
Housing can’t be a good investment and affordable - jseliger
http://cityobservatory.org/housing-cant-be-a-good-investment-and-affordable/
======
whack
I'm glad someone is pointing out something that nagged away at me for a long
time. With every other cost-of-living product, we celebrate when their prices
go down, because we recognize that a lower cost-of-living translates to better
qualify-of-life, at the aggregate. So why is it that we do the exact opposite
with housing.

Imagine if house prices tomorrow were to increase by 10% across the board,
throughout the country. Who exactly would that help? Not the vast majority of
home-owners who own a single home. They're still going to continue living in
their house, and will be unaffected by the 10% increase in any meaningful way.
And if they ever decide to sell the house and claim the 10% increase as
profit, where are they going to live next? They will just have to buy/rent
another house, where their earlier profit will be going entirely towards
paying the higher housing prices for their new home.

So what you really have is a situation where all the renters face dramatically
higher costs of living, the single home owners are mostly neutral, and the
upper-class with multiple homes suddenly find themselves with a windfall. And
we think this is cause for celebration?

Personally, I can't wait for the next housing crash.

~~~
resolaibohp
I agree with you here. It really annoys me when people tell me they hope their
house continues to increase in value at an exponential rate. Houses are not
like stocks, families don't buy and sell them to make money. They are places
to live.

The people I hear this the most from are in the middle class, the ones who are
most likely not to benefit from the increases.

I hope this thinking stops.

~~~
AnimalMuppet
If it continues, it's going to help me a lot when my kids are gone, and I can
downsize to a smaller (less expensive) house.

~~~
ZoeZoeBee
And there is the rub, the Boomers have treated their homes as investments, on
average their homes are by far their largest "investment", with plans of
downsizing to finance their retirement. The problem with this is you need to
find someone to purchase the home.

Over the last few years a large part of the reason in the increase in the
value of homes has had to do with historically low interest rates and a
statistically low inventory due to the number of homes underwater or with low
equity. The Boomers are just starting to retire, over the next decade many
will attempt to do as you describe creating a glut of homes for sale, while
the median household income has continued to decrease making it impossible for
the generations coming behind to absorb those homes based upon their income
and Demographics, remember Gen X is much smaller than the Boomers and the
Millenials have not come into their own yet.

~~~
AnimalMuppet
Well, with each generation containing more members than the previous, it would
all work out, except for that pesky "median household income continuing to
decrease" part...

~~~
ZoeZoeBee
Well that would be the case if Demographics and birthrates supported that. The
Boomers were the largest generation by births Gen X was much smaller and the
only reason there are more Millenials than Boomers at the moment is
immigration and some of the Boomers have died off. Birthrates at or below
replacement level in most of the developed world for the last 40 years are
begging to show their consequence, the problems will grow over the next few
decades as Demographics take hold. As of this year more people are dying in
the EU every year than are born, Japan has been mired in this for years and
China will see the problem as well as their working age population is in
decline.

------
projectramo
That is an excellent point.

TL;DR: A good investment has to grow in value over inflation, and if housing
grows in value at even a decent rate, it compounds out of affordability. As an
example, housing in San Fran has grown at 2.5% over inflation.

~~~
VT_Drew
>A good investment has to grow in value over inflation

Housing is the exception to this rule. Yes you want your investments to beat
inflation, but unlike an index fund, or a stock, or a commodity, you need
housing (you have to live somewhere). You have to either rent or buy (or live
off the land in the woods, which can be illegal many places). When you rent
you are throwing your money away, you will never see that money again, period.
The one other alternative is to purchase, even if you lost a small percentage
on your "investment" buying a home, isn't that better than just throwing your
money in the trash and losing 100% of it? An investment that isn't great is
still better than an investment that absolutely sucks.

~~~
sfaf
That's not how ROI works. You can show that in San Francisco, IF you live in a
rent controlled apartment, it's very possible that you get a better economic
ROI from renting than owning. The factor you are forgetting is that owning a
house requires a down payment and there's an opportunity cost of not investing
that down payment in alternative investments (stocks average 6-8% ) which
could generate a return that's significantly better than your house.

I've actually done a 10 year DCF analysis for SF and in many scenarios, a rent
controlled apartment whose rent becomes cheaper over time (since SF rent
controls are at 1% while inflation is 3%) can be a significantly better (and
less risky) investment than owning.

There is this false concept that rent is "throwing money away" but that's not
true in many cases; there's an opportunity cost of your down payment, property
taxes, etc. with house ownership. NYTimes has a nice web calculator to help
figure it out for you: [http://www.nytimes.com/interactive/2014/upshot/buy-
rent-calc...](http://www.nytimes.com/interactive/2014/upshot/buy-rent-
calculator.html?_r=0)

Key reasons why renting could make sense 1 house ownership is incredible risky
due to high down payments 2) rent control laws makes renting actually cheaper
over time

~~~
eldavido
Fellow SF renter here.

I've also done the DCF analysis and found that it's about a wash assuming a
10% discount rate and 10-year rent vs. buy-then-sell-with-payoff.

One problem with your analysis is that I think anti-rent control sentiment is
growing in SF as the city's politics moderate overall. You could very well get
Ellised out of your place and then the entire analysis goes out the window
(though I suppose you could probabalistically factor this in, including the
Ellis payment, but then, you really should work on Wall Street building option
and mortgage payout models, shouldn't you)

A few interesting observations from the DCF:

(1) In expensive markets like SF, the mortgage interest break is a _huge_
deal. Consider that most buyers will be in a pretty high marginal bracket, CA
has obscenely high taxes, _and_ you'll be paying a ton of mortgage interest on
a $1MM+ loan.

(2) Not surprising, but your inflation/growth estimates for price vs. rent are
the most important parameters. I don't think anyone could've foreseen the 10%
year-over-year growth we've had for the better part of the last 5 years in
rent. You just can't foresee everything in a model. (And to be perfectly
honest, I can't stand the smugness of the luck-masquerading-as-skill crowd
these days. Because sure, you "just knew" Google was going to be huge when you
worked at some random startup back in 1998. And you "just knew" housing would
go up like it has.)

(3) I really buy the "forced savings" argument. Sure, you could theoretically
do better running a "lean" operation and investing, but do most people have
the discipline to do it? I might, and I certainly am now, but I'm not sure.
Getting locked-in with a payment you know you MUST make is a powerful
psychological anchor that might change behavior around, say, buying a new car,
or a vacation, vs some abstract and sort of arbitrary savings goal.

------
TheBeardKing
I don't care as much about my home as an investment (though appreciation
matching inflation would be nice) as much as not having to pay rent or
mortgage when I'm older. Retiring at 70% income means nearly full salary after
the mortgage has been paid off, minus taxes and insurance.

~~~
nomel
I think the article is simplifying things. Gaining money with a housing
investment is great and all, but stoping the stream of money that goes into
the void from rent is also a gain. Owning with a loss less than that from
renting is, by definition, and investment.

    
    
      Investment: the action or process of investing money for profit or material result.
    
      Profit: money in - money out.
    

For the bay area, that means you just have to not lose ~36k/year in taxes,
fees, and any housing dips.

~~~
gozur88
>Gaining money with a housing investment is great and all, but stoping the
stream of money that goes into the void from rent is also a gain.

You're just trading the stream of money that goes into rent for the stream of
money that goes into taxes and interest on your loan.

You can't say "owning is better than renting" or _vice versa_ without
crunching the numbers for your particular situation.

When I bought my first house I was paying out more every month (by quite a
bit) than I did as a renter. Then I rented for awhile and bought my current
place, in which I come out ahead vs renting.

------
Kinnard
I'm not sure I agree. I suspect the real issue is the government supplied debt
financing. I think government subsidies drive up housing prices to the extent
that you __NEED __to take out a loan to pay for a house rather than being able
to pay for housing up front out of savings.

Housing prices would be a lot lower(and more affordable) were it not for all
the money unnecessarily doused on it.

Because prices are so high buyers must participate in credit markets which is
like socio-economic ankle weights for poor people. They either get screwed or
excluded(and screwed).

EDIT: The Higher Prices also ensure that people need continue to work to "pay
off" their mortgages. If housing prices weren't artificially high they'd
already be "payed off" having been payed for with savings. cf:
[https://news.ycombinator.com/item?id=12131855](https://news.ycombinator.com/item?id=12131855)

------
mamon
I wonder why no one seems to take into account that house is something that
wears off with time.

Shouldn't the value of the house asymptotically aproach zero, given long
enough timeframe? I mean, at some point, like maybe in 100 years it should
eventually rot and collapse. Or you can keep fixing and redecorating it, but
that also costs money.

~~~
AnimalMuppet
Well, the _land_ never goes to zero. The _house_ may (or may even be worth
less than zero), but not the land...

~~~
planteen
Exactly. That's why in Denver you see lots of old houses getting purchased
only for their land, torn down, and then a new $800k house in their place.

------
kirykl
Houses build equity, I'm not sure if they have been expected to be a good
investment that beats inflation. This was pushed hard though by multiple
industries during the mortgage bubble

------
norikki
Is this author a complete idiot, or just a stooge of the banks? Investing 1/3
of your income into equity every year sure as hell beats losing it forever to
rent-seeking landlords.

It doesn't matter if the value of your home goes up, just that instead of
being empty handed after 30 years of paying rent, you will have a huge
financial asset.

~~~
collyw
If the value of your house goes down by more than you pay in rent, then
renting is the better option.

------
kmonsen
It is not a ponzi scheme, it is a limited good in demand. At some point the
price will be high enough that it is not affordable for the people that want
to buy it.

You cannot just treat housing like a stock, since it is also a way to get good
jobs and children in good schools.

~~~
sidereal1
It's a ponzi scheme when Government subsidized debt and high risk mortgages
(NB: free money) removes price pressures, allowing prices to inflate to
unreasonable highs. It's a feedback loop where more money > higher prices =
good investment > more money.

------
snowwrestler
Homes do not need to grow faster than inflation to be good investments.

Let's look at a couple numbers. Over the long term, on average, U.S. homes do
not appreciate faster than inflation.

> Home prices look remarkably stable when corrected for inflation. Over the
> 100 years ending in 1990 — before the recent housing boom — real home prices
> rose only 0.2 percent a year, on average.

[http://www.nytimes.com/2013/04/14/business/why-home-
prices-c...](http://www.nytimes.com/2013/04/14/business/why-home-prices-
change-or-dont.html?_r=0)

Yet, despite that, home ownership is correlated with net gains in household
wealth.

> Overall, owning a home is consistently found to be associated with increases
> of roughly $9,000-$10,000 in net wealth for each year a home is owned. Also
> consistent with earlier studies, African-Americans are found to benefit less
> from owning a home, but each year of owning is still associated with gains
> in net wealth of between $6,000 and $8,000, which is substantial considering
> the generally low levels of wealth among African-Americans generally.

[http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/hbt...](http://www.jchs.harvard.edu/sites/jchs.harvard.edu/files/hbtl-06.pdf)

So how does this make sense?

Well first, home prices on average keep up with inflation, which is a strictly
better rate of return than just holding cash. So even if just think of it as a
vehicle for pure savings (wealth preservation), home ownership is better than
no investment.

But you can also easily and relatively safely leverage up to buy a home. With
a 20% down payment, if the home appreciates at inflation 2.5%, your actual
rate of return will be 12.5% before expenses and payments!

But what about expenses and payments? Well--you have to make them anyway, even
if you're renting.

But aren't mortgage payments usually more expensive than rentals? At first
they might be, but with a fixed-rate mortgage, the nominal monthly payment
doesn't go up. So again, inflation helps out: every year the real cost of the
monthly payment declines. Good luck finding an apartment with rent control for
30 years.

Finally there are the tax advantages. Every one knows about the mortgage
interest deduction, but potentially more powerful is the capital gains
exemption of up to $250,000 per person.

------
Kinnard
A potential solution to this problem:
[https://news.ycombinator.com/item?id=12122503](https://news.ycombinator.com/item?id=12122503)

