I'm not against profit, but with something like housing which is a fundamental need, it seems like some effort must be made to build a system which makes it attainable for average people.
Not everyone can live in NYC or SF.
Saying that, people need to consider the low interest world we live in. When their parents bought their home years ago, the interest rate was very likely 10% or higher. Today it’s 3.5% and even lower. This drives prices up. The biggest issue is getting a down payment.
I believe a combination of lower standard down payments and new mortgage terms of 40-50 years would make housing more attainable for a lot of people. I also agree, more development is needed.
Reads more like "naturally the poor should be displaced from wherever the rich choose to live" considering that both cities have been heavily gentrified. There's a lot more than just higher income couples putting pressure on the market, there is a lot of distortion coming from developers seeking to squeeze every penny of margin from the jump in prices
To be sure, the down payment doesn't protect the buyer at all. It simply exists to protect the lender in the case of an early default. They can still sell the foreclosed home, possibly under market or in a depressed market, and be made whole since they only lent 80% of the original price.
In fact, the average Joe would be better off in today's climate by putting 0 down and using what they would have put down into different financial instruments that will likely out perform the 3.x% interest rate they are likely receiving, considering they wouldn't have other penalties like PMI.
The financial crisis had a lot of inputs and bad banking was a part. That is, banks giving loans to those who were not financially able. However, a big part of this was due to government interference in the free market pushing President Bush's "ownership economy" policy which forced banks to give loans to people they probably wouldn't have otherwise. And then the whole thing went to hell.
A 0% down loan to a vetted individual with sufficient net worth wouldn't be a bad thing. I do believe there is a calculus we are missing between interest rates, inflation rates, and what a viable down payment should be.
The first part would not be an issue except in the short term without the second.
In cities surrounded by cheap farmland waiting to be developed, this money can be funneled into housing development. In the modern city that's already at "peak suburb", homeowner subsidies just contribute to bidding wars, driving up prices.
What we need is better utilization of land in desirable location.
Also, we need transit to connect neighborhoods to city centers. Hellish driving commutes could be pleasant train commutes with modern infrastructure.
The options have always been build up, build closer together, or build further out. The first two have been illegal in most places for decades, and at peak suburb we've reached the limits of the third one in terms of car infrastructure
This is an example of the issue I was talking about: it functions as an inequality accelerator. People who are already "in" have the power to set the rules of the game to be even more advantageous to themselves.
Cheap living is thus prohibited, though some large California cities look the other way sometimes when the homeless build homes of that nature.
You can't even build a new home without arc fault interrupters and centrally wired fire alarms. In some places, you'll even need to install solar. Of course this isn't cheap! We have simply banned cheap construction.
Areas of CA and UT have appreciated faster than other locations mainly due to the popularity of living there for professionals. But a big part of the real estate price boom has been declining interest rates.
When you’re looking at property that costs many hundreds of thousands and into the 1m range, even a single interest point can have a dramatic effect. Because interest rates have fallen so much, value has moved into the cost of the real estate.
If interest rates were to rise to 8% for example, you’d see the pricing of these homes cut in half. It’s what the market can afford monthly that sets the price.
Of course if interest rates were to rise like that, an all cash purchase begins to make sense.
This was the model that led me to believe there were problems in the housing market in ~2005. Well, technically, it was the concrete evidence that this model was being violated. House prices in South Florida, where I lived at the time, tripled in ~5 years, but incomes did not. Robert Shiller had a graph of housing prices normalized to income from 1890-2005 in the NYT in 2005. Price-Income generally stayed flat, with the exception of a bump after WW2, the S&L crisis in the late 80's, and an enormous launch in the early 2000's.
As I see it, current housing prices are being forced out of the traditional model by the effects of the Fed's QE efforts.
Very likely true. The financial crisis messed everything up. Driving interest rates down and QE stemmed the bleeding but it is only prolonging the pain. Possibly we are in a new normal of low-to-negative interest rates for the extended future. If this is the case, expect homes to continue to rise in value and for people with access to cheap capital to continue to pull away from everyone else.
I'm not optimistic interest rates will rise as inflation stays low. They tried raising rates last year and it shook the markets and there just doesn't seem to be a stomach for a prolonged reckoning.
I agree that interest rates are likely to stay low.
I find it ironic to think of as inflation as low, given that housing is way out of its historical pricing band relative to the model factors.
I remember when interest rates fell from 9% to 7% (early 90s). We had just bought a house for about $60K. Then interest rates fell, and house prices jumped, and suddenly our house was worth 90K. But if we had bought the same house at 90K at 7%, our monthly payments would have been the same.
I took a generic mortgage calculator and ran the numbers (30 year mortgage) on your house (first two rows), and on a South Florida townhouse that used to be mine (second two rows), to illustrate:
Price Rate Monthly Lifetime
60000 9 483 173798
90000 7 599 215558
142000 7 945 340000
309000 3 1303 468992
Note that the monthly payments are 24-37% higher in their after scenarios, even with a low, low interest rate for my townhouse. I see this scenario playing out over and over again and people assign the difference to interest rates when crunching the numbers suggests there's more to it.
But house prices have more to do with interest rates than inflation currently I suspect.
Utah has remained a hidden gem for years, but external market pressures are driving up prices, and supply is surprisingly constrained by the local geography (mountains and bodies of water constricting available land in the SLC metro.) Utah doesn't enjoy the same wide open space of many inland states, at least in the developed areas where people want to live.
https://www.zillow.com/homedetails/14455-S-Muirwood-Cir-Herr...
I need that much space for prototyping some of my inventions and intend to open the worlds largest Makerspace, hackerspace, and artist commune.
I recently decided to move to a new state on the other side of the country, purely because of the low cost of real estate there. It feels like the tipping point was recently reached, and having zero opportunity to have the place I wanted in Utah or California, pushed me to look elsewhere. Elsewhere being Arkansas.