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> Isn't it great if real estate is cheap? It means people can afford to live there and spend there money on other things and keep the economy going that way. R

> Isn't it great if real estate is cheap? It means people can afford to live there and spend there money on other things and keep the economy going that way. Real estate prices rising means that the people are getting more wealthy. When real estate prices fall, it means that people are most likely getting less wealthy. > I understand that often times people will take out mortgages against there houses if the price goes up and that way money goes back into the economy. What you're describing here is called "re-financing", it's a perfectly normal means of borrowing money against your house if you have enough collateral. I've never heard of people doing it so that money goes back into the economy, it's usually to re-invest money into your house like for construction or whatever, and your monthly payment just increases.

refurb 12y ago
I've never heard of people doing it so that money goes back into the economy, it's usually to re-invest money into your house like for construction or whatever Isn't spending the extra money on construction sending the money back into the economy?
ajmurmann 12y ago
>Real estate prices rising means that the people are getting more wealthy. When real estate prices fall, it means that people are most likely getting less wealthy. That uses real estate prices as an indicator for how the economy is doing. However, it doesn't mean the economy gets better because real estate prices are up. This almost reminds me of the backyard furnaces during the great leap forward. Metal output was seen as a indicator of good industry and so Mao had everyone melt perfectly good pots and pans and other stuff to improve the indicator. However, most of the metal was useless and the pots and pans were gone. What the article described sounds similar to me. Housing prices are way up, economy indicator looks great, but people are living on the street. > What you're describing here is called "re-financing", it's a perfectly normal means of borrowing money against your house if you have enough collateral. I've never heard of people doing it so that money goes back into the economy, it's usually to re-invest money into your house like for construction or whatever, and your monthly payment just increases. So the money does go back into the economy. Also: Not all re-financing results in a larger mortgage than before. Some people re-finance to get lower interest rates on the same or smaller principal.
jeffdavis 12y ago
"Real estate prices rising means that the people are getting more wealthy. When real estate prices fall, it means that people are most likely getting less wealthy." Can you elaborate? For most necessities, we're happy when the price goes down. But for housing, we're happy when it goes up. Why? What's so special?
- logicchains 12y ago
  Because people invest absurd sums of borrowed money into houses? If people borrowed hundreds of thousands to invest in for instance the corn industry, they'd be cheering for the price of corn to go up. When house prices go down, many people really do become less wealthy, because they have lots of money invested in houses. Similar to how Google's shareholders would become less wealthy if the value of Google stock fell by 90%.
  - ajmurmann 12y ago
    The difference between Google stock and a house (if you only have one) is that you need the house, but I have not practical value for Google stock other than it's monetary value. If I sell my house I need to buy another one or rent. So I am happy if my house's value goes up, but only if it's relative to other houses in areas I would be interested to move to, because it would open the option to swap it out for another one that's better or in a location I would prefer. So if real estate prices go up everywhere that wins me nothing. I am rich, but only on paper. Housing being relatively cheap also allows for people with low capital to try out business ideas that they couldn't elsewhere. Berlin in the early 2000s was filled with awesome little shops, restaurants and cafes that would have been impossible in any other comparable city. One of the big reasons was the cheap real estate.
    - logicchains 12y ago
      Good point. Even if real estate prices going up everywhere wins me nothing, however, real estate prices going down always causes me a loss if I've purchased a house with borrowed money. For instance, if I borrow $500k to buy a house, and its value soon after falls to $300k, I still owe the bank 500k yet my assets are only worth $300k, meaning my net worth is down by $200k. If I was renting this wouldn't happen. I think culturally there's too much willingness to buy houses with borrowed money. The proverbial average Joe wouldn't leverage themselves to buy any other investment worth hundreds of thousands with borrowed money, yet it's seen as perfectly reasonable to borrow hundreds of thousands of dollars to buy a house. The inherent risk involved in investing a large sum of borrowed money just seems to be ignored, and then people do everything they can to keep house prices rising in order to avoid this risk materialising.

refurb 12y ago

I've never heard of people doing it so that money goes back into the economy, it's usually to re-invest money into your house like for construction or whatever Isn't spending the extra money on construction sending the money back into the economy?

ajmurmann 12y ago

>Real estate prices rising means that the people are getting more wealthy. When real estate prices fall, it means that people are most likely getting less wealthy. That uses real estate prices as an indicator for how the economy is doing. However, it doesn't mean the economy gets better because real estate prices are up. This almost reminds me of the backyard furnaces during the great leap forward. Metal output was seen as a indicator of good industry and so Mao had everyone melt perfectly good pots and pans and other stuff to improve the indicator. However, most of the metal was useless and the pots and pans were gone. What the article described sounds similar to me. Housing prices are way up, economy indicator looks great, but people are living on the street. > What you're describing here is called "re-financing", it's a perfectly normal means of borrowing money against your house if you have enough collateral. I've never heard of people doing it so that money goes back into the economy, it's usually to re-invest money into your house like for construction or whatever, and your monthly payment just increases. So the money does go back into the economy. Also: Not all re-financing results in a larger mortgage than before. Some people re-finance to get lower interest rates on the same or smaller principal.

jeffdavis 12y ago

"Real estate prices rising means that the people are getting more wealthy. When real estate prices fall, it means that people are most likely getting less wealthy." Can you elaborate? For most necessities, we're happy when the price goes down. But for housing, we're happy when it goes up. Why? What's so special?

logicchains 12y ago
Because people invest absurd sums of borrowed money into houses? If people borrowed hundreds of thousands to invest in for instance the corn industry, they'd be cheering for the price of corn to go up. When house prices go down, many people really do become less wealthy, because they have lots of money invested in houses. Similar to how Google's shareholders would become less wealthy if the value of Google stock fell by 90%.
- ajmurmann 12y ago
  The difference between Google stock and a house (if you only have one) is that you need the house, but I have not practical value for Google stock other than it's monetary value. If I sell my house I need to buy another one or rent. So I am happy if my house's value goes up, but only if it's relative to other houses in areas I would be interested to move to, because it would open the option to swap it out for another one that's better or in a location I would prefer. So if real estate prices go up everywhere that wins me nothing. I am rich, but only on paper. Housing being relatively cheap also allows for people with low capital to try out business ideas that they couldn't elsewhere. Berlin in the early 2000s was filled with awesome little shops, restaurants and cafes that would have been impossible in any other comparable city. One of the big reasons was the cheap real estate.
  - logicchains 12y ago
    Good point. Even if real estate prices going up everywhere wins me nothing, however, real estate prices going down always causes me a loss if I've purchased a house with borrowed money. For instance, if I borrow $500k to buy a house, and its value soon after falls to $300k, I still owe the bank 500k yet my assets are only worth $300k, meaning my net worth is down by $200k. If I was renting this wouldn't happen. I think culturally there's too much willingness to buy houses with borrowed money. The proverbial average Joe wouldn't leverage themselves to buy any other investment worth hundreds of thousands with borrowed money, yet it's seen as perfectly reasonable to borrow hundreds of thousands of dollars to buy a house. The inherent risk involved in investing a large sum of borrowed money just seems to be ignored, and then people do everything they can to keep house prices rising in order to avoid this risk materialising.