People should also understand that a 'good investment' and a 'wealth building tool' are not necessarily the same thing. Consider a world in which housing only keeps up with inflation, and few people ever raid their home equity to buy stuff (the way it was traditionally). The house then truly is a good wealth-building tool - a savings account that most people never touch, that pays interest in the form of rent savings, and that can be liquidated in old age to use the funds. This view of things is not at odds with affordable housing, and I think is more in line with the traditional view of housing as a wealth building tool. Traditionally people didn't expect to strike it rich by buying a house.

That view does have some assumptions baked in, though.

For example, that term, "rent savings," is an assumption in and of itself. In the real estate market I live in, a house can easily offer negative rent savings. Based on the figures I've seen in my area, I'd estimate that the point at which my hypothetical lifetime expenditure on owning a house drops below my hypothetical lifetime expenditure on renting would come a decade or so after the point at which I can expect to die.

That said, I don't want to imply that buying a house is a bad idea, even in my market. Lately I've been getting more interested in doing it, myself. But, at least to me, this is right in line with how the clothing and food that I buy have also changed over the past couple decades: The more money I have, the more I can afford to spend it on having nice things.

"I'd estimate that the point at which my hypothetical lifetime expenditure on owning a house drops below my hypothetical lifetime expenditure on renting would come a decade or so after the point at which I can expect to die."

Can you share some of the numbers you used to get to that conclusion? I've done similar estimates in my (high cost-of-living) city, and even with pretty conservative estimates of property value growth the payoff is much sooner. Yes, the mortgage payments are more than rent for a comparable home, but the interest (plus estimated taxes, maintenance, etc) is somewhat less than rent.

I'd guess one of the following is true:

* you are assuming stock market returns will significantly outstrip growth in your housing market, even considering leverage

* you don't have access to tax breaks on mortgage payments

* you are much older than 30

* you live in an area where home prices are wildly inflated beyond what rents would predict

I don't have my notes or the exact numbers anymore. It sounds like we might have been doing a very different calculation. For me, I didn't consider property value growth at all. That all just sort of went into a bucket labeled, "Equity I have invested in some asset; regardless of whether it went into a house or into T-bills or ICOs, for my purposes none of it counts as money I spent."

From there I just looked at the money I would never see again - interest, taxes, maintenance, fees, assessments (if a condo), etc.

Are you considering the value of the equity in the home?

> there really aren't that many good investment opportunities over the long term

What’s wrong with the market as a long (emphasis) term investment vehicle? ~7% average yearly returns for the past 150 years is pretty solid. Yea you have to insulate yourself from market fluctuations, but that’s also true of the housing market (see the collapse of the US housing market 10 years ago). Barring a complete collapse of the US economic system, in which case Americans will have other things to worry about, how is housing superior than some boring-old Vanguard market tracking ETFs/Mutual Funds? Better returns?

Certainly isn't returns. Over the last 10 years, housing in the US has appreciated on average 39%, or 3.4% annually (https://fred.stlouisfed.org/series/CSUSHPINSA). Over the exact same time period, the S&P 500 with reinvested dividends has gone up ~323%. or 15.5% annually (https://dqydj.com/sp-500-return-calculator/).

To avoid cherry-picking, if we go out to 20 years housing has an average annual return of 4%, and the S&P 500 is at 6%. Go out 30 years and housing hits 5% while the S&P is at 10%.

PS, I really appreciate the Case-Schiller index used above for housing prices. It's methodology specifically targets the change in value of a house, instead of capturing overall price increases caused by house flipping, the expanding size of houses over time, etc.

I think that looking at avg house appreciation is probably not a very good way to measure things, since there are large swaths of empty land and then a few hot spots. What's the average return of urban real estate? The average return of urban real estate by state? Now those numbers, would probably be interesting.

There are separate Case-Shiller Indexes for 20 large metro areas, as well as composite indexes for the 10 or 20 largest metro areas.

For the 10 largest metro areas (https://fred.stlouisfed.org/series/SPCS10RSA), the annual returns are the following. Interesting to note that nationally home values are over their 2006 peak values, but that in the 10 largest metro areas home values are only about even with the previous peak.

  10 Years: 3.8%
  20 Years: 4.7%
  30 Years: 3.6%

Alternatively, if you look at just San Francisco (https://fred.stlouisfed.org/series/SFXRSA):

  10 Years: 7.8%
  20 Years: 5.7%
  30 Years: 4.8%

Are you factoring in saved rents and tax deductions in the housing number?

Investment returns on German, Japanese, Russian, Polish, Zimbabwean, Austro-Hungarian stock exchanges since 1910 look pretty awful. More generally you’re assuming away political risk. Once your investments go to zero you’re done.

As an investment housing does much better when compared to equities than we thought until recently and it’s less risky. If the Communists come you’re screwed no matter what but if there’s regime change there’s a decent chance you can keep real property, especially if it’s local.

> The authors of the aforementioned study — Òscar Jordà, Moritz Schularick and Alan M. Taylor — have constructed a new database for the U.S. and 15 other advanced economies, ranging from 1870 through the present. Their striking finding is that housing returns are about equal to equity returns, and furthermore housing as an investment is significantly less risky than equities.

> In their full sample, equities average a 6.7 percent return per annum, and housing 6.9 percent. For the U.S. alone, equities return 8.5 percent and housing 6.1 percent, the latter figure being lower but still quite respectable. The standard deviation of housing returns, one measure of risk, is less than half of that for equities, whether for the cross-country data or for the U.S. alone. Another measure of risk, the covariance of housing returns with private consumption levels, also shows real estate to be a safer investment than equities, again on average.

https://www.bloomberg.com/opinion/articles/2019-03-21/buy-a-...

In a lot of America, the scarcity is kind of artificial or unstable though, so it's still a risky investment. Look at California City - land there is anything but scarce. Or Detroit where the seemingly indestructible world-leading industry it depended on for house value shifted out from under it. Or the concepts of white flight and gentrification where neighborhoods can be tipped one way or the other in a self-perpetuating avalanche effect that doesn't necessarily correspond to any fundamental change in their utility. What's scarce isn't property in general, but property near rich people. If the rich people move away, so do the property values. I'd say property investors are chasing after rich people extracting value out of their desire to congregate together.

Housing investment doesn't really have the ability to live in it. If you don't rent out your house, you're losing investment returns. Plenty of property investors depend on rents, not just price rises for their profit. As long as you live in a house in the free market, you're paying for that privilege, whether you own it or not. What it does provide over renting is you can't be kicked out so easily. I think that could be the main reason families prefer to buy houses instead of rent.

> gentrification where neighborhoods can be tipped one way or the other in a self-perpetuating avalanche effect that doesn't necessarily correspond to any fundamental change in their utility

No fundamental change in their utility? Gentrification goes hand in hand with reduced crime rates, better education, increase in available public spaces/restaurants/bars. It's a feedback loop based off of people's tolerances. In one common model, for example, it begins with more desperate braver artists starting to congregate in an area because it's what they can afford. Their presence alone will typically change the dynamics of an area to a certain degree that is enough to create a tolerable pocket for the more adventurous that are better off (think software engineers opting to live in Mission/Oakland 5-10 years ago for the cultural element of the neighborhood). More tax money starts coming in, policing goes up and is partly responsible for crime going down, which also goes down due to demographic shift to wealthier people who are less likely to feel as though they must engage in crime. The children of these people can create a large enough community of kids that are culturally primed to take education seriously that the critical mass of a classroom can shift from boisterous and unruly to more manageable, further stabilizing the education situation for those that come after.

The point is, very little of this is just some arbitrary decision with no impact on the function of neighborhoods. Over the course of gentrification, neighborhoods change dramatically in ways other than demographic shift.

The value changes from gentrification or owner flight (see' most mid-century US cities) come from the community rather than any significant owner-initiated changes to the propety itself.

You do nothing, rich people move in around you, value increases.

You do nothing, rich people move out around you, value decreases.

The direct utility of the property is unchanged. The owner has made, net, an insignificant contribution to the surrounding community. And yet value accrues (or diminishes) all the same.

Housing and real estate internalise the net community utility changes. The pathological cases are where the owners or investors are outside the community and strip-mine the resulting wealth.

Land value taxes both dampen wild valuation swings and internalise value gains to the community to provide infrastructure, institutions, and services.

Unfortunately, it's hard to find a way to allocate land without using the market. Yes it's unfair that rich people have to pay more to live where they want than poor people who are happy living near other poor people, but how else can you allocate land that gives the useful land to the people who'll get the most value from it? Central planning doesn't get it right, a lottery would mean people can't group themselves together so they would lose that important value (eg programmers in Silicon Valley).

Land value tax would take money from people who don't need those community services and give it to different people who happen to live nearby. That's not really fair. It's still a kind of rent seeking that also happens to give the rent to charity but not back to the original payers in proportion to what they paid. But it does sound more reasonable than the luck of the draw that property owners get.

Long-term leases and LVT seem among the better solutions.

It's the assetification of an essential economic input that seems to be the root of the problem. Bernhard J. Stern commented on this in the 1930s in several works I've submitted (to no traction) in recent weeks.

https://doi.org/10.1177%2F000271623820000104

https://archive.org/details/technologicaltre1937unitrich/pag...

You misunderstood me. You've described the same self-perpetuating phenomenon that I was referring to. By "fundamental", I meant something stable that isn't a consequence of gentrification or white-flight. For example, being near a harbor, on flat land, good ocean views, low risk of flooding, or for smaller areas with weak influence on their environment, near a big city, near convenient transport/roads, etc.

Without fundamentals like that, then it is arbitrary decision which neighborhoods have high prices and which have low. It becomes an accident of recent history that could flip the other way over a period of decades and ruin people's investments.

Probably the best and least emotionally-charged analysis of gentrification I’ve ever read. Thanks for writing this comment. Always suspected a lot of these things to be true.

>No fundamental change in their utility?

Yes. A given neighborhood might change, but a common, if not fundamental, characteristic of gentrification is that the associated demographic shifts constitute a commensurate shift in the location of community-related amenities, e.g., good schools, lower crime, public and private investment in public spaces. In other words, gentrification doesn't create more affluent communities, it simply shifts them, to places ready for new development as older communities become less desirable ultimately as a simple function of their age.

There is also the necessity of addressing the role of race and class anxiety in how, why, and when we invest in communities.

Great description. It’s also interesting to note that the description of gentrification given is indistinguishable from colonization, except that the colonizing is internal to a nation.

Not at all. Colonization used violence to take over people's land and enforce the incoming people's laws on the existing population. Peacefully buying it with no duress is a perfectly acceptable kind of colonization, but that's not the word we normally use. We call that "immigration", or in this case, internal migration.

It's naive to think that violence and laws that are onerous or disadvantageous to current residents are not employed in the process of gentrification. Suppose, for example, that you close a grocery store that serves thousands of lower-income, often low-mobility, residents, in preparation for building luxury apartments. Or you increase "broken windows" arrests in such a away that existing residents are disproportionately affected. How is that not duress? You have introduced conditions for continued residence that threaten life, comfort, and freedom.

Colonization is a fine word for it.

Yes, but to be more precise, what's scarce is property near jobs. Jobs are ultimately what determine who moves where. That's critical for understanding the problem.

CA voters thought they could prevent people from coming here by reducing housing and boy were they ever wrong. It's too bad this lesson took 50 years to play out and awareness is only now slowly starting to arise.

Palo Alto residents saw this problem and they have opted to limit business growth in their city.

https://sanfrancisco.cbslocal.com/2016/08/30/palo-alto-mayor...

Also it's one of the few investments where you can borrow to invest and this get a multiplier effect on any returns

Anyone can get leverage in Forex.

Housing, though, is the only place where you can get leverage with literally 0% down.

Real Estate is also MUCH less volatile than the stock market, which (I think) makes it seem less risky (and maybe factually is, but I don't know for sure).

What about maintenance though?

Banks give out loans with 0% down.

That's where "leverage" comes in.

Typically if you don't have a house, you can't get a big bank loan either.

You are conflating investment with collateral. Any property you own can be collateral for a loan whose proceeds you can invest.

> Housing is treated as a good investment because it is scarce.

Here in Norway there's also some significant tax benefits which factors into it. For one the tax value of your primary home is one quarter the market value (higher for secondary homes). So you pay a lot less tax having your money tied up in your home than in the bank.

In addition you can deduct quite a lot based on the interest you pay on your loan.

Together they make it quite attractive to own rather than rent a home.

I never had to spend tens of thousands of dollars to put a new roof on my gold investments.

I don't need to pay someone 5% of the value to sell my gold investments.

You also can't live in your gold investment

If you rent for long enough, you'll pay for a new roof eventually because buildings eventually need new roofs, and rental property repairs are funded from rent payments.

>Stuff that's affordable is usually not scarce. Hence you can't have both something that's scarce and affordable.

A gram of dirt from my backyard is completely unique from any other gram (at a molecular level) and is therefore incredibly scarce - if you want exactly THAT gram and no other. I’d also sell it for almost nothing, so it’s affordable.

That is a substitutable good and you know it.