Prices are high because we don't build enough houses which is mostly because it's really expensive to build houses, then the houses we have built are all owned by empty nesters and people with 1 - 3 investment properties.
Everything else you're describing is completely ridiculous.
> which is mostly because it's really expensive to build houses,
Assuming you're referring to the typical high CoL areas, the shortage has very little to do with the expense of building. The zoning laws don't permit sufficient supply in those areas. And that's quite unlikely to change (at least quickly) because anyone pushing such reform would be obliterating the average Joe's net worth.
> anyone pushing such reform would be obliterating the average Joe's net worth.
This what Obama calls the false choice dichotomy -- "Damned if you do, damned if you don't." In your scenario, if we build more homes, then existing home owners are "obliterated". This is untrue. We can easily build twice as much in high cost areas (with the strongest job markets) with little impact on existing home owners.
That doesn't really make sense. The problem we're trying to solve is that housing is too expensive. If we do things that end up lowering the cost of housing, then the saleable value of "average Joe's" house will also go down. You can't say that newly-built housing will be (for example) 20% less expensive, but existing housing will keep its value; that's just not how the housing market works.
I'm not sure if "obliterated" is the right word to use, but if making housing affordable means a 20% drop in home prices (which is perhaps not even enough in some places), average Joe existing homeowner is going to run into financial trouble once that happens.
> We can easily build twice as much in high cost areas (with the strongest job markets) with little impact on existing home owners.
If that's the case, then all that new housing will also cost more or less exactly the same as the existing housing stock costs, and the problem will not have been solved yet.
How do home owners get into trouble from falling prices if they're just living in their home?
Sure, if they need to move and sell, the price difference might be less favorable to them, but having to weigh cost vs benefit of moving is a fact of life one way or another.
It's a strange expectation to have that home values should act as an investment that can only ever go up.
Letting that expectation influence policy on making space for living available is one of the root causes of this crisis.
My feeling is because we build little in the way of new units of housing most places. All the money being injected into the real estate industry is from the price-debt spiral.
I'm only proposing to build enough units such that house prices rise at the rate of general inflation or slower. In many highly developed, capitalist systems, their housing prices barely budge in a generation when accounting for general inflation. This is done though careful regional planning. This business of "housing as investment" (for normies) is awful and greatly harms renters.
To be honest, just getting to the point where house prices don't rise above inflation, maybe even stay fixed (so inflation eats away at their value), would be a massive accomplishment. The main problem at the moment is prices keep rising above inflation in most places, year after year.
Also known as “housing cannot be both a good long-term investment and simultaneously remain affordable over a long period of time.”
Many people have been sold on the former and will (fairly understandably) act to protect the value of their single largest purchase which often has a large mortgage attached to it.
Many people overlook the effect of 30 years of general inflation on their outstanding mortgage debt. Also, most people's income rises as they age, so the monthly payment becomes proportionally smaller. If you buy around 30-35 (and many in the US, outside of crazy areas, buy much younger), then their income will rise for long periods of their mortgage.
What I'm describing is a systemic dysfunction due to financial incentives.
The "crisis" is specifically the high cost of housing. So if whatever you do doesn't lower the price then by definition you've failed to solve the problem.
It's certainly a dichotomy but I don't see how it's false?
> We can easily build twice as much in high cost areas (with the strongest job markets) with little impact on existing home owners.
It's certainly possible to encounter nonlinear behavior. If some aspect has saturated then we might build quite a bit without seeing any substantial price movement. But eventually prices would start to decline.
> anyone pushing such reform would be obliterating the average Joe's net worth.
Only in a purely illusory sense. Suppose you have all your net worth tied up in a house. If your house magically vanished, you'd have nothing but your job.
The price of houses falls to $500 and you potentially go bankrupt. Then, you buy a house for $500.
You, personally, are now better off than you were before. Some examples:
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1. You have $200,000 of equity in a $700,000 house. After the price drop, your net worth in dollars has improved by $300,000. Your net worth in "stuff" has risen dramatically; you kept your job, and now you have 100% of a house instead of having 30% of a house.
2. You have $700,000 of equity in a $700,000 house. After the price drop, your net worth in dollars is down by $699,500. Your net worth in stuff is unchanged. Assuming you always need to live in a house, this will never have any negative impact on you. You retain the option to live in the house you have (which leaves your life unchanged), and you also retain the option to sell your house and use the proceeds to buy another house (and this option looks a lot better than it used to; given the crash in prices, you can probably afford a much nicer house).
3. You have $200,000 of equity in a $700,000 house. You also have $15,000 of "equity" (resale value) in a car that you owe no money on and bought for $50,000. After the price crash, you lose your house and your car, and then you buy another house for $500.
Replacing your car will cost you $50,000. You are in a similar position to the guy in example (1), but $50,000 poorer. So now we ask: was it better to be $500,000 in the hole on your house before, or to be $50,000 in the hole on your car now?
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There isn't a way for the average Joe not to come out ahead. There is a way for someone else to lose out on the price crash: if you had more than one house before, you lost everything on the houses you weren't living in. But that's got nothing to do with the average Joe.
You would still need to pay the bank the full 700k even if it's only worth 300k now. This might mean that you still owe 400k on a 300k asset. In this way you can be underwater while still being a 30% owner.
It does raise the point though that anyone who borrowed against his house to obtain other assets could be negatively affected by this turn of events.
Also in the case of mass bankruptcy and mortgage failure of the lower middle class I guess there would be risk of bank failure as in 08? That said, I still think the hypothetical illustrates the overall situation quite well.
> It does raise the point though that anyone who borrowed against his house to obtain other assets could be negatively affected by this turn of events.
How?
A drop in the price of houses means it becomes more difficult to exchange houses for non-houses.
If you borrow against your house to obtain something else, and then the price of houses falls, you successfully timed the market. That's all upside for you.
What do you think is the difference between example 3, the guy with a $500,000 mortgage on a $700,000 house, plus a $50,000 car, and example 3', the guy with a $450,000 mortgage and a $50,000 car loan on his house, plus a $50,000 car?
Say I inherit a $700,000 house and, being the kind of guy I am, immediately mortgage it for $500,000. But I stop renting and move in to my new house. Also, I hire a bunch of call girls to live with me in my house. One year later, the price of my house drops to $100,000, and I turn it over to the bank.
I started (the crash) with a $500,000 loan and no way to pay it back other than selling my house. At this point, the faster I realize what's happened and sell my house, the more money I'll be left with. (If I sell immediately, I'll get $200,000!) The longer I postpone selling, the worse off I'll become. (Though since I can live in the house, this trades off against what I would spend on rent.)
I've also spent $500,000 on entertainment and one year's rent. Mostly entertainment. Is this a harm that was dealt to me by the fall in the price of my house?
When the price falls, this forces me to sell the house, locking in a profit of... $500,000. (Which I've already spent.) It could have been $700,000, in theory. This $200k difference in profit vs potential profit can be seen as an effect of the price crash. But that's pretty good for an event that notionally took $600,000 out of the value of my house. Borrowing against the house helped me.
If you want to talk about a negative effect on someone, walk me through the accounting.
At the beginning of this process, I was short $700,000 for a house that I needed but didn't have.
Before the price crash, I had "200k equity"† in that very house, leaving me $500,000 short of a house.
After the price crash, I was deeply underwater on the house. Without bankruptcy, I was still $500,000 short of my house, but only $100,000 short of some other house.
And then, after the bankruptcy, I was $100,000 short of a house.
1. What is the harm that I suffered from the price crash?
2. If the "hookers" column had some other label, would that change the harm that I suffered from the price crash?
† You might note that this is accounted as 700k equity in the table. The table is correct, but that's not how we talk about it. There is probably an error in my earlier comment related to this.
> a $50,000 car loan on his house, plus a $50,000 car?
Well I suppose that guy might come out unscathed since many US states protect your primary vehicle in a bankruptcy. But to an approximation declaring bankruptcy involves losing all of your remaining assets. So in that scenario the borrower is on the hook for the cost of replacing those assets (limited by how far underwater they were on the mortgage naturally).
Your other example involved blowing the borrowed money on entertainment in which case I agree that you come out ahead. But that is precisely why I used the term "assets" in GP.
Also I don't think everyone just gets let off scot free after a bankruptcy? Don't you sometimes get stuck with some amount of repayment depending on the nature and volume of your income?
My question about bank failure also still stands. While the impacts of this hypothetical on personal finances are certainly interesting to consider, I'm thinking we really don't want to do the whole widespread mortgage default thing again.
Sure, bank failure might happen. That comes out clearly in the chart; the flow of value is that the bank loses a bunch of cash which ends up in "hookers".
> But to an approximation declaring bankruptcy involves losing all of your remaining assets. So in that scenario the borrower is on the hook for the cost of replacing those assets (limited by how far underwater they were on the mortgage naturally).
If you financed something by borrowing against your house, then it cost less than your house, and when you have to replace it, the cost will be less than the cost of buying a house at the original prices. This is the "you lose your house and your car" example. Losing your mortgaged house and your owned-free-and-clear car is good when buying a replacement house+car costs less than the mortgage on your house.
What if house prices fall into the sweet spot where (1) your mortgage is underwater; and (2) a new house + new "assets" exceed the value of your mortgage? (But don't exceed the original value of your house.)
It could be that those assets don't generate income. In this case, they are isomorphic to the hookers in the example.
If they do generate income, then you might save money by keeping your house at its inflated pre-crash price, and you'll make those pre-crash loan payments using the income stream generated by the assets. Here you have a loan that is nominally against your house but actually against your business. It's underwater when considered as a mortgage, but it's not underwater when considered as a business loan, so you'll keep paying it. Your bank will be fine with this. (Both in the sense that they won't object, and also in the sense that they won't suffer financial hardship.) You'll probably have to recollateralize the loan.
(Or your assets might generate income, but not enough income that you'd save money by keeping your original mortgage. In this case it's straightforward that you're better off losing the original house, losing the original assets, buying a new house, and then not buying new assets.)
That is an excellent way of putting it. However I fear that it will be nigh impossible to convince the average Joe that the numbers going down was actually good for him.
In the past tense it should be easy to do. Since he is better off, and he has a good view of how he's doing personally, you don't really need to do much. The difficulty is in convincing him that it will be good for him, not that it was good for him.
Compare congestion pricing in NYC, or self-service gas in Oregon.
In areas with low CoL the cost of building houses and the cost of selling a house has a massive impact on the number and type of homes that get built. If it's not profitable for a builder to build a home they simply won't, whether it's because of bureaucratic red tap or economic conditions. There's very strong incentives for builders to take the path of least resistance and highest margin.
> If it's not profitable for a builder to build a home they simply won't,
Agreed. They will generally build as tall and as dense as they are permitted to because (within reason) it reduces unit cost. Obviously there are limits to that. No one wants to build a high rise in the middle of nowhere.
But within high CoL areas they are generally severely limited on both of those aspects. That's due to zoning laws.
Of course that's not the whole story. Infrastructure has to be upgraded to keep pace with growth. But that's on the local government to plan and execute properly. Right now they largely just say "no".
The profit margin has to be significantly higher than simply plopping that cash straight into an index fund. The risk of a project failure is simply too high.
> If it's not profitable for a builder to build a home they simply won't, whether it's because of bureaucratic red tap or economic conditions.
Right, and that bureaucratic red tape is one of the things that makes the cost of building higher. If the builder expects they won't be able to break ground for two or three years because dealing with the planning commission takes forever, or because they'll have to deal with environmental lawsuits before they can build, then they will need to target higher-end buyers (by building a higher-end property) in order to make a profit. And if they can't do that... right, they simply won't.
The zoning laws are far from the only tool used by municipalities to dramatically reduce supply. Permitting, requiring expensive changes at various points in the process, local building boards requiring extraneous modifications and often forcing scope reductions, affordable housing requirements, etc all make building more expensive. Often by a very large amount.
I don't believe this has much impact on the current situation (relative to zoning) but would be interested to learn otherwise. Can you provide verifiable examples for any of it?
"drop" is doing a lot of work there; as these things are slow and take time, the "drop" is often a reduction in the rate of appreciation (which, everything else being the same, should roughly be equal inflation ± some fudge factor for desirability of the area).
that's a great paper, but did you read it? I don't see the authors reaching this conclusion. in fact, they seem pretty emphatic that restrictive zoning is a major driver of supply bottlenecks.
Prices are high because we don't build enough houses which is mostly because it's really expensive to build houses, then the houses we have built are all owned by empty nesters and people with 1 - 3 investment properties.
Everything else you're describing is completely ridiculous.