The interesting thing to watch for is the flipper sales. Which is to say if a significant chunk of the market in your area is actually being held by people who bought the house just to flip it, then when you get two or three months of flat to downward pressure on house prices they will all yell "Peak!" and run for the exits. Then you'll see a nice flurry of downward movement as these folks try to unwind their position before the market falls into a hole that loses them money. Pro tip, there aren't enough chairs and the music is no longer playing :-).
That could bring some welcome relief for home buyers who have struggled in the 'no contingency cash only' markets like parts of the Bay Area.
I know that was the case when I considered buying property to rent back before the 2008 crash (I ended up not doing that, luckily).
In California markets, rental properties are not profitable, when you consider 20% downpayment, 75% rent, etc.
There are 4 kinds of buyers in this market:
1. First home buyers: renters becoming buyers.
2. Second home buyers: thanks to the appreciation of their primary residence, people have bought second homes for "retirement nest egg", "return on equity", etc. Borrow 80% at 4.5%, expect 15% return.
3. Moving Up: same like (2), but they sell primary residences.
It is kind of hard of flippers to get conventional loans; they have to use portfolio banks, banks that keep loans on their books. A bank I know of, offers 6% fixed first year, variable rate for the next five years. Flippers get these deals, after putting 20 to 30% down.
The interesting part has been the interest rates. We started out borrowing hard money at 14% and are down to 7-8% now depending on the lender. Lots of cash out there chasing returns.
In most markets, rental properties are not profitable. Almost all of the profit comes when you sell the building, from appreciation. If you're breaking even on a rental, you're actually ahead of the game.
I probbably should have sold it long ago but $70/month is like internet.
Now, they could re-finance the property into a conventional rental property but none of them can afford to do it for all of their properties. Flippers tend to do 4-5 at a time, not just one.
What I suspect happens is that once you reach some number of properties, you become a commercial borrower, and different rules apply. A former coworker owned most of a street of duplexes at one time, and he had no problems getting loans.
Yeah, the sort of unspoken ethos after 2008 was that people had to be saved from all the underwater mortgages. But the only way to do that is to not pop the bubble. So we got a slew of policies from the banks and the government designed to shore up housing prices, and now they've rebounded to above the pre-crash prices.
But those prices are bubble prices. We didn't pop the bubble which means we're still in it. All we did was kick the can down the road. The prices are still unsustainable and have to come down.
The best thing they did in the interim was to print a bunch of money. If you can't lower nominal housing costs because people can't have underwater mortgages then lower real housing costs by keeping nominal housing costs the same and causing sustained moderate inflation of everything else. Also very effective for devaluing other existing debt (student loans, credit cards, public debt). It's possible that we're now at the point of needing more of that.
I purchased a new home out of the area recently, it's a lot different looking at homes that aren't vacant, and dealing with the previous owner not getting all their stuff out on time.
Or those with Adjustable Rate Mortgages that popped and then got priced out of their homes.
Or those with interest-only periods, same effect.
This! I've been talking to people about this for years. Most don't believe me when I say it. In fact, I've only had one person, a banking official, acknowledge that this was standard practice, but he assured me that it was coming to an end (two years ago).
But yes, what you've written is totally the case. In fact, I just checked on a house that I know to have been abandoned by its "owners" in early 2011, but is still recorded as in their possession. Those folks sent the bank jingle mail, which the bank kindly sent back! (LOL)
[edit 1: I also don't think that many of the low- & no-money down portfolio sales that Fannie and Freddie did to clear their books helped matters.]
It's almost like Japan (from the little that I've read) was a blueprint for the U.S. etc., and the U.S., I suspect, will be an further example for other markets.
[edit 2: Book recommendation Chain of Title by David Dayen]
As someone already mentioned, "zombie houses," which as far as I'm concerned qualify as shadow inventory, have existed for some time.
The portfolio sales did not help the average person buy a house. They did provide the GSEs an out with respect to clearing their books. The terms of sale that I've seen for a few of those transactions were incredibly generous; basically "pay us if, and when, you can."
Please do correct me where I'm wrong.
50% is A LOT.
- The new SALT cap is extremely low, particularly if you own a home in the Bay Area. 10K! Mitigative solution: Stay put and keep current tax base, hampering both supply and demand (for a nicer home)
- The doubled standard deduction made owning with a mortgage less attractive (But a win overall once your loan is paid off enough).
- Mortgage interest deduction lowered from 1M to 750K (I believe it's 1/2 if you're buying alone). Houses are so expensive here this actually matters. On the supply side: More post-tax money + higher interest rates means those who locked into great rates won't want to sell, or want to buy a more expensive home. On the demand side: All of the above means everything just got even more expensive.
EDIT: Regardless of what your stance is on mortgage interest deductions, there's no doubt that the upcoming tax code changes threw cold water onto the housing market.
This wouldn't be such an issue if there was more supply in the first place, but here we are.
That being said, with the new tax bill, 90+% of both owners and renters will be taking the standard deduction this year. It is my opinion that's a good thing, it's my opinion the standard deduction should truly be standard. However, moving all the middle and upper middle class into taking standard deduction makes the mortgage interest deduction basically exclusively for the very wealthy.
You may disagree that that’s a desirable policy goal (and I might agree with you), but comparing it to some other payment that isn’t deductable misses the point entirely. Especially rent. Congress wanted to create an economic dis-incentive to being a renter and push people to own the homes they live in.
IIRC it was actually to encourage more borrowing so that the banks could securitize and sell off the loans. Increased home "ownership" was/is the altruistic reason presented to the public so that they feel good about the whole thing. Not looking to start an argument here, but there are plenty of other ways to encourage "ownership" that don't require encouraging debt peonage and market inflation.
Also when credit cards were first becoming a mainstream thing, the interest on that was also tax deductible. I forget the specifics about why it was deemed acceptable to dispense w/that tax break.
It became deductible in 1913, but simply because in 1913 all interest became deductible. The first $3k ($4k married) was excluded. Only the top 1% paid enough interest to take any deduction, and very little of that would have been mortgage interest because they usually bought their homes outright.
Wikipedia claims that the reason they made interest deductible on personal income taxes was that in a nation of small proprietors the line is fuzzy between personal and business expenses, and it was simpler to just make it all deductible instead of just trying to allow business interest to be deducted.
As for why credit card interest later became non-deductible, it is kind of the inverse of why mortgage interest is deductible. That is just as mortgage interest became deductible because all interest became deductible, credit card interest became non-deductible because almost all interest became non-deductible. The Reagan tax reforms took away almost all such deductions except the mortgage deduction.
As to why Congress decided to save the mortgage deduction when they were killing all the rest--I have no idea. That was in 1986, when a lot more than the top 1% were taking it, and most homes were bought using mortgages, so both the "encourage home ownership" theory and the "encourage more borrowing to please the banks" theories are plausible, at least.
I'd say, based on experience and conversations w/ elected officials, at the end of the day "encourage home ownership" is less likely to be a driver, but more so a selling point to the public.
I also seem to remember reading in a number of sources, one of Michael Lewis' books comes to mind, is that Lew Ranieri (and friends) is a probable reason for the deduction's survival if, as you suggest, there was any real discussion about cutting the MI deduction.
I can also tell you that NAR, for the more recent discussion about cutting the MI and SALT deductions would have been (and were) a significant factor in lobbying against changes that they would expect to slow sales.
Externally, lobbying is talked about as some sort of corrupting force to be excised. Internally, it's simply considered to be an integral part of the legislative process. IMHO, people should attribute less to altruism decisions that are likely linked to someone's lobbying efforts.
Exactly. In fact all interest was deductible until the 1986 tax reform. Unfortunately the mortgage interest deduction survived due to lobbying from the real estate industry.
with the new tax bill, 90+% of both owners and renters will be taking the standard deduction this year. It is my opinion that's a good thing.
It's a very good thing for fairness, economic efficiency, and saving taxpayer time.
The maximum rental deduction in Indiana is capped at $3,000 and the income tax rate is a flat 3.23%. So a renter in Indiana only pays $97 less in taxes.
High tax states can tax themselves all they want to, but that shouldn’t reduce their federal tax burden.
The Republicans don't always control Congress, and the Democrats generally favor program expansions when they do have control.
Moreover, even when they're not in the majority, they're still in Congress. Even though the vote was mostly along party lines, the deciding vote on the Medicare expansion under Bush was a Democratic Congressman from New York.
And have a look at the parties of the Representatives from California and New York. A majority of their Representatives are Democrats but they still elect more Republicans than most states have Representatives.
I have no idea who is downvoting you. That's absolutely correct.
If they really wanted to subsidize ownership they would make it tax deductible to pay down principal. (And then give you zero tax basis so it's all taxable income when you sell, and cap the maximum sunk deduction per person at the median home value so rich people don't buy twelve houses to avoid their taxes.)
Add to the fact that most folks don't really know how the new tax laws will impact them until they do the calculations early next year, and the fact the rising interests rates should put downward pressure on the market, and the rather volatile political situation (who really knows where this tariff thing is going to go, and how it will impact the economy), and it just made more sense to wait it out.
By all means, max out the $20k or so you are allowed to put into a 401k, but don't fool yourself into thinking it will outperform what is essentially a government-subsidized leveraged investment. You have to have exceptionally bad timing or move very frequently to lose in real estate.
Maybe so, but the sizzling hot housing market means I can't ever move to another place I own because, like you said, I'd have to take all of that appreciation and plow it right back into another property. Never mind that anything north of the ship canal is still completely unaffordable by my standards (that is, $450k or less, which is still a staggering sum of money in my world).
I'd much rather do like the grandparent and have those gains as actual money in a 401k, not theoretical money in a house that I'd have to practically leave the time zone to realize.
What you say is true only if you know exactly when to downsize and leave a hot market.
It can be the case that housing will always be more valuable in one place than another. But it can't be the case that the rate of increase will always be dramatically higher, because that will lead to a runaway differential. Therefore you have to expect a correction at a time that is uncertain.
Real-estate does give leveraged wins.
Don’t fool yourself into thinking that buying into what would become a ridiculously hot market is much more than dumb luck.
You can't cash out unless you move out of the area or you downsize. And I may be wrong on this, but unlike CA (prop 13), your property taxes are going up.
And regarding timing, 5 years ago was probably one of the best times to buy a house on the west coast in the last few decades. That moment has passed. The reason I bring up the rent calculator, is because in most markets, at most times, that calculator will tell you to buy. Its the reason that I started considering buying ~2 years ago. But things have changed. Rents have been flat for about 3 years (at least in the Bay Area), while prices kept creeping up. So the way I see it, right now may qualify as 'exceptionally bad timing'. If the price-to-rent ratio is this out of whack, at the very least rental investors are going to head for the exits. My hunch is others (myself included) will exit as well. And the nice thing about renting, is I am only in a 1 year lease, so if I am wrong, and if the fundamentals change, I can jump back it the market.
This I take to be a bad sign. We're in "this time it's different" territory.
Considering that home sales volume has dropped a lot as affordability has fallen (due to higher interest rates + higher prices), banks mortgage business is likely falling - not due to foreclosures but rather due to lower home sales volume. They may feel that, with lending standards now higher than 10 years ago, the risk of losing money in a potential foreclosure is now low enough that the risk is justified given the loss of business.
Welcome to 2007! But don’t worry you’ll be unemployed in another year too!
Like a corporation that sells annuities? It seems like a minor detail of financial engineering, just like figuring out how to profit from a perpetual motion machine.
It still seems obvious to me that any asset with perpetual outperformance must revert to the mean before or after it eats the world and people just have gotten very accustomed to denying this fact because the boom in the US stock market has outlived any human who doubted it.
Look at Moore's law - it became an article of faith, but things that can't go on forever the same way don't.
> Like a corporation that sells annuities?
They exist, of course, but I think you'll find "simply" doesn't begin to describe how this works in reality, especially with the confounding factor of that corporation adding another layer of risk/opacity.
> any asset with perpetual outperformance
That's different from your initial premise, which was returns exceeding inflation. Outperformance is a different concept, which is about being better than the mean, but the "stock market" (at least in the US) is often considered that mean.
To consider inflation (i.e. zero, in real terms) to be the mean suggests zero economic growth and/or wealth creation and/or zero-sum activity, and I think it's safe to say it's obvious that's not what's happening.
It may certainly be that the stock market outperforms overall economic growth, but that premium can easily be explained by risk, so long as it's not huge. If S&P500 real returns are 6%, there's not much room for a huge premium to begin with, and I'd be surprised if it's as wide as a full percentage point.
>> If that was the case, then couldn't someone simply
>>establish a perpetual entity to invest and sell their
>>average returns to people with shorter time horizons?
>> Like a corporation that sells annuities?
>They exist, of course, but I think you'll find "simply"
>doesn't begin to describe how this works in reality,
>especially with the confounding factor of that
>corporation adding another layer of risk/opacity.
>> any asset with perpetual outperformance
>That's different from your initial premise, which was
>returns exceeding inflation. Outperformance is a
>different concept, which is about being better than the
>mean, but the "stock market" (at least in the US) is
>often considered that mean.
>To consider inflation (i.e. zero, in real terms) to be
>the mean suggests zero economic growth and/or wealth
>creation and/or zero-sum activity, and I think it's
>safe to say it's obvious that's not what's happening.
Essentially all my savings are in fact in the stock market. So I'm not promoting, say, gold, or bitcoin, or whatever alternative. I'm just nervous if I can't justify the direction of the herd in spite of the fact it would make me feel better if I was sure the market would keep going up.
Even so, what you propose doesn't quite exist, and my point was that this is because it isn't simple, or, if you will, that your use of "simply" was dismissive of the Devil that's in the details.
Annuities and even perpetuities exist, but even characterizing them as an "everyday thing" is borderline misleading. An annuity is a common instrument for retirement. Otherwise, not so much.
For your proposed use-case of turning long-term returns into short-term ones, for any investor that comes asking, they don't exist at all, AFAIK.
> No, it's not meant to be different. "Outperformance" can mean performance relative to a given benchmark
Fair enough. I was going off the understanding that the benchmark had to, itself, perform, which inflation does not (unlike, e.g., the S&P500, which describes actual performing assets).
> Right now in the US, maybe it's not happening.
Since the context is long-term, "right now" would need to be at least the past 3 decades, so that's an extraordinary "maybe" requiring extraordinary evidence.
> But look at Japan and what's happened to investment returns and inflation in the last 30 years
Japan's overall economic situation appears to be reflected in the Nikkei 225 returns (losses), so consistent with my thesis there, too.
> I'm not promoting, say, gold, or bitcoin, or whatever alternative.
And that's the crux of the issue. None of those examples have much opportunity to produce anything or create additional wealth, whereas companies do. More common alternatives are bonds, which are either another form of capturing the output of companies (including non-publically-traded ones) or of taxes (which, arguably, captures labor output, to the extent that it's income/payroll tax). True alternatives would need to be assets that could do the same, such as land (agriculture, mining).
Foreign buyers could be a catalyst that has inflated the home prices to new heights.
One other thing, Brexit, 5th largest economy, if the EU doesnt allow the UK to stay in the single market, what sort of effect on the global economy will the UK market crashing out of the EU single market and going into major recession have on the global economy. Brexit in a way has the global economy by the balls and the EU led by Germany will be seen as the bad guys for not budging on their philosophy.
High student loan payments and high mortgage rates means that the only thing left to give is the price of the home. Or the bank can be cool with us leveraging ourselves to 50+% income.
However, my opinion has been that housing /has been/ in a bubble since at least the mid 2000s (pre recession); and it didn't actually deflate (at least in the area I live in) /during/ that recession.
It would really be nice if some way of fixing this bubble chasing nonsense happened. Maybe if healthcare and retirement were fully socialized this would be less of an issue.
In the US, housing is an appreciating investment because we've made that a political axiom, and because homeowners hold political power that let them fight any policy that would make housing cheaper.
There's a case to be made that the two aren't mutually exclusive.
Sure, by the traditional definition of "investment", a profit or gain is required, but a broader understanding includes considerations such as risk and loss avoidance (i.e. hedging).
Even under the traditional/strict definition, a car could be considered an investment if the loss from depreciation is less than the loss from not having it available (e.g. having to pay more for rideshare services).
That said, with housing, it's important to remember there are two components, the depreciating part (the structure) and the land (location). The latter both doesn't depreciate and is usually the part people are investing in, at least in high-cost areas.
Housing appreciates because land supply is limited in big cities. You can't manufacture more land
What we don't have enough of is density in the places where people actually want to be, and that's not a natural limit. You could make more density, if it weren't illegal in all of these desirable places.
And I just mentioned Tokyo, which actually does have serious land constraints but does zoning and transit well. (And where they are making more land.) Ordinary people can afford homes there and almost nobody is homeless.
"They're not making any more land" isn't a relevant thing about urbanism, it's just a cliche that a realtor says to convince you to buy.
Most cities would fail to function if they all had the same density as New York or Tokyo
To solve the infrastructure problem, you have to, again, invest billions.
A car depreciates because it has high long-term maintenance costs due to wear and tear. A 10 year-old car more expensive to maintain than a 2 year-old car. Almost everything in a car eventually needs to be replaced. The exception is at the high-end where some cars become collectors items after 30+ years and will then appreciate due to rarity (as per your original argument).
Houses properly built will literally last centuries. My old house in Baltimore is over 100 years old.
Penalize corporations (banks) for holding inventory, rather than the other way around. Vacant residences should have a higher tax rate.
Plus insulating existing homeowners from the rising market value of land is a tax on literally everyone that does NOT live there.
Though note that at age 55, you can move into a less-expensive home and keep your old property tax basis (if you meet certain restrictions). This provides somewhat of an escape valve that allows empty-nesters to downsize and new families to move in.
I believe the benefits can also be passed in some non-sale transfers of the property; IE passing it on to loved ones. So if something stays within the family those benefits are locked in at the old rate instead of hitting the new rate. Which while it sounds nice for handing off a property among married couples creates an entirely new class (literally) of people as land ownership flows through family generations.
Prop13 was expanded to allow transfer taxes between parents & children and grandparents & grandchildren.
Also, commercial property is covered by prop13 too.
Also, prop 13 is not limited to the primary residences.
Also in many places schools are funded from property taxes, so all those complaints about horribly underfunded non-performing Californian schools have big "FU, got mine" from homeowners behind them.
And in case if you don't have kids but pay way much more than your next door neighbours?
Or in case if the majority of your neighbours pay almost nothing in taxes? Then your taxes alone will not cover the expenses of that local school for you to benefit from.
Why have public schools then?
Actually what I want to say is that there is nothing fair in Prop13.
"In 1986 and 1996 respectively, California voters passed Propositions 58 and 193, which extended Prop 13 to exclude from reassessment property transfers between parents and children (58) and grandparents and grandchildren (193). As a result, when you inherit a home in California, you inherit its tax assessment as well"
But back to taxes in general - if we want to have schools funded only by current parents contributions those are private schools.
It can’t be used to pass off property whenever you wish — only when you die. Given how long people generally live, this means that the people inheriting properties are usually already homeowners themselves, and in many cases already senior citizens.
the market price only matters if you're forced to sell or forced to buy. if you dont need to sell or dont need to buy, you can ignore it
- I plan to rent out the second bedroom, and rents are dropping. And I plan to rent out the whole place within a few years
- I miss out on cheaper rent in nicer buildings (also because rents are dropping) or on buying a cheaper or nicer condo
I'm fortunate enough that I can am more or less comfortable paying for it as long as I have my job but if I can't find a renter at a decent price, I'm going to be hurting a little bit.
I ended up living there for 11 years, with the majority of the time being there with it some $120k underwater. It was terrible and I wished I had waited a year or two - not only did I pay more to service a more expensive mortgage, I walked away with considerably less equity than I would have if I just waited.
I don't know how anyone could possibly be thinking about purchasing a place right now. It's been 12 years since the last crash started and real estate is traditionally on a 10 year boom/bust cycle. Even if you think you want to live in your place for decades, things happen. As always, if you can help it, buy low, sell high, don't pander to emotion on what is one of the biggest purchases you can make.
I agree. If housing is overvalued, and renting is a cheaper alternative that is feasible, rent & plug the saved money into some other form of investment.
I guess it's a bit tricky with housing as well, as buying into housing tends to involve borrowing a large amount of money, which then exposes you to risk of potentially being forced to sell if the market or your circumstances change significantly.
Well people need a roof over their heads. In a lot of areas (more rural for example) rental properties aren’t very common and they’re often smaller places so if you have a family and want somewhere to sleep at night you’ll need to buy.
Basic rule of thumb - if you can rent a like property for less than you can purchase, you should rent, esp. when things are toward the top of the market. The irrational fear that one will be priced out of a market leads to bad decisions. The idea that renting is throwing money away/giving it to a landlord leads to bad decisions.
Depressed earnings in all but a tiny sector, and incredibly inflated house prices.
Perpetual growth is unsustainable in this manner, but is expected by investors.
I hope the market corrects. Not for my sake (I live in Sweden and have no US desires) but for those who hope to have a life and family near their ancestral home.
I am not preaching to the choir of HN, people on this site generally have it a lot better than the people who also live in the places that are huge tech hubs.
Also if you're talking about the Bay Area, much of the real estate pricing there is driven by the anti-development tendencies of the owners of ancestral homes, either lining their own pockets or pushing some misguided political wheelbarrow (especially in SF). In that sense it's largely self inflicted. In other places even uneven economic growth tends to create bigger cities as the wealth spreads through the economy via construction and services and the like. It's when you try to fight the market that you get unintended consequences.
We’d better get around to ceding Manhattan back to the Lenape, too.
I come from a city in England called Coventry. Family ties are what keep most of the population in place- perhaps “familial” is a better word.
The idea of not being able to live close to family is distressing to many of my fellow city dwellers.
You can argue the semantics of how valuable such a thing is. You can even argue that the entire family unit should probably move somewhere cheaper, or that commuting to see your mum isn’t all that bad. But honestly; it would take a lot for me to revisit the idea that I am not able to live amongst my family. Even if I personally did not choose to.
Local population can be priced out if external buyers (ie, foreign cash) can pick up the slack / drive up demand.
Foreign investment is likely why case-shiller is so high since mid-2000s.
There aren't two different housing markets.
They get their mail delivered there while renting it out to help bolster their residency claims.
So they are getting a nice tax shelter while pricing legit home buyers out of the market.
Nobody wants to actually do anything about it, so we pass laws that are easy to work around. Like a foreign buyers tax that is easily circumvented by using a shell corporation.
Agree that incomes put an upper limit on housing prices...they can’t go up forever at the same rate as the past 5 years.
Ideally, HN would point at the original.
Personally, my phone Adblock prevents google from spying on my traffic in general, but these cached amp links get tracked by google.
Submitters: please don't post those! It's important that readers see what domain a story is coming from.
(this explanation is perhaps only 60% right, someone who actually knows about AMP may like to weigh in and correct me)
Submitters: please don't rewrite titles like that. If an article title is neither misleading nor linkbait, the site guidelines ask you not to change it.
Also there is no MLS, there are a lot of them.
It's a complete shit show as of 2013. Basically anything that is on any MLS I've seen is probably incorrect.
1. Try and get an offer before that window is up.
2. Put the listing up with enough wrong information that you get 2-3 more days to try and sell the property.
Apart from that, there's a lot of minor lying when it comes to these listings. Maybe the lot was 2 acres before it was subdivided, so you say on the listing that it's 2 acres. Maybe you jiggle the handle on the listing for the first week or so so it shows up as new/updated every day. Maybe you say that the listing has "central window unit AC" to try and confuse people into showing up.
It's mostly a lot of light treason against buyers and sellers. Real estate is a bit of a dogfight and much of it falls into the "technically illegal but not worth suing" bucket.
I know there's not much that's sexy from a technical perspective about running what is effectively a tech-heavy discount brokerage at scale, but it allows them to offer a fundamentally better UX than Zulia or any of the pure leadgen sites can. And there's a huge amount of code involved in running the ops on an organization like that, which a pure search app doesn't have to write/maintain.
It's really selling them short to say their only difference is marketing.