
Gerontopoly: Homeownership, wealth, and age - jseliger
http://cityobservatory.org/gerontopoly-homeownership-wealth-and-age/
======
40acres
> Is the “dream” of homeownership really just a massive, intergenerational
> wealth transfer?

Yes & it has been this way since the inception of government backed loans.

I've recently been digging into the history of housing discrimination in the
US and how it relates to the racial wealth gap between blacks and whites. In
my opinion there is a clear line from redlining, blockbusting, white flight &
loan discrimination to the massive wealth gap among races we see today. It's
quite clear to me that one of the best ways to build generational wealth is by
the older generation passing off homes to the younger ones.

~~~
btilly
Theories like this one do not explain how it is that immigrant groups do
reasonably well. The history of the USA is filled with people who arrive with
no money, poor language skills, sometimes traumatized - and yet wind up doing
well within a generation or two.

[https://en.wikipedia.org/wiki/List_of_ethnic_groups_in_the_U...](https://en.wikipedia.org/wiki/List_of_ethnic_groups_in_the_United_States_by_household_income)
is a good starting point to think about. Look at groups such as Vietnamese and
Cambodians. They mostly arrived in my lifetime. Everything is against them.
Poor language skills, widespread PTSD from what they witnessed, no savings -
pretty bad picture.

And yet, look where they are today versus blacks. How did that happen?

~~~
40acres
> And yet, look where they are today versus blacks. How did that happen?

Generally I don't like to compare the struggles amongst minorities in America.
There is a multitude of factors that come into play when analyzing these types
of things..

But when you look at the history of discrimination vs. black people in America
you need to go back and consider the effects all the way back from slavery, to
Reconstruction/Redemption, Jim Crow, discriminatory housing policy,
discriminatory lending, discriminatory policing, discriminatory criminal
"justice", disenfranchisement on multiple levels, lynching, etc. etc. etc.
This is 400+ years of compounding discrimination against black people.

I'm not saying the Vietnamese and Cambodians (and for good measure the Irish &
the Italians) did not have it bad.. but I think we need to look at this with a
broader lens.

~~~
Clanan
You're focusing on a single variable. The above poster is recommending a
multivariate approach. If a similar minority group can start from a worse
position (not even knowing the language!) and advance to a better position in
a single generation, then your single variable is lacking. The response of "go
back 400 years" does not explain away the discrepancy. The common-sense
approach is to consider other factors too.

~~~
40acres
> If a similar minority group can start from a worse position (not even
> knowing the language!) and advance to a better position in a single
> generation, then your single variable is lacking.

I can't agree with this sentence. I agree, not knowing the language puts you
in a bad spot, but I think you are really underestimating the level of
discrimination vs. blacks in America if you think simply "not knowing the
language" is enough to put some immigrant group in a worse position than
blacks in America.

I'm not sure what other variables you'd like me to use in this analysis but I
think if you look back over the history of America you see that others have
used one variable to levy their discrimination and it's always been race.

~~~
Clanan
Are you saying present discrimination can explain the wealth gap? my initial
response assumed you meant historical discrimination explains the current
wealth gap. Thus, if other non-white groups can start at a similar level and
attain a higher outcome, then I would posit that other variables must play a
role. But maybe you're saying present discrimination (not levied at other
groups) can explain it.

> others have used one variable to levy their discrimination and it's always
> been race

There have been countless forms of discrimination, not all of them associated
with race. After all, it's imperfect people dealing with imperfect people.

Other factors I think are also relevant to present-day wealth gaps: family
norms/stability (e.g. single-parent prevalence), cultural expectations,
education, location. Undoubtedly these are entwined with each other and with
the variable of race.

~~~
40acres
I think historical and present discrimination explains the gap, but I would
say that the historical discrimination plays a bigger role because it has had
time to "compound".

My general defense against the "what about other minorities" argument is that
other minorities are not starting from a similar position to blacks in America
and that 400 years of discrimination has compounded and sets blacks back.

The other factors would be very interesting to analyze but once again I think
you would need to understand the entire history of America and racial
discrimination to make a full comparison, for example:

\- Family Norms / Stability: When comparing this across races you would need
to take in account a few things, such as the disproportionate amount of black
men who are incarcerated and how that affects family dynamics.

\- Education: You would need to consider the fact that most public schools are
funded via property tax, and then you would need to dig deep into housing
discrimination history to see why property values in black neighborhoods are
so low and why the schools are poorly funded also.. schools were segregated
for a long time and are still pretty segregated now.

\- Location: Most African Americans in America live in the south, which has a
lower GDP than other parts of America. However, the south was once an economic
power house in America... but the engine of that power house (slaves) never
benefited from the wealth they generated. So that would also be interesting to
analyze.

------
rifung
> As we’ve pointed out at City Observatory, there’s an inherent contradiction
> between the goals of promoting housing affordability and using homeownership
> as a wealth building strategy. Affordability requires that housing be stable
> in price; a good investment needs to appreciate. If housing is a great
> investment, its because its becoming less affordable. If housing stays
> affordable, it is, by definition, not an investment that generates gains.

I have thought about this before and really think we should stop treating home
ownership as an investment. However, I can't think of a way to do that which
is fair to those who bought homes already..

~~~
mistursinistur
Why does policy need to be "fair" to investors? New government policies move
asset values (including real estate values!) in both directions all the time.
Investors -- including homeowners -- are not entitled to an investment that
always appreciates.

This belief that we cannot do a thing unless that thing benefits wealthy
homeowners is harmful.

~~~
WesleyLivesay
In this case I believe it would have to be "fair" due to the political power
of home owners in most areas of the United States. The fastest way to lose
every vote from Suburbia is to lower the value of their greatest investment.

~~~
taurath
And this is how we get real estate bubbles. It’s already back to the “it’ll
always go up” stage even after 2007, in most areas with decent jobs that might
afford some security or ability to pay mortgages.

------
nostrademons
Much of this is predicted by classical economics.

When you have an asset with minimal elasticity in supply (such as housing in
areas where building more is difficult) that is nevertheless needed for
survival, owners of that asset will be able to capture most of the productive
capacity of the people who need that asset. In areas with high productivity
and high incomes - like around rich coastal cities - that's manifested by
skyrocketing housing prices. In areas with lower productivity and lower
incomes, prices still go up, but not as much, and the effect is felt as an
inability to get ahead or even make ends meet even when you work hard. The
wealth generated by younger laborers is transferred to older asset-owners who
own the necessities of life, simply because they continue to own them.

Similarly, classical economics predicts a substitution effect for these goods:
as they become increasingly less affordable, buyers will try to bypass the
market entirely.

That's behind nearly all the social changes and huge tech businesses of the
last two decades. Can't find a place to live? Rent in a tiny apartment instead
of buying a house. Live out of a van. Move to cheaper locales while working
remotely. Can't get a job because that's yet another scarce resource
monopolized by an older generation? Drive people around in your car with Uber.
Sublet your rental on AirBnB. Blog for advertising revenue. Sell your crafts
on Etsy. Start a new service business and advertise on Facebook or Google.
Take funding from YCombinator and try to start the next great marketplace.

The last couple years have brought even more radical examples, eg. Bitcoin is
basically an attempt to setup a shadow financial & monetary system and opt out
of the dollar-denominated economy entirely.

~~~
dnomad
Yeah, this is not predicted by classical economics.

Westerners _really_ need to look at other countries. You do not see these
sorts of extreme housing shortages in Asia. You don't see it in Tokyo,
Bangkok, Shanghai, or Seoul. I have trouble even explaining what's happening
in places like San Francisco or London or Paris to my Asian partners. That's
because Asian cities aren't afraid to grow. Tokyo, Bangkok -- these cities
have grown enormously and continue to do so [1].

Ultimately, the West has collectively decided to tombstone their cities. There
is _enormous_ demand to live in the West's metro centers and yet, at virtually
all levels, powerful forces work to ensure that these cities do not expand to
satisfy this demand. This decision not to grow is very much a _political_
decision.

The end result here probably won't be good. A great deal of economic growth is
being left on table. Cities are the primary engines of economic growth and
when they aren't allowed to grow the result is less growth and opportunity.
Political instability ticks up; a great deal of many people stuck languishing
in less dynamic areas because they can't afford to move to the dynamic cities
end up _feeling_ like they're stuck and now want to tear the whole system
down. Democracy itself breaks down as the urban-rural divide becomes more and
more severe.

But hey, in the short term, those who bought early get rich.

[1] [https://jamesjgleeson.wordpress.com/2018/02/19/how-tokyo-
bui...](https://jamesjgleeson.wordpress.com/2018/02/19/how-tokyo-built-its-
way-to-abundant-housing/)

~~~
nostrademons
See reply to sibling comment:

[https://news.ycombinator.com/item?id=16908733](https://news.ycombinator.com/item?id=16908733)

Monopoly is well-treated in classical economics, and this is an instance of
zoning regulations enforcing an artificial monopoly. And the results are
exactly as predicted in a microeconomics textbook: owners of the monopoly
asset capture nearly all economic surplus from trade in it.

------
drchiu
I once made the observation that much of the older generation’s net worth is
tied intimately with their homes. That if we exclude home equity, the
resulting net worth is very little — demonstrating a pattern of poor savings
habit and investing. Unfortunately, for the younger generations, they will
have to be much more diligent savers and investors as they are now fighting
asset price inflation — a problem previous generations didn’t have as much.

~~~
hndamien
Or currency debasement/ asset price inflation.

------
hardtke
To be fair, the people who have massive housing equity generally bought their
houses when interest rates were sky high. In the 1970's, when you could buy a
decent house in Palo Alto for $50,000, the interests rates were 15-20%. As
rates have gone down, the prices have gone up. Mortgage payments as a fraction
of income have gone up much less dramatically than the sales prices.

~~~
Qworg
How'd that interest rate fare in the face of A) being able to refinance and B)
inflation/rising wages?

The principal/down payment is the first problem - interest rates just increase
the cost of money, but get eaten away by time.

------
listenallyall
An extended low-interest rate environment is a (the?) major factor in
increasing income inequality. Assets become much more expensive, benefiting
owners (in this case, of houses and real estate) and hurting those who strive
to own. Further, savers are generally barely breaking even with inflation,
which leads to less saving.

Low interest rates "stimulate the economy" which means those who already have
(applicable to both people and companies), can borrow more and multiply their
assets much more rapidly than those who don't have, can catch up.

~~~
mancerayder
Sure, but high interest rates make money more expensive, meaning less people
can afford less house. A factor that impacts people who need to borrow the
most (the non rich).

So what's better, high asset prices or high borrowing costs? Something tells
me they both even out painfully.

~~~
listenallyall
Not true, as home prices key around monthly payment, so high rates put
downward pressure on prices to keep the monthly payment relatively constant.

When long-term risk-free rates are exceptionally low, capital seeks excess
return, much of which gets invested in real estate, increasing demand and
prices. When the risk-free rate is 7, 8, 9% on a 10Y bond, then messy,
illiquid, physical real estate is far less desirable as an investment.

The original article was about income inequality -- when average Joe can
easily borrow $300k for a house, the average company can easily borrow $300
million or $3 billion to get larger, buy competitors, execute LBO's, etc...
all of which consolidate power and capital among the wealthiest and ultimately
reduce labor opportunities for everybody else.

~~~
mancerayder
_Not true, as home prices key around monthly payment, so high rates put
downward pressure on prices to keep the monthly payment relatively constant.

When long-term risk-free rates are exceptionally low, capital seeks excess
return, much of which gets invested in real estate, increasing demand and
prices. When the risk-free rate is 7, 8, 9% on a 10Y bond, then messy,
illiquid, physical real estate is far less desirable as an investment._

That's just one factor. Another is this. When interests rates go up, the
reason why price pressure is down in the first place is that fewer buyers can
afford fewer houses; in other words, sales go down. This is already happening
today ([https://www.bloomberg.com/news/articles/2018-04-25/are-
risin...](https://www.bloomberg.com/news/articles/2018-04-25/are-rising-
mortgage-rates-a-threat-to-u-s-housing) <\-- today's article). When sales go
down, sure, there's downward price pressure. But by that time, contrary to
what you seem to be suggesting, the little guy doesn't necessarily benefit
(because borrowing costs can be out of reach). And worse: if they go down far
enough, it could bring some people underwater, which as we saw from the last
cycle disproportionately impacted the lower middle class. And even worse: any
home equity line of credit that has a balance is going to be more expensive to
pay back.

 _The original article was about income inequality -- when average Joe can
easily borrow $300k for a house, the average company can easily borrow $300
million or $3 billion to get larger, buy competitors, execute LBO 's, etc...
all of which consolidate power and capital among the wealthiest and ultimately
reduce labor opportunities for everybody else._

Yes, the original article was about income inequality. And I've addressed
these above, using different factors than the ones you've honed in on (capital
concentration). I have news for you, capital concentration still leads to
inequality during times of cheaper housing. You're making a mistake by
thinking higher interest rates will make a big dent here: Blackstone and
American Homes 4 Rent have sources of cash that you and I don't have (IPOs,
bonds, to name some, I am sure there are many more).

~~~
listenallyall
In a capitalist system (that is not collapsing), income inequality will always
trend upwards, high interest rates won't stop it. However, low interest rates
accelerate the increase in inequality.

Income inequality has expanded at an unprecedented pace in the past 10 years,
during which, global interest rates have been the lowest they've ever been.

------
pattrn
I must be missing something in this article. It seems to say that older
generations have more net worth than younger generations. Its graph depicting
net worth by age scales almost linearly. Isn't this how it's supposed to work?

If I encounter someone who has spent a year digging a hole, another person who
has spent two years digging a hole, and another person who has spent ten years
digging a hole, I suspect that each respective hole's depth would be roughly
proportional to the length of time spent digging it. The same concept applies
to years making income. Clearly this isn't ubiquitous, since it's only
possible to gain wealth if you make enough money to save wealth, but one could
argue using this data that it's actually the norm.

What am I missing?

~~~
rabidrat
People should start spending their retirement at some point. The article
points out that in the 80s, the 45-65 group had the most money, more than the
65+ group. But apparently older people are now hanging onto their still-
appreciating homes, and only when they die will they pass on their homes to
their (also now aging) children.

------
nmca
Homeowners are, disproportionately, voters.

Politicians set the policy that determines supply and demand of housing.

I strongly believe these things are causally linked, but do not know how to
empirically test it.

~~~
stevenwoo
I think it's more those with more money can influence lawmakers to make rules
more hospitable for making more money. That would explain something like this
happening for a long time, that would not be explained by a high percentage of
home owners being voters (when it's one big company that owns a lot of homes):
[https://www.theatlantic.com/business/archive/2018/04/rent-
to...](https://www.theatlantic.com/business/archive/2018/04/rent-to-own-
redlining/557588/)

------
so33
Regulations like mandatory minimum lot sizes and density restrictions make it
a lot harder for younger people to buy their own piece of the ownership pie,
which creates scarcity, which in turn causes property values to skyrocket even
further. I can’t help but see this as a form of regulatory capture.

------
aj7
The price of a house goes up. It’s called appreciation, but it mimics
inflation much more. Except in certain volatile areas, housing has not been an
inordinately good investment, but it is an inflation hedge. Housing is
illiquid, does indeed depreciate, and often must be relinquished to be
“spent.” Lack of savings or income so low it precludes savings are more
important than housing as a source of inequality.

~~~
awat
This! The inflation hedge also makes the wealth gap exponential for those
without the capital to get in the real estate game for lack of a better term.
The capital needed to get into a home with traditional financing seems to go
up by the month and is essentially moving the finishing line for those
millenials saving for homes.

------
kbutler
This seems to ignore confounding factors:

\- divorce/single head-of-household rate. Over 75 probably has a much higher
marriage rate than younger. If you divide that wealth into two households, how
does it look?

\- shift to private ownership of retirement accounts. In 1989, pension plans,
etc., were much more common. These wouldn't count as personal wealth as they
are income-maintenance, rather than an asset.

------
pascalxus
It all comes down to supply: why is this such a hard concept for people to
understand. It's not old people's fault, unless they're the voters who keep
preventing housing from being built. When you limit supply, prices MUST go up:
there's no other way it can go.

The other big problem is fundamentally: regulations that drive up costs for
developers: everything from impact fees, to zoning, etc. We need to start
working with developers to drive down costs and increase competition: that,
plus vast amounts of building will drive down costs.

~~~
taurath
Current homeowners are incentivized to always vote for their property values
to go up - so they always vote to prevent new housing to be built, in the name
of neighborhood character.

------
digi_owl
One claim about homeownership that i ran into is that "homeowners do not
riot".

Thus homeownership is pushed as a kind of pacification of the urban
population.

------
mevile
Putting the contradiction of an "affordable investment" aside and looking at
the high prices: couldn't local governments change zoning laws to encourage
building more homes to lower prices? More supply lowers prices right?

~~~
MrMorden
They could, but they don't want to.

------
MekaiGS
Slight off topic but the graphs are terrible on the site, could someone
smarter than me explain what the blue/red splits on the graphs represent?

------
RickJWagner
The secret to wealth is easy.

Spend less than you earn, and invest in the market. Over time, wealth will
surely (surely) accumulate.

There is no unfairness. You can read the same thing in books that are many
decades old.

~~~
rland
Housing is both mandatory and the largest expense for nearly everyone. It's a
tremendous damper on "spending less." If the secret to wealth was easy when
those books were written decades ago, it is much less easy now.

------
thetrumanshow
I think once you factor in property taxes for all of those years, it’s pretty
close to a wash.

~~~
mikeyouse
Renters still pay property taxes -- they're imputed in the cost of renting a
house.

~~~
bendmorris
That's not really true (something that land value tax advocates will gladly
point out) because supply of housing is fixed in the short term. Landlords
charge what the market will bear for housing; rent isn't anchored to their
actual costs. They bear the burden of increasing costs.

There is a risk that property tax could suppress supply of housing in the long
term, since it makes rentals as investment vehicles less profitable, and
therefore indirectly contribute to increasing rents.

~~~
hiram112
Agreed.

In my high COL area, renting is definitely cheaper than owning, at least with
regard to small condos that I look for. Foreign and older buyers have pushed
up the price of condos as rental properties, but now there is a glut, and they
must rent at __the price the market will bare __, which has absolutely nothing
to do with their actual costs, but instead what the average 30 year old can
afford here.

And in my city, there simply aren't enough millenials able to buy these high
priced condos ($300K + $800 in HOA / taxes per month). Thus the rent gets
pushed down to $1500, which is way less than it'd cost to buy, and is
definitely a money-loser for many of the owners after paying interest,
management fees, taxes, HOAs, etc.

------
madengr
So why are housing prices rising? Maybe it’s the young people willing to pay
ever increasing prices. Maybe they are responsible for shooting themselves in
the foot?

~~~
gnarcoregrizz
low interest rates + rising wages. it seems like people will buy as much home
as they can afford. so yes, in a sense, people are collectively shooting
themselves in the foot by leveraging their homes as much as possible, but then
again you need a place to live.

------
ethn
It's great, it use to be the opposite.

For centuries prior the elderly were subjugated to the mercy of the young
(like many Asian economies and as one could imagine in primate hierarchy
groups), due to physical labor being the largest source of wealth. In
contemporary society, the contrary is true given that physical labor has been
a diminishing source of wealth. Today's economy is one where experience and
knowledge triumphs, as physical labor is rapidly replaced through automation.
Society is still far from it, but as close to a meritocracy as it has ever
been.

~~~
so33
For many centuries, land ownership was (and in fact still is) the largest
source of wealth. Historically, it conferred not only wealth but also power.
This was the key characteristic of the feudal system.

~~~
ethn
Land is a store of wealth, that's not the source of wealth. If we look at the
Forbes top 20 richest people compilation, we would be hard pressed to point
out anyone who made the majority of their wealth through land.

