Want to share a house with friends for twenty years and share childcare responsibilities? Great, have them sign an intent-to-lease agreement and take that to the mortgage company to help with qualification. Not having this kind of agreement can lead to all sorts of issues.
This should also extend to being jointly and severally liable for paying rent, not just mortgage. What happens when a tenant stops paying? If you've got joint and several liability, you basically have to pay the full amount while being unable to evict the deadbeat for nonpayment (since they're an owner or on the lease). It's slightly better in the case of the lease since you can negotiate a technical default and deadbeat-only eviction with your landlord, but it's still a mess that you should avoid if possible.
That all said, living in a house with friends is an excellent choice IMO. I think humans are built to have some non-blood relatives at that level of closeness and cooperation, and it seems good to raise a child with more than two adults that they interact with in their typical household setting.
If everyone is contributing to the downpayment and everyone wants to share in the risk/reward of appreciation, than your proposal doesn't work (and if only the first holds, setting all parties but one up as renters is problematic because then either much the downpayment is gifted to them, or exchanged for a claim against the property (and first right to lease is a claim), or it is lent by the “renters”), all of which have problems, including the fact that some are outright disqualifying for some loan programs.
Your proposal is exactly the right thing to do when one of the people is supplying the initial capital and everyone wants them to take the sole risk/reward of future market moves.
The logistical issues you raise are why you ideally want the group to form a separate legal entity to buy the house, have everyone rent from that entity, and have an appropriate ownership agreement for that entity as well as rental agreements, so that a deadbeat can be both evicted and have their ownership share of the controlling entity bought out; but that's probably an initial and ongoing cost more than you want for the purpose if it's just for a shared home.
Around here, finding the money for a 20% down payment is the biggest impediment to buying a house (it can be hard to scrape up $100K - $200K), so that's easier if you can pool your funds among friends, its easier to do. So that pretty much precludes a rental arrangement. I think it'd be hard to get a loan on a property if the down payment funds are coming from your friends -- and you're treating it as an investment property because you need their rent to afford the mortgage.
This kind of arrangement is typically structured as a Tenancy in Common:
Well, that's true in the US in that, so long as you have sufficient income to make the payments, you can probably fine subprime financing for purchases with less than 20% down, but you'll pay more for it than you would for the same size loan with more equity (whether in PMI, interest, fees, or some combination.)
So realistically, the only way you could buy a house and rent to your friends is if you can qualify to buy the house on your own.
Ideally they wouldn't increase your rate then. I know SoFi has no PMI with 10% down but I believe rates are slightly higher.
Banks typically won't issue a mortgage for a TIC title as they're not interested in becoming a tenant-in-common in the case of default, making such titles relatively unmarketable. TIC owners through inheritance almost always liquidate by selling the property as a whole or, in the case of undeveloped land, through partition.
But in San Francisco TICs have become common alternatives to condominium conversions with real estate developers. The city caps the number of yearly condominium conversions, but has little ability to control private arrangements like TICs. It's so common that many local banks will issue mortgages for TIC shares, provided the proper contractual arrangements are in place to expedite recovery from deadbeat tenants-in-common. Taking ownership of a TIC share typically involves simultaneous execution of both a title transfer from the seller and contracts with each remaining TIC owner. (These contracts also effectively partition the property, as TIC owners otherwise have a right to access the entirety of the property, including your bedroom.)
The contracts tied to TIC arrangements do increase the costs and risks of litigation. If title passes to someone who doesn't enter the shared contract--say by inheritance--then you have a problem. (Presumably TIC contracts attempt to force maintenance of Wills or Trusts to prevent this from occurring.) So while banks here will issue mortgages the property values are discounted. But that means that TIC apartments also typically sell for substantially less than comparable condominiums, which translates to a smaller mortgage, making ownership more affordable. If you see a deal too good to be true in SF, assuming its legitimate it's probably a TIC.
Condominiums are designed to simplify this whole process, but in their absence you can hack together a substantially equivalent form. Interestingly, few property lawyers outside San Francisco would think of doing this. My Property Law professor, who was also the professor for my Land Use seminar, was surprised TICs were being used this way. So if you're outside San Francisco it may pay to inquire with an SF-based real estate developer or property attorney.
Your suggestion seems to be to just buy the place and have your friends be roommate tenants? The reason this isn’t viable is the costs are too high.
By buying a place together you can get a better place with an affordable mortgage split and you can share in the upside without getting locked out of the market.
The risk is the standard social risk plus the risk that if everyone does this prices will get even crazier.
Should be roughly neutral in effect; the money is pulled out of the rental side of the housing market by people who aren't able to afford sole purchase going together to do a joint purchase and going into the owner-occupied housing side that way, but that either drops rental prices (making purchase at high prices less attractive) or gets current rental units sold off into the owner-occupied market because they are unable to make enough to be profitable as rentals, increasing supply on the owner-occupied side and dropping prices.
So not viable after all then. The only solution I see is build higher and denser, and do it so much that it can accommodate the demand growth.
Unfortunately between existing owners working to kill any new units and renters in SF claiming that building more increases rent (and vying for rent control which makes things worse) I think it’s just hopeless.
I co bought a house with my wife and another couple. We spent about 18 months figuring out the legal agreement, including many permutations on failure to pay. Fwiw, our 'failure to pay' arrangement is in two steps. First step is the generation of interest bearing loans, secured against the non paying owner's equity. (Effectively auto sale of part of the non-paying owner's portion of the house.) Stage two is an actual sale process, which might be owner to owner, or might be dissolving entirely and selling the house. All of this is in our TiC contact.
On the flip side, we were able to pay 40% down on an awesome place that we couldn't have done individually, and even the lowest earner is getting significant equity because of the way we've structured our terms.
Rent is theft.
Owning your own house is thus exposed to significant downside risks that can hit both your income and your assets simultaneously. Imagine being a Ford employee who bought a house in Detroit in 2007. The auto employers ran into severe issues and many cut employee pay in 2008, right when Detroit's housing prices basically fell by half. The only way to make matters worse would be to own significant amounts of Ford stock, too.
>First step is the generation of interest bearing loans, secured against the non paying owner's equity. (Effectively auto sale of part of the non-paying owner's portion of the house.)
Yeah, that's actually a great point that I should have thought more about. Co-owners have home equity, which means that you have an asset right there that the other owners can lay claim to in case of non-performance. This works better with significant down payment to ensure positive equity, too.
>Stage two is an actual sale process, which might be owner to owner, or might be dissolving entirely and selling the house. All of this is in our TiC contact.
Suppose a co-owner got a job offer halfway across the country that pays significantly more than their current salary. Would they be able to unwind their position here without significant loss of equity? Or does an entering agreement like this effectively limit your labor mobility?
(Which, fwiw, is equivalent to what any home owner taking a distant job offer would face, though more people are impacted. The fall back to renting, though, leaves other owners in the house, to ensure things are well taken care of, at least; much better than the absence landlord situation...)
Wow that's strong. Do you really believe anyone who offers property for rent at market price is morally equivalent to a conventional thief?
Part of rent pays for goods and services: construction costs, upkeep costs, administration costs, insurance costs, etc. Insofar as it does that, I believe that it is a healthy net-positive economic exchange.
Rent also partly goes to pay an individual or company for the service of everyone else staying away from that particular chunk of space. That's the problematic part.
See also: banks selling mortgages are financial arms dealers profiting off of exacerbating all of this.
The real trick is figuring out what to do about it and how, of course.
That sounds like a general aversion to any property rights or right to privacy at all, if you mean that you're paying for nobody else to come and be in the property at the same time as you. Not sure how it's specific to rent?
It's not an aversion to property rights in general. In particular, it isn't an aversion to allowing private ownership of the means of production (communism) or, on the flip side of the modern acceptability coin, private ownership of people (slavery).
You're right that the phrasing of the argument was general. There are more specific moral arguments on every side of every one of these, but the practical side of it always boils down to: how do you preserve incentives in a market's growth phase while discouraging rents (in the economic sense of the word) in the steady state?
That's a tricky one, and I don't claim to have a general answer, but I'm pretty sure that in the particular case of land it has something to do with society not making unbounded promises in exchange for bounded goods, e.g. of eternal, transferable land exclusivity to a private entity in exchange for building a log cabin on it. From that perspective, the government of past generations stole the exclusivity rights from modern citizens, and the present landowners are in a situation similar to any other possessor of stolen goods.
Conversely, if there's an earthquake/fire/mold problem, then the equity holder is on the hook and the renters can just move on.
It also means: no property taxes, maintenance costs, stamp duty, and it makes it easy to move.
No rent means you're spending more on housing, as you need to pay for someone's mortgage, costs and their profit, so it means you save less and so have less liquid capital, and also don't have any non-liquid capital in your equity.
> It also means: no property taxes, maintenance costs, stamp duty
No you're paying for all that, via your rent.
> Rent means you're spending more on housing
That's not a contradiction; liquidity has a cost. Yes, by tieing up capital in property purchase, you can, on average, trade liquidity for lower total cost if you are using the property forever. (Whether the actual total cost ends up being lower if you ever decide to move depends on market conditions and timing and transaction costs; transaction costs on both ends of a home purchase or sale are a lot higher than entering or exiting a residential lease.)
If I pay $2000 a month rent I'm always going to have less liquid capital than if I pay $1000 a month mortgage, aren't I? The mortgage payer ties up their money in the equity so it's not liquid, but the rent payer's money is just gone, so it's infinitely not liquid, and on top of that more of their money is gone.
When you've paid off the mortgage the mortgage payer has more liquid capital, and a property.
I don't know who you think ends up paying for maintenance and taxes in a rented property - it's the renter, through their rent.
Equally correctly, the landlord pays them, and landlords that can't at market rents on top of any purchase financing that they are still paying go out of the landlord business.
Most precisely, where, as is usually the case, neither supply nor demand are either haveperfectly elastic or inelastic, the costs are effectively split between renters and landlords in some ratio; the market rents are higher but the financial profits are lower than they would be if the costs involved were not a factor.
What I’m saying is that you don’t (usually) get to buy a house for $0 down. So it’s never a choice of $2000/mo for rent vs $1000/mo for mortgage. It’s more like $20k cash + $2000/mo for rent vs $20k equity + $1000/mo mortgage. Over long enough time horizons the monthly payments don’t matter and it’s a question of which investment appreciates more.
Even if your mortgage interest is greater than property value appreciation you could conditionally still come out ahead as compared to the available alternatives.
Diversity, leverage, better appreciation: if you're not already wealthy you can really only pick 1 (maybe 2) out of the 3.
And this ignores the value of having stable monthly living expenses, something not otherwise possible without rent control. You can of course buy cheap land, but such places are typically remote from employment opportunities and, while possible, that approach is just another form of speculation--people will readily share stories about living in the country and telecommuting to a high paying job (successful speculation), but few would ever discuss how they ended up stuck in a cycle of minimum wage employment (unsuccessful speculation).
That's wrong - the futures market is easily available if you have $10k, and offers rock-bottom costs for embedded leverage due to arbitrageurs. It varies based on the contract in question, but the two-year treasury futures contract offers roughly 400x leverage. Generally they offer you as much leverage as you can handle before overnight price moves will eventually wipe you out, so you definitely want to use less than they're offering.
But what's your exposure? Home mortgages are almost always non-recourse loans, limiting your losses to your initial down payment.
I don't think speculation in the futures market is a very good justification to the argument that home ownership is in general a poor investment--IME the conventional thinking in economic circles. I stand by my larger point that home ownership is a categorically sub-par investment only for those already with substantial wealth.
If you pay 20% down plus 4% upfront in closing costs on a $1 million dwelling, and then pay mortgage of $3,800/mo (which is fairly realistic for a conventional loan), it'll be more than 5 years before you break even, in liquid capital and presuming nothing is extracted from equity and ignoring any property maintenance costs that landlords have that would be rolled into rent for most renters, with a renter paying $7,600 for a similar dwelling which would actually represent a quite high rental yield.
To add to this, if you own, you are stuck in one area. Selling and buying has closing costs. I might be biased because I prefer the markets more than anything but index fund investing on its own can give you better returns than owning. IMO, owning and renting out a portion is the best return, or rental properties run by a property management company, especially if you own property in a LCOL area.
Fundamentally, landlords capture any and all surplus value.
They can't, but the maximum limit on both mortgage interest ($100K) and the indebtedness on which you can deduct interest paid ($1.1 million) apply per-taxpayer for unmarried co-owners. You still can only each deduct what you actually pay. This is a result of a 9th Circuit City decision IRS decided not to appeal that almost certainly want the intent of the law, and was not the way the law was applied prior to the decision.
I'm surprised Republicans haven't framed it as a new marriage penalty and jammed a “fix” that would increase the limit for married taxpayers to double the single-taxpayer limit into one of their tax bills, since it would let them champion marriage, rail against the perfidy of the Ninth Circuit, and cut taxes on the rich all at the same time.
On the other hand, you need to be charging market rents with the intent to try to make a profit in order to do this on your taxes, and that means keeping track of rent payments and reporting them. And any profit here could mean that what would otherwise be an untaxed sharing of expenses is now a taxed profit-seeking transaction.
I love where we are now but I could have continued to live in the situation we were in longer. It was like family. We did lots of things together socially and we supported each other. Financially, it was the best thing both couples have done in their lives (again lucky the market continued to go up).
That's my sample size of one.
When we bought people thought it was the peak of the market and that is part of the people telling us it was crazy. We had no thoughts of the market continuing to go up when we bought. Our main focus was possibly making a bit on the renovations.
Even if the the market had gone down or sideways, and we didn't sell, I would have been fine with it. If we had lived there for the rest of our lives, I would have been fine with it. I liked the location and with the renovations, it was a great house.
It wasn't a get rich quick "scheme". Buying with friends was a way to buy a home. We were constantly being renovicted. We didn't have a place we felt was home. That house was home and buying with fiends was the only way it was possible.
It is hard to say though. You don't really know someone until you go through hardship together. My sense from knowing my friends would be yes we would be friends but I just can't say. We did go through some things in that time on personal fronts but it wasn't financial. Financial things can be different than others.
Our main focus was having a place of our own. We had the five year plan but as I said, I liked living where we were and with our friends. If it turned into a ten year plan or more, that would have been fine with me.
I think if we all kept our jobs, etc, things would be fine. If someone couldn't pay their side of the mortgage or something, that would have been more detrimental. Or if we had some sort of fight and were mid-renovation and had to try to finish the renovation not getting along or try to sell a half renovated house. Those things would have been pretty detrimental.
We moved in in the mid 80s, and in the early 2000s after all the kids had moved out my parents sold their half to the co-owner. Everyone's still friends.
I'm leaning more towards stacked micro-houses, aka micro condos, as the "future of housing" in urban centers.
This is already a thing, it's called coffin cubicles or cage homes: https://www.theguardian.com/cities/gallery/2017/jun/07/boxed...
What I'm trying to say is: No, you should not lean towards this. You should lean towards jobs and opportunities spreading out over the country. To appeal to the HN population, instead of thinking in the binary thought of "SF (or some other tech hub) or fully remote!", consider another option: opening up smaller offices. Bring work where housing is affordable.
Some cities are certainly more affordable than others, but in my experience they are also much less desirable.
I now live in a place an order of magnitude larger, but that really does not cut down on the time spent on basic shopping.
We will likely not see jobs move to less expensive areas in the US(or any other high wage country), in any meaningfully significant number, because those cheaper areas can never compete with cheaper countries overseas on cost.
Distributed teams across the US isnt much of a problem, but try working with people that have an 8 hour timezones difference and it's much more difficult.
Can someone say 'urban sprawl'?
Because your equity is now at the mercy of other people who you cannot control. No one wants to default on a mortgage.
Considering that many college students have two to four dormatory roommates, I don't see what's wrong with renting a small living as a young adult - provided that the living space itself is up to code.
Here's my stance:
Getting into a mortgage with roommates = bad.
Getting into a lease with roommates = no problem.
The massive living spaces we have now are not sustainable. By 2050 if we are to avoid 2 degrees of warming we need to be emitting 2 tons of carbon per year per person: http://insight.gbig.org/targeting-2-tons-closer-than-we-thin.... The average American today emits 11 tons, whereas 2 tons per person is closer to that of someone living in Brazil or Egypt.
In climates where you need to heat and cool a home, carbon taxes will make heating and cooling the living spaces we have now financially impossible. People will drive demand for these smaller living options out of necessity. Additionally, as we make consumption less and less economically attractive people will have fewer things to want to store anyway, and personal vehicles will likely no longer be something the average person will be able to afford or want so there will be less need for parking and garages.
Moving into micro houses isn’t going to cut it, you’d need to slash US economic activity to reduce those numbers (an entire new technology).
We're not going to solve climate change by democracies adopting high carbon taxes.
There is simply no way developed nations are going to curb their emissions enough in time, and that developing nations will refrain from increasing their emissions, for us to avoid this disaster.
We might as well get used to the idea that our civilization is going to collapse before too long, and there's really nothing we can do about it. Other civilizations in the past collapsed and disappeared because of environmental change, and ours will be no different.
Our globe-spanning communications seems like it should help us solve these problems together, but instead look what it's brought us: anti-vaxers convincing a lot of people not to vaccinate, which has now brought back diseases we thought were almost extinct. Instead of using these communications to convince people about real problems and solve them, these communications have instead enabled the stupidest people to have a much larger voice and influence, which has led us to disaster politically in the US for one (just look at who we elected in 2016).
Sorry, but I don't see how there's any way out of this mess. We can't just figure things out in 50 years and then start fixing the problem; by then it'll be far too late.
The space can be rented out to someone else to cover the cost, possibly at a profit to the remaining owners since the renter isn't taking on any risk.
The bigger risk in this arrangement is to the party that is leaving since a share of a house is illiquid.
But my biggest issue with this approach is that it doesn't solve the underlying issue of housing affordability. Essentially it says "you need 4 incomes to buy a house now", which will enable prices to keep on rising. What will happen when prices keep on rising and 4 incomes are not enough? Where will the limit be.
"Is buying with friends the future of housing?" I hope that if I do it it's because I want to, not because it's what I need to do to put a roof over my head.
No, we work more for more things. If you were to live according to the living standards of the times we associate with stereotypical one income households, say 40 years ago, your house would be 1000 sq feet smaller, your electricity consumption would be much lower because you would have no smartphone, a small TV, your car would not have the features it has today, you would likely have no college education, and your healthcare expenditure would be lower because you would receive significantly less care. You also would sweat a lot in the summer, because back then air conditioning was a luxury rather than the rule.
You would also eat significantly less meat, and you would be much less likely to go on holidays, travel abroad, or eat fresh fruit from the other end of the world at all times during the year.
A big part of why we have more is social & technical progress. We get more for our money.
I do think your parent's question is an interesting one- thorny, but it's not ridiculous to wonder if doubling the work force eventually gnaws away at compensation for the same work. (The natural next question is, well did the demand for labor grow to match, stay constant, or somewhere in between? Did the pie grow and we're all wealthier for it, or are twice as many people now fighting over the same pie?)
A larger labour force means more competition in wages, but it also increases supply so this shouldn't have any effect. If this wasn't true, then you could reduce inequality simply by artificially restricting the supply of labour, which I don't think has ever occurred.
Smartphones use a ridiculously small amount of power compared to many of the appliances people had in those days. Modern TVs also use less power than old ones.
No, electricity consumption would be lower because you wouldn't have air conditioning. That's the big power user in most peoples' homes.
You've got to be joking. My grandparents lived in much bigger houses with much more land than I could ever afford despite the fact that they were single earner manual labourers and I'm a highly qualified person with in STEM.
In any case, they were at least as happy with their cars then as we are now, and they didn't want smartphones.
You happen to be an outlier if you're living in a smaller house than your grandparents. Given that you're saying you're a STEM worker and that your grandparents were manual labourers, my guess is that they owned cheaper property and you live in a very urban area. Which has very different perks.
The only people to whom a single-earner household outside the upper and upper middle classes was ever considered a default were the inhabitants of certain developed countries for a few decades in the middle of the 20th century; and even then it was more of a norm than a universal fact.
The only things that changed recently are a) women now can also have "careers" and prestigious occupations instead of just jobs; and b) working outside the home has become normal for upper middle class women as well as working class women (and for some even a status symbol rather than a symbol of poverty).
Edit: Just as soon as I post about not seeing the connection, I find the bit they were referencing:
"6. The Two-Income Trap, as recently discussed on this blog. It theorized that sufficiently intense competition for suburban houses in good school districts meant that people had to throw away lots of other values – time at home with their children, financial security – to optimize for house-buying-ability or else be consigned to the ghetto.
From a god’s-eye-view, if everyone agrees not to take on a second job to help win their competition for nice houses, then everyone will get exactly as nice a house as they did before, but only have to work one job. From within the system, absent a government literally willing to ban second jobs, everyone who doesn’t get one will be left behind."
CAGR from 1971 to 2018 - 5.5%
Ignoring the headline. This seems to be mostly beneficial to the lenders more than anyone else. The risk of a non-payments and financial issues is much higher and repossessions will be higher.
> Even if four people's names are on a mortgage, if one or more stop paying, the mortgage lender has the right to demand full repayments from whoever they can reach, he explains.
You only have to consider divorce rates to see the maligned incentives. Can someone more knowledgeable than me on the subject of mortgages explain if repossession is more valuable to the lender than someone paying off their debt? Intuitively it feels like repossession is worth more on a long enough time scale but would be interested in insights from someone else.
The idea of hyper-unstable living seems to be if you live by yourself or with a spouse you'll make a mortgage transaction every 20 years on average, but if you try to live in a giant commune like a 90s era sitcom, it'll financially collapse every 2 years and ya gotta live somewhere so you'll be entering into new transactions the bank can middleman every two years rather than every twenty years. They probably will make less money off each transaction, maybe lose some of the time, but if you increase transaction volume by 10, as long as their profit drops less than 90% its a net gain for them on average.
Also interest is profit to the financial institution, they'll make far more money off ten two year mortgages than one twenty year mortgage. With a side dish of the bank eating all the equity in interest in fees meaning the participants will be much poorer after twenty years meaning the bank can extract ever more middleman profits off the victims.
The nightmare scenario for a financial institution is someone getting a mortgage, paying it off early, and not getting another mortgage.
I think the nightmare scenario for financial institutions is people buying houses for cash. No mortgage, no down-payments, no middlemen. The west coast right now is seeing an increase of such transactions. Add to that the slew of services trying to get around realtors, and the future may be bleak for such financial institutions.
One can only hope...
I don’t, but all the appliances sellers here advertise it so people must do it.
I recently replaced a refrigerator, which was over 40 years old and which I'd done multiple overhauls myself on over the years.
Appliance store had lots of refrigerators in the $3,000-$16,000 range. With lots of features and compartments, multiple icemakers, LED zoned glow lighting, exotic hinges, internet connectivity, etc.
I got a good fridge for $500 for cash. No icemaker and a single fridge and freezer door so it had the highest energy efficiency rating, higher than all the high tech fridges there with exotic energy saving features. And plenty of room inside because it wasn't taken up by compartments and drawers and icemakers.
So... if most people are financing as you speculate, maybe it is because they are going for these $5000 refrigerators that don't work as well as the $500 refrigerators.
Also I just know that all the internet, digital stuff, and touchscreens on the $5000+ fridges is going to break down in a few years and cost a fortune to repair. No thanks!
If I had invested the money in my stock portfolio instead, I would be ahead of the game since in the US (I realize the article is about the UK) mortgage rates are ridiculously low, stock returns are good, and mortgage interest is deductible.
I like to upgrade my houses though including major demolition which the lienholder of record sometimes doesn't want to go for without trouble. I have more freedom with the property with an outright purchase. Despite the fact I'd have more money taking a mortgage and investing my investment gains have been dramatic enough that I'd rather have the freedom.
Anyone working in IT should own at least one house outright by age 30 if they want to and if the can't they need to upgrade their skills, switch jobs, or stop spending irresponsibly. Starting salaries for recent grads from decent colleges are $90k now on average. That's people with no experience. After 10 years everyone should be making a lot more than that and all these rates are vastly more than anyone needs to live on. Save save save in the early years, then invest. Don't spend earned income on anything other than bare essentials. Spend from surplus investment income. Lots of people are in trouble every month spending all their earned income despite making $180-$400k and they never get ahead. There's no excuse for that. Cut expenses to what the poor spend and invest the surplus until you can permanently live well off your investments. But continue working at that point.
I graduated ~7 years ago. Besides this figure being far higher than I experienced as a starting salary,
1) These salaries are for high cost of living areas. Rent can and often is $25,000 or more a year.
2) These high cost of living areas, homes can and readily list for $1,000,000 or more, which is, in your estimate, 11 times the starting yearly salary, ignoring every and all expenses.
3) These 'decent colleges' can put you in several hundred thousand dollars in debt.
4) $180-$400k is not in the salary range for most software developers. This is well above average.
There's no way I'm buying a home when I'm 30. When I do, there is no way I will own it outright. And I feel like I make a good living for myself.
So after 8 years of living the bare minimum life style and using up the a good portion of your youth on saving money, you can finally outright buy a 800sq foot house in the poorer communities of silicon valley.
Sounds like a great plan to me. /s
Note you could invest the money while you build it, but get if the market tanks, good buy money
You do 10 years. Let's do 8 years instead so we take our next move age even 30. Using your numbers there's 465.5 saved total. But we put that in the market each year in boring run of the mill bread and butter commodity stocks with half decent dividends and reinvest the dividends. Over all we see a modest 7% annual return from the market all together, both gains and dividends. So we're 30 and have $625k in fungible stocks that can be cashed in. Similar to 617.5k but somehow having 0% returns, and we're 2 years ahead.
So the only option is to buy a lousy house in a bad neighborhood with crime in a city where homeless guys are blowing each other on the sidewalks which are strewn with feces and AIDS infected heroin needles?
No of course not. If in such an area the only rational thing is to move to another area.
Now if you bought a house in this hot market that house appreciated more than 7% for these 8 yrs. But you also were paying 4% or so on a mortgage. Still you have a big gain. You paid $480,000 for a condo in 2010 and now it's worth $1.3 million (12.5% APR). BTW, I'm using real numbers for a family member's property in the bay area with these exact years. So that's nice cash infusion as well, rather than losing money on rent. However ignore that, let's just go with rent and stock gains instead, which I recommend anyway. I don't recommend people pay cash for houses like I do unless they have a reasonable justification for doing so. It's better to let the bank front it when mortgage rates are low as they are.
Anyway so you get a transfer to Topeka or Bismarck or Austin or Durham. You buy a mansion with a swimming pool and a horse barn on a 2 acre parcel. Or maybe you decide to commute 10 minutes from outside town where you buy a 4500 sq ft farm house on 75 acres of land. And you pay $250,000 either way. If you had bought your condo in 2012 you have around $1 million to spend, if not you have around $625k to spend. The rest you leave in those stocks.
You took a big salary hit moving. Went from $140k with $300k in bonuses and equity to $110k and $300k in equity/bonuses if managed to move in-company but different office across country, or $110k and no equity if not. Either way your living expenses drop to near zero. Company has full benefits so you're paying utilities, low property tax, and food. Maybe $500 a month total since your mansion is paid off. Now you have $104k a year to stuff into those low yield commodity stocks.
But you get "lucky", like everyone who invests long term. It's not luck, it's just persistence. One of those stocks takes off. Or maybe you have an equity event in a company you're consulting with who couldn't pay market rate. So that's a few million here or there.
I'm not lucky or special. I just do basic common sense stuff and avoid stupid stuff. I know car mechanics who have done better than me by retirement with their investments because they took more risks. But I have done OK and my value is above $30M. I'm old and now have health problems, so it's nice.
It seems really backwards to consider this the nightmare scenario. This is exactly what everybody wants: for people to take a mortgage once and pay it off eventually.
A business that considers healthy finances a nightmare scenario is a predatory business that needs to die.
A healthy economy would make investors compete over those investment opportunities. If a lot of investors want to put their money into residential single-family mortgage loans, and only N families seek to borrow with that type of loan per year, the investors would have to offer lower interest rates for every level of default risk. This limits the amount of money the investors can make by lending, so some go off to look at different types of investment. The rate of return naturally sorts itself out such that it increases with increasing risk.
When rates of return are low, entrepreneurs generate more investment opportunities at all levels of risk. But housing starts and transfers are more closely associated with employment opportunities, which tend to trail new business starts. People don't buy houses unless they have jobs that pay enough to buy houses, and they don't have better jobs unless businesses are expanding and labor is getting more scarce.
What seems to be happening is that middlemen are assembling artificial investment opportunities with a falsified risk profile, in order to capture investment dollars that would otherwise leave to find other opportunities with a better return/risk ratio. Some of those investments would have eventually sloshed back into mortgages, filtered through new employees or promoted employees, to replenish the pool of available investment opportunities. So the risk fraud is self reinforcing; the more it happens, the more it has to happen in order to maintain the status quo.
If the financial institutions are completely serving the mortgage market, that excess money has to go into other investments, or it loses its value. They won't be mortgage investments, but there are only so many of those around to pick up. The "nightmare scenario" is "OMG! We need to find another parking spot for our colossal pile of money! And the available ones are SOOOO FAR--like 50m away!"
Are hospitals predatory?
I guess this is the clearest case ever of why regulation is important. Good regulation provides businesses with incentives that help rather than harm society.
"Healthy" society is a weasel word here though: a qualifier that turns this into a "no true scotsman".
In this one, and most real societies, hospitals do want people to visit more often. Their incentives are geared towards that.
And not just "visit more often" -- hospitals (well, hospital execs, doctors, etc) want (and do) all kinds of things detrimental to society:
- to charge more for healthcare
- to add hidden charges
- to perform unneeded operations and treatments to make profit (even if the patient not only doesn't need them, but can be in danger from them)
- to prescribe drugs that the drug companies wine and dine them to promote, whether they're needed or not
And whole more besides.
This might be true, but I would expect citations. I might be biased, is only anecdote, but my experience around the world would single out USA as a place where this is predominant.
Besides, not all the hospital visits are equal, a clear example of how we can align the incentives are vaccination campaigns.
Sure, but most of the discussion on HN focuses on a USA context.
In my country for example, such incentives might not be predominant re: public healthcare (since the staff gets paid whether they have more patients or not), but they are with private practices.
Maybe this is true in the US but not sure it's valid point in Europe where, given how the health system works, most of the time patients are actually a cost for the business hence less patients the better really.
Hence the other arguments he made, about gas stations want you to burn more fuel, etc.
It's about how for-profit incentives of companies can be detrimental to society.
Price-sensitive customers may feel differently.
The Surgery Center of Oklahoma, for instance, makes a profit while providing better, lower-cost treatments than traditional hospitals. And they actually have transparent pricing.
This is very interesting and produces an odd incentive structure. The only upside I can think of is mortgage terms might be favourable to the buyer as the lenders just want a higher mortgage turnover which can't happen if people are stuck in mortgages for too long.
Why would I dump $x00,000 into home equity when I could leverage that money for decades are earn more in the market?
It seems like a win win, at least for people who have access to 4% interest.
My favorite rebuttal to that argument is this Q&A: https://money.stackexchange.com/questions/89245/should-i-buy...
To quote the top answer:
> Ask them if you already owned the house, would they be advising you to take out a mortgage in order to invest elsewhere. If not, ask them to explain the difference between taking out a mortgage on the day you buy the house and taking the same mortgage out the day afterwards.
If I owned a house (with no mortgage), I wouldn’t take out a mortgage on it just to invest those funds in the market. Some people might, but that’s too much risk for me.
If your mortgage is big enough (over 750k as of the last tax bill, which is not that uncommon in some real estate markets) or small enough (so you don't itemize your tax deductions; that roughly corresponds to mortgages under $300k for married couples, I would think), then putting money into paying off the mortgage has a guaranteed 4% _after-tax_ return for some number of years that depends on where you are in your mortgage payoff cycle.
Would you buy a government bond on those terms in the market?
There are obviously liquidity issues with home equity that are much less of a problem with bonds, but I am also not seeing any 4.5% (generously assuming a 12.5% marginal rate on your bond interest) US treasuries bonds in the market right now, at any maturity.
You're still losing a little but you will be ready for emergency home fixes & getting sacked with random specials from your city which are usually at a higher interest rate.
Of course if you have tons of cash, then for sure throw it in some ETFs in the market.
People take out long term mortgages but it is quite common to re-mortgage on the same property to get a better deal...and usually people go with a different lender in those cases
Or to "extract" equity as money to spend. There's a huge amount of advertising out there trying to convince people they should take out a home equity loan and spend the resulting money.
This is only true provided that the mortgage rate for this person is below or at the federal funds rate, right? Given how low it is, even in the nightmare scenario they're making good money.
Though for the originating institution you're generally correct.
Well, that's a bit of encouragement to overpay my upcoming mortgage.
Increased risk does not benefit the lender.
Lenders do not want real estate, or the work it takes to get it. They want regular payments.
a lender’s job is to price default risk. if they could do this properly (pricing at a premium), they’d prefer higher risk because it would net them more profits (this is supposed to be reigned in by regulations on risk exposure but we saw how effective that was a decade ago). so higher risk does generally benefit the lender.
however, lenders are horrible at being real estate investors and property owners/managers, so they’d rather avoid (most) foreclosures as it’s less profitable to them. they’ve even gotten out of managing the loans in many cases, preferring to sell them off and reinvesting the money in new loans instead. it’s specialization at work.
This changes when banks exploit mispricing or miscalculation of risk by other lenders, to undercut them or to buy low risk debt at high risk prices.
Major underwriters want regular payments. If they wanted market value property, they would invest in that instead.
If banks wanted to foreclose property, why wasn't 2008 a winning year for banks?
This was one of the major ways the black middle class was hollowed out since homeownership was one of the major sources of middle class wealth gain.
No, it's not more valuable.
When a property is repossessed by a lender, it is sold (often at auction) by the lender. The proceeds (minus costs for admin, auction fees, legal costs) will be put towards the debt. If there is money left over, then it goes to the borrower.
So, in the best case, the lender gets their money back (and loses the chance to earn interest for the remainder of the mortgage term). In the worst case, they get back less than they were owed.
Don't forget that you hardly repay any capital at all in the first years of mortgage which is in favour of the lender. Similarly in a lot of countries like Spain, UK, France, ... if you LTV is too low, the bank charge you for a specific insurance that covers loss of value of the property.
The common wisdom was that indeed the bank would rather have people paying their debt, but I'm not so sure it is still necessary the case. One sibling comment to yours provide a different point of view, talking about how bank takes money of transation and more transaction is more money. Following the 2008 crisis that showed that the backend debt component of the mortgage is actually instrumentalised and resold and the element I mention here, I wouldn't be surprised if, for some banks at least, repossession is not part of their revenue stream.
Is this just what they do as it makes financial sense to them, or is there some law or similar prompting them to do it? I was wondering if holding on to strategic property would be beneficial. But if they are immediately selling all property that is repossessed then it doesn't sound as ominous as I imagined and actually sounds like the most beneficial thing that could be done, for the market and potential buyers.
When banks end up owning properties is usually when there are no bidders; the starting bid is usually either the amount of delinquent debt or the total of the debt and any other costs that can be charged to the borrower. The bank has effectively shown that the house is worth less than what was owed at that point in time, and then it's their job to get rid of it (in some cases a bit of staging will go a long way, in others, they'll have to sell it for much less or hold it for a long time or both)
As far as I'm aware there's no law demanding they turn around and sell, but it makes a lot of sense to.
There are practical problems relating to specialization in the industry; there are no participants at this time who could play the proposed game. There are salespeople-transactors companies who need to turn their working capital over every month or so; the people who sell you a loan for a commission and then sell the loan to a national servicing company next month, they need to turn that working capital over every month or two or they go out of the business of selling loans because they run out of cash to turn over in new loans. Meanwhile the national servicers specialize in logistics, sort of, by trying to optimize cheap and poor customer service to turn (junk) bonds and such into the largest income stream they have; they optimize all internal processes on being identical and simple and fast and dumb. They're in the business of raising money, buying lots of small income streams, then milking it for all its worth via monthly payment transactions and trying to branch out into long term real estate investing is problematic for that business model level. Why don't restaurants own farmland, because skilled farmers and skilled restaurant operators usually aren't the same people so two people trying to do that would overall make far more money if one tried to be the farmer and one tried to be the restaurant chain owner.
There are real estate investment trusts but they tend not to be a tiny department of a sales org or a servicing org. REITs tend to be stereotypical investment organizations that happen to buy real estate and derivatives and holding companies rather than Apple or Google stock; not a desk at your local bank branch or a dude in the mail room at a national service center.
The closest analogy is probably pawn shops. Those guys will sometimes do weird things to optimize return on their collateral. Its probably a good thing they tend to be smaller and less centralized than the world wide megacorporate financial system.
That is a significant misunderstanding of fractional reserve banking. Banks can only lend money they have, i.e. that customers have deposited. They can't just invent money to lend. So, a bank with $100,000 in cash can only make loans totaling $90,000 with it (assuming a 10% reserve requirement).
By financialising the mortgages and other loans, the banks can now treat them as if they were lendable cash. A bit like they can treat gold bullion like cash.
They'll likely sell at an auction for cash too. With two houses otherwise identical, one being sold normally, one as a reposession, you'd go for the normal one. How much less would you pay for a repossession which runs a risk of the previous owners coming back to haunt you?
In hot markets sure, maybe a bank might see a default and repossession as a good thing, but I doubt they are optimizing for those scenarios.
A rate of 2-4% is about average for the US, I'm told most lenders model default rates of up to 8%, though given 2008 I'm guessing 10% will be seen in some forecasts from now on.
As a side note, the above site fred.stlousfed.org has some of the best clean data that you can find for free for modelling purposes
And lenders always want to be repaid as there is no incentive for them to repossess a house as its auctioned off and the owner get any excess return above what they own.
As others have said, banks don't want to be holding on to property any longer than they have to.
While that may include plenty of fees etc, theres limited upside.
This classic example is lenders forcing an auction into which they know the only likely bidder is a related company of the lender.
Google "jointly and severally liable".
This is called "joint and several liability" and is the legal position for many agreements when a party is made of several people (at least in the UK).
For example, people sharing a flat/house as renters will have the same liability unless they have separate tenancies. This is extremely common but surprisingly many people have no clue about it and think that they are fine paying "their share" of the rent.
The risk if they don't look after their security properly is that the lender ends up owning (say) a 1/3rd joint share in a property which they are not permitted to sell without permission from the other 2 owners and on which they are not entitled to any rent and can't evict the defaulting borrower. There are cases where this has been the result of a defective mortgage arrangement. Understandably, that's not something lenders really want to risk.
It is possible for property to be owned with only one name on the deeds and one name signing the mortgage deed by establishing a trust.
If you want the lender to consider multiple incomes on that basis then you'd need guarantors and you then run into the problem that this probably needs specialist human legal input so it is suddenly not a mass market product.
It's also worth noting that under joint and several liability, the tenants would usually have the right to then sue one another for the relevant shares if the lender went after one of them for the whole amount.
I notice this more and more, along with promotion of clearly trivial stories to the front page - is a banal and contrived tweetstorm about Trump/race/trans/gender/tax issues justifiably worth elevating above a story like Venezuela, or rampant knife crime, or any number of other inconvenient yet important stories about which the BBC chooses to avert its eyes?
I believe that much of what is motivating their current direction seems to be desperate fear of becoming irrelevant in a changing media landscape (an existential threat given that with falling engagement the license fee would eventually become untenable), hence their degeneration into a crumby buzzfeed simulacra. Another reliable institution subverted and going down the tubes, hey ho.
Remote work might be the panacea...hopefully.
Remote workers who previously worked in Seattle have done this to where I live now - which has only displaced their housing affordability crisis to a different location, and on to a different demographic.
Furthermore, why has the movement of people to your town created an affordability crisis in the first place? If the existing residents are opposing increased building, then it's not really the newcomers fault. If you're building to meet demand, why are prices going up?
Constant property ramping by the BBC back in the early 'oughts was the main reason I cut the cord and never looked back. They're about the only big player in UK media with no commercial interest in doing it (no ads from the property sector), but even so, they just couldn't control themselves.
Bigger houses, bigger plots, bigger garages.
At the same time, families got smaller, stay-at-home spouses (i.e. "free" upkeep) became less common, etc. Add in population growth in popular areas and the recent trend to smaller housing makes a lot of sense.
Especially so when you consider incumbent NIMBYs.
"The median estimate for future growth sees the world population reaching 8.6 billion in 2030, 9.8 billion in 2050 and 11.2 billion by 2100" (2017)
Also, from Wikipedia:
Low estimates suggest a decline
Moderate estimates suggest a plateau
High estimates suggest constant increase
Time will tell, and estimates suggest that the earth can comfortably support ~10bn
I don't think housing prices have much to do with population increase, but more to do with urbanization (as well as increasing wage gaps).
People are flocking to existing cities, and the more center you are the higher prices are.
This pushes people to the outskirts, which become more urbanized, which spreads urbanization through the same cycle.
But top places like London now attract from a global pool of billions.
People need to realise that a world with 10 billion does not look like a world with 2 billion.
Lastly, the planet has trouble with us now... It's terrorism to suggest that 10 billion is just fine.
Calling it terrorism is a bit absurd.
It's totally possible (and even likely within our lifetimes), but that doesn't mean that there aren't huge logistical issues to overcome for it to be comfortable.
One of the main problems is that the world population is so widely distributed. We can already feed and house everyone, we already have more resources than what would be required... they're just not distributed appropriately (some due to hoarding, some due to supply chain barriers, political borders, etc).
...and even if I did say it was "just fine" it wouldn't be tantamount to terrorism because I was pointing out something that is very likely inevitable.
I'm not invoking 3 billion people by assuming one day they will exist.
You don't need to weaponize "sorry" — just don't say it.
It doesn't make sense to jump to ad hominem attacks because someone's calling you out on a statement that seems completely irrelevant.
It is only 'inevitable' because no-one has cared about it and, worse because some try to downplay the issue.
I did not accuse you personally, but you also did not say that it was inevitable, you spread the opinion that it was fine.
Those who claim that it is all good are pushing us to the abyss.
Edit: Downvoting the inconvenient truth won't make it go away.
This conversation has reached the point of unproductive a while ago.
I'm sure you'll try to bait me back into it, because you fit that MO, but you're on your own.
The UKs pop should dropping, if not for immigration which the UK can control if they wanted too (being an island surrounded by rough seas and rich neighbors).
If you look at London (since that's essentially the article), population has actually only reached back to its 1950 level.
But attractive cities can now pull people and investment from a global pool of billions of people and thus the market does its thing and prices move accordingly.
The massive change in urbanisation is happening in developing countries. In developed countries it happened earlier and is not really a thing anymore.
We are massively overbuilding a housing type with offensive levels of resource consumption built in: single family detached.
Cap VW at 100 cars a year. Think they’re going to be Jettas or Porsche? Probably Porsche. Doing that, then getting mad that cars are unaffordable, and saying “clearly if we let the automakers make more cars they will just be more Porsches, that’s not helping” would be silly.