3 ms·

Beyond inflation numbers that may interest economists, the extreme cost of housing worldwide means that people who might seem to have identical lives actually h

Beyond inflation numbers that may interest economists, the extreme cost of housing worldwide means that people who might seem to have identical lives actually have completely different lives. For example three men working the same job at the same company, having the same salary: Man 1 has his home paid off, he owns it because of an inheritance that came his way. He can have a great quality of life from his salary and earns an extra yearly salary each year from his real estate increasing in value. He doesn't need to sell to reap that money, he can borrow against his increased home value and use a small part of his salary to pay off the loan. Man 2 is paying off a mortgage on his home. His salary is enough to do it and depending on what stage he is at, he starts getting some money to spare. He earns an extra yearly salary each year from his real estate increasing in value. If things become desperate, he can refinance for some extra cash or even sell. Man 3 is loosing most of his salary to rent to pay somebody else's mortgage. He is desperately trying to save money to get into some real estate of his own, but he's getting more broke for each year working. If he can ever get onto the real estate ladder, he will have hefty payments for forty or fifty years. He still needs to get his own real estate, because the yearly salary from owning real estate is higher than the yearly salary from working. To reach the living standard of Man 1, Man 3 would need a salary that is 3-5 times higher than what the three of them are earning. Now how do you set wages as a business owner? You can employ the people who get by fine with a low salary because they own their homes and complain that young people don't want to work. You can hire cheap foreign labour that accept living in dismal conditions to be able to send some quids back home. Are they going to consume your product? If I would predict the future, I expect to see an enormous mobility of labour worldwide. Not only the cheapest labour as has been, but all labour including the highest qualified labour and everything in between. If you don't have real estate, you have no future no matter where you live and no matter how skilled you are at your vocation. And that's true right now, except for in few countries. You have to go somewhere where you can make a future ASAP.

itake 3y ago
At least since the Seattle housing market man, number two is paying way more per month than man number three. There is literally a 4x difference between a man that bought 4 years ago and one that bought 1 year ago.
- carlosjobim 3y ago
  Man 2 can sell his real estate at any time he pleases and become a renter if he likes.
  - itake 3y ago
    Yes, but Man 2 has a 3-6% transaction cost on an already upside down property. Why do you think Trump doesn't want to sell his properties and become a renter?
    - carlosjobim 3y ago
      Very few people with a mortgage are upside down. But yes, if you're upside-down that is of course the worst situation. But they are so few as to be marginal.
      - itake 3y ago
        Most rent vs buy calculators project a break even rate is ~9 years, to never, after your home purchase. Meaning if you sell before the 9 years mark, you will have a loss. https://www.nerdwallet.com/mortgages/rent-vs-buy-calculator https://www.nerdwallet.com/mortgages/rent-vs-buy-calculator
        carlosjobim 3y ago
        Is that calculator simply comparing the monthly payments between paying rent and paying a mortgage? In that case, that is completely misleading. Rent can only be compared with the interest part of a mortgage payment, since rent is 100% interest and 0% amortization. If you can rent for less than the interest part of your mortgage payment, then it is a better deal to rent. Or if you expect real estate to come down in value.
        itake 3y ago
        If you clicked the link, you would see it accounts for inflation, appreciation, and opportunity cost of your investment compared to other investment alternatives. > if you can rent for less than the interest than the interest, This is completely false. If I owned my home, my home value could fall when the stock market goes up (see 2022-2023). In this situation, it would have been better for my money to be invested in SNP500 instead of my home. Before you claim 2022-2023 and 2008-2009 are exceptions, not the rule. Houses typically appreciate 2-3% where as stock appreciates 8-12%.
tzs 3y ago
> He can have a great quality of life from his salary and earns an extra yearly salary each year from his real estate increasing in value. He doesn't need to sell to reap that money, he can borrow against his increased home value and use a small part of his salary to pay off the loan. I don't see how that would work. Borrowed money has to be paid back plus interest. My house is currently worth about twice what I paid for it ~17 years ago, and I do have a home equity line of credit so I can borrow against the increased value at will, but the current interest rate on that is over 9%. The only effect I and most of my neighbors see from rising home values unless we sell our homes is that our property taxes rise by about the same factor, which is vary annoying to those whose salaries have not also risen by a similar factor.
- carlosjobim 3y ago
  Of course you have to pay it back with interest, what do you expect? But you can use that increased real estate value if you need to, without having to sell your home. And usually with the lowest interest rates available to any individual person. A renter can not use any of the rent he or she has paid as security for any loan.
  - tzs 3y ago
    You originally described it as "an extra yearly salary each year from his real estate increasing in value" though, which I think is greatly overstating its utility. It's really more useful for those occasional things that are too big for the liquid assets you have available right now, but that aren't so big that it will take you too long to pay off. For example you need a new HVAC system, but to pay for it would have to take some money from an IRA. You are close enough to the next tax bracket that half of that IRA withdrawal will be taxed at that higher marginal rate. It may then be cheaper to only take 1/2 of what you need from the IRA and the other half from your home equity line of credit. Then at the start of next year make another withdrawal from the IRA to pay back the home equity loan. That way none of the IRA withdrawals end up in a higher bracket. A similar scenario would be if you are getting ACA tax credits and taking all the money at once from your IRA would push your income over the maximum income for ACA tax credit eligibility. For most of us I think such situations will be rare enough that what we can gain by doing them won't be as much as what we lose from the increased property taxes from our home values going up.
nradov 3y ago
Those are not realistic scenarios. While many people do receive some sort of housing assistance from parents, the number who inherit a home with no mortgage is tiny. And in the rare cases that it does happen, the heirs tend to be close to retirement age themselves. Likewise, almost no one has unrealized annual capital gains on their primary residence which are anywhere near their regular income. US median household income is $75K and median single family house price is $387K. Virtually no one is seeing 19% annual price appreciation on their home.
- carlosjobim 3y ago
  So what happens is that people are paying on their mortgages and then they have a windfall from the inheritance and can get out of debt if they want to, or not if they think their current mortgage is a good deal. In the past decades, what I've seen is that a debt-free house is normal inheritance when it comes to real estate. But maybe not for the future. Yes, as you say the heirs are usually not young themselves, but maybe with 10-15 years left of working before retirement. And as retirement ages get pushed up for today's young to 70 years and further, this means these people are staying at the workplace and will be staying there. > Likewise, almost no one has unrealized annual capital gains on their primary residence which are anywhere near their regular income. Then we live in different worlds. With people and places I know it is normal to have a higher return in real estate appreciation than from labour. Mainly because taxes take away most of your salary, while real estate appreciation is tax free. People have been talking about "real estate careers" for a long time now. Meaning that they're borrowing the maximum amount possible and getting more and more expensive homes as their main career, while their day job is just a way to make minimum mortgage payments and qualify for more expensive mortgages.
  - nradov 3y ago
    Yes, we live in different worlds. To be more specific, you live in a fantasy world. The circumstances you describe are so rare as to be irrelevant to any macroeconomic analysis. It is possible to make a fortune through leveraged real estate investments on multiple properties. But doing that with just a single primary residence is virtually impossible regardless of tax effects or financial engineering.

itake 3y ago

At least since the Seattle housing market man, number two is paying way more per month than man number three. There is literally a 4x difference between a man that bought 4 years ago and one that bought 1 year ago.

carlosjobim 3y ago
Man 2 can sell his real estate at any time he pleases and become a renter if he likes.
- itake 3y ago
  Yes, but Man 2 has a 3-6% transaction cost on an already upside down property. Why do you think Trump doesn't want to sell his properties and become a renter?
  - carlosjobim 3y ago
    Very few people with a mortgage are upside down. But yes, if you're upside-down that is of course the worst situation. But they are so few as to be marginal.
    - itake 3y ago
      Most rent vs buy calculators project a break even rate is ~9 years, to never, after your home purchase. Meaning if you sell before the 9 years mark, you will have a loss. https://www.nerdwallet.com/mortgages/rent-vs-buy-calculator https://www.nerdwallet.com/mortgages/rent-vs-buy-calculator
      - carlosjobim 3y ago
        Is that calculator simply comparing the monthly payments between paying rent and paying a mortgage? In that case, that is completely misleading. Rent can only be compared with the interest part of a mortgage payment, since rent is 100% interest and 0% amortization. If you can rent for less than the interest part of your mortgage payment, then it is a better deal to rent. Or if you expect real estate to come down in value.
        itake 3y ago
        If you clicked the link, you would see it accounts for inflation, appreciation, and opportunity cost of your investment compared to other investment alternatives. > if you can rent for less than the interest than the interest, This is completely false. If I owned my home, my home value could fall when the stock market goes up (see 2022-2023). In this situation, it would have been better for my money to be invested in SNP500 instead of my home. Before you claim 2022-2023 and 2008-2009 are exceptions, not the rule. Houses typically appreciate 2-3% where as stock appreciates 8-12%.

tzs 3y ago

> He can have a great quality of life from his salary and earns an extra yearly salary each year from his real estate increasing in value. He doesn't need to sell to reap that money, he can borrow against his increased home value and use a small part of his salary to pay off the loan. I don't see how that would work. Borrowed money has to be paid back plus interest. My house is currently worth about twice what I paid for it ~17 years ago, and I do have a home equity line of credit so I can borrow against the increased value at will, but the current interest rate on that is over 9%. The only effect I and most of my neighbors see from rising home values unless we sell our homes is that our property taxes rise by about the same factor, which is vary annoying to those whose salaries have not also risen by a similar factor.

carlosjobim 3y ago
Of course you have to pay it back with interest, what do you expect? But you can use that increased real estate value if you need to, without having to sell your home. And usually with the lowest interest rates available to any individual person. A renter can not use any of the rent he or she has paid as security for any loan.
- tzs 3y ago
  You originally described it as "an extra yearly salary each year from his real estate increasing in value" though, which I think is greatly overstating its utility. It's really more useful for those occasional things that are too big for the liquid assets you have available right now, but that aren't so big that it will take you too long to pay off. For example you need a new HVAC system, but to pay for it would have to take some money from an IRA. You are close enough to the next tax bracket that half of that IRA withdrawal will be taxed at that higher marginal rate. It may then be cheaper to only take 1/2 of what you need from the IRA and the other half from your home equity line of credit. Then at the start of next year make another withdrawal from the IRA to pay back the home equity loan. That way none of the IRA withdrawals end up in a higher bracket. A similar scenario would be if you are getting ACA tax credits and taking all the money at once from your IRA would push your income over the maximum income for ACA tax credit eligibility. For most of us I think such situations will be rare enough that what we can gain by doing them won't be as much as what we lose from the increased property taxes from our home values going up.

nradov 3y ago

Those are not realistic scenarios. While many people do receive some sort of housing assistance from parents, the number who inherit a home with no mortgage is tiny. And in the rare cases that it does happen, the heirs tend to be close to retirement age themselves. Likewise, almost no one has unrealized annual capital gains on their primary residence which are anywhere near their regular income. US median household income is $75K and median single family house price is $387K. Virtually no one is seeing 19% annual price appreciation on their home.

carlosjobim 3y ago
So what happens is that people are paying on their mortgages and then they have a windfall from the inheritance and can get out of debt if they want to, or not if they think their current mortgage is a good deal. In the past decades, what I've seen is that a debt-free house is normal inheritance when it comes to real estate. But maybe not for the future. Yes, as you say the heirs are usually not young themselves, but maybe with 10-15 years left of working before retirement. And as retirement ages get pushed up for today's young to 70 years and further, this means these people are staying at the workplace and will be staying there. > Likewise, almost no one has unrealized annual capital gains on their primary residence which are anywhere near their regular income. Then we live in different worlds. With people and places I know it is normal to have a higher return in real estate appreciation than from labour. Mainly because taxes take away most of your salary, while real estate appreciation is tax free. People have been talking about "real estate careers" for a long time now. Meaning that they're borrowing the maximum amount possible and getting more and more expensive homes as their main career, while their day job is just a way to make minimum mortgage payments and qualify for more expensive mortgages.
- nradov 3y ago
  Yes, we live in different worlds. To be more specific, you live in a fantasy world. The circumstances you describe are so rare as to be irrelevant to any macroeconomic analysis. It is possible to make a fortune through leveraged real estate investments on multiple properties. But doing that with just a single primary residence is virtually impossible regardless of tax effects or financial engineering.