Ha, yes. I don't own a home, but I would like to someday, so I'm always confused how news about falling home prices is treated as "bad" in general in the media. For me, I celebrate the news. I want housing prices to go kaboom so I can afford one.
The problem with that though is that housing prices are tightly tied to surrounding economic factors. You could go to some crappy neighborhood in a depressed area of the USA and get a great house for "nothing" (relative to, say, CA). If housing prices go kaboom, it's likely because there aren't as many people moving there, and people aren't moving there because there aren't jobs that can support people.
And be careful what you wish for, because once you do own that house, if the prices continue to fall, you could be underwater fairly easily. If a $1m place falls to $750k, which you can afford, but then the economy continues to stutter, it could fall to $500k or $350k. Remember that your mortgage doesn't reflect what you could sell your house for, once you sign the papers, you're on the hook for it.
The problem with that though is that housing prices are tightly tied to surrounding economic factors
I really question what those economic factors are though. For SF it's clearly the availability of high paying jobs. However in Portland, OR (where I live) there are little to no high paying tech jobs available, and yet the housing prices are sky rocketing to levels never seen before.
Given my basic understanding of economics the current climate makes absolutely no sense. Wages have been stagnate for years, college grads have no career outlook (outstanding student debt is now $1.2 trillion), and prices for everything (except for oil) are higher than ever. I've seen friends empty their bank accounts just to pay rent. The concept of savings or retirement for millennial might as well not even exist.
The concept of savings or retirement for millennial might as well not even exist.
Probably not a popular view, but I think there's some truth to it. Check out the Harvard JCHS article [1], more households are paying 30, 40, and even 50% of their salaries for rent than ever before.
Major shifts like this can only be explained by culture, IMO. Maybe the US is undergoing a major shift toward wanting to live in city centers, even at the cost of saving for the future? Or people in certain metros just think they're that exceptional / special / etc. that they "deserve" to live in a certain place? Or everyone in a high-ambition career think they don't need to save because they'll "make it" (maybe true?) and will have fuck-you money in a few years?
Tangentially, the cost of paying a mortgage is comparable to or cheaper than paying rent in the metro areas I've priced. The problem is getting enough of a % downpayment saved to "unlock" the house purchase option.
People I've known who bought houses look at it as locking a "rent rate" in for 30 years and assuming the burden of maintenance rather than riding the fluctuating markets. Right now, they're locked in at lower rates than other people I know are paying in rent to live in a similar area.
I willing to wager part of the problem is the lockdown on lending after 07/08 and more people got pushed into the rent market because they couldn't get the loans to purchase a house which has led to the inversion of the cost of owning vs renting. Historically, owning has been more expensive than renting in most places
Especially so for an investment like housing, where rapid growth due to a shift in the popularity of your neighborhood is about the only reliable way for your "investment" to fare much better than sticking money under the mattress would.
Sorry for the barb, but that meme (your house as an investment) really bothers me, because it has the potential to do a lot of damage. It's like penny stocks. Sure you can make money if you really know what you're doing or get lucky, but by and large the idea that it's a good investment originates with people who've a financial interest in convincing you to buy some.
rapid growth due to a shift in the popularity of your neighborhood is about the only reliable way for your "investment" to fare much better than sticking money under the mattress would
Pretty shortsighted view there, and demonstrably wrong. Historically housing prices have always risen faster than the rate of inflation - both in 'popular'neighborhoods and elsewhere. Take almost any 10 year period of time and you'd be very very hard pressed to find a region where housing prices didn't dramatically outpace inflation.
Yes, but if you're looking at them as an investment then you need to look at the overall picture. Just looking at prices over time is interesting, but it doesn't give the financial picture from the perspective of a homeowner because it ignores taxes, maintenance and repairs. Once all that's factored in the picture tends to get a lot less rosy.
For example, over the past 25 years the average price of a US home has grown by about 14% in real terms. I'm too lazy to calculate out what that would be as an annual percentage rate, but it's definitely lower than the average US property tax rate, which I believe is a smidge under 1%. So already, even without considering other expenses, houses tend to be gradual money losers on average.
Is this true in all countries, or just the ones (like my country, the USA) where the real estate market is rigged by various government/incumbent entities?
Eventually. I'd personally love it is my house stopped increasing in value so I can pay lower property taxes. My value went up over $100k in the first year after I bought it.
A house is more than just an investment, though. It's, you know, the place you live. The catchment area for the schools your kids go to. The hospitals you have access to. And so on.
This is hugely important for "normal" people. Most people have care a lot more about the value of their house not going down than not going up. Breaking even on a house is find because it provides roof over your head.
This doesn't seem like a "simple fact", rather insanity that has caused many of the economical problems we have seen recently.
I don't buy a house expecting to use it 10+ years and still make a buck selling it afterwards. The same way I don't buy a car and expect it to yield me money when it's a broken beater, in fact, the simple fact of buying it immediately devalues it (to others).
(I guess this is because (1) the market and tax situation in the US are broken and (2) it causes the land to be vastly more valuable than whatever is standing on top of it)
The larger point was that incentives flip as soon as you become a homeowner. As a renter, you are hoping for housing prices to go down and would like to see this happen via increased housing supply, deregulation, or even a local economic downturn as someone suggested above. But as soon as you become a homeowner, you want housing prices to level or increase because a large portion of your net worth is tied to it. So you suddenly want new housing supply to shrink, increased developmental regulations, and a booming economy in your area.
You buy the neighborhood with the price of a home (in theory). Invested neighbors keep appearances up, elect good leaders, push for better schools etc. Once the value starts dropping, none of that is necessarily a given. In my area once gorgeous suburbs became gang centers just a decade or two later. Not exactly a great thing given the recommended home stay for a starter home is about 5-7 years in order for you to "make your money back" should it even go up.
Not to mention a lot of consumers view home ownership as the single largest investment they make, so they are sitting on their retirement.
Comments
Ha, yes. I don't own a home, but I would like to someday, so I'm always confused how news about falling home prices is treated as "bad" in general in the media. For me, I celebrate the news. I want housing prices to go kaboom so I can afford one.
The problem with that though is that housing prices are tightly tied to surrounding economic factors. You could go to some crappy neighborhood in a depressed area of the USA and get a great house for "nothing" (relative to, say, CA). If housing prices go kaboom, it's likely because there aren't as many people moving there, and people aren't moving there because there aren't jobs that can support people.
And be careful what you wish for, because once you do own that house, if the prices continue to fall, you could be underwater fairly easily. If a $1m place falls to $750k, which you can afford, but then the economy continues to stutter, it could fall to $500k or $350k. Remember that your mortgage doesn't reflect what you could sell your house for, once you sign the papers, you're on the hook for it.
I really question what those economic factors are though. For SF it's clearly the availability of high paying jobs. However in Portland, OR (where I live) there are little to no high paying tech jobs available, and yet the housing prices are sky rocketing to levels never seen before.
Given my basic understanding of economics the current climate makes absolutely no sense. Wages have been stagnate for years, college grads have no career outlook (outstanding student debt is now $1.2 trillion), and prices for everything (except for oil) are higher than ever. I've seen friends empty their bank accounts just to pay rent. The concept of savings or retirement for millennial might as well not even exist.
Probably not a popular view, but I think there's some truth to it. Check out the Harvard JCHS article [1], more households are paying 30, 40, and even 50% of their salaries for rent than ever before.
Major shifts like this can only be explained by culture, IMO. Maybe the US is undergoing a major shift toward wanting to live in city centers, even at the cost of saving for the future? Or people in certain metros just think they're that exceptional / special / etc. that they "deserve" to live in a certain place? Or everyone in a high-ambition career think they don't need to save because they'll "make it" (maybe true?) and will have fuck-you money in a few years?
It's a big change from the past, that's for sure.
[1] http://www.jchs.harvard.edu/research/publications/projecting...
Tangentially, the cost of paying a mortgage is comparable to or cheaper than paying rent in the metro areas I've priced. The problem is getting enough of a % downpayment saved to "unlock" the house purchase option.
People I've known who bought houses look at it as locking a "rent rate" in for 30 years and assuming the burden of maintenance rather than riding the fluctuating markets. Right now, they're locked in at lower rates than other people I know are paying in rent to live in a similar area.
I willing to wager part of the problem is the lockdown on lending after 07/08 and more people got pushed into the rent market because they couldn't get the loans to purchase a house which has led to the inversion of the cost of owning vs renting. Historically, owning has been more expensive than renting in most places
Being underwater is only an issue if you want to sell the house, or lose the ability to pay for it.
But at least you still have a house, and steady, predictable payments - instead of rent that could start creeping up and up and up.
It is nice to have somewhere to live though
Yes, but as soon as you buy one you will want housing prices to go up, just like any investment.
Especially so for an investment like housing, where rapid growth due to a shift in the popularity of your neighborhood is about the only reliable way for your "investment" to fare much better than sticking money under the mattress would.
Sorry for the barb, but that meme (your house as an investment) really bothers me, because it has the potential to do a lot of damage. It's like penny stocks. Sure you can make money if you really know what you're doing or get lucky, but by and large the idea that it's a good investment originates with people who've a financial interest in convincing you to buy some.
Pretty shortsighted view there, and demonstrably wrong. Historically housing prices have always risen faster than the rate of inflation - both in 'popular'neighborhoods and elsewhere. Take almost any 10 year period of time and you'd be very very hard pressed to find a region where housing prices didn't dramatically outpace inflation.
Yes, but if you're looking at them as an investment then you need to look at the overall picture. Just looking at prices over time is interesting, but it doesn't give the financial picture from the perspective of a homeowner because it ignores taxes, maintenance and repairs. Once all that's factored in the picture tends to get a lot less rosy.
For example, over the past 25 years the average price of a US home has grown by about 14% in real terms. I'm too lazy to calculate out what that would be as an annual percentage rate, but it's definitely lower than the average US property tax rate, which I believe is a smidge under 1%. So already, even without considering other expenses, houses tend to be gradual money losers on average.
Is this true in all countries, or just the ones (like my country, the USA) where the real estate market is rigged by various government/incumbent entities?
Eventually. I'd personally love it is my house stopped increasing in value so I can pay lower property taxes. My value went up over $100k in the first year after I bought it.
A house is more than just an investment, though. It's, you know, the place you live. The catchment area for the schools your kids go to. The hospitals you have access to. And so on.
This is hugely important for "normal" people. Most people have care a lot more about the value of their house not going down than not going up. Breaking even on a house is find because it provides roof over your head.
Exactly, so many people seem to forget this simple fact
This doesn't seem like a "simple fact", rather insanity that has caused many of the economical problems we have seen recently.
I don't buy a house expecting to use it 10+ years and still make a buck selling it afterwards. The same way I don't buy a car and expect it to yield me money when it's a broken beater, in fact, the simple fact of buying it immediately devalues it (to others).
(I guess this is because (1) the market and tax situation in the US are broken and (2) it causes the land to be vastly more valuable than whatever is standing on top of it)
The larger point was that incentives flip as soon as you become a homeowner. As a renter, you are hoping for housing prices to go down and would like to see this happen via increased housing supply, deregulation, or even a local economic downturn as someone suggested above. But as soon as you become a homeowner, you want housing prices to level or increase because a large portion of your net worth is tied to it. So you suddenly want new housing supply to shrink, increased developmental regulations, and a booming economy in your area.
You buy the neighborhood with the price of a home (in theory). Invested neighbors keep appearances up, elect good leaders, push for better schools etc. Once the value starts dropping, none of that is necessarily a given. In my area once gorgeous suburbs became gang centers just a decade or two later. Not exactly a great thing given the recommended home stay for a starter home is about 5-7 years in order for you to "make your money back" should it even go up.
Not to mention a lot of consumers view home ownership as the single largest investment they make, so they are sitting on their retirement.