Incidentally, this is what has happened in Japan, but with one big difference.
In Japan, people expect houses to be worthless after a decade, and they rebuild their houses frequently. This is partly because the poor quality of houses built in the first decades after WWII has created a bias against older homes that is probably no longer justified. Many buyers tear down homes and replace them -- this happens everywhere, but it is more common in Japan. People who have owned their home for a few decades will have it torn down and rebuilt every 20-30 years, and they will continue to live in the new one without any intention of selling the land.
On the other hand, while homes are worthless after a decade, land is extremely expensive. This leads to 40-year mortgages or to people building homes on land they lease for decades, and having them torn down when the lease ends.
I don't expect that kind of situation to develop in the US, nor do I want it to, but it's always good to learn about other approaches to home ownership, because it demonstrates that considering a home as an investment is not natural or inevitable.
But the problem is, if you've just spent 40 years paying a mortgage (which I assure you is probably a non-insignificant amount of your lifetime income in aggregate), you would expect to be able to recoup at least some of that expense, no?
In the US, your primary residence is usually your largest asset, and by its very nature, it becomes an investment that you want to protect. The depreciating nature of real estate in Japan is okay because they're a nation of savers. They have other investments to draw upon in retirement. This is not true in the US, and your home is essentially a forced retirement vehicle (unless you're just stripping out the equity all of the time, in which case you're screwed).
TL;DR It'd be fine if we pushed down real estate asset prices if people saved more and needed less income in retirement.
Japanese people do not expect to recoup the value of the land they paid their mortgage for. They expect their children to inherit the land and live on it. Considering that mortgages last 40 years, a lot of them are paid off by two generations of the family.
Land in Japan is not really an investment. Investments are made with the purpose of selling them at some point in the future to realize gains. That's not how Japanese people approach land ownership. It's not how Americans really approach it either -- many Americans will say that their home is an investment but also say they want to live in it until they die, which means they will never realize any gains.
Because that's how the system was built. Sure, tear said system down. But there will be consequences. You'll see consumption and tax revenues drop through the floor. You've got millions of homeowners 50+ who are expecting to use that asset value to live on, and that will need to come from somewhere else then (most likely social security and medicare topped up from federal tax receipts).
We're just arguing over how we squeeze the ballon; the size of the ballon stays the same (for the most part).
"The Baby Boom generation possesses enormous home equity, which by some estimates exceeds $6 trillion. Despite this mountain of housing wealth, many Boomers will face financial insecurity in retirement. According to one study, between 30 and 40 percent of Boomers will have insufficient income at age 70 to adequately replace their pre-retirement earnings. The extent to which Boomers and preceding generations might be able to draw upon their housing wealth to enhance financial security in retirement hinges on multiple factors, including:
* the amount of home equity that older adults of different socioeconomic subgroups hold today and will likely hold in the future
* seniors’ willingness to tap housing assets in retirement
* the barriers that older adults might face in extracting home equity to finance retirement spending."
"For most households, a majority of their wealth derives from owning a primary residence, and the authors find that the proportion of households aged 65 and over who own their homes has held up quite well despite the housing bust and subsequent homeownership decline. Whereas the overall homeownership rate has fallen to multi-decade lows in the wake of the housing crisis, the proportion of older adults who owned their primary residence was 78.2 percent in 2012, slightly higher than it was in 1998 or at the peak of the housing bubble in 2006."
> ... You've got millions of homeowners 50+ who are expecting to use that asset value to live on...
Wealth and cash flow are two very different things. I can't tell you what the future holds for sure, but a few things.
If they have significant equity in their home, chances are good that they have significant equity in other places as well. I don't have data to back this up, with the exception of my role on the board of a my employer's 457b plan.
Timing, more than anything, has more to say on any matter in retirement that we give credit. One doesn't know when cancer hits. One doesn't know when COPD hits, and you have to move to Arizona. One doesn't get to pick when the market bottoms or tops.
Housing is a lousy investment from a purely numbers point of view. I became an owner very reluctantly and it has cost me dearly. Taxes have gone up 15% every year. While they house ages it breaks and I am on the hook for everything. $75 in weed/bug stuff today... next week it will be something else, and the week after. I've spent multi-thousands on this thing outside of mortgage that I will never recoup... also time and it pisses me off.
My sweat equity will never be recaptured, really. I am only 36 once, and I spent a good three months last year remodeling a bathroom (due to mold) and missed a ton of good run days, time with family. BUT I saved a bunch of money doing it myself!!!! Don't care, laying tile sucks ass. never again.
I can't wait until home ownership becomes a relic of the past.
Housing is a lousy investment from a purely numbers point of view. I became an owner very reluctantly and it has cost me dearly. Taxes have gone up 15% every year. While they house ages it breaks and I am on the hook for everything. $75 in weed/bug stuff today... next week it will be something else, and the week after. I've spent multi-thousands on this thing outside of mortgage that I will never recoup... also time and it pisses me off.
Whatever makes you think you don't pay for those things when you rent? Sure, rent can be cheap if the landlord considers it "free money" while waiting for the property to increase in value, but if home ownership becomes a relic of the past, you can be damn sure rents will be more than enough to cover taxes, bug sprays and every other expense, plus some margin.
In Germany, rentals tend to be for much longer terms and allow much customization - so much so, my brother had to negotiate hard to get a kitchen left in his house when he lived there for a few years, as the previous tenants wanted to take it with them!
The price of housing will fall greatly when the baby boomers begin to die off, its going to turn the market upside down when it happens. This generational handover will look nothing like any that has come before because of its magnitude and the relative paucity of non real estate assets a majority of the boomers possess.
I disagree, but you're entitled to your opinion. There's enough buyers out there to soak up real estate inventory boomers will want to unload. Millenials are screwed but foreign buyers will do fine.
You can't count on foreigners for this sort of thing. Even in liberal Vancouver they're lowering house prices by slapping a tax increase on foreign purchases.
It does seem likely millennials get screwed in any outcome but what else is new, the savvy ones already account for that.
According to one study, between 30 and 40 percent of Boomers will have insufficient income at age 70 to adequately replace their pre-retirement earnings.
Aren't expenses lower in retirement? I can imagine these people being in trouble if they can't get, say, 70% of their pre-retirement income. Even in that case, they will be fine if they deflate their lifestyle accordingly.
Seriously, the area a house is built on is a limited resource. In the US not so limited in theory but in practice quite limited due to building permits and limited availability of working infrastructure (good schools are financed by local affluent clusters). This allows claims on location to act as a store of wealth similar to currency (issued in moderation) or bitcoins (minted in moderation) particularly as long as the population seeking housing grows.
Japan is a very different place due to much more flexible building permit system, an ubiquitous infrastructure, a shrinking population and a confidence bursting bust in the past.
Both situations are sort of mostly stable. An issue in the US is that the housing prices have disconnected from income through labor. What makes this really a problem is that housing is not the only asset where appreciation has disconnected. When this corrects the question is whether it simply corrects or whether the correction follows the path Japan has taken in the past. There are more people in the US but there is also vastly more land and Japan has shown that a society can change its mind about real estate as an asset.
Ask the people who shafted every other form of retirement savings?
This is the case in the UK; the government and industry have systematically dismantled both the state and private pension schemes for the vast majority of the people. Interest rates are held low, the stock market is incredibly volatile. Now they are coming after the one asset that people have left. Of course people are upset about that.
> But the problem is, if you've just spent 40 years paying a mortgage (which I assure you is probably a non-insignificant amount of your lifetime income in aggregate), you would expect to be able to recoup at least some of that expense, no?
It's not just that. Imagine that you've just taken out a 40 year $500,000 mortgage. How happy are you going to be if next year your house is now worth $250,000 but you still owe $490,000 on it?
As far as I can tell the best solution to this is to expand the housing stock in the presence of moderate inflation, so that nominal housing prices stay the same while real housing prices fall.
The US has a huge debt problem in general and moderate inflation helps with that too -- if the government creates new money it's that much less they have to borrow or tax and it reduces the real value of the national debt and everyone's mortgage, student loans, etc.
Imagine I've just borrowed $500,000 in order to purchase the same amount of AAPL. Then someone else starts producing phones that people like better than the iPhone, AAPL tanks and my securities are worth only $250,000! I'd be super unhappy about this.
But the "best solution" to this is not for the government to somehow prevent people from buying non iPhones so my AAPL stocks don't go down. The best solution is for me to recognize that placing highly leveraged bets on the stock market is extremely risky and that I just lost money because I made a bad bet.
What you are describing is socialized losses, privatized gains. Why is that a good thing?
The difference between a house and shares of AAPL is that the government has been encouraging people through words and laws to over-invest in houses (and likewise student loans etc), leading to a huge bubble. The bubble is the fault of government policy, not people rationally buying houses based on the existing policy environment.
To fix this, there are going to be losses. The question is, who should primarily suffer them? The homeowners who reasonably relied on official policy, or the banks who promoted and benefited from that policy?
> What you are describing is socialized losses, privatized gains.
It isn't. The losses would otherwise be suffered by a majority of American families, which sounds pretty "socialized" to me. Those are also who would receive the gains from inflation.
The best place to actually put the losses would be the government, except "the government" doesn't actually have any money, it just spends your money which it takes through taxes or inflation. And the money has to go to homeowners/borrowers rather than come from them, so what you would effectively need is a tax on creditors, which is what inflation is.
It's essentially the same logic as the 5th Amendment Takings Clause. If the government is going to take your property they should compensate you for it. Normally this doesn't apply to things like zoning changes for pragmatic reasons -- the taken value would be too large for the government to afford and then they could never make zoning laws. Which is nothing but a pragmatic injustice. If we can avoid that we should, and in this context inflation would allow us to do it.
Inflation is a type of tax and you're just making the equivalent argument to "all taxes are theft".
As you note, bankers and homeowners decided to exploit socialized losses and privatized gains in order to become wealthier at the expense of everyone else. Let them reap what they've sown.
The best place to actually put the losses would be the government, except "the government" doesn't actually have any money, it just spends your money which it takes through taxes or inflation.
Yes. So homeowners and banks have been exploiting renters like myself. Because "the government" is at fault, you'd like the government to continue exploiting renters like myself in order to prevent the homeowners from suffering a loss.
It's essentially the same logic as the 5th Amendment Takings Clause. If the government is going to take your property they should compensate you for it. Normally this doesn't apply to things like zoning changes for pragmatic reasons...
While the takings clause might apply to downzonings, since downzongings restrict property rights you previously held, they definitively do not apply to upzonings. Your property rights simply do not include the right to prevent others from competing economically.
I'm going to speculate that you hold a leveraged long position on real estate, and you want the government to protect your investment?
> As you note, bankers and homeowners decided to exploit socialized losses and privatized gains in order to become wealthier at the expense of everyone else. Let them reap what they've sown.
The problem is it isn't current homeowners. Current homeowners are the ones who have paid twice as much for their home as it ought to be worth because there was no other option.
And if you just let nominal housing prices fall, the banks get to keep their unearned gains. The homeowners still owe them the full mortgage amount.
It also doesn't work, because people won't be willing (or able) to sell a house for less than what they owe on the mortgage, so the property becomes unsellable, which keeps it off the market and keeps prices higher longer. Or we get a huge number of defaults and relive the housing crisis, and then the banks keep the foreclosed homes off the market as they did last time.
> Yes. So homeowners and banks have been exploiting renters like myself. Because "the government" is at fault, you'd like the government to continue exploiting renters like myself in order to prevent the homeowners from suffering a loss.
How does it continue to exploit you? Are renters creditors?
You are being exploited the same as homeowners because high housing prices result in high rents. Reducing real housing prices will reduce real rents to your benefit. Reducing nominal housing prices is politically and economically intractable, so the alternative to inflation is that you continue to pay real high rents.
> While the takings clause might apply to downzonings, since downzongings restrict property rights you previously held, they definitively do not apply to upzonings. Your property rights simply do not include the right to prevent others from competing economically.
And yet from a practical perspective the result is the same; the property value has gone down (and the mortgage debt hasn't). Which makes causing that to happen politically infeasible, leading to our current predicament.
> I'm going to speculate that you hold a leveraged long position on real estate, and you want the government to protect your investment?
I want real housing costs to come down. Do you have a better idea, that won't be defeated politically by existing homeowners?
And if you just let nominal housing prices fall, the banks get to keep their unearned gains. The homeowners still owe them the full mortgage amount.
Some homeowners will default and the banks will suffer too.
Or we get a huge number of defaults and relive the housing crisis, and then the banks keep the foreclosed homes off the market as they did last time.
The reason banks did this is they wanted to pretend bad homes and bad loans were still valuable, in order to use them to satisfy capital reserve requirements. There's a very simple solution to this problem.
You are being exploited the same as homeowners because high housing prices result in high rents. Reducing real housing prices will reduce real rents to your benefit. Reducing nominal housing prices is politically and economically intractable, so the alternative to inflation is that you continue to pay high rents.
This is simply not true. The housing bubble was manifest in the price vs rent ratio, which skyrocketed. The only way to reduce rents is to produce more housing. If that tanks the price of existing houses, I don't really care.
I want real housing costs to come down. Do you have a better idea, that won't be defeated politically by existing homeowners?
My mistake, I thought you were discussing whether this is something we should do. I didn't realize you were merely discussing what is politically possible.
I don't believe that fixing the US is politically possible. In spite of this being the Flight 93 Election [1], I think the odds that Trump will save us are close to zero. I don't plan to be here for the end.
> Some homeowners will default and the banks will suffer too.
And then we relive the housing crisis.
> The reason banks did this is they wanted to pretend bad homes and bad loans were still valuable, in order to use them to satisfy capital reserve requirements. There's a very simple solution to this problem.
And what is that?
> The only way to reduce rents is to produce more housing.
Of course it is. That is the only way to reduce real housing prices in general. But if you propose to tank the nominal prices of existing houses, more people will oppose you than you can defeat. Meanwhile you can produce more housing without existing homeowners fighting you that hard if it means their nominal home prices don't go down.
> My mistake, I thought you were discussing whether this is something we should do. I didn't realize you were merely discussing what is politically possible.
What we should do is constrained by what is possible.
Sometimes you have to swim upstream and convince people to do the hard thing because it really is necessary, but convincing millions of homeowners that they should vote for a policy that will cause them to go underwater on their mortgages is just never going to happen. So we need some way to reduce real housing costs without causing that to happen. Inflation is one way; I'm open to alternatives.
> I don't believe that fixing the US is politically possible.
It isn't a question of whether it will be fixed, it's a question of how bad things have to get first before people develop the will to fix it.
<nitpick>there's no leverage if you use $500K to buy $500K of AAPL. Financial leverage is created when you multiply the buying power of a fixed amount of money through financial vehicles like options. It could be as simple as using the fact that your brokerage is usually willing to loan you money up to a certain percent of your assets in the account. You can then use that loaned money to buy more stock, perhaps as a hedge or perhaps to double-down on your original investment thesis</nitpick>
>Imagine that you've just taken out a 40 year $500,000 mortgage. How happy are you going to be if next year your house is now worth $250,000 but you still owe $490,000 on it?
The thing is, this is exactly what happens with everything else that an American consumer purchases with a loan: cars, boats, RVs, everything that is purchased with a credit card.
As has been said before, a house is just a wooden box that you leave out in the rain for 30 years. But yet we expect that this box will become more valuable over time...
I think a reasonable assumption should be made regarding home ownership, "Assume to pay (yearly) 3% of the current purchase price in maintenance or deferred work."
i always assumed house prices went up because the population center expands and the price balloons out from the center, I guess i'm kind of dumb though
In other words you are asking the government to steal value from people who own debt and give it to people who owe debt. That is neither fair nor an obvious win in the long run.
Not this again.
People do not own the value of a dollar, just the dollar's IOU. If you have a house, you do not own the value of the house, you own the house. ——The values of your dollars and your houses depend on valuations by the rest of society, and you do not own that, and thus the value of your dollars and houses cannot be stolen. In fact per the Constitution, the government has thr exclusive right to choose the number if dollars to produce, and we investors made a prediction that the government's money creation policies would continue a certain way. In the case where the government produces more money than we had predicted doesn't make us victims of theft, just poor investors.
As a matter of policy, there are multiple stakeholders: those owning debt want deflation, those born without wealth want inflation so that there are enough dollars in circulation to match the growth in population.
>People do not own the value of a dollar, just the dollar's IOU.
Value of your dollar holdings= (value of all dollars) * (number of your dollars / number of all dollars).
You assert that nobody is promising the value of your dollar holdings will remain constant. I agree that this assertion is true, but it's also obvious that failing to maintain the "value of all dollars" is a good way to impoverish all dollar holders, possibly permanently. Convincing people that you aren't going to allow them to maintain the value of their dollar holdings is a good way to encourage them to sell dollars.
And if people sell dollars then we get inflation, which allows the housing stock to expand and reduce real housing costs without putting everyone underwater on their mortgages by reducing nominal housing prices. What seems to be the problem?
downvoting was not deserved. In anycase, your comment did not contradict mine. My point was that framing it as theft is incorrect and unhelpful. There are multiple stakeholders, retaining value is good for some, but detrimental to thers. That is, it is a matter of policy, not rights of ownership.
The Japanese Government had to shift to Yen debasement to deal with their debt because there was no longer enough of a savings base to sell their immense debt requirements into. The Japanese famously own most of their debt, previously funded by that high savings rate. The consequence of that debt and Yen destruction, is the Japanese standard of living is being hammered.
Their savings rate has fallen from ~15% in 1990, to basically 0%-2% now. This is happening simultaneously while their consumer economy struggles along as it has for decades. What happened? They've debased the Yen so much, and Japan has fallen so far behind on economic growth (they climbed above the US on GDP per capita by 1988, were 50% higher by 1995, and will soon be 50% below the US), that the high cost of living in eg Tokyo now consumes too much of their incomes to be able to save like they used to.
Today, Japan's GDP per capita is comparable to where it was in the early 1990s. In that time, China has increased its GDP 20 fold, South Korea and the US have roughly tripled their GDP. South Korea should catch Japan on per capita GDP in the next decade at the rate things are going (30 years ago there was 6x gap between them). Japan's GDP per capita is about 20%-25% lower than it was in 1995.
Some people blame the lack of population growth on Japan's inability to grow its economy. Germany has tripled its economy with zero population growth. Austria has tripled its economy with 10% population growth. Sweden has had sub 20% population growth over 30 years, and tripled their economy (South Korea has performed similarly on both metrics). There are far too many examples of low population growth countries substantially boosting their economies, for that to be the primary issue (especially given Japan's population growth was a mere 10% between 1980 and 1995, despite a huge leap in economic output).
Hysterical deflationary economists have proclaimed for two decades that Japan was suffering vicious deflation. The fact is, they haven't actually suffered much deflation, their CPI has been more flat than down meaningfully the last 30 years. Chopping the Yen to pieces to deal with debt, is rapidly inflating away their economic position in the world, while the lack of falling prices is crushing their standard of living (prices have stayed expensive, while real disposable income has fallen, eradicating savings).
In Japan, people expect houses to be worthless after a decade, and they rebuild their houses frequently. This is partly because the poor quality of houses built in the first decades after WWII has created a bias against older homes that is probably no longer justified. Many buyers tear down homes and replace them -- this happens everywhere, but it is more common in Japan. People who have owned their home for a few decades will have it torn down and rebuilt every 20-30 years, and they will continue to live in the new one without any intention of selling the land.
On the other hand, while homes are worthless after a decade, land is extremely expensive. This leads to 40-year mortgages or to people building homes on land they lease for decades, and having them torn down when the lease ends.
I don't expect that kind of situation to develop in the US, nor do I want it to, but it's always good to learn about other approaches to home ownership, because it demonstrates that considering a home as an investment is not natural or inevitable.