Dr. Housing Bubble

It is already popping... like it did last time and like it will do next time. Welcome to the financialization of everything! Look here for more data: http://www.doctorhousingbubble.com/

For Southern California, and the Los Angeles area in particular, this is a very good blog to read: http://www.doctorhousingbubble.com/ Their current (May 29) entry is titled "Don’t hold your breath for Millennials to purchase homes: 6 years into a recovery and Millennials are still moving into parental homes at record levels."

The correct analysis should take into account that you now have a downpayment and extra money to invest every month if you rent compared to buy. Buy scenario, free maintenance and no property taxes: Living in a $2.7M house means a downpayment of $540,000 plus $6.6k/month of mortgage (assuming 2% interest rate on ~$2.2M mortgage paid over 40 years). Your housing prices increase 6%/year on average (1985 - 2015 average, http://www.doctorhousingbubble.com/california-housing-history-real-est… You sell 40 years later your house for $22,628,579. Rent scenario: You put your $540,000 plus $4400 per month into your average stock market. 1985 to 2015 the performance was more than 10% per year (http://www.moneychimp.com/features/market_cagr.htm). Let's say you're conservative and you go for 6%/year in growth. In 40 years your net worth is $77,737,237.02. Renting is definitely better than buying in the scenari outlined in grandparent's comment.

I don’t think the price of home sales is a good measure of housing affordability. Here’s a graph from Zillow which does not show a huge increase in last 30 years: http://www.doctorhousingbubble.com/wp-content/uploads/2016/07/mortgage… According to the American Housing Survey, housing as a percentage of income only increased from 19 to 22% from 1985 to 2005. Overall, wages have exceeded or kept pace with inflation since 1979: https://www.politifact.com/factchecks/2019/jan/30/kamala-harris/are-pa…

In retrospect (as the housing prices have mostly recovered: http://www.doctorhousingbubble.com/wp-content/uploads/2013/01/united_s… ), the hosing crisis can be seen as an irrational bubble, with the major problem being that the banks were under-capitalized for the risk they were taking on. After several years of injecting capital into the banks for several years, they are fine. Arguably the banks didn't worry about the risk because they trusted the government would help them out.

I did not state that property sales have been suppressed, I said that property tax revenue has been suppressed. My particular anecdote was around property improvement, not sales. And once again, a property sale does not mean that reassessment definitely occurred. However it is hardly groundbreaking to state that prop 13 has created a "lock in" effect [1][2][3][4]. [1] http://econweb.ucsd.edu/~miwhite/wasi-white-final.pdf [2] http://taxprof.typepad.com/taxprof_blog/files/2008-19151-1.pdf [3] http://www.doctorhousingbubble.com/prop-13-california-housing-lottery-… [4] http://www.nytimes.com/2006/05/07/realestate/07california.html?ex=1182…

So? It's a fact, but why does it matter? You'd think it's obvious: home prices typically dictate affordability, and affordability is what we ultimately care about. But in housing it's more nuanced. Home prices * financing prices dictate affordability. That latter price, to finance (i.e., interest rates), have been dropping for 50 years, making it cheaper and easier to borrow and thus cheaper to afford certain price levels. It's key to focus on these interest rates as the other portion (principal paydown) isn't an expense and doesn't make one any poorer, as it just exchanges cash for home equity, which can be reversed again upon sale. A much easier way to look at this entire discussion is simply to look at monthly fees as a percentage of income. The main fees to look at are either fees to rent the home directly (rent), or fees to rent the money to buy the home (interest rates). Rent in particular is increasing as a percentage of income, but it's much less crazy than some people seem to think. For interest rates it's even been dropping despite increasing home prices. [0] I'm definitely not seeing any data that indicates exponential decreasing affordability which is what we should care about. [0] http://www.doctorhousingbubble.com/wp-content/uploads/2016/07/mortgage…

The various land regulations such as Prop 13 and rent control were overtly billed as "ways to stave off all the social change that's been happening" when they were debated and passed in the 70s and 80s. It's not a guess or some sort of conspiracy theory. Review the newspaper polemics of the time. It was quite openly the goal. You can see exactly that continuous spectrum of decay in California in many places. The state has become ever more polarized into rich and poor, with less and less middle, during that entire time. This is partially a process that was going on everywhere in the US, but all the extra regulation in California that was designed to halt that process actually made it worse. The California middle class has been massively eroding since the '70s. Before that, you could drop out of high school and still get a job that would lead to you owning a house within a few years. Now, owning a house is impossible for almost everyone. The land regulations that restricted supply have made long term housing prices grow far faster than the national average: http://www.doctorhousingbubble.com/wp-content/uploads/2015/08/US-San-F… Huge tracts of formerly middle class suburbs near San Francisco and LA have become massive ghettoes -- where you still have to pay half a million dollars or more to buy a house next to thugs who openly sell crack 24 hours a day, where people are shot a couple of times a month. Where else in…

http://www.doctorhousingbubble.com/why-millennials-stuck-at-home-eb5-v… "The homeownership rate of the 30 year old cohort has tanked starting in 2007 with the market implosion. That is very clearly illustrated by the green line above. Why? These were the folks buying with toxic mortgages and timed the market very poorly (or simply had bad luck). The rate of those young adults living at home has gone up unabated since 1999. Of course the increase in home prices has been driven by investors and this will simply make it harder on a cohort with lower incomes and much higher levels of student debt. It is safe to say that many more young Americans will be renting deep into their adulthood. It is also safe to say given the current cost of college that many more young Americans will be coming back home to live with mom and dad. The Fed’s findings are simply reinforcing this trend."

This is part of the problem with the American housing industry. How did it become "normal" to borrow 4/5ths of the value of a home? It didn't used to be that way. If you look at average loan-to-value ratios over the last 40 years, they've consistently gone up. Same with the home value to income ratio. Home prices have appreciated much more quickly that they should have based on fundamentals of the economy, propped up by government incentives, cheap money sloshing around, and an oversized mortgage industry. Ultimately, what we really need is to go back to a system where people can actually afford the homes they live in. The vast majority of Americans, whether they "own" or "rent," are still renters with no real chance of ever actually owning their home outright. If that perception changed, prices would come down, and we'd eventually get back to a system where you could buy a home for 2X your annual income. The problem with a return to a sane system is that it would bury existing homeowners, and we aren't willing to accept the pain in the short run. We need to artificially inflate housing prices in order to allow people to sell their homes, keep the economy functioning etc. So, in short, we're stuck. http://www.doctorhousingbubble.com/wp-content/uploads/2013/02/Househol…

The middle class is shrinking precisely because what it means to be "middle class" should reasonably grow with increases in productivity. And it has. Every decile has considerably more stuff today than they did in 1980. More cars, bigger houses, more food, more medicine, and more education [1]. Jbooth is making the fallacy of measuring income in non-constant baskets of goods. His claim is that in 1980, median wages bought you 1 basket of goods, and in 2010, median wages still buys only 1 basket of goods. He is deliberately ignoring the fact that the basket in 2010 is bigger. However, this isn't happening. And by many measures its decreasing (say health care, college education). College consumption has increased: http://www.childstats.gov/americaschildren/edu6.asp The same is true of medicine - we consume more drugs, visit the doctor more, and get more treatments. According to a quick google search, the % of the labor force producing health care has gone up considerably: http://www.doctorhousingbubble.com/wp-content/uploads/2009/10/chart-10… You might want to argue that consumption should have increased more, but it's nonsensical to argue that consumption has not increased significantly (as jbooth is). [1] I don't like treating education as a consumption good, since it's primarily purpose is to gain credentials/skills so you can get a job.