I think there's a lot of people who view homeownership as an investment strategy but that has never been the case it is a lifestyle. Investing in real estate is an investment strategy but that's separate from homeownership. Even moderate market investments have risen at a pace that meets or exceeds the growth that we've seen in home prices.
The one benefit that homeownership does provide as far as an investing strategy is that it inadvertently locks you into this investment in a way that other investments don't. If you were to measure renting versus owning and taking the difference in cost and applying it to investments renting is a much more attractive option over the long term. There is a definite sacrifice in lifestyle because owning a home provides a big lifestyle benefit that a lot of people want. The real problem with renting versus owning as far as investment goes people in general especially the lower middle class and below who are sold on this idea of home ownership as an investment are poor at investing over the long term. So when they rent they tend to spend most of the rest of their disposable income instead of putting a portion of it away in a long-term investment. The ownership of the house automatically causes them to have a long-term investment that they can realize in 10 or 20 years.
So while I agree with the author that real estate will not continue to rise at the pace that it's risen in the past percent gain is not really the measure of an investment or a capital asset like this. What I do believe will continue to take place with real estate is that as an inflation in adjusted investment vehicle it will continue to maintain pace. So that does mean that home ownership real estate will continue to maintain pace and grow as an investment compared to inflation. And over the long term homeownership as an investment vehicle does not tend to outpace inflation except in very limited jumps.
The key to any real investment is finding one that will outpace inflation by a decent margin that is the only way to see growth. That is possible to do with investment in real estate but very difficult to do with home ownership.
How is investment in real estate going to outpace inflation when it comes up against the income barrier? I’d argue we are going to see that it won’t. The future isn’t like the past and when real estate gets too expensive for even the wealthier members of the working class to afford we are going to see stagnation or extremely limited growth. A large portion of the real estate market is homeownership and having that slice of the market disappear would have extreme downward pressure on prices.
Because you're confusing home ownership and real estate investing. Real estate investment is investing in rental properties of some form or fashion and this can be for business rentals it can be personal rentals any number of things. Because that form of investment does not rely on the buying and selling of the property to realize the gain in the investment.
You still have a problem with people affording rent if you are buying rental properties at 128x average income. Rent is going to be an inconsequential portion of the interest on the mortgage if someone making average income or even 3x average income has to afford it.
There's a whole lot of American households whose sole investment is their house. If their house value goes down, there goes kid's college, vacations, easier retirements. Any President is going to keep this from happening at almost any cost. The political party that lets the majority of Americans' mortgage go underwater will be punished for a decade.
The solution here is 70s/early 80s style stagflation - prices go up, but mortgage interest does too, as does price-of-living, until the inflated real estate prices actually match some lesser value.
It has to but it won't. The central point of the essay is that in order to keep going up in the next 50 years like real estate has in the last 50 years, the average house has to reach prices that are 128X an average income by 2072. When you consider supply and demand, the number of people in the market at that price point is too small to reflect a reasonable real estate market. Ergo, prices will either go down or grow far more slowly to reflect a more reasonable price point where more people can participate in the market.
I want to know what "corner of the world" the author lives in where home prices have gone from ~2x annual income to ~16x now
Annual median household income in the US was ~$67k in 2020 [0]. It was less than $10k in 1970 [3].
Median home sales prices are hovering around $425k [1] (vs ~$17k 50y ago [4] (adjusted to 2000 dollars it was ~65k [5]))
That's less than 7x annual household income, not 16X
Add-in average home sizes increasing dramatically in the last 50 years, (1770 sq ft to 2687 sq ft [2]), "basics" like central HVAC now being standard (they weren't not too long ago), and myriad other "table stakes" to a modern house, and it only makes sense housing prices have increased
If anything, they've increased far slower than the author claims, because
The relevant market is Toronto. I agree if you look at markets like the entire US including major rural and suburban areas the story is quite different but I think what you've done is average a bunch of shrinking economies into the rapidly growing ones. I could have been more clear that this was about housing prices in rapidly growing major urban centres rather than housing prices anywhere in the nation.
Dealing with median instead of average doesn't solve the problem though. I'm writing an article about real estate prices in areas where real estate prices are growing rapidly and are quite high. I've said that the good times can't continue forever and have found some metrics that indicate why. You've said these markets aren't reflective of all of America and if we look at the 50th percentile of house the situation looks rather different. I agree the situation looks different but I don't see how that in any way refutes my point about the specific market.
The median of Canada is a terrible way to look at the housing prices of Toronto. The median of the USA is a terrible way to look at the housing prices of San Francisco. As much as it can be tempting to say "median is a great statistic" and it's even true that it's usually better than average. That doesn't make it a panacea and that doesn't make it do things it's not intended to do.
There is some merit to me getting data to compute median housing prices in Toronto and redoing the analysis based on that. Still an analysis of average housing prices in Toronto is far more useful to the Toronto market than an analysis of median housing prices in Canada.
Median income in San Jose is not the same as median income in the entirety of the US - but it's the median in the area you're looking at
I honestly don't understand why you have such a hard time understanding this - unless you just want to post hyperbolic complaints about a city you cannot afford to live in, perhaps
I don't have the full dataset so can't calculate the medians. If you have the data you're welcome to do so and make the comparisons. You continue to act as if you've refuted my central point when all you have done is provide a data set that is irrelevant to the region of interest and computed the median of that irrelevant data set.
My point that average while imperfect is still a useful measure. My point is that the irrelevant data is not useful even if you compute a median for it. My point is that I'd rather analyze information about the San Jose real estate market from the average prices of San Jose then the median prices of the US. I also don't think it is close which of those sources is better data.
I'm working with the data I have. Would I like it to be better? Yes.
I also happen to be able to afford to live in the city I live in. I happen to be one of the few in my generation that gets to own a home. I also think my home won't go up 12.5 times in value in my lifetime the way my parent's home did. I think society has its head buried in the sand about how real estate works and I think a reckoning is coming in the next 50 years because of metrics about what costs in hot markets will look like. People hate this message because people are overinvested in real estate to the point where they have multiples of their net worth tied up in a house.
The extrapolations the author of this pastebin makes reminds me of the charts that plot how fast people ran the mile (or the 100 meter dash) - if you pick the right scale, you can predict when someone'll break the 3 minute mark for the mile
And the 2 minute mark (which, btw, is an average of 30mph)
But if you keep it up, eventually you can see where someone will run the mile in negative time
The relevant German proverb here is "Bäume wachsen nicht in den Himmel"
"Trees don't grow to the sky"
The question for many of us is how long you want to wait for the inevitable correction, because it could, worst case, be a decent portion of a human lifespan.
19 comments
[ 22.4 ms ] story [ 2314 ms ] threadThe one benefit that homeownership does provide as far as an investing strategy is that it inadvertently locks you into this investment in a way that other investments don't. If you were to measure renting versus owning and taking the difference in cost and applying it to investments renting is a much more attractive option over the long term. There is a definite sacrifice in lifestyle because owning a home provides a big lifestyle benefit that a lot of people want. The real problem with renting versus owning as far as investment goes people in general especially the lower middle class and below who are sold on this idea of home ownership as an investment are poor at investing over the long term. So when they rent they tend to spend most of the rest of their disposable income instead of putting a portion of it away in a long-term investment. The ownership of the house automatically causes them to have a long-term investment that they can realize in 10 or 20 years.
So while I agree with the author that real estate will not continue to rise at the pace that it's risen in the past percent gain is not really the measure of an investment or a capital asset like this. What I do believe will continue to take place with real estate is that as an inflation in adjusted investment vehicle it will continue to maintain pace. So that does mean that home ownership real estate will continue to maintain pace and grow as an investment compared to inflation. And over the long term homeownership as an investment vehicle does not tend to outpace inflation except in very limited jumps.
The key to any real investment is finding one that will outpace inflation by a decent margin that is the only way to see growth. That is possible to do with investment in real estate but very difficult to do with home ownership.
It might happen to grow in value during your stay, but the home you live in is not an investment: it's just a house
There's a whole lot of American households whose sole investment is their house. If their house value goes down, there goes kid's college, vacations, easier retirements. Any President is going to keep this from happening at almost any cost. The political party that lets the majority of Americans' mortgage go underwater will be punished for a decade.
The solution here is 70s/early 80s style stagflation - prices go up, but mortgage interest does too, as does price-of-living, until the inflated real estate prices actually match some lesser value.
Annual median household income in the US was ~$67k in 2020 [0]. It was less than $10k in 1970 [3].
Median home sales prices are hovering around $425k [1] (vs ~$17k 50y ago [4] (adjusted to 2000 dollars it was ~65k [5]))
That's less than 7x annual household income, not 16X
Add-in average home sizes increasing dramatically in the last 50 years, (1770 sq ft to 2687 sq ft [2]), "basics" like central HVAC now being standard (they weren't not too long ago), and myriad other "table stakes" to a modern house, and it only makes sense housing prices have increased
If anything, they've increased far slower than the author claims, because
------------
[0] https://www.census.gov/library/publications/2021/demo/p60-27...
[1] https://fred.stlouisfed.org/series/MSPUS
[2] https://www.rocketmortgage.com/learn/average-square-footage-...
[3] https://www.census.gov/library/publications/1971/demo/p60-78...
[4] https://www2.census.gov/programs-surveys/decennial/tables/ti...
[5] https://www2.census.gov/programs-surveys/decennial/tables/ti...
Sure, there are a minor handful of nutty expensive (and cheap) markets ... but they're just that - a handful
Averages are a horrible way to look at things like housing prices, incomes, etc
The median income of Canada may not be the median income or Toronto, but you still want to look at the median, and never the average
In 1984, the college major with the highest average starting salary was Cultural Geography
Know why? Michael Jordan
Averages are very deceiving most of the time
There is some merit to me getting data to compute median housing prices in Toronto and redoing the analysis based on that. Still an analysis of average housing prices in Toronto is far more useful to the Toronto market than an analysis of median housing prices in Canada.
Median income in San Jose is not the same as median income in the entirety of the US - but it's the median in the area you're looking at
I honestly don't understand why you have such a hard time understanding this - unless you just want to post hyperbolic complaints about a city you cannot afford to live in, perhaps
My point that average while imperfect is still a useful measure. My point is that the irrelevant data is not useful even if you compute a median for it. My point is that I'd rather analyze information about the San Jose real estate market from the average prices of San Jose then the median prices of the US. I also don't think it is close which of those sources is better data.
I'm working with the data I have. Would I like it to be better? Yes.
I also happen to be able to afford to live in the city I live in. I happen to be one of the few in my generation that gets to own a home. I also think my home won't go up 12.5 times in value in my lifetime the way my parent's home did. I think society has its head buried in the sand about how real estate works and I think a reckoning is coming in the next 50 years because of metrics about what costs in hot markets will look like. People hate this message because people are overinvested in real estate to the point where they have multiples of their net worth tied up in a house.
Median home prices likewise: https://creastats.crea.ca/mls/treb-median-price
And the 2 minute mark (which, btw, is an average of 30mph)
But if you keep it up, eventually you can see where someone will run the mile in negative time
"Trees don't grow to the sky"
The question for many of us is how long you want to wait for the inevitable correction, because it could, worst case, be a decent portion of a human lifespan.