Ethics of Real Estate Investment, NIMYism and the Housing Crisis

pheller said:

STM317 said:

Houses were also cheaper relative to median incomes in 1975 than they are now.

So the median home price in 1975 was 3.00 times the median family income, and the median house in 2021 cost 4.78 times the median family income. The only way any of this works out to be "affordable" for normal people is if the ratio between prices and incomes shrinks.

It seems like I'm interested in trying to figure out the supply side reason why houses are more expensive today than years ago. 

A few factors it seems have contributed to this:

- Trades make higher wages now relative to the rest of the population. That means that the median income for home buyers is likely lower than the median income for homebuilders. 

- More people are moving to housing markets with either A) less vacant land or B) less previously established housing. It's hard to buy into a housing market as a new resident when all of the housing is relatively new. 

- Good deals are quickly snatched up by flippers, STR investors, LTR investors, or institutional investors. It looks like this has been a growing trend since about the 80's, although the data is a bit hard to determine if it really is any worse today than what it was 30 years ago. 

- Wages have not kept up with HOUSING inflation. We might live better lives in terms of our cars, phones, healthcare, etc, but in terms of our housing, we're getting less square footage for our dollar. Is that a result of better and more expensive insulation that reduces our O&M more so than decades ago? 

Agree/Disagree?

It's important to remember that housing prices reflect supply and demand both, so isolating a certain amount of price increase to supply side rather tahn demand side seems difficult and potentially flawed. For example, in recent years we've had both Boomers and Millenials in the home buying market at the same time which is unprecedented demand for housing in a time when we historically underbuilt after the Great Recession. Anyway, if we're trying to focus specifically on the supply side:

Square footage of new construction is way up in general

Homes have more strict building codes which add material/price

Buyers expect more features, and builders are happy to accommodate and increase their margins

If each piece of a home has gone up in price, you get higher price per sqft. If you then make the home larger, you get even higher prices.

I'm also curious about what role lending might play. Small loans are often penalized by lenders with higher rates if they'll lend at all.

This is just the last 5 years or so, but it really shows how much prices have exploded. There's likely a lot of speculation, money from foreign or institutional investors and other factors that contribute here but it's an interesting visual.

z31maniac said:

pheller said:

STM317 said:

frenchyd said:

 More to the point. In 1975 when I bought my first house it took almost 50% of my net pay to make the monthly payments.   When I sold it 9 years later  the payment was barely10% of my income.   10 years after that my tax deduction for the house payment was dwarfed by the deduction for child care.  
       My points are that tax deductions for interest on mortgage payments, make home ownership affordable for young childless couples. And pay increases if only for inflation reasons also make home ownership affordable and  worth while.   Remember the payments remain pretty well fixed while rents will steadily increase with inflation.   

Mortgage insurance deductions only come into play with large prices and/or high rates. The standard deduction for a married couple is now $25,900. Even with current rates over 7%, a median home buyer in MN is likely better off taking the standard deduction than they are itemizing to take advantage of the mortgage interest deduction.

Houses were also cheaper relative to median incomes in 1975 than they are now.

So the median home price in 1975 was 3.00 times the median family income, and the median house in 2021 cost 4.78 times the median family income. The only way any of this works out to be "affordable" for normal people is if the ratio between prices and incomes shrinks.

It seems like I'm interested in trying to figure out the supply side reason why houses are more expensive today than years ago. 

A few factors it seems have contributed to this:

- Trades make higher wages now relative to the rest of the population. That means that the median income for home buyers is likely lower than the median income for homebuilders. 

- More people are moving to housing markets with either A) less vacant land or B) less previously established housing. It's hard to buy into a housing market as a new resident when all of the housing is relatively new. 

- Good deals are quickly snatched up by flippers, STR investors, LTR investors, or institutional investors. It looks like this has been a growing trend since about the 80's, although the data is a bit hard to determine if it really is any worse today than what it was 30 years ago. 

- Wages have not kept up with HOUSING inflation. We might live better lives in terms of our cars, phones, healthcare, etc, but in terms of our housing, we're getting less square footage for our dollar. Is that a result of better and more expensive insulation that reduces our O&M more so than decades ago? 

Agree/Disagree?

You're missing one HUGE difference. 

Look at the avg sq ft of new construction in the 50s-60s. Look at the avg sq ft of new construction now. 

I raised 4 kids in 1100 sqft and 1400 sqft. Some friends just bought 4000 sqft and they've never had kids. 

Our next house will be sub-1000 sqft. Heating and cooling more than that is just insane to me. I don't spend that much time inside the house.  

I agree. The playbook on both real estate growth and income levels has changed. 
 

Expenses have also changed. We all have expenses now we consider priorities that didn't even exist 20 years ago. 
 

I believe the net result of the digital age (and expenses related) are a net loss (financially) for the average person. 
 

The combined cost of hardware, software, cell phones, data plans, apps, upgrades, security, training, hardware and software replacement, games,  streaming services, etc, etc, etc is HUGE.  We've convinced ourselves we have to have it, and that it's not very expensive. But when expressed as a percentage of gross income, I'm confident that most people spend more on digital media, hardware, and software than I spent as a percentage of my income on my first house. 
 

The house grew in value exponentially. The digital tools and media need to be replaced every few years. 
 

It's a black hole.

In reply to SV reX :

The things that typically appreciate over time, lead to increased earnings, or improve health have all far outpaced inflation while the things that lose value have gotten cheaper and easier to access:

In reply to STM317 :

That's how much the price has changed. It would be different expressed as a percentage of income. 
 

And that only goes back to 1999. Frenchy was talking about 1976. My first home was 1985. That stuff didn't exist then. 
 

Edit: And your graph ends in 2018, prior to some very big inflationary pressures. 

SV reX said:

I believe the net result of the digital age (and expenses related) are a net loss (financially) for the average person. 
 

The combined cost of hardware, software, cell phones, data plans, apps, upgrades, security, training, hardware and software replacement, games,  streaming services, etc, etc, etc is HUGE.  We've convinced ourselves we have to have it, and that it's not very expensive. But when expressed as a percentage of gross income, I'm confident that most people spend more on digital media, hardware, and software than I spent as a percentage of my income on my first house. 

This is a consumerism/capitalist society thing.  Technology is always expensive when it comes out, then gets cheaper and cheaper until its either phased out or so inexpensive it doesn't matter, then we shift our spending to new bullE36 M3.

I think people with wasteful spending in all those areas now found ways to waste it 20 years ago.  I think back to the rear-project TVs I knew people with (that cost thousands) back in the late 80s and Cable bills that were probably teh equivalent of $250 today.

In reply to ProDarwin :

No doubt. But no one I knew was spending the equivalent of a house payment on consumer spending in the 1980's

SV reX said:

In reply to ProDarwin :

No doubt. But no one I knew was spending the equivalent of a house payment on consumer spending in the 1980's

I don't know anyone doing that now.  The people I know with frivolous spending habits now have always had them and will always have them.

This is all anecdotal, but I am curious what society averages are.

In reply to z31maniac :

I think people are missing the point.  I made less than the median income right after Vietnam.   So I bought a house I could afford.   I didn't sit on the sidelines .  
 Inflation raised my net worth.   It will do the same for everybody who gets on the home ownership elevator. 
   Oh you can ruin it yourself.  Get a divorce, overspend and go bankrupt or have to borrow against the house to pay your debts.  Or make a foolish purchase in the wrong neighborhood. My late wife would have had me do just that. She liked the wallpaper in one, and a few other cosmetic things.  But it was a tiny lot in a not great neighborhood.   Poorly constructed but very "cute". 

In reply to frenchyd :

And the point you're missing is there are no houses currently to buy with "less than median" income.  That door of opportunity has closed.  If someone tried to build a massive neighborhood of $180k houses (3x median income), an REIT or other investment group would swoop in, buy all of them, and then try to either resell for $300k, rent them out for double the mortgage, or if they can't do those things, let them sit empty until they can.  The one thing they absolutely would not do is sell them for the same $180k to people looking for homes.  
 

Ironically, raising rates may crash the economy, lower houses prices, and crack it back open.  It will GUT those large investor groups above.  If so, I welcome the change, and i say that as a homeowner who would be fine with his house dropping 40-50% in value (if it meant median income households could once again buy homes).

In reply to Flynlow (FS) :

I don't know where you live but some states property is very cheap.  West Virginia for example has median homes prices of $108, 000 and I think there are some 5-6 states where the median home price is under $150,000

   There are websites that point out the median home price in all 50 states.  Granted , Hawaii, California, and New York aren't going to be cheap. But Texas and Florida are  modestly priced as are many states in the Midwest.  ( not Illinois ) 

  My best friend bought a brand new large house in a new development, paid cash for it and put a big pile of money in his retirement account by selling his home in San Diego. 

  That's the benefit of riding the inflation elevator.  
  Yes, Home values crushed 50% during the 2008 meltdown. But a few years later they were right back and climbing. 
     332 million Americans want homes. And Foreign  investors are buying them both as investments and as a fall back should their country fail.  Plus all those American investors 

I live in one of the more affordable cities in the country, and my first house purchase was a farm in rural ohio.  Not sure why all of your posts have to be about a specific person's situation, the saying, "The plural of ancedote is not data." would seem to apply to this conversation.  I don't care about your friend's one-off house purchase.  That's not not imbuing knowledge, or refuting a fed chart.  My friend was given a jaguar by his uncle for free.  Interestingly, this made all jaguars nationwide free.  They are all completely worthless now!  'Cause that's how economics work!

For the purposes of this thread, I care about national (or state) median house price, divided by national (or state) median income.  

And with that, I'm out.  This is an unproductive conversation.

frenchyd said:

  My best friend bought a brand new large house in a new development, paid cash for it and put a big pile of money in his retirement account by selling his home in San Diego. 

  That's the benefit of riding the inflation elevator.  
 

That's not inflation. That's real estate appreciation, mostly due to supply/demand.

A 30 year mortgage with a low fixed rate can be a good hedge against the effects of high inflation but nobody is really helped when inflation erodes their purchasing power.

STM317 said:

frenchyd said:

  My best friend bought a brand new large house in a new development, paid cash for it and put a big pile of money in his retirement account by selling his home in San Diego. 

  That's the benefit of riding the inflation elevator.  
 

That's not inflation. That's real estate appreciation, mostly due to supply/demand.

AKA the "property ladder" nonsense that got us into this mess.

RX Reven' said:

GameboyRMH said:

1. X'er who could buy a house, sit on it for a few years, sell it and repeat to collect hundreds of thousands of dollars just for moving. 

2. property/home owners won't be happy about having a big chunk of their net worth lopped off

1.  Why wouldn't the house they're moving to have gone up an equal amount?

The idea was that you would find a good deal on a house in an "up-and-coming" (AKA early gentrifying) neighborhood or a new construction rather than just trading for a similar house for similar money. Rinse and repeat, and a middle-class person could collect a half-mil over a few moves before retirement if they played their cards right.

GameboyRMH said:

RX Reven' said:

GameboyRMH said:

1. X'er who could buy a house, sit on it for a few years, sell it and repeat to collect hundreds of thousands of dollars just for moving. 

2. property/home owners won't be happy about having a big chunk of their net worth lopped off

1.  Why wouldn't the house they're moving to have gone up an equal amount?

The idea was that you would find a good deal on a house in an "up-and-coming" (AKA early gentrifying) neighborhood or a new construction rather than just trading for a similar house for similar money. Rinse and repeat, and a middle-class person could collect a half-mil over a few moves before retirement if they played their cards right.

I've always tried to avoid the churning costs associated with rinsing and repeating.

1984, age 20, 850 sq ft condo in Port Hueneme, CA for $59,500 as a rental property and sold in 1988 for $119,500 (4 years / +60K = 25% annual increase)

1988, age 24, 1,250 sq ft condo in Westlake Village, CA for $127,500 to live in and sold in 1998 for $129,000 (10 years / +$1,500 = 0.0001% annual increase)

1998, age 34, 1,750 sq ft home in Westlake Village, CA for $194,500 to live in and sold in 2008 for $600,000 (10 years / +$405,500 = 21% annual increase)

2008, age 44, 2,100 sq ft in Westlake Village, CA for $750,000 to live in forever and paid mortgage off May 2022 (14 years / +$502,000* = 5% annual increase)

*Bases on today's average estimate between Zillow & Redfin.

So, $15,000 down in 1984 + $8,000 additional principle in 1988 + $65,500 additional principle in 1998 +$150,000 additional principle in 2008 = $238,000 total which equals 19% sweat equity and 81% price appreciation.

Housing prices haven't come down nearly enough yet to reflect the soaring interest rates but once they do, buy and hang on until you can refinance at a lower rate for the win.

I feel sorry for the generations after me that can't afford to buy a home...writing off the mortgage interest is huge and knowing your a$$ is on the hook to pay the mortgage each month or risk losing your principle gets you good at adulting real quick.

In reply to Flynlow (FS) :

Well I gave you some state median numbers off the top of my head.   National won't mean much if you need to be in Boston New York  or California coastline.   Or are retiring and looking for modest home prices. 
   Those numbers tend to refute your statement that there are no houses  that people with median incomes can afford. 
     
     I'll grant that the old technique of buying a housing living it it for a while while you build up equity to move up is pretty well obsolete the cost of selling &  moving eats up 10% of the equity.  More if you choose the wrong appliances, curtains, carpet, and paints. 

Flynlow (FS) said:

And the point you're missing is there are no houses currently to buy with "less than median" income.  That door of opportunity has closed.  If someone tried to build a massive neighborhood of $180k houses (3x median income), an REIT or other investment group would swoop in, buy all of them, and then try to either resell for $300k, rent them out for double the mortgage, or if they can't do those things, let them sit empty until they can.  The one thing they absolutely would not do is sell them for the same $180k to people looking for homes.  

That's one of the things that concerns me about adding supply - will the "supply" meet the right demand? 

Aside from Affordable Housing Programs run by local governments that offer big incentives, and maybe Habitat for Humanity, nobody is writing deed restrictions that limit who can buy or how homes could be used. It's often beleived that Housing Trusts that limit potential buyers or how an owner can use a property really deny owners the ability to ride the market appreciation - but it might be one of the few ways you control who actually buys all those new "reasonable" homes. 

frenchyd said:

In reply to z31maniac :

I think people are missing the point.  I made less than the median income right after Vietnam.   So I bought a house I could afford.   I didn't sit on the sidelines .  
 Inflation raised my net worth.   It will do the same for everybody who gets on the home ownership elevator. 
   Oh you can ruin it yourself.  Get a divorce, overspend and go bankrupt or have to borrow against the house to pay your debts.  Or make a foolish purchase in the wrong neighborhood. My late wife would have had me do just that. She liked the wallpaper in one, and a few other cosmetic things.  But it was a tiny lot in a not great neighborhood.   Poorly constructed but very "cute". 

Did I really just read you say "inflation raised my net worth?"

z31maniac said:

Did I really just read you say "inflation raised my net worth?"

Some parts of Texas are not that affordable.  Austin is more expensive than Denver and Denver isn't all that cheap anymore.

I'm actually hoping for a massive real estate correction, I'd love to get a place in Vail and they're insanely over priced right now....

In reply to docwyte :

I want to get stationed in Denver next. Maybe when I get there that correction will happen lol

One of the neighborhoods near me recently had "stop development" signs sprout up all over.  I did some digging and it turns out a small somewhat defunct farm in the town is apparently looking to be converted in an 84 unit housing development.  Naturally, a lot of folks in the town are against it and want to keep the land as open space for wildlife and what not. They also don't want the likely increase in traffic. 

However, an issue they may not be thinking about is the added taxes those 84 houses would add to the town coffers.  As you can imagine, tax increases are not a popular subject.  My own taxes haven't increased in 4 years, and even then it was only by a few $. It absolutely does not keep up with inflation.  Township services are subject to the same inflation problems as everyone else.  They need to give employees raises. Buy fuel for twp vehicles. Maintain vehicles and facilities. And so on...  But they have limited ways to increase revenue: basically, raise individual taxes or increase the tax base (add taxable locations). Or cut services (often by not replacing employees who leave for various reasons). 

So while I tend to agree with the residents on not wanting further development in their small, semi-historic town, I can also understand the desire for further development from a $$ POV.

docwyte said:

Some parts of Texas are not that affordable.  Austin is more expensive than Denver and Denver isn't all that cheap anymore.

I'm actually hoping for a massive real estate correction, I'd love to get a place in Vail and they're insanely over priced right now....

Be careful what you wish for. Last time there was a massive correction  over 22 million people were unemployed.   

In reply to Ian F (Forum Supporter) :

Well said and thought out.