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Comment by stouset | Hacker News Reader

> This means that my family's wealth has increased by $75,000 per year just from owning our home.

Sort of, but in practice not really (particularly when interest rates are higher, like now). The only meaningful way to realize that extra wealth is to sell. But then you’ve got to live somewhere, but everywhere else has (on average) gotten proportionally more expensive too. The only way to really capture that wealth is to downgrade or to go to an area that has underperformed, neither of which are typically appealing options, nor are they generally aligned with our notions of “increased personal wealth”.

What’s really happened is that non-homeowners have effectively gotten effectively poorer since their only options are to pay increasingly-large rents or buy at inflated prices.

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No, this is purely wealth, it's not a "sort of" it's the actual real wealth just like a bag of diamonds in a safe.

Indeed, homes are some of the most liquid form of wealth, easily leveraged with loans to buy even more property. And home values are one thing that governments are most likely to protect through drastic policy changes. Sure, you can take out a loan backed by your diamonds, but it won't be on terms as good as that of your home.

Home wealth really is one of the strongest forms of wealth there is, and people trying to pretend it is not have no concept of how lucky they are, or even what wealth really means.

People without this wealth are forced to pay their rent to others, who accept both the rent and then the real estate gains.

> People without this wealth are forced to pay their rent to others, who accept both the rent and then the real estate gains.

I note this in that not owning results in being beholden to increasing rents and at a cost disadvantage in buying a future home.

But the property value gains are hard to realize in a meaningful way. Yes, you can potentially leverage your equity into acquiring more homes. But real estate gains have traditionally lagged the stock market. So as you continue this cycle, you increase your leverage dramatically while investing in highly-correlated and slightly underperforming assets.

Meanwhile, little of these gains are able to be used for actual lifestyle improvements until you start unloading these properties.

Well the location is the lifestyle. If the homeowner doesn't value the location as much as all the wealthy people clamoring for a spot in the neighborhood, yet they still hold onto their home, it truly is a bad allocation of resources among people.

None of these homeowners would even consider the option of selling their home and renting it from the purchaser, because it is so obviously a bad idea in every way. But their blindness to the alternative is also indicative of just how amazing a form of wealth is.

Super wealthy people are always convincing themselves that they are not wealthy, because they always see others with a higher level of lifestyle. I knew an older man who had built an empire of hotels, but because he wasn't Hilton, he always felt like a failure despite never flying commercial, owning mansions across the world, and being surrounded by servants at his beck and call.

When people have raised their wealth without their lifestyle "changing," yet they can now move nearly anywhere else and have a massive lifestyle improvement in consumption, without the location they were in, they somehow trick themselves into thinking this is not wealth.

> they still hold onto their home, it truly is a bad allocation of resources among people.

The above statement assumes that a home is nothing but a cold investment decision.

A home is a place to live and a neighborhood to grow older in. It is not an "allocation of resources".

People hold on to their home because they like it there, they like the neighbors, their kids like their friends in the area and so on. It is not a financial decision. It's a home. This is often lost in these discussions.

A home is all those that things, but it's also a scarce resource that costs a lot to build and that we don't have enough of. So for every market inefficiency we accept on the basis that a home is special (which isn't wrong!) we accept some level of people dying in the streets, or young people being pushed out of their hometowns, or families never being started.

We don’t have to accept it to this degree though. We have options available to limit who can participate in local markets, and to what extant. A foreign billionaire with loose ties at best to the locations in question should not be eligible to buy houses as they please as “investments”, in fact I find it a strenuous ask to allow local billionaires to do the same. I certainly wasn’t happy to hear a Silicon Valley billionaire moved back to my area and started buying up land in a vain attempt to “revitalize” the area, only to sit on it for the last 5 years.

The problem is that enforcing any sort of restrictions would be warped to disproportionately affect the 99% while the 1% would use loopholes to continue doing as they please. So it would probably be more pragmatic to eat the rich and their lackeys before anything else.

I think you are forgetting the most common way people realize this: sell house for gain, use money to afford down payment on nicer home, perhaps enough to end up paying a similar monthly payment in the end. People act like you need to go from paid off house to paid off house but thats hardly the case. Partially paid off house to even less paid off house is common especially if you know you will be working for another few decades.

I’m not forgetting this. The house was a store of wealth. Assuming your house went up 50% in value, it’s reasonable to assume a better house in a nicer area also went up by something near 50% in that time.

This is an assumption, but on average this is true.

If that’s the case, the extra wealth you have for purchasing the new home was simply having a convenient way to store your down payment while saving additional money each month in the form of your principal.

Some people do actually realize a good part of their gains by retiring to the countryside and keeping the lion’s share of their RE gains. But this is something you get to do more or less once, and it’s something generally done in one’s twilight years. Nothing to sneeze at of course, but it again doesn’t really dovetail with the notion of a means to become practically wealthy.

Uh, home equity lines of credit are a thing in most places. They certainly are in the US!

Also, renting out rooms. Also ‘granny flats’, etc.

HELOC isn't free money. You have to pay it back. Unless you're suggesting that you use the money to make bets.

That's a pretty common investing strategy. Take a HELOC, invest the money in index funds or whatever, and take a tax write-off for the interest. As long as the average return beats the HELOC rate (minus tax deductions) you come out ahead.

Someone noted it as an investment strategy (which is one way), but I was specifically using it to address the ‘you don’t get the money until you sell’ element.

You pull money out of the HELOC, which does give you access to the equity. You then pay it down similar to a mortgage, at very low rates.

You just cashed out some of the ‘inaccessible’ equity by using it as loan collateral.

You’d still get to live there, and any gains in equity will be 100% yours. But you have cash now, with low payments and low interest to pay it back. If you do sell, proceeds could go right into paying it off.

There are similar ways to setup second mortgages, etc.

> real estate gains have traditionally lagged the stock market

Does that take into account the relative ease and long term leveraging in real estate vs. the stock market?

Considering the above scenario where real estate is gaining at 75k per year. A wealthy individual could easily leaver themselves to 75*5 = 375k/yr. Using the starting cost of a home at 600k, this would equate to an average rate of return of about 300%

Such rates of returns are simply impossible in the general stock market without getting very lucky.

You can lever yourself in the stock market too.

Not with 30-year lock-in in rates and with a similar commitment to avoiding margin calls for that long if your bet goes poorly in the short term.

My parents bought their house for $150k in Miami in the 90's. They sold it last year for 800k. Then moved to a cheaper town in central Florida where they got a place for 200k.

> ...actual real wealth just like a bag of diamonds in a safe.

Vs. the grim reality:

https://fortune.com/2023/09/03/diamond-demand-falling-lab-gr...

And if this was happening to home values, there would be a panic in the legislature and all sorts of policy to stop it and preserve home wealth.

Which is one of the reasons it rubs me so wrong when people think their homes are not a form of wealth.

Homes are a form of wealth. They are not a liquid form of wealth, and they are more practically a store of wealth for the overwhelming majority of your life.

The one way to generally extract this gain in wealth is to downgrade (e.g., retire to a quiet place in the boonies), and that’s generally a one-time option and not something everyone wants to do.

Liquidity isn't a yes no thing, it's on a spectrum. The legal structures around housing, in addition to the financial products, many invented by legislative force (e.g 30 year fixes rate mortgages), mean that one access cash via real estate much more easily than many other assets, without even having to transact that asset.

This is a remarkable feature of real estate as wealth.

While there are other forms of wealth with more liquidity, housing wealth and real estate really are up near the top of the ones that give a person access to cash.

Nice example of supply/demand and why we just need to build more units.

It's not, though. Since 1970 home prices in the US have gone up 16x and the S&P 500 has gone up 44x. Adjusted for inflation, that's 2x for houses and 5.5x for stocks. And you don't have to sell your stock if you have to move (and take a 6% hit on RE agent commissions) or pay money to maintain it. You can borrow against it whenever you want with just the click of a button. Of course housing sounds like a great form of wealth when you compare it to the hilariously bad investment of a bag of diamonds in a safe.

These calculations ignore that most homes are eligible for extreme amounts of highly protected leverage. Sure, you can trade on margin on the stock market, but you are subject to margin calls, which is not the case with a home.

So multiple that 16x by the typical 4x-5x leveraging, and homes turn out to be really great. And since the transaction fees and the non-existence of index funds in the 1970s made it harder to invest in the stock market at a small scale, and homes were a much better investment.

Add on to that that everybody needs a place to live, and your home acting as an investment vehicle with equivalent performance to the US stock market, and people from the 1970s have had had an amazing deal that younger people have not had access to.

But you have to put that capital in anyway because house leverage is amortizing. Margin debt is not.

All that leverage absolutely crushed investors in the 2008 housing crash, and is again now ruining people who had poor or nonexistent interest rate hedges.

The idea that it’s easy or natural to make money via leveraged housing had ruined many people.

This isn't really a thing in the US right now. Less than 10% of mortgages are adjustable. The share of ARMs in 08 was much, much higher.

*/1 ARMs are insane and shouldn't be allowed in the market.

*/5s or even */3s offer an interesting option, depending on terms.

Yup, people don't realize that leverage works both way. It's not a freebie.

The difference here is that you would make 44x from the spare change you can save every month after paying for rent, not from a loan worth >5x your yearly salary.

A loan which you have to pay back with interest. So unless home prices are rising faster than interest rates, you're losing on that deal

Or, you know, you rent out the place.

And if you are your own landlord (ie a homeowner) you can pretend your rent is whatever you want, but the market rent is what one should impute as the value of that rent.

Which you can still lose on. Most major markets in the US now rent below cost to own.

Yes, but:

1) Historically they have.

2) Most people in the US that haven't purchased very recently are locked in at very low rates. Only 9% of mortgages are over 6%. 61% of outstanding mortages are <4% [0].

3) There are a lot of incentives (and the ability) for governments to ensure home prices continue to increase, although at a rate lower than they are now.

4) We spent over a year with inflation that is double most people's mortgage rates.

5) You have to live somewhere regardless; the alternative is renting. For most of the country, at least until very recently, that was a worse option.

[0] https://apolloacademy.com/the-distribution-of-mortgage-inter...

You are looking at avg gain. I can tell you anecdotally that over the past 25 years there have been markets that have barely budged at all in median prices, and markets that have seen fold change gains in median home prices. In some markets you are doing a lot worse than the index, in others you handily beat the index and these are generally the ones people bemoan in cost of living articles in the media.

> Indeed, homes are some of the most liquid form of wealth

"Liquid" means fast to sell without giving a deep discount. Homes are far less liquid than listed securities.

> And home values are one thing that governments are most likely to protect through drastic policy changes

100%. Home owners are one of the most selfish voting blocs out there, and will punish politicians for not perpetuating unsustainable policies at the expense of the greater social good. That makes it a very good investment, at least until society completes its transition away from capitalism to a new kind of feudalism.

Indeed, homes are some of the most liquid form of wealth, easily leveraged with loans to buy even more property

They absolutely aren't.

Transaction costs are very high (6%), the time required to sell can be months.

Borrowing against a house is not the definition of a "liquid asset". By that same logic a complex equity with no market could still be "liquid" because you could borrow against it.

> Indeed, homes are some of the most liquid form of wealth

Real estate is not a liquid asset by the definition of that term. Example:

https://www.investopedia.com/ask/answers/032715/what-items-a...

(Jewelry (as in your diamonds) are not liquid assets either.)

A primary residence is even less liquid for the reasons PP stated. Sure, you can sell it but then what? You still have to live somewhere so you can't use that money for something else, you'd have to buy another home at which point the money is locked up in real estate again. The only time you can extract that wealth into cash is if you can downsize to a much smaller home, or move to a much cheaper area.

So yes, a primary home is real wealth, but it is as far from liquid as any form of wealth can be.

The only way to really capture that wealth is to downgrade or to go to an area that has underperformed, neither of which are typically appealing options, nor are they generally aligned with our notions of “increased personal wealth”.

There are people doing that. I know of multiple people who have sold their $1m++ houses in the city and moved out to retire on farms. Their property taxes and total cost of living went way down and all of that real estate wealth turned into cash.

A lot of Ontario license plates here in Alberta these days.

Do you mean that there are a lot of Ontarians temporarily staying in Alberta for less than 183 days, or that a lot of those newly minted former-Ontarians Albertans arrived in the last 90 days[1]?

[1] https://www.alberta.ca/transfer-vehicle-registration

Not necessarily. Home Equity Lines of Credit (HELOC) are a thing. My admittedly overly simplistic understanding is that the higher the valuation of your house, the higher line of credit you can borrow against it, thus the incentive to keep valuation high even if it's unrealized.

It's not just the valuation of the house it's debit to equity.

In a $100k home where you owe $80k the HELOC would be like only $10k - and the rate would be less good.

In the same home where you owe $20k (have $80k equity) you could borrow $50k at a better rate.

They would still need to pay back the HELOC using actual cash, not unrealized gains from estimated home value. Seems like an extremely small benefit.

A large part of the 2008 housing crash in the US was driven by HELOCs where the borrower ended up not being able to repay or refinance. Such loans can be a good way to access the value of the home, but only at the expense of reduced consumption while paying the loan off or reduced payout when it finally selling.

It works out to effectively way more than $75k/yr in realizable income because, in the US at least, long term capital gains on your primary residence are heavily tax-advantaged in a way that income isn't.

Even better in Canada since capital gains on your primary residence is not taxed at all.

Same in the UK

This entire thread is unsophisticated people bemoaning (or celebrating) things they don't understand. A median that is going to be less than 1 house for a 30 year old, and maybe 3 in the average lifetime, so truly, what do they know? 90th percentile is probably 10 trades. It's garbage in, garbage out, and it's why there is zero progress made on any of these issues.

Nobody forces you to buy, or sell, a house. And if you feel strongly about the politics of the issues, try to get elected.

It's one of the only assets available to "normal people" that is highly leveraged (yet also protected in many ways).

So that 200-something-thousand-dollar increase is on a downpayment that may have originally just been 200K or less.

Short-term "stepping up" through a series of properties can be much more wealth-building than, say, renting + investing in stocks. The longer you stay in one place the less advantageous the returns are over just putting the down payment in the market, but then having a concrete asset has its own benefits even then.

Except when interest rates are near 0%, you can take a loan against the house and use as leverage to buy more stocks (or property).

> The only meaningful way to realize that extra wealth is to sell

This is true only on first approximation. On second approximation rent prices are positively correlated with property prices. This means that rent_amount / mortgage >>> 1 and if you rent the place out you can essentially get passive income. You are correct that you still need to live somewhere and that is going to come at a cost which will eat up the passive income, but effective rent will still be lower.

Another option is to realize that lower mortgage compared to equivalent rent means that extra cash is freed up towards other things. This can either be extra investments every month, experiences such as traveling the world, or even a lower paying job with a lot less stress.

The problem these days, though, is that the equity in House 1 is often needed to buy House 2 if you move, otherwise you're dipping into your nest egg for a second down payment, which is not financially wise. Equities generally have a higher rate of return than real estate.

Also, multiple homes mean multiple maintenance bills, and also the potential for bad tenants wrecking the place. I had a rental property in the past and had to spend multiple thousand dollars staging it for sale because, renters generally DGAF about maintenance, and property managers get lazy and do the bare minimum to get it rented.

I don't see the problem here. You aren't entitled to ownership of multiple houses. Being forced to sell one house in order to buy another one sounds like working as intended to me.

But that’s entirely my point. It’s hard to actually realize these gains in practice since when you sell your house, the increase in value is absorbed by buying your next residence, which has on average also inflated in value.

Unless you move somewhere the cost of living isn't crazy, and pocket the difference.

That’s a one-time trick, and it only really works if you were already wealthy enough to own in a HCOL area to begin with.

Plus “moving to a less desirable area” doesn’t really dovetail with most people’s assumption of “increased personal wealth”. It is sometimes a good option for retiring somewhere cheap, which absolutely reflects a real increase in net worth. But it’s far from liquid worth and requires steep compromises not everyone is a fan of.

My point was that "rent it out and print money" doesn't always work. I did it with a home I owned, but that was also a period of time where I was a) bouncing around the country renting the roof over my own head and b) waiting to sell after taking it in the shorts value-wise during the Great Recession. I was never underwater, but would have taken a huge capital loss for awhile if I'd sold.

You aren't entitled to ownership of a single house, either.

This is an English sentence with grammatical structure, yet no coherent meaning.

If I can be approved for a mortgage or have cash on hand, and have someone agree to sell me a house, and I sign a contract with them to purchase said house on such-and-such a date, and I fulfill my end of the deal and don't default on the contract, then yes, I am entitled to ownership of a single house. Because I bought it fair and square, and it's now legally mine. Just like if I were to stop making payments on said house, the bank would then seize it, and then I wouldn't be entitled to own that house any more, because I defaulted. This is not rocket science.

> The only meaningful way to realize that extra wealth is to sell. But then you’ve got to live somewhere

Which is one of many reasons we're considering leaving Toronto

tl;dr your wealth should be measured as "1 house" not in dollars.

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