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It seems that we made a pact with the devil by positioning housing as an investment asset. By doing so, we've encouraged people to commit a very large fraction

It seems that we made a pact with the devil by positioning housing as an investment asset. By doing so, we've encouraged people to commit a very large fraction of their net worth into a rather illiquid asset, tying their financial fates to the future assessment of that asset. As a result, protecting the price and appreciation of this asset has come to overshadow the other crucial roles that housing plays in our society. If I bought shares in AAPL at $50 (now $100+) and someone comes along asking that AAPL let them buy some shares for say, $65, I'm obviously not going to be happy since the value of my investment is under threat. This is the kind of reaction we've unfortunately promoted for ourselves. It didn't have to be this way, as other countries have shown us. But now that we're here, it's hard to imagine a way to turn back time.

vtange 10y ago
It's a double whammy when you also consider that property taxes are generally based on real estate value. City and local governments are dependent on that income and have little incentive to see real estate values (and thus tax) go down.
- hkmurakami 10y ago
  That would depend on the price elasticity of the existing housing stock in response to each additional unit of housing that is supplied to the market. It's conceivable that the marginal decrease in tax revenue from the existing stock would be more than offset by the additional tax revenue from the one additional unit.
- maerF0x0 10y ago
  Also governments get tax not on the value of a single property but the cumulative value of the properties (emphasis on the plurality) . If my 1M house gets replaced with 10x 250k units the government has 2.5x its tax base. See how affordability and solid tax base can coincide?
  - Retric 10y ago
    Local government costs also go up as population increases.
    - mjmahone17 10y ago
      The relationship is not usually linear, though. With density comes efficiency in services. Though some of that efficiency is eaten by the additional cost of doing the work.
      - Retric 10y ago
        Not really teachers are linear with population size. An overpass is vastly more expensive than a stoplight and still cheaper than a subway system. So, yes for small changes to population size a city need not spend more an can simply degrade services slightly, but doubling population size quickly gets really expensive.
        maerF0x0 10y ago
        I would have thought that the linear system was still more expensive than the dense system (within some reasonable limits). Consider the single family home as the null case, everyone lives in single family homes as far as the eye can see, the distance that family must travel to get to the core of a city is greater than any other existing family (that is new homes are on the outer ring of the city and thus progressively further and further from the core). So that family consumes more road miles daily. Vs if you grow in density you do not create anymore miles of road because those people only have to travel a shorter distance. And when the inevitable overpass comes, instead of needing overpasses from 1/2radius of the city you may only need them for 1/4 etc because the people are already in the core and do not need to come from as far. just some thoughts on efficiency of density vs dispersement
- refurb 10y ago
  But tax rates generally adjust for increasing housing prices. In my old hometown, when housing prices went up 20% in one year, tax rates decreased by ~15%, so overall the increase was about inflation. Otherwise you'd see city budgets double in only a few years in really hot markets. Of course this doesn't work in California with Prop 13, but I've seen it in other areas.
- dredmorbius 10y ago
  That's not the case, to a large extent, in California, thanks to Proposition 13. The longer a property is held, the lower its assessed value relative-to-market. In cities with buy-an-hold populations (and Palo Alto tends to resemble this), that means a large part of the assessible property value is severely underassessed. Mind: this means that surplus value of urbanisation goes to the property owner rather than to help provide city services. The double-whammy is actually the opposite of what you suggest, and may well be a triple: 1. Prop 13 keeps property taxes down, meaning ... 2. There's an additional upside (and less downside) to inflating property values and ... 3. There's growing opposition to providing new and higher-density housing, as this would remove pressure from housing prices, and leave existing homeowners with a lower property value, itself useful for loan collateral, HELOC, etc. Knowing long-time California natives who've been chased entirely out of the state, I'm starting to think the situation may become untenable. Or, perhaps, it's one more in line of economic population displacement, which began with Spanish missionaries displacing the aboriginal natives, American Anglos the Mexican successors to the Spanish, and now various new money, some domestic, some foreign, chasing out the 1950s - 1980s immigrant class, at least from the Bay Area.
digi_owl 10y ago
I ran into a claim some years ago saying that homeownership is policy because homeowners do not riot.
- thaumasiotes 10y ago
  Homeowners don't riot. Neither do married people. But while there is good evidence that marriage transforms rioters into non-rioters, giving houses away doesn't seem to have much effect on the recipients. Logically, if you want to tamp down rioting and your metric is homeownership, you should be trying to oppress non-homeowners, not trying to get houses to the people that don't have them.
jhulla 10y ago
Housing is a taxpayer subsidized, inflation proof savings plan for the average citizen. It is also levered. Open this chart of historical mortgage rates and click 'max': https://fred.stlouisfed.org/graph/?g=NUh https://fred.stlouisfed.org/graph/?g=NUh Since 1981, rates have declined and tax treatment has become more advantageous to existing owners. With the current ZIRP/NIRP/QE regimes around the world, the leverage available to the average citizen has never been greater. That leverage has gone directly into housing. If the leverage trends continue (see 'helicopter money'), housing (along with all other asset classes), will get further out of reach.
StanislavPetrov 10y ago
>It seems that we made a pact with the devil by positioning housing as an investment asset. That was certainly a mistake, but the much larger mistake was made (and continues to be made) by the FED (and other central banks at the FED's insistence). FED efforts to prop up the housing and equities markets through QEinfinity, Operation Twist, the FOMC, and countless other FED mechanisms designed to prop up markets (and owners) at the expense of everyone else have led us to the situation we are in now. If not for FED chicanery, housing prices would fall precipitously to meet real demand. People would be able to afford a place to live and speculators would realize that homes are places to live and not investments. >If I bought shares in AAPL at $50 (now $100+) and someone comes along asking that AAPL let them buy some shares for say, $65, I'm obviously not going to be happy since the value of my investment is under threat. If nobody was willing to to pay more then $65 for your Apple shares, then in a free market, like it or not, your shares are worth only $65. Just because they were $100 at one point and you "arent happy" that they arent still worth $100, doesn't mean the government should step in and offer $100 when the market only offers $65. That's the problem we have now. In the fantasy world that the FED is trying to propagate they can continue to offer $100 no matter how low the actual demand for your stock is. In reality, all their efforts to prop up your stock have eliminated free markets, dried up "real" liquidity, and massively disrupted equity, bond, fx, and all other markets. The longer they try to extend and pretend the worse the problem gets. For example, the bank of Japan owns over 60% of all ETF's in Japan. 60%!! Things are not going to end well.
- jhulla 10y ago
  Get outta here with your free markets. In free markets, those that lose big get up off the table. In our TBTF markets, the bigger your loss, the greater the odds that your national Treasury will backstop you. Have you helped out your local banker today?
  - deleted 10y ago
    [deleted]
- ScottBurson 10y ago
  > If not for FED chicanery, housing prices would fall precipitously to meet real demand. Maybe in some places, but I don't think that would happen in Silicon Valley. As the article says, the population of Palo Alto doubles during work days. A lot of those people would rather live there than commute from wherever. Silicon Valley is not a creation of the Fed.
WWKong 10y ago
Well put. Most discussions around here take a simplistic position, "build more to drive prices down". And then wonder why it doesn't happen when the solution is so obvious. Because it is not only about new buyers but also about folks who have invested everything they have into a market that was already in place before they invested.
bufordsharkley 10y ago
The "technically correct" way to fix this would be to remove the investment potential of housing by taxing away land value (the grand old panacea of the Land Value Tax[0]). I think this is a good idea, but it's a disruptive one, and one unlikely to happen soon. But in the meantime, we might as well fix the policy that's in direct contradiction to this ideal: 1) Repeal prop 13. Full stop. 2) Intervene with exclusionary zoning on a state level. Zoning is, after all, a state power that is entrusted to cities. (Jerry Brown is already doing good work in this department[1]) 3) Implement split-level property taxes a la Pennsylvania. There's work that demonstrates that this partial LVT had real benefits for Pittsburgh when it was under effect: [2] [0] https://en.wikipedia.org/wiki/Land_value_tax https://en.wikipedia.org/wiki/Land_value_tax [1] http://www.latimes.com/politics/la-pol-sac-jerry-brown-housing-cities-20160602-snap-story.html http://www.latimes.com/politics/la-pol-sac-jerry-brown-housi... [2] https://www.lincolninst.edu/subcenters/property-valuation-and-taxation-library/dl/oates_schwab.pdf https://www.lincolninst.edu/subcenters/property-valuation-an...
- all2well 10y ago
  The thing about getting rid of prop 13 is you'd price out a lot of residents that bought a long time ago for something they don't have a whole lot of control over. If you thought that gentrification is bad now, churn in residents would got through the roof. Not to mention that you wouldn't solve the issue of shorter-term investments in land, or investments that include new constructions. Honestly, the real issue in the bay area is there isn't enough housing, period. To solve this, build more housing, or build more infrastructure to enable people to live further away, or both. However, residents in the bay area have always been opposed to things like that.
  - lsiebert 10y ago
    We shouldn't just repeal it. You abuse it's existence and the appeal to drive investment in property. Have the repeal not affect existing housing... and not affect housing built for some short period afterwards. In places where developers have sway with local government or have carte blanc from counties to build, there will be immense efforts, because the benefits to the property owner will be huge, meaning they can charge a premium. And after 5 years or whatever is appropriate, you will have removed the penalty in tax revenue cities take with residential and residential services. Maybe add a provision for city councils to more easily approve bond measures to fund housing development, and kick start building properties where value will go up.
mchaver 10y ago
Which countries do you think handle housing well? Any references would be appreciated.
- Noseshine 10y ago
  I myself know little about the subject, but since I followed the discussions I noticed the Singapore has been mentioned several times. https://en.wikipedia.org/wiki/Public_housing_in_Singapore https://en.wikipedia.org/wiki/Public_housing_in_Singapore > The majority of the residential housing developments in Singapore are publicly > governed and developed. As of 2013, 80% of the resident population live in such > accommodation. It's been an often used example because it is a market economy, no use pointing to a "socialist" country because nothing unexpected if they let government take care of housing. I can only point to this example though, since it always seems to come up in these discussions, I cannot evaluate it. EDIT: Aaaand it's come up in this thread too. Just search for "Singapore" to find the comments.
- khuey 10y ago
  Japan.
nradov 10y ago
Have you actually talked to many Bay Area homeowners? The primarily reason that many long-time residents oppose new denser housing developments has little or nothing to do with property values. The real reason is concerns over quality of life, such as traffic, noise, pollution, school overcrowding, etc. You're not going to convince them to support higher housing density without addressing those concerns. Personally I think denser housing developments in some neighborhoods would be a good idea. But the infrastructure improvements need to be constructed first, not as a reactive afterthought.
geebee 10y ago
I'm not sure that nimby behavior can be explained by a desire to maximize the cash value of a single family home. Keep in mind, owners typically own the land their house sits on as well. If I were allowed to purchase a SFH in palo alto, tear it down, and replace it with a four story apartment building, I would probably profit, even at these sky high prices. This does come up in San Francisco as well. I live in one of the SFH zoned parts of SF, though we are all packed in there, houses are small, not free standing and backyards are small. A friend who lives nearby owns a SFH that is technically zoned R-2. This means that he could technically tear down his house and build two flats. This isn't just theoretical, it has been done on his street. I do believe that the value of the two flats would be considerably greater than the dollar value of his SFH (especially if nobody else did it, but even if it were widespread). He could still live in one of them, with the same square footage he currently has, and with the profits, he could pay off his mortgage and have an impressive chunk of change left over. Hostility to greater density is a complex issue, but I really don't think that a drive to maximize the dollar value of real estate assets is the major factor here. If people were purely interested in maximizing this dollar value, I think they'd be agitating for the right to build, rather than the right to prevent their neighbors from building. I think that a lot of bay area nimbys are long time residents who bought when it was less expensive and are well heeled enough that they don't really need the money, and anyway, where would they go? If they cashed in by tearing their house down and making a ton of dough, they'd try to move to... well, a medium density suburb with nice, old, historic houses, pleasant year round weather, a university nearby, a city with a good opera and ballet a moderate drive away, and... oh wait, yeah, palo alto - just. as. it. is. To me, there's yer trouble.
- sjg007 10y ago
  You'd have to get the property rezoned for multiple family occupancy.. Good luck with that.

vtange 10y ago

It's a double whammy when you also consider that property taxes are generally based on real estate value. City and local governments are dependent on that income and have little incentive to see real estate values (and thus tax) go down.

hkmurakami 10y ago
That would depend on the price elasticity of the existing housing stock in response to each additional unit of housing that is supplied to the market. It's conceivable that the marginal decrease in tax revenue from the existing stock would be more than offset by the additional tax revenue from the one additional unit.
maerF0x0 10y ago
Also governments get tax not on the value of a single property but the cumulative value of the properties (emphasis on the plurality) . If my 1M house gets replaced with 10x 250k units the government has 2.5x its tax base. See how affordability and solid tax base can coincide?
- Retric 10y ago
  Local government costs also go up as population increases.
  - mjmahone17 10y ago
    The relationship is not usually linear, though. With density comes efficiency in services. Though some of that efficiency is eaten by the additional cost of doing the work.
    - Retric 10y ago
      Not really teachers are linear with population size. An overpass is vastly more expensive than a stoplight and still cheaper than a subway system. So, yes for small changes to population size a city need not spend more an can simply degrade services slightly, but doubling population size quickly gets really expensive.
      - maerF0x0 10y ago
        I would have thought that the linear system was still more expensive than the dense system (within some reasonable limits). Consider the single family home as the null case, everyone lives in single family homes as far as the eye can see, the distance that family must travel to get to the core of a city is greater than any other existing family (that is new homes are on the outer ring of the city and thus progressively further and further from the core). So that family consumes more road miles daily. Vs if you grow in density you do not create anymore miles of road because those people only have to travel a shorter distance. And when the inevitable overpass comes, instead of needing overpasses from 1/2radius of the city you may only need them for 1/4 etc because the people are already in the core and do not need to come from as far. just some thoughts on efficiency of density vs dispersement
refurb 10y ago
But tax rates generally adjust for increasing housing prices. In my old hometown, when housing prices went up 20% in one year, tax rates decreased by ~15%, so overall the increase was about inflation. Otherwise you'd see city budgets double in only a few years in really hot markets. Of course this doesn't work in California with Prop 13, but I've seen it in other areas.
dredmorbius 10y ago
That's not the case, to a large extent, in California, thanks to Proposition 13. The longer a property is held, the lower its assessed value relative-to-market. In cities with buy-an-hold populations (and Palo Alto tends to resemble this), that means a large part of the assessible property value is severely underassessed. Mind: this means that surplus value of urbanisation goes to the property owner rather than to help provide city services. The double-whammy is actually the opposite of what you suggest, and may well be a triple: 1. Prop 13 keeps property taxes down, meaning ... 2. There's an additional upside (and less downside) to inflating property values and ... 3. There's growing opposition to providing new and higher-density housing, as this would remove pressure from housing prices, and leave existing homeowners with a lower property value, itself useful for loan collateral, HELOC, etc. Knowing long-time California natives who've been chased entirely out of the state, I'm starting to think the situation may become untenable. Or, perhaps, it's one more in line of economic population displacement, which began with Spanish missionaries displacing the aboriginal natives, American Anglos the Mexican successors to the Spanish, and now various new money, some domestic, some foreign, chasing out the 1950s - 1980s immigrant class, at least from the Bay Area.

digi_owl 10y ago

I ran into a claim some years ago saying that homeownership is policy because homeowners do not riot.

thaumasiotes 10y ago
Homeowners don't riot. Neither do married people. But while there is good evidence that marriage transforms rioters into non-rioters, giving houses away doesn't seem to have much effect on the recipients. Logically, if you want to tamp down rioting and your metric is homeownership, you should be trying to oppress non-homeowners, not trying to get houses to the people that don't have them.

jhulla 10y ago

Housing is a taxpayer subsidized, inflation proof savings plan for the average citizen. It is also levered. Open this chart of historical mortgage rates and click 'max': https://fred.stlouisfed.org/graph/?g=NUh https://fred.stlouisfed.org/graph/?g=NUh Since 1981, rates have declined and tax treatment has become more advantageous to existing owners. With the current ZIRP/NIRP/QE regimes around the world, the leverage available to the average citizen has never been greater. That leverage has gone directly into housing. If the leverage trends continue (see 'helicopter money'), housing (along with all other asset classes), will get further out of reach.

StanislavPetrov 10y ago

>It seems that we made a pact with the devil by positioning housing as an investment asset. That was certainly a mistake, but the much larger mistake was made (and continues to be made) by the FED (and other central banks at the FED's insistence). FED efforts to prop up the housing and equities markets through QEinfinity, Operation Twist, the FOMC, and countless other FED mechanisms designed to prop up markets (and owners) at the expense of everyone else have led us to the situation we are in now. If not for FED chicanery, housing prices would fall precipitously to meet real demand. People would be able to afford a place to live and speculators would realize that homes are places to live and not investments. >If I bought shares in AAPL at $50 (now $100+) and someone comes along asking that AAPL let them buy some shares for say, $65, I'm obviously not going to be happy since the value of my investment is under threat. If nobody was willing to to pay more then $65 for your Apple shares, then in a free market, like it or not, your shares are worth only $65. Just because they were $100 at one point and you "arent happy" that they arent still worth $100, doesn't mean the government should step in and offer $100 when the market only offers $65. That's the problem we have now. In the fantasy world that the FED is trying to propagate they can continue to offer $100 no matter how low the actual demand for your stock is. In reality, all their efforts to prop up your stock have eliminated free markets, dried up "real" liquidity, and massively disrupted equity, bond, fx, and all other markets. The longer they try to extend and pretend the worse the problem gets. For example, the bank of Japan owns over 60% of all ETF's in Japan. 60%!! Things are not going to end well.

jhulla 10y ago
Get outta here with your free markets. In free markets, those that lose big get up off the table. In our TBTF markets, the bigger your loss, the greater the odds that your national Treasury will backstop you. Have you helped out your local banker today?
- deleted 10y ago
  [deleted]
ScottBurson 10y ago
> If not for FED chicanery, housing prices would fall precipitously to meet real demand. Maybe in some places, but I don't think that would happen in Silicon Valley. As the article says, the population of Palo Alto doubles during work days. A lot of those people would rather live there than commute from wherever. Silicon Valley is not a creation of the Fed.

WWKong 10y ago

Well put. Most discussions around here take a simplistic position, "build more to drive prices down". And then wonder why it doesn't happen when the solution is so obvious. Because it is not only about new buyers but also about folks who have invested everything they have into a market that was already in place before they invested.

bufordsharkley 10y ago

The "technically correct" way to fix this would be to remove the investment potential of housing by taxing away land value (the grand old panacea of the Land Value Tax[0]). I think this is a good idea, but it's a disruptive one, and one unlikely to happen soon. But in the meantime, we might as well fix the policy that's in direct contradiction to this ideal: 1) Repeal prop 13. Full stop. 2) Intervene with exclusionary zoning on a state level. Zoning is, after all, a state power that is entrusted to cities. (Jerry Brown is already doing good work in this department[1]) 3) Implement split-level property taxes a la Pennsylvania. There's work that demonstrates that this partial LVT had real benefits for Pittsburgh when it was under effect: [2] [0] https://en.wikipedia.org/wiki/Land_value_tax https://en.wikipedia.org/wiki/Land_value_tax [1] http://www.latimes.com/politics/la-pol-sac-jerry-brown-housing-cities-20160602-snap-story.html http://www.latimes.com/politics/la-pol-sac-jerry-brown-housi... [2] https://www.lincolninst.edu/subcenters/property-valuation-and-taxation-library/dl/oates_schwab.pdf https://www.lincolninst.edu/subcenters/property-valuation-an...

all2well 10y ago
The thing about getting rid of prop 13 is you'd price out a lot of residents that bought a long time ago for something they don't have a whole lot of control over. If you thought that gentrification is bad now, churn in residents would got through the roof. Not to mention that you wouldn't solve the issue of shorter-term investments in land, or investments that include new constructions. Honestly, the real issue in the bay area is there isn't enough housing, period. To solve this, build more housing, or build more infrastructure to enable people to live further away, or both. However, residents in the bay area have always been opposed to things like that.
- lsiebert 10y ago
  We shouldn't just repeal it. You abuse it's existence and the appeal to drive investment in property. Have the repeal not affect existing housing... and not affect housing built for some short period afterwards. In places where developers have sway with local government or have carte blanc from counties to build, there will be immense efforts, because the benefits to the property owner will be huge, meaning they can charge a premium. And after 5 years or whatever is appropriate, you will have removed the penalty in tax revenue cities take with residential and residential services. Maybe add a provision for city councils to more easily approve bond measures to fund housing development, and kick start building properties where value will go up.

mchaver 10y ago

Which countries do you think handle housing well? Any references would be appreciated.

Noseshine 10y ago
I myself know little about the subject, but since I followed the discussions I noticed the Singapore has been mentioned several times. https://en.wikipedia.org/wiki/Public_housing_in_Singapore https://en.wikipedia.org/wiki/Public_housing_in_Singapore > The majority of the residential housing developments in Singapore are publicly > governed and developed. As of 2013, 80% of the resident population live in such > accommodation. It's been an often used example because it is a market economy, no use pointing to a "socialist" country because nothing unexpected if they let government take care of housing. I can only point to this example though, since it always seems to come up in these discussions, I cannot evaluate it. EDIT: Aaaand it's come up in this thread too. Just search for "Singapore" to find the comments.
khuey 10y ago
Japan.

nradov 10y ago

Have you actually talked to many Bay Area homeowners? The primarily reason that many long-time residents oppose new denser housing developments has little or nothing to do with property values. The real reason is concerns over quality of life, such as traffic, noise, pollution, school overcrowding, etc. You're not going to convince them to support higher housing density without addressing those concerns. Personally I think denser housing developments in some neighborhoods would be a good idea. But the infrastructure improvements need to be constructed first, not as a reactive afterthought.

geebee 10y ago

I'm not sure that nimby behavior can be explained by a desire to maximize the cash value of a single family home. Keep in mind, owners typically own the land their house sits on as well. If I were allowed to purchase a SFH in palo alto, tear it down, and replace it with a four story apartment building, I would probably profit, even at these sky high prices. This does come up in San Francisco as well. I live in one of the SFH zoned parts of SF, though we are all packed in there, houses are small, not free standing and backyards are small. A friend who lives nearby owns a SFH that is technically zoned R-2. This means that he could technically tear down his house and build two flats. This isn't just theoretical, it has been done on his street. I do believe that the value of the two flats would be considerably greater than the dollar value of his SFH (especially if nobody else did it, but even if it were widespread). He could still live in one of them, with the same square footage he currently has, and with the profits, he could pay off his mortgage and have an impressive chunk of change left over. Hostility to greater density is a complex issue, but I really don't think that a drive to maximize the dollar value of real estate assets is the major factor here. If people were purely interested in maximizing this dollar value, I think they'd be agitating for the right to build, rather than the right to prevent their neighbors from building. I think that a lot of bay area nimbys are long time residents who bought when it was less expensive and are well heeled enough that they don't really need the money, and anyway, where would they go? If they cashed in by tearing their house down and making a ton of dough, they'd try to move to... well, a medium density suburb with nice, old, historic houses, pleasant year round weather, a university nearby, a city with a good opera and ballet a moderate drive away, and... oh wait, yeah, palo alto - just. as. it. is. To me, there's yer trouble.

sjg007 10y ago
You'd have to get the property rezoned for multiple family occupancy.. Good luck with that.