Broadly speaking: you are not "investing" in any market if you only own the amount you intend to use or consume for yourself. You are only "investing" if you own (or have contracts on) more than you intend to consume.
For example, having a few bananas in your fruit bowl does not give you a position in the banana market. Owning thousands of bananas you intend to resell, or shorting a banana company, gives you a position in that market.
Likewise with housing. Owning enough housing to live in (at whatever standard of living you intend) is a market-neutral position, so you should not be particularly excited by price changes in the market. If you own too little housing, you're "short" and price raises are a negative, and if you own excess housing (extra properties, or a larger-than-desired property) you're "long" and price raises are a positive.
This is an excellent point which deflates most of this article's premise. The "shelter short" you hold by being a living breathing person is really just what can be considered livable shelter. For most people, I'd imagine they live in houses that are well beyond what they could reasonably survive in, so that portion of the equity position of the house they live in is strictly "long".
This probably is better served by an example. Lets say you buy a $2m home as a single person. And lets also say you could just as comfortably live in a $250k home. If house prices go up and your $2m home suddenly becomes a $2.25m home, you can sell it and get a "free" livable home with the 250k profit. (Technically that house would be selling for 277k at that point so you get to buy a "livable home" for $27k, but that's besides the point.) You basically are now market neutral, whereas before you were long. You will have a livable home for the rest of your life, as long as your requirements of what is considered livable do not change.
Where does the "free livable home" come from? $1.75M of your original home was "long houses". Or, another way to look at it is you were leveraging beyond your $250k "survivalship position" in housing by 8x, and then scaled back the leverage to 1x when you bought your second home. This $1.75M was speculation (or investment, depending on how you look at it :)) in the housing market. The additional speculative risk you took via the leverage resulted in the market rewarding you with a place to live.
There are 2 ways we can see your example. Living in 400sq m house when you only need 40sq m could be:
1) equivalent to living in a 40sq m apartment and owning a separate ~300 sq m house elsewhere but not renting it. Well, of course in this case you're losing money as long as you don't rent it. Even if the real estate prices go up and you finally sell the house years later, you need also to subtract the money you threw away by not renting it, or say, compare to the situation you didn't buy the extra house and instead invested the money on Treasuries.
2) Going back to one 400sq m house. Now of course one could claim one's using and enjoying the extra-space beyond the 40sq m. Later, after the housing price goes up, you sell it and buy a 40sq m apartment; but this means you're cutting down on your monthly consumption of housing. So this doesn't deflate the article's premise either.
Not necessarily. In fact, I went to high school in NYC and I distinctly remember my 10th grade History teacher reminding us repeatedly "New York city is nothing like the rest of America!"
I think one takeaway from the article is that people misunderstand what market movements are good for them when they own a home exactly because they see it as a long investment, while they are actually often still short some proportion of their dream home...
If you want to one day trade down, like in your example, then increasing prices is good.
If you want, instead, to maximize the size of the the house you live in, within a similarly prized area, you should instead hope for a steadily deflating house market - the faster the better, down to a level where you have only just enough equity left to put down a deposit on a larger house.
People often see their house as an investment that will give them a lot of money, while forgetting that they likely dream of trading up, and forgetting that if their house appreciates, the price gap from their house to the their dream house is increasing too.
For most people other than the old, we tend to be perpetually in the situation where we would like to trade up. And so we should cheer on price drops, to a certain extent, rather than cheer on rises in equity.
But in practice people buy houses with heavy leverage (often only 20% down), meaning that price appreciations have the potential to multiply their capital and more than make up for the price gap widening.
I made the same argument lower in the thread but with omission of an instant price bump the instant you get the home or buying purely with cash, the idea of getting a very expensive home with the strategy of banking the difference in appreciation is typically a very bad idea. Banks will love to tell you its a great idea and that is because a million dollar loan held for 5 years at 5% interest will cost you 250k in interest to hold the asset effectively wiping out the 250k profit if that happens.
The only true reward is going to the bankers for taking the risk of loaning a million bucks.
It probably wasn't clear but I thought it went without saying that the example I gave is a horrible idea in practice. As soon as you see the word "leverage" you should start getting scared.
When I hear the word "mortgage" I hear "leverage" whereas most people hear "monthly payments where I own the house instead of renting it." It's bad news.
Leverage is the only way to larger returns. This is true whether you go from a 1 person company to a 2 person company, whether you borrow or take equity to expand a company, or whether you borrow to fund a house.
Without leverage, you're getting nowhere. Employing a person is using leverage - you're betting that the employee will generate more revenue than they cost to keep.
Buying a house with leverage is neither dumb nor smart. It is a strategy. Strategies only become successful or failure after the events unfold.
In the case of houses, you only lose if the resale value of the property falls below the outstanding amount of the loan, presuming interest + taxes + maintenance do not exceed the equivalent amount of rent. Because loans are fixed at a currency amount on the date of funding, a property that keeps pace with inflation wins.
There are also intangible aspects to ownership, including security of tenure and ability to modify the dwelling as needs arise. It's impossible to put a price on this, but you could imagine one by asking a tenant how much insurance would they pay per year to prevent being evicted.
The key to property in general is the land underneath the property. A dwelling is itself a depreciating asset, which wears out, becomes unfashionable and falls in value. The land underneath the dwelling is the bit that increases in value, or at the very least maintains it's value compared to a currency being systematically inflated by a central bank.
For many people, a modest mortgage and their own property is a sensible investment, provided that they do not trade houses excessively, dip into the equity or destroy the value of their house.
So, again, leverage is a strategy used everwhere with many things. Excessive leverage is high risk, but sensible, well managed leverage is the key to success in life.
Much of your comment is valid but this paragraph is just so wrong I needed to pull you up on it.
> In the case of houses, you only lose if the resale value of the property falls below the outstanding amount of the loan, presuming interest + taxes + maintenance do not exceed the equivalent amount of rent.
While absolute dollar loses may not be bigger if you are leveraged than buying the same house outright the buying power is and the absolute loss is greater than it would be if you bought something that you could buy outright.
Example 1: If you have 100K and buy an apartment for 100k then the market drops 10% you have 90K in equity and could still buy a similar apartment (and trading up is actually cheaper than before).
Example 2: You have 100K and borrow 400K to buy a 500K house. The market falls 10% and you have a 450K house with a 400K mortgage and only 50K equity and you are unlikely to be able to get a similar property. You may need to trade down substantially and you can't even buy a 90K apartment without a mortgage.
The final sentence is true but makes it sound like there is a high confidence of keeping up with inflation (doubtful in my view given the current levels of private debt.
> Because loans are fixed at a currency amount on the date of funding, a property that keeps pace with inflation wins.
Given the fact that you are losing value on savings due to the central bank increasing the supply of money, you also have to take into the account the amount of time it took you to save up the 100K.
You may very well actually saved 100K to buy the apartment, but the real value of that 100K may have already decreased by 10K.
The question is whether the rate of value loss by currency inflation is outpaced by the interest you'd pay on a mortgage.
In both my examples 100K was saved at the beginning so I'm not sure that is relevant.
Currency inflation is a positive factor for you if you have a large mortgage. Deflation while obviously historically less frequent but not unknown (US 1930s, Japan 1990-current) is a negative risk if you have debt, and one that you don't have if you haven't got debt.
> "Given the fact that you are losing value on savings due to the central bank increasing the supply of money, you also have to take into the account the amount of time it took you to save up the 100K."
Presumably the hypothetical subject isn't saving money by stuffing it in a mattress. In which case the interest rate on their savings should have been at least able to track inflation.
Right now in the US, interest rates on savings isn't keeping up with inflation. Not sure what macro-econ says about the sustainability of such a situation, but current fed policy is definitely penalizing savers in the short term.
And the current economic situation is an aberrant special case; it isn't implicit or ever-present.
And, even still: I think anyone whose annualized rate of return on savings -- over the last, say, ten years -- has fallen below the rate of inflation, can be safely said to have invested in a manner tantamount to stuffing it in a mattress.
You're right, it was poorly worded and has an obvious error. It should have said that you only lose if the price falls below the original purchase price. Of course any decrease in capital in absolute terms is a loss.
A house financed with a mortgage (which is what he said, imo) can be an investment. A mortgage by itself is not an investment, it's what you use the mortgage for that makes the mortgage part of the investment strategy.
Really, all the 'mortgage = bad!' speak in this thread is depressing. How do you people ever think of making real money? Leverage is a wealth multiplier. Of course it comes with risk, but so does crossing the street - you need to manage it well (looking left and right before crossing, and checking the economic fundamentals of your leveraged investments).
Leverage is a _return_ multiplier, including a _negative return_ multiplier. Another way of putting it is that leverage is a risk multipler.
As an investment single family homes are not particularly attractive, a mortgage may or may not make sense depending on the terms, risk tolerance, and the expected market behavior... but it's really only the inherent shelter-short you suffer that makes a mortgage interesting in most cases. (Because that short is what makes not owning a home also risky)
Most people should not be thinking of making "real money" when they purchase a home, they should be thinking of having a place to live. It takes a certain degree of financial security to start thinking about using leverage to multiply wealth, which many people buying mortgages don't have. Tying the risk of a leveraged investment to something as important as the place you live is dangerous for the large portion of the population that is not particularly financially savvy.
Could you recommend any resources for educating yourself on how to '[look] left and right before crossing, and checking the economic fundamentals of your leveraged investments'? I'm not a home owner, but eventually I may be, and this topic sounds fascinating to me.
Returns only increase if there is positive drift to the underlying asset walk. In other words, this only makes sense if prices are OK. If prices are fundamentally "off" (ie, housing bubble, stock market bubble), your going have your "correction" magnified.
You shouldn't have a change in liability after taking out a mortgage, unless you refinance to release equity, which is a whole other discussion.
The missing point in many peoples analysis is that inflation is constantly eroding buying power and savings, and that property with a large land component (house > apartments) is a good hedge against inflation, due to naturally restricted supply. Of course, governments these days tend to magnify the supply restriction by refusing to approve new land developments in many areas.
Even if you buy at the top of a bubble, if you hang on, you're still likely to come out ahead over a 10-20 timeframe, as inflation takes care of your overpriced purchase.
Of course all property is local, and it's very easy to permanently lose a lot of money by purcashing the wrong property for the wrong price.
Leverage however increases the variance of the random walk of prices. You hope/pray the RW has a + drift that exceeds your cost of debt (ie, value grows X% > Y% on your pmt). If you are forced to sell (say, divorce or to relocate) you are going to bear more of the brunt of interim Vol. Over the long run (if you run out 30 years) your just facing the pricing/cost of capital issue.
TLDR Mortages are from a time long gone, where people lived in houses their whole working lives, from 22-52, with the same job, a wife and kids, etc. Then it made much more sense then today, when you need 1-200k to down-pay a 1-2m house (age 32 to 62?) and move/change jobs every X years, divorce is 50% liklihood, etc.
>You shouldn't have a change in liability after taking out a mortgage
By this I meant the mortgage level should not increase.
>Mortages are from a time long gone, where people lived in houses their whole working lives, from 22-52, with the same job, a wife and kids, etc.
I disagree that the idea of a family residence is from a time long gone. Nearly all my friends fall into this category.
I agree that having to move frequently means you should not purchase. But if you reverse that and decide to not move frequently, it changes the aspect a lot.
I disagree that the idea of a family residence is from a time long gone
Agree, but Nobody is arguing/describing this. My point was if you are overconsuming (buying too much house), you are delaying ownership and extending payment, such that you never really get clear of the debt. A 30 year mortgage taken on at 35 needs you working at the same job until 65. But careers are no longer so stable, in this regards at all, or so it seems lookinga around the West. It also leaves precious minimum left to pay for college. In the example of 22-52, you had 13 years free to pay/save/recover from your housing expenditure to pay for schooling of your kids. This would require taking out a 15 year mortgage at 35, and that would be smarter. But many people could not then afford the payments....
This is part of the reason people have overbid for housing. The other reasons are social/signalling, etc. But that is as old as forever...think of all the nobles in europe living with massive debts, etc...
>As soon as you see the word "leverage" you should start getting scared.
Meh, that's mostly how I've played it so far, and I've done... poorly compared to the people I know who have leveraged. Especially in the housing market.
Especially in housing, I mean, as long as you don't have other assets, and the potential upside is large enough to make up for 7 years of poor credit, if some damnfool bank is willing to lend you a bunch of money to buy a house in a volatile market, why not leverage? If housing prices go up and you sell out before the fall, the potential for profit is huge. If prices fall, at least in California, my understanding is that most home loans are 'no recourse' - meaning that you can give the keys back to the bank and they can't come after you for the balance. Worst case, bankruptcy.
So yeah, uh, I can see how people that use leverage generally do better than I do.
What is really sad and irritating about my position is that yeah, I'm profitable, I own my servers free and clear, I have no outstanding debt, etc, etc, but I still have leases. And leases? as far as I can tell, are treated /exactly like/ debit if you want out early. Before the year is out, I'll likely be signing a five year datacenter contract worth as much as a nice silicon valley condo, and at the end of those five years, I'll own nothing. (and that one lease will save me rather a lot of money over the two smaller leases I currently have.) That's a lot of money. It's very rare that the value of my servers is higher than the remainder of the lease. (well, the amount I could actually get for the servers. the 'replacement value' is considerable. Retail is hard work.)
I mean, I own my servers, but after five years, the thing is worth a tad more than it's value in steel (yeah, there's gold in them circuit boards, but not a whole heck of a lot of it.)
For me? that's what changed my view of the rent vs. buy question. Leases, especially commercial leases are usually less flexible than buying. And every time they renew? if the landlord thinks it's hard for you to move, prices go up. It's terrible. I'd much rather have a payment I can count on for the next 15 years, and then know I'll own the place after that (modulo property taxes)
Here in Australia I'm quite bullish about commercial property. The residential market is garbage because people buy emotionally, and the market is therefore full of irrational actors. But the commercial market is boring and therefore full of investors who logically value any potential assets and don't pay too much for them (meaning you can still find decent returns).
Being a commercial land owner is great, as you've found yourself on the receiving end of.
And by the same token, your business customers no doubt pay you for a service and at the end of each month have nothing tangible to keep, which is kind of the same deal.
But I'll keep renting my residential house, let the owner subsidise my rent by taking a loss (negative gearing), and put my savings into commercial property where I receive enough to cover the interest on the loan and then some.
>Here in Australia I'm quite bullish about commercial property. The residential market is garbage because people buy emotionally, and the market is therefore full of irrational actors. But the commercial market is boring and therefore full of investors who logically value any potential assets and don't pay too much for them (meaning you can still find decent returns).
I think there are irrational folks in both camps; Here in silicon valley, in 2007? clearly residential housing was overpriced. I really haven't been paying attention to the commercial market until quite recently, but I do know that recently, residential rents have been going up pretty dramatically, and sale prices of houses have been falling dramatically; There was a point a few years back where buying was a ridiculously better deal than renting (prices are coming back up, especially towards mountain view.) But yeah; as they say, real-estate is intensely local.
I mean, I wasn't paying attention to commercial real-estate at the time, but certainly businesspeople can be irrational too. I kind of get the feeling that most people here were still in school or something during the first dot-com, but I remember it well.
Really, I think it has to do with the ratio of rent to purchase price (and the cost of capital)
>And by the same token, your business customers no doubt pay you for a service and at the end of each month have nothing tangible to keep, which is kind of the same deal.
Yeah. And that's the thing to think about. I mean, a whole lot of what I'm selling is that I sell you servers in smaller chunks, and nobody has yet figured out a reasonable 'server condo' business model, (I've thought a lot about this, and I think it's mostly because the condo model doesn't cope well with rapid depreciation, and nothing depreciates like servers.)
But the other thing customers are paying for is me maintaining the equipment, which is significant. I mean, don't get me wrong, if the customer was using a whole server to themselves (I mean, a real whole server, you know, 128G ram on up) it'd probably be cheaper in the long term for them to own even if they have to buy hardware help at $100/hr (you can usually get hardware help for rather less) But, that requires, you know, knowing someone who is good, and evaluating people outside of your skillset is difficult.
Those same problems also apply to real-estate (well, except the condo model seems to be workable in real-estate. Not perfect, but it seems to work.) If I owned the building, especially if I owned the datacenter, I'd have to learn a whole lot (which I'm cool with; considering that I pour more money into this that I pay myself, it's worth the effort... but there will be a significant cost, measured in years.)
Of course, with plain old warehouse space, the landlord seems to do almost no work at all, so next time one of the industrial condos down the road goes up for sale, I'm probably gonna go for it.
Volatility, when it comes to large numbers with dollar signs next to them, is scary.
Startup culture is not leverage in the sense I am using here. Startup founders are generally leveraged on the upside but not on the down. They own calls.
If you don't believe me consider that sometimes the powerball jackpot every few years has a positive expected return. Unless you are going to live forever, you need to be mindful of volatility.
>Startup founders are generally leveraged on the upside but not on the down.
I don't agree with this at all. This assumes zero costs on the part of the founder when it comes to a startup. There are significant costs, including extra work, low or no salary, and opportunity costs.
I agree that the potential upside is much more like a call than a long position, but all calls have a premium cost, and have a much higher risk of being out the premium cost with no reward.
Agree - I wanted to point out the problem with the seemingly rosy situation of using leverage to "get ahead." There are many people that think they are being financially smart by buying as much a house as the bank will give them with the assumption they will bank the difference while seemingly never paying attention to where their paycheck is evaporating each month.
The market does not "reward" you for taking "risk" in that sense. You got lucky. Portfolio theory does suggest some risk premium on undiversifiable assets but not that.
One does not invest in markets. One invests in assets, preferably productive assets.
If I drink milk, I can either continue to buy it at the store, or buy a cow. By investing in a milk-producing asset, I've made myself market neutral to milk prices. I'm pretty sure that a single cow would actually be more milk than I would consume, so I run into the inconvenience of the asset not trading in odd lots.
Housing has the nice feature that it can be conveniently bought and sold in units that match my consumption (unlike half-cows). I think the analogy of being short housing is apt as well, because housing is something I am pretty much certain to consume.
The more interesting game is the one in which the housing market is not assumed to be homogenous. If you can somehow anticipate a positive change in a local housing area, buy a house there and then sell it after the change occurs, moving to a cheaper, less desirable house, you can indeed make a profit. However, this requires two things: a) that you correctly anticipate the change and b) that you don't want the change for yourself. The nice thing about this play is that even if the change never occurs you still have a house. (There are many examples of positive change - e.g. the new railroad going through Rock Ridge in Blazing Saddles.)
You can do this. This may seem idiotically simple, but you can easily see how very possible this is. Track the market you are interested in purchasing a home. Watch the number of homes sold vs the number of homes coming up for sale. (simple supply and demand) If you see more homes coming on than being sold you are going into a buyer's market (price dropping) If the opposite, then seller's market (price goes up). By doing this, you can stay ahead of the market. Note: you must seasonally adjust, which is very easy to by getting a history of the market you are tracking.
Proof:
Look up historical solds vs "on the market." (ask a realtor for this info, keep calling you will eventually find one who will give it to you) Then look at zillow or any other site that tracks historical home prices. You will see the supply leads price, usually by months/years not days or weeks.
How can this the be possible?
1. Realtors, on average, are wildly misinformed and much more interested in making a sale than doing market research.
2. It does not pay for large investors to buy individual properties so you do not have savvy investors correcting market errors. (this does not apply to commercial property)
A couple issues with this though. Realtor commissions (possible to avoid if you have enough knowledge), and/or loan fees, closing costs, title insurance, etc. Also in the US, capital gains taxes if you don't live in it for at least 2 years. So the appreciation or difference in price would have to be significantly large.
The housing market does not have the same liquidity that other markets have and this creates opportunities where a spread exists between actual and perceived value. There is always someone who needs to sell now and always someone who is willing to wait as long as it takes to get a specific price.
Also keep in mind that on the "housing ladder" it's always easier for someone with a big property to down size than it is for someone to move up. Mid to low end housing will have a completely different market dynamic than 2 million dollar estates.
you don't have to be "investing" in an asset to have exposure to that asset.
you have short exposure to an asset iff: asset value up => your utility down. the opposite is true of long exposure.
by owning and using a car, you have a short exposure on gasoline. gasoline prices up => you are worse off. you're not "investing" in gasoline, but you still have an exposure.
you have a "natural" short exposure to housing because if you do not buy a house and housing prices increase, you will be worse off. if you rent, housing price increases will drive rents up, and if you are going to buy a house, the amount you have to pay for your house will increase.
by buying a house, you become housing price neutral. if you already have a house, then an increase in housing prices doesn't make you any better off - even though your house is worth more, so are other houses.
I generally agree with your point that you are not investing if you are not taking a long position in an asset above its needed weight.
When the typical person buys a home they do so with a lot of leverage. 20% down gives you 80% debt which is now 4x leverage.
The way I see it, you have two potential choices when you are considering an home purchase with debt like a normal American.
1) Go short 100% the value of a house.
2) Go long 5x 100% the value of the house.
I am glad a few people get this. High housing prices are an unmitigated disaster. They are sometimes a symptom of something good (a robust job market) but often not even that.
For that, high housing prices have more to do with supply disruptions and destruction than with demand, because housing prices are extremely inelastic. A 1% drop in supply can push rents or prices up by 20% or more. (Ask New York.) Mouth-breathing bourgeois fuckheads clap their fat hands together when prices rise and say, "People really want to live here!" No, fuckface. What actually happened is that all those stupid NIMBY regulations made it impossible for anyone to fucking build, and so there's a supply crunch, making prices and rents three times as high as they should be.
This also explains why New York real estate prices went up after 9/11 (except for Lower Manhattan, which dipped for a few months and then went up) and will probably do so after Sandy. It was speculation driven by the possibility of future supply destruction, which would be bad for the few thousand people affected but increase overall price levels.
I agree. Nimbys and current owners prevent the building of higher density and modern housing. You would hope that the Federal government would step in because new construction would create jobs. Also in the Bay area, you could add lots of higher density housing near the Caltrain and gain that way.
My city's aging infrastructure is having trouble withstanding the population boom that's come with recent high density building. Sewers, traffic, and public transit are all suffering from unchecked construction. Sometimes NIMBYs have good reasons to fight development.
Agree. Especially in the south bay/peninsula, you have all the millionaire NIMBYs preventing the area from becoming a new dense metropolis. It doesn't seem possible for cities like SF and Manhattan to be built today.
Rising housing prices for owner occupiers are popular politically. Or at least, they were until the bubble popped and people started noticing that real household incomes had never risen to match the housing prices.
The alignment of class interests has changed on this issue. Renters and net debtors are now the majority, rather than the bubble temporarily making every other owner-occupier into a net profiteer.
I'm surprised we don't see more discussion of house prices on sites such as this. In my opinion it is THE issue affecting our generation.
Specifically for HN, the high cost of housing severely restricts entrepreneurship. If you are paying 50% of your income on a rent or mortgage, you are of course less likely to start a business, and the cost of doing that business in terms of employees salaries and commercial rents make it less viable.
Also consider that your suppliers, and their suppliers, and their suppliers ad infinitum, all have the same high costs ultimately derived from high housing costs for their employees.
This all adds up across the country and the whole economy is made less competitive and agile as a result. With lower housing costs there would certainly be less unemployment.
The sad thing is that the even intelligent people are duped into believing the myth that high house prices are good for them. Clearly lower prices mean more disposable income, which is usually a good thing? Clearly high house prices barely benefit anyone as we all need a house, and the next house you buy would likely have gone up by a greater price than the one you have now? And yet we persist - 'we MUST get on the housing ladder' and we blame those nasty banks because 'they aren't lending any more' when all they are doing is scaling back lending multiples from the absurd back to the ridiculous.
All that high house prices achieve is to keep young people into debt serfdom, keeping us on a treadmill servicing massive mortgages for the same bricks our parents bought for 20% of the price. We really could be out doing something much more worthwhile.
Word about this problem is trickling out, slowly—I like to cite Edward Glaeser's The Triumph of the City and Ryan Avent's The Gated City on the subject—but I think a lot of people simply don't understand supply and demand.
One time in Seattle I was driving home a friend, who was in law school, and she complained that there was too much construction in the city, and that construction made it less affordable. I said that more units make the city less affordable than it would be otherwise, and she said that they were tearing down "affordable" housing to put up housing for "rich people."
I tried to explain that, if given space that had 12 units now has 200, the overall affordability rises, but she totally didn't or wouldn't get that point. It was a bit like the scene where the Martian and man meet in The Martian Chronicles. Except that I'm right and she isn't. But until more people connect supply restrictions with cost, we won't get (much) improvement.
>I tried to explain that, if given space that had 12 units now has 200, the overall affordability rises, but she totally didn't or wouldn't get that point.
I don't know what your friend's reasoning was, however, I can see an argument on her side.
If the 12 units that were torn down were worth (and able to be sold for) 200k each and they were replaced by 200 units worth (and able to be sold for) 500k each, then that neighborhood is about to change character, and it probably won't continue to be affordable for the people who can't afford a 500k unit.
As I understand it, even if the builder is wrong and they can't sell at 500k (there are only 200k buyers), affordability still suffers.
Why? Because the developer won't sell the first flat for 200k even if that turns out to be the highest achievable sale price, because it would mean immediately having to write down the market value of the other 199. (A paper loss of 200 * 300k, not just the one lot of 300k). That's going to mean the flats sit there unsold for a long time, while the developer holds out hope of finding high value buyers that don't materialise.
Net upshot, for a significant period the developer has reduced the available housing by twelve 200k flats (the replacement two hundred are effectively not available for sale at the going rate).
Exactly, we can consider that the 200k unit is not the same item as the 500k unit. Indeed, the price of "de luxe" units will decrease (but maybe there were not enough of them in the first place) and, unfortunately (for poorer people), the price of the "affordable" unit will raise.
If real estate development was a free market, and a true commodity, then I would agree with you. The problem is, it isn't either thing.
The tax rules associated with large construction projects, plus that fact that large-scale commercial real estate is a cartel in most US markets means that the actual impact in terms of units doesn't equate to the number of units built. That's one reason why you see economic behavior that doesn't make sense on the surface -- prime urban residental property left vacant or rented out as tenament housing and big commercial properties left vacant for years.
Generally speaking, today, new residential construction in urban areas is pushing affordability out to the periphery of the city, or the aging out ring of suburb outside of the city.
Another issue is that location matters, and we tend to stick to desirable places in a limited area. Few people want to uproot their kids from school every few years or move away from their families and social networks. So the fact that a 3 bedroom ranch in Minneapolis costs 60% less than a 1 bedroom apartment in Queens doesn't really matter.
I'd suggest you read the sections in Robert Caro's "The Power Broker" see how these kinds of shifts impacted millions of people in NYC during the 50s and 60s.
>The tax rules associated with large construction projects, plus that fact that large-scale commercial real estate is a cartel in most US markets
Interesting. Do you have any links to contemporary discussions of this issue?
The in-depth Glaeser/Yglesias/Avent discussions I've seen mostly focus on height limits and minimum parking requirements as major problems in urban areas.
For what it's worth, specific to what I've seen in Seattle, the vast majority of the higher density apartment buildings being constructed in Seattle today are replacing single family homes, parking lots, and quite often single floor commercial development with mixed-use.
I hear this "there's too much construction, they're building luxury apartments for AMZN/MSFT workers and pushing out the artists and baristas" argument all the time on Capitol Hill, but I've sat down and looked at the many dozens of buildings that have been build in the last couple years and the ones currently under construction, and only once was a cheap building torn down for construction of a luxury building. The specific location is the NW corner of E Pine and Bellevue, and the former building was abandoned after a fire.
Along Broadway E, several blocks of commercial real estate have been replaced with equivalent commercial square footage plus 5-6 stories of apartments on top. No units lost, only gained. In Denny Triangle, Amazon is ripping out a car dealership and some parking lots to build three blocks out with 500ft tall office towers, and apartment and condo towers are popping up in the area surrounding that already.
The story is similar in Lower Queen Anne and South Lake Union. Generally, no units are being lost to new construction, and neighborhoods are getting more dense and more walkable, all of which benefits people who don't want to depend on cars.
One of the most exciting housing developments in the city right now is the Apodment craze. These small dormitory-style apartments are built in very walkable areas of the city, and priced so that students, artists, and baristas can afford to live in them. They're generally built without any parking at all, which helps keep costs down. They exploit a loophole in the building code to allow this high density, and the typical NIMBY characters are quite upset. Funny, the same people who complain about luxury apartments putting bland software developers in their neighborhood abhor the thought of housing that the artists can actually afford being built.
Supply and demand isn't that simple especially in housing or other assets seen as investments. Rising prices in housing increases rather than decreases demand. People want to get on the ladder, banks throw money at people with no incomes and the world goes mad when house prices go up. It may be than supply can do a little to moderate the effects of the backwards demand curve but I don't think it can generally fix it.
Where there is a real building boom (Ireland/Dubai/Spain... 2004-2008, probably much of China now) the building industry can actually be a large part of the economy bringing in migrants (and housing demand) into the area temporarily increasing demand. Also the building tends to happen when prices are rising and people build and purchase speculatively based on the rising prices. So in the short term affordability falls due to the increased demand. In the slightly longer term prices start to fall and the building stops and therefore the demand falls further and no one will offer a mortgage to buy anything so affordability is still rubbish.
[Edit: typos. Added Spain to list of 2004-2008 boom areas and put a "probably" on China]
Something to note is that Seattle's central neighborhoods were strongly in the grip of a condominium boom. Older houses and 12-unit apartments were being torn down to build fancy 200-unit condo buildings for more than double the previous rent.
Everyone has to live somewhere; fitting 200 people on a small but tall, fancy condo plot frees up 200 people-units elsewhere. That's how supply and demand work.
Except that somewhere isn't implicitly in the vicinity of the new development. That somewhere could be in the suburbs, another city, a dorm room, a room in a parent's house, or any other options which doesn't have any real impact in the availability of housing in an area.
That doesn't take account of what quality and price-point the old and new units occupied. If the old units were older housing with fewer amenities at a lower price-point and the new units were luxury condos with in-building gymnasiums and doormen, then she was right and you were wrong. In that case, the construction was shifting the supply-versus-quality curve to more supply at higher quality and less supply at lower quality. Lower quality isn't always a bad thing, because it naturally implies a lower price for those comfortable with the no-frills approach.
One strange thing about the house prices is that people can opt out, especially in the US. You don't have to live in expensive places. You can live in perfectly nice places where house prices are 30%. One would have thought that the internet would have eased some pressure on the most desirable addresses, but the discrepancy seems to be getting sharper.
Another way of putting it is that if house prices are harming innovation, you would see more entrepreneurship in lower cost of living locations.
While the internet does make location irrelevant for a lot of purposes, there is value in being in an area with lots of other technology people. Even Superman moved from Smallville to Metropolis. :)
Another way of putting it is that if house prices are harming innovation, you would see more entrepreneurship in lower cost of living locations.
Correlation != causation.
Right now, location still matters a great deal. People are just mobile enough to stratify in their 20s (ambitious people move to the star cities) but not enough to render location obsolete outright.
In the Bay Area and New York, you have a continuous/liquid job market. If you're a startup that needs to hire a Scala expert with knowledge of 3 specific NoSQL databases, and you need to hire that person in two weeks, you can find such a person in the Bay Area, for a price. In Minneapolis, there are a lot of talented people, sure, but there isn't the critical mass that allows you to have ridiculous AND-ing in your requirement query. The same goes in job searching. You might have to choose between your location and your speciality.
The appeal of the star cities is the continuous, liquid market. For build-to-flip startups that grow rapidly and reallocate huge amounts of money without doing much, the second-tier cities just aren't an option.
The appeal of the star cities is the continuous, liquid market. For build-to-flip startups that grow rapidly and reallocate huge amounts of money without doing much, the second-tier cities just aren't an option.
In which case I think it's the build-to-flip "businesses" that deserve to die rather than the "second-tier" cities.
But what do I know? I live in a "second tier" city with its own Google, Microsoft, and Intel R&D labs alongside the nation's Institute of Technology. Somehow we're still considered second-tier and every freaking start-up still locates itself in the city 1 hour's drive south from here with Boston-scale housing prices in a country of Minneapolis-scale salaries.
It's not so much that no one would buy if they couldn't get a loan so much as it is that the availability of the loan causes prices to rise because demand goes up relative to supply.
All good points. But ask yourself, 'What's in the best interest of the wealthy and powerful, who get what they want?'. (They own a lot of real estate) Sorry if i'm too cynical.
I know next to nothing about trading. But it's become apparent to me that some of the core concepts/terms in trading (long, short, hedge, liquidity, futures, cover, etc) are very useful for modeling things in other walks of life. So, trading-savvy HNers: Are there any books, websites, or habits that you'd highly recommend to help a newbie become familiar with basic trading concepts?
Pick up a few books like Liar's Poker, When Genius Failed, and Barbarians at the Gate. That'll give you an engaging intro. Then you can start reading sites like FT, seekingalpha, Bloomberg, etc.
A few pieces of advice: under no circumstances do you want to get caught in the weeds of technical analysis, similarly stay away from the gold bugs, and finally learning is good, but don't jump in unless you are prepared to lose your shirt.
You won't learn finance specifics from those books, but they're all great recommendations.
In particular, everyone in this community should read When Genius Failed as a cautionary tale. It had a big impact on my world view. Here's a case where the best and brightest formed an accurate, contrarian hypothesis and executed on it perfectly, but were then blinded by their own cleverness and succumbed to hubris (the partners were leveraging their personal wealth to increase their stakes in their fund) and lost it all.
under no circumstances do you want to get caught in the weeds of technical analysis
Why is that? (I ask as someone who is genuinely curious and has no prejudice, not as someone who disagrees with you.)
similarly stay away from the gold bugs
What do you mean? Do you mean, "Don't buy gold," or do you mean something more than that? And, why? (Similar caveat to before, modulo that it looks obvious to me that gold is a much safer store of value than almost anything else and probably even a good investment.)
I'm fond of Warren Buffett's view on gold: you could buy a hunk of yellow metal that just sits there, or you could buy an equivalent amount of Coca-Cola. Coca-Cola will give you about a 3% dividend every year, plus there are thousands of people working hard every day to make sure that they sell even more Coca-Cola next year. At the end of, say, ten years, your hunk of gold is still the same amount of gold. But your chunk of Coca-Cola has grown and even given back to you 30%. So the question is, which would you rather buy?
Technical analysis can give you a false sense of 'knowledge' - when you may only be picking up patterns in randomness. But it's very seductive in its certitude.
Gold : If the 'store of value' argument is obvious to you, it's also obvious to a lot of other people. The price of gold tends to balance out the two camps : Anyone who sells you gold believes (naturally) that the price is higher than can be justified (vs. other assets). Gold can certainly go up and down from here. People also used to believe that houses were a fantastic store of value ('everyone has to live somewhere') - that was only 6 years ago.
The typical trader's wisdom is that if a taxi driver (or some other version of 'the man in the street') offers an opinion about a 'sure thing' - run in the opposite direction. Currently, taxi drivers love gold. A few years ago, they had friends flipping condos. Before that it was internet stocks, etc...
If the 'store of value' argument is obvious to you, it's also obvious to a lot of other people.
I don't know, I mean, there's lots of smart people who think gold bugs are just nutty libertarian types, and then there are other smart people who aren't particularly bullish on gold (such as yourself).
But it seems kind of backwards to just "do the opposite of what everyone thinks is a sure thing" (as you said) or "do the same and jump on the bandwagon". Ultimately, in many cases, there will be economic fundamentals (and not just other people's sentiments) that will drive the value of things over time.
Which leads me to a more specific question: What kind of event would cause a major "correction" that would drive the gold price down (either over time, but a significant downward trend, or suddenly, like a bubble popping)? I can't really think of one. Can you?
I mean, one would be if everybody "sentimentally" just decided gold was in a huge bubble, but that seems quite unlikely without an underlying factual reason. Another would be if there were lots of much better investment opportunities, that would drive wealth stored in gold into factors of production... e.g. a very major, capital-intensive global economic boom. Right? Which is something I would be willing to bet against, at least over the course of the next decade.
> Which leads me to a more specific question: What kind of event would cause a major "correction" that would drive the gold price down (either over time, but a significant downward trend, or suddenly, like a bubble popping)? I can't really think of one. Can you?
Hmm... Let's think:
Strengthening of the global economy.
Political crisis in China that prompted players with lots of money to flee.
Government action in the US, India or China banning or restricting gold ownership or import.
Accounting scandal affecting a major gold ETF.
Discovery of a new, large deposit of ore.
Changes in tax treatment.
Changes in margin requirements for investors.
There are people who are investing in gold today because the US debt situation is horrific and the economy is in a bad place -- they are rational investors. There are other people who have been predicting the fall of the monetary system since 1980, and are recommending that you orient your life toward the stockpiling of gold, and cash out your 401k for a 100% "gold IRA". Those folks are gold bugs.
Gold isn't a terribly useful metal. There are some minor electrical applications, a handful of catalyst applications, and of course jewelry. The size of the international investment stocks is a great multiple of the annual usage in all these categories.
So the high value of gold is predicated on the high value of gold -- think tulips, Miami condos, and dot com equity.
However, gold has been in this bubble for a very very long time. Consider the famous investing maxim "the market can stay irrational longer than you can stay solvent" and just stay away is my opinion.
In response to the sibling post on transmuting gold, the minimum possible energy cost is really, really high (due to the necessary gamma rays and the cross section of 198Hg). Unless we figure out a way to produce to nearly free energy it is never going to be worth it.
> What kind of event would cause a major "correction" that would drive the gold price down.
The value of gold has fallen a few times before. Mostly because people moved onto something else as an investment. When investing in industry is uncertain, like it has been when the solvency of countries are even in question, gold and other commodities is a good hedge. However, just like no one could perceive that house prices could collapse (since everyone needs somewhere to live and the population is growing), people struggle to understand that money put into gold now could be tempted to new investments tomorrow. Planetary Resources could also discover a golden asteroid.
> I don't know, I mean, there's lots of smart people who think gold bugs are just nutty libertarian types, and then there are other smart people who aren't particularly bullish on gold (such as yourself).
1) It doesn't depend on how smart the person is. It only depends on whether or not they believe it.
2) It doesn't have to be everyone. It just has to be enough people.
> Which leads me to a more specific question: What kind of event would cause a major "correction" that would drive the gold price down (either over time, but a significant downward trend, or suddenly, like a bubble popping)? I can't really think of one. Can you?
This actually makes me wonder what it would take to synthetically manufacture gold. A glance at Wikipedia says that it's not feasible (possible only in "unmoderated reactors", and I don't know what that means), but we seem close enough that if we wanted to, we could probably do it.
I will be thoroughly entertained if Iran actually decides not only create a honest-to-God nuclear reactor, but uses it to synthesize gold and flood the market. It'll never happen, but it would be hilarious.
>(possible only in "unmoderated reactors", and I don't know what that means)
I'm fairly sure that refers to a nuclear reactor gone into meltdown. By the time you've knocked together enough particles to make gold nuclei it's quite hard to calm the thing down again...
It's possible to distinguish natural diamonds from synthetic diamonds because diamonds can't be melted down and recast, so the impurities and flaws of natural diamonds set them apart.
Gold, on the other hand, is routinely melted down and recast.
Correction; women seem to want 'the real thing', but diamonds aren't themselves valuable, they are a status symbol. Girls don't want to show their friends a "fake" diamond and unfortunately due to marketing, they consider man-made fake even though it's real.
Somehow I can't imagine lab-produced gold being worth less than naturally occurring gold for jewelry, etc. I imagine the only potential difference would be the distribution of isotopes. But I suppose it could still happen if large players would benefit.
Technical analysis is curve fitting run amok. There is so much data that the dangers of post hoc hypothesis formation is even more acute than usual. On top of that the 'field' is filled with people hawking a mix of appeal to intuition and techno-babble that is really smarmy.
As for gold bugs, you aren't going to learn anything about trading from them. They may be right or they maybe be wrong but if your answer to everything is buy gold, how interesting is that? On top of that, and something I'd rather not get into a huge debate about, their understanding of macro tends to be pretty medieval.
There is a case to be made for having precious metals as part of a diversified investment portfolio. (IIRC Burton Malkiel, mentioned elsewhere in this thread, suggests that it be about 1% of your holdings.) But the “gold bugs” are the people who treat gold as the measure of value.
This does a really good job of explaining how having people fulfilling different roles viz trader, dealer, investor results in being able to buy and sell whatever you want whenever you want. I wish I could send a copy to everyone who thinks flipping second-hand goods on Craigslist is arbitrage.
Open an account on thinkOrSwim (etrade, whoever), fund it, trade with small amounts of money and research everything as you go.
Arbitrarily, SLV, which is an ETF that tracks silver futures. If you want to play with fire (and learn a lot of cool stuff), trade options (that's what I used to do)
Websites: SeekingAlpha (side note: financial articles, SA included, are sophisticated-sounding babble put out by someone that has to meet their quota, not well-thought-out logical explanations by people in-the-know)
Make a list of terminology and learn directly what it means to your trading. Pretty much any trading term that has general meaning and isn't arcane and quant-y is googleable. I recall Khan Academy also having very useful videos explaining a lot of terminology (Salman Khan used to be a trader)
For example, in SLV:
Liquidity: How easy (read: cheap) it is to open and close a position. If the spread on an option is $33.00 (sell) and $33.33 (buy), you lose 1% (most people say $0.33 - I prefer to look at the percentages) just by getting in and out of a position regardless of your trade (I'm ignoring commissions), and assuming the trade reliably goes through instantly. The higher the cost (time, risk of nonfulfillment, money) of opening and closing a position, the more illiquid the position is.
In the context of houses, the time and effort and money put into maintenance and time and uncertainty involved in buying/selling, etc make them extremely illiquid investments. If you own AAPL stock and it crashes, you can hit a button and sell it. If you own a house and the housing market collapses, good luck!
If I were to invest the cost of a house in some high-volume stock with a tight bid-ask ratio and sell it two years later for the same price by hitting a button on my phone, my losses are just the bid-ask difference and I was never really at much risk of being unable to sell it instantly (during market hours at least). It's a very liquid position.
That's just one example, but there are plenty out there. Jump in feet first, google all the things, and don't wager stupid amounts of money.
"A random walk down Wall Street" by Burton Malkiel is the classic layman's introduction to investing.
I would also recommend "Fooled by Randomness" for the introduction of the essential idea that most returns are not "normally distributed" - most profit and loss happens via wild swings, and most successful people are lucky rather than good.
Finally, for a more technical but very entertaining read: "Trading and Exhanges" by Larry Harris. eg in this book I learnt about "the Brazilian straddle" options position: a naked short option position hedged with a one way ticket to Brazil. (in case the bet goes against you) ;)
Like with any other language, I've found that frequent interaction with financial terms improves your literacy and helps you make better connections between ideas. For instance, a few years ago when Southwest Airlines seemed to have much lower prices than everyone else, I read that they had bought futures contracts back when oil prices were low. Right there you have a company that's 'naturally short' oil, who 'hedged' against rising prices by buying 'futures', etc. A couple of good sources for financial news are the APM Marketplace podcast and Felix Salmon's blog on Reuters, and you can look up terms on Wikipedia when needed.
Keep in mind that a bunch of the commonly recommended finance books are either a bit pop-finance (Liar's Poker) or somewhat outdated (Intelligent Investor), which is OK if your goal is to be entertained or well-versed, respectively. Most authors have a thesis, and if you were to only devote time to one book and it happened to be something like Fooled by Randomness, you'd find yourself with a very skewed view of things. That's why I'd suggest current news if you're only interested in financial terms as they relate to your job.
And finally, like with any other jargon, realize that while it's useful to know and can help formulate ideas, a lot of people overuse it. Not saying this article does it, but I've seen finance people go "short" undesirable menu items at a restaurant. Don't let the gratuitousness make you think these terms are more important than they are :)
The best books are the 'Interview' series by Jack Schwager. These date right back to the 1980s until a very recent release last year. They are just interview format books with successful traders from a very wide variety of markets and styles.
The key takeaways from the books are 'your investment style must fit your personality' and 'anything is tradeable if you have an edge'.
The books will give you a very good grounding in trading concepts as well as open your eyes as to the diversity of people that succeed in the field.
It will also help you dismiss 'advice' like 'technical trading is useless' or 'fundamental trading is hopeless', because you will be able to detect the advice-givers bias, and realise that, like anything, it's different strokes for different folks. What matters (in trading, in life) is that you identify an edge you hold, and apply that edge with discipline. And if you don't know what your edge is, you don't have one.
I have also been following this course and am extremely disappointed in its quality -- not just in poor production, but also in the coverage of course material. I would not recommend this as a primer on investing.
Last year I was in a kindof similar situation, this stock, investment, trading always intrigued me.Started with random reads i.e. articles at marketplace, FT and looking for terminologies at investopedia. The first formal read was: Trading for dummies (sounds bit noobish) but it proved a top move, with zero distractions and aqcuired the basic fundamental and technical analysis concepts plus lot more. After it, definitley go for some detail read Intelligent Investor, Liar's Poker .
Something like "Options as a Strategic Investment" is probably the shallow end of the big pool of modern trading. Highly recommended. Others might disagree, and say its over-ambitious (without some technical chops).
My parents bought their house 25 years ago 250k and sold it for 1.5m. Now they are renting a 2 br apt for 1500/month. Their housing cost will be roughly 25k/yr and they are millionaires. The idea that the article talks about how you can't be long the housing market is just dumb. His analogy doesn't work and to say that you can't benefit from house prices going up is dumb.
If your parents took out a loan when they bought the original house, you're likely neglecting the cost of interest. If not, that's fine too.
So they "made" $1.25MM at the sale of their house. That's a taxable capital gain. The rules for that can be complicated, but let's just say 15% to keep it simple. So that drops the gain about $188k down to $1.06MM.
Let's say they live for the rest of their lives in the 2BR apartment (I have no idea how old your parents are, but lets just say that's another 30 years). So you say your parents' housing costs will be $25k per year. Let's say that goes up 2% per year. In a rent-controlled area it might be a little lower than that, and otherwise it might be a bit higher. Over those 30 years, your parents' housing costs will be $970k. So now your $1.06MM is down to about $90k.
So, effectively, your parents have "made" $90k on their $250k home. That's 36%, or about 1.5% per year. Not great, but better than most savings accounts. Er, wait. Inflation. Wolfram Alpha says that 250k 1987 dollars is worth just over $500k today. So under this model, your parents just "lost" $410k.
Not to mention that your parents are now living in a 2BR apartment instead of a presumably-larger house. And maybe that's fine: you can say that your parents' innate housing short got smaller because they've decided that they don't need such a large house anymore, and something smaller and not free-standing will be fine for them. But that's basically like saying you bought a case of beer, then decided you didn't need that much, sold it, and bought a half-case of beer to replace it. Sure, you now have a half case of beer worth of money that you didn't have before, but you can't say you "made money" selling the beer.
Now, I'm sure I left out some costs (housing upkeep, property taxes, etc.), and didn't get the capital gains tax quite right, but I hope you see my point here. It may make financial sense to sell your house and downsize, but this in no way means that a home purchase was an "investment".
Presumably, they'd 'invest' that $1M @ 2.5% to get 25K/yr, nicely paying off their rent, and keeping the capital in place.
And if they invest it at 2.5% + inflation, they'd never run out their capital either.
So your conclusion is incorrect.
The way I see it, land (+ house) provides inherent value - ala equity in a stock, and unlike gold or cash. So buying a house, is an investment, since it'll presumably last beyond your lifetime, and continue to deliver value.
Still, though, depending on a lot of factors, his parents may or may not make out net positive in the end.
Thinking about it a bit more, though, I think I'm harping on the wrong thing here.
Whether or not you come out ahead has nothing to do with whether home ownership is an asset or a hedge. You can certainly come out ahead with a hedge: that is, the instrument that you use as a hedge can turn out to be a source of income in the end. That's part of the reason that it's there, to provide a possible gain to offset a possible loss. But that doesn't make it an "investment" after the fact. It's still a hedge.
In all of your complexity, you seem to fail to account for the "control case" of GP's parents renting the whole time. You can't reasonably "charge" the $970K for the next 30 years of rent against their "profit" from their ownership experience.
What you've essentially proven is that, "In order to live in their original house for 25 years plus an additional 30 years of renting, they will have out-of-pocket housing expenses." That finding is air-tight, but also unenlightening.
What would it have cost them to rent for all those 55 years?
You can use whatever math to rationalize your theoretical position on the subject. However, my parents who were a single income middle class family earning no more than 60,000 at their peak now has 1.5m in the bank.
The idea they "lost" 410,000 when they have $
1.5m cold hard cash is mind boggling in your own self delusion.
Rasing 1.5M in non-inflation adjusted dollars in 25 years requires saving only about $1563/mo.
It's quite possible that they did better with their leveraged housing purchase than they could have otherwise since they needed housing anyways... but they were fortunate to be in a location that went up in demand, many places barely kept up with inflation.
But raising 1.5M in 25 years is no astounding feat on its own.
I never said it was astounding those are your words not mine. Now tell me how many of your parents middle class friends have been able to save $1500/month consistently for 25 years and have 1.5m in the bank. Unless you are in the upper class, I'll bet none of them.
The point is the above poster gave ludicrous manipulative figures saying they "lost" 400k. It's a great example of how people can sit back and be great armchair quarterbacks and pooh-pooh things using flawed mathematical assumptions but when you look at things in the real world, it all falls apart. He says based on his numbers they "lost" 400k meanwhile they have 1.5m in the bank. You say all it takes is to save 1500/month over 25 years every year and ill be willing to bet no one you know has been able to save 1/3 of their pretax income consistently every month for 25 years.
Housing is generally a great passive way for people to save for retirement. Nothing is guaranteed of course. Many people lost their savings because of the Housing bust. But that is a 5 year period of people relative to decades of people who actually prospered from it.
I've personally saved more than 1/3rd of my _pretax_ income over the past 14 years. Does that count?
People don't talk in public about their finances very much, so I don't know about other people. Especially because when people realize you have healthy savings they start asking for 'loans'. Perhaps that is another benefit of owning an expensive house: it's a way to stash away value that less thrifty friends and family won't mistake for free money that you can give them.
The long term housing values are net positive, yes, but not relative e.g. to the broad stock market.
The fact that housing can be a "great passive way for people to save for retirement." is largely because they already need housing, which was part of the article.
I wasn't stating that the prior poster's figures were correct... just pointing out that the 1.5m figure isn't that impressive and that achieving that depended on historically atypical appreciation, and that it could have gone the other way.
You're missing his point (which wasn't hard since the point wasn't very clear...)
In inflation adjusted dollars, your parents paid roughly $500,000 for their house. You said they sold it for $1.5MM. Even if we ignore interest payments, property taxes, repairs, maintenance, upgrades, and the myriad of other costs associated with ownership, and all transaction costs associated with buying/refinancing/selling, your parents netted $1MM in 25 years. Let's also assume they only put down 20% in 1987, or $100,000 in today's dollars. Under these circumstances, they doubled their money 3.25 times, or earned roughly a 10%/year rate of return. That's pretty good, if you ignore all associated costs.
Now consider just one easy alternative: The S&P 500 was at 250 in Dec 1987. Today its at 1400, meaning it has doubled 2.4 times, or earned roughly a 7%/year rate of return. The DOW was at 1750 and today its at 13000, meaning it doubled almost 3 times, or earned roughly 9%/year rate of return.
Mind you, the costs associated with investing in and holding an index fund are unbelievably lower than the costs associated with owning real property. Once you account for even a portion of those costs, your parents' real rate of return on their real property is likely to be around half of what their return would have been on just a simple index fund.
(The above analysis excludes what your parents would have paid in rent during those 25 years. This is obviously a significant factor that changes the numbers [just as all the other costs associated with real property would], but as you can see, even when returns on real property look significant [we turned $250k into $1.5MM in 25 years!], the actual return is often much, much different.)
Edit: Note that I've just purchased a rather expensive home in California within the last year, so I am "long" housing relative to what I could be paying in rent. I'm not bashing real estate by any means, only pointing out that all returns are not what they appear.
He says based on his numbers they "lost" 400k meanwhile they have 1.5m in the bank.
I think the person who said they lost $400K was telling you that they really could have had almost $2M in the bank today, not that they should be $400K in debt.
You're right that his mathematical assumptions are wrong, but I wouldn't hand wave away sound financial math reasoning if you want to make informed investment decisions.
Your analysis is incorrect because having to spend 25k + inflation 30 years from now is not the same as spending it today. To calculate properly, future expenditures need to be discounted according to return minus inflation compounded over the duration. So unless you're claiming that you can't safely get a return above inflation, his parents will come out ahead.
I never said anything about inflation over the 30 years following the home sale. I was talking about inflation between the $250k purchase and $1.25MM sale of the house.
A lot of people think their house is their pension and they will downsize, but few people do.
A lot of old people simply don't want to leave their home, and of those that do, most people will prefer to stay in the same area near lifelong friends and family. As area tends to be a bigger element of the price than the size of the house, it's difficult to be release that much capital after taxes, costs of moving.
Also note that your parents lived through a massive and unprecedented credit bubble. Just because this happened over the last generation does not mean it will continue to happen. Quite the opposite, we'll be unwinding the excesss of that generation over the next 10-20 years.
Wtf?! Yes you are short housing...then u buy one...prices go up... you sell the damn thing...at which point you become short again...but with that extra money you can cover your short and come out ahead in a different market.
It isn't like gold in that the prices are fairly constant across markets. If my house in the bay area goes up 30% i sell that and relocate to illinois you can bet i will cover the short and come out ahead since home prices in illinois lag ca by a good 150-200k.
"If my house in the bay area goes up 30% i sell that and relocate to illinois you can bet i will cover the short and come out ahead since home prices in illinois lag ca by a good 150-200k"
You need to factor in interest paid on your bay area loan to get the full picture. Just because your house value goes up by a certain margin does not come close to meaning you have profited by that much. This is especially important to understand in areas with large home prices in that the cost of holding the asset (interest) is very high especially early into the loan.
Very true, but don't also forget to deduct the cost of renting liveable accommodation from your mortgage costs. Otherwise your comparing the cost of living in a house to the cost of living in a cardboard box.
Actually, you have profited much more. If you put 25% down and your home appreciates by 25% you have doubled your money (net of interest and other costs). Also, newsflash: interest rates are very low these days.
But that last portion "(net of interest and other costs)" is my argument. Interest, property taxes, capital gains taxes, real estate agent fees are all apart of the cost of owning and selling the asset and it usually adds up to quite a bit. Within the first 5 years even with a 3.5% loan you pay around 20% of your mortgage balance just in interest.
But there's a reason home prices lag, generally speaking. Pay also tends to lag. But honestly, the Bay Area is an outlier in the housing market. Imagine moving from Chicago to San Francisco...
As mentioned elsewhere in the thread, you are not short some dollar value but short some "survivalship house value" based upon your own subjective tolerance for what is a "minimally viable living situation."
If you live in the bay area, you may be short the "house value" equivalent of $500k, but living in Illinois you may be short the "house value" equivalent of $250k. Of course the location is part of the "minimally viable" part for certain people, but for others this is a less important part of "viability". Regardless, it's not a dollar value, it's "house living value", and anything beyond that part of the equity in the house you own (for most people: the majority of it) is speculation/investment into the real estate market.
This is true, you can't sell your house and then NOT have shelter. What older people can do is sell their house and then move into an apartment and gain financially from this transaction, assuming they don't live for many many more years.
However, if they do they "lose" on the transaction: and this proves the "covering a short" nature of the transaction.
"If house prices rise, the value of your house (the hedge) increases but so does the cost of shelter."
What about the ability to rent? As demand for purchasing housing goes up, demand for renting typically goes down (ie. either levels off or regresses). Sure over time both go up, but at a particular slice of time, usually on a cost of living basis one is advantageous over the other. And while you're renting at a cheaper cost than it would be to essentially rent money (let's not kid ourselves, you don't own a house if you have a mortgage), you have liquidity to place in other investment vehicles.
Small observation... maybe there's something to it, maybe not, but it seems I'm 2/2 on calling when market swings happen here in downtown San Diego over the past 10 years. Take a look at the delta in rental prices in properties in various classes and compare verses actual selling prices. Just like a P/E for a company, if you can't at least turn a profit on owning a piece of property as a rental, it is likely overpriced. As much as people love to talk about various market factors much of this is emotionally driven.
For instance, last year I observed an entry level condo complex in a marginal area rent 1 beds in the $1800-1900 range. The latest comps for that building were $150k for like properties. About 5 blocks away 1 beds in a luxury high-rise were renting in the $2200-2300 area. Comps? High $300k. At the height of the market comps for the luxury high-rise were in the mid $500k area and the marginal property were in the upper $300k area. Back when that was happening, the luxury high-rise unit was renting just shy of $2k. The marginal unit? About $1400. I took another 4-5 other buildings in the area of varying quality and this trend was intact. To be fair this is a small, insular market and these swings are largely driven by speculation from the bubble-tastic situation many overheated markets found themselves in (ie. people owning and flipping multiple properties found the bottom of the market being rented cheaply).
> As demand for purchasing housing goes up, demand for renting typically goes down (ie. either levels off or regresses)
While it's true that we had a rather large anomaly 2004-2009 (a.k.a. the housing bubble), and that there are tiny boom/bust cycles in which it is possible to get a little leverage to cover switching costs, prices and rents seem to be mostly linearly correlated [1]. This means that as prices go up, rent goes up.
In order for prices to be divorced from rents, you have to hypothesize some weird market externality, like a major recession, or crazy incentives for mortgages, city suddenly becomes a tourist destination, etc.
It would behoove you to read beyond the sentence you quoted.
"In order for prices to be divorced from rents, you have to hypothesize some weird market externality,"
There are always externalities at play with an asset, and many times they are irrational. Sometimes people just want a place to put their money because a particular asset class appears to be more performant at a given time than the alternatives.
[1] Isn't applicable as this is a regional phenomena. Looking at this at a national or global level absorbs localized hysteris.
While it's true that there are regional price/rent divergence phenomena, the transactional costs exceed the profits and effectively segment owner-occupied and renter-occupied housing into noninterchangeable goods. Quoting from a BLS meta-study [1] who cites an earlier BLS manuscript by the same author (original paper unavailable):
> Despite this novel divergence finding, the third novel finding is that there were evidently no unexploited profit opportunities. The detached-unit rental market is surprisingly thick, and detached housing is readily moved between owner and renter markets, so the capital specificity issue highlighted by Ramey and Shapiro (2001) should not play a big role. However, the large costs associated with real estate transactions would have prevented risk-neutral investors from earning expected profits by using the transaction sequence buy–earn rent on property–sell, and would have prevented risk-neutral homeowners from earning expected profits by using the transaction sequence sell–rent for one year–repurchase. The large wedges offer a partial explanation of the significant divergences: rents and user costs might evolve somewhat independently until their divergence becomes large. Another way to put this is that the owner-occupied and rental markets are segmented.
Those transaction costs are going down to the point where they will be a non-issue. Technology is making it happen. 1%/flat fee brokers were common during the last cycle as well as all sorts of tools to buy/sell your property. Check out something called homecoin.com. Additionally, did you know you can become a licensed broker for less than $1000?
BTW, I am both a landlord and a homeowner, have been since 2003.
I also have known 5 gentlemen/families over the years who have made 8 and 9 figure fortunes solely from real estate. No, it didn't happen over night, it took several boom/bust cycles and leveraging up. I'm just echoing largely what I've been told.
I'll take practical experience over studies any day.
The variable delta between rent and purchase price/mortgage cost doesn't break the premise that purchasing a house is a hedge against future requirements. You might do better renting but you don't have the future right to occupy that house at any cost. Rents might go up more than your investments and leave you needing to look elsewhere but if you have bought it you have a secure tenancy (subject to mortgage conditions).
I think you are very right about a large delta being a signal of an unsustainable market though. Steve Keen (http://www.debtdeflation.com/blogs/) describes investment in assets where the profit won't cover the interest as 'Ponzi' investment as you are hoping to pay it off from rising asset prices and points out that these are unsustainable in the long term, someone is going to get caught out. He thinks that loans should be capped to a multiple of rental value which should reduce the tendency to drive up prices by purchasers competing to take on the most leverage and mean that competing purchasers compete on who can commit the most equity.
"The variable delta between rent and purchase price/mortgage cost doesn't break the premise that purchasing a house is a hedge against future requirements."
But it does break the premise "but so does the cost of shelter." There is an advantage to sell while it's a seller's market and rent, while doing the opposite while it's a buyer's market. That's leverage that breaks this premise.
"You might do better renting but you don't have the future right to occupy that house at any cost."
This thinking is one of the key reasons why it's possible to systematically make money off of real estate. It's pervasive crowd-think, at least in the more impacted markets. It seems sound and logical, but it's fear based and irrational. There is clearly an upwards trend in real estate, yes that is true. But there are peaks and valleys along that mean.
"Steve Keen (http://www.debtdeflation.com/blogs/) describes investment in assets where the profit won't cover the interest as 'Ponzi' investment as you are hoping to pay it off from rising asset prices and points out that these are unsustainable in the long term, someone is going to get caught out. "
Yes, that's speculative action at work - as I mentioned in my original post with actual examples toward the end with my theory of how to detect the switchover. It's fun to talk about and how to solve it but it doesn't change that it actually occurs. The recent housing bubble exacerbated it but it is a phenomena of active markets during boom/bust cycles.
> But it does break the premise "but so does the cost of shelter." There is an advantage to sell while it's a seller's market and rent, while doing the opposite while it's a buyer's market. That's leverage that breaks this premise.
Hedged is never optimal but it should never be disastrous either.
You can often profit from unhedged speculation. If you can successfully predict the market you have nothing to gain from hedging. That you can do it profitably and possibly reliably doesn't make it hedged.
>> "You might do better renting but you don't have the future right to occupy that house at any cost."
> This thinking is one of the key reasons why it's so easy to make money off of real estate. It seems sound and logical, but it's fear based and irrational.
This thinking may be based on fear and suboptimal in terms of dollar wealth outcome but that doesn't necessarily make it irrational (stability and security have real value to some people) but you are right that it creates opportunities for those seeking profit.
The Steve Keen / Ponzi finance comment was in agreement with you.
What about if you get to 60, sell your house and use the money to rent for the rest of your life. In that case you might have higher short term costs as well but to you can stay in short term as you will likely not need a house for long enough to make long term more economical.
Also housing markets in different places don't move in unison so there is some room to trade markets and turn a profit.
Not sure any of this effects the point of the article though.
Yes - you are only naturally short the housing you will need for the rest of your life, but if you own a house then that represents housing for the rest of the asset's life.
If the life of the asset is expected to be significantly longer than your life, then you are indeed slightly long in housing.
Similar reasoning applies to willing your house to your kids (or whoever else) -- that's potentially a lot of value you can transfer when you no longer have housing needs yourself.
If you are "naturally" short housing because you need it, can't you could make the same case for all hard commodities and stocks in companies that produce all your future consumption needs?
Because everyone needs to live somewhere, if they don't own a house, they are hurt if house prices (and 'therefore' rents) rise.
To avoid being affected by something external (like house price fluctuations), it makes sense to own a property (or invest in property-related stocks). But only enough to cover your needs.
If you buy a too-big house, or several houses, you'll be in the situation of hoping for house prices rises - meaning that you'll benefit if prices rise - beyond the additional cost that you'll face in the current property markets.
The surprising point of the article is that it is natural to assume that no property = no exposure. But that's not true in the case of housing.
If X is some investment (gold, real estate, Apple Inc. stock, whatever), and I have structured my portfolio so that I would benefit from the price of X going down, then I am “short X”. If I would benefit from the price of X going up, then I am “long X”.
“You are naturally short housing.” = “If the price of housing goes down, you will be naturally be better off.”
I cant figure it out either, but I think it just means that you will always need shelter, so prices going up is bad for you.
At first I took "shorting" literally, and thought it meant I borrowed a house, sold it, and now I need to buy it back at some point. It probably just means "in need of", with a bit of financial connotation?
"Define short"
7. low in amount; scanty: short rations.
9. below the standard in extent, quantity, duration, etc.: short measure.
10. having a scanty or insufficient amount of (often followed by `in or `on ): He was short in experience.
It's literally the last definition there: "having an insufficient amount of." "Shorting" refers to the process of getting to the position of having an insufficient amount, assuming you start neutral or long. He's saying you are "born short", not that you interact in any "shorting."
Depending where you live there are alternative shelters. The alternatives are not for everyone, and they are usually not "easy", but there are advantages and disadvantages to not owning (a house) and to not renting.
example? I mean, assuming one wants to live within society and not as an "outlaw" wanderer, I'm having a difficult time thinking of how you can avoid buying or paying for shelter.
You could live with your parents, or couchsurf with an understanding friend / partner. Richard Stallman famously lived out of his MIT office for a long period of time.
Of course, these lifestyles all have costs, just not necessarily financial ones.
So do you plan to continue your genetic lineage? Um, I mean, have kids and reproduce? If not, cool. You can die alone in your office.
If you do plan to have kids, where are you going to house them? Okay, so they're going to share the RV with you. Do you plan to home-school them? Do you have time? Okay, maybe take advantage of the public system then. Whoops, you need a permanent address for that. I guess you're going private. Hope you saved up.
Unless you are RMS, you know, or otherwise really, really difficult to replace, the boss is unlikely to let you 'establish residence' in your office. The tax implications alone are complex. insurance, housing law, zoning law, man, it's a pain in the ass. I mean, I always was /that guy/ and I was a little annoyed the boss wouldn't let me live in the office, but now that I am the boss? I see why. It's cheaper to buy a cheap apartment than to deal with the bullshit.
that said, if I was single, I'd probably get a nice live-work place and let the chips fall where they may come audit time, just 'cause I think it'd be really cool and because some of those issues (like the 'establishing a residence' - you really don't want to have to call the sheriff and go through evictions when you fire the guy.) go away if the owner is the employee, too. but as I'm not single, yeah, having that separation of space (and having "my space") is pretty nice, too.
> Okay, maybe take advantage of the public system then. Whoops, you need a permanent address for that.
False, at least in NJ.
> For instance,
the commissioner of education found that year-long residency in a local campground in violation of zoning laws had no impact on the determination of domicile under New Jersey’s school residency law. It is therefore unlawful for a school board to deny admission to a student on the basis of the legal status or physical condition of his or her home.
First off, sure, there are circumstances that make it difficult to seek alternative shelters, but the root poster in this thread said "the alternatives are not for everyone." If you have have kids, you're not gonna be couch surfing. The idea, however, is that for some people, alternative housing is definitely an option, and that point seems perfectly valid.
Secondly, there's no need to be negative in your reply. Some people might have different goals than you and it's not very kind to disparage them for that. There are people that don't continue their genetic lineage and have fulfilling lives. Perhaps you're just exaggerating to make a point, or the humor didn't quite convey over text and I'm just taking it too literally, but I don't see what you're trying to achieve with that harshness.
sure, sure, I can avoid paying taxes, too, if I talk my mom (or more realistically, my boss) into paying them for me... but that's not what I was asking about.
I travel the world country hopping every month or so and stay almost exclusively in places sourced off airbnb or wikitravel. Works fine, I don't know if I'd qualify as an outlaw wanderer? Perhaps not.
Or you could buy an RV and travel whatever land mass you're stuck in, or you could buy a yacht and travel the seas, or the options are fairly limitless. Buying a house and settling down is just the path most frequently taken, not the only one by any stretch of the imagination.
AirBNB (and hotels in general) are still renting. sure, short-term renting, but you are still renting a residence, even if it's for a day.
Note, by 'outlaw' I did not mean "breaker of the law," I mean "not materially protected by the law" (or, more correctly, protected less by the law.)
If you don't have a place to keep your stuff, well, you aren't going to receive the same protection for that stuff as someone who does. You also aren't going to receive the same level of personal protection against, e.g., harassment that you would in your own space.
Property protection is amusingly tenuous when you expand the playing field to the entire globe. In my opinion; live minimalist and have insurance for what you have. Has worked for me through Vietnam and Thailand and I am about to try Cambodia.
Sure, you could buy an RV, or yaht, but now you are just lawyering the definition of 'housing' - I would argue that putting wheels on a house doesn't make it less of a house. Same with floating it. And both of those solutions are way more expensive than traditional housing.
And both of those solutions are way more expensive than traditional housing.
Citation needed.
My understanding, from people who have done it, is that living in an RV is equivalent to a cheap apartment, and living in a boat can be even less expensive than that.
From what I remember of my research looking at boats and boat births on the peninsula, the boat space cost was about the same as an apartment, then you needed to pay to buy and maintain the boat. (anything in water needs... a lot of maintenance to remain floating.) - certainly around silicon valley, there aren't free places to park your boat. (the economics may be different elsewhere.) also, I did this research around the first dot-com bubble, it's likely the numbers have changed. But still, there is a reason why they call them 'holes in the water into which you throw money'
RVs are a bit more of an open question; where are you parking it? I mean, you /can/ boondock for free, switching between walmart parking lots and the like, but that requires an RV that can move when the owner of the space wants it to move, (and when the wastewater tanks need to be emptied.) and functional RVs are pretty expensive, and they require maintenance. is that more than what an apartment would cost? certainly if it's a nice RV. Could you buy a cheap RV off craigslist and keep it running for a year for $12K in depreciation and maintenance? maybe? but it'd be a close thing, and it wouldn't be a nice RV, and you'd have to move about often. but maybe. I do see a whole bunch of people boondocking on Stockton Ave near one of my co-lo facilities.
this can't be good, that hedge funds are currently buying up housing in a huge way, moving into rentals especially, going long housing, expect a rent grip like no other in the next 3-5yrs :
Question, what if you own a permanent shelter and then buy/rent/lease another (or multiple) shelters as an investment. Would you still consider that shorting the housing market?
This would make you 'long' in the housing market, but I fail to understand why people are so eager to buy individual properties as an investment. Individual properties are incredibly risky because the price is tied to so many local factors, what if the area goes bad? What if a bad tenant destroys it or doesn't pay rent for a few months? - for those who believe investing in property is a 'sure thing', why not simply invest in real-estate investment trusts, spreading the risk to thousands of properties around the country (or world), and getting a much less volatile return which is more representative of the 'true' housing market.
The best and worst reason I can think of for why people are attracted to investing in properties is leverage. For the typical person it is the only asset class where banks will lend and allow you to leverage an order of magnitude above investment. You cannot do that in a REIT. However you are right it increases risk and also you put in a lot more work. If you can afford the risk and have time, then great. If not, there are other ways to make money, as you point out.
You can actually gear into a REIT to a similar level. Most REITs have internal gearing, so applying your own gearing, albeit at lower ratios, will produce a similar effect.
You might think you have local knowledge which allows you to purchase and charge a higher than average rent. Also you might be choosing a house that you want to live in down the track as an investment now.
You are correct though that this can carry added risk.
It comes down to competition, information, and control.
When you go for maximum diversity in big markets (like a big REIT), you're competing against a big pool of smart money. There are going to be fewer pricing errors to exploit. You don't have more information than other players, and you don't have any particular control over the management of the investment.
If instead you are an expert in one small market, competing against a smaller pool of other players, you are going to find more pricing errors to exploit. And you are going to achieve much greater control over the investment, so if you happen to think you're an above-average manager (or chooser of managers), you can improve your returns above average.
Diversity isn't everything. It can actually hurt, if it means you're investing in many things you don't understand well, vs a few things you do.
I found the author's style engaging and simple enough for the broader audience. I'd like to see more of this, perhaps continuation of the thought and description of mortgage backed bonds and CDOs ?
maybe the PlanetMoney podcast? The episodes they did with This American Life about the mortgage crisis back in like 2008-2010 were brilliant (imo), and then they bought their own CDO toxic asset in 2010, I think, and reported on it.
- Author fails to make the distinction between two aspect of owning a house: for shelter and as an investment. These are two, although related, distinct aspects.
- Author fails to acknowledge that the point of making money an a house ('using it as investment') hinges on not rising prices, but prices that rise faster than inflation / COL, and/or inflation being above the mortgage rate the house was financed with. So no you're not 'just covering a short position', you're covering a short position and going long at the same time, with the same vehicle. But this is of course where the analogy falls apart. I posit that his analogy is unhelpful in understanding the role of a house in personal wealth management.
- You are inherently short the hypothetical minimum shelter requirement home— this is your future housing obligation.
- You may also be long a highly correlated actual home asset.
Appreciation of the latter is not beneficial to you when it is matched by the former. This means, for example, that you should think carefully before obtaining a HELOC against "appreciation" because you can have paper appreciation while staying equal or actually becoming worse off relative to your future obligations.
It'd be great if my parents understood this concept.
They always seem excited to sell their house when prices go up, and plan on buying a new one in a couple years after buying the first.
Absolutely. But you should realise that while you are renting you are 'short' on housing and you will either need to keep buying housing monthly (a.k.a. renting) for the rest of your life or buy a house later (hopefully cheaper or at least more affordable to you than you could now). There is nothing wrong with being short on the housing market you may have no alternative or you may have much better places to invest your assets or you may just think house prices will fall.
No option is risk free but the lowest risk approach is to match your lifetime needs to your assets so that you don't care what happens to house prices.
For example, having a few bananas in your fruit bowl does not give you a position in the banana market. Owning thousands of bananas you intend to resell, or shorting a banana company, gives you a position in that market.
Likewise with housing. Owning enough housing to live in (at whatever standard of living you intend) is a market-neutral position, so you should not be particularly excited by price changes in the market. If you own too little housing, you're "short" and price raises are a negative, and if you own excess housing (extra properties, or a larger-than-desired property) you're "long" and price raises are a positive.