The entire point of the article is that this way of thinking is outdated. Yes, we have long considered homes as primary investments and as the best way to grow wealth, and yes, we have had falling home prices bite us in the ass before. But these things are not set in stone, and a world where houses are just one of many goods we own and consume would work out just fine too, and perhaps it would work even better.
We can change the tax code, and home prices don't have to drop suddenly like they did in 2008 and put people underwater. They could simply plateau.
I read the article and it just glosses over the political difficulties, which will be extremely hard to overcome. Basically, when the most engaged citizenry also happens to be homeowners, legislating any measure that reduces home values will be akin to political suicide.
Even while it acknowledges the hypothetical nature of its arguments, the article doesn't consider negative factors - like the massive number of middle class middle-aged homeowners, whose mortgages will be underwater in case home prices were to drop. Is there going to be bailout of all of them? If not, we are looking at a repeat of 2008. If yes, who foots the bill?
Maybe, this idea would have been interesting at the beginning before homeownership was entrenched with the personal wealth. Now? Not so sure.
The author is right that treating housing as an investment is a mistake, but doesn't take their analysis far enough. In the case where no new houses are built and their house appreciates significantly, after they sell their house _they still need a place to live._ Their next house will cost just as much, regardless of if they rent or buy, effectively eliminating all the gains they made selling the first house. The only real ways out of this are to move somewhere else with lower housing costs, or die. And really, it's worse than this, because their children will need housing too unless they're ok with them living at home forever.
The mentality that housing is an investment good has created a lot of perverse incentives (buy as much house as you can, you'll make more money!), that we really need to curb so that we can lower the cost of housing for everyone. Housing needs to be a consumptive good, where much like cars there's incentives to drive prices down and keep overall spending on the sector low.
The problem is that people need houses to live in now. I can’t suddenly not need a house to live in simply because I feel very strongly that the trend of real estate appreciation won’t continue forever.
Seeing housing as a vehicle for wealth building is what leads to policies that increase or maintain housing prices. People don't need to put their money in to housing to build equity, they can just build equity. You know, save. Put it in diversified assets not chuck it all in to one asset and then leverage debt to chuck even more in to that asset.
Home ownership is how the system keeps the common man down. It should absolutely not be championed in his favour.
In the US, homes are the best way for the middle class to create wealth because the government essentially subsidizes this transfer. The entire financial system and tax code are designed to support this. There is no other country in the world where you can just get a loan that leverages you up 10:1 . This is where the cycle begins. Home prices have to go up now, otherwise these loans go underwater and we get another financial crises like the one we saw in 2008. Then, the tax code effectively gives you free money to do this trade. If you don't take advantage of it, you're probably missing out. Finally, this is why we always like a bit of inflation. Inflation devalues that loan and pushes the price of your house up. Falling home prices would be a disaster for America ... we've already seen this scenario less than 10 years ago...
You're missing the point: people who currently own a house get fucked. An entire generation or two of people will be locked out of retirement if housing prices significantly fall.
This needs to be accounted for. A majority of Americans own a home, so you're not going to get meaningful change in this area if it hurts most people.
This was an explicit goal of housing policy in the US 100 years ago. Read any text from that time period and you will see that housing was viewed as an investment and the foundation of wealth. Policy was therefore supportive of this view.
It's time we revisited this now that the country looks very different.
- For one, there is a large trend towards urbanization which changes the makeup of the country.
- The 30 year fixed-rate mortgage and mortgage interest deduction (now capped, and less impactful given higher standard deduction amounts) have been a large contributor to housing values being distorted from normal market prices.
- Throw in low interest rates, widespread speculation, financialization of real estate (ABNB, loanmls.com, etc)
you end up with a human right being divvied up by institutions, speculators, and an aging wealthy populace that has no interest in sharing the pie.
For what it’s worth, I fully agree with the author that the trends we see in housing availability and affordability are driven largely by perverse economic factors, and that the result is destructive.
However, “creating new wealth” is kind of a weird way to judge the validity of investments - many companies we invest in are not profitable due to wealth creation, they’re vehicles for growing wealth because of speculation, and for a lack of better options.
A lot of this boils down to inflation and the need to keep debt prices low to fuel growth. Countries can’t really unwind the ball of noodles that neoliberalism has cooked up, the transition from a moderate growth economy to a high growth, low risk environment necessitated low interest rates and low inflation, and the rest of the market has followed suit.
In light of all of that, it’s still true that unless the world’s government change course to disincentivize real estate speculation, owning your own house will create wealth by the basic fact that they allow you to lock in a fixed cost essentially forever while everything else gets more expensive. I will pay the same amount on my mortgage for many years while salaries gradually increase, to the point where 40 years from now my $2000/mo payment will look to us like the $200/month payment of 1980. In the past few years, I’ve seen several friends go from paying $700/month for rent to well over $1000, with some renting smaller places for prices that massively exceed my mortgage. At some point, something will have to change - whether that means new development in smaller communities, rent regulation, negative speculation incentives, or something else. As a homeowner, I personally don’t care, because I bought my house to live in, and trust that whatever happens, it will first need to affect flippers and speculators over people who actually utilize their real estate.
I’m not sure this is true anymore. The median American will never be able to afford their own home at current housing prices. Sure, we have a higher gdp per capita, but it doesn’t buy us the things we actually need like housing, health care, etc.
Perhaps what’s needed is to bring back family homesteads, but that doesn’t feel like much progress.
> Home equity is the main financial element that middle class families use to build wealth, and black rock, a federal reserve funded financial institution is buying up all the houses to make sure that young families can’t build wealth.
Faulty logic. First, though historically people have used home equity to build wealth, that hasn't been the best method of building wealth. Most of those people would have been better off continuing to rent and investing in the stock market instead.
Second, building wealth through alternatives to home ownership may be better for a large portion of the population that finds the very fact of their residence decreases the value of a home relative to other homes.
>>There is another side of this that the article doesn't touch on: home ownership.
Oh boy. There's so much I can say about this topic, and none of it is positive.
Basically, the way our culture mindlessly promotes home ownership is insane. Absolutely insane!
Every time I hear people complaining about "throwing away money" by renting, and how they would rather put that money into a house, I want to hold them by the shoulders and shake them violently. It's like the housing market crash did not teach anyone anything!
It comes down to this: a house is a terrible, terrible means of investment. It's a fixed asset that, contrary to popular belief, is not guaranteed to always go up in value. In addition, people don't really take into account the negatives. Primarily, a house ties you down. You have zero mobility as a labor market participant if you own a house, and this significantly reduces your leveraging power when it comes to negotiating salary. Besides that though, houses have a ton of expenses, and as fixed assets they are subject to a lot of uncontrollable risk (fire, floods, earthquakes, the neighborhood depreciating, etc.).
Instead of having that money tied down on a house, people are much better investing in the stock market, which has, over the past 100 years, gone up by 7% annually.
The only time a house makes sense is when raising kids. The stability of the environment has a lot of positive benefits for their growth. It also makes social integration easier.
I posted this in my own comment, but I agree that a lot of people won't buy homes until they drop even more. Unfortunately, I don't know how much more they're going to drop. There is a lot of artificially maintaining the value of homes, because politicians want to keep the voting block happy (people in debt with a family). I bought my home, because rates dropped below 5% and I had a chunk of money on hand, found a home I really liked, and was kind of sick at the thought that I'd just handed over almost $200k in just over ten years by renting apartments.
I make a solid income and owning a home isn't a trivial expense to me, so I can't imagine someone making a go at it if they have a family and an income that is half or a third. Prices should drop to whatever their natural un-aided point would be, so that all those people out there who will either never own a home or only do so by getting into unfathomable debt (all over again) will actually be able to own a piece. Imagine what the long term benefit to the economy would be if prices dropped just long enough for tens of millions of people to lock in rates on their own home? It would transform the economy as well as, perhaps, society. Owning a home would be the rule, instead of exception. Being in debt to own a home would be an exception. High rent would be an exception. There would be much more discretionary income to put back into other industries. Or, better, for people to stick into their savings so that they can retire with a home to live in and finances to support themselves.
The downside to making home ownership popular by making it a “no brainer” asset is that you have to keep making it a “no brainer” asset indefinitely.
2008 was people finding the boundaries of the equation (“just how quickly can we make prices go up?”) and the foreseeable future is a slower continuation of that game: housing will keep getting more expensive but not better because current asset holders will pull all the levers they can (outright blocking supply, making it more expensive to build via things like below-market-rate requirements, etc) to keep the train rolling.
Honestly the inevitable fallout is probably one of the greatest risks to the current societal structure (probably tied with climate change).
This doesn't seem to fit the facts. Entire occupational classes today can't buy homes that a single income household could buy in the past. The quality of housing is better in some ways (much bigger, heating, AC in most areas, etc.) but that's not much consolation if you're priced out.
This is a very silly comment when you look at actual prices. Even adjusting for inflation house prices have doubled or tripled in a lot of places while wages have remained stagnant.
No amount of scrimping and saving will overcome the fact that the house I grew up in is now $600,000 more than they bought it for when the average wage is like $55,000.
I’m not even a generational doomer type. Millennials and Gen Z will probably broadly be ok in the long run. But pretending that not owning a house is a problem of excess is just stupid when looking at the math.
"...but in the early 2000s, it was very common for people to view homeownership as some sort of magic escalator to riches - one would buy a home, then basically be guaranteed to resell it for significantly more later, and the gains would be used to buy a more expensive home..."
I'm not so sure that perception has changed. Sure, the magic escalator might be moving slower, but most people buy believing values are guaranteed to go up. Likely. But once you factor in the true total cost of the mortgage, taxes, repairs, etc. The profits are slim.
Kids might be a justification for home ownership. But most other favor the Homeownership Industrial Complex, as well as gov. Let's not forget Big Inc who love it when you're locked into a mortage.
I had the exact same thoughts as you when reading the article. It seems that many people are irrationaly fixated on home ownership as some kind of magical pathway for wealth. When you ask these people to put some numbers on paper, that magic goes POOF pretty fast.
I tend to agree, but I also feel like houses as a financial growth (vs family housing stability) investment is a new thing over the last 25-30 years, exacerbated no doubt by economic policies.
Before that, the only financial rationale I recall for buying a house was as a forced savings vehicle and as freedom from rent variations.
We can change the tax code, and home prices don't have to drop suddenly like they did in 2008 and put people underwater. They could simply plateau.
reply