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So much written about housing is just... Wrong. And I don't mean factually inaccurate. I mean based on false premises. Owning your own home serves several purp

by cletus 8y ago

So much written about housing is just... Wrong. And I don't mean factually inaccurate. I mean based on false premises. Owning your own home serves several purposes: 1. Security 2. Stability 3. As a hedge against inflation 4. As a hedge against market forces That doesn't mean buying is always a good idea. Clearly or isn't. Like don't but in a town where 70% of the adults are employed by the local coal mine, for example. Here's how I like to think about it: you are never out of the housing market. By not owning you have a large short position in real estate. Given that rents eventually track prices, if prices go down you benefit (you're rent will eventually go down and you didn't lose capital). If prices go up you lose. You missed a gain and your rent will go up. Given that, you buy your house to remove risk of local changes to your detriment.

jdavis703 8y ago
The idea from the headline should be viewed at a more macro level. A society that views housing as an investment means that we wind up adopting housing policies that lead to people being priced out (i.e. regulatory capture). This eventually means people winding up in subpar situations like moving in with parents, couch surfing or living on the street. Now your argument about housing on a personal financial level is spot-on, at least points #1 and #2. As for the latter points, the first purpose of a house should be to house people. When we view housing as an investment we start making economically rational (but morally questionable) arguments like, "ban new apartments because they'll lower my home's value."
- klipt 8y ago
  Right, the problem is NIMBYs are allowed to rent-seek by preventing construction around them. And in San Francisco, Prop 13 / rent control insulates many people from any consequences of rising prices, as long as they don't have to move, which means they make decisions that push up prices for everyone else. In the economically ideal case we'd have a fair Land Value Tax to encourage as much building as necessary.
  - asdff 8y ago
    So what might happen if California enacted statewide rent control? Capping yearly rent increases at inflation + 3%? There are places where properties have doubled in value in less than a dozen years while wages remain stagnant, leading to rents surging and more %income going to housing. Many low income renters are paying 50% or more of their income on rent, that's not sustainable for the wider economy that relies on low skill labor to function, and the solution is not to have people commute 4h every day to clean an office, teach a class, or fight a fire. The housing market moves so much faster than wages ever will, and it seems having only some units rent controlled exacerbates the problem for units that aren't, so why not make every unit in the state a rent controlled unit? The landlords are already insulated from the whiplash of the housing market from statewide property tax control in the form of prop 13, why not let renters enjoy that isolation as well?
    - jdavis703 8y ago
      There are several rent control bills in California right now. AB 36 will allow cities to enact rent control on older buildings. AB 36 would not apply to new construction, only to buildings older than 10 years. This should help to prevent supply crunches, or at least not make them worse. AB 1482 would set a state-wide cap on rent increases, for example inflation + 10%. The idea is to stop massive rent increases that lead to evictions. The exact number hasn’t been determined yet, the bill sponsors are trying to figure out a good number that protects tenants and gives landlords a legally guaranteed return on investment. These bills will face a lot of corporate opposition. It’s important that our electeds here from renters, homeowners and “mom & pop” landlords as they consider these bills.
      - bobthepanda 8y ago
        AB 36 sounds like it would encourage a lot more turnover on older buildings, incentivizing the redevelopment of what is currently affordable housing. New York has similar regulations, and what you end up having happen is that landlords will either redevelop or renovate to whatever the threshold is to get out of the affordable housing requirement.
- seem_2211 8y ago
  Yah both of these points are valid. I had a good discussion with one of my dad's friends recently (who is a realtor), and mentioned that one of the biggest costs we never talk about is the cost of compliance. Basically, his argument is that the cost of existing housing is driven by the cost of building new housing, of which places like San Francisco have been very effective at limiting! But as well as that, what are the development fees for example? When politicians virtue signal about what percentage of a housing development will be below market rate for example, you have to remember that this sort of thing will be factored into the price you pay. Or the endless studies that city governments (again looking square at you San Francisco) commission. The buyer and the renter pay for these. America actually has relatively cheap housing across the vast majority of the country, so it's not as if the buildings themselves are the major factor in jacking up the prices.
  - xKingfisher 8y ago
    There was a fantastic post on this subject by an architect in the Los Angeles subreddit last year. The general gist is that building requirements (parking in particular) make anything other than luxury condos financially infeasible. https://www.reddit.com/r/LosAngeles/comments/6lvwh4/im_an_architect_in_la_specializing_in_multifamily/ https://www.reddit.com/r/LosAngeles/comments/6lvwh4/im_an_ar...
- snowwrestler 8y ago
  > A society that views housing as an investment means that we wind up adopting housing policies that lead to people being priced out (i.e. regulatory capture). No. Housing that appreciates at exactly the rate of inflation can still be a good investment and a great tool for building wealth.
  - bobthepanda 8y ago
    Homeowners aren't necessarily satisfied with that though, and they have voting power. Prop 13 is basically a voter-approved way of guaranteeing the upside of stratospheric rises in property value without reaping any of the downside (increased tax reflecting said skyrocketing property value).
    - snowwrestler 8y ago
      I agree with you. I think articles like this one contribute to the problem by perpetuating a false sense of what housing prices should do to be a "good investment."
    - aey 8y ago
      Prices go up because demand is higher than supply. No other reason. If cities doubled the number of houses built any year the average price went up by 5% or more, this wouldn’t be a problem. The tax rate could even be negative.
      - alasdair_ 8y ago
        >Prices go up because demand is higher than supply. No other reason. If the government mandates that the price of something is X, and X is higher than the price is now, prices go up. Also, remember than nominal price and economic price are distinct. “Price” needs to include all tax subsidies and other incentives/ dicincentives.
        aey 8y ago
        No they don’t. See the USSR, real prices were completely removed from what the government set. If SF set the price of a house to 100k, people would just bribe each other the difference.
- pascalxus 8y ago
  Yup. And even if you view housing as an investment and even if you create policies in favor of that, in the long run, you're not going to have greater gains anyways because the growth is not sustainable. Long run, housing always has to revert to a mean increase equivalent to incomes/inflation, even if in the short term you might have a huge run up. In the short term there can be a huge run up causing great pain, but after that it'll come back to it's income/inflation rate increase.
- hinkley 8y ago
  It also encourages people to buy the biggest house they can afford instead of the smallest one they can be comfortable in. Very few people buy the nicest car or the best TV, because we know those don't have a return. But being bad at math, we can't seem to figure out that we only see 30% of every dollar put into the house (taxes, mortgage, upkeep, improvements) back and we conveniently forget about inflation. Yeah, if your house doubled in value in 25 years that means you kept pace with inflation. You could have done better with CDs.
zenincognito 8y ago
I would argue that security, stability and hedge are all perceived and not actual risks. I don't own but have quite a large position in index funds. I am both financially secure and stable in one of the fastest growing city in the world. My rent hasn't increased in 5 years and I pay half of what I would pay in mortgage for the same property. The property market has put up nearly 20% gain in those years.
- itchyouch 8y ago
  You sound like you have the rarer, nice landlords with maybe a handful of properties that are being rented out. These are the landlords that as long as you pay their mortgage and provide little fuss, they are happy and not trying to constantly maximize their returns. I'd imagine your scenario would not be the case with a typical management company. While your scenario is attainable for a small amount of people, it would be difficult to see happenning for the masses.
- cletus 8y ago
  What city? Also, does it have any form of rent control? In terms of investment returns it should be pointed out that depending on country you can't get a lower rate of interest, better tax treatment and leverage than you can with your mortgage. Lastly, we're in one off the longest bull runs on the stock market in history and the last 2 years in particular have been insane. This should not be treated as representative.
  - irq11 8y ago
    I’ll tell you two cities the OP could be in right now: SF and NYC. Lived in both, tried to buy in both, gave up both times because the numbers were silly. Neither one makes much sense from a rent/buy perspective. New York is closer, but most properties are still cash-flow negative relative to rent. You have to assume unrealistic rates of appreciation and/or indefinite tax deductions for the numbers to work (and folks are finding out, right now, that those deductions can go away!) People have been treating homes like investment vehicles for a while now, and there are actually very few big cities in the US where rental rates can cover costs of mortgage, taxes and insurance. Renting literally puts cash in your pocket.
cheez 8y ago
These are all true, and as a society should we not support (1) and (2) more than the others? Personally, I invest in REITs, the money I would invest in real estate. These investments cover my rent and more.
- seanp2k2 8y ago
  shh don't tell everyone about REITs and how you can get into and out of the upsides of housing markets without actually maintaining properties and dealing with tenants!
  - cheez 8y ago
    The thing that really convinced me was when you look at the appreciation of real estate, overall it appreciates by X, but a particular area is not guaranteed to do so. The intention is to have REITs finance my retirement home in the country.
sys_64738 8y ago
More importantly, a house is mine (and the bank’s) and I decide all things about it so it’s my home. Renting is always temporary and generally doesn’t work in old age when homeowners are typically mortgage free.
- macawfish 8y ago
  For many people, it's mostly the bank's though, eh? ;)
  - snowwrestler 8y ago
    I think you're joking, but just in case you're not (and for those reading): when you use a mortgage to buy a house, you own the house completely, and the bank owns it not at all. It's your property. That's why you can use it to secure the loan of the mortgage. If you fail to satisfy your mortgage agreement with the bank, then yes, they can take the house from you in a foreclosure. But until then, it's yours, not theirs.
    - seanp2k2 8y ago
      The point that was attempting to be made, which I agree with, was along the lines of the bank having the power to take it back means that they ultimately have control, regardless of the technical legal terms that indicate that the homeowner owns, well, the home. You REALLY own it after the mortgage is paid off and the bank has no interest in it. Same thing with vehicles. They're leinholders, which the first Google result defined as: A lienholder is a lender that legally owns your property (a car, for example) until you pay it off in full. The lender — which can be a bank, financial institution or private party — holds a lien, or legal claim, on the property because they lent you the money to purchase it. https://www.allstate.com/tr/car-insurance/learning-about-liens.aspx https://www.allstate.com/tr/car-insurance/learning-about-lie... Edit: legally they DO differ, but they're the same in that they allow the lender to take back the property in the event of non-payment. Therefore, even though you might legally technically own a property with a mortgage, the bank still has the ability to take it away from you, so do you REALLY control it? https://www.quora.com/How-do-a-lien-and-a-mortgage-differ https://www.quora.com/How-do-a-lien-and-a-mortgage-differ
conistonwater 8y ago
> Owning your own home serves several purposes: ... 4. As a hedge against market forces I think the logic of this point is dead wrong: every housing bubble (and its bursting) is a counterexample.
- anextomp 8y ago
  Buying hedges against the market when you intend to live in the house. When the market goes up, your rent will increase, but the price to stay in the house you own is still zero.
  - BigJono 8y ago
    I think the point is that it does the complete opposite if the market goes the other way, assuming you're taking out a loan to buy. If you have a net worth of $100k and take out a loan for a $500k property, as little as a 20% drop can wipe out your life's work, assuming the property market doesn't go back up. I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black?
    - twblalock 8y ago
      > I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black? The difference is that you still own a home, even if it is worth less than what you paid for it. If you bet all your money on roulette and lose it, you have nothing left. 30 years from now, when you pay off your mortgage, your cost of living will be very low -- this is very good for retirement. People who are still renting 30 years from now will probably be paying monthly rental bills higher than your mortgage payments, due to inflation if nothing else. The difference over that time might exceed your hypothetical $100k.
      - dominotw 8y ago
        > this is very good for retirement. i can buy a house in detroit for $400 and pay no rent . is it a good retirement?
simonebrunozzi 8y ago
I think I know what you're trying to do and I think it's well intentioned. However, I can already point out to mistakes in your own points. Security and stability: in what sense? Owning a house explicitly means that you can't be evicted by the landlord, but there isn't any other significant feature that derives from owning the house. Hedge against inflation or market forces (or "short position in real estate"): you can simply buy into a REIT, and enjoy similar benefits (actually, a much more diversified risk, which in most cases would be positive) compared to owning a single house.
- titanomachy 8y ago
  "can't be evicted by the landlord" is a pretty good benefit. Also, if rents go up a lot in your area, renters end up spending more on housing. When you buy, your cost of housing becomes more predictable in the long-term. Interest rates can change as well but are less volatile than rents, and become less of a concern as you pay off more of your principal.
  - haditab 8y ago
    Although that may be true, if the house is paid for by a loan, you have the additional insecurity that you need to pay $XXXX per month for the next 15-30 years. If something happens and you can't afford it anymore you risk foreclosure.
    - twblalock 8y ago
      If a renter could not make the monthly payments it would result in eviction. Both eviction and foreclosure are bad for your credit, and both mean you need to find somewhere else to live.
    - titanomachy 8y ago
      "If something happens and you can't afford it anymore you risk foreclosure." That's assuming the home value has gone down in addition to losing your job or whatever. If the home has kept its value, you can probably use a line of credit to bridge while you sell the house.
granshaw 8y ago
Another reason is choice. In my area it is difficult to find a decently updated SFH to rent - the ratio of homes for sale vs for rent is 5 to 1 or greater
Alex3917 8y ago
> Given that, you buy your house to remove risk of local changes to your detriment. If you own real estate you're buying into local risk. Real estate generally isn't insured against things like acts of war, so if NYC gets nuked or whatever then you lose all your money. If you're buying real estate right now then you're basically betting against war, automation, AI, climate change, energy price spikes, etc. Even if you don't think that any of those things will happen imminently, do you really want to bet against all of them over the next 30+ years?
- ThrustVectoring 8y ago
  What should be more worrying than all that is the correlation between local housing prices and the local labor market. Take Detroit, for example: it had both plummeting real estate prices and mass layoffs from the big automakers in 2007/2008. And if you're working, you're already exposed to changing conditions in the local labor market. Owning your house exacerbates this in the worst way, just like how the very last company you should own stock in is your employer.
  - Alex3917 8y ago
    Exactly. I like the idea of owning a house, but the idea of not only investing in the real estate market, but investing where I live is insane. If I'm in the NYC labor market then I feel like if I were to own real estate then I should be hedging my risk by owning in Austin or something.
    - ThrustVectoring 8y ago
      Different careers have different amounts of local correlation - I'm planning on waiting on buying a house until I get established as a remote programmer, then buying in a relatively low COL area.
- mikeash 8y ago
  What alternative do you propose that doesn’t involve betting against all of those things? Hoarding gold?
andrepd 8y ago
>several purposes You're thinking of purposes as an investment. The point of the article is precisely that it is not beneficial for it to be seen as an investment, but first and foremost as a practical human necessity.
bumby 8y ago
Maybe I'm not old enough or it's due to the markets I've worked in, but I've literally never seen rent go down in price. During the housing crisis, for example, rent went UP because as people became evicted there was higher demand for rentals. I acknowledge this was a black swan event though.
- fabianhjr 8y ago
  > I acknowledge this was a black swan event though. How is something that happens regularly a black swan event? https://www.wikiwand.com/en/List_of_recessions_in_the_United_States#/Early_recessions_and_crises https://www.wikiwand.com/en/List_of_recessions_in_the_United...
  - bumby 8y ago
    Sorry, I could have been more clear. I didn't mean that a recession is a black swan event, but that the specific nature of the housing crisis is considered a black swan. More concretely, a recession is more predictable and to be expected while the failure of the mortgage-backed security market (and the broader consequences) less so.
- icelancer 8y ago
  Rent has gone down relative to ownership pricing in Seattle, especially lately. Maybe not in an absolute sense, but you have to live somewhere...
- astura 8y ago
  FWIW, I've both seen rent stagnant and I've seen it go down. A lot depends on your local markets.
- tmh79 8y ago
  I think a bigger concern with investing in housing WRT alternatives is this: Rents don't usually go down, but they often stagnate ESPECIALLY in units owned mom n pop landlords. If your rent doesn't change for 5 years, but inflation is 2%, at the end of the period, your rent has effectively declined by about 10% in real terms. Additionally, you have your 20% down that would be paid for a house, but instead you invest in the stock market that returns 6% annually, at the end of 5 years, you have increased your assets by 33% If you bought a home, and the home price did not increase for 5 years and you pay the normal 20% down mortgage, %6 closing costs, and 1.5% annual property tax, you're looking at some significant loss of net worth when compared to the rent alternative.
jseliger 8y ago
Given that, you buy your house to remove risk of local changes to your detriment. Housing raises your risk; it doesn't lower it. 1. Over time, renting and owning cost similar amounts: https://affordanything.com/is-renting-better-than-buying-should-i-rent-or-buy/ https://affordanything.com/is-renting-better-than-buying-sho.... 2. You run great risk in terms of the market: look at anyone who bought in Detroit, pretty much ever. Buying in West Coast housing markets may look hot right now, but the minute a big earthquake hits one, a lot of people may be financially wiped out. A serious recession could do the same. Miami? It may be literally underwater. https://www.newyorker.com/news/news-desk/miami-faces-an-underwater-future https://www.newyorker.com/news/news-desk/miami-faces-an-unde... 3. The neighborhood may change for the worse. 4. Given birth rates, you should be worried about deflation, not inflation.
- snowwrestler 8y ago
  If renting and owning cost similar amounts over time, then how does anyone afford to own rental properties?
  - astura 8y ago
    The article GP posted addressed this (among a lot of other things... It's worth a read.) >“Rachel’s landlord needs to make money. How could he/she possibly earn a profit under this scenario?” >Here are many ways Rachel’s landlord could benefit: >The landlord could purchase the property at a steep discount, such as through a foreclosure auction, short sale, estate sale, or by “driving for dollars” (making direct contact with the owners of distressed property.) This allows him/her to purchase the property significantly below market value. >The landlord could be holding the property for the sake of inflation-protected wealth preservation, rather than as a cash flow investment. (Don’t assume all landlords share the goal of cash flow. Some simply want to diversify their assets.) >The landlord could be making a speculative play on potential appreciation. (I don’t recommend this technique, but many landlords do this.) >The landlord could have inherited the property. The landlord could have purchased the property decades ago, paid off the mortgage, and now enjoys the cash flow. They don’t want to sell/trade into a different property due to the hassle involved, so they let this property ride. The other secret is, many people, at the end of the day, simply make very little to no money as landlords. My parents were landlords for many years and broke even for all those years thinking that the profit was going to be right around the corner. Never came. The steps to being successful at real estate is not 1) buy house 2) print money like a lot of people think going in. The other thing is, their calculations take in opportunity costs of having your money in your house vs having it in a better performing asset, which a lot of people simply ignore as "not a cost." It's also highly dependant on your local market which one is cheaper.
wutbrodo 8y ago
> Given that, you buy your house to remove risk of local changes to your detriment. I think the more reasonable complaint is that people don't like thinking about how much of a risk a leveraged, illiquid investment worth >100% of your net worth is, so they have to delude themselves into thinking of housing as unrelated to their finances (incidentally, this is why richer households' net worths recovered so much better from the financial crisis: poorer households' were more likely to have a portfolio tilted ludicrously towards a single, illiquid asset). That is to say, you're definitely correct that getting equity in the housing market has concrete second-order benefits, financial and otherwise, that don't show up in a simple assessment of the asset classes in your portfolio. But the _amount_ of house people choose seems to be systematically skewed upwards, often for no real reason other than financial illiteracy and an aversion to sitting down and thinking through the purchase decision.
- hinkley 8y ago
  Oh man. They say there are two things you can't discuss over beers, but it's three. Politics, religion, and whether their house is an investment. People get pissed at you if you tell them that having all of their money in their house is a bad investment. You'd get less aggression telling your friend you think their wife is cheating on them. If you are in a lower income bracket than what we used to call middle class (before being middle class meant "up to your eyeballs in credit card debt"), it's likely that the majority of your net worth is the equity the house. That's bad. And that doesn't mean "take out a second mortgage and start playing the stock market", that means you have more house than you can afford long term. The people for whom it works as an investment are diversified. If less than 30% of your money is in your house you are probably doing it right. If it's 75% and you also don't have a retirement fund, well you're subsidizing those of us who are both more fortunate and better at math.
teekert 8y ago
Too bad I only own it after paying massive interest for 30 years that is adjusted every 10 years (or unreasonably high). A house costs you a large part of your income for 30 years now and somehow people fail to see this as debt, they just accept it and hope their house grows even faster in value than the others.
- bluGill 8y ago
  After 30 years though... If you are not reasonably able to think 40 years ahead a house is not for you. But renting isn't going to do better either as you need to think 40 years ahead for any investment.
fulafel 8y ago
If the house is expensive (many years worth of income) and a dominant part of your assets, it's a big source of risk, dwarfing any hedge attributes you may pine for. Even in a normal city with diverse economy.
basetop 8y ago
The premise of housing depends entirely on how society or more specifically the government or even more specifically banks/business want it to be. The only true purpose housing serves is shelter. That's it. Any other purpose is artificial. Housing normally is a depreciating asset, like cars. Normally it shouldn't be a hedge against anything, including inflation. It normally shouldn't be an asset of speculation, no more than tulips or bitcoin. And as for security and stability, you can get that from renting ( especially if you live in rent controlled apartments ). The idea of a house as an asset or investment is due to government and business policy decisions. Increasing immigration, limiting development via zoning laws, creating tax incentives, advertising pushing home ownership, laws favoring home owners and landlords over renters, etc. All the premises we believe are premises we are taught. Your premise is just as false as anyone elses. It's entirely artificial. Policy decisions could make renting more favorable than owning. Policy decisions could actually make owning a home near a coal mine more stable than owning a home in silicon valley. Policy decisions could make home prices decline considerably by encouraging overdevelopment so that supply outstrips demand. Fundamentally, as I stated before, the only purpose of owning a house is shelter. Everything else are "false" premises we've been taught.
- lowken10 8y ago
  "Housing normally is a depreciating asset, like cars". I love people like you. You think you are smart but in fact you are a moron.
  - basetop 8y ago
    No need for name calling. With a stable population, no tax incentives, no legal or government incentives, etc, your home is a depreciating asset. If you've owned a home, you realize it is constantly breaking down and you have to constantly fix it. A home isn't a productive asset like a business. It isn't making you any money "productively". The only way homes become appreciating asset is purely through external manipulation. Increasing population, limiting development, tax incentives, legal incentives, etc. This isn't a secret.
    - 8y ago
Spooky23 8y ago
Nothing is ever always a good idea. Real estate is a good investment when the fortunes of the area are on the rise. A $30k house in 1980 is NYC could be worth $3M today. The same house in Cleveland is probably less than $250k. (Mostly inflation) Even in that situation, the Cleveland house may still have been a good value based on having a fixed expense vs dealing with landlords. Likewise, when economic policy shifted to favor the south, lots of owners of swampland in Florida and other places became very rich.
fatnoah 8y ago
I would also add that buying vs. not is also a lifestyle decision. I've owned and rented for > 10 years each and there are pluses and minuses to both. I consider any financial gain one way or the other to be side issues.
SilasX 8y ago
I think your comment is itself missing the point of the article: to the extent that housing is "affordable" in the sense that most necessities are affordable, it would not satisfy your points 3 and 4. That is, if it fell in price over time like food, and so were affordable in that sense, it would fail to be a hedge against inflation or market forces. In fact, if you replace "housing" with "food", you see a natural response to your penultimate paragraph: "You're never out of the market for food. Therefore, it makes sense to buy a forward contract that pays out a [predefined] basket of groceries forever." The error in logic is that you expect food to fall in price, and or your tastes to change, so locking in such a contract would probably be a poor use of money, considering what they would charge. It's less obvious, but the same logic applies to your points 1 and 2 as well. The very reason that a home provides security and stability is because you expect to get priced out of that neighborhood, or difficulty in moving to another nearby, similar home. That's also an artifact of housing being made "a good investment" by policies that make housing more expensive over time! So, yes, housing does provide those things, but only because current policy picks one branch of the affordable/good investment dichotomy.
notSupplied 8y ago
I don't see a huge difference between #1 and #2, so I'll address them together: Home ownership as it stands today does not provide financial security / stability because of the degree of leverage required for most Americans to own a home. It is funny how much basic financial advice boils down to "diversify!" but then we turn around and define the "American Dream" as levering up to buy a single asset that is worth several multiples your networth. Home prices are absolutely not hedged against market forces, and the double whammy of losing your job WHILE owning a house whose value is down significantly from your purchase price is substantially worse than losing your job while merely renting your home. When your house value is underwater, your only play is to stay and wait it out until prices recover. But if you also get laid off and can't make the mortgage, you can't simply move to a smaller / cheaper home like you could had you been renting. You'd be forced to sell at the bottom, or try to rent out at currently depressed rental rates to make up for your mortgage that was locked in from when your house was worth much more. To own a home is to be in a state of constant stress over the value of your home, and the more levered up you are, the worse this gets. This source of stress is why I believe NIMBYism is so prevalent.
- c0vfefe 8y ago
  > To own a home is to be in a state of constant stress over the value of your home, and the more levered up you are, the worse this gets. This source of stress is why I believe NIMBYism is so prevalent. This is a major argument for living in a low cost-of-living area. While in Silicon Valley, house prices are 10-20x a developer salary, in my location in the midwest, houses are 1-2x developer salary.

by cletus 8y ago

jdavis703 8y ago

The idea from the headline should be viewed at a more macro level. A society that views housing as an investment means that we wind up adopting housing policies that lead to people being priced out (i.e. regulatory capture). This eventually means people winding up in subpar situations like moving in with parents, couch surfing or living on the street. Now your argument about housing on a personal financial level is spot-on, at least points #1 and #2. As for the latter points, the first purpose of a house should be to house people. When we view housing as an investment we start making economically rational (but morally questionable) arguments like, "ban new apartments because they'll lower my home's value."

klipt 8y ago
Right, the problem is NIMBYs are allowed to rent-seek by preventing construction around them. And in San Francisco, Prop 13 / rent control insulates many people from any consequences of rising prices, as long as they don't have to move, which means they make decisions that push up prices for everyone else. In the economically ideal case we'd have a fair Land Value Tax to encourage as much building as necessary.
- asdff 8y ago
  So what might happen if California enacted statewide rent control? Capping yearly rent increases at inflation + 3%? There are places where properties have doubled in value in less than a dozen years while wages remain stagnant, leading to rents surging and more %income going to housing. Many low income renters are paying 50% or more of their income on rent, that's not sustainable for the wider economy that relies on low skill labor to function, and the solution is not to have people commute 4h every day to clean an office, teach a class, or fight a fire. The housing market moves so much faster than wages ever will, and it seems having only some units rent controlled exacerbates the problem for units that aren't, so why not make every unit in the state a rent controlled unit? The landlords are already insulated from the whiplash of the housing market from statewide property tax control in the form of prop 13, why not let renters enjoy that isolation as well?
  - jdavis703 8y ago
    There are several rent control bills in California right now. AB 36 will allow cities to enact rent control on older buildings. AB 36 would not apply to new construction, only to buildings older than 10 years. This should help to prevent supply crunches, or at least not make them worse. AB 1482 would set a state-wide cap on rent increases, for example inflation + 10%. The idea is to stop massive rent increases that lead to evictions. The exact number hasn’t been determined yet, the bill sponsors are trying to figure out a good number that protects tenants and gives landlords a legally guaranteed return on investment. These bills will face a lot of corporate opposition. It’s important that our electeds here from renters, homeowners and “mom & pop” landlords as they consider these bills.
    - bobthepanda 8y ago
      AB 36 sounds like it would encourage a lot more turnover on older buildings, incentivizing the redevelopment of what is currently affordable housing. New York has similar regulations, and what you end up having happen is that landlords will either redevelop or renovate to whatever the threshold is to get out of the affordable housing requirement.
seem_2211 8y ago
Yah both of these points are valid. I had a good discussion with one of my dad's friends recently (who is a realtor), and mentioned that one of the biggest costs we never talk about is the cost of compliance. Basically, his argument is that the cost of existing housing is driven by the cost of building new housing, of which places like San Francisco have been very effective at limiting! But as well as that, what are the development fees for example? When politicians virtue signal about what percentage of a housing development will be below market rate for example, you have to remember that this sort of thing will be factored into the price you pay. Or the endless studies that city governments (again looking square at you San Francisco) commission. The buyer and the renter pay for these. America actually has relatively cheap housing across the vast majority of the country, so it's not as if the buildings themselves are the major factor in jacking up the prices.
- xKingfisher 8y ago
  There was a fantastic post on this subject by an architect in the Los Angeles subreddit last year. The general gist is that building requirements (parking in particular) make anything other than luxury condos financially infeasible. https://www.reddit.com/r/LosAngeles/comments/6lvwh4/im_an_architect_in_la_specializing_in_multifamily/ https://www.reddit.com/r/LosAngeles/comments/6lvwh4/im_an_ar...
snowwrestler 8y ago
> A society that views housing as an investment means that we wind up adopting housing policies that lead to people being priced out (i.e. regulatory capture). No. Housing that appreciates at exactly the rate of inflation can still be a good investment and a great tool for building wealth.
- bobthepanda 8y ago
  Homeowners aren't necessarily satisfied with that though, and they have voting power. Prop 13 is basically a voter-approved way of guaranteeing the upside of stratospheric rises in property value without reaping any of the downside (increased tax reflecting said skyrocketing property value).
  - snowwrestler 8y ago
    I agree with you. I think articles like this one contribute to the problem by perpetuating a false sense of what housing prices should do to be a "good investment."
  - aey 8y ago
    Prices go up because demand is higher than supply. No other reason. If cities doubled the number of houses built any year the average price went up by 5% or more, this wouldn’t be a problem. The tax rate could even be negative.
    - alasdair_ 8y ago
      >Prices go up because demand is higher than supply. No other reason. If the government mandates that the price of something is X, and X is higher than the price is now, prices go up. Also, remember than nominal price and economic price are distinct. “Price” needs to include all tax subsidies and other incentives/ dicincentives.
      - aey 8y ago
        No they don’t. See the USSR, real prices were completely removed from what the government set. If SF set the price of a house to 100k, people would just bribe each other the difference.
pascalxus 8y ago
Yup. And even if you view housing as an investment and even if you create policies in favor of that, in the long run, you're not going to have greater gains anyways because the growth is not sustainable. Long run, housing always has to revert to a mean increase equivalent to incomes/inflation, even if in the short term you might have a huge run up. In the short term there can be a huge run up causing great pain, but after that it'll come back to it's income/inflation rate increase.
hinkley 8y ago
It also encourages people to buy the biggest house they can afford instead of the smallest one they can be comfortable in. Very few people buy the nicest car or the best TV, because we know those don't have a return. But being bad at math, we can't seem to figure out that we only see 30% of every dollar put into the house (taxes, mortgage, upkeep, improvements) back and we conveniently forget about inflation. Yeah, if your house doubled in value in 25 years that means you kept pace with inflation. You could have done better with CDs.

zenincognito 8y ago

I would argue that security, stability and hedge are all perceived and not actual risks. I don't own but have quite a large position in index funds. I am both financially secure and stable in one of the fastest growing city in the world. My rent hasn't increased in 5 years and I pay half of what I would pay in mortgage for the same property. The property market has put up nearly 20% gain in those years.

itchyouch 8y ago
You sound like you have the rarer, nice landlords with maybe a handful of properties that are being rented out. These are the landlords that as long as you pay their mortgage and provide little fuss, they are happy and not trying to constantly maximize their returns. I'd imagine your scenario would not be the case with a typical management company. While your scenario is attainable for a small amount of people, it would be difficult to see happenning for the masses.
cletus 8y ago
What city? Also, does it have any form of rent control? In terms of investment returns it should be pointed out that depending on country you can't get a lower rate of interest, better tax treatment and leverage than you can with your mortgage. Lastly, we're in one off the longest bull runs on the stock market in history and the last 2 years in particular have been insane. This should not be treated as representative.
- irq11 8y ago
  I’ll tell you two cities the OP could be in right now: SF and NYC. Lived in both, tried to buy in both, gave up both times because the numbers were silly. Neither one makes much sense from a rent/buy perspective. New York is closer, but most properties are still cash-flow negative relative to rent. You have to assume unrealistic rates of appreciation and/or indefinite tax deductions for the numbers to work (and folks are finding out, right now, that those deductions can go away!) People have been treating homes like investment vehicles for a while now, and there are actually very few big cities in the US where rental rates can cover costs of mortgage, taxes and insurance. Renting literally puts cash in your pocket.

cheez 8y ago

These are all true, and as a society should we not support (1) and (2) more than the others? Personally, I invest in REITs, the money I would invest in real estate. These investments cover my rent and more.

seanp2k2 8y ago
shh don't tell everyone about REITs and how you can get into and out of the upsides of housing markets without actually maintaining properties and dealing with tenants!
- cheez 8y ago
  The thing that really convinced me was when you look at the appreciation of real estate, overall it appreciates by X, but a particular area is not guaranteed to do so. The intention is to have REITs finance my retirement home in the country.

sys_64738 8y ago

More importantly, a house is mine (and the bank’s) and I decide all things about it so it’s my home. Renting is always temporary and generally doesn’t work in old age when homeowners are typically mortgage free.

macawfish 8y ago
For many people, it's mostly the bank's though, eh? ;)
- snowwrestler 8y ago
  I think you're joking, but just in case you're not (and for those reading): when you use a mortgage to buy a house, you own the house completely, and the bank owns it not at all. It's your property. That's why you can use it to secure the loan of the mortgage. If you fail to satisfy your mortgage agreement with the bank, then yes, they can take the house from you in a foreclosure. But until then, it's yours, not theirs.
  - seanp2k2 8y ago
    The point that was attempting to be made, which I agree with, was along the lines of the bank having the power to take it back means that they ultimately have control, regardless of the technical legal terms that indicate that the homeowner owns, well, the home. You REALLY own it after the mortgage is paid off and the bank has no interest in it. Same thing with vehicles. They're leinholders, which the first Google result defined as: A lienholder is a lender that legally owns your property (a car, for example) until you pay it off in full. The lender — which can be a bank, financial institution or private party — holds a lien, or legal claim, on the property because they lent you the money to purchase it. https://www.allstate.com/tr/car-insurance/learning-about-liens.aspx https://www.allstate.com/tr/car-insurance/learning-about-lie... Edit: legally they DO differ, but they're the same in that they allow the lender to take back the property in the event of non-payment. Therefore, even though you might legally technically own a property with a mortgage, the bank still has the ability to take it away from you, so do you REALLY control it? https://www.quora.com/How-do-a-lien-and-a-mortgage-differ https://www.quora.com/How-do-a-lien-and-a-mortgage-differ

conistonwater 8y ago

> Owning your own home serves several purposes: ... 4. As a hedge against market forces I think the logic of this point is dead wrong: every housing bubble (and its bursting) is a counterexample.

anextomp 8y ago
Buying hedges against the market when you intend to live in the house. When the market goes up, your rent will increase, but the price to stay in the house you own is still zero.
- BigJono 8y ago
  I think the point is that it does the complete opposite if the market goes the other way, assuming you're taking out a loan to buy. If you have a net worth of $100k and take out a loan for a $500k property, as little as a 20% drop can wipe out your life's work, assuming the property market doesn't go back up. I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black?
  - twblalock 8y ago
    > I don't see how it's any different to me withdrawing my entire bank account, walking down to the casino and putting it all on black? The difference is that you still own a home, even if it is worth less than what you paid for it. If you bet all your money on roulette and lose it, you have nothing left. 30 years from now, when you pay off your mortgage, your cost of living will be very low -- this is very good for retirement. People who are still renting 30 years from now will probably be paying monthly rental bills higher than your mortgage payments, due to inflation if nothing else. The difference over that time might exceed your hypothetical $100k.
    - dominotw 8y ago
      > this is very good for retirement. i can buy a house in detroit for $400 and pay no rent . is it a good retirement?

simonebrunozzi 8y ago

I think I know what you're trying to do and I think it's well intentioned. However, I can already point out to mistakes in your own points. Security and stability: in what sense? Owning a house explicitly means that you can't be evicted by the landlord, but there isn't any other significant feature that derives from owning the house. Hedge against inflation or market forces (or "short position in real estate"): you can simply buy into a REIT, and enjoy similar benefits (actually, a much more diversified risk, which in most cases would be positive) compared to owning a single house.

titanomachy 8y ago
"can't be evicted by the landlord" is a pretty good benefit. Also, if rents go up a lot in your area, renters end up spending more on housing. When you buy, your cost of housing becomes more predictable in the long-term. Interest rates can change as well but are less volatile than rents, and become less of a concern as you pay off more of your principal.
- haditab 8y ago
  Although that may be true, if the house is paid for by a loan, you have the additional insecurity that you need to pay $XXXX per month for the next 15-30 years. If something happens and you can't afford it anymore you risk foreclosure.
  - twblalock 8y ago
    If a renter could not make the monthly payments it would result in eviction. Both eviction and foreclosure are bad for your credit, and both mean you need to find somewhere else to live.
  - titanomachy 8y ago
    "If something happens and you can't afford it anymore you risk foreclosure." That's assuming the home value has gone down in addition to losing your job or whatever. If the home has kept its value, you can probably use a line of credit to bridge while you sell the house.

granshaw 8y ago

Another reason is choice. In my area it is difficult to find a decently updated SFH to rent - the ratio of homes for sale vs for rent is 5 to 1 or greater

Alex3917 8y ago

> Given that, you buy your house to remove risk of local changes to your detriment. If you own real estate you're buying into local risk. Real estate generally isn't insured against things like acts of war, so if NYC gets nuked or whatever then you lose all your money. If you're buying real estate right now then you're basically betting against war, automation, AI, climate change, energy price spikes, etc. Even if you don't think that any of those things will happen imminently, do you really want to bet against all of them over the next 30+ years?

ThrustVectoring 8y ago
What should be more worrying than all that is the correlation between local housing prices and the local labor market. Take Detroit, for example: it had both plummeting real estate prices and mass layoffs from the big automakers in 2007/2008. And if you're working, you're already exposed to changing conditions in the local labor market. Owning your house exacerbates this in the worst way, just like how the very last company you should own stock in is your employer.
- Alex3917 8y ago
  Exactly. I like the idea of owning a house, but the idea of not only investing in the real estate market, but investing where I live is insane. If I'm in the NYC labor market then I feel like if I were to own real estate then I should be hedging my risk by owning in Austin or something.
  - ThrustVectoring 8y ago
    Different careers have different amounts of local correlation - I'm planning on waiting on buying a house until I get established as a remote programmer, then buying in a relatively low COL area.
mikeash 8y ago
What alternative do you propose that doesn’t involve betting against all of those things? Hoarding gold?

andrepd 8y ago

>several purposes You're thinking of purposes as an investment. The point of the article is precisely that it is not beneficial for it to be seen as an investment, but first and foremost as a practical human necessity.

bumby 8y ago

Maybe I'm not old enough or it's due to the markets I've worked in, but I've literally never seen rent go down in price. During the housing crisis, for example, rent went UP because as people became evicted there was higher demand for rentals. I acknowledge this was a black swan event though.

fabianhjr 8y ago
> I acknowledge this was a black swan event though. How is something that happens regularly a black swan event? https://www.wikiwand.com/en/List_of_recessions_in_the_United_States#/Early_recessions_and_crises https://www.wikiwand.com/en/List_of_recessions_in_the_United...
- bumby 8y ago
  Sorry, I could have been more clear. I didn't mean that a recession is a black swan event, but that the specific nature of the housing crisis is considered a black swan. More concretely, a recession is more predictable and to be expected while the failure of the mortgage-backed security market (and the broader consequences) less so.
icelancer 8y ago
Rent has gone down relative to ownership pricing in Seattle, especially lately. Maybe not in an absolute sense, but you have to live somewhere...
astura 8y ago
FWIW, I've both seen rent stagnant and I've seen it go down. A lot depends on your local markets.
tmh79 8y ago
I think a bigger concern with investing in housing WRT alternatives is this: Rents don't usually go down, but they often stagnate ESPECIALLY in units owned mom n pop landlords. If your rent doesn't change for 5 years, but inflation is 2%, at the end of the period, your rent has effectively declined by about 10% in real terms. Additionally, you have your 20% down that would be paid for a house, but instead you invest in the stock market that returns 6% annually, at the end of 5 years, you have increased your assets by 33% If you bought a home, and the home price did not increase for 5 years and you pay the normal 20% down mortgage, %6 closing costs, and 1.5% annual property tax, you're looking at some significant loss of net worth when compared to the rent alternative.

jseliger 8y ago

Given that, you buy your house to remove risk of local changes to your detriment. Housing raises your risk; it doesn't lower it. 1. Over time, renting and owning cost similar amounts: https://affordanything.com/is-renting-better-than-buying-should-i-rent-or-buy/ https://affordanything.com/is-renting-better-than-buying-sho.... 2. You run great risk in terms of the market: look at anyone who bought in Detroit, pretty much ever. Buying in West Coast housing markets may look hot right now, but the minute a big earthquake hits one, a lot of people may be financially wiped out. A serious recession could do the same. Miami? It may be literally underwater. https://www.newyorker.com/news/news-desk/miami-faces-an-underwater-future https://www.newyorker.com/news/news-desk/miami-faces-an-unde... 3. The neighborhood may change for the worse. 4. Given birth rates, you should be worried about deflation, not inflation.

snowwrestler 8y ago
If renting and owning cost similar amounts over time, then how does anyone afford to own rental properties?
- astura 8y ago
  The article GP posted addressed this (among a lot of other things... It's worth a read.) >“Rachel’s landlord needs to make money. How could he/she possibly earn a profit under this scenario?” >Here are many ways Rachel’s landlord could benefit: >The landlord could purchase the property at a steep discount, such as through a foreclosure auction, short sale, estate sale, or by “driving for dollars” (making direct contact with the owners of distressed property.) This allows him/her to purchase the property significantly below market value. >The landlord could be holding the property for the sake of inflation-protected wealth preservation, rather than as a cash flow investment. (Don’t assume all landlords share the goal of cash flow. Some simply want to diversify their assets.) >The landlord could be making a speculative play on potential appreciation. (I don’t recommend this technique, but many landlords do this.) >The landlord could have inherited the property. The landlord could have purchased the property decades ago, paid off the mortgage, and now enjoys the cash flow. They don’t want to sell/trade into a different property due to the hassle involved, so they let this property ride. The other secret is, many people, at the end of the day, simply make very little to no money as landlords. My parents were landlords for many years and broke even for all those years thinking that the profit was going to be right around the corner. Never came. The steps to being successful at real estate is not 1) buy house 2) print money like a lot of people think going in. The other thing is, their calculations take in opportunity costs of having your money in your house vs having it in a better performing asset, which a lot of people simply ignore as "not a cost." It's also highly dependant on your local market which one is cheaper.

wutbrodo 8y ago

> Given that, you buy your house to remove risk of local changes to your detriment. I think the more reasonable complaint is that people don't like thinking about how much of a risk a leveraged, illiquid investment worth >100% of your net worth is, so they have to delude themselves into thinking of housing as unrelated to their finances (incidentally, this is why richer households' net worths recovered so much better from the financial crisis: poorer households' were more likely to have a portfolio tilted ludicrously towards a single, illiquid asset). That is to say, you're definitely correct that getting equity in the housing market has concrete second-order benefits, financial and otherwise, that don't show up in a simple assessment of the asset classes in your portfolio. But the _amount_ of house people choose seems to be systematically skewed upwards, often for no real reason other than financial illiteracy and an aversion to sitting down and thinking through the purchase decision.

hinkley 8y ago
Oh man. They say there are two things you can't discuss over beers, but it's three. Politics, religion, and whether their house is an investment. People get pissed at you if you tell them that having all of their money in their house is a bad investment. You'd get less aggression telling your friend you think their wife is cheating on them. If you are in a lower income bracket than what we used to call middle class (before being middle class meant "up to your eyeballs in credit card debt"), it's likely that the majority of your net worth is the equity the house. That's bad. And that doesn't mean "take out a second mortgage and start playing the stock market", that means you have more house than you can afford long term. The people for whom it works as an investment are diversified. If less than 30% of your money is in your house you are probably doing it right. If it's 75% and you also don't have a retirement fund, well you're subsidizing those of us who are both more fortunate and better at math.

teekert 8y ago

Too bad I only own it after paying massive interest for 30 years that is adjusted every 10 years (or unreasonably high). A house costs you a large part of your income for 30 years now and somehow people fail to see this as debt, they just accept it and hope their house grows even faster in value than the others.

bluGill 8y ago
After 30 years though... If you are not reasonably able to think 40 years ahead a house is not for you. But renting isn't going to do better either as you need to think 40 years ahead for any investment.

fulafel 8y ago

If the house is expensive (many years worth of income) and a dominant part of your assets, it's a big source of risk, dwarfing any hedge attributes you may pine for. Even in a normal city with diverse economy.

basetop 8y ago

The premise of housing depends entirely on how society or more specifically the government or even more specifically banks/business want it to be. The only true purpose housing serves is shelter. That's it. Any other purpose is artificial. Housing normally is a depreciating asset, like cars. Normally it shouldn't be a hedge against anything, including inflation. It normally shouldn't be an asset of speculation, no more than tulips or bitcoin. And as for security and stability, you can get that from renting ( especially if you live in rent controlled apartments ). The idea of a house as an asset or investment is due to government and business policy decisions. Increasing immigration, limiting development via zoning laws, creating tax incentives, advertising pushing home ownership, laws favoring home owners and landlords over renters, etc. All the premises we believe are premises we are taught. Your premise is just as false as anyone elses. It's entirely artificial. Policy decisions could make renting more favorable than owning. Policy decisions could actually make owning a home near a coal mine more stable than owning a home in silicon valley. Policy decisions could make home prices decline considerably by encouraging overdevelopment so that supply outstrips demand. Fundamentally, as I stated before, the only purpose of owning a house is shelter. Everything else are "false" premises we've been taught.

lowken10 8y ago
"Housing normally is a depreciating asset, like cars". I love people like you. You think you are smart but in fact you are a moron.
- basetop 8y ago
  No need for name calling. With a stable population, no tax incentives, no legal or government incentives, etc, your home is a depreciating asset. If you've owned a home, you realize it is constantly breaking down and you have to constantly fix it. A home isn't a productive asset like a business. It isn't making you any money "productively". The only way homes become appreciating asset is purely through external manipulation. Increasing population, limiting development, tax incentives, legal incentives, etc. This isn't a secret.
  - 8y ago

Spooky23 8y ago

Nothing is ever always a good idea. Real estate is a good investment when the fortunes of the area are on the rise. A $30k house in 1980 is NYC could be worth $3M today. The same house in Cleveland is probably less than $250k. (Mostly inflation) Even in that situation, the Cleveland house may still have been a good value based on having a fixed expense vs dealing with landlords. Likewise, when economic policy shifted to favor the south, lots of owners of swampland in Florida and other places became very rich.

fatnoah 8y ago

I would also add that buying vs. not is also a lifestyle decision. I've owned and rented for > 10 years each and there are pluses and minuses to both. I consider any financial gain one way or the other to be side issues.

SilasX 8y ago

I think your comment is itself missing the point of the article: to the extent that housing is "affordable" in the sense that most necessities are affordable, it would not satisfy your points 3 and 4. That is, if it fell in price over time like food, and so were affordable in that sense, it would fail to be a hedge against inflation or market forces. In fact, if you replace "housing" with "food", you see a natural response to your penultimate paragraph: "You're never out of the market for food. Therefore, it makes sense to buy a forward contract that pays out a [predefined] basket of groceries forever." The error in logic is that you expect food to fall in price, and or your tastes to change, so locking in such a contract would probably be a poor use of money, considering what they would charge. It's less obvious, but the same logic applies to your points 1 and 2 as well. The very reason that a home provides security and stability is because you expect to get priced out of that neighborhood, or difficulty in moving to another nearby, similar home. That's also an artifact of housing being made "a good investment" by policies that make housing more expensive over time! So, yes, housing does provide those things, but only because current policy picks one branch of the affordable/good investment dichotomy.

notSupplied 8y ago

I don't see a huge difference between #1 and #2, so I'll address them together: Home ownership as it stands today does not provide financial security / stability because of the degree of leverage required for most Americans to own a home. It is funny how much basic financial advice boils down to "diversify!" but then we turn around and define the "American Dream" as levering up to buy a single asset that is worth several multiples your networth. Home prices are absolutely not hedged against market forces, and the double whammy of losing your job WHILE owning a house whose value is down significantly from your purchase price is substantially worse than losing your job while merely renting your home. When your house value is underwater, your only play is to stay and wait it out until prices recover. But if you also get laid off and can't make the mortgage, you can't simply move to a smaller / cheaper home like you could had you been renting. You'd be forced to sell at the bottom, or try to rent out at currently depressed rental rates to make up for your mortgage that was locked in from when your house was worth much more. To own a home is to be in a state of constant stress over the value of your home, and the more levered up you are, the worse this gets. This source of stress is why I believe NIMBYism is so prevalent.

c0vfefe 8y ago
> To own a home is to be in a state of constant stress over the value of your home, and the more levered up you are, the worse this gets. This source of stress is why I believe NIMBYism is so prevalent. This is a major argument for living in a low cost-of-living area. While in Silicon Valley, house prices are 10-20x a developer salary, in my location in the midwest, houses are 1-2x developer salary.