Comment by csense | Hacker News Reader

Comment by csense | Hacker News Reader

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> housing/real estate mainly

> If someone finds out to produce real wealth much cheaper, we'll see a major redefinition of consumer society.

Please learn basic economics.

The problem is that there's a limited amount of supply of real estate. Everyone wants real estate, so market participants bid up the price until supply and demand match.

If everyone in the world gets substantially wealthier in the next few decades, then they'll just bid higher and higher against each other for the same pool of real estate, driving up the price of real estate until enough people are priced out of the market for supply to again match demand [1].

Of course, Le Chatelier's principle [2] says that as the prices rise, changes will happen that oppose the rise in prices. For example, if you're a company in a land-intensive sector like agriculture, more expensive land means you invest more in existing equipment and techniques that can help you use your land more effectively right now, and R&D into brand new equipment and techniques that will help you use your land more effectively in the future.

Likewise, if land prices rise, prices of other goods will change to reflect the cost of land used to produce them. Because land-intensive products are more expensive in this world, people will naturally make decisions on their own to use less of them. Falling demand for land-intensive products will translate directly into reduced demand for land to produce them, opposing the rise in prices.

[1] Assuming no new supply of real estate is discovered. Of course, it's possible that new supply sources will be discovered causing a drop in prices, or blunting the impact of the forces that cause housing prices to rise. While we can rule out the discovery of a new continent as happened with the European "discovery" of North and South America, it's conceivable that within 100 years we'll have some combination of space colonies, artificial islands, multilevel cities / more high-rise construction, better technology for doing things in deserts and other presently marginal regions, underground buildings...

[2] http://en.wikipedia.org/wiki/Le_Chatelier%27s_principle

> The problem is that there's a limited amount of supply of real estate. Everyone wants real estate, so market participants bid up the price until supply and demand match.

In most developed countries, real estate prices are artificially inflated by restrictions on the construction of new housing stock.

This is far from a simple case of supply and demand.

> real estate prices are artificially inflated by restrictions on the construction of new housing stock.

How do you explain the housing crisis? The backlog of unsold homes that developed in many parts of the country says to me that prices didn't fall far enough. That is, due to the way market participants act, housing prices are "sticky" like wages. Sellers (mainly banks) apparently would rather let a house sit vacant and unsold than set sale prices at levels that would allow the market to clear (and take big capital losses).

I'd say that it's clear evidence that real estate prices are inflated -- not by zoning regulations, but by perverse incentives produced by the way real estate lenders keep their account books.

This falls in line with the picture that, due to the loan bundling practices that were encouraged by US government agencies Fannie Mae and Freddie Mac, the owners of most housing loans weren't the same as their originators and hence, this created an incentive for the originators to make loans to people who couldn't pay them in the long run. Which increased demand in the housing market due to allowing these borrowers to enter (their shaky financial status would have been excluded them if they hadn't had access to the questionable loans), which caused prices to rise. Eventually a lot of those borrowers (predictably) went bankrupt and exited the market, dumping the extra supply (now-vacant houses) on the banks (which obviously promptly put them on the market, since being homeowners is out-of-scope of most banks' business plans -- they'd much rather be the creditors of homeowners, a role they're much better set up to play).

But prices couldn't fall again and return us to the status quo ante, because not enough sellers were willing to go with Option A: Sell for whatever buyers are offering, and take an immediate capital loss in their books.

The banks were more willing to go with the alternative, Option B -- tolerating the damage over time of the taxes and expenses involved in owning a vacant house for many months or years. Although the costs of Option B would, over a sufficiently long period, dwarf those of Option A, the short-term incentives of upper management -- encouraged by short-term thinking common among investors and, indeed, endemic in the financial industry as a whole -- made Option B more attractive due to its better short-term results.

> artificially inflated

Keep in mind that at least in the US, many people own homes -- many times with a mortgage, which essentially makes it a leveraged bet, so small swings affect them more. (If you spend $200k on a $200k home and its price drops to $190k, you've suffered a 5% loss -- ho-hum. If you have $10k equity in your $200k home and its price drops to $190k, you've been wiped out -- suffered a 100% loss.)

Many people were "sold" on a mortgage by someone promising them that "it's an investment that will always go up." Because most people are rather ignorant about finance, and a home purchase is the largest single transaction they will ever make, a US politician seriously proposing what seems to be the trend of this discussion -- that house prices should go down -- would provoke an enormous political firestorm from the vast number of people with money on the table, at least as big as the current gun control debate.

In an ideal world, we'd implement the policy backed by the soundest argument and the best evidence. I'm not taking a position on what the best policy is at the moment. I just want to note that, if it turns out the best policy is one that calls for substantial deflation of housing prices, politics would likely kill it quickly.

Sorry for the double reply, but I think the above paragraphs say something substantially different from my other reply to the parent and really belong in their own comment.

It's still a case of supply and demand, just that the supply of build able real estate isn't just about dirt. It's dirt with a road,sewage, power and legal status allowing dwellings.

The point still stands - even a radical readjustment in planning policies could maybe double land supply - but a type of moores law with land will never happen.

> a type of moores law with land will never happen.

Never say "never." It's easy to imagine a future where interplanetary travel is routine, and habitable places are common (either due to the human race getting lucky in terms of there being an abundance of vacant Earth-like planets within easy range of future space drives, or due to the human race being diligent in the development of technology to live on hostile worlds or asteroids).

In such a future, I could readily imagine the human race expanding geometrically -- such expansion would end when we reached the edge of the galaxy, but that would still give tens of thousands of years of unlimited geometric expansion, assuming our ships are self-sufficient and can penetrate any within-galaxy area void of habitable planets, and also assuming our space drives won't allow faster-than-light travel (I think the galaxy is ~100,000 light years in diameter).

Should we count on things turning out that way? It seems irresponsible to assume so at this point. But it also seems like we shouldn't discount this scenario entirely, either -- and discounting this possibility is exactly what you're doing when you say "a type of moores law with land will never happen."

We don't need - we no longer grow our populations exponentially.

There is still the underlying point of resource distribution. When you have some people buying things they do not need, while other people cannot afford things they do need, that means that resources went into producing the things that are needed less. Becuase of the decreasing value of money, it is in your best interest to convert your money into stuff, wheather or not that stuff is a good use of resources. I think this inefficiency is invevitable in an economy based around a concept of money simmilar to our own, but we should acknowledge that it is sub-optimum in terms of societal interests.

> it is in your best interest to convert your money into stuff

Not necessarily. If by "stuff" you mean "real estate" -- since that is what this part of the discussion was talking about -- keep in mind that it's taxed annually as an asset, at least in most places in the US. Plus any structures get older every year, and things break, and needs heated in the winter even if unoccupied (if you live in the frozen northlands as I do, this is necessary to keep ice from forming in the pipes and causing them to rupture).

You have to have renters for real estate to become viable as an investment. And there are a ton of regulatory headaches to comply with. It can be difficult to get rid of problematic tenants because of Equal Opportunity and whatnot, in some places you have to deal with Rent Control, etc. If you've ever watched Judge Judy, you know that some tenants like to trash their place, use your property for illegal activities, make subleases which you wouldn't approve of if you knew about them...

In short, being a real estate mogul is a business like any other business: You have to have your hand on the tiller if you want to steer a successful course.

For set-it-and-forget-it investing, I'd stick to an index ETF.

How either real estate or stock investing is "suboptimum in terms of societal interests" is something I fail to follow.

Most "stuff" decreases in economic value faster than money, so I don't really see the point you're making.

Neither can you store the money for long (5+ year) periods. The rate of inflation, and taxes, exceeds the interest on standard bank accounts.

That's why people just waste their money on things they don't need.

The problem is that real estate (education, medical care) has this property when they can suck any amount of money from the economy. All other services and wares because cheaper, wages rise, but real estate (education, medical care) can eat all this difference and make you even poorer.

That's because demand is inflexible. And supply is artifically scarce. Artifically because it's not hard to build more and more housing - there's plenty of room in most of the countries.

> it's not hard to build more and more housing - there's plenty of room in most of the countries.

Building a house doesn't just involve taking a bunch of wood or bricks and making a big box.

You have to dig a hole in the ground to give a solid foundation to make sure the house doesn't shift. You have to have a variety of materials -- siding, insulation, roofing materials, interior walls, exterior walls, doors, windows.

Then of course most people expect new houses to have electricity, running water, sewage disposal, gas, and telephone and cable lines. A lot of this involves running stuff everywhere through the house.

Then you can't just take a square mile of wilderness and have everyone build their own house wherever they want. First the trees and whatever have to be cleared until you have enough space for a house. And most people want a yard to go with their house, not a forest or swamp or whatever it was before.

You can bemoan government regulation all you want, but those houses need to laid out according to a central plan so the lines for the aforementioned electricity and water and whatnot can be laid efficiently. Not to mention the roads and driveways, which people also generally expect houses to have, especially if they're new.

Needless to say, this all requires a ton of equipment and labor, and also tends to go a lot better if you have at least a few specialists on hand who have done this before and thus are familiar with the standard methods of resolving common issues that might arise during construction.

And then there's the pesky issue of building codes. Again, it's government regulation, but in this case I'd rather err on the side of knowing someone actually checked that the man or woman in charge of building my house knew what he or she was doing, and that someone else who is also a trained professional -- a government inspector -- looked at the end result of that work and made sure that all of the above things were done in a way that's sufficiently safe and structurally sound for human habitation.

Of course, all the best locations for building houses -- with the best access to existing roads, closeness to desirable locations, favorable terrain, etc., are already taken. In my area of the country, several new developments have been built in wetlands. Besides the environmental issues of building in wetlands, those houses are slowly and unevenly sinking into the ground, and have issues with water seeping into their basements.

I could go on and on. Neither I nor, apparently, you, have ever built a house. But at least I am vaguely aware of why it's ridiculous to say that "it's not hard to build housing."

As for "demand is inflexible" or "supply is artificially scarce..." In case you haven't noticed, the USA just got out of a housing crisis. In many areas of the country, there are still a lot of homes for sale on the market that can't find buyers. See my other comment elsewhere in this discussion [1] for more on this.

[1] http://news.ycombinator.com/item?id=4958251

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