased compared to demand, in aggregate, how can that not plummet the price of grandma's land for the aggregate grandma?

housing should not be an investment. simple as that.

> Housing can not be both an investment and affordable.

If old homes were somehow better and more desirable, they could theoretically be both. But homes aren't like comic books or magic cards: newer-built ones are generally better in quality, often dramatically so.

Homes may be both affordable and an investment as long as median income increases faster than inflation.

Being a good investment is a different question and really comes down to your alternatives. You need to sleep somewhere, and renting includes many overheads. Depending on how you value your time and what skills you have managing your own home can be worthwhile or a waste. A carpenter may use their downtime between jobs to improve and flip their houses while a doctor is wasting time calling people for even the most modest repairs.

> Housing can not be both an investment and affordable.

Mathematically this isn’t true, as housing (even owner-occupied housing) pays a dividend [0]. So a house whose price tracks inflation (0% real price return) that pays a 4% dividend in net operating income still has a respectable 4% real return. Juice that return way up with a fixed-rate mortgage and you still have a great investment without home prices racing past affordability for normal people.

But that’s just the theoretical perspective. I don’t know if housing can be a good investment and affordable in practice.

[0] https://earlyretirementnow.com/2017/11/15/that-house-over-th...

This is something that only makes sense in the lunacy of housing-based-investment.

Your house might pay a dividend, but it has immense maintenance cost.

If the dividend from your house, on average, is enough to pay this cost, we’re in this hellscape.

Anecdotally, when my wife and I were looking at homes it'd be inevitable we'd hear someone else at the open houses talking about their 7th or 8th investment property.

My wife is the chatty sort, so she'd ask them about how they could afford it and they'd always be leveraged up to the eyeballs. The cheap credit hog has been a complete disaster, and when the rates inevitably rise to where they should be we're going to see a lot of idiots with a lot of unbacked debt defaulting on everything.

If they locked in the rates for 30 years, then they can be leveraged and probably be fine. Anyone know if investment properties are eligible for the same 30-year fixed that primary homes are?

Not eligible

It seems like you can get a 30-year fixed on a rental property. Am I misreading that?

It is the combination that did it. Restrictive zoning limited available housing stock. Then financialization optimized the market for extractive high profits.

Make it possible to build more then the market should eventually correct, but the financial squeeze will continue until the market has plenty of supply as often referred to by economists as market clearance such that demand is saturated at all levels.

Covering a mortgage payment each month is much more feasible than purchasing a house for most. The real issue is saving for the down payment and having good enough credit to get approved for a loan.

There's a considerable difference between the loan payment with a big down payment and good credit versus bad credit and a low down payment. That difference can essentially turn an unaffordable home purchase into an "affordable" monthly rent.

Your thesis is a large number of people are right at the inflection point between being able to afford mortgage payments but cannot qualify for a mortgage. I don’t mean to sound harsh but this seems like a highly unlikely explanation.

My thesis is that there are a lot of people that either can't qualify for a mortgage, can't save up enough money for a reasonable down payment, qualify for a mortgage that they can't reasonably afford, etc.

On a 300k house, the difference between 5% and 20% down results in around a 400 dollar difference per month in a mortgage payment. That can be a pretty big difference maker for a lot of families.

5% down on a house like that is also 15k. That's a significant amount of money to save for a lot of families.

There are other relevant factors here as well, but this is certainly a significant one.

> the market must necessarily correct

This kind of market-based intuition doesn't always work in a constrained market like housing, where what kind of housing you're allowed to build, how much of it, or whether you can build housing at all, is all heavily determined by local regulation.

> Since the less wealthy person couldn’t cover the mortgage to begin with

In the US, this isn't true. It's not uncommon for property to rent for higher than the cost of mortgage, taxes and insurance. That is, be profitable from day one (assuming 20% down).

People complain about being able to afford a mortgage but not being given one. Or not being approved for a monthly payment of Y and instead paying Y+X a month in rent.

In China, the situation you described exists. Have no idea about in Europe.

The market cannot optimize itself because a number of legislation like Prop 13, restrictive zoning and height limitations are there to prevent an efficient market.

Because the interest rate is low and people could have afforded it based on the loans the banks were giving

Seriously... Just a few years ago, banks were giving you loans for like 1 - 5 percent down..

It's not a free market due to restrictive zoning. If artificial rules limit the supply of housing in places where people actually want to live, how could the market correct?

The rationale I have for explaining situations where it doesn't feel like prices are being dictated by the relative levels of supply and demand is that there is latency involved in reaching equilibrium.

The time it takes for prices to reflect reality can take far far longer, in some cases, than anyone is comfortable accepting. There is no fundamental law that says things need to happen at the speed of convenience.

Certainly over the course of human history some sociopolitical or economic arcs took multiple human lifetimes to play themselves out.

because there’s a big gulf between “afford” and “survive”. The point at which most people could afford housing passed by long ago, nowadays housing is something many people are only able to survive the cost of by making big sacrifices elsewhere. Housing is not optional, there’s no room to cut a little cost here or a little cost there, so everything else is sacrificed before it.

Landlords couldn’t care less about affordability, so “the market” is very happy to make money by pushing people into survival mode.

(Affordability in housing is often measured as being up to 30% of income, whereas people can survive by sacrificing everything else — including heat, and food — spending up to 80% of their income on housing. That gap is where the increases and profit of the last decade have been coming from.)

Borrowing turned your initial thought on it's head.

Homeownership has never been anything close to 100% of the populaion. Historically I think its about 65%. It's probably more like you need a median income to afford a 25th percentile home. I don't have the actual data on that but it's my guess based on the fact that 65% of the population owns a home (which is verifiable).

The beneficiary from a market distortion is incentivized to invest (lobbyists, media, pressure campaigns) in maintaining and extending that distortion in order to make even more money.

The average income of folks in SF can afford an average house in SF.

But the average income of folks in SF is really high, because people without very high incomes can't live in SF!

That's bad.

I think it’s the nature of averages. Why should it be the case? There are a lot of people earning minimum wage, which brings down the average etc.

What is the average home? Is it a detached single family house, half a duplex, apartment, trailer in a trailer park?

What do you think the correction in a supply constrained market is supposed to look like?

> I’m wrong about this obviously but I still cannot understand why.

I have this theory (I wish I could think of a way to easily prove it right with some kind of cherry-picked statistics/data but I'm not confident I'd be able to) that we've finally reached a point (I'm sure it isn't the first time in history but I don't know a lot of history) in "late-stage capitalism" that the top 20% don't mind paying/can pay/will pay/are willing to pay/compete with each other to the point where the bottom 80% can't keep up.

My source is, I tried to buy a house semi-recently. All of the typical stuff you read. Lots of demand/competition. Middle class stuff. The houses sold for what it sold for because that's what people are willing to pay.

Whether it's because the couple who won the bid had bought a $300k house 10 years ago and it doubled and they had $300k extra in funny money equity fall out of the sky is almost irrelevant because it puts them in that "20%" category. Once you are in that category (in my mind), things like "I should drive a Corollla to be efficient" go out the window when every stop light is people who can comfortably afford $80k BMWs without blinking an eye. "Who would pay that?! You can get a good used car for $20k! Blasphemy"

I see it like this:

If a house is priced for $600k but your gut (bias based on historical data) says "it was just $400k not too long ago, it should be worth $400k! this is madness", but then the market moves on and leaves you in the dust (and that $600k house goes from $600k to $700k and beyond), it's just upper middle class people paying (hopefully) what they can afford/are willing to pay.

Essentially, the power of money grows exponentially. A well-off tech person earning a few hundred thousand dollars per year has the financial power equivalent to dozens of minimum wage people. I agree that we’re now at the point where there is so much money at the top that the power imbalance is too influential to be ignored. A few decades ago, the number of wealthy people was so small and their reach so short that it was unlikely the average person would experience any of their influence… nowadays, every block has someone wealthy enough to be buying up property with borrowed money to turn it into an airbnb. The influence of money today has permeated every aspect of our lives. And we, as well off tech people, are partly to blame.

> I agree that we’re now at the point where there is so much money at the top that the power imbalance is too influential to be ignored.

Would you agree if I said the problem isn't really the billionaires when it comes to why middle class hard working people can't afford a single family house, but instead it's people making $200k/yr+?

I think the most direct responsibility for the community level impact is with the people earning $200k+ who are irresponsibly exercising the power that income brings. For example, it’s so common for families making good money to do things like buy investment properties in their local community… which is growing their wealth at the expense of their community.

However, the reason we are all able to earn so much is due to the ruthless pursuit of capital further up the market. The only reason we are able to earn so much is because billionaire business people decided that the best way to maximise their company value was to take the not-innovative option and pay lots of people huge amounts of money.

> I think the most direct responsibility for the community level impact is with the people earning $200k+ who are irresponsibly exercising the power that income brings.

I think irresponsible is probably a poor word choice here (in my opinion) just because it leads my mind to think the assumption "why aren't they entitled to spend the money they earned the way they want to"

But instead of splitting hairs there, I'd be more curious to potentially partner with you in the effort to accurately determine whether the effects of the group we are specifically discussing are actually having a sizable impact in "harming" (preventing) the groups below them from being able to purchase a house

because inflation is high it could be used as an investment.

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