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A Lego model of financial capitalism
- dgfitz 3y agohttps://web.archive.org/web/20240405111833/https://www.asomo.co/p/a-lego-model-of-financial-capitalism https://web.archive.org/web/20240405111833/https://www.asomo...
- steve_gh 3y agoReally clear. Recommended.
- Supermancho 3y agoThe Lego model has a scale problem. Some of those arrows are a LOT bigger than others. It's not a minor issue when discussing the economy, as a whole.
- bombcar 3y agoA variation of this is why owning your house has (historically in the USA) been such a "deal". Because you put 20% down (or less) in cash, borrow the rest, and the appreciation goes to you. At 20% down, if the house goes up 20% you've doubled your money. At 5% down, it's 4x (minus transactional costs). As long as you ignore all the other aspects, like inflation, maintenance, etc, you have a pretty darn good return on paper.
- triceratops 3y agoIt's actually safer than almost any other debt financing. Even in bankruptcy creditors can't take your house.
- bombcar 3y agoYes - the benefits for single family home ownership are so insanely high it's hard to come up with situations where it is not the way to go (usually involving not being in an area for long enough to overcome transactional costs). In California on a purchase loan you literally can't lose - the bank can only take the house, it's non-recourse.
- 01HNNWZ0MV43FF 3y agoI just don't think it makes sense from outside the system. If the benefits are so great, why can't the benefits be shared and even increased if I live in a condo in a row of condos? Then we have fewer outside walls to insulate, we can all pitch in for a manager to handle exterior maintenance, we can pool parking, maybe get some solar panels using that nice big shared roof space... I agree the benefits _as the system is set up now_ are obvious. I don't think those benefits _should_ exist because I don't think they make sense or fall out from first principles. And this isn't a communist thing, I think that single-family homes just look like an inefficiency. As a capitalist, why am I paying to heat and cool extra walls?
- triceratops 3y agoMost of these benefits apply to condos too.
- supportengineer 3y agoWhat sets condos apart (in the same general location) is the monthly HOA fees. Monthly condo fees could range from $200/month to $4,000 a month or more. When buying a place with a HOA you really need to do your due diligence. As part of the process you will receive a copy of the HOA's financial statements. You need to dig into those and look at common areas like the streets and the pool and look to see how much expected lifetime remains, the current estimated future costs, and the level of the reserves (do they have money in the bank or not).
- zdragnar 3y agoThis is the reason my elderly parents still live in an oversized home for their current needs. They've looked at downsizing to a townhome or condo, but comparing everything they would lose to sharing noise through walls, HOA fees despite still being responsible for mowing and shoveling snow, and everything else it just doesn't make sense for them.
- com2kid 3y ago> Monthly condo fees could range from $200/month to $4,000 a month or more. Older high rise buildings have much higher fees, this is unfortunately true. (Soon as you have interior hallways and elevators...) But as you alluded to, in general if you go through the finances of townhome complexes, the HOA dues are (often mandated by law) just creating a cash reserve to cover future expected maintenance. Or to put it another way, realistically everyone who owns a home needs to set aside a few hundred a month to save up to buy a new roof, siding, paint fence, do pest removal, an so forth. The HOA in a townhome complex is a forcing function that requires people (again in some cities by law!) to calculate what the expected maintenance costs are going to be and to then save up accordingly for them using some low interest safe investment vehicle (or just cash, but IIRC my HOA has its money in some 2 or 3% interest bearing accounts). > and the level of the reserves (do they have money in the bank or not). This is the key part, a healthy HOA has reserves for the next n years of issues and has reasonable HOA dues to keep those reserves at a healthy level. Basically they know some large bill is, statistically likely, to come up, which will drop the reserves down, and the HOA dues are set at such a level as to refill the reserves before the next big bill comes around. This is the math that all home owners should be doing.
- _factor 3y agoIf you were to invest the money, you might come out a little ahead, but the value of having somewhere to live outpaces that.
- financetechbro 3y agoThe fancy word for this is LBO
- triceratops 3y agoI think a rental property would be more like an LBO. The bank takes into consideration the income potential of what you're buying when underwriting the loan. Obviously your credit-worthiness still matters too.
- game_the0ry 3y agoIt also why leveraged losses can be so devastating - the same works in reverse. When your home depreciates, you lose the down payment and you are still on the hook for the debt. That's what happened during 2008 GFC when home prices went down.
- elpakal 3y agoAre you still on the hook for the debt, though? I though that's what bankruptcy was for
- iamthirsty 3y agoJust because you go legally bankrupt doesn't mean the debt magically disappears.
- compiler-guy 3y agoIn many states a home loan is “non recourse”, which means that in a default the bank gets the house and nothing else. The debt is completely discharged.
- game_the0ry 3y agoBut your credit score will still take a hit.
- LanceH 3y agoThey don't like it when you play by the rules.
- toomuchtodo 3y agoYou’re eligible for a new mortgage within ~3 years after foreclosure with an FHA mortgage, 7 for conventional. This is known as waiting periods wrt mortgage underwriting guidelines. Credit score might impact the rate, but on the property ladder might be than not, have to model both ways (appreciation, cost of debt service, reserves, rent, etc). (Strategically defaulted on property after buying at the peak before 2008 GFC)
- 01HNNWZ0MV43FF 3y agoThe house going up 20% is its own oddity. My living here doesn't attract more business or residents to the neighborhood, it doesn't really improve the value of the land except for my fractional contribution to keeping a nice grocery store open nearby. I suspect in many cases home ownership is just subsidized. Might be Director's Law at work. https://en.wikipedia.org/wiki/Director%27s_law https://en.wikipedia.org/wiki/Director%27s_law
- bombcar 3y agoIt a lot of factors but the main drivers are inflation and desirability. In places where the desirability is basically neutral, houses do what you would expect and “used” ones sell at a moderate discount to new construction.
- toomuchtodo 3y agoThey aren’t making more land.
- MisterBastahrd 3y agoLand is cheap. Location is expensive.
- bckr 3y agoAren’t they? Isn’t that what sprawl is? Obviously, not literally creating more physical land, but developing land into useable land. They’re making more useable land.
- tel 3y agoTo make matters stronger there are significant tax benefits (the public subsidizing private home ownership) and the US’s 30y fixed rate loan is startlingly good, especially since you have a refinancing option. The risk of these loans is again subsidized by the public.
- RHSeeger 3y ago> As long as you ignore all the other aspects, like inflation, maintenance, etc, you have a pretty darn good return on paper. That's a pretty significant amount of things to ignore. When you include closing costs (10-15k in NY) and insurance, you're underwater on your house for a pretty long time.
- paulddraper 3y agoHistorically, conventional wisdom has been two years to recoup the overhead. Obviously depends on market volatility, and I've no idea if there's a more accurate # now.
- zdragnar 3y agoI've heard 5-7 years, but that may be with much lower than the 20% down.
- bombcar 3y ago7 years is the usual estimate in a “neutral/slow” market because it usually costs 10% to sell (realtor fees, etc). Of course if appreciation is going up more than 10% you can profit much faster, or you have flipping techniques to avoid frictional costs (like being your own realtor).
- deleted 3y ago[deleted]
- mitthrowaway2 3y agoInsurance and maintenance are costs of shelter, though. That's an exchange for the benefit of enjoying a roof over your head -- it shouldn't be considered a financial loss from an investment perspective. If you were renting out the property instead of living there, the renter would be paying those costs through their rent.
- RHSeeger 3y agoMy apologies, I meant interest and maintenance. And I would say that maintenance certainly counts as a financial loss when you're considering the property from an investment perspective. If it was a paper investment (stock/bond/whatever), it wouldn't exist. It's part of that specific investment.
- civilized 3y agoAppreciation is a good deal for speculators and flippers, but for normal homeowners it isn't worth much. If all house prices double including my own, the money I make selling my house just goes into buying a new one.
- mitthrowaway2 3y agoIt still matters to normal homeowners who eventually intend to downsize before they die. Or if they borrow further against the rising value of their house to finance other investments at a lower rate than they otherwise could borrow at. But yes, it matters much more to speculators or investors who own rental properties.
- karakot 3y agoI have paper appreciation but very real tax increase. My taxes almost 3 times higher now comparing to what I paid when I bought the house.
- mitthrowaway2 3y agoThat is a symptom of your city's budget needs increasing, not rising home prices.
- bombcar 3y agoSpeculators are definitely gambling on appreciation but investors (while liking it) don’t want to depend on it. They want appreciation that they can be causal on, like reducing or increasing vacancies, raising rents, etc.
- gizmo686 3y agoThe presence of leverage means that appreciation still favors you. Assume you buy a $100k house, with a 30 year mortgage at a 6% interest rate and a 20% down payment. You then buy an equivalent house. Over the course of those 5 years, you will spend $28.77k in principle and interest, reducing your loan balance from $80k to $74.44k At 0% appreciation, you sell, giving you $25.56k in equity, then buy another $100k house at 20% down leaving you with $5.5k in cash. At 2% appreciation, you sell, giving you $35.96k in equity, then buy another $110.4k house at 20% down leaving you with $13.88k in cash. At 4% appreciation, you sell, giving you $47.22k in equity, then buy another $121.66k house at 20% down leaving you with $23.00k in cash. At 6% interest, the difference between the 80k loan and 97.328k loan is $103.89 a month, or about $1.25k a year. Set asside $6.23k from your surplus to cover the marginal P&I cost for 5 years and you are left with $16.77k cash. Subtracting the $5.5k of equity you woupd have had at 0% appreciation, and a 4% appreciation rate netted you $11.27k over just 5 years. Given your 20k initial investment, that is a net return of 56.35%. Which is an annualized return if 9.35%.
- deleted 3y ago[deleted]
- roenxi 3y agoThere is an ugly reverse side of this that people don't like to notice (in a "difficult to get a man to understand something if his salary depends on him not understanding" way). If this appreciation is a good deal, it suggests there is a wealth transfer happening between new residents in an area to old ones. In a vacuum house prices shouldn't reliably appreciate compared to the interest rate. For all the complaints about the very wealthy, this wealth transfer by real estate is likely one of the major effects that stops people improving their own living standards. Once people are forced to be long term renters they aren't going to be as wealthy as they otherwise could have been, due to the theoretical concept economists call rent seeking (distinct from the usual meaning of rent).
- xyzelement 3y agoYou seem to have forgotten repayment of the borrowed funds with interest, and the risk of your home losing value for a million of reasons.
- chiefalchemist 3y agoProperty taxes, time for maintenance, filling the house with shit you don't need simply cause you have the space, working a job you hate cause it pays well and pays the motgage (as opposed to waiting for your lease to end and moving to a new town). Don't get me wrong, overall owning is better, maybe. However, the 25 yr and 30 yr mortgage (as opposed to say 15 yr) will someday be viewed as the start of the downfall of the middle-class. It's when housing prices shot up (as did total cost of paying off the mortgage) and life became the march for more $ (over peace of mind).
- ngcc_hk 3y agoYou are paying some other people mortgage or your own. The problem for some occupation like uk “junior” doctor you do not stay and hence it is a kind of investment to offset this (buy to let vs your rental place). For one mortgage … For second or third or fourth, it is a pension. As long as it is rentable …
- mxschumacher 2y agoit's important to note that post financial crisis, interest rates were very low due in part to quantitative easing. With interest rates rising, asset prices will have to come down. Leverage cuts both ways, the equity in your house can easily be wiped out.
- photochemsyn 3y agoYou can tell this is fluff because it discusses commercial real estate without ever mentioning the many tax shelters that politicians have created for their real estate developer donors, e.g. > "What are the most common tax benefits of investing in commercial real estate? > "The most common tax benefits of investing in commercial real estate include accelerated depreciation, mortgage interest deductions, and tax advantages for an investor’s heirs. Accelerated depreciation allows investors to write off the cost of their investment over a shorter period of time than the asset’s useful life. Mortgage interest deductions allow investors to deduct any interest they pay on a commercial mortgage off of their federal income taxes. Lastly, tax advantages for an investor’s heirs can lead to a massive difference in returns, especially over an extended period of time." https://www.commercialrealestate.loans/blog/the-top-10-tax-benefits-of-investing-in-commercial-real-estate/ https://www.commercialrealestate.loans/blog/the-top-10-tax-b... If the market really goes belly-up, then the government will step in to bail out the 'fearless entrepreneurial capitalist investors' as with the subprime collapse, the covid collapse, the Silicon Valley Bank collapse, etc. Then the cheerleaders of capitalism stop complaining about socialism, at least for as long as it takes for them to deposit their government welfare checks.
- digging 3y ago> You can tell this is fluff What does that even mean? It's not a marketing page, it's just a simplified, introductory lesson.
- coretx 3y ago[flagged]
- xyzelement 3y agoI can’t think an example in my life. Can you provide ?
- coretx 2y agohttps://en.wikipedia.org/wiki/Rent-seeking https://en.wikipedia.org/wiki/Rent-seeking
- B1FF_PSUVM 3y agoI went off to his https://www.asomo.co/p/the-war-on-informality https://www.asomo.co/p/the-war-on-informality essay, and found it a good read - the graphic illustrating the small monetary interaction then and now hits hard.
- hgomersall 3y agoHe's written loads of good stuff!
- DesiLurker 3y agoI guess citizen's united & regulatory capture would be the KraGle.