Owning your own home serves several purposes:
3. As a hedge against inflation
4. As a hedge against market forces
That doesn't mean buying is always a good idea. Clearly or isn't. Like don't but in a town where 70% of the adults are employed by the local coal mine, for example.
Here's how I like to think about it: you are never out of the housing market. By not owning you have a large short position in real estate. Given that rents eventually track prices, if prices go down you benefit (you're rent will eventually go down and you didn't lose capital). If prices go up you lose. You missed a gain and your rent will go up.
Given that, you buy your house to remove risk of local changes to your detriment.
Now your argument about housing on a personal financial level is spot-on, at least points #1 and #2. As for the latter points, the first purpose of a house should be to house people. When we view housing as an investment we start making economically rational (but morally questionable) arguments like, "ban new apartments because they'll lower my home's value."
In the economically ideal case we'd have a fair Land Value Tax to encourage as much building as necessary.
It seems absurd that a vacant parking lot pays basically nothing in property taxes while a hotel of the same size pays tens of thousand a month, but both take up the same amount of space and have the same potential. This kind of tax would certainly lead to better utilization.
LVT says the state should not only stop protecting these things, it should do a 180 and actively kill the uses by levying taxes they can't afford. Rather than slowing/blocking the transition to condos and formula retail, accelerate it.
In principle, the new denser buildings could have space for the old low-value uses, but new construction is expensive. The new buildings would have to age a while before those marginal uses could afford them, and in the meantime the tenant organizations would all die. Maybe this could be averted using some central-planning scheme, maybe not. But you can imagine how the electorate might not want to risk it. The trends LVT would tend to accelerate are the ones most residents lament.
I think we should allow sites that are already dead or are transitioning voluntarily to drastically increase density. Letting owners do this forces tenants' hands, which is a sad tradeoff (and to the left-NIMBYs, a dealbreaker). LVT goes even further and forces owners' hands, which I'm less wild about.
> LVT says the state should not only stop protecting these things, it should do a 180 and actively kill the uses by levying taxes they can't afford.
Do all of those things have to be at ground level? Remember space is not taxed (the marginal tax on building up more space vertically is 0), only land. If a theater is on the 5th floor of a larger building, does it stop being a theater?
Can any theater afford a ground level space at current San Francisco prices?
If a theater can only afford to be in San Francisco because of Prop 13 then we should recognize that as a form of taxpayer subsidy for the theater.
If there is the political will for taxpayers to subsidize theaters (why not, art is nice), then why not subsidize a theater's lease on the 5th floor of some building, instead of preventing building up by subsidizing a one storey theater on the ground floor?
But I think there's a good argument to be made that the taxpayer subsidy process should be more transparent and less arbitrary than "whichever theater bought its land longer ago gets a bigger subsidy".
Your proposal would force this woman from her home as her land value tax rose (As she has no ability to pay for this increasing tax burden)
Property taxes pegged to market value are an incentive for liquidity in the real estate market.
In both cases (SFH on less valuable land, condos on more valuable land) the land shouldn't end up being the majority of the value, since with condos the land value is effectively split among all units in the building.
You can provide land tax subsidies or rebates to targeted individuals (eg the disabled, the retired) without providing massive tax breaks to everyone else.
What's more, this system makes it impossible for, say, retired people to downsize or move because that resets their tax base to a much higher level on their new property (in the Prop 13 case).
I assume there would be limited capacity for abuse just so long as the break only applies to your primary residence.
The tax break wouldn't be so bad if it only applied to primary residence, was means-tested, and couldn't be passed down to children. Regardless, though, homeowners tend to be more well-off than tenants; they shouldn't be receiving tax breaks in the first place.
Prop 13 empowers NIMBYs to vote to kill new construction, strangling supply and pushing prices up, without facing any of the consequences of those rising prices.
Actual valuation methods used in real world by countries like Taiwan, Estonia, and Singapore to levy lvt (all countries with 90% plus home ownership) are more sophisticated than that though
Ultimately, why should the owner of a vacant lot be compelled to sell or develop on the basis of the potential value?
And who decides the potential value? Should a 10 story hotel be taxed like a 100 story office tower? Should my $200k home be taxed like half of a 30 unit apartment block?
Property rights are important, but they aren't the end-all-be-all. Eminent domain, blight laws, zoning laws, tenant rights, and a variety of other property-related laws arguably disrespect property rights, but they have been a staple for hundreds of years. Property rights were never some sacred ground.
Cities are (or should be) for the people in them. Not simply a vehicle for the ultra-wealthy to park wealth.
Ultra-wealthy aren't laundering money in real estate because property taxes are too low. The situation we have today is a obvious result of fiscal policy made in the 80s, that was predicted then.
Highly recommend you read Progress and Poverty, it's still very relevant today.
The housing market moves so much faster than wages ever will, and it seems having only some units rent controlled exacerbates the problem for units that aren't, so why not make every unit in the state a rent controlled unit? The landlords are already insulated from the whiplash of the housing market from statewide property tax control in the form of prop 13, why not let renters enjoy that isolation as well?
No-one would move, ever. People wouldn't be able to change jobs even for much higher salaries or better conditions. Children would live with their parents forever. Many people would live precariously in illegal sublets with inadequate fire exits etc. Developers would stop building. Landlords would stop doing maintenance and let their buildings rot. Everyone would be miserable.
> Many low income renters are paying 50% or more of their income on rent, that's not sustainable for the wider economy that relies on low skill labor to function, and the solution is not to have people commute 4h every day to clean an office, teach a class, or fight a fire.
Rent control creates longer commutes. To the extent that the economy actually relies on low skill labour, it can pay the actual cost of having that labour where it needs it. In fact by having rent control you artificially depress wages and encourage companies to employ humans in bad jobs rather than finding ways to make things better.
It's also a problem that's essentially invisible to anyone who bought into the market at a good price, or is wealthy enough to pay market-rate rents. But for the rest of us, it hurts.
I feel like this post should feature at the top of any discussion on housing.
The really problematic rent control is in San Francisco, where rent increases are capped at 60% of CPI (well below inflation). This results in massive giveaways to the rich that grow every year.
inflation + 3% is an investment that I'd make.
I don't think you could just set the cap and say job done, there's enough money there to ensure everyone benefits though.
If the policy were to apply to all leases, new as well as existing ones, would the problem be somewhat mitigated?
(That's basically how things work here for student housing. Far from perfect, but more sane than housing in the Valley)
The unpredictability this would entail would probably be worse than a functioning price mechanism. Imagine you get a job in San Francisco but there’s only a 20% chance you’ll be able to “win” a housing unit where you want. Versus the current reality of for sure being able to find housing given you’re willing to pay enough.
This does not happen, nor is it remotely desirable. Having a life involves much more than having a decent job. It entails living where the person chooses to live according to their personal tastes and desires.
If you force the decision on where to live based on a single constraint that in theory is only a major part of your life so that you can fund your personal life and personal interests then this leads to poor quality of living for all (including spouces, offsprings and immediatr family) just to cater to a company's bottom line.
You're confounding your observations. People with money choose to live in areas that maximize their quality of life, and they don't mind paying a premium for that.
Quality of life matters to all, whether rich or poor. Poor people aren't masochists.
The main driver of price is not "demand" imagined as how much people willing to pay for a particular house but demand as how much people are capable of paying, which is mediated by access to debt. If access to debt is clamed down on across the board, then prices will fall accross the board. People will still compete on price but as a society a smaller fraction of income will be spent on housing.
it's not the whole story however. In order to increase Supply, it has to be profitable to build new homes. If building new homes is not profitable, none will be built, and the price of existing homes will be forced upward until it matches the cost of new construction.
So I agree with you that access to debt is a very important factor, but I disagree that it is more important than demand when you look at the whole picture.
No they wouldn't. I lived in an european city with a socialist municipal government who enforced social housing programs which, on the brochure, meant that window cleaners would have a similar chance of getting an apartment as their boss, and when the program was put to practice... Surprise, surprise: the apartments were distributed throught the party's ranks and through minions in the local and national media.
In the end the municipality started dismantling the program due to the backlash and their solution was to sell the apartments to the current tenants at a firesale price (1/5th to 1/10th of the market value) which,again, led to some amusing anecdotes.
Sweden has had rent control since the 1940's, and as a result the rental housing market is completely dysfunctional by international standards.
In Stockholm, demand for central inner city apartments is way, way, way higher than supply. The rationing method used is a queue administered by the city, and the queue time for the most sought-after areas is on average 17 years. Even the most remote areas have a queue-time of at least a year.
SEVENTEEN YEARS. GOOD LUCK, COMRADE.
This means that if you want to move to Stockholm from outside the city or outside the country, you will not get a rental apartment, unless you rent one second-hand or third-hand, unless you buy a rental apartment under the table, unless you have "contacts", or unless you buy a condo on the perfectly functional condo market.
Since there's a functioning market for condos, but a dysfunctional market for rental complexes, the ROI on building a condo complex is decent, but the ROI on building a rental complex is abysmal. You're better off setting your pile of money on fire than invest in building rental apartments. No private for-profit company will voluntarily build new rental apartments. So the only actors left that could do that is the city itself. However, the city government changes politically every four years, and even if there's a left-wing majority, there is absolutely no budget to increase supply meaningfully.
In addition, there's political and economical pressure to convert the city's housing stock to condos. Current renters love it, because it means they can realize the value of their rental into cold hard cash, and the city council loves it because they get a temporary cash infusion. It's zero-sum for the housing stock, and the long-term effects are shit, because the rental supply diminishes, making the queues worse.
The net result is that it is incredibly hard for companies to attract outside talent, because finding a place to live if you don't already live in Stockholm, is incredibly hard. If you're a transient worker or simply doesn't want to buy an apartment, and if you don't have a decade of accumulated queue time, you have to rent from the much more expensive second-hand weird market, which means that companies have to pay you much more than they would have to pay a local for the same job.
Compare this with SF, or any other large city with a functional housing market, where every company has to pay their employees a wage that covers the housing market rate, which means that there's no difference between local workers and outside workers, and it means that the city has a much easier time attracting new people who want to come there and live there. Because anyone can live there, if they just show up with enough cash to pay the market rate.
Yes, market rates means you get a host of problems, gentrification most of them, but that's a positive problem compared to all the horrible problems that rent control bring.
What is pretty unique is the 100 year mortgages with no default.
You fail to show how that's worse than the version in other places. All you have is an "appeal to anti-communism"(1). Not having to fear that you loose your living space because some investor decided to price you out of it seems valuable and something that should be weighted against the hardships of being able to rent something easily in Stockholm.
(1) Is there a fallacy name for that? I think there should be, it's one of the most popular fallacies here in any financial discussion.
When I moved from Stockholm to SF and told my friends, the first question every single one of them asked was "But how will you find somewhere to live?"
Because if you've only ever lived in Sweden and experienced its rent-controlled market, it's really hard to envision a different system, an actual free rent market, so all of my friends were really surprised that my answer was "I'm just gonna open craigslist and pick something."
In Sweden things are getting deregulated, income taxes are lowered and the social safety net is made less generous. The housing market is now mainly competitive. But for some reason people think they aren't the ones that are going to be affected, (partly because they aren't). If you don't have wealth or are willing to pay up your are a bit fucked, like myself. It is of course hard overstate how bad it is overall, especially for a smaller city. But the market itself isn't uniquely bad. It is mostly like everywhere else.
Yes, but these are not rent-controlled apartments! These are second-hand apartments or houses that you rent from someone who either owns the place, or is already renting it from someone else. You are paying market rates for these, not rent-controlled rates.
Deregulation that allows people to rent out homes they own or rent is what has allowed this market to grow in the past few years, this is the very opposite of rent control!
I started this subthread to argue that rent control is shit, it has shit consequences, it has shit second-order consequences, it has shit third-order consequences. Maybe Stockholm isn't a shining example of how shit it is these days since deregulation and condo-conversions have effectively removed a lot of rent controlled stock, but that just proves my point!
1. Subsidies for building rent controlled units were removed.
2. Publicly owned apartments were sold at below market value. Meaning those who already owned apartments got a discount in the market.
3. The profits weren't used to build new apartments, but to lower taxes.
4. Co-ops were favored by keeping deductions for mortgages, creating new ones for renovations.
5. Property taxes were removed for co-ops.
6. Credit remained largely unregulated and was then regulated to a hundred years.
7. Interest rates are being kept low by the central bank.
8. Taxes were lowered in general.
Of course this new market will never be able to produce affordable housing, so the rent controlled market doesn't "work". The whole thing is set to implode though. Already if you bought an apartment ~"two years ago" you have now lost your down payment.
This means you can't grab quick opportunities, you can't move to Stockholm on a whim to try your luck, so local companies and the local economy suffers. Fewer people move to Stockholm than who otherwise would, which means the city misses out on potential growth. It's an inefficient allocation of the work force on a national level.
There might be some social good to artificially restricting the growth of your most important economical urban centers, but I highly doubt it.
The supposed benefit of rent control is that attractive inner-city apartments are cheap. Sure. But since rents are based on utility value instead of location or attractiveness or market value, this means that unattractive apartments two hours from the inner city cost as much to rent as comparable ones in the inner city. It's impossible to save money by renting in a less attractive area. Normal cities have some sort of parity between cost-to-own and cost-to-rent, regardless of area. In Stockholm instead, this parity changes dramatically depending on your distance from the inner city!
Another second-order effect from rent control is that having an attractive rental apartment in Stockholm suddenly has value. This makes people reluctant to let go of an apartment once they have it, which makes them reluctant to move away to pursue other opportunities elsewhere, even if that would be the better choice. Still, if you have one, you can rent it out on the second-hand rental market, so now you've created a class of rentiers, the people that have gone through the Soviet bread-queue can now cash in on that scarcity. But I thought rent control was about fairness?
AB 36 will allow cities to enact rent control on older buildings. AB 36 would not apply to new construction, only to buildings older than 10 years. This should help to prevent supply crunches, or at least not make them worse.
AB 1482 would set a state-wide cap on rent increases, for example inflation + 10%. The idea is to stop massive rent increases that lead to evictions. The exact number hasn’t been determined yet, the bill sponsors are trying to figure out a good number that protects tenants and gives landlords a legally guaranteed return on investment.
These bills will face a lot of corporate opposition. It’s important that our electeds here from renters, homeowners and “mom & pop” landlords as they consider these bills.
In my experience, pass throughs are a theoretical concession instead of a practical one.
As Walter E. Williams said in 1987: "Short of aerial saturation bombing, rent control might be one of the most effective means of destroying a city."
Is that true everywhere? Or are you just focusing on one-off locations like the Bay Area ?
According to Schiller housing has tracked inflation in the US for 100+ years
Consider Shanghai as described below. Consider following the link.
"In 1996: After the mayor boasted that 18% of the world’s construction cranes were at work in Shanghai, international media widely reported – and exaggerated – the statistic. Reports described the crane as China’s national bird. The figure on how many cranes were working in Shanghai got rounded up to “a fifth,” “a quarter” and, in more than one publication, “half” the world’s total. "[https://blogs.wsj.com/chinarealtime/2011/12/21/china-shangha...]
BTW, people who call SF "charming" have not visited it recently!
You’d lose some neighborhoods composed of endless streets dominated by garage doors at the ground level, and all those surface parking lots, but I think you guys could figure out how to cope.
I had a good discussion with one of my dad's friends recently (who is a realtor), and mentioned that one of the biggest costs we never talk about is the cost of compliance.
Basically, his argument is that the cost of existing housing is driven by the cost of building new housing, of which places like San Francisco have been very effective at limiting! But as well as that, what are the development fees for example?
When politicians virtue signal about what percentage of a housing development will be below market rate for example, you have to remember that this sort of thing will be factored into the price you pay. Or the endless studies that city governments (again looking square at you San Francisco) commission. The buyer and the renter pay for these.
America actually has relatively cheap housing across the vast majority of the country, so it's not as if the buildings themselves are the major factor in jacking up the prices.
The general gist is that building requirements (parking in particular) make anything other than luxury condos financially infeasible.
No. Housing that appreciates at exactly the rate of inflation can still be a good investment and a great tool for building wealth.
If cities doubled the number of houses built any year the average price went up by 5% or more, this wouldn’t be a problem.
The tax rate could even be negative.
With how small polities are in the Bay Area this leads this to everyone pushing the burden onto someone else. With a large enough polity responsible for zoning (e.g. New York City's five boroughs) the pressure to add housing becomes too large to completely ignore.
If the government mandates that the price of something is X, and X is higher than the price is now, prices go up.
Also, remember than nominal price and economic price are distinct. “Price” needs to include all tax subsidies and other incentives/ dicincentives.
It might make it sting a bit less buying a single-family home in San Jose for 1.5mil and knowing that you're paying 10x the tax of your next-door neighbors.
Short of massively expanding the poor's ability to vote (making Election Day a holiday, putting it on a weekend, mail-in voting) this holds true in American elections.
My anecdote for the morning.
It costs thousands to buy a house
It costs thousands to sell a house
It costs thousands to maintain a house (I once spent, over $10,000 in one month on repairs)
It costs thousands in property tax and insurance
You pay thousands in interest and maybe PMI.
If the asset doesn't appreciate faster than inflation, where's the wealth building coming from? Sure, I'm not paying rent, but, honestly, it ends up being mostly a wash once you factor in all the expenses I am paying.
I bought a house because I wanted to own a house, not because i thought it would build wealth.
One thing that can make it better to own (in the US) is that mortgage interest is tax deductible (at the federal level). Rent typically is not (although some states make rent tax deductible because voters naively believe this is a subsidy to renters and not to landlords).
In CA I might be paying double the tax than my neighbors but I can’t charge more rent than them
Very few people buy the nicest car or the best TV, because we know those don't have a return. But being bad at math, we can't seem to figure out that we only see 30% of every dollar put into the house (taxes, mortgage, upkeep, improvements) back and we conveniently forget about inflation.
Yeah, if your house doubled in value in 25 years that means you kept pace with inflation. You could have done better with CDs.
Housing raises your risk; it doesn't lower it.
1. Over time, renting and owning cost similar amounts: https://affordanything.com/is-renting-better-than-buying-sho....
2. You run great risk in terms of the market: look at anyone who bought in Detroit, pretty much ever. Buying in West Coast housing markets may look hot right now, but the minute a big earthquake hits one, a lot of people may be financially wiped out. A serious recession could do the same. Miami? It may be literally underwater. https://www.newyorker.com/news/news-desk/miami-faces-an-unde...
3. The neighborhood may change for the worse.
4. Given birth rates, you should be worried about deflation, not inflation.
The first is 5% interest. Mortgages can be significantly less interest - mine is 1.08% right now (fixed for 2 years, but those are the most important 2 years for paying down).
The second is that you'd pay the mortgage off over 30 years. It's entirely possible to pay off much quicker - perhaps 15 to 20 years - in which case the total interest paid drops significantly.
2. The article completely misses the other huge value of buying a home - risk mitigation. You can't be evicted suddenly for reasons out of your control, you're not subject to market whims in rent (there's an upside to this, but generally rents are sticky - you need to move house to get a better deal even in a falling market), you have no unexpected moving costs, your kids can stay in the same school. Looking at it purely from a monetary point of view completely misses the point.
Ultimately the benefits of stability are worth a lot, especially as you get older.
We have examples of folks losing their homes to build gas pipelines and shopping malls.
As renters are also fully exposed to those, the existence of them does not alter the degree of the stability advantage for home ownership over renting.
>“Rachel’s landlord needs to make money. How could he/she possibly earn a profit under this scenario?”
>Here are many ways Rachel’s landlord could benefit:
>The landlord could purchase the property at a steep discount, such as through a foreclosure auction, short sale, estate sale, or by “driving for dollars” (making direct contact with the owners of distressed property.) This allows him/her to purchase the property significantly below market value.
>The landlord could be holding the property for the sake of inflation-protected wealth preservation, rather than as a cash flow investment. (Don’t assume all landlords share the goal of cash flow. Some simply want to diversify their assets.)
>The landlord could be making a speculative play on potential appreciation. (I don’t recommend this technique, but many landlords do this.)
>The landlord could have inherited the property.
The landlord could have purchased the property decades ago, paid off the mortgage, and now enjoys the cash flow. They don’t want to sell/trade into a different property due to the hassle involved, so they let this property ride.
The other secret is, many people, at the end of the day, simply make very little to no money as landlords. My parents were landlords for many years and broke even for all those years thinking that the profit was going to be right around the corner. Never came. The steps to being successful at real estate is not 1) buy house 2) print money like a lot of people think going in.
The other thing is, their calculations take in opportunity costs of having your money in your house vs having it in a better performing asset, which a lot of people simply ignore as "not a cost."
It's also highly dependant on your local market which one is cheaper.
If there's a long list of situations in which owning is less expensive than renting, it is intellectually dishonest to then assert that they cost the same.
The key mental breakthrough for understanding homeownership is that it's just like renting, except you are the landlord as well as the renter. So if you can imagine a bunch of different ways in which a landlord makes money with a rental property, then you can start to imagine situations in which homeownership will be better than renting for you.
You can buy foreclosures, short sales, estate sales, or just contact someone to buy their house.
You can hold property for the benefit of inflation-protected wealth preservation (in fact, this is one of the main ways homeownership helps build wealth).
You can speculate on potential appreciation (in fact, many people do this when selecting where to buy).
You can inherit property, or (more under your control) you can pass property on to your children.
You can hold a piece of property for decades, pay off the mortgage, and enjoy the greater cashflow--in your case, from income that would have gone toward rent.
Plenty of people buy investment properties generating them 2% a year thinking they're doing great!
This is however generally different to owning a house. If you want to own a house, it shouldn't really be seen as an investment, more as a place to live and put down some roots.
You shouldn't invest in putting the best kitchen in your rental property, but you can do that in your own house if you want to.
That's a false dichotomy - we should "buy low, sell high." Obviously both events contribute to your total ROI.
1% may not seem like much, but consider that you only pay 3.33% of the amount owed every year on a 30 year mortgage. Not only are their monthly payments lower, but they pay more principal sooner.
The article differentiated two different investment strategies:
Low income property with a decent profit over monthly expenses.
High income property with little to no monthly profit, but large appreciation in value over a short time period.
So, instead of buuying one or two high income properties, one could purchase 5 to 10 low income units.
I found it interesting and a new perspective for me.
In the long run, these two factors tend towards irrelevance, relative to the tens or hundreds of thousands of dollars of wealth you build that you couldn't have built through rent payments.
I think the more reasonable complaint is that people don't like thinking about how much of a risk a leveraged, illiquid investment worth >100% of your net worth is, so they have to delude themselves into thinking of housing as unrelated to their finances (incidentally, this is why richer households' net worths recovered so much better from the financial crisis: poorer households' were more likely to have a portfolio tilted ludicrously towards a single, illiquid asset).
That is to say, you're definitely correct that getting equity in the housing market has concrete second-order benefits, financial and otherwise, that don't show up in a simple assessment of the asset classes in your portfolio. But the _amount_ of house people choose seems to be systematically skewed upwards, often for no real reason other than financial illiteracy and an aversion to sitting down and thinking through the purchase decision.
Politics, religion, and whether their house is an investment.
People get pissed at you if you tell them that having all of their money in their house is a bad investment. You'd get less aggression telling your friend you think their wife is cheating on them.
If you are in a lower income bracket than what we used to call middle class (before being middle class meant "up to your eyeballs in credit card debt"), it's likely that the majority of your net worth is the equity the house. That's bad. And that doesn't mean "take out a second mortgage and start playing the stock market", that means you have more house than you can afford long term.
The people for whom it works as an investment are diversified. If less than 30% of your money is in your house you are probably doing it right. If it's 75% and you also don't have a retirement fund, well you're subsidizing those of us who are both more fortunate and better at math.
If you own real estate you're buying into local risk. Real estate generally isn't insured against things like acts of war, so if NYC gets nuked or whatever then you lose all your money.
If you're buying real estate right now then you're basically betting against war, automation, AI, climate change, energy price spikes, etc. Even if you don't think that any of those things will happen imminently, do you really want to bet against all of them over the next 30+ years?
And if you're working, you're already exposed to changing conditions in the local labor market. Owning your house exacerbates this in the worst way, just like how the very last company you should own stock in is your employer.
If I'm in the NYC labor market then I feel like if I were to own real estate then I should be hedging my risk by owning in Austin or something.
The only true purpose housing serves is shelter. That's it.
Any other purpose is artificial. Housing normally is a depreciating asset, like cars. Normally it shouldn't be a hedge against anything, including inflation. It normally shouldn't be an asset of speculation, no more than tulips or bitcoin. And as for security and stability, you can get that from renting ( especially if you live in rent controlled apartments ).
The idea of a house as an asset or investment is due to government and business policy decisions. Increasing immigration, limiting development via zoning laws, creating tax incentives, advertising pushing home ownership, laws favoring home owners and landlords over renters, etc.
All the premises we believe are premises we are taught. Your premise is just as false as anyone elses. It's entirely artificial. Policy decisions could make renting more favorable than owning. Policy decisions could actually make owning a home near a coal mine more stable than owning a home in silicon valley. Policy decisions could make home prices decline considerably by encouraging overdevelopment so that supply outstrips demand.
Fundamentally, as I stated before, the only purpose of owning a house is shelter. Everything else are "false" premises we've been taught.
A house should ideally be a stable investment: the value should keep pace with inflation.
Most people pay more for house maintenance than required (updating a perfectly good kitchen...). That is an investment in quality of life.
During the housing crisis, for example, rent went UP because as people became evicted there was higher demand for rentals. I acknowledge this was a black swan event though.
Rents don't usually go down, but they often stagnate ESPECIALLY in units owned mom n pop landlords. If your rent doesn't change for 5 years, but inflation is 2%, at the end of the period, your rent has effectively declined by about 10% in real terms. Additionally, you have your 20% down that would be paid for a house, but instead you invest in the stock market that returns 6% annually, at the end of 5 years, you have increased your assets by 33%
If you bought a home, and the home price did not increase for 5 years and you pay the normal 20% down mortgage, %6 closing costs, and 1.5% annual property tax, you're looking at some significant loss of net worth when compared to the rent alternative.
There are a number of assumptions in the above. Each that is different for you changes the analysis. In particular it assumes disciplined savings such that rent+savings == house payment + house maintenance + savings. It assumes that house maintenance and remodeling is not making the house more luxurious. Its assumes similar levels of luxury (renters are likely to go for a cheaper apartment and spend the difference in housing luxury on travel).
As always, location, location, location. Different areas have different situations that can make one significantly worse than the other.
There was a massive China-fueled resources boom in the early 2000s that soaked up the available construction capacity (materials and labour) for capital projects like building oil rigs and ports and all the ancillary stuff that entailed.
In 2000 you could buy any number of 1970s houses for <$100k. These were relatively small 3x1s (like 1000-1500 sq ft) but solid. Concrete pad, brick-and-tile (Australia doesn't build timber-framed houses).
By 2006, those same houses now cost $350k. There were articles at the time stating that the cheapest house for sale in the city was $250k.
And all that paled in comparison to what happened at the high end of the market.
Anyway, rents went through the roof.
By 2011, the resources boom had definitely cooled and prices were starting to drop. There were less FIFO (fly-in fly-out) workers and so on. Rents had actually did drop through the middle 2010s, sometimes significantly. I used to rent out a house for $450/week and now I'd be lucky to get $300/week for. Thankfully I'd long since sold it.
So yes, rents can go down.
Went down for at least 1BRs in Silicon Valley. Apartments that were renting for $2000+ in 2007 were going for $1700 in Q4 2008 and $1400 in Q2 2009.
I'd be curious if there's any evidence as to why rent went down in SV. For example, did the lack of credit affect the venture capital necessary for start-ups and ultimately lead to less demand in housing?
This is also why the rental market was more affected than the housing market: people who owned homes (particularly expensive single-family homes) had already put down roots in the area, and if they were foreclosed upon (and many were), they were replaced by other people who wanted to put down roots but had kept their jobs. The lower-end condo market softened significantly, though, because it draws from a similar demographic as the rental market.
How is something that happens regularly a black swan event?
More concretely, a recession is more predictable and to be expected while the failure of the mortgage-backed security market (and the broader consequences) less so.
I think the logic of this point is dead wrong: every housing bubble (and its bursting) is a counterexample.
That's the other end of the coin that's really easy to miss. I moved to Las Vegas in 2011, when my wife graduated (and where she landed in a nation-wide job search), thinking it'd be easy to find a job in any city with > 500k people (given that I had no trouble finding jobs as a recent CS grad in the relatively small metro of Champaign-Urbana, IL). It wasn't.
It's also easy to miss that "leverage" simply isn't available as an "investment tool" to most people, except with a mortage.
doesn't ur property tax go up with the market value?
> doesn't ur property tax go up with the market value?
The market value of a property is typically not assessed yearly, at least where I live.
I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black?
The difference is that you still own a home, even if it is worth less than what you paid for it. If you bet all your money on roulette and lose it, you have nothing left.
30 years from now, when you pay off your mortgage, your cost of living will be very low -- this is very good for retirement. People who are still renting 30 years from now will probably be paying monthly rental bills higher than your mortgage payments, due to inflation if nothing else. The difference over that time might exceed your hypothetical $100k.
i can buy a house in detroit for $400 and pay no rent . is it a good retirement?
It's very similar to margin trading on a stock brokerage, except that margin accounts are generally higher interest and not tax-deductible, while getting margin-called does not affect your credit. In both cases, you forfeit accumulated wealth built up if the market moves against you.
not if you owned a house in detroit or any number of downturn cities.
Perhaps patience will be rewarded in Detroit too.
why do they have to hold on to some hope of price incrase just because they bought a house. Instead of having the freedom to choose the best investment like everyone else.
Sure hold on to it if you really think its the best investment for your money( i really doubt detroit house is best you can do with your money), not because of some sentimental value.
You're thinking of purposes as an investment. The point of the article is precisely that it is not beneficial for it to be seen as an investment, but first and foremost as a practical human necessity.
Home ownership as it stands today does not provide financial security / stability because of the degree of leverage required for most Americans to own a home. It is funny how much basic financial advice boils down to "diversify!" but then we turn around and define the "American Dream" as levering up to buy a single asset that is worth several multiples your networth.
Home prices are absolutely not hedged against market forces, and the double whammy of losing your job WHILE owning a house whose value is down significantly from your purchase price is substantially worse than losing your job while merely renting your home.
When your house value is underwater, your only play is to stay and wait it out until prices recover. But if you also get laid off and can't make the mortgage, you can't simply move to a smaller / cheaper home like you could had you been renting. You'd be forced to sell at the bottom, or try to rent out at currently depressed rental rates to make up for your mortgage that was locked in from when your house was worth much more.
To own a home is to be in a state of constant stress over the value of your home, and the more levered up you are, the worse this gets. This source of stress is why I believe NIMBYism is so prevalent.
This is a major argument for living in a low cost-of-living area. While in Silicon Valley, house prices are 10-20x a developer salary, in my location in the midwest, houses are 1-2x developer salary.
The reason I say that is because 9 times out of 10, from what I observed, old people who own end up living in squalor because they lose the ability (financial or otherwise) to care for their house. Maintenance ends up being deferred indefinitely. At the same time senior apartments are incredibly affordable, at least in my area.
Sure, that's not every old person, but I see it enough that it's concerning.
P+I is just a part of the cost of owning a home.
And why would renting not work in old age? It works fine, its a value exchange and the money that ive saved for my old age in various investment vehicles will typically outperform most real estate investments.
I also have an asset I can sell which doesn't exist when renting. Property taxes are generally lower relative to where I could rent and simply don't enter into it.
More important to me, a bought house is my home.
That applies to literally everything in the world, and therefore is pointless to bring up here.
If you fail to satisfy your mortgage agreement with the bank, then yes, they can take the house from you in a foreclosure. But until then, it's yours, not theirs.
A lienholder is a lender that legally owns your property (a car, for example)
until you pay it off in full. The lender — which can be a bank, financial
institution or private party — holds a lien, or legal claim, on the property
because they lent you the money to purchase it.
Edit: legally they DO differ, but they're the same in that they allow the lender to take back the property in the event of non-payment. Therefore, even though you might legally technically own a property with a mortgage, the bank still has the ability to take it away from you, so do you REALLY control it? https://www.quora.com/How-do-a-lien-and-a-mortgage-differ
I understand the point being made. It's a commonly held opinion, and it's fine for inspiring people to get out of debt, but legally it's not correct. Your home is your property, even with a mortgage.
Also, a foreclosure is not the only way to lose your property. Stop paying your taxes and see what happens. Even unpaid unsecured debt (like credit cards) can lead to your home being taken in some situations. Or the government can take your property via eminent domain.
So there is no such thing as REALLY controlling property, in terms of excluding any way it can be taken from you. But you do have specific legal rights to your property, and those apply to mortgages too.
Can you expand on why this is the case?
In fact, if you replace "housing" with "food", you see a natural response to your penultimate paragraph: "You're never out of the market for food. Therefore, it makes sense to buy a forward contract that pays out a [predefined] basket of groceries forever." The error in logic is that you expect food to fall in price, and or your tastes to change, so locking in such a contract would probably be a poor use of money, considering what they would charge.
It's less obvious, but the same logic applies to your points 1 and 2 as well. The very reason that a home provides security and stability is because you expect to get priced out of that neighborhood, or difficulty in moving to another nearby, similar home. That's also an artifact of housing being made "a good investment" by policies that make housing more expensive over time!
So, yes, housing does provide those things, but only because current policy picks one branch of the affordable/good investment dichotomy.
Security and stability: in what sense? Owning a house explicitly means that you can't be evicted by the landlord, but there isn't any other significant feature that derives from owning the house.
Hedge against inflation or market forces (or "short position in real estate"): you can simply buy into a REIT, and enjoy similar benefits (actually, a much more diversified risk, which in most cases would be positive) compared to owning a single house.
Interest rates can change as well but are less volatile than rents, and become less of a concern as you pay off more of your principal.
In 20ish years, inflation is likely to have significantly reduced the value of $XXXX, it could have as little as half the purchasing power it does today. If renting, the rent is likely to increase (particularly if you move) so that you are still paying $XXXX in today's money. If repaying a mortgage, you are likely to be paying roughly $XXXX in absolute terms (depending on interest rate changes).
So yes, you are tying yourself to a risk that you will lose your house (and any difference between the outstanding loan and its sale value) if you lose your job over a certain period. However, after a certain period you are also reducing the risk that you won't be able to afford your housing costs if you lose your income.
Lenders are also more likely to consider a term extension to enable you to make more realistic payments, than a landlord is to agree to lower your rent.
That's assuming the home value has gone down in addition to losing your job or whatever. If the home has kept its value, you can probably use a line of credit to bridge while you sell the house.
How is that if I were to rent?
Personally, I invest in REITs, the money I would invest in real estate. These investments cover my rent and more.
A $30k house in 1980 is NYC could be worth $3M today. The same house in Cleveland is probably less than $250k. (Mostly inflation) Even in that situation, the Cleveland house may still have been a good value based on having a fixed expense vs dealing with landlords.
Likewise, when economic policy shifted to favor the south, lots of owners of swampland in Florida and other places became very rich.
I'd imagine your scenario would not be the case with a typical management company. While your scenario is attainable for a small amount of people, it would be difficult to see happenning for the masses.
Also, does it have any form of rent control?
In terms of investment returns it should be pointed out that depending on country you can't get a lower rate of interest, better tax treatment and leverage than you can with your mortgage.
Lastly, we're in one off the longest bull runs on the stock market in history and the last 2 years in particular have been insane. This should not be treated as representative.
Neither one makes much sense from a rent/buy perspective. New York is closer, but most properties are still cash-flow negative relative to rent. You have to assume unrealistic rates of appreciation and/or indefinite tax deductions for the numbers to work (and folks are finding out, right now, that those deductions can go away!)
People have been treating homes like investment vehicles for a while now, and there are actually very few big cities in the US where rental rates can cover costs of mortgage, taxes and insurance. Renting literally puts cash in your pocket.
Right now, most properties in manhattan rent for less than their monthly carrying costs (including HOA fees). People have traditionally justified it via the mortgage interest and SALT tax deductions, but congress just blew the latter all to hell, and it’s making properties about 30% too expensive...
So many units have priced in the SALT tax deductions! The rent/buy calculation was borderline before, but now it’s just comically bad.
Now buying something to rent it out is a different story and I just don't see those numbers making sense from an investment POV if that's your point.
I’ve been doing a search in Manhattan this spring. On nearly every property I see, mortgage + hoa / taxes + insurance easily exceeds equivalent monthly rent. And not by a little bit, but by hundreds of dollars a month.
Deduct mortgage interest and $10k of SALT, and a few properties (~10%) start to make sense on a 5-10 year timeframe. Most are nowhere close to affordable. Factor in opportunity cost at any reasonable long-term rate of return, and nothing makes sense (You basically have to assume that the stock market will underperform, and the housing market will over-perform to make the numbers work.)
The few properties that make sense on a spreadsheet sell quickly. Most linger. Ask any real estate agent - the market is shifting, and the shift reflects the fact that prices got ahead of fundamentals.
So it depends strongly on when you bought and how rare your deal was, but these days, the vast majority of the Manhattan market is overpriced, and implicitly betting on speculative price appreciation.
Would you feel comfortable installing a new kitchen or bathroom?
...can you? Even owning a home doesn't guarantee that you'll be able to live comfortably in one place for 3 decades. Median homeownership is usually shorter than 15 years. (Per 2009* - more recent numbers that I've seen indicate that number is decreasing, not going up, but those are usually based on more short-term studies, post 2008.)
And renovations aren't exactly something homeowners are comfortable with, even if they technically can do it.
Source: I work for a homebuilder who aims to sell multiple homes to each customer (from first-time, to trade-up, to retirement.) If the median homeownership-length went up to 30 years, we'd have to reevaluate our entire business model.
It would be completely within my control (excepting the extremely rare case of eminent domain being applied if the UK wanted to build a railway station or something).
What the median or mean or modal person does is neither here nor there. It's completely irrelevant.
15 years is also a colossal period of time compared to any private rental. The average tenancy length in the UK is about 2-3 years.
All of this isn't even to consider the fact that most homeowners don't literally "own" their home in that timespan, as 30-year mortgages are very common. A lot of people buy homes because mortgage payments are oftentimes cheaper than rent payments (there are exceptions, obviously.)
Every step of that is awful, of course, but nothing disallows it from happening. And indeed, if you compare trends in wages and home prices you'll see two lines that don't look like they know each other.
(I pulled the first two graphs I found, if someone wants to go get wages and home prices and index them by the same inflation metric that'd be awesome.)
Now, I can imagine an exponentially distopian world where 4 families are forced to live in a single house. In such a world, housing prices could rise faster than wages/inflation for quite some time, but not forever. There's only a finite amount of space inside a house. And at some point, you will run out of cubic feet of space (if disease and pestillence doesn't kill you first). In the infinite long run, those prices will only be able to increase as much as wages as long as wages remain the primary source of money.
Have you seen Hong Kong cage homes? You're right that there is a limit, but we're far from close to it.
Now ROI and asymptotic analysis are both mathematical niceties the belie real world limitations, but that's how people talk.
I don't think this is true at all. Prices can outstrip wages easily when there's a large influx of new inhabitants, either through a high birth rate or through migration. See London over the last decade for an example. It's less common to see this effect in entire countries because it would take a vast number of people, but I do think it could happen.
Prices can continue to rise if mortgages become cheaper to service: as we've seen over the last thirty years, declining interest rates and lengthening mortgage terms push up the price of houses.
Prices can also rise if there is sustained outside investment - for example wealthy people outside the country looking for somewhere safe to stash their money (see London again).
OF course, all of this is contingent on what exactly you mean by "the long term". But the UK has seen a sustained boom in property prices for a generation. That seems pretty long term to me.
Places can become more or less desirable to live in - all this talk about matching inflation rates etc. is about the housing market as a whole - average. If you bought in a bad neighborhood and suddenly the neighborhood gets renovated and richer people start moving in - your property can increase in value multiple times over what you paid for it initially. If your area has excellent job offers and limited housing supply you will see housing prices increase because more people with more income will come to that area to work there. The problem happens when the local job market hits a slump and you assumed the demand increase will fuel the growth to cover your investments.
Of course, others I know have also lost substantial value at times.
I don't think this is true at all. Even the nature of "desirable" land has changed drastically over the last few hundred years. There's no reason to think that change won't continue to happen. Especially given the rise of internet, climate change, and the necessary decarbonization of our economy, what's "desirable", it's ridiculous to think where people want to live is fixed.
1. Cheap shipping via navigable rivers
2. Deep water ports
3. Not subject to periodic flooding
4. Flatness (not a huge deal, but it does make construction cheaper)
5. Soil suitability for construction (especially relevant is where the bedrock is, and what kind of soil lies atop it)
Granted, a lot of this is merely the reason why network effects got started where they did. But they are still highly relevant considerations that add completely natural value to land, regardless of what people would decide to do with it.
Note also that your "uhh" is something many people find objectionable. E.g. https://web.archive.org/web/20070105163441/http://www.televi... with more discussion here: http://languagelog.ldc.upenn.edu/nll/?p=28802
Granted, the risk-free rate doesn't have to be above-inflation, but the real interest rate currently is positive in the US.
inflation or wages within the pool of people eligible and willing to buy said housing. So you get weird distortion when housing is bought up by folks not actually living in them (foreign ownership, and kind of speculative buying)
This assumes the lack of a bubble created by anti-competitive regulation, like SV's cap on new development.