The math fails to account for mortgage interest deduction on income taxes, and for increases in rent prices. Let's look at scenario 2 again. Alice, who can afford a $700k house, probably makes $100k+ per year and therefore her income is taxed by the federal government at the 24% marginal level. Her monthly payment on a 30-year loan principal of $562k at 7% is $3742. Over 18 years, she pays over $600k in mortgage interest. If this is deducted from her taxable income, she pays ~$150k less in taxes over those 18 years. This is a lot more than "a few tens of thousand dollars" over 18 years, rather it makes her save nearly $10k more per year. Her savings would increase even more if we account for higher earnings, increases in rent over 18 years, and state tax benefits.
I'd be more persuaded to read the rest of the article if the math added up, but unfortunately it's not realistic. You paint a worse picture for home ownership than it deserves.
Most hopeful scenario: upzoning/increased density increases land value (benefiting existing homeowners), and reduces rent (benefiting renters). Big losers there are existing condo owners though.
So, if you ask any realtor, the value of a house doesn't increase much because of fancy countertops or sweaty equity. There is one, singular dominate factor, location. The closer the house is to major services, corporations, and good school districts dominates. Its the scarcity of large dwellings in those places that pushes rents to sky high values.
Enjoyed your reasoned analysis. There’s an important emotional element to owning a house too. I rented all my life till 52 then bought one in a cheaper but not bad area and it feels so much better than renting. I don’t regret renting as I liked the flexibility, but I was paying someone else’s mortgage.
Agree with Chris - math doesn't fully account for home ownership; 7% interest is historically high for the past 20 years, but that's good in a sense that at 1-2% interest money was 'free' which allowed housing prices to be speculatively bid up.
Programs like FHA loans allow 3% down, which again inflated prices.
Overall, the reason to 'own' a house is at some point you, in fact, 'own' it. You no longer have the expense, and the house is yours. Gains when you sell are tax free up to $500K.
But more importantly, fixed location is critical to all sorts of life goals: building a stable community, raising a family, and making a place yours: you will never be fully in control of that if you rent.
I've always assumed that current rental prices *price in* the cost of a mortgage and maintenance and a small profit for the owner. No one rents their house if they are losing $$ on it (or at least they shouldn't!)
If I need flexibility, then I pay the premium to rent. If I can stay put for a long time, I buy and get the benefits of holding the asset for a long time. It's not really a pyramid scheme in the sense that the houses are tangible, real assets. People will definitely pay more to live in Littleton CO than an hour farther away from work. Everything in life is like that. Early stock purchasers, or inventors. You get there first and there is a benefit. Not that it's "fair", but... If it's a pyramid scheme, then all of life is a pyramid scheme, and to label it as such is meaningless.
For me I think I've tended to assume that I should have a home because my parents did. But looking back, my parents had the house, but very very little disposable income - life seemed (from my recollection) much simpler and fewer expenses. You don't eat out, you don't go out, you have a house and hang around there. They poured their $$ into the house. Sometimes I think the future generation is stuck between two sets of expectations - they expect to have a stable house and own it like their parents did, but are also sold on 'living their best life right now' which involves a fair number of expenses. I still cringe at a $40 cell phone bill, but I know younger people who are fine paying DoorDash a $10 delivery fee on a $5 starbucks drink, when starbucks is a 2 minute walk away! Something has to give there, but is a painful place to be :( And our consumer society is going to continue to tell everyone "you need this latest convenience" -- I'd say that is the bigger pyramid scheme - "you'll be happy if you do X"! When, everyone knows deep inside, that isn't true. But we still play the game.
If Littleton CO is *really* median rent of 2k / mo and a mortgage with 20% down is 2950 / mo, that's would seem stupid to buy. It would appear to be an upside down market. In every place I've considered living, things are flipped. The rent would be about 3k / mo, a mortgage would run about 2k / mo. At that point you are weighing
fixed costs for a long time + maintenance + customization potential + lump investment + illiquid assets
vs
flexible costs + no maint + no customization + flexibility + no lump investment + liquid assets
I believe that no matter the environment, things will adjust to where there is a benefit to holding an asset longer and having less liquidity. There isn't an alternative. If renting was *more* liquid assets + flexibility + no risk, then rents would just rise to capture that benefit until it was more of a balance like I mention above. If renting was a terrible investment, the rates would trend downward. If I owned a house and was losing money renting it out, and renters were "making" a ton of money, I would be crazy not to adjust rent upwards until I (who are holding risk, long term debt, maintenance, etc) would get *some* benefit... Right? Or I'd have to sell the house, and that would make houses cheaper which could make rents cheaper. It all hinges on what people want to pay. But in the end, it probably settles on rent = higher upfront + lower long term entanglement vs buy = lower up front + longer entanglement. Is there another way it could possibly work?
There could be a number of sensible reasons why housing prices are likely to increase faster than inflation. Increasing population and GDP per capita mean the total number of people who are capable of buying a home will increase, while the number of desirable locations which are nearby jobs and everything else people want are not necessarily on the same trajectory. Intangible assets and intellectual capital can expand at a much faster rate than property, so as long as our education system and overall economic growth continue raising the bar it seems reasonable to expect property prices to increase.
Furthermore, urbanization and the non-linear fluctuations in supply and demand across different locales will no doubt impact prices. Littleton is a burgeoning aerospace hub near Denver, a fairly rapidly growing and safe city. People can telecommute but zoom doesn't cut it for going to concerts, skiing, or meeting friends at a restaurant. Littleton is nearby the slopes, Red Rocks, and a hip food scene, all more reasons for property price increases.
Median income for college graduates in their late 20s is around $52,000, so a married couple should be able to afford a $500,000 home after saving for a few years. Many people I know, myself included, rented to roommates to help cover the mortgage for the first few years after buying a house earlier than most. With many jobs available across the economy more expensive housing should incentivize people to continuing learning and increase their own value, and to me a sensible policy would be to encourage and subsidize higher education in specifically the areas where there is the most demand.
I wonder if it would work to construct a package deal with:
* YIMBYist construction in major cities
* Mortgage relief for anybody who already bought a house in those areas (the state could evaluate the net impact on house-prices of building each new unit and the developer would pay some fraction of that amount into the mortgage relief fund, which would be proportionally distributed to all the mortgage holders.)
My hope is that a coalition containing both the renters and the owners who are still paying down substantial mortgages would be large enough to win, most of the construction would happen (though with somewhat higher rents/prices to pay to unwind the system) while also not leaving any of the most vulnerable homeowners underwater. (Of course, this might still be politically impossible. I imagine pushback like: "Why should *I* not get payed for my house to decrease in value? I already payed down my mortgage like a responsible person!")
Good post, however I would modify your take a bit. You're thinking of housing not as an investment but as a speculation.
Things like paintings, comic books, etc. are speculations. You buy them today and hope tomorrow you can sell them at a higher price. There's no wealth creation, only transfer. You use a little wealth today to buy them and you hope tomorrow people will transfer a lot of their wealth to you for that, say, first edition Watchman issue #1. It is a zero-sum game. Watchman fanboy of tomorrow will become poorer after he transfers his wealth to you for the comic book.
Investment, however, should be thought of more as a capital good. Consider a pizza oven. It makes pizzas. You sell the pizzas. That's a stream of income to you. You mix your labor with the capital and produce more income than if you tried to make food to sell with no oven. The oven grows old, will need to be fixed now and then, will need replacement parts and so on. That's sometimes called depreciation but more often people think of depreciation as it is treated by the tax and accounting system. But if you imagine your pizza oven makes 1,000 pizzas a month, it maybe you have to set aside the income of, say, 25 pizzas, to cover the repairs that will ultimately happen someday...or in the case of some types of capital goods completely replacing it with a new one.
Felix Salmon, financial journalist, likes to say "we are born short on housing and have to cover that". What he means is you don't have to eat pizza in your life but you do have to live somewhere. So it's like just by existing, you've borrowed some pizzas and you have to cover that...except its a place to live. Just like with pizza, you can 'cover your short' by making the good yourself or paying someone else to do it for you. If you own a home, you're making the good yourself. If you own two homes, you can cover yourself and someone else (by being a landlord...or if you're the 'cool uncle' letting nephews crash for free for a bit).
So I would look at a house like this:
1. You will consume a lot of pizza in your life, a special pizza called 'living somewhere'. You can either make that pizza yourself or pay someone else to make it for you.
2. Your home is a capital good. It produces every month a 'place to live pizza pie'. Like any other machine, it can work for a while totally on its own but you'll have to at some point be faced with repairs and the like. You also run the risk of complete disaster (like it burning down, an earthquak flattens it, asteroid lands on it etc).
3. The speculative asset of it should be considered a seperate element. Yes 100 year old Coka-Cola vending machines have some value on the antique markets, but back in 1923 when a gas station brought the soda vending machine, they were probably thinking of it as a capital asset. With a bit of labor and some periodic fixes, the machine makes a bit more money than goes into it. Sure it would be nice if in 100 years some collector will pay ten times more than its original cost, but even if it ends up at the scrap metal yard in a decade, it's worth it if it produced more than it consumed.
You should buy your home the way the gas station brought a vending machine a century ago. You need to cover your 'housing short' and on top of that you may want to consume certain things that come with it (a particular place, so many bedrooms, a style, etc.). Beyond that you're playing with speculation. If you want to spend $700K instead of $500K because you want to speculate with $200K, feel free. But why? Would you balk if I said spend $500K on a house and borrow $200K to buy comic books? If you would, maybe you aren't quite clear on what you're doing.
Not in the US but feel the same hopelessness for the situation. I own and have margins on my side (reasonable mortgage) but feel bad for those outside the system.
Given the current high rates and most people in my country on flexible rates, we might be in for a rough couple of years. No one can pay 80% of their income on hosting for too long.
The mountain of suddenly risky personal debt is staggering
It's felt like the past 10 years there simply aren't enough good places to invest money or maybe there is too much money that needs to be invested due to wealth inequality. That's why you see private equity buying up the most random things and the creation of the crypto bubble. Housing is simply another part of that.
this is great. i was thinking about this a lot more than i had before after digging into data back in December looking at how little we pay teachers and their lack of ability to afford a home on what we pay them (https://indytelegraph.com/objects/bc5e47fa-0a2b-46e2-b1d3-8dba3e94f162). even rent (i added more data to the chart later) which artificially keeps up with home prices.
it's wild that people don't seem understand this and perhaps it's because we can't make a good soundbite out of it.
in the end i think we should do a property/rent reset - devaluing them all where they belong (and of course adjusting mortgages to reflect the new value) and taxing people heavily for owning > N houses (not sure what N should be) as well as landlords that charge an exorbitant rate.
more to it than that, but i'm down here in the comments section. :)
The math fails to account for mortgage interest deduction on income taxes, and for increases in rent prices. Let's look at scenario 2 again. Alice, who can afford a $700k house, probably makes $100k+ per year and therefore her income is taxed by the federal government at the 24% marginal level. Her monthly payment on a 30-year loan principal of $562k at 7% is $3742. Over 18 years, she pays over $600k in mortgage interest. If this is deducted from her taxable income, she pays ~$150k less in taxes over those 18 years. This is a lot more than "a few tens of thousand dollars" over 18 years, rather it makes her save nearly $10k more per year. Her savings would increase even more if we account for higher earnings, increases in rent over 18 years, and state tax benefits.
I'd be more persuaded to read the rest of the article if the math added up, but unfortunately it's not realistic. You paint a worse picture for home ownership than it deserves.
Great post!
This was really well done. I quoted at length from it in my most recent Substack post. https://brinklindsey.substack.com/p/the-next-level-of-rich
Most hopeful scenario: upzoning/increased density increases land value (benefiting existing homeowners), and reduces rent (benefiting renters). Big losers there are existing condo owners though.
So, if you ask any realtor, the value of a house doesn't increase much because of fancy countertops or sweaty equity. There is one, singular dominate factor, location. The closer the house is to major services, corporations, and good school districts dominates. Its the scarcity of large dwellings in those places that pushes rents to sky high values.
Enjoyed your reasoned analysis. There’s an important emotional element to owning a house too. I rented all my life till 52 then bought one in a cheaper but not bad area and it feels so much better than renting. I don’t regret renting as I liked the flexibility, but I was paying someone else’s mortgage.
Owning a home is much more than a coldly calculated ROI. Should need to know why, don't bother to ask.
Agree with Chris - math doesn't fully account for home ownership; 7% interest is historically high for the past 20 years, but that's good in a sense that at 1-2% interest money was 'free' which allowed housing prices to be speculatively bid up.
Programs like FHA loans allow 3% down, which again inflated prices.
Overall, the reason to 'own' a house is at some point you, in fact, 'own' it. You no longer have the expense, and the house is yours. Gains when you sell are tax free up to $500K.
But more importantly, fixed location is critical to all sorts of life goals: building a stable community, raising a family, and making a place yours: you will never be fully in control of that if you rent.
I've always assumed that current rental prices *price in* the cost of a mortgage and maintenance and a small profit for the owner. No one rents their house if they are losing $$ on it (or at least they shouldn't!)
If I need flexibility, then I pay the premium to rent. If I can stay put for a long time, I buy and get the benefits of holding the asset for a long time. It's not really a pyramid scheme in the sense that the houses are tangible, real assets. People will definitely pay more to live in Littleton CO than an hour farther away from work. Everything in life is like that. Early stock purchasers, or inventors. You get there first and there is a benefit. Not that it's "fair", but... If it's a pyramid scheme, then all of life is a pyramid scheme, and to label it as such is meaningless.
For me I think I've tended to assume that I should have a home because my parents did. But looking back, my parents had the house, but very very little disposable income - life seemed (from my recollection) much simpler and fewer expenses. You don't eat out, you don't go out, you have a house and hang around there. They poured their $$ into the house. Sometimes I think the future generation is stuck between two sets of expectations - they expect to have a stable house and own it like their parents did, but are also sold on 'living their best life right now' which involves a fair number of expenses. I still cringe at a $40 cell phone bill, but I know younger people who are fine paying DoorDash a $10 delivery fee on a $5 starbucks drink, when starbucks is a 2 minute walk away! Something has to give there, but is a painful place to be :( And our consumer society is going to continue to tell everyone "you need this latest convenience" -- I'd say that is the bigger pyramid scheme - "you'll be happy if you do X"! When, everyone knows deep inside, that isn't true. But we still play the game.
If Littleton CO is *really* median rent of 2k / mo and a mortgage with 20% down is 2950 / mo, that's would seem stupid to buy. It would appear to be an upside down market. In every place I've considered living, things are flipped. The rent would be about 3k / mo, a mortgage would run about 2k / mo. At that point you are weighing
fixed costs for a long time + maintenance + customization potential + lump investment + illiquid assets
vs
flexible costs + no maint + no customization + flexibility + no lump investment + liquid assets
I believe that no matter the environment, things will adjust to where there is a benefit to holding an asset longer and having less liquidity. There isn't an alternative. If renting was *more* liquid assets + flexibility + no risk, then rents would just rise to capture that benefit until it was more of a balance like I mention above. If renting was a terrible investment, the rates would trend downward. If I owned a house and was losing money renting it out, and renters were "making" a ton of money, I would be crazy not to adjust rent upwards until I (who are holding risk, long term debt, maintenance, etc) would get *some* benefit... Right? Or I'd have to sell the house, and that would make houses cheaper which could make rents cheaper. It all hinges on what people want to pay. But in the end, it probably settles on rent = higher upfront + lower long term entanglement vs buy = lower up front + longer entanglement. Is there another way it could possibly work?
There could be a number of sensible reasons why housing prices are likely to increase faster than inflation. Increasing population and GDP per capita mean the total number of people who are capable of buying a home will increase, while the number of desirable locations which are nearby jobs and everything else people want are not necessarily on the same trajectory. Intangible assets and intellectual capital can expand at a much faster rate than property, so as long as our education system and overall economic growth continue raising the bar it seems reasonable to expect property prices to increase.
Furthermore, urbanization and the non-linear fluctuations in supply and demand across different locales will no doubt impact prices. Littleton is a burgeoning aerospace hub near Denver, a fairly rapidly growing and safe city. People can telecommute but zoom doesn't cut it for going to concerts, skiing, or meeting friends at a restaurant. Littleton is nearby the slopes, Red Rocks, and a hip food scene, all more reasons for property price increases.
Median income for college graduates in their late 20s is around $52,000, so a married couple should be able to afford a $500,000 home after saving for a few years. Many people I know, myself included, rented to roommates to help cover the mortgage for the first few years after buying a house earlier than most. With many jobs available across the economy more expensive housing should incentivize people to continuing learning and increase their own value, and to me a sensible policy would be to encourage and subsidize higher education in specifically the areas where there is the most demand.
I wonder if it would work to construct a package deal with:
* YIMBYist construction in major cities
* Mortgage relief for anybody who already bought a house in those areas (the state could evaluate the net impact on house-prices of building each new unit and the developer would pay some fraction of that amount into the mortgage relief fund, which would be proportionally distributed to all the mortgage holders.)
My hope is that a coalition containing both the renters and the owners who are still paying down substantial mortgages would be large enough to win, most of the construction would happen (though with somewhat higher rents/prices to pay to unwind the system) while also not leaving any of the most vulnerable homeowners underwater. (Of course, this might still be politically impossible. I imagine pushback like: "Why should *I* not get payed for my house to decrease in value? I already payed down my mortgage like a responsible person!")
Good post, however I would modify your take a bit. You're thinking of housing not as an investment but as a speculation.
Things like paintings, comic books, etc. are speculations. You buy them today and hope tomorrow you can sell them at a higher price. There's no wealth creation, only transfer. You use a little wealth today to buy them and you hope tomorrow people will transfer a lot of their wealth to you for that, say, first edition Watchman issue #1. It is a zero-sum game. Watchman fanboy of tomorrow will become poorer after he transfers his wealth to you for the comic book.
Investment, however, should be thought of more as a capital good. Consider a pizza oven. It makes pizzas. You sell the pizzas. That's a stream of income to you. You mix your labor with the capital and produce more income than if you tried to make food to sell with no oven. The oven grows old, will need to be fixed now and then, will need replacement parts and so on. That's sometimes called depreciation but more often people think of depreciation as it is treated by the tax and accounting system. But if you imagine your pizza oven makes 1,000 pizzas a month, it maybe you have to set aside the income of, say, 25 pizzas, to cover the repairs that will ultimately happen someday...or in the case of some types of capital goods completely replacing it with a new one.
Felix Salmon, financial journalist, likes to say "we are born short on housing and have to cover that". What he means is you don't have to eat pizza in your life but you do have to live somewhere. So it's like just by existing, you've borrowed some pizzas and you have to cover that...except its a place to live. Just like with pizza, you can 'cover your short' by making the good yourself or paying someone else to do it for you. If you own a home, you're making the good yourself. If you own two homes, you can cover yourself and someone else (by being a landlord...or if you're the 'cool uncle' letting nephews crash for free for a bit).
So I would look at a house like this:
1. You will consume a lot of pizza in your life, a special pizza called 'living somewhere'. You can either make that pizza yourself or pay someone else to make it for you.
2. Your home is a capital good. It produces every month a 'place to live pizza pie'. Like any other machine, it can work for a while totally on its own but you'll have to at some point be faced with repairs and the like. You also run the risk of complete disaster (like it burning down, an earthquak flattens it, asteroid lands on it etc).
3. The speculative asset of it should be considered a seperate element. Yes 100 year old Coka-Cola vending machines have some value on the antique markets, but back in 1923 when a gas station brought the soda vending machine, they were probably thinking of it as a capital asset. With a bit of labor and some periodic fixes, the machine makes a bit more money than goes into it. Sure it would be nice if in 100 years some collector will pay ten times more than its original cost, but even if it ends up at the scrap metal yard in a decade, it's worth it if it produced more than it consumed.
You should buy your home the way the gas station brought a vending machine a century ago. You need to cover your 'housing short' and on top of that you may want to consume certain things that come with it (a particular place, so many bedrooms, a style, etc.). Beyond that you're playing with speculation. If you want to spend $700K instead of $500K because you want to speculate with $200K, feel free. But why? Would you balk if I said spend $500K on a house and borrow $200K to buy comic books? If you would, maybe you aren't quite clear on what you're doing.
Not in the US but feel the same hopelessness for the situation. I own and have margins on my side (reasonable mortgage) but feel bad for those outside the system.
Given the current high rates and most people in my country on flexible rates, we might be in for a rough couple of years. No one can pay 80% of their income on hosting for too long.
The mountain of suddenly risky personal debt is staggering
It's felt like the past 10 years there simply aren't enough good places to invest money or maybe there is too much money that needs to be invested due to wealth inequality. That's why you see private equity buying up the most random things and the creation of the crypto bubble. Housing is simply another part of that.
For the antidote I recommend the book "Progress and Poverty" by Henry George but it will never be implemented because all governments are corrupt.
this is great. i was thinking about this a lot more than i had before after digging into data back in December looking at how little we pay teachers and their lack of ability to afford a home on what we pay them (https://indytelegraph.com/objects/bc5e47fa-0a2b-46e2-b1d3-8dba3e94f162). even rent (i added more data to the chart later) which artificially keeps up with home prices.
it's wild that people don't seem understand this and perhaps it's because we can't make a good soundbite out of it.
in the end i think we should do a property/rent reset - devaluing them all where they belong (and of course adjusting mortgages to reflect the new value) and taxing people heavily for owning > N houses (not sure what N should be) as well as landlords that charge an exorbitant rate.
more to it than that, but i'm down here in the comments section. :)