I'd argue that this makes for a bad public policy environment. With such a high levels of concentrated investment in a single asset class political manipulation of that asset class isn't just tempting, it's practically a political necessity. What the voters demand is impossible to sustain forever (monotonically increasing nominal prices and above the rate of general inflation growth over every five year period), but with such high political pressure politicians try anyway.
Mass renting creates the worse political incentive structure of anti-gentrification, motivating people to oppose any improvements in their neighborhoods.
Maybe if the bubble were ever allowed to actually just deflate, then we wouldn't be in a state of perpetual worry?
The present feedback loop is straightforward: CPI is an average of consumer goods and the price of housing. Due to technological and economic progress, the costs of manufactured goods are always dropping. To maintain the Fed's stated goal of continual inflation, new money must be injected into the housing market to compensate.
(The same goes for anything else that can be financialized, eg cars)
I have two houses paid off in the Seattle area. I'm tempted to sell them (I rent one out), but I don't know what I'd do with the money. I could hold and wait for a downturn and buy again but that seems risky.
I would keep them. You get rental income, and they are likely to appreciate in the long term. They are paid off, so your expenses should be low. You can't liquidate them without paying taxes on the gains unless you use the money to buy more real estate, which seems to defeat the purpose.
The recession is coming. We're in the 2nd longest expansion in US history (at ~10 years), and the contraction is on the horizon. Liquidating a property now, waiting for the recession to hit, and sticking the money into a low-fee index fund seems pretty reasonable. Maybe a financial advisor could check in and let us know if that's a valid strategy? I've been thinking of doing something similar.
A recession is always coming. It is nearly a certainty that there will be one at some point in the future. That is not a good argument for liquidating investments now, because nobody knows when the next recession will happen, how bad it will be, and how long it will last.
A lot of people have missed out on big market gains over the past few years because they wanted to protect themselves from a recession. It's a poor long-term investing strategy and it's based purely on guesswork, unless you own a time machine.
If you think we're at the top of the market, liquidating property, paying taxes on the gains, and then putting money in an index fund isn't great advice.
In 08 the S&P tanked 50%+, while housing (measured by Case-Shiller national home price) only dropped around 18%. In desirable cities the housing correction was even smaller.
In any case, bull markets don't die of old age, they die from recessions.
I agree that for the dominant tech titans, reducing costs is the next phase. Amazon has saturated the US market for Prime accounts...Apple has found a near-term ceiling for phone prices...etc etc
The most obvious tool for juicing margins in the next two years is in reducing costs (headcount or salaries)
It's an unstable condition in a game theoretic sense, because if you don't push for a higher margin when you have the chance, your competition might and then you go out of business altogether because they can outspend and outinvest you. So you always have the incentive to optimize margin as high as you can.
Keep in mind the tax implications. You basically can't sell real estate without immediately turning around and buying more real estate via 1031 exchange, unless you want to pay a massive capital gains bill.
If you have two houses paid off, then you are way ahead of the game. So I wouldn't take any advice from any of us and just keep doing whatever it is that got you where you are.
As someone who just purchased a primary home, it’s unnerving to hear about a correction on the horizon and that my house won’t be worth the debt I took on.
I’m still recovering after tapping into my 6 mo emergency fund to make the down payment. I think I need to move to a more aggressive E fund regeneration strategy. The article states having ~20%~ 10% of home value in liquid cash; my ~6~ 3 month E fund is about there.
I haven’t learned how to check the indicators to tell if the economy is about to go through deleveraging yet. I don’t know if I’m seeing more attention to this type of article now that I own a home or if the presence of these articles are in indication something bad is about to happen.
I guess the future will tell. I’ll tighten my belt much more and get that E fund back up.
I wasn’t working in 2008 during the recession; I’ll prepare just in case I lose my job. No new debt.
Edit: article recommends 10% the value of your home in cash, not 20%, to get through a downturn. Updated this response.
Whats the issue with your home not being worth the debt you took on? Obviously it isn't great to have an asset like that loose value, but most people don't change homes very often, so the value of the home shouldn't have much impact on your life until later. Even if the value goes to 0, you can still live in it just as well as if it's value stayed constant.
> Whats the issue with your home not being worth the debt you took on?
There were tons of short sales during the last recession because people could not afford their mortgage payments and their houses were worth less than they owed. It's a very bad situation to be in, and if you lose your job you might have no choice.
Another less bad situation is that you might need to turn down better career opportunities in other cities because you aren't able to sell your house.
Being in that kind of a jam really diminishes your control over your future.
> Another less bad situation is that you might need to turn down better career opportunities in other cities because you aren't able to sell your house.
If the house price stays the same this still ends up costing you roughly 6%.
True. So assume they put down 20% and hae 20% equity. A sale will cost you 6% (up to 8% in places like NY where you have transfer taxes.) That leaves the person with 12% equity (of which 4-8% will wiped out on the purchase.) This is painful but they arent yet losing money they dont have.
If the house is underwater (which the OP discussed) then you literally cannot sell without making up the difference.* Meaning, YOU PAY someone for them to take the house. That is a horrible situation. Also, that means you have less than 0 left to purchase the next home.
The bottom line is that it's a bad idea to buy a house unless you are fairly certain that you will be staying in it for at least 6-10 years. Anything else is unduly relying on nominal price appreciation.
The morgage payments don't change with the house price though, right? People couldn't afford to pay their morgage because they got more house than they could afford initially.
But yeah being stuck in the same house because it lost value wouldn't be good.
Not just that, but they got talked into 5-year balloon mortgages, where they would be forced to refinance after 5 years (the upside being that they got lower monthly payments than a 30-year fixed).
Well, 5 years later rates have gone up to where they can't afford the new payments, so end up losing the house.
> Whats the issue with your home not being worth the debt you took on?
Good point. The problem would arise if I lost my job, had to broaden the cities I apply to jobs for and I had to sell my house to move to a new city.
Presumably, the market would contract forcing employers to downsize. My employer would downsize and I would get caught up in it. I would then have to choose to keep the house but limit my job prospects or cast a wider net by applying in other cities. At that point, I would have to realize a loss on my house, potentially tapping into my already constrained finances.
However; best case scenario I wouldn't lose my job and I get to weather a deleveraging in the house I just bought.
Last crash was before AirBnB that’s one. Second you could always rent the whole unit just to cover the cost of mortage. I seen friends houses going from 180,000 to 30,000 during crash, only to get back to 170,000 some 8 years later. So so long as you can get hired as McDonald burger flipper, you should be able to withstand next crisis, even if it chops off 80% of your home value.
Second you could always rent the whole unit just to cover the cost of mortage.
That’s not always possible. A great example is Vancouver right now. A 2 bedroom condo is around $600k. That’s almost $5000k when you include mortgage, insurance, property taxes and opportunity cost of your down payment.
If we enter an economic correction strong enough to drop housing prices by 20% nationwide, AirBnB activity will tank. Travel is a discretionary expense, and people cut back on those in a downturn.
If you need a frame of reference, check what happened to marriott during the 2008 crash (fell by almost 2/3).
> Whats the issue with your home not being worth the debt you took on?
The issue mentioned in the article is: What if you need to sell? Like what if you lost your job, found a new one but in a completely new city, far away from where you bought your house: will you be able with the new salary to pay for both a rental near your new work, and continue paying the mortgage on your original house?
> most people don't change homes very often, so the value of the home shouldn't have much impact on your life until later.
This is the assumption that people might disagree with.
Does it make sense?
You disagree with the claim that most people don't change homes very often? The average time someone owns the same home is over 5 years. I mean I get the argument that, if you loose your job and sell your house it would be bad. But for me, I would only buy a house if I was sure I was going to stay in the area.
> The article states having 20% of home value in liquid cash; my 6 month E fund is about there.
it says >=10%. which taken as some absolute rule, is absurd. if you're not moving in the next 10 years, the current value of your house is meaningless.
For some it actually reduces their financial burden because you can appeal to have your property taxes repegged to market value. As long as the economy doesn’t tank with the housing market, it can be a welcome adjustment.
Where I'm at, property taxes are based on the previous couple years "qualified" sales. So what happened last time, property values tanked, so no one was willing to sell. No sales means no comps. The only sales happening were foreclosures and/or short sales, which weren't considered qualified sales.
> If you’re dying to buy a primary residence today, make sure you can withstand a 20%+ correction over a five year time frame, if history is any guide. If you don’t have a financial buffer equal to at least 10% of the value of your property after putting down 20%+, then you are not financially prepared for a downturn. Better yet, pay cash.
You're right, the article does say 10%, not 20%. Thanks for the correction!
Don't you mean your house won't be worth the equity you put in? Assuming you put 20% down, your debt is 80%. I would think it's pretty tough for a house to lose more than 20% of it's value.
Also, if the house isn't worth the debt you took on, that's technically the debt holder's problem not yours.
I'm not the GP, but I'm guessing he means what he said. Being "under water" means that the debt is more than the house's value. So ignoring the various costs of bankruptcy, it would be better to just walk away and lose the current equity, then buy the same house at current market price.
That time never stopped here in the big-city parts of Canada. The US housing crisis was a speed-bump in our endless upward price-march out of affordability.
It's definitely still going in Toronto. I'm seeing condos that are selling for 50-100k more then they did a year ago, and anything in the downtown core or near a subway line seems to gain value like clockwork.
Every time I read these articles, I'm optimistic this might mean rents are going down, but they always have an asterisk: "Well, except the bay area." Which is understandable -- with 20 cities in the Case Shiller index, one bucking the trend does not negate the trend. But alas, I don't get to live in an index of 20 cities.
And it should be noted, this article is from February 2018.
House prices have fallen in the Bay Area, I've been keeping an eye on it. If it falls well enough I will move there. The reason no one wants to reduce rent in the Bay is because of rent control. I saw some multi units for sale, folks were stuck renting out 2 bedrooms for less than $1,000/month.
I'm not sure what the situation is in the US, but in the UK there has been a number of changes which has helped increase the rate of new house building to increase the stock. This, along with Brexit uncertainly, looks like it's starting to show signs of slowing down the dramatic shortages and house price rises we've been seeing for decades. Some people bought based on assumptions regarding the rate of price rises and may be disappointed, but I don't expect a crash resulting in a lot of defaults because lending criteria has been tightened and many people have the last recession in their recent living memory so they are more careful.
As someone that doesn’t own a home, I really do hope for a correction so housing is more affordable here in California.
While Californians are aligned on many things, in some ways your perspective on the housing situation depends a lot on whether you own a home or don’t.
If things stay their course I plan on renting indefinitely and moving to another state where prices are relatively affordable for my family.
Having grown up in the Bay Area, it’s a little disconcerting that I can’t afford to settle down here after moving back after college.
> In 2017 I experienced softening rents first hand when I tried to find replacement tenants for my SF rental house at a similar rent of $9,000 a month.
That's more than I pay for a year for a 2bd apartment in downtown Phoenix...
I'd argue that this makes for a bad public policy environment. With such a high levels of concentrated investment in a single asset class political manipulation of that asset class isn't just tempting, it's practically a political necessity. What the voters demand is impossible to sustain forever (monotonically increasing nominal prices and above the rate of general inflation growth over every five year period), but with such high political pressure politicians try anyway.