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| ▲ | AnthonyMouse a day ago | parent | next [-] | | The assumption for a couple of generations has been that housing costs will always increase over time as a percent of wages. The problem with that is that it's unsustainable. The next generation has to be able to afford it in order to buy it, and they also need to buy food and utilities etc., which also cost more when real estate does. Investors can't save you either when the next generation can't afford the rent they would have to charge to turn a profit. But in order for housing to be a good investment, it has to have competitive returns with other investments, i.e. it needs to increase by at least as much as GDP per capita. Meanwhile median wages have been increasing slower than GDP per capita, which as above is the long-term cap on housing prices. In other words, housing can't long-term sustainably beat other market investments unless wages do, which they haven't, in which case people would get better returns by putting their money in stocks etc. Worse, years of ZIRP inflated housing prices beyond any sustainable level even with the scarcity being maintained by existing zoning restrictions, i.e. the "eventually it's not sustainable" point is already in the past. The result is that in order for housing to be a good investment going forward from now, there would first have to be a major housing crash so that "investors" (i.e. home buyers) could buy low instead of buying high. Which thereby implies that it wouldn't be a good long-term investment at current prices. And by major housing crash, notice what "enormous housing bubble that crashed the world economy" looks like on this chart in 2007 and compare it to what things look like since then, especially since 2020: https://fred.stlouisfed.org/series/MSPUS A lot of people haven't realized that the party is over and are expecting housing to still be a good investment. | | |
| ▲ | coryrc a day ago | parent [-] | | Nothing you said is wrong, but you could say that in 2013 too, and in that time apparently prices have nearly doubled and you missed out if you didn't take advantage. Mortgages are "heads I win, tails you lose" in non-recourse states like California. You're not down more than your down payment, but the upside is huge, and for the past fifty years it has been more financially advantageous to use that leverage to buy the most expensive home they will allow you to. | | |
| ▲ | AnthonyMouse a day ago | parent [-] | | > Nothing you said is wrong, but you could say that in 2013 too, and in that time apparently prices have nearly doubled and you missed out if you didn't take advantage. In 2013 you couldn't say that prices have nearly doubled since 2013 under ZIRP, which is the argument that buying now would be buying high. > Mortgages are "heads I win, tails you lose" in non-recourse states like California. You're not down more than your down payment, but the upside is huge, and for the past fifty years it has been more financially advantageous to use that leverage to buy the most expensive home they will allow you to. You're not down more than your down payment plus whatever principal and interest you've paid since then. On top of that, it's still leverage. Suppose you buy a $1M house with a $200k down payment and ~$5000/mo going to principal and interest. In five years you've paid out the $200k down payment, another ~$50k in principal and ~$250k in interest. If the value at that point declines by 25% since you bought, you're not down 25%, you're wiped out, -$500k, because you're left with a $750k house where you still owe $750k having already paid $500k. Let's say it's only -$380k because you'd have had to pay $2000/month to rent a smaller apartment in the alternative. Whereas if you put the $380k into non-leveraged investments and the market declined by 25%, you'd still have $285k instead of $0. If the overall market does better than housing or it was "safe" investments like CDs then you'd still have the entire $380k plus whatever interest it earned. Worse yet, if housing costs declined then your monthly rent would go down but your mortgage is fixed for 30 years. You could still make the argument that it's worth it to take the leverage if the upside is expected to be large, i.e. you expect the value to keep going up, but suppose you don't. | | |
| ▲ | coryrc 20 hours ago | parent [-] | | > In 2013 you couldn't say that prices have nearly doubled since 2013 under ZIRP, which is the argument that buying now would be buying high. But in 2013 you could say they've nearly doubled since 1998 under ZIRP, and then everything you say applies. It's also an option on continuing to live in your same COL but a different city, with a nice large house. Worse case, prices fall enough you can afford a new mortgage even if your investment is wiped out. Worst case of renting is you can never buy because houses appreciate faster than you can save. You said > then you'd still have the entire $380k plus whatever interest it earned. And it's not enough to buy a house if prices continue up, and you've lived in a cheap (so probably small and undesirable) apartment for years while your friends are building up their household. | | |
| ▲ | AnthonyMouse 18 hours ago | parent [-] | | > But in 2013 you could say they've nearly doubled since 1998 under ZIRP, and then everything you say applies. The problematic number is the home price to median household income ratio: https://www.longtermtrends.com/home-price-median-annual-inco... In 1998 it was ~4 having been stable in the 4 to ~4.5 range since the late 1970s. By 2013 it was ~5, from being five years into ZIRP. The peak in the housing crisis bubble was 6.8. Right now it's ~7. > Worse case, prices fall enough you can afford a new mortgage even if your investment is wiped out. Where are you getting another down payment having been wiped out? The original down payment was $200k. It only takes a 25% decline to wipe you out and even at the lower price you'd need another $150k to get a new mortgage. And just after a crash would be the time to buy, but that's when you'd have just been zeroed out. You might be better off to keep the existing house even if you're slightly underwater on it, at least then you don't need to sink another down payment, but then you're stuck continuing to pay the mortgage for a million dollar house when it's only worth $750k. And there is also a third option. Suppose the prices don't move significantly up or down for a while. Then the leverage neither wipes you out nor gives you leveraged returns, but it means you're paying the interest on that $800k loan while getting no return from it. > Worst case of renting is you can never buy because houses appreciate faster than you can save. Which is precisely the problem with buying if that's the thing that actually happens to other people. If prospective buyers can't afford to buy your house for the high price anymore then you can't sell it for the high price anymore, so the next thing that happens is that the price comes down. > And it's not enough to buy a house if prices continue up, and you've lived in a cheap (so probably small and undesirable) apartment for years while your friends are building up their household. Which is again predicated on the prices continuing to go up. How high can the home price to income ratio get before something gives? | | |
| ▲ | coryrc 4 hours ago | parent [-] | | I was thinking the same thing 10 years ago, but people are still buying houses, the stock market keeps going up. It doesn't make sense. But I lost a lot of money not being more heavily invested and buying a house I could easily afford. I also feel like we're a zombie economy that doesn't know it's dead yet, but all I know is somehow I'm going to be screwed and I won't see it coming. |
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| ▲ | coryrc a day ago | parent | prev [-] | | That's the bank's problem. |
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