Imagine if 70% of Americans invested their wealth in, I dunno, IBM. Don’t you think that’s going to incentivize some crony policies?
Now imagine we make a rule that you can’t exit that position. But you can borrow against your unrealized gains. That obliviously incentivizes even more protectionist policy.
Just like with housing, you can rarely fully exit the market because you’ve got to live somewhere. But when people have most of their wealth tied up in a single asset that also acts as a revolving line of credit, it tends to overly inflate the value of that asset. It just makes people protect those unrealized gains that much more or risk being upside down on an asset you can’t sell.
e.g. If you buy a $200k house with 20% down at 2% on a 25-year amort, over five years you accumulate about $26k in equity not counting your down-payment. In my jurisdiction, standard realtor fees on that would be about $10k, going with the 1% rule of thumb for maintenance would run you another $10k, and property taxes would be another $6k. You’re already at zero net profit before you even have to pay insurance or utilities. (All that isn’t to say that you wouldn’t have lost more money renting.)
The fact is, in many areas, buying any house at all is not feasible for the vast majority of young adults.
Guess what, the small and lower cost place you bought 10 years ago went up in price too. So you have equity and you've been in the rising market.
> The fact is, in many areas, buying any house at all is not feasible for the vast majority of young adults.
100% untrue. Buying a house in the place they feel they deserve to live is. You can buy a home that is a 30m commute by train or bus to NYC for <= $400k.
> You can buy a home that is a 30m commute by train or bus to NYC for <= $400k.
Even a door to door commute from Secaucus, NJ station, one stop from Midtown is 20min+. I would say 60min is at least the commute you would need for housing at $400k.
Exactly, that's the problem. There exist people who did not buy houses 10 years ago, due to personal failings such as being teenagers at the time. Yet the houses continued to appreciate much faster than inflation and are now out of reach.
> Buying a house in the place they feel they deserve to live is. You can buy a home that is a 30m commute by train or bus to NYC for <= $400k.
A: You absolutely cannot.
B: Why don't they deserve it? Why should would-be buyers be forced out of every major city and even the surrounding areas, due to artificial price increases, when that was never the case for previous generations?
It's not about deserving it... it's basic supply and demand. If the house is desirable, people will bid up the price. People with more money than young adults (older adults with more career experience) can afford to pay more and so will bid up the price on the most attractive housing until they get it.
I gave up air conditioning (among other things) for a few years to help save money for a down payment on my first house. What makes a person who didn't sacrifice/safe more deserving of the house than I (who can afford to pay more)?
A famous person once said "there are a million things in this universe you can have and there are a million things you can't have".
We all can't live in high rise penthouses and lakefront mansions. The whole point of markets and pricing/discovery is to decide who gets what. There's not enough for everyone.
https://www.zillow.com/harrison-nj/
PATH train, 22m to WTC.
Not a bad area either, just not where the whiners who think they deserve prime Brooklyn dream apartment want to live.
Imagine inflation and property appreciation at exactly 5% and an interest-only mortgage (principal paydown is just forced savings, hitting cashflow, but not expenses).
Buyer buys a $500K house, puts $100K down. Next year, the house is worth $525K, meaning that $100K in equity they put down is now $125K, for a 25% increase, even though the value of the property exactly tracked inflation.
If real estate values do not rise faster than inflation (I would say substantially faster), it would be a very poor investment or not an investment at all.
Yesterday I was reading in the subreddit of the town where I live about people's complaints regarding the absurd cost of living here. It was funny and puzzling that people were saying, "Yes, it's so hard to live here, housing is so expensive. We were lucky to buy 10 years ago for $500,000, now our house is valued at $1.4 million." Not recognizing that they are the problem.
How are they the problem? They bought one house and occupy it as a family. That's fair play by anyone's measure, I'd think.
If more other people want to move into the town than there are units of housing for them and, as a result, bid up the housing that's available, it's not the fault of the people in the town who bought one house 10 years ago and have lived in it for those 10 years.
We bought our place in 2007 (and lived in it continuously). It's worth roughly 2x what we paid for it. That's a CAGR of just under 5% per year. Was that a good investment? Hard to say, but let's look: The S&P total return was a CAGR of 8.5% over that time, but would have been 8.5% CAGR on X (downpayment amount) or about +2.4X. The house was 4.8% CAGR on 5X or about +5.4X.
Along the way, we've spent around 0.8X on repairs, improvements, and maintenance that I can think of and around 1.1X on taxes and insurance. Mortgage interest (after taxes) was another several X. Our house is vastly more pleasing to live in than our old apartment was and we've had two kids and a dog here comfortably for 15 years. The non-financial aspects dominate the financial aspects, but for a property that's appreciated about inline with inflation, it's been OK financially and great psychologically.
* investors bought out most of the housing and made it "scarce" or otherwise inflated prices - tacit cartel is common
* the area has been restructured to make it impossible for non-rich people to live there even if they get the housing for free (gentrification)
* people cannot inherit property as they cannot pay the inheritance tax on the inflated valuation
* there is an external scarcity factor like well paid jobs or at least opportunity for them
Note that lack of space to live or overloaded services actually tends to depress prices.
The statement already implies the people live there for a long time and have focused on the valuation for some reason. They will give their inheritors a problem they cannot pay off and have to try to sell. The ones being able to buy such property are likely to be investors. Now multiply that times a lot and you have the shape of the problem.
I don't understand the mechanism by which this would represent a driver for the valuation to go up. This effect would seem to be small in any case, but also tend to reduce (not increase) prices in its small effect, all else being equal. Unless I'm misunderstanding your point somehow.
Property should depreciate. If you hear that it doesn't, there's a massive structural problem, likely one of the described above.
And these people using the property thinking they're gaining something are not doing anything about it, dooming their heritors.
Structures get repaired and renovated. My house is over 100 years old but I just pumped 700k into it. Does its value not increase?
Homes are expensive to maintain.
The reason for the absurd rise in housing prices is that not enough housing is being built to meet demand, and the main reason is that homeowners (obviously not all, bear with me if I generalize) and their cartels oppose any new development. It is a problem with a very simple solution, made complicated by people who make money by throwing smoke. A good place to start is to look at how other countries or regions have solved the problem. It is somewhat parallel to homelessness; there is no will on the part of politicians and institutions to solve a problem that is easily solved (from a system perspective).
The housing stock is fixed because certain interests (i.e., homeowners and real estate investors) want their capital to increase in value and/or their neighborhoods to remain sculpted over time. The calculations in the comment are, outside the specific case, largely irrelevant: dilapidated houses infested with rats and mold in desirable locations have increased in value 10-fold over 20-30 years because the housing stock has not increased over time.
The advice is completely out of touch because there is a generic undersupply of housing in the US, especially of entry-level housing in areas where the jobs are. What starter houses exist have reached the end of their serviceable lifespan. My starter house in the Midwest (affordable because construction is happening around town, would have preferred staying in MA) has a roof issue and in the medium term 80 feet of sewage pipe will have to be replaced. I was discussing these issues with a builder, and at some point it stops being economical. But meanwhile you need a roof over the head, especially when you own a large dog.
I'm actually angry at the unserviceable advice from people. Please field-test first before opening mouth.
It's fucking great. The occasional late night poppity pop, the nip bottles in the street, the un-mowed lawns gaurded by un-trained dogs, they all serve as amazingly effective repellent for the types of people who think they know how I or anybody else ought to live.
But you see young people renting for 15 years in expensive places of cities because they want to be close to nightlife/etc. and then trying to figure out how to come up with a 15%-20% down payment on a dream house when they're nearing 40 and wondering how anyone does it and complain the system is broken.
They do it by buying a small house in an expensive location and building equity and then upgrading.