5 ms·

Real Estate Won’t Go Up Forever

3 points by TimPC 4y ago

elmerfud 4y ago
I think there's a lot of people who view homeownership as an investment strategy but that has never been the case it is a lifestyle. Investing in real estate is an investment strategy but that's separate from homeownership. Even moderate market investments have risen at a pace that meets or exceeds the growth that we've seen in home prices. The one benefit that homeownership does provide as far as an investing strategy is that it inadvertently locks you into this investment in a way that other investments don't. If you were to measure renting versus owning and taking the difference in cost and applying it to investments renting is a much more attractive option over the long term. There is a definite sacrifice in lifestyle because owning a home provides a big lifestyle benefit that a lot of people want. The real problem with renting versus owning as far as investment goes people in general especially the lower middle class and below who are sold on this idea of home ownership as an investment are poor at investing over the long term. So when they rent they tend to spend most of the rest of their disposable income instead of putting a portion of it away in a long-term investment. The ownership of the house automatically causes them to have a long-term investment that they can realize in 10 or 20 years. So while I agree with the author that real estate will not continue to rise at the pace that it's risen in the past percent gain is not really the measure of an investment or a capital asset like this. What I do believe will continue to take place with real estate is that as an inflation in adjusted investment vehicle it will continue to maintain pace. So that does mean that home ownership real estate will continue to maintain pace and grow as an investment compared to inflation. And over the long term homeownership as an investment vehicle does not tend to outpace inflation except in very limited jumps. The key to any real investment is finding one that will outpace inflation by a decent margin that is the only way to see growth. That is possible to do with investment in real estate but very difficult to do with home ownership.
- TimPC 4y ago
  How is investment in real estate going to outpace inflation when it comes up against the income barrier? I’d argue we are going to see that it won’t. The future isn’t like the past and when real estate gets too expensive for even the wealthier members of the working class to afford we are going to see stagnation or extremely limited growth. A large portion of the real estate market is homeownership and having that slice of the market disappear would have extreme downward pressure on prices.
  - elmerfud 4y ago
    Because you're confusing home ownership and real estate investing. Real estate investment is investing in rental properties of some form or fashion and this can be for business rentals it can be personal rentals any number of things. Because that form of investment does not rely on the buying and selling of the property to realize the gain in the investment.
    - TimPC 4y ago
      You still have a problem with people affording rent if you are buying rental properties at 128x average income. Rent is going to be an inconsequential portion of the interest on the mortgage if someone making average income or even 3x average income has to afford it.
- warrenm 4y ago
  Home ownership is not an investment - because you "have" to have a place to live, it's just a cost of living somewhere It might happen to grow in value during your stay, but the home you live in is not an investment: it's just a house
bediger4000 4y ago
It almost has to, at least politically. There's a whole lot of American households whose sole investment is their house. If their house value goes down, there goes kid's college, vacations, easier retirements. Any President is going to keep this from happening at almost any cost. The political party that lets the majority of Americans' mortgage go underwater will be punished for a decade. The solution here is 70s/early 80s style stagflation - prices go up, but mortgage interest does too, as does price-of-living, until the inflated real estate prices actually match some lesser value.
- TimPC 4y ago
  It has to but it won't. The central point of the essay is that in order to keep going up in the next 50 years like real estate has in the last 50 years, the average house has to reach prices that are 128X an average income by 2072. When you consider supply and demand, the number of people in the market at that price point is too small to reflect a reasonable real estate market. Ergo, prices will either go down or grow far more slowly to reflect a more reasonable price point where more people can participate in the market.
warrenm 4y ago
So many gloss-over statements in this pastebin, it's hard to know where to start critiquing it
warrenm 4y ago
I want to know what "corner of the world" the author lives in where home prices have gone from ~2x annual income to ~16x now Annual median household income in the US was ~$67k in 2020 [0]. It was less than $10k in 1970 [3]. Median home sales prices are hovering around $425k [1] (vs ~$17k 50y ago [4] (adjusted to 2000 dollars it was ~65k [5])) That's less than 7x annual household income, not 16X Add-in average home sizes increasing dramatically in the last 50 years, (1770 sq ft to 2687 sq ft [2]), "basics" like central HVAC now being standard (they weren't not too long ago), and myriad other "table stakes" to a modern house, and it only makes sense housing prices have increased If anything, they've increased far slower than the author claims, because ------------ [0] https://www.census.gov/library/publications/2021/demo/p60-273.html https://www.census.gov/library/publications/2021/demo/p60-27... [1] https://fred.stlouisfed.org/series/MSPUS https://fred.stlouisfed.org/series/MSPUS [2] https://www.rocketmortgage.com/learn/average-square-footage-of-a-house https://www.rocketmortgage.com/learn/average-square-footage-... [3] https://www.census.gov/library/publications/1971/demo/p60-78.html https://www.census.gov/library/publications/1971/demo/p60-78... [4] https://www2.census.gov/programs-surveys/decennial/tables/time-series/coh-values/values-unadj.txt https://www2.census.gov/programs-surveys/decennial/tables/ti... [5] https://www2.census.gov/programs-surveys/decennial/tables/time-series/coh-values/values-adj.txt https://www2.census.gov/programs-surveys/decennial/tables/ti...
- TimPC 4y ago
  The relevant market is Toronto. I agree if you look at markets like the entire US including major rural and suburban areas the story is quite different but I think what you've done is average a bunch of shrinking economies into the rapidly growing ones. I could have been more clear that this was about housing prices in rapidly growing major urban centres rather than housing prices anywhere in the nation.
  - warrenm 4y ago
    That's why I dealt with median and not average :) Sure, there are a minor handful of nutty expensive (and cheap) markets ... but they're just that - a handful
warrenm 4y ago
The extrapolations the author of this pastebin makes reminds me of the charts that plot how fast people ran the mile (or the 100 meter dash) - if you pick the right scale, you can predict when someone'll break the 3 minute mark for the mile And the 2 minute mark (which, btw, is an average of 30mph) But if you keep it up, eventually you can see where someone will run the mile in negative time
harambae 4y ago
The relevant German proverb here is "Bäume wachsen nicht in den Himmel" "Trees don't grow to the sky" The question for many of us is how long you want to wait for the inevitable correction, because it could, worst case, be a decent portion of a human lifespan.

3 points by TimPC 4y ago

I think there's a lot of people who view homeownership as an investment strategy but that has never been the case it is a lifestyle. Investing in real estate is an investment strategy but that's separate from homeownership. Even moderate market investments have risen at a pace that meets or exceeds the growth that we've seen in home prices. The one benefit that homeownership does provide as far as an investing strategy is that it inadvertently locks you into this investment in a way that other investments don't. If you were to measure renting versus owning and taking the difference in cost and applying it to investments renting is a much more attractive option over the long term. There is a definite sacrifice in lifestyle because owning a home provides a big lifestyle benefit that a lot of people want. The real problem with renting versus owning as far as investment goes people in general especially the lower middle class and below who are sold on this idea of home ownership as an investment are poor at investing over the long term. So when they rent they tend to spend most of the rest of their disposable income instead of putting a portion of it away in a long-term investment. The ownership of the house automatically causes them to have a long-term investment that they can realize in 10 or 20 years. So while I agree with the author that real estate will not continue to rise at the pace that it's risen in the past percent gain is not really the measure of an investment or a capital asset like this. What I do believe will continue to take place with real estate is that as an inflation in adjusted investment vehicle it will continue to maintain pace. So that does mean that home ownership real estate will continue to maintain pace and grow as an investment compared to inflation. And over the long term homeownership as an investment vehicle does not tend to outpace inflation except in very limited jumps. The key to any real investment is finding one that will outpace inflation by a decent margin that is the only way to see growth. That is possible to do with investment in real estate but very difficult to do with home ownership.

TimPC 4y ago
How is investment in real estate going to outpace inflation when it comes up against the income barrier? I’d argue we are going to see that it won’t. The future isn’t like the past and when real estate gets too expensive for even the wealthier members of the working class to afford we are going to see stagnation or extremely limited growth. A large portion of the real estate market is homeownership and having that slice of the market disappear would have extreme downward pressure on prices.
- elmerfud 4y ago
  Because you're confusing home ownership and real estate investing. Real estate investment is investing in rental properties of some form or fashion and this can be for business rentals it can be personal rentals any number of things. Because that form of investment does not rely on the buying and selling of the property to realize the gain in the investment.
  - TimPC 4y ago
    You still have a problem with people affording rent if you are buying rental properties at 128x average income. Rent is going to be an inconsequential portion of the interest on the mortgage if someone making average income or even 3x average income has to afford it.
warrenm 4y ago
Home ownership is not an investment - because you "have" to have a place to live, it's just a cost of living somewhere It might happen to grow in value during your stay, but the home you live in is not an investment: it's just a house

bediger4000 4y ago

It almost has to, at least politically. There's a whole lot of American households whose sole investment is their house. If their house value goes down, there goes kid's college, vacations, easier retirements. Any President is going to keep this from happening at almost any cost. The political party that lets the majority of Americans' mortgage go underwater will be punished for a decade. The solution here is 70s/early 80s style stagflation - prices go up, but mortgage interest does too, as does price-of-living, until the inflated real estate prices actually match some lesser value.

TimPC 4y ago
It has to but it won't. The central point of the essay is that in order to keep going up in the next 50 years like real estate has in the last 50 years, the average house has to reach prices that are 128X an average income by 2072. When you consider supply and demand, the number of people in the market at that price point is too small to reflect a reasonable real estate market. Ergo, prices will either go down or grow far more slowly to reflect a more reasonable price point where more people can participate in the market.

warrenm 4y ago

So many gloss-over statements in this pastebin, it's hard to know where to start critiquing it

warrenm 4y ago

I want to know what "corner of the world" the author lives in where home prices have gone from ~2x annual income to ~16x now Annual median household income in the US was ~$67k in 2020 [0]. It was less than $10k in 1970 [3]. Median home sales prices are hovering around $425k [1] (vs ~$17k 50y ago [4] (adjusted to 2000 dollars it was ~65k [5])) That's less than 7x annual household income, not 16X Add-in average home sizes increasing dramatically in the last 50 years, (1770 sq ft to 2687 sq ft [2]), "basics" like central HVAC now being standard (they weren't not too long ago), and myriad other "table stakes" to a modern house, and it only makes sense housing prices have increased If anything, they've increased far slower than the author claims, because ------------ [0] https://www.census.gov/library/publications/2021/demo/p60-273.html https://www.census.gov/library/publications/2021/demo/p60-27... [1] https://fred.stlouisfed.org/series/MSPUS https://fred.stlouisfed.org/series/MSPUS [2] https://www.rocketmortgage.com/learn/average-square-footage-of-a-house https://www.rocketmortgage.com/learn/average-square-footage-... [3] https://www.census.gov/library/publications/1971/demo/p60-78.html https://www.census.gov/library/publications/1971/demo/p60-78... [4] https://www2.census.gov/programs-surveys/decennial/tables/time-series/coh-values/values-unadj.txt https://www2.census.gov/programs-surveys/decennial/tables/ti... [5] https://www2.census.gov/programs-surveys/decennial/tables/time-series/coh-values/values-adj.txt https://www2.census.gov/programs-surveys/decennial/tables/ti...

TimPC 4y ago
The relevant market is Toronto. I agree if you look at markets like the entire US including major rural and suburban areas the story is quite different but I think what you've done is average a bunch of shrinking economies into the rapidly growing ones. I could have been more clear that this was about housing prices in rapidly growing major urban centres rather than housing prices anywhere in the nation.
- warrenm 4y ago
  That's why I dealt with median and not average :) Sure, there are a minor handful of nutty expensive (and cheap) markets ... but they're just that - a handful

warrenm 4y ago

The extrapolations the author of this pastebin makes reminds me of the charts that plot how fast people ran the mile (or the 100 meter dash) - if you pick the right scale, you can predict when someone'll break the 3 minute mark for the mile And the 2 minute mark (which, btw, is an average of 30mph) But if you keep it up, eventually you can see where someone will run the mile in negative time

harambae 4y ago

The relevant German proverb here is "Bäume wachsen nicht in den Himmel" "Trees don't grow to the sky" The question for many of us is how long you want to wait for the inevitable correction, because it could, worst case, be a decent portion of a human lifespan.