23 ms·

Housing bubbles are universally destructive

117 points by Zweihander 8y ago

msvan 8y ago
It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be. People thought that the internet would make location irrelevant, but it seems that the opposite has happened. I can think of many armchair theories as to why, but it's not a simple question to answer.
- dionidium 8y ago
  > “I can think of many armchair theories as to why, but it's not a simple question to answer.” My guess: tools that make it easier to live wherever you want disproportionately benefit the places people most want to live.
  - analog31 8y ago
    I think there's a lot of merit to this. The Internet has not made location irrelevant, because many other things still make location relevant. Drawing only from my own list of preferences, there are things like climate, proximity to family, access to outdoor activities, culture, social outlets, crime rate, the transportation system, and so forth.
- olliej 8y ago
  There's supply/demand - as some area becomes more popular more people want to move there. If you're not building new homes in the area at a rate that at the very least matches both the migration rate and the birth rate housing price is only going to increase. (People in SF fighting against tech folk also seem to fight new properties, ignoring that simply having children in SF means you necessarily must build more homes, maybe just a bit slower) The thing that makes it worse is when taxable property values trail actual property values - it makes simply holding on to property a tax payer subsidized investment. CA for instance has capped taxable property valuations at 2%, which is a subsidy for empty properties, properties that increase rent/lease by more than 2% a year, and business (which never sell property) - the biggest component of civic services is fundamentally the cost of rent/mortgage, as that dictates how much all civic servants (emergency services, city/county administration, elected officials) need as there /base/ income. It also indirectly costs tax payers through the increased need for housing and other financial support for low income people (which can actually be a double tax, as it may result in tax payers paying rent on a property that is underpaying taxes anyway).
- mc32 8y ago
  One thing surprises me about this article: It prescribes Inflation as the antidote to land/RE prices... But that was not the case necessary for Japan. And on the other hand they didn't highlight the role international investment in RE has had on local markets. It plays a significant role in many of the major international cities where foreign entities are allowed to buy RE as investment properties.
- AnthonyMouse 8y ago
  > It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be. They are, in the short-term. The problem is that high housing costs have a slow, long-term corrosive effect on a city. Companies have to pay higher wages for workers to achieve the same standard of living, which makes them less competitive. So, for example, you see a lot of tech companies springing up in Austin now. It doesn't happen overnight, but it happens. It also creates a large net transfer of wealth out of the city whenever someone moves. Someone who moves in with half a million dollars in net assets would normally be a boon because they would go use that money to patronize local businesses, but now they have to spend that and a good chunk of their salary going forward on housing, which goes to the seller who is moving out of the city and taking the money with them. The housing ratchet is also completely unsustainable. The people who already own real estate want prices to increase rather than decrease to justify the high price they already paid and generate a competitive return on that huge amount of money, but when housing is already the majority expenditure for city residents, costs long-term can't increase faster than wages, and the higher wages get for the same standard of living the less competitive local companies are. Eventually you reach a limit on how high housing costs can sustainably go, but once you hit it, nobody wants to put down a million dollars for a house that won't appreciate at all when they could be getting some ROI on the same money in the stock market. Then prices finally start to decline, but people definitely don't want to pay $950K for a house that will lose value, so the decline is rapid. This is, of course, catastrophic. It's almost impossible to avoid this once the values are already ridiculous, but what the article suggests can mitigate it somewhat: Sustained moderate inflation combined with a large increase in the housing supply, so that real values come down even though nominal values are stable. Then the crash is in real value rather than nominal value, so people don't end up with underwater mortgages, and it can ideally happen over a period of a decade or so rather than instantaneously in a way that causes a local economic crisis.
  - timcederman 8y ago
    I think for most folks actually living in these high cost areas, capital appreciation is not the primary motivation. Also I disagree that they are universally destructive - how else do you explain the long term success of high price cities such as London, New York City, Hong Kong, etc.
- debacle 8y ago
  For starters, there are a lot of places in the US I can't live because I need home access to good Internet.
  - jeffbax 8y ago
    That's going to change rapidly with 5G
    - restalis 8y ago
      I think you don't quite understand how things work. 5G may be efficient but the exploitable bandwidth is still limited. In cities the density of cellular mobile communications antennae is higher which leads to a reduced areas covered by a tower in which subscribers have to share the bandwidth with others. Also, in cities as opposed to rural areas, even when the bandwidth is shared, the users of a given area are often just transient. The conclusion is that the urban network quality is different from the rural one and that it (unfortunately) adds up as another reason to flock to a city.
- _pmf_ 8y ago
  > I wonder if these these areas have simply become way more valuable than they used to be. It will self correct once companies realize that by using middle managers with a modicum of domain expertise enables people to work remotely and not have to be at work for 8 hours just so their managers can visually check their presence for the contractually agreed amount of time. Give it 500 years.
- scirocco 8y ago
  A good start is to look at the interest rate curve (cost of borrowing money has gone down dramatically). Here is the US Fed Funds Rate since the early 80's: https://tradingeconomics.com/united-states/interest-rate https://tradingeconomics.com/united-states/interest-rate
- Emma_Goldman 8y ago
  I think it would be very wrong to think of increasing house prices as a direct reflection of intrinsic value. In the UK the economic model of the past forty years has been based on a conscious policy of asset price inflation. Thatcher stripped away most of the social housing in this country and put it into the market. Few have been built since. The recentering of the economy in financial services has led to a massive expansion of easy credit, that reaches its fulcrum in the housing market. Together this has meant: (a) a dwindling housing stock; (b) progressively larger sums of credit chasing the same number of properties. That is not to mention the fact the since the late 1960s London has been the main global waystation for offshore tax havens, much of which is attached to property sales in the capital. There are 100,000 properties in the UK which are held as investments, unoccupied.
  - TheOtherHobbes 8y ago
    There are actually two economies - one where everything is an investment to be sweated for returns, and one where everything is priced according to real world utility. In a financialised system everything is priced according to the values of the first economy, which are completely divorced from conventional economic utility. This makes everything unaffordable to those who don't have access to that economy. It also lowers the quality of goods and services within the second economy, because providing quality and value conflicts with fast high returns.
  - zimablue 8y ago
    Great post, worth noting that the marketing of the destruction of social housing as "right to buy" was a work of evil genius, and the citizens who know the most about it are people whose parents made a killing from it and are unsurprisingly very happy with the policy. Catchment areas for schools are also a significant factor, mandatory ballots for school entry would make a massive difference but our government has been going in precisely the opposite direction, privatising the education system and leading to an expulsion crisis which is having knock on effects in crime. Also London specifically is one of the lowest density major capital cities, the centre is often old and beautiful but we could stand to build a bit higher.
lewis500 8y ago
This whole piece makes me ask what a bubble really means. The author admits to having been wrong about housing prices since 2000. But that’s okay because bubbles can, apparently, last decades. If a bubble can last a very long, but totally indeterminant amount of time, does it have any reality?
- nimchimpsky 8y ago
  > does it have any reality? No. The author also predicts : a 50% decline in house prices Which is just absurd, I assume they have been saying something similar since the year 2000. I don't understand all these articles about house prices, all saying the same thing for year on year. And being plainly wrong. There is a lot of rich people out there, and they buy houses.
- setr 8y ago
  Im no economist but intuitively i would think the key piece is that they “pop”; that is, the market corrects itself ib a sudden and aggressive fashion. That its a “correction” necessitates that the valuation is divorced from its “real” value, the primary mechanic allowing this being speculation. And ofc, since speculation and correction is always a market, the final piece of the dish is that the speculation (and thus, the eventual correction) is significantly large. And then given that the market itself lasts long (substantially longer than decades), and that we rightfully fear, not the existence of, but the crash, then it seems fine to claim a bubble lasting decades, and even centuries. And like all predictions of the future, there’s money to be made in the difference between its actual popping and its predicted pop, if you choose to make the bet. Ofc, money to be lost too. And if you expect it to last a century... then just make sure your grandchildren get out before it bursts (and hope it doesn’t take everything else with it). Doesn’t matter to you particularly at that time scale, but it still exists (unless ofc it corrects slowly... but hey, hindsight is 20/20)
- MrKristopher 8y ago
  It's all guesswork, right? Someone says these house prices don't make sense; someone else says they do make sense. If enough people agree that the house prices don't make sense, then the market would correct, then someone can say that really was a bubble after all.
purplezooey 8y ago
It's no bubble now because we don't build nearly enough in these areas. We need some kind of big federal or state project where lots of people get bought out to leave, or moved via eminent domain, and higher density built.
- chadcmulligan 8y ago
  I'm in brisbane, australia, and this seems to be the case here as well. There has been huge increases in property values and rental returns. Recently though they're has been a high rise building boom and sure enough rental prices seem to be dropping and there's an over supply. There is a general property slow down occurring to, though how far its going to go no one knows. The supply side of the demand / supply seems to be increasing. Another theory that seems to be going around recently is its the availability of credit that causes these bubbles, which on the face of it seems to make sense. If credit isn't available then prices wont increase, if easy cheap credit is available then people will leverage up, which pushes up house prices and the circle continues.
CPAhem 8y ago
Real estate bubbles rarely burst unless there is accompanying unemployment. The reason is psychological, people hate realizing a loss. Another practical reason is that if borrow $1 million for a house, and it is now worth $800,000 you just keep paying off the mortgage and hope prices go up again. Selling it would require you pay in some cash to pay off the loan. All this is provided you keep you job and can afford the loan.
- david927 8y ago
  The faster a bicycle goes, the more stable it is and therefore less likely to fall over. But also when it does fall over, the damage is much more devastating. You're right that there's a keel keeping real estate from tipping. The reason isn't just psychological (although there is a strong sentimental sense of attachment you have to your house); real estate is also less liquid than almost everything else. Other factors, including proximity to work, children's schools, etc. make it a last resort in terms of liquidating. You're right -- as long as someone can keep up the mortgage payments, they'll do so. The problem is that the bigger the bubble, the more unlikely someone can maintain those payments if suddenly unemployed or underemployed. The crash of 2008 wasn't so much averted as postponed. Subprime mortgages became 'nonprime mortgages'. The practices are still there. The artificially low interest rates are still there. The bicycle is going a thousand miles an hour and when it really crashes, look out.
  - saint_abroad 8y ago
    > The crash of 2008 wasn't so much averted as postponed. This. The US housing market correction from 2006 was 30%. In this time, the US Fed funds rate went from 5.25% to 0.15% cutting banks' monthly cost for a $250k loan from >$1k/m to <$50/m. In the meanwhile, median LTV has gone from 80% in 2007 to 95% in 2017 [1] and median loan sizes have gone from $175k to $325k. What happens when interest rates normalise and mortgage interest doubles? The banks have been propped up but the risks have not left the system. [1] https://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-september-2017/view/full_report https://www.urban.org/research/publication/housing-finance-g...
zimablue 8y ago
There's a kind of interesting way to think about this, especially in the UK. Because people don't automatically think in terms of opportunity cost and don't know eg. that the long term equity return is X, there's a disconnect between reality and how people think of it. People in the UK think of rent as "wasted" money. In an efficient market, it wouldn't be wasted at all because the saving from lower rent vs mortgage could be put into eg. equity/bonds. Someone will reply that there is no saving but that itself is a symptom of the way we run housing. But because people think that, and think that no-one would ever want to rent, we tolerate super weird policies like a residency house being exempt from capital gains tax, poor protection for renters, government tax transfers (in the UK they will literally give you money to buy your first house, the government is so committed to the your-house-is-your-bank philosophy). All these distortions then actually CREATE the conditions which mean that you're consistently losing money if you rent, because the government is effectively taxing you much more. So our misunderstanding of economics creates an economic system which conforms to our mistaken beliefs, it's kind of amazing.
- claydavisss 8y ago
  Who are these people who intentionally seek a lower rent over a higher mortgage so as to invest in stocks? I've yet to meet one. Renters are just as likely to give in to vanity purchases, dumb spending habits etc... And why are stocks such an awesome alternative? A stock can go to zero...even foreclosed homes have some value. Stocks are optional - shelter isn't. Since you must commit some of your earnings to shelter, it makes sense over the long run to fix the costs and find a way to profit. On a subjective level, home owners have better finances, more say in guiding their communities, and many other advantages. Of course we can turn your argument back...why does society make so many accommodations for people who just buy and sell pieces of paper?
  - zimablue 8y ago
    What you're saying, which is a good point, when you say that shelter isn't optional, you can phrase that more precisely as "owning property is a hedge against variable property prices". It's true but there are other ways to hedge this, eg. Long term rental contracts, limited rent controls or owning specific derivatives all reduce this risk. There are societies that run like that, eg. Germany. Some stocks can go to zero, some are very unlikely to and most portfolios have things that are very unlikely to flatline like govt bonds. Well i don't mortgage although i could, and I do save so hello you've met your first. The idea that we need a bank threatening to throw us out of our houses to enforce responsible saving is infantile and grotesque. General criticism of the finance sector is a bit too off topic for me to engage with.
randomdata 8y ago
As a resident of a more rural area that has seen a complete economic turnaround in the last few years, which seems to be attributable to people leaving the big city to find more affordable ground, the big city housing bubble is the best thing that has ever happened. It may be destructive at a local level, but I'm not sure it is universally so.
- dsfyu404ed 8y ago
  >As a resident of a more rural area that has seen a complete economic turnaround in the last few years, which seems to be attributable to people leaving the big city to find more affordable ground, the big city housing bubble is the best thing that has ever happened. It may be destructive at a local level, but I'm not sure it is universally so. Your town is going from the "boarded up storefronts" phase to the "hardware store and Chinese take out restaurant" phase. You'll probably start considering the housing market driven gentrification destructive again when it gets to the "organic free trade hemp clothing store and bars that only serve micro-brews" phase.
  - randomdata 8y ago
    That's scarily accurate. But I would say we're already in the last phase. Which is great, as it means we now have all the amenities one expects from the city, without having to live in the city.
dgudkov 8y ago
He is talking about inflation as a way to resolve it, but my personal (and totally unscientific) pet theory is that inflation is already here. The prices are so high not because the real estate is expensive, but because the intrinsic value of money is declining. How come elevated inflation is not reflected in official stats? The problem with counting inflation is that it doesn't account for the loss of quality which is happening in all areas except high-technology products. E.g. while the price (in real money) for a burger in McDonalds can be more or less the same as in the 90s or 60s, the quality went down due to excessive use of herbicides and drugs in farming. No wonder many people get debts because it's the right strategy when money are losing value. If the real inflation is say 5%, then getting a mortgage at 3.5% earns you 1.5% a year. No wonder stock indexes are record high nowadays -- it's not because businesses excel more than ever, it's because the dollar is worth less.
- a008t 8y ago
  Why is gold doing so poorly then?
  - dgudkov 8y ago
    My guess would be that the intrinsic value of gold is declining as it has no much use outside of manufacturing and jewelry. Gold itself is a complex market heavily influenced by regulations and a few players. But I'm in no way an expert in it.
    - AnimalMuppet 8y ago
      The intrinsic value of gold is set by manufacturing and jewelry; it has not changed much. The investment value of gold is (primarily) set by two things: the need for an inflation hedge, and speculation. Speculation is pretty much dead at the moment (nobody's buying gold because they think gold is going to go up). And gold's use as an inflation hedge is declining, because people are less worried about inflation than they were. Why were people more worried about inflation recently? Because they thought that QE was going to cause a ton of inflation. As it now looks like the Fed will be able to unwind all of that without triggering mass inflation, people see less need for gold than they did, say, five years ago.

117 points by Zweihander 8y ago

It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be. People thought that the internet would make location irrelevant, but it seems that the opposite has happened. I can think of many armchair theories as to why, but it's not a simple question to answer.

dionidium 8y ago
> “I can think of many armchair theories as to why, but it's not a simple question to answer.” My guess: tools that make it easier to live wherever you want disproportionately benefit the places people most want to live.
- analog31 8y ago
  I think there's a lot of merit to this. The Internet has not made location irrelevant, because many other things still make location relevant. Drawing only from my own list of preferences, there are things like climate, proximity to family, access to outdoor activities, culture, social outlets, crime rate, the transportation system, and so forth.
olliej 8y ago
There's supply/demand - as some area becomes more popular more people want to move there. If you're not building new homes in the area at a rate that at the very least matches both the migration rate and the birth rate housing price is only going to increase. (People in SF fighting against tech folk also seem to fight new properties, ignoring that simply having children in SF means you necessarily must build more homes, maybe just a bit slower) The thing that makes it worse is when taxable property values trail actual property values - it makes simply holding on to property a tax payer subsidized investment. CA for instance has capped taxable property valuations at 2%, which is a subsidy for empty properties, properties that increase rent/lease by more than 2% a year, and business (which never sell property) - the biggest component of civic services is fundamentally the cost of rent/mortgage, as that dictates how much all civic servants (emergency services, city/county administration, elected officials) need as there /base/ income. It also indirectly costs tax payers through the increased need for housing and other financial support for low income people (which can actually be a double tax, as it may result in tax payers paying rent on a property that is underpaying taxes anyway).
mc32 8y ago
One thing surprises me about this article: It prescribes Inflation as the antidote to land/RE prices... But that was not the case necessary for Japan. And on the other hand they didn't highlight the role international investment in RE has had on local markets. It plays a significant role in many of the major international cities where foreign entities are allowed to buy RE as investment properties.
AnthonyMouse 8y ago
> It is true that housing prices in urban areas have risen astronomically in many regions of the world, and while we may well see a correction, I wonder if these these areas have simply become way more valuable than they used to be. They are, in the short-term. The problem is that high housing costs have a slow, long-term corrosive effect on a city. Companies have to pay higher wages for workers to achieve the same standard of living, which makes them less competitive. So, for example, you see a lot of tech companies springing up in Austin now. It doesn't happen overnight, but it happens. It also creates a large net transfer of wealth out of the city whenever someone moves. Someone who moves in with half a million dollars in net assets would normally be a boon because they would go use that money to patronize local businesses, but now they have to spend that and a good chunk of their salary going forward on housing, which goes to the seller who is moving out of the city and taking the money with them. The housing ratchet is also completely unsustainable. The people who already own real estate want prices to increase rather than decrease to justify the high price they already paid and generate a competitive return on that huge amount of money, but when housing is already the majority expenditure for city residents, costs long-term can't increase faster than wages, and the higher wages get for the same standard of living the less competitive local companies are. Eventually you reach a limit on how high housing costs can sustainably go, but once you hit it, nobody wants to put down a million dollars for a house that won't appreciate at all when they could be getting some ROI on the same money in the stock market. Then prices finally start to decline, but people definitely don't want to pay $950K for a house that will lose value, so the decline is rapid. This is, of course, catastrophic. It's almost impossible to avoid this once the values are already ridiculous, but what the article suggests can mitigate it somewhat: Sustained moderate inflation combined with a large increase in the housing supply, so that real values come down even though nominal values are stable. Then the crash is in real value rather than nominal value, so people don't end up with underwater mortgages, and it can ideally happen over a period of a decade or so rather than instantaneously in a way that causes a local economic crisis.
- timcederman 8y ago
  I think for most folks actually living in these high cost areas, capital appreciation is not the primary motivation. Also I disagree that they are universally destructive - how else do you explain the long term success of high price cities such as London, New York City, Hong Kong, etc.
debacle 8y ago
For starters, there are a lot of places in the US I can't live because I need home access to good Internet.
- jeffbax 8y ago
  That's going to change rapidly with 5G
  - restalis 8y ago
    I think you don't quite understand how things work. 5G may be efficient but the exploitable bandwidth is still limited. In cities the density of cellular mobile communications antennae is higher which leads to a reduced areas covered by a tower in which subscribers have to share the bandwidth with others. Also, in cities as opposed to rural areas, even when the bandwidth is shared, the users of a given area are often just transient. The conclusion is that the urban network quality is different from the rural one and that it (unfortunately) adds up as another reason to flock to a city.
_pmf_ 8y ago
> I wonder if these these areas have simply become way more valuable than they used to be. It will self correct once companies realize that by using middle managers with a modicum of domain expertise enables people to work remotely and not have to be at work for 8 hours just so their managers can visually check their presence for the contractually agreed amount of time. Give it 500 years.
scirocco 8y ago
A good start is to look at the interest rate curve (cost of borrowing money has gone down dramatically). Here is the US Fed Funds Rate since the early 80's: https://tradingeconomics.com/united-states/interest-rate https://tradingeconomics.com/united-states/interest-rate
Emma_Goldman 8y ago
I think it would be very wrong to think of increasing house prices as a direct reflection of intrinsic value. In the UK the economic model of the past forty years has been based on a conscious policy of asset price inflation. Thatcher stripped away most of the social housing in this country and put it into the market. Few have been built since. The recentering of the economy in financial services has led to a massive expansion of easy credit, that reaches its fulcrum in the housing market. Together this has meant: (a) a dwindling housing stock; (b) progressively larger sums of credit chasing the same number of properties. That is not to mention the fact the since the late 1960s London has been the main global waystation for offshore tax havens, much of which is attached to property sales in the capital. There are 100,000 properties in the UK which are held as investments, unoccupied.
- TheOtherHobbes 8y ago
  There are actually two economies - one where everything is an investment to be sweated for returns, and one where everything is priced according to real world utility. In a financialised system everything is priced according to the values of the first economy, which are completely divorced from conventional economic utility. This makes everything unaffordable to those who don't have access to that economy. It also lowers the quality of goods and services within the second economy, because providing quality and value conflicts with fast high returns.
- zimablue 8y ago
  Great post, worth noting that the marketing of the destruction of social housing as "right to buy" was a work of evil genius, and the citizens who know the most about it are people whose parents made a killing from it and are unsurprisingly very happy with the policy. Catchment areas for schools are also a significant factor, mandatory ballots for school entry would make a massive difference but our government has been going in precisely the opposite direction, privatising the education system and leading to an expulsion crisis which is having knock on effects in crime. Also London specifically is one of the lowest density major capital cities, the centre is often old and beautiful but we could stand to build a bit higher.

lewis500 8y ago

This whole piece makes me ask what a bubble really means. The author admits to having been wrong about housing prices since 2000. But that’s okay because bubbles can, apparently, last decades. If a bubble can last a very long, but totally indeterminant amount of time, does it have any reality?

nimchimpsky 8y ago
> does it have any reality? No. The author also predicts : a 50% decline in house prices Which is just absurd, I assume they have been saying something similar since the year 2000. I don't understand all these articles about house prices, all saying the same thing for year on year. And being plainly wrong. There is a lot of rich people out there, and they buy houses.
setr 8y ago
Im no economist but intuitively i would think the key piece is that they “pop”; that is, the market corrects itself ib a sudden and aggressive fashion. That its a “correction” necessitates that the valuation is divorced from its “real” value, the primary mechanic allowing this being speculation. And ofc, since speculation and correction is always a market, the final piece of the dish is that the speculation (and thus, the eventual correction) is significantly large. And then given that the market itself lasts long (substantially longer than decades), and that we rightfully fear, not the existence of, but the crash, then it seems fine to claim a bubble lasting decades, and even centuries. And like all predictions of the future, there’s money to be made in the difference between its actual popping and its predicted pop, if you choose to make the bet. Ofc, money to be lost too. And if you expect it to last a century... then just make sure your grandchildren get out before it bursts (and hope it doesn’t take everything else with it). Doesn’t matter to you particularly at that time scale, but it still exists (unless ofc it corrects slowly... but hey, hindsight is 20/20)
MrKristopher 8y ago
It's all guesswork, right? Someone says these house prices don't make sense; someone else says they do make sense. If enough people agree that the house prices don't make sense, then the market would correct, then someone can say that really was a bubble after all.

purplezooey 8y ago

It's no bubble now because we don't build nearly enough in these areas. We need some kind of big federal or state project where lots of people get bought out to leave, or moved via eminent domain, and higher density built.

chadcmulligan 8y ago
I'm in brisbane, australia, and this seems to be the case here as well. There has been huge increases in property values and rental returns. Recently though they're has been a high rise building boom and sure enough rental prices seem to be dropping and there's an over supply. There is a general property slow down occurring to, though how far its going to go no one knows. The supply side of the demand / supply seems to be increasing. Another theory that seems to be going around recently is its the availability of credit that causes these bubbles, which on the face of it seems to make sense. If credit isn't available then prices wont increase, if easy cheap credit is available then people will leverage up, which pushes up house prices and the circle continues.

CPAhem 8y ago

Real estate bubbles rarely burst unless there is accompanying unemployment. The reason is psychological, people hate realizing a loss. Another practical reason is that if borrow $1 million for a house, and it is now worth $800,000 you just keep paying off the mortgage and hope prices go up again. Selling it would require you pay in some cash to pay off the loan. All this is provided you keep you job and can afford the loan.

david927 8y ago
The faster a bicycle goes, the more stable it is and therefore less likely to fall over. But also when it does fall over, the damage is much more devastating. You're right that there's a keel keeping real estate from tipping. The reason isn't just psychological (although there is a strong sentimental sense of attachment you have to your house); real estate is also less liquid than almost everything else. Other factors, including proximity to work, children's schools, etc. make it a last resort in terms of liquidating. You're right -- as long as someone can keep up the mortgage payments, they'll do so. The problem is that the bigger the bubble, the more unlikely someone can maintain those payments if suddenly unemployed or underemployed. The crash of 2008 wasn't so much averted as postponed. Subprime mortgages became 'nonprime mortgages'. The practices are still there. The artificially low interest rates are still there. The bicycle is going a thousand miles an hour and when it really crashes, look out.
- saint_abroad 8y ago
  > The crash of 2008 wasn't so much averted as postponed. This. The US housing market correction from 2006 was 30%. In this time, the US Fed funds rate went from 5.25% to 0.15% cutting banks' monthly cost for a $250k loan from >$1k/m to <$50/m. In the meanwhile, median LTV has gone from 80% in 2007 to 95% in 2017 [1] and median loan sizes have gone from $175k to $325k. What happens when interest rates normalise and mortgage interest doubles? The banks have been propped up but the risks have not left the system. [1] https://www.urban.org/research/publication/housing-finance-glance-monthly-chartbook-september-2017/view/full_report https://www.urban.org/research/publication/housing-finance-g...

zimablue 8y ago

There's a kind of interesting way to think about this, especially in the UK. Because people don't automatically think in terms of opportunity cost and don't know eg. that the long term equity return is X, there's a disconnect between reality and how people think of it. People in the UK think of rent as "wasted" money. In an efficient market, it wouldn't be wasted at all because the saving from lower rent vs mortgage could be put into eg. equity/bonds. Someone will reply that there is no saving but that itself is a symptom of the way we run housing. But because people think that, and think that no-one would ever want to rent, we tolerate super weird policies like a residency house being exempt from capital gains tax, poor protection for renters, government tax transfers (in the UK they will literally give you money to buy your first house, the government is so committed to the your-house-is-your-bank philosophy). All these distortions then actually CREATE the conditions which mean that you're consistently losing money if you rent, because the government is effectively taxing you much more. So our misunderstanding of economics creates an economic system which conforms to our mistaken beliefs, it's kind of amazing.

claydavisss 8y ago
Who are these people who intentionally seek a lower rent over a higher mortgage so as to invest in stocks? I've yet to meet one. Renters are just as likely to give in to vanity purchases, dumb spending habits etc... And why are stocks such an awesome alternative? A stock can go to zero...even foreclosed homes have some value. Stocks are optional - shelter isn't. Since you must commit some of your earnings to shelter, it makes sense over the long run to fix the costs and find a way to profit. On a subjective level, home owners have better finances, more say in guiding their communities, and many other advantages. Of course we can turn your argument back...why does society make so many accommodations for people who just buy and sell pieces of paper?
- zimablue 8y ago
  What you're saying, which is a good point, when you say that shelter isn't optional, you can phrase that more precisely as "owning property is a hedge against variable property prices". It's true but there are other ways to hedge this, eg. Long term rental contracts, limited rent controls or owning specific derivatives all reduce this risk. There are societies that run like that, eg. Germany. Some stocks can go to zero, some are very unlikely to and most portfolios have things that are very unlikely to flatline like govt bonds. Well i don't mortgage although i could, and I do save so hello you've met your first. The idea that we need a bank threatening to throw us out of our houses to enforce responsible saving is infantile and grotesque. General criticism of the finance sector is a bit too off topic for me to engage with.

randomdata 8y ago

As a resident of a more rural area that has seen a complete economic turnaround in the last few years, which seems to be attributable to people leaving the big city to find more affordable ground, the big city housing bubble is the best thing that has ever happened. It may be destructive at a local level, but I'm not sure it is universally so.

dsfyu404ed 8y ago
>As a resident of a more rural area that has seen a complete economic turnaround in the last few years, which seems to be attributable to people leaving the big city to find more affordable ground, the big city housing bubble is the best thing that has ever happened. It may be destructive at a local level, but I'm not sure it is universally so. Your town is going from the "boarded up storefronts" phase to the "hardware store and Chinese take out restaurant" phase. You'll probably start considering the housing market driven gentrification destructive again when it gets to the "organic free trade hemp clothing store and bars that only serve micro-brews" phase.
- randomdata 8y ago
  That's scarily accurate. But I would say we're already in the last phase. Which is great, as it means we now have all the amenities one expects from the city, without having to live in the city.

dgudkov 8y ago

He is talking about inflation as a way to resolve it, but my personal (and totally unscientific) pet theory is that inflation is already here. The prices are so high not because the real estate is expensive, but because the intrinsic value of money is declining. How come elevated inflation is not reflected in official stats? The problem with counting inflation is that it doesn't account for the loss of quality which is happening in all areas except high-technology products. E.g. while the price (in real money) for a burger in McDonalds can be more or less the same as in the 90s or 60s, the quality went down due to excessive use of herbicides and drugs in farming. No wonder many people get debts because it's the right strategy when money are losing value. If the real inflation is say 5%, then getting a mortgage at 3.5% earns you 1.5% a year. No wonder stock indexes are record high nowadays -- it's not because businesses excel more than ever, it's because the dollar is worth less.

a008t 8y ago
Why is gold doing so poorly then?
- dgudkov 8y ago
  My guess would be that the intrinsic value of gold is declining as it has no much use outside of manufacturing and jewelry. Gold itself is a complex market heavily influenced by regulations and a few players. But I'm in no way an expert in it.
  - AnimalMuppet 8y ago
    The intrinsic value of gold is set by manufacturing and jewelry; it has not changed much. The investment value of gold is (primarily) set by two things: the need for an inflation hedge, and speculation. Speculation is pretty much dead at the moment (nobody's buying gold because they think gold is going to go up). And gold's use as an inflation hedge is declining, because people are less worried about inflation than they were. Why were people more worried about inflation recently? Because they thought that QE was going to cause a ton of inflation. As it now looks like the Fed will be able to unwind all of that without triggering mass inflation, people see less need for gold than they did, say, five years ago.