The Fed at this point controls the whole economy and they have two options:
1. Raise interest rates and stop printing. Crazy inflation stops, but asset prices crash and we enter a major recession or depression. The end result will likely be unrest and blood in the streets.
2. Do nothing, keep printing. Inflation picks up massively. The economy keeps humming along but young people, including myself, are permanently priced out of home ownership and many other things. We enter a new era of cyberfeudalism, which probably involves some blood in the streets.
It seems like they are going with option 2. I am 24 years old and I can't say I'm particularly excited. It doesn't even really seem like any of the high paying jobs are enough to keep up with this insane market. All I can do at this point is raise my fist to the sky and say fuck the fed, fuck the financial system, fuck the greedy rich, fuck BlackRock, and fuck you.
This is only part of the problem - and a small part of the problem at that.
The real problem as always is zoning. Houses cost roughly the same on a $/sqft basis, adjusted for inflation, as they did in the 1970s. They're more expensive now because outside of town they're twice as big on average [1] - in part due to zoning rules. In town, zoning rules preclude densification necessary for supply to meet demand [2]. And, families are smaller.
Check out Japan housing CPI - a market where supply meets demand thanks to federal zoning rules, and is also centrally banked. Dead ass flat. [3] This chart alone basically debunks the theory the Fed is solely responsible for lower housing affordability.
Zoning is the issue, not the Fed.
[edit] Yes, the fed contributes a little - monthly affordability of a more expensive house is the same when interest rates are lower, but down payments are not. However, if you want to solve the affordability crisis build more houses. Any houses. Now. Compare the Japan housing CPI in [3] to the US housing CPI in [4] and weep. Housing in the US is driving inflation, not responding to it.
While I agree zoning is a huge issue (I think that interest rates being so low doesn't help, either, but I concur with your thesis that zoning is the bigger problem), this, however:
> Houses cost roughly the same on a $/sqft basis, adjusted for inflation, as they did in the 1970s.
Sorry, but no. My parents bought their first home for $72/sq ft. real¹. They sold it for $99/sq ft. The same house last sold for $208 sq ft., and is Zestimated today at $302/sq ft. The value of the home has averaged >7% gains YoY, well outpacing published inflation.
Their current home, built significantly later, and like you say, significantly larger, was $149/sq ft. at purchase, and is $182/sq ft. today.
Every house I look at sings this same tune. Accounting for inflation, where my parents got a large house ready to move into, for the same amount to day I'm looking at what I call a "contractor's paradise", and that will require significantly more than the sticker price to make it habitable.
¹all dollar figures in this comment will be in 2021 real dollars, not nominal ones. I.e., adjusted for inflation.
The inflation adjusted $/sqft statement is a blended average across the US. It’s lower outside of towns and higher inside towns. This is tracked by the Census bureau but as always with averages there are values on both sides of the mean. [1]
One caveat is it does reflect only new construction.
You're conflating the market for suburban family homes with the market for real estate. What about apartments, commercial real estate, etc.? Rent has absolutely exploded, which might not be priced into suburban family homes that aren't built to be rented and don't directly compete with more urban apartments.
under market, no. but due to locality there are a lot of different real estate markets. dragging prices of wyoming into the dataset when you are interested in nyc or sf makes just no sense. then you have the problem of the different types of new constructions too. i don't see how averaging helps here.
at least where i am looking (european country), cities have roughly seen a 100% price increase since 2010. income hasn't kept up with inflation or the housing prices.
Part of the problem with the first item you mentioned is that developers don’t really want to build cheap housing (I guess this is an assumption, but it makes sense financially.) They can make way more money catering to the people who can “afford” to build a $500k home, and people who want a very custom design and lots of space. On the renting end, “luxury” apartments will make more money than really basic cheap units. So most of the new housing stock doesn’t help address the problem for people new to housing. Even if you want to build out a very basic, small house, you have to have cash to DIY without a bank, or find some way to finance a builder (increasing the significant labor cost) without having existing equity. So the part of the market that does want cheap, basic housing doesn’t even have a way to influence those units. There is loads of demand for them (young people without money make up a huge portion of the population), but no developers willing to meet that demand when they can just make expensive units. And not enough developers so that some need to chase the cheap market.
And in cities, the lot cost is very prohibitive too, before even getting into building a very basic house.
> Part of the problem with the first item you mentioned is that developers don’t really want to build cheap housing (I guess this is an assumption, but it makes sense financially.)
This is like saying that Toyota would rather sell Lexuses than Camrys.
Yes, it's true, but they sell Camrys anyway. Why? Because the market for luxury is only so big. They can make more money total addressing other parts of the market.
So why doesn't this apply to housing? Land + zoning. Imagine if Toyota was only allowed to produce 10,000 cars a year. What kind of models would they choose to make?
Can only speak for my city (Seattle), but no one’s building Camrys and building is constant. It’s not because any zoning prevents building affordable units. It’s because there’s limited land to develop at all and demand for property of any kind is extraordinarily high. All of the development in residential neighborhoods is already zoned for everything that could accommodate 4-10 times as many tenants. But they’re building luxury units anyway.
Doesn’t surprise me but this zoning explanation ain’t it.
50% of the developable land in Seattle is designated for single-family homes, and not one single inhabitable SFH in Seattle city limits is what anyone would call "affordable". The fact that it's illegal to replace those SFHs with duplexes, quadplexes, or midrises is a primary driver of housing unaffordability.
Seattle's population growth has outpaced its housing growth for multiple decades. There's a huge amount of "catching up" to do, and SFH zoning is blocking that from happening.
Once enough there's enough housing to hold all the rich people that want to live here, of which there are many, you will see some downmarket construction happening. But we're a long way away from that.
They’re replacing SFHs with multiplexes all over the city all the time. Instead of assigning A/B/C units or fractions they just split the numbers already designated for the lot.
Zoning for MFHs won’t change that. It’ll maybe bring more skepticism to luxury developments. But people buying million dollar units with no lot will know they’re buying the same thing.
And mixed use luxury apartments are the only development otherwise. No one is building anything more affordable in zoning more favorable for it. At best this is trickle down economics where everyone who needs somewhere affordable to live might be able to get scraps at the most dangerous furthest flung place in Lake City.
So if this is a "problem" for government to fix via either Zoning being abused or the free-market being naughty, then why doesn't the government just create very specific and targeted "high-density, high-rise, cheap-price" zone that can only be built with the right and necessary units?
Dude have you been to lake city? The only area that’s dangerous is where there city built one street up with all projects. It’s significant safer than Ballard university district and and capital hill
> As of 2019, there were 367,806 housing units in Seattle, representing a 19 percent increase since 2010 (according to Washington State Office of Financial Management). The growth in the number of housing units in Seattle from 2010 to 2019 surpassed the 14 percent growth seen between 2000 and 2010. However, even with the rapid increase this decade, expansion of our housing stock has not kept up with Seattle's population growth of 22 percent between 2010 and 2019.
And here's Seattle's land zoning ("Land Use" tab on the same website):
> Can only speak for my city (Seattle), but no one’s building Camrys and building is constant
I'm in the Seattle metro. Building higher density housing is still illegal in most of the city, because attitudes there are still fundamentally NIMBY, even if it's not as bad as SF.
The city has generally upzoned little slices at a time around 'urban villages', and while that's certainly better than nothing, it's a lot less effective than largest scale upzones, and streamlining building processes.
This is a poor analogy. People rely on cars way differently then they rely on housing. If the only car you could buy was a Lexus, you might stretch you budged, take out a big loan and buy one, or you might simply not buy a car, get a bicycle instead, take the train, a cab, or pay a coworker to carpool.
Housing doesn’t give you this option. If you don’t want to be homeless you may be able to rent, but that is pretty expensive too.
It seems to me like your list has analogs in housing without squinting too hard: spend more of your budget on housing, get a mortgage (big loan and buy one), get a smaller place (bicycle), rent a place (train), or move in with roommates (carpool).
So many landlords have taken old homes and converted them into single apartments, raising the cost without creating any value. I would say destroying something of intangible value as well. That trend has definitely driven the cost of housing up.
Because selling a Camry doesn't reduce the selling price of Lexuses built in proximity to it by more, in aggregate, than the profit from the Camry. Which is why developer-founded and controlled HOAs have much more restrictive rules than public zoning rules.
One theory, and this may just apply to my location, starter homes supply is being eaten up by firms who are going to turn around and rent it out. So they are essentially grab what little supply there is of new construction starter homes, then turning around and renting them out for quiet a bit of a sum that still prices quiet people out of them unless they are fine eating shit.
We don't seem to have an issue with Hertz coming in and scoping up all the camrys.
There are plenty of yuppies to buy up any fancy new houses in town, though. So no cheap houses are built inside the cities proper.
In the US, there's always more land - it's just further away! The cheap "Camry" houses still get built, but never as infill. It just gets pushed further and further out to the exurbs.
Unless you take money (or cheap debt) out of the hands of the yuppies, nothing changes here.
It doesn't really matter if you add new stock at the top end or at the bottom end, people from the bottom move up, and make space at the bottom for new entrants. Any new stock you add increases supply, which leads to lower prices across the board.
[edit] and btw, I think builders aren't tripping over their shoelaces to service the low end of the market because they know the city is so aggressively capping how much they can build. This means they will only build the most profitable units, the high end today. But once the high end is saturated, the low end ones will be the profitable ones anyways.
> It doesn't really matter if you add new stock at the top end or at the bottom end, people from the bottom move up, and make space at the bottom for new entrants.
Only if the old housing stock isn't torn down to make room for the new housing stock. Thankfully property taxes aren't driven in the potential value of land (rather, they are tied to actual value), but most small scale landlords of affordable housing right in it are in it for property appreciation, not rents. Their exit plans are often to sell to a developer as tear downs.
> This means they will only build the most profitable units, the high end today.
There are costs are too high (to acquire property and build) to justify anything but going after the highest end of the market. Once the high end is say satisfied, money (investment) could simply move away from housing if it can't make any money there. Money chases the highest returns between all of the markets, not just one market.
> Thankfully property taxes aren't driven in the potential value of land (rather, they are tied to actual value)
That's not a thankful thing at all, it incentivises using the limited land in wasteful (low-value) ways.
> Once the high end is say satisfied, money (investment) could simply move away from housing if it can't make any money there. Money chases the highest returns between all of the markets, not just one market.
Available capital is practically unlimited these days, anything that's profitable and legal to build will get built.
> Only if the old housing stock isn't torn down to make room for the new housing stock
This is about zoning too. Normally, if the demand is there for it a smart land owner would build more housing on the same plot, e.g. turning a single family into a two family, but of course that is illegal in many places.
Yes, that is exactly what is happening in Ballard (Seattle area) right now. Those cheap 100 year old low income housing complexes (one or two stories) are being raised for a bunch fo three story townhomes, smart developers can sell each of those town homes for $1 million each, and they could get much less if they kept it as a hotel-like complex. I just bought one of those town homes, so I'm not going to complain too much, but I'm self aware about what is going on here.
So poor people are still getting screwed. My daily walk to the grocery store passes by a few places that are pretty shabby (so low income) and right across the street they are building a bunch of luxury town homes. It doesn't take a rocket scientist to figure out what will happen to those shabby places in a year or so.
> a smart land owner would build more housing on the same plot
This is an uncomfortably extremist position, should maximizing revenue per investment be the one and only consideration society takes into account?
I do many things that provide joy in life in other ways, even if I know they don't maximize revenue or savings. I wouldn't want to go through life thinking about nothing else than ROI for every action.
>property taxes aren't driven in the potential value of land (rather, they are tied to actual value)
That means multifamily properties have higher tax bills for absolutely no reason. Expensive locations need to provide more housing per area so charging a fixed fee based on the value of the land is a much better approach. You get to build a single family home and pay through the nose or split the bill with a multi family home.
I hear this repeated a lot. In practice, at least in the cities I've lived in, I've only seen housing go downmarket when there's an explicit exodus. The reason is that housing is built for a specific living space size. Los Angeles has so many single family houses that it's impossible to cater to people downmarket...unless houses are torn down and multi-unit housing is built. You could rip those down and build upscale, large apartments, but I feel like I see them sitting vacant instead of moving downmarket. The bust sucks for everyone and the boom (gentrification) sucks for the less well off.
Maybe we're saying the same thing, but instead of gradually reaching a equilibrium like you're describing I see a dramatic boom bust cycle--both are held back by lack of building.
> It doesn't really matter if you add new stock at the top end or at the bottom end, people from the bottom move up, and make space at the bottom for new entrants. Any new stock you add increases supply, which leads to lower prices across the board
I could definitely see that being how it works in a lot of cases, but it seems like a stretch to assume that's some sort of natural law of prices. If I have a market of ten potential buyers, the first who has $1, the second who has $2, and so forth until the tenth buyer has $10, I could put an infinite number of goods for $10 for sale, and none beyond the first would be able to be purchased. Sure, you could argue that it would be silly of me to price in that way, and you would be right, but in reality you don't know the exact financial details of every potential buyer of your whole market. GP is hypothesizing that basically this exact scenario is happening with housing, and I don't know if they're right or not, but your rebuttal doesn't seem very convincing that this is an impossibility.
My point is that it's at least mathematically possible for a scenario to exist where the assertion I was responding true does not happen. If the idea is that _in practice_ people always lower the prices, then it seems more direct to just say that rather than claim some sort of law of economics that doesn't actually have any mathematical proof.
If they priced at $6, they’d sell 5 units for $30 and 5 people would still be unable to afford to buy housing while the seller held onto 5 more units waiting for another person to come along with $6. If they priced at $7, they’d sell 4 units for $28, which still might be better for them.
This might not be that far off from what’s happening.
We have the same problem with the car market. I can only afford a $5,000 car, but the car manufacturers make all their money building $20,000 cars. I just can't see how Honda making another $20,000 fit is going to help me afford a $5,000 car.
The problem from the manufacturers' perspective is that the gear required to meet 2021 safety, emissions, and fleet efficiency standards by itself almost pushes a new car's price over $5000, and that's without leaving any budget left over to make it a car anybody would want to buy.
They do sell vehicles at that price which get around all of those standards, but they lose two wheels in the process.
You used to be able to buy a decent used car for $5k but as of recent you can't find any without connections. I've been telling folks interested in Japanese cars that it's $10k at this time to buy used with low mileage for a sedan and $15k to buy used with low mileage for an SUV.
I mean VW makes $100,000 Porsches and $20,000 Jettas. At some point it’s not economical to make cheaper cars due to materials and workmanship. You can certainly buy an e-bike for half that, I did.
The cost of construction in America is $150/sqft. We’re not even close in cities. Off by an order of magnitude.
Sorry I guess I was more obtuse than I intended. My point was I can buy a used car for $5,000, and Honda building new cars allows that even if the new cars are out of my price range.
Some analysts believe that in another 5-10 years in the US, you'll get if not quite a $5K USD car off the Internet, a $10K USD car from a Chinese manufacturer, and the Detroit automakers will reprise their arrogance-into-bankruptcy role from the 70's again when Japanese cars entered the US market, when they famously remarked the new entrants can have that cheap unit market.
Watching the Detroit product roadmaps, I'm inclined to agree with that analysis at this time.
In cities with no zoning todays luxury housing is tomorrows affordable housing. For example in Houston apartments and houses that were touted as luxury in the 80s are slums now.
This also holds for smaller cities in the Rust Belt. My childhood home, purchased almost new in 1980, is only worth about 2x what my parents paid at a time of 20% interest rates. It has been very well kept and sits on about an acre and a half. Everyone with means has moved away. Retirees and people with no better options are all that's left.
We're seeing a massive demographic shift to single person households all across the first world countries from Canada to Korea. But for some reason the housing market is still geared towards families.
Households with two or more incomes are more likely to be able to afford real estate than single-income households - both in absolute income levels as well as in economic crisis where it is less likely all family is losing their all of their income simultaneously than a single person..
If the real problem was always zoning, wouldn't dense cities like NYC and Shanghai be cheaper than average, not way over average?
> Check out Japan housing CPI - a market where supply meets demand thanks to federal zoning rules, and is also centrally banked.
Japan went through a huge bubble in the 1980s. Also, housing (the structures at least) rapidly depreciates in Japan, which prevents them from being used a speculative asset as in countries (even then they still went through a huge bubble in the 80s). It is definitely an alternative model to our own, but I'm not sure how many people will want to experiment with that. Japan also much more strictly restricts immigration than other countries, which makes it, for example, a bad place for Wenzhou house wife real estate speculation.
> If the real problem was always zoning, wouldn't dense cities like NYC and Shanghai be cheaper than average, not way over average?
It's not about supply by itself, it's supply vs demand.
Big cities have big populations and economies, which means a lot of demand.
But as far as zoning goes, note that like other metros, NYC has actually effectively downzoned areas over time; in fact, a huge proportion of buildings there would now be illegal due to different types of density restrictions: https://www.nytimes.com/interactive/2016/05/19/upshot/forty-...
A lot of NIMBY's tend to go, "well, there's still some areas where it's possible to build more, so there's no real issue there". This is approximately like restricting car manufacturing to one state, and then when car prices go through the roof, saying "well, there's still more land to build car factories there, so I don't see the problem, it couldn't possibly be this rule".
NYC housing has pushed outwards into Queens and the Bronx, manhattan is less populated these days because it lacks full time residents (the apartments are still sold, but their owners list upstate/Connecticut/long island properties as their permanent addresses, and they have many less occupants in them even when full, not like the turn of the century when more than a few people were crammed into small apartments).
> A lot of NIMBY's tend to go, "well, there's still some areas where it's possible to build more, so there's no real issue there". This is approximately like restricting car manufacturing to one state, and then when car prices go through the roof, saying "well, there's still more land to build car factories there, so I don't see the problem, it couldn't possibly be this rule".
My only point was that making cities more dense seems to make them more desirable, causing more people to want to live there. Yes density is a great thing! But it doesn't solve affordability problems on its own. Can you imagine if San Francisco (6.2k/sqm) had NYC-level density (27k/sqm), would it be more or less affordable? I'm going to go with the less.
What is really holding us back are the American libertarians who are afraid of a public housing system like the one in Singapore.
> My only point was that making cities more dense seems to make them more desirable, causing more people to want to live there.
Increasing housing in this manner would probably boost land prices, but over a greater number of units, so result in overall decrease in housing cost.
NYC is a bit of a weird spot in real estate, in that having a Manhattan address (and probably a Williamsburg or Bushwick address to a lesser degree these days) is a status symbol for foreigners, in the same way that London or Paris might be. Most American cities do not have this kind of cachet and so at some point prices will fall if you build enough.
The problem is really that housing production would have to increase by an incredible amount to get to affordable. To use the example of Tokyo as affordable, let's look at comparative housing production statistics.
* The 23 special wards of Tokyo, 8.9M people, built 110,000 new homes that year.
* The entire country of England, population 53M, built 115,000 homes a year.
* The metropolitan area of NY, population 20.3M, approved 27,000 units in 2012, but approvals != actual construction.
> * The 23 special wards of Tokyo, 8.9M people, built 110,000 new homes that year.
Since housing is refreshed in Japan on a 20-30 year basis, you can't quote the number of housing built without comparing it to the number of housing torn down (since, as mentioned before, housing depreciates).
> * The metropolitan area of NY, population 20.3M, approved 27,000 units in 2012, but approvals != actual construction.
So the way it works in NY IIRC, you can get an approval and not actually act on it, and the reason you can do this is because the approval can be sold with the property, which isn't an uncommon thing.
NYC does not track construction starts like that, or at least not when that article was written
Demand isn't unlimited, and you have the causation mostly backwards. Cities being successful causes people to flock to them, which means there's demand for density.
The problem is that it isn't just those on the right opposed to density -- the left is little better. Sure, progressives are largely okay with what density already exists, but propose upzoning and they flip out. Just look at the California state legislature, or major west coast cities.
Demand is pseudo unlimited. The real problem is betting on a single location. All 300 million Americans won't fit into new york. Why not build more new yorks?
New York became a hub for commerce and culture because it was a very successful port city. With the completion of the Erie canal, it connected the American heartland to the Atlantic Ocean. This naturally led to it being the main port for immigration as large numbers of people came to the US in search of economic opportunity. Decades of sitting at the center of the northeast corridor, the richest metropolitan area in human history, has made it a solid contender for the financial capital of the world. You can't simply build more New Yorks, the geography and history that produced it are unique.
Of course not everyone wants to live in New York, indeed there are many cities that each have their own unique circumstances drawing vast numbers of people, and all of them experience great demand. But there's a reason you can't just through up a bunch of skyscrapers in South Dakota and get everyone to move there.
> My only point was that making cities more dense seems to make them more desirable
You have it backwards, it is making the spot desirable that leads to them becoming dense. More people keep moving in, you build denser to accommodate them. Can you imagine how expensive NYC would become if 77% of current residences suddenly stopped being unavailable?
Yes, you will have some non-linear effects, people do want to live in big cities where the action is, but the reason those cities exist in the first place is because the action's already there. New York is a massive hub of commerce and culture which is ultimately a consequence of it's position as a major port. You won't make it undesirable by decreasing density so long as its still the center of the financial world.
I'm pretty sure this is wrong. Yes, it's the first answer that comes up if you Google this stat, but this is off by a factor of 3 or so. Before the pandemic San Francisco had a density of around 18K/sqm. Although a lot of people left SF during the pandemic, 6.2k/sqm is still way to low.
Now, that we have that out of the way. In general, I agree with you. Most cities that have a high population density are expensive places to live. It's a good thing to allow cities to accommodate more people, but those places will still have a high cost of living, because many people still want to live there.
Doesn't it make sense though? In 1910, manhattan was expensive but a lot of people still lived/worked there. The apartments would be crazily subdivided so you could fit 10 people into a 3 or even 2 bedroom. Now they are all owned by wallstreet bankers with small families, and they spend much of their time somewhere else (they might not even list their manhattan apartment as their "main domicile" during the census).
Demand for Manhattan apartments is crazy high, it's just illegal for taller ones to be built to meet demand most of the time.
People think Manhattan is mostly skyscrapers, but the reality is very different. Only a small portion of the land has high rises on it, just glance at Google Maps with 3D view on.
Manhattan is mostly multi level apartment buildings, at least 4 stories or so. I don't know why your point would contradict mine. Yes, units in the taller skyscrapers are more expensive and sell for tens of millions of dollars, if not more.
I wonder how NYC would do with cheap 30 story Chinese concrete apartment blocks? (30 stories, because any taller requires steel, at least with construction practices that use cheap migrant labor).
This pattern of living is still common to a lesser degree in outer-borough immigrant neighborhoods, which is why they were so hard hit during NYC's massive COVID wave.
No, demand is actually down in Japan[0]. That chart shows residential housing vs. under 65 year-old population. So demand is decreasing but residential RE is rising slightly. Your analysis is also ignoring that services cost a lot more in the US than they did in the past. You can't build cheaply in NYC or SF or Seattle anymore because construction workers cost more.
The idea that zoning is the issue is always funny to me because it’s very easy to disprove. Plenty of paces in the US have permissive zoning (like the NY metro area). If zoning was the issue, then one would expect affordable housing in these areas, but it is still totally out of reach for most.
> Zoning issues/lack of supply would imply that there are lots of homeless people without a roof over their head.
The price of housing only matters to people who don't already have homes they own. 65% of Americans own homes, so that cuts down your working set dramatically.
There are a lot of homeless people, yes - 0.2% of the population - but lack of affordable housing tends to be roughly equivalent to "perma-renting" as renting has a lower barrier to entry.
To buy a home you have to come up with a lump sum of money to make a down payment. If you can't do that, you're forced to rent or split accommodation or live with your parents. Lack of affordable housing doesn't mean homelessness. There's a lot of elasticity there.
> Investors have too much access to property. It's a system of greed that benefits those who entered the market early (typically boomers).
Investors buy property to rent because home ownership is unaffordable. Blackrock buying up property is a symptom of the market, not a cause. They don't see houses becoming cheaper because they don't see zoning reform on the horizon, so they believe there will be long-standing demand for their rental units.
If housing were to become affordable, due to a large increase in supply, these investors would get bowled over twice - once due to lower real property value and once more due to lack of demand for rental units as folks buy instead.
Even foreigners parking capital abroad, more supply makes that (a) a bad idea and (b) kind of irrelevant. I'm not saying that shouldn't be tackled too, but once again, zoning would solve the problem.
There are lots of homeless people. There's an even larger population of people who are, for example, living in their parents basements, or over-occupying small apartments, or commuting for hours because they are living in distant, cheaper areas.
The die was cast for option 2 30 years ago. Once policy flipped to “we will provide capital to prevent bad things”.
Half the economy is based on real estate… people building buildings to avoid taxation (if you have $) and borrowing against equity (joe homeowner). You cannot break equity values without breaking the economy.
The people who are getting screwed are the same people who have been getting screwed since the Vietnam era. Go watch “clerks” and read early 90s op/ed pieces - it’s the same cycle.
A lot of large corporations are basically real estate companies. You know, companies like McDonalds.
It's actually funny how the efficient market hypothesis makes no sense once you consider the role that land has played in human history. It's the biggest unsolved problem in economics that no politician really acknowledges.
Even anti government or extreme free market ideologues still insisted that land should be heavily taxed or regulated in the name of efficiency.
In retrospect, it rings true. I think I had my eyes opened during 2008 crisis and FED was effectively buying everything thrown at it. I remember thinking how can government own its own bonds?
> I think I had my eyes opened during 2008 crisis and FED was effectively buying everything thrown at it.
They definitely did not. [1]
The bailouts were largely loans, ones that were repaid to the US government for a pretty substantial profit, not less. And assets the Fed took on were literally that, assets, which the Fed was profitably unwinding before COVID hit.
On the chart shown at your link, Fed-owned assets go from ~.8T to 2.5T (blue line, assuming the MBS (red line) are part of that.) and then grow as QE takes effect and the Fed buys all manner of things. That .8T was all US Treasuries, no longer true of the expanded balance sheet. If you look at the updated chart (https://fred.stlouisfed.org/series/WSHOSHO), whatever you make of it, it doesn't look like much in the way of loans getting repaid. Whatever you want to say about loans being repaid, I think that the 1.5T (conservative number) that the Fed spent buying non-UST assets was then spent by the sellers on raising other asset prices not on paying down loans.
The bailouts were via Treasury. [1] QE was via the Fed. I believe, and correct me if I'm wrong, back in 2008 the Fed could only pick up bonds and maybe mortgage backed securities?
You can see the Fed unwinding its balance sheet here [2], up until 2020, and in the link you provided.
If the Treasury lends out ~700B for ~MBS and is repaid ~700B for MBS, and the Fed buys $1-2T (low end of the repayment you mention) in MBS, who is really doing the bailout?
Treasury made loans with repayment schedules to specific businesses. The Fed purchased certain kinds of assets to hold temporarily on their balance sheet.
They both filled different roles - one was meant to manage inflation and the other to secure the stability and function of the markets. The Fed's dual mandate is to maintain maximum employment and low, predictable inflation rates over medium term. Spotting Ford in a rough patch doesn't fit the mandate.
It seems to me that tripling the monetary base and investing two parts of it in MBS is going to have an inflationary effect on house prices. Am I being obtuse here?
To be clear, I don't think you're being obtuse at all.
Fractional reserve lending means that an increase in the monetary base is a result of lower interest rates - money supply operates on a pull model not a push model. Lower interest rates mean a more expensive house costs the same per month when mortgaged, which in turn increased the outstanding supply and balance of mortgages, hence new money. Lower interest rates increase the price of houses, but to a much lower extent the affordability of those houses - which is more likely to be measured on the monthly cost of a 30 year fixed loan. It will move the goalposts on down payments, however, but down payments are only 2-20% of the cost of the house.
In my opinion, however, I believe zoning to be a much bigger contributor to overall affordability.
So, I’m 36, and I promise you don’t want a deep recession. Cheap housing doesn’t matter if you don’t have a job. We dodged a freaking bullet economically with COVID. We recovered quickly. Heck, even in 2008 we did better than the countries that tried fiscal or monetary austerity.
And yeah, the real enemy is zoning. It’s fun to blame Blackrock, and they deserve it, but it’s regular homeowners trying to restrict more housing that is the cause.
I think graduating into the 2008 mess gives us peculiar point of view. Two years older, we might have already had burgeoning careers. Two years younger, we might have avoided it altogether.
I remember so much impending doom from those years. Pretty different than the current sentiment.
2002 here got into the market right after the 2000 bubble and the second Irak war… my lessons learned since has been to travel and go where the market is better.
Didn't mean to imply that things were back to normal by 2010, only that it was (in theory) possible to prepare for it a little. In my case, there's no way I would have dropped CS in favor of anthropology if I knew what my prospects would look like!
But yeah, it was rough for everyone. Even now, young careers are shaped by what happened in 2008.
One of the ironic twists is that EU is doing all the "hardcore" free market austerity stuff (think Greece's imposed austerity or Germany's balanced budget) while the US is doing the Keynesian stuff (tax cuts, stimulus checks, infrastructure projects).
That's not true, the Netherlands has a budget deficit of 60 billion this year saving the economy from COVID. The US gives money directly to citizens while Northern European countries are giving it to businesses.
I am also 36 and zoning is not stopping me from buying a house, lack of trucking to move out of state is because I want my stuff to actually show up in a reasonable amount of time.
Inflation can be good for young people. If you really think there will be significant inflation, go buy a house, borrow more than you are comfortable with it necessary. Inflation will make the debt easier to deal with in time.
This is borderline romantic at this point. What bank do you think would ever possibly agree to this? Most people can’t even prove to their banks that they can afford a mortgage that’s less than the rent they’re currently paying.
There’s a lot more expenses as a homeowner than the mortgage (even the PITI (principal, interest, taxes, and insurance)).
I can’t think of a year where I didn’t have $5K of crap that needed fixing/replacement/improvements*, the year with the fence was 6x that, and I’ve got a boiler coming due that will be a $15K project in all likelihood, $25K if I go higher-end and improve the piping configuration for more even heat on the far end of the piping runs.
* not making improvements is a major saving point in favor of renting. Improvements are a money and time pit and most return less than $0.50 per $1.00 spent on them. It means you live without the improvement, but it’s wildly less expensive over time.
This sounds like someone buying 15yrs old heavily used car and complaining that all of the cars are expensive to upkeep.
Therefore its better to use taxis.
My mortgage cost are half the rent for same property I dont see myself loosing money anytime soon on my deal. Plus nobody will kick me out on the whim of truing rental into AirBNB like my parents got few months back.
> I can’t think of a year where I didn’t have $5K of crap that needed fixing/replacement/improvements
For a contrary anecdote, I've been living in my current house for well over 20 years and not once have I spent 5K in a year in maintenance. Rarely have I spent even over 1K.
I can't think how I could even spend that kind of money in maintenance every year. What's there to fix that costs you so much?
> I can’t think of a year where I didn’t have $5K of crap that needed fixing/replacement/improvements,...
To the younger generations out there mortgaging themselves into housing: the closer you are to median income, the more you should make damn sure you're computing PITI+Maintenance when crunching your numbers (there are a couple good calculators out there now, discussed in the past on HN), staying below a 33% post-tax DTI, and taking on as much of the fix/replace/improve work yourself as possible.
With increased US income precarity due to the medical debt adverse lottery selection pressure (major source of bankruptcy), conventional housing is a bigger gamble for median income earners, and conservative personal financial planning around housing mortgaging decisions is completely absent from mainstream American discourse. The field is entirely tilted against the common folk, and young generations in particular are specifically preyed upon.
With the high cost basis of housing today, try to avoid transaction churn and look to stay in one property for as long as the numbers make sense to you, and crunch the numbers for any moves to include round-trip realtor fees. At 2-3X gross pre-tax annual income for a house, while moving around and buying each time you move wasn't optimal, carrying the cost for big career income increases was justifiable. At today's ratios, with today's decreased class/income mobility, the round-trip realtor fees to sell-then-buy are tone-deaf by the industry to the reality on the ground for young customers.
The US real estate industry is tremendously out of alignment with serving the majority of the US population and especially the younger cohorts, and their extractive orientation only eats their seed corn to set up an asset bust down the road. The demographic time bomb that is now unfolding even in the US will be challenging to reverse/slow/halt, and has likely already indelibly written the secular asset bust into the real estate industry's future. No doubt the central bank will bail out the private underwriters again by making the quasi-public underwriting facilities take on the overleveraged valuations at their lows and unload as the private balance sheets can pick them up again to profit off them in the up cycle.
The real estate industry in general thrives upon a population who generally cannot get along with each other living in close quarters with each other as individuals, and that is also a hackable vector (among many others). If you can find extremely close (forged over 7-10 years) friends who you can thrive together even when living with each other under the same roof, then you've found a de-leveraging function against the industry's imposed costs instead of going at it yourself.
While all the efforts at YIMBY and related legislation are great, people need to get on with their lives and fund their retirements today. Hack your own solutions at your own level now instead of waiting for those efforts to bear fruit, because for damn sure the politician meat puppets of the real estate industry and the industry itself aren't ever going to do anything for us.
That's an ideological concern, not a financial one. The fact is that regular people can do very well investing in real estate, and inflation is very good for real estate investors.
Jerome Powell has already made it clear through his actions that everything is now 'Too Big To Fail'. Capital is at an all-time low in terms of actual real cost to the borrower.
You'd be an idiot not to borrow right now. If we keep seeing dramatic inflation, there will be some increase in wages, and it'll be enough to offset whatever interest rate you get, unless you're just an utterly unqualified borrower.
There's a reason /r/wallstreetbets exploded in popularity right around the time COVID-19 hit and money was being printed nonstop and assets were dramatically increasing in value... the hoi polloi know the playbook that the wealthy elite have been using, and now they're using it too.
There's no guarantee Jerome Powell will always be the fed chair (and if inflation really gets out of hand he could just be the fall guy).
But the bigger problem is that in an inflationary environment, real assets get bid up high to compensate. This has already happened in housing (clearly) so you're late to the party. If you knew for certain that inflation was going to get to this level before everyone else, maybe it would have been a good idea to do what you're describing.
> There's no reason to think you know what the future holds.
Prior behavior is the best predictor of future behavior. The world has become complacent and dependent upon cheap capital, and no one - and I mean no one - is ready or willing to turn off the faucet yet.
Prior behavior includes the 50% stock market crash in 2008 and ten year periods of negetive real stock market retutns. A financial plan that doesn't include a probabity of these events recurring isn't one I can get behind.
No expert recommends dwelling on only the most recent behavior.
Yes, but people were saying this several years ago too. The truth is no one knows what is happening. We're in a new market regime that has not been explored before. Everyone is just guessing what's going to happen. Some of them are going to be right and do very well. Some of them are going to be wrong. People will say the ones who were right were smart and the ones who were wrong were dumb.
As Adam Smith said, the true price of everything is in human labor. Inflation generally raises the cost/price of new labor at the expense of historic labor. Demand for labor is still high, the price will likely continue to increase.
Housing is also not a great comparison metric because it was so perturbed by 2008. New unit starts dropped precipitously and still have not fully recovered: https://fred.stlouisfed.org/series/HOUST
We know how to build housing quickly and now it's clear there is demand. If the current trend continues it looks like we will again have a housing surplus within the decade.
> As Adam Smith said, the true price of everything is in human labor.
Cite?
Also who died and made Adam Smith's word synonymous with fact?
Last I checked the true price of anything is the price I have to pay to acquire it, which is incidentally more in line with Adam Smith's actual quote which was: "The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.". The price I have to pay to acquire something translates to money, that I gained through "toil and trouble" so to speak. Quite far from the true price of everything being human labour.
Wealth of nations, book 1, actually. "toil and trouble" could be interpreted as "labour". I certainly take that interpretation.
though Smith really didn't make much use of the labour theory of value, as he thought it would be less relevant in an advanced economy. Riccardo and especially Marx developed and used it much more. (For Marx see the first part of Capital)
> Wealth of nations, book 1, actually. "toil and trouble" could be interpreted as "labour". I certainly take that interpretation.
You are free to interpret it any way you like, but then taking your interpretation and saying that is what Adam smith was trying to say, when it is quite literally not what he said, nor even close to what he said, is called lying, and that is not really okay.
There's no need for interpretation, Smith makes it quite clear with nearly an entire chapter dedicated to it:
> The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour therefore, is the real measure of the exchangeable value of all commodities.
> It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labour which it can enable them to purchase or command.
> But though labour be the real measure of the exchangeable value of all commodities, it is not that by which their value is commonly estimated.
The idea of "value" independent of price is something treated by Marx as a normative claim that neither Adam Smith or Ricardo developed. When Ricardo or Adam smith talked of "value", they just meant "price" but in some notional unit of currency which was irrelevant to the discussion at hand. E.g. they wanted to discuss prices in a barter economy.
Adam Smith explored the labor theory of value in the context of primitive societies with fixed capital. In that case, you do get prices scaled to labor inputs, as capital is constant.
Ricardo tried to develop more sophisticated models than those with fixed capital, but did not have the tools to determine price setting, and finally admitted "I am not satisfied with the explanation I have given of the principles which regulate value.".
It wasn't until economists started using math more seriously and included production functions and utility functions that they were able to formulate a more general theory of price setting involving marginal costs and benefits. This allowed the creation of numerical estimates for things like price elasticity that provided useful information for price setting and allowed (in some cases) for falsifiability and even laboratory experimentation. See the famous experiments of Vernon Smith, for which he won a Nobel Prize. https://www.econlib.org/library/Enc/bios/SmithV.html
Thus standard economics was able to go bit beyond the thought experiments of Ricardo and Smith whereas Marx continued the process of philosophically musing about value in a normative sense, now removed from any actually observed prices, and far off into the world of political economy rather than economics per se.
Unfortunately none of the modern economic theories apply to real estate, because it is a land market in disguise and has little to do with housing.
Price of land is determined when looking at the world as a whole (margin of production), so it can't be measured in a simple microeconomic laboratory experiment.
It can actually be studied using models, but one would have to go back to Smith and Ricardo and add the third factor of production (land) back into the equation. Which was removed by marginalists for simplification to study simple markets of bananas and yogurts.
The modern economic foundations simply don't have the tools to study land markets, so they will always fall into the trap of a drunk man looking for keys under the lamppost only.
Honestly, I am disappointed with Marx. For every day people only two things really matter. Fix money (usury and debt) and land. Once you do that, there is no need for a communist utopia.
Is there any measures of what percent of those pre-2008 builds were speculative investments vs. occupant-owners? It reminds me of the scene in The Big Short when he knew the system was on a precipice of disaster when the a stripper was telling him about the multiple homes she owns.
It seems to me many bubbles are the result of speculation with easy credit and I’m not sure 2008 can be considered a “perturbation” instead of a correction.
Thank you. Maybe you can help me understand this correctly.
Your link shows the "owner-occupied" housing was relatively flat during the housing crises. The link below shows new housing units were still increasing during that time.[1] Does that imply most of the new builds were investment properties (i.e. not owner occupied) during this time period?
I think this is what matters most. It's good to have some vacancies so that people have options but too many likely indicates there's some speculation/over-building going on that the market doesn't support.
There's a world of difference between high interest rates (which are good and healthy) and rising interest rates (which implode the economy).
You gotta look at the derivative.
Rising interest rates are really, really bad. Anyone who relies on revolving business debt, credit card debt, or other non-fixed-rate debt goes bankrupt.
I kinda wish I entered the economy when we still had 12% interest rates. Each time a recession hits, we level it off by lowering them a bit, and we've kinda hit the floor.
I don't think we can get back to 12% interest within my lifetime without some kind of economic collapse or cataclysmic event.
> Anyone who relies on revolving business debt, credit card debt, or other non-fixed-rate debt goes bankrupt.
This is hyperbole. Rising interest rates aren't fun, but they aren't cataclysmic. Rates have gone up and down for decades. Further, if you signal that you're taking the option to raise rates off the table, risk tolerance and asset prices will explode (some would say this has already happened due to Fed signaling).
To explain more about the logic used by the guy you replied to...
...the problem is people think: interest rates go up, economy slows down, we can never raise interest rates. This logic takes on a life of its own.
The US economy was in this position in the late 60s: the Fed was under pressure to accommodate govt financing, they raised rates in 1959 and were blamed for causing a recession that influenced the outcome of the 1960 election, in 1967 they attempted to raise rates briefly but did so at the wrong time...eventual result (combined with some unfortunate timing with oil price changes) is rates never rise, inflation does, serious problems.
When the discussion moves to this point, and we have been moving this way for years, I think it is a sign that something has gone quite wrong. And that expectations around interest rates and Fed behaviour are actually adding volatility and uncertainty, not reducing it.
You are quite correct though. Rising interest rates are not bad. It is just the price of money. Falling interest rates can be just as bad too, but the problems are usually subtle (i.e. financial repression, which is what is happening now, no-one will realise what has happened until they try to retire in 20/30 years and realise they can't). Public policy has moved to this risky stage where people blame everything on politicians...the result is, unfortunately, inevitable.
This is the exact situation many financial commentators highlighted post-2008, so I think your historical points are very relevant.
The Federal Reserve is supposed to have independence from the government. It will develop its own monetary policy which doesn't need government approval. In reality, the President appoints all the Governors, so people get selected based on doing what the President wants done.
The Fed's monetary policy is typically an inflation target - keep the money supply growing to encourage growth, but keep inflation in check as well.
The problem is the political influence starts to impact the pure decisions about what's best for the economy. Election coming up? Well, hold off on increasing rates since we need good employment numbers for the next few months.
If the economy gets unstable the Fed ends up riding the razor's edge trying to stick to policy but not piss off the President. Problem is that the economy can go off the rails faster than the Fed can response.
The issue highlighted after 2008 was that "yeah, printing new dollars and buying distressed assets worked pretty well! and no massive inflation so far. But there will be incredible pressure to not raise rates later and if the Fed waits too long to apply the brakes, they won't be able to get ahead of it and inflation will skyrocket."
Chairman McChensey Martin (who served in the late 60s when all this started to blow up) used to say that the Fed is independent within government. So the Fed is able to develop policy independently but doesn't have room to actually run counter to whatever the Executive is doing.
I don't think the impact is necessarily elections anymore, if it ever was. But the Fed was supporting bond auctions through 2020. I don't think it will stop them raising rates but it has stopped them raising rates fast enough imo.
The apparently only empirical study relating interest rates and growth was done by Richard Werner, concluding growth actually historically happened in high interest rate environments, whereas the current economic dogma states exactly otherwise.
I don't know what his point is. There is no absolute level of low or high interest rates.
Interest rates merely balance the supply and demand of/for labor.
Growth usually happens when there is high demand for labor and that means interest rates are high during periods of growth. When you think about it, interest is just the risk adjusted yield of a labor saving investment plus minus bank fees and profit share of the borrower. That means the existence of high yielding investments is what drives interest rates up as lots of borrowers got to the bank and present their fantastic business ideas and the bank picks the highest yielding ones.
Well, I also have to say something. Growth didn't really stop with lower interest rates. The economy is much bigger than 30 years ago.
Also about negative interest rates, it's a fallacy to think they are supposed to stimulate borrowing. They are supposed to balance people's desire to be in debt with people's desire to hold onto credit (equivalent to demand/supply of labor). That means negative interest rates exist as a disincentive to save money because nobody wants to borrow money.
Richard Werner is a bit nutty but his work does have value. He takes a heavily heterodox position on interest rates, some of this is him being misleading in order to be controversial. But his points about the impact of interest rates on bank profits are very trenchant (and btw, the reason why he is a bit nutty is because his professional experience was Japan in the late 80s/90s, that scenario tested all the assumptions about macro and found a lot of them were false, his book Princes of the Yen is good...although, again, very heterodox).
The extent to which you might be right or wrong depends to some extent on how much debt there is in the system (or how leveraged/wound up the economy is).
A debt-based economy is much more vulnerable. Last time we raised interest rates rapidly, in the eighties, household debt was less than half of what it is today, adjusted for GDP.
Yes, whenever rates eventually rise, it's going to hurt some people. People and companies burdened with debt. Some will in fact go bankrupt (most will not, of course). But that's not a reason not to do it, all that is, is more evidence of fiscal irresponsibility. Any company which is unable to withstand higher debt costs is just as poorly managed as one which is unable to withstand a rise in any other input cost. If McDonald's went bankrupt tomorrow claiming rising beef costs, you'd say their business plan was flawed, being overly reliant on subsidized farming and not planning ahead for contingencies. The same is entirely true for a company that is bankrupted by higher interest rates. Making excuses and accommodating heavy debtors by keeping rates artificially low is one of the most damaging things you can do.
I really don't know if this is correct or not, but one thing I've heard is that low rates disincentivize lending by banks because loans are less profitable. Higher rates will actually encourage lending. Much of the money in circulation comes from the banks because of fractional lending and not from the fed's printing presses. I'm curious if anyone has a take on that.
Also, I think rates need to be looked at in comparison to GDP growth. High rates are fine when GDP growth is greater. If rates shoot higher because the fed is trying to stop runaway supply-side driven inflation while GDP growth is low it could easily kick off a depression.
Higher rates increase willingness to lend. Lower rates increase willingness to borrow. You need both a willing lender and a willing borrower for lending to happen.
Spreads compress when rates are low, so yes, loans are less profitable per dollar when rates are low. But many more people and companies want to borrow so banks make out fine. And there are plenty of other financing sources available for companies, including issuing equity, VCs, junk bonds, which grow in popularity when investors need to chase yields.
Even worse than rising interest rates is a society addicted to the fentanyl of zero interest rates.
There is a reason major religions regulated debt in general, because that is how societal slavery develops. Of course we, the modern people of technology, 'know better' than our primitive ancient ancestors.
I don't get it. Most religions were against usury and they insisted on debt forgiveness if the debtor can't pay.
Charging 0% interest is absolutely fantastic. The only problem is that we don't do the debt forgiveness. We bail out banks and then expect tax payers to shoulder some or all of the losses. It was especially bad with Germany vs Greece. German banks were bailed out and public healthcare was basically eliminated in Greece.
The only reason why anyone would be against low interest rates is that they noticed that those interest rates eat into economic rents and therefore the owner of money benefited from the economic rents rather than the owner of the monopoly.
In that sense, the only difference is that the money goes to the land owner instead of going to the bank. People don't realize that if they buy a $600k house with 0% interest that they would still have to pay $600k at 5% interest except most of the money goes to the bank instead of the seller who only gets $250k (made up number).
I think people forget just how bad the early 80s recession was, possibly because most of the people affected then are dead or senior citizens now. Nationwide was 10% (on par with the 2009 recession), and in some cities it went up to 25%. Farmers drove their tractors into Washington DC and blockaded the Eccles building. Car dealers sent coffins containing the keys of unsold vehicles. Construction workers sent 2x4s to Volcker because nobody needed them for home construction. The Treasury Secretary publicly undermined him, and the House Majority Leader called for his resignation.
Sure, but the mortgage rate was around half that in the year before and just as high in 1974. Though compared to today, 13% is high but not ridiculous. 13% today would be ridiculous.
Canada already did #2. Average home prices in almost all metro areas are around 10x yearly income. There is no blood on the streets and it is still considered a destination country.
it's human nature and backed by human history. blood on the streets will come, maybe tomorrow, 10 years from now or 50 years from now. in the face of inequality, it's either war or fascism. no two ways about it.
My Canadian friend mentioned this but then followed it up by saying no one in Canada cares what the Bank of Canada does and all eyes are on the US. Could that be one reason there wasn't a significant effect?
Also, there's quite a bit of cash in savings accounts now, and rates are still low by historical standards. We'll see what happens when mortgages are above 5% again.
10x isn't terrible, though, is it? Assuming 20% down on a mortgage, if you're frugal, you can save for a down payment in 4 or 5 years or so. Not ideal, of course, but not impossible. In some places in the US folks could save for a decade or more and still not be able to afford a down payment.
3x is based on early-80s interest rates (12%). I did out the math [1] for someone on Reddit and it turns out that if you buy 3x your income @ 3% interest, you'll only be spending about 12% of your income on housing. To get to 30% of gross on housing (the other common rule of thumb), house prices need to be about 7x income.
3x is not based on 80s interest rates. And the mortgage is only part of your expenses, you need to budget for home repair, taxes, and insurance. Plus any other savings that are needed, like putting yoyr kids through college or retirement.
I did out the math in the Reddit comment, and you can run the numbers by Googling [mortgage calculator] and plugging them in. 12% is the equilibrium interest rate where the "home price = 3x income" and "housing expenses should be no more than 30% of gross" rules of thumb are both true. At 3% interest rates, a 3x home will cost you about 12% of monthly gross, and 30% of gross will get you 7.5x income. Those two rules of thumb cannot both be true at 3% interest rates.
With taxes and insurance, those numbers change to 3x = 17% of gross and 30% of gross = 5.4x, assuming California tax rates. Things like emergency funds, retirement savings, etc. are included in the "housing should cost no more than 30% of gross" rule of thumb.
Housing expenses should be no more than 30% gross isn't a rule of thumb, it's a maximum amount lenders will traditionally lend you. It's called the front end ratio.
Quoting investopedia "Lenders prefer the front-end ratio to be no more than 28% for most loans and no more than 31% for FHA loans."
Lenders don't care if you can retire or if your kids can go to college, they care if you are likely to default on your loan. So I wouldn't take the front end ratio as personal finance advice.
The 3x income housing advise in not related to the front end ratio. 3x income is the max you should borrow (according to the advise givers, you are of course free to disagree), the front end ratio is what you can borrow.
There literally doesn't exist a 3x property where I'm from in Europe. I make almost triple what the average salary is, and shitty old properties start at 5-6x.
What? Save 2x (20% of 10x) your annual income in 5 years? What planet are you on where you think people can save 40% of their net income, let alone gross
And even if by some miracle you save 2x for a 20% deposit, what bank will lend you 8x income for the rest ?
There seems to be a possible, overlooked cause & effect in the current landscape:
If FIRE followers scale the strategy of investing and renting multiple homes, are they not limiting housing supply for other potential homeowners or exacerbating homelessness?
It is not just that houses are not being built, but that a shortage of supply is caused by the FIRE generation: buying houses as investments rather places to live, with the goal of living off on other people's rents or Airbnb, not paying taxes and leeching on society for the rest of their lives.
Would these houses even be built if someone is not paying for them. They are not leeching but investing. May be we could call it leeching when they form a cartel and start raising rent prices in unison (which only biggies like black rock can do).
They invest in housing specifically because there's a bunch of tax avoidance loopholes for small-time landlords. There's nothing wrong with honest investing, but tax breaks are for leeches.
If tax breaks are there to be availed, why wouldn't anyone avail them. Does anyone pay more tax than they are legally obligated to ? It doesn't make much sense because the house prices already account for tax breaks, low interest rates and high rents. If one is to voluntarily to reduce rent or pay more tax or take higher interest loans, they would just be making losses and won't be in business for long. Many of these are not individual choices. They are choices of the market as a whole. Of course you can certainly get lawmakers to remove these tax breaks but till then no sane person would pay more tax even if they are progressive leaning in beliefs (not to mention most tax money goes to military spending so its not like paying taxes is even good by default).
The tax breaks are popular because they're advertised as making it easier for people to buy homes; in fact as you say they get priced in and so end up pushing up prices and making it harder for people to buy homes.
"No sane person would voluntarily refrain from exploiting tax loopholes" is the same kind of argument as "no sane person would voluntarily spend money to avoid damaging the environment". In fact there are plenty of people with a decent moral compass who do exactly that.
Tax breaks are written for two major purposes: giveaways to influential donors and incentives to take certain actions.
Rarely are they exclusively the second, but landlords get to deduct the economic costs of doing business. Loan interest and property taxes cost money, buildings and fixtures wear out (but the land does not). Maintenance costs money. Landlords have the ability to deduct these costs of doing business against rental income just like every other profit-seeking business does.
Can you name a tax loophole for small-time landlords that you think is improper in the context of a tax system which taxes profits?
You're begging the question; the fact that regular people are taxed on their gross income while the rich get to be taxed only on their profits is a big injustice in the first place. But on top of that: that rental properties are usually an investment that grows in value, so that's where a lot of the expenses you mentioned actually go, but they're deductible as business expenses; unrealistically high depreciation is also often deductible.
> the fact that regular people are taxed on their gross income while the rich get to be taxed only on their profits is a big injustice in the first place.
In many countries (including the two I've lived in as an adult) regular people get to make deductions for stuff like the cost of commuting to work, work clothes or equipment (to the extent that's not supplied by their employer), etc. By "deductions" here I mean, subtracting this money[1] from their pre-tax income and have their income tax calculated on what's left. In effect, getting taxed only on "the profits from work".
Surely even the USA must have some similar thing?
___
[1]: Often implemented as a default deduction anyone can make without proof; if your outlies are larger, save the receipts and deduct the actual amount. This general-deduction-amount at least used to be high enough that most people benefited from just checking the box to use it.
You can deduct costs that are narrowly specific to your job. But for most regular people the biggest costs of working are the rent/mortgage cost of having to live near a centre of employment, and perhaps the cost of a vehicle which they use for commuting, and neither of those is deductible.
Assuming this is not sarcasm, why not make that extra buck and donate whatever savings you make to what ever cause you see fit. It's odd to trust the government to use your money more prudently than yourself.
The rise of passive investing and FIRE is just a natural consequence of the "infinite" bull market and resulting widening equality gap.
Whether it goes down in a gradient to common people like FIRE folks, or is strictly restricted to the higher classes, someone will position themselves to profit from the Fed policies. I don't see how they can be blamed. Blame the people that create these economic conditions, because they and their friends certainly aren't benevolently leaving profits on the table, they're grabbing everything they can.
Isn't it likely that this is happening at a larger scale by private equity firms, REITs, and other commercial organizations? I don't see how FIRE is anything more than a drop in the bucket.
People buying houses and renting them to others to live changes ownership stats but does not increase homelessness, at least not in an obvious way. If a housing unit is occupied by N people, that’s N people who aren’t homeless because of that unit.
Buying additional houses and then not renting them out would contribute to homelessness as that unit would be housing 0 people.
He might be referring to the problem that the landlord has a subsidized mortgage whereas the renter is paying by earning money from the circulating economy.
> The Fed at this point controls the whole economy
No, it doesn't. Congress has a lot more control than the Fed (in fact, a strict superset of the Fed’s powers), and definitely much finer, more targetable control, but they have a little more problems coordinating on action.
> and they have two options
They have a near infinite spectrum of options between two poles.
> Raise interest rates and stop printing
Well, the first. “Printing” is just metaphor.
> Crazy inflation stops, but asset prices crash and we enter a major recession or depression.
There is no real reason (though its a popular unsupported idea from some quarters) to believe that there is no distance between the tight monetary policy sufficient to acheive the first effect and that which will cause the second effect.
> Do nothing, keep printing. Inflation picks up massively. The economy keeps humming along but young people, including myself, are permanently priced out of home ownership and many other things
Again, very little reason to thibk the last thing is at all true. We had high inflation with a weak economy with stagflation in the 70s, and young people then weren't permanently priced out of hone ownership. More normal, strong-economy inflation isn't going to do that.
> It seems like they are going with option 2.
Tapering QE is not “doing nothing”, its taking the foot off the accelerator.
The OP's #2 is actually an exponential growth in money printing.
If the growth stops being exponential, it moves away from the target in an exponential way. If the growth just becomes an exponential with a smaller exponent, it moves away from the target in an exponential way.
In theory you could have an exponential that grows in a very slow, controlled way. On practice, it will get out of control, because nobody has any idea what the target actually is, so you either always correct towards it, or deviate.
The big risk now is that the fed waited too long. They could have already raised rates when the economy started doing better before delta hit. They would have had more ammo this time around, and the supply side driven inflation we're seeing might have been tamer.
If the permabubble option is so predictable, though, it should be easy to account for. Just empty your bank account and send all your funds to a stock brokerage and go all in on TQQQ (triple-leverage NASDAQ-100 ETF). Your gains should predictably outpace inflation and even real-estate appreciation so long as the Fed doesn’t prick the bubble by hiking interest rates like they did with the dot-com bubble.
This is why I think inflation is not as big a deal as it historically once was. It’s never been easier to convert cash to inflation-sensitive assets and back again. We could very well transition to a world where cash simply becomes a short-term medium of exchange and loses all purpose as a store of value. All your wealth could kept in hard assets until the very moment you need to spend it.
Note that this is exactly how countries undergoing hyperinflation operate. Nobody keeps savings in the national currency, and if they do, they don't have savings for long. They keep their wealth in stocks, gold, foreign currency, bottles of alcohol, bullets, or any other durable liquid asset.
I don't quite understand the obsession with homeownership.
If a large enough percentage of people rented from property management companies, there would be more impetus to have strong tenant's rights laws to protect residents, and people would have more flexibility to move around. Moreover everyone would have an interest in increasing supply to keep their own rent down, pushing prices down toward cost-of-materials and upkeep.
As it is people willingly submit to homeowners associations that are in many ways worse than the laziest landlord. I don't see what gets worse by just becoming a nation of renters.
It seems pretty simple, I can spend money to rent a place, and after 30 years (rent), have nothing to show for the money I put in, or I can buy a house (mortgage), spend money for 30 years, and then have an asset I own.
Not to mention the freedom to do whatever you want to your home / house without having to ask for permission, or being in a position of putting money into an asset that you don't own.
It's not that simple. Right now the interest portion of my mortgage, plus my property taxes, plus my HOA dues, not to mention maintenance and upkeep, is more than what I was paying in rent right before I bought my house. That money is "thrown away" in the same sense as rent is; only money going toward mortgage principal gives me something to show for it. It absolutely would have been more economical to rent than buy. But I wanted to buy (see: your totally valid argument about having the freedom to do whatever I want to my home), and was lucky enough to be able to afford it, so I did it.
Sure, you can make the argument that I can hopefully expect some capital gains down the road if/when I sell the place. But that's not guaranteed (consider all the people underwater on their mortgages, for example, after the 2008 financial crisis; I wouldn't be at all surprised if something like that happens again during my lifetime), and it may well be that putting that money in the stock market would net me better returns over time.
But it really just depends on your local housing market. In some places it makes more financial sense to rent (rent < interest+taxes+upkeep), and in some places to buy (rent > interest+taxes+upkeep). And sometimes the financials aren't the #1 driver of the decision, anyway.
It's not simple, it's a calculation to do but at the end of the day the calculation gives you a number of years you need to live in your house to make buying worthwhile.
If you sell your house 2 years after buying it, unless the prices really skyrocketted during that time you should have rented instead.
If you stay 30 years in your house however it's financially much better to buy rather than renting.
Of course there are non-financial aspects (freedom of modification for homeowner, easier to move out for renters) but the financial equation boils down to how long you stay in the same house. Exactly where is the cut-off depends where and when you live.
Interest is amortized in most mortgages so that this type of analysis on year 0 of homeownership is always going to look very unfavorable owing to the large interest payments in the early years of the mortgage. You have to consider what happens over the life of a 15 or 30 year mortgage to understand the financial benefits of ownership. As the years go by, you will be paying a larger fraction toward principal while inflation has shrunken the real cost of your debt and it feels cheaper to you over time.
If your wages keep up with inflation (say 3% for example), in 10 years you'll be making about 35% more dollars but your housing payment stays the same. If your home value tracks inflation, it will also be up 35% after a decade, but your payment stays the same. And if you're lucky, there may have also been appreciation above inflation. Inflation melts your fixed rate debt and grows the nominal value of your asset, speeding the rate at which you build wealth in the form of home equity.
Over that same period, a renter is certain to have experienced significant increases in their housing costs. They may have saved and invested more than the homeowner over the first few years of homeownership, but as you know this is a long-term game.
I guess it comes down to what form of risk/investing you are most comfortable with and whether you value the intangible lifestyle things like getting to customize things to your liking. Getting to purchase an asset with between 5-33x leverage in the form of low fixed rate debt seems like a pretty unique opportunity for most people who would not be comfortable borrowing for other forms of investment.
With rent, it's a guaranteed loss, with a mortgage on a property there's a high possibility of a return of investment, in addition to a return on investment.
This is what most people get wrong about home ownership. Mortgage and rent are two different, unrelated things.
Rent is part of the value of a property. If you live in it, you're essentially paying its opportunity cost. That in itself has nothing to do if you borrowed money against it or not.
The only way to not pay rent is to make someone else pay for you (eg live with someone else that doesn't charge you)
Yes, they're different things. However you need a place to live so unless you already own a paid off house, you can choose between paying a rent or paying a mortgage.
It's the bigger part of your "housing costs" in both cases.
Yeah I know. The point is the comparison is not really mortgage vs rent. From a purely financial perspective you're paying mortgage + owning costs + rent opportunity cost + liquidity risk.
If you can pay a mortgage most likely you can pay a rent, and it's going to be way cheaper if you factor everything in. And in both cases you can be evicted if you don't pay anyway.
I think people who parrot this line try to ignore the total cost of their mortgage being quite different from the purchase price of their home, property taxes, repairs, etc.
As a lifelong renter, I’ve done quite well by keeping my rent low (my preference is studio/1-bedrooms in relatively dense urban areas) and putting extra money into the market.
30 years from when I started renting, I’ll have quite a lot to show for it!
Screw the apartment. You could save so much money living out of a van.
I honestly don't understand this line of thinking. "Why do people even want [tangible good]?"
If an explanation is really needed: it's nice to have a large, private space. People like cars in garages, a room for their work, a room to cook, a room to relax, a room to sleep, a room to store stuff, etc. Why do people bother with any of these things? Why isn't everyone a minimalist? Why do people even bother living?
It's bizarre and alien to me. It also misses the point that people are supposedly free to pursue happiness.
I think this argument gets confused because some people refer to it as an investment/asset while others refer to it in emotional terms as a means to pursue happiness. They aren’t always the same thing.
For most people it's both. There's a reason home ownership is often a component of "the American Dream".
Owning land and a house is a huge step in status and financial security. Owning a house is also a huge luxury. It's strange to deny either of these realities. Some people don't want luxuries, okay, but it should be clear that nearly everyone does.
Recognizing it is one thing, but thinking it’s a good “investment” is another. Often funding/chasing status is a fools errand IMO.
Part of the problem is that homes being the largest asset that a person owns because they’re chasing the status of that American Dream. Can you think of any other illiquid asset that people would suggest piling a majority of your net worth into?
There is no other asset I can own that alleviates the financial burden of burning nearly half of my take-home pay in perpetuity to fund some rich landlord's beach vacations.
If someone is well-off enough to be in a position to choose, renting is essentially paying a premium for freedom of movement. Used smartly, this can be an avenue to dramatically increase earnings over time because in today’s economy switching jobs is one of the faster ways to increase wages. While previous generations may not have had that problem, I think it changes the own/rent calculus for younger people.
I was living in a place in SF that would have cost me 3x to purchase versus my rent. I could take the leftover and invest in other assets. I'm actually ahead of where I would be had I owned since condos have dropped in SF with Covid.
If you’re spending that large of a percentage on housing you’re already running against most prudent financial advice and probably shouldn’t be thinking of housing as an investment asset
With that aside, I absolutely do want to foster social mobility. I actually think it’s still possible but probably not in the dream-world way many people think where it comes completely on their own terms. In most cases, it involves avoiding a few basic things like substance abuse, onerous debt, living outside ones means, and having kids before one is financially stable.
But that often flies in the face of what people emotionally want or are told to pursue, so sometimes people want to go into massive debt for depreciating assets or to go to college because that’s what “everyone” does, or to live in an expensive, trendy area because it’s cool or they think that’s where they need to be to chase status. Barring those types of mistakes, social mobility (towards the upper middle class level at least) is generally available. I’m willing to bet many people on HN are already close to that status even if it doesn’t feel like it because they’re comparing themselves to economic outliers rather than the average citizen.
I don’t disagree, but that’s the reality of many Americans. Their home is their largest asset by type. This is also why home ownership is one of the largest drivers of wealth.
It's factored in your net worth (i.e. your wealth) but it's not something you can leverage like the rest of your wealth.
Note that if you're a homeowner, and the overall market goes up, you don't benefit from it at all. Your wealth goes up on paper, but it doesn't change anything in your life except it will be more expensive if you want to move.
I completely understand the distinction, but it’s not entirely different from other assets for the typical American. The two largest wealth assets are their homes and 401k/pensions. Both those groups have a lot of friction before their gains can be realized.
And many people do downsize as they get older, meaning it’s less expensive to move events if their home value increased. Unfortunately, many people (just skim this thread) assume home values always go up so they consider them an investment.
You're doing the same thing though. The whole argument against apartment living is that nobody can imagine that anyone would want to live this way, "Why do people not want [tangible good]?"
The argument against apartment living is the lack of choice in the matter. More people are living in apartments now than before and it isn't because of preference.
You also have government guaranteed mortgages. This is probably the most unusual aspect of the American home market in comparison to other markets...it is essentially publicly owned (the only place that has a similar structure is Denmark, and even then there is no Freddie Mac/Fannie Mac...just a large secondary market for resi mortgages) and makes mortgages very cheap with little rate risk (I am in UK, 30yr fixed mortgages are unheard of, the most you can get is 5yr fixed and it costs 200bps more than a 30yr fixed in the US).
Just a broader comment: the main financial argument against home ownership is really the size of the deposit. If you are paying 25% down (this is now standard where I am in the UK, we went from 120% mortgages to 75% mortgages in the last ten years...and house prices kept rising, so the upfront cost of housing is way way way up) then it may be close for some people. But you add in the security, the potential for capital growth...it is attractive financially (and I wouldn't say this is true in the UK, downpayments are too high, mortgage rates are too expensive and come with massive interest rate risk...it isn't worth it on a pure financial basis).
I can't see myself every buying a house because I just don't like having a lot of stuff, it tends to worry/distract me. But I think it is unfortunate that housing has become associated with this "I got mine" mentality. Germany is a nation of renters, it has led to levels of wealth inequality higher than the US because all that value from rising property prices has gone into the pockets of a few large corporations (the median net financial wealth of a German citizen is EUR20k, about the same as Greece...and they have one of the highest per capita rates of billionaires). Maybe we can tax rising property values more efficiently but the US model (essentially, publicly guaranteed mortgages) works quite well too.
It can be both, but in US real estate historically was seen as a good way to park money. I will venture to say that you are an outlier. I remember renting with my SO. The jumps in rent were getting onerous to the point, when it became cheaper for us to actually buy a place.
But again, each situation varies. Before living with my now wife just like you I lived in a small apartment, because that was all I really needed at the time ( and it was very budget friendly ).
Yes, as long as you start with a modest home that you can actually afford, it can work. The mortgage payment, including taxes and insurance, on my first home (a small 2-br bungalow) was hundreds of dollars less (monthly) than the 1-br shithole apartment I was renting (shithole because I was trying to save for a down payment). At that point, as long as home values do what they normally do, you can upsize every 5 years or so if needed until you are in a home that really fits, rolling the equity gain in the former house into a larger down payment on the newer house.
Mistakes people make: starting with too big a house where they are in trouble immediately if they miss a paycheck. Refinancing and taking equity out to spend on other "things" that depreciate or are consumables like boats, new cars, extravagant vacations, expensive furniture, etc.
Yeah this entirely. I had a 600 sq ft shoe box in a high-rise in a major city center for $1800/mo. My mortgage a mile and a half away on a 3000 sq ft house is $2000/mo.
I don’t even use half the rooms in my house and it’s still a way better deal. And no less convenient as I still have everything I really need within a 3-4 block radius. And my mortgage will only get cheaper over time — especially if we get a ton of inflation.
Precisely. People really underestimate the costs of home ownership.
You need to include everything like: 1) mortgage interest, 2) property taxes, 3) insurance, 4) maintenance, 5) opportunity cost of down payment, 6) transaction costs buying and selling.
Clearly if you see major appreciation in the value of your house you'll clearly come out ahead of renting, but I've been in two situations (one while renting, one while owning) where I would have come out ahead renting. In one case the home values went up 20%, but the stock market went up 50% and adjusting for transaction costs, I made more money continuing to rent than buy.
> You need to include everything like: 1) mortgage interest, 2) property taxes, 3) insurance, 4) maintenance, 5) opportunity cost of down payment, 6) transaction costs buying and selling.
Factor 1 to 4 are all included (with additional profit margin on top) in rent so you're always paying for those regardless. As an owner at least you don't pay the extra profit margin on it to the landlord.
On #6, if you're moving very frequently then yes, you're better off renting. If you want to settle down, buy.
So realistically that only leaves #5 as a consideration. In the short haul it favors the renter but over a lifetime, not so much.
Most homes are bought with 5x or more leverage. In a year where the stock market is up 50% and houses up 20%, recent homeowners probably did better than renters, not worse.
I wish more people (in the US, especially) would think of housing in this way. I think we'd have much more sane housing markets just with that change, even without fixing a lot of the other structural problems we have around housing.
Mortgage on your home residence also acts as life insurance. If tomorrow I die, my mortgage will be 100% reimbursed by the mortgage insurance. This was a motivation to buy in my case, to protect my kids.
Money aside, there's a big difference in lifestyle (some might say quality of life) of homeowners vs renters. There's a lot you can do in a property you own yourself that you simply cannot do in a rental. It's hard to put a price on being able to customize things exactly to your liking. For example I recently had 20 year old thermostat replaced with a Nest thermostat that gives me a lot more flexibility and efficiency in how I heat my home; I never would have made that type of change in a rental. I can paint whatever I want without permission from the landlord. Ditto for having pets.
And greater housing security in old age is very appealing. That people will need a place to live even after they stop working is something even the financially illiterate can understand and plan for with home ownership. For my parents who are retired on a fixed income, having a paid off home is the difference between a comfortable enough retirement lifestyle and being stressed a landlord is going to claim an even greater share of their meager income with every passing year. As owners they still have exposure to property tax increases, but that's modest compared to escalating market rents.
> And greater housing security in old age is very appealing
This can't be overstated. It's one thing to keep up with ever-rising rents as a young professional, but do you want to compete in that market as an older retired person on a fixed income? Or have a paid-off house?
I have rented my entire life. I just bought my first 'home' which is a condo (with a reasonable HOA). I bought it with savings and no debt. I feel lucky.
I can't tell you how nice it is to not have to worry about rent. How nice it is to feel like if I want to change something about my home, I can and I'm not just improving someone else's capex. How nice it feels to know that I can travel and leave the place empty for a year without worrying about subletting it.
It makes you more money than you earn. Imagine if when you paid rent you got a cheque for twice what you paid in rent. I’m $12,000 in “rent” on my current place and it’s returned $123K, I moved in in May didn’t start paying rent til July.
When you’re done with it you can rent it and have someone else buy it for you.
The market might return slightly higher but with leverage (mortgages) the returns are unbeatable.
In Canada selling your primary residence is exempt from cap gains.
When you combine all of these factors with modern zoning and rent control laws you basically can’t lose money.
If you buy presale by the time the unit is built it rents for more than the mortgage.
> Home owners are more likely to maintain homes well (and efficiently).
That property owners aren’t willing to maintain property well if they don’t live there is not an indictment of the renters, but of the property owners. The renters pay the property owners to do this very job.
There's something to be said for privacy, and owning your own slice of the universe to do (mostly) whatever you want with. Not to mention a nice asset and something to pass along to family.
I live in Denver. My monthly housing costs of a fully owned home is $600 a month. The house next to me, very similar, is renting for $2400 a month. Do the math.
Then you don't have an asset. You paid for the option of living there for the duration of your leas, but you have no control on the property, or your future.
a house isn’t a particularly good investment. it’s just the one everyone, in america, makes because they’re financially illiterate. anyone can buy ETFs now with zero commission and zero gate keeping.
It’s money you have to spend (shelter is non-optional), and mortgage is definitely a better investment than renting (you’ll get at least some of it back on selling, unless it dips very far) whereas rent is guaranteed to be burnt.
And the difference between rent and mortgage as a monthly payment isn’t that far for same-lifestyle, assuming you can put up the standard up-front capital requirements.
> And the difference between rent and mortgage as a monthly payment isn’t that far for same-lifestyle
That doesn't seem to be true in the Bay Area which has a very high buy/rent ratio because everyone expects housing here to be a great investment. The property tax alone on a townhouse can be higher than the rent on a similar apartment.
And property tax, mortgage interest, HOA fees/utilities like garbage and water, are pure expenses like rent, not investments.
Anecdotally, I live in the bay area and bought a house 4 years ago in a very desirable location, and my mortgage + property tax is cheaper than the equivalent rent would be.
It is a differentiator if those things would add up to more than rent. In that case renting is literally saving money that you can e.g. put into the stock market instead of real estate.
interest payments from the mortgage can be directly compared with rent, but not the principle repayment portion of the mortgage.
> assuming you can put up the standard up-front capital requirements.
which is also a cost - just more difficult to imagine as a cost. This cost is called the cost of capital, and is non-zero. If you take the minimum return, which is the risk-free rate from buying treasuries, this can be considered your cost of capital for this upfront deposit. More, if you consider this capital could be invested in the markets for some risk.
It isn't always clear cut which wins out, mortgage or renting. For the past few decades, mortgages have been winning out due to declining interest rates, but that might not last.
> interest payments from the mortgage can be directly compared with rent, but not the principle repayment portion of the mortgage.
You keep saying this but my mortgage payment for the past six years has been 0. And when I had a mortgage the payment always was comparable with the rent I was paying on a 2 bedroom apartment before buying the house. That apartment would never accommodate my family of four.
If renting works for you that's great, keep renting. But don't pretend it's because it is somehow cheaper than owning - it's not.
Believing people are stupid for owning their homes is a rather interesting opinion, especially with the implication that putting the same money in the stock market instead is smarter. It certainly seems higher risk and potentially more lucrative as a result, but you can't live in an ETF. As someone with both a mortgage and ETFs, I've been pleased with the return on both over the years.
Life is not all about money or investment. Sometimes it's about stability - owning a home lets you plan for the future in ways that nothing else allows for. It puts you out of reach of all sorts of predatory folks and companies.
That, itself is an investment. Stability is an investment. Forecasting is speculation and risk, and stability is to mitigate risk and that is an investment opportunity (or not.)
This discounts the power of investing on margin because loans are easily available to people. And it makes sense, because people are more likely to pay back a loan on their home then on a stock.
Or, maybe you're right and everyone but you is dumb.
rent is often lower, or the same, as the interest payments. The mortgage consists of both interest and principle payments, which is higher, but the principle payments can be considered equity, so it cannot be compared with rent.
My P&I, taxes, and insurance is less than what I paid for rent a few years ago. I get twice the square footage inside, private spaces outdoors, can make any modifications I want.
Meanwhile rents in the area increased 10% while my monthly went down due to refinancing. Taxes are only a small amount monthly overall so even if that doubled (it won't at least anytime soon) it wouldn't be as much of a change as the rental market.
Yep I hit this recently. Over the lifetime of my hypothetical mortgage I would be paying $500/mo more than my rent just in interest. Bleh. Assuming my salary keeps up with inflation this actually becomes a great deal after roughly 15 years (maybe less
if my house appreciates in real value) compared to renting buttttt…
- I lose the ability to quickly scale down my life if something bad happens to me financially before my 30 years are up.
- I’m not really tied to a specific location and right now my career prospects are better if I’m mobile.
- I’m not excited to have to basically stop putting money into the market and into a single asset.
I can pay less for a mortgage but for worse living arrangements. If that was an acceptable trade I could just find a cheaper place to rent.
Quite often the landlord will just be paying off an equivalent mortgage, and price the rent as the mortgage payments + maintenance + profit. In areas where living space is in demand and people are building or buying units that were not rentals to rent them out, the rent will be strictly higher than the mortgage including the equity-building principal part.
Also, keep in mind rents only ever go up (barring a major economy crash) and mortgages only ever go down or stay same.
Long time ago when I was renting, my rent (Silicon Valley) was $1200. I bought a very similarly-sized house and my monthly costs went up to ~$3000. So it hurt for a little while.
In just a couple years I had refinanced down to a sub-$2000 mortgage and the rent on my previous place was up to $1500. Getting close to even already.
Couple decades later, rent over there is up around $5000 and my mortgage has been refinanced down to $800.
By the time I'm retired my mortgage will be $0 and rents might be $8000 or more, let's see what future inflations brings.
My advice to anyone early in their career, just buy a home as soon as you can. It'll hurt initially for a few years but you'll set yourself up for a lifetime of being better off than renting.
The argument for home ownership in a nutshell: if you're spending 40% of your take home pay now on rent, and your pension will pay a fraction of what you earn now, say 40% again, how the fuck will you ever be able to retire?
Home ownership is a sensible part of retirement planning
The quality on homeownership can be several orders of magnitude higher than renting. Every time I have owned the appliances are much better, hardware is better, etc. If you are buying from previous homeowners they often have better maintained properties since someone had to live there longer than a year.
Also moving sucks, when your landlord wants to sell you have zero say and a timeline.
Homeownership gives you way more control over your life. Control comes with responsibilities, sure.
Not equity building, lack of control, and sometimes the "incentives" are off. For example a landlord wants the cheapest possible appliances. A renter wants features, quality and efficiency.. Also having no agency in the layout or functionality of the home is going to lead us all into misery. I don't understand how people think this is remotely OK.
If you’re already paying for the electricity and are willing to pay your landlord to have an electrician to install a 14-50R outlet in the parking area, I’d imagine most landlords would take that deal. That’s a cost that you’d pay even as a homeowner.
Plenty of people own EVs without owning a house. I own a house, but still almost always charged at work before COVID. As in “I’d plug in at home maybe 2x per year in total, because we mostly use street parking.”
Likewise, there are portable/countertop RO systems that can usually be installed with no permanent mods to the building.
Given a strong desire for those two things, they seem achievable.
It is absurd to pay to increase the value of a property I don't own and will not live in after a few years. Should I just spend this money every time I move?
My work doesn't have EV chargers and I'd need 20 hours of slow charging a day to make up for my commute. Relying on superchargers is reasonable though.
I had not heard of portable RO systems before. I'm definitely hopping on that. Cheers.
If I added a 14-50R to my house, its value would increase by maybe $100 versus the same house without that outlet. (It could very likely be exactly $0.)
Have you approached them with an offer to increase the rent you pay by $25/month if the landlord is willing to fit an outlet that you can plug a charger into? Or by $40/mo if they’re willing to put a 40A capable fast charger in so you don’t have to buy anything but can just use the service you want?
Just as you don’t want to spend money for something that you care about using for a couple years but someone else might also later get benefit from, the landlord doesn’t want to spend that same amount of money for something that they don’t even care about at all.
1. Raise interest rates and stop printing. Crazy inflation stops, but asset prices crash and we enter a major recession or depression. The end result will likely be unrest and blood in the streets.
There's zero historical indication that this would happen based on interest rates from the past. In '74 the interest rate was 12%, in '81 it was 19.8%, in 1990 it was 9%. Even going as high as 6% nobody is getting out their seats. If you want to incite violence you need to race bait and then dress it up as "economic anxiety".
And the last relevant number is the WAM (Weighted-Average Maturity) and it's around 5 years for that.
Now imagine how the numbers change when you go back to 12% interest rates and that debt gets rolled over at the new rate? Starting to see why no one thinks rates are going back there?
Fed printing operation is affecting the whole world, not just USA. Because international trade is denominated in dollars, every other country is priced out by USA when buying something just because they are farther from the main printer. IMHO, there will be bloodbath with p.2 too.
the problem is that if inflation continues, then interest rates will go up, whether the fed wants them to or not...once rates go up, money will flow from asset investment to bonds etc...and that will crash asset prices...checkmate...one way or another, asset prices WILL crash
That's assuming a free market with true price discovery. In reality, we have the Fed buying up financial assets and printing enormous amounts of money, and bailing out companies (which reduces risk, keeping rates low)... the entire thing is specifically engineered to AVOID true price discovery.
There is no such thing as a global free market with true price discovery in the real world. Foreign markets exist and you can't control them. They also tend to do insane things like selling products to you for money while lending the money back which drives the velocity of money down while simultaneously fueling speculative bubbles.
Whatever the Fed is doing is just a side effect of things that happen in the global economy. It has more to go with globalization and China than the US economy.
How exactly does this work? I thought that the fed controlled interest rates. Under what circumstances could the interest rate rise independently of the fed?
At the end of the day, money is stored work. If your country is running a deficit, living beyond its means, then you're dependent on other people's work now, on the promise of returning the favour later. If it starts to look like you're not going honour that, then suddenly you have to face the shock of living within your means, and no amount of printing new money is going to relieve you of that. If you can't live within your means, i.e. reduce the deficit to zero, you're going to have to start promising at lot more work in return, for the shortfall you have now.
No, no it's not. USD denominated interest rates are whatever the Fed wants them to be. The Fed controls the entire USD yield curve, although that control does weaken a little as maturity goes out into the future, but not more than about 10%.
Treasury auctions are kabuki theater[1]. Thanks to the Primary Dealer system it's impossible for an auction to fail. While the nominal rate may bounce around a few basis points, at the end of the day the Fed absolutely controls rates. They will literally create reserves and lend them to primary dealers at whatever rate is necessary to assure Treasury sells as many securities as it needs to at something near the target rate.
Typically when weaker countries do this, it was once considered a sign of fundamental weakness and a sure sign that a currency crisis was imminent. The US abandoned the same principles in government finance that it once advanced through institutions like the IMF. It's not that it was bad advice; we see the results of the irresponsibility in today's markets. The US is just a big bad 'basket case' without much in the way of financial credibility past what it can dictate through market manipulation.
Makes you wonder if there could be a scenario where the Fed raises rates for interbank lending and for loans to the general public but maintains a near zero percent interest rate on its own debts. As far I can tell the Fed operates with impunity and can do whatever it wants. So why not stave off inflation while protecting itself at the same time.
Not if they do YCC. Yield curve control. Which they are sort of doing at the tail end of the yield curve. And they did that back in the 40s as well when US had tons of debt from all the spending in the war.
Not an expert, but the central bank can set the interbank loan rate (rate at which banks loan money to each other overnight).
But for things like mortgages, personal loans, corporate bonds, those are not control by the fed and rates are set through auctions.
Of course, the fed controls the money supply so can signal whether they will increase or decrease it, so the rates set at auctions are influenced by what people think the feds will do.
If the demand for labor exceeds the supply of labor inflation goes up which also means interest rates must go up. The Fed exists to moderate inflation down to a 2% inflation goal. When you consider that inflation had been below target for a number of years with no way to increase it, it only makes sense to let it run wild for a bit and then reign it in.
Is this so? The price of other assets going up doesn't change the riskiness of the bank's ability to repossess a home, in the chance the borrower becomes delinquent. You're borrowing money for a physical, durable thing in which the bank retains the deed until the debt is paid off. If the benchmark rate remains low, it's hard to imagine mortgage rates going up due to exogenous factors, or you would have expected us to see that in the past 50 years.
There is another option: The government could buy/build/offer public housing as an alternative to the free market. It was done in the past and in other countries and I see no reason not to do it now.
The way I see it (and the way you put it) the free market has failed to provide housing to people, to an extend that there is no free market solution going forward. If the government (federal/state/county/municipal/etc.) provides and alternative to free market housing, they will directly be competing with private housing speculators. Prices on the free market will likely go down as a result (why pay $1,000,000 for a house from a speculator when you can buy a better house from the county for $400,000). These speculators will get angry, (and some bootlickers/sympathetic middle class) but they will not have the masses behind them to generate blood on the street.
This is not an alien solution, it is battle tested as it has been done multiple times in most countries several times in history, as recently as the 1960s. The only reason not to go for it (given your two other scenarios) would be that the government is so sympathetic to the few rich that it is willing to let everything else crash and burn in just to cater to the interests of the rich.
Oh well, let's see it from a different perspective, then everything would be much simpler and clearer. The government can actually make housing a lot cheaper but why would it do so?
Just take a look at the budget sheets, you will find out that the government is one of biggest if it's not the biggest one of the beneficiaries from the property boom. By making housing more expensive, it can collect more land/property taxes. If it cannot hike the tax rates easily, the evaluation hikes anyway. By printing more money, it dilutes its liabilities. Almost all the governments have been printing money for decades now, but they claimed there were not enough inflations, really? There seemed to be no severe inflation simply because of the methods used to calculate the inflation rates were biased. Indeed groceries' prices did not raise much, but how about the assets and/or properties? The economy is a dynamic system and can compensate by reducing non-essential expenditures to maintain essentials. But doesn't matter how flexible a system is, it still has a limit which no one really knows what it would be. We are pretty close to a tipping point if we are not already at it. The reason is pretty simple, any system with only positive feedback, doesn't matter how small the positive feedback is, is eventually going to crash as it requires more and more resource as input so that it can maintain the output. When it hits the hard limit, boom...
> the free market has failed to provide housing to people
Is it really a free market in places like the Bay Area where zoning is so restrictive and NIMBYs can show up to planning meetings to basically block any new construction?
It's been pointed out elsewhere in this thread that Japan also had a free market but less restrictive zoning and housing is much more affordable there.
The main argument for government efficiency would be if the government could override the NIMBYs more easily than private developers can.
idk about the housing market in Japan, but I was under the impression that housing prices in Tokyo were far from affordable. Also a quick glance at Wikipedia informs me the governments in Japan actually take a pretty active role in the housing market, including by providing public housing.
Are you sure zoning is the only thing that sets apart the Bay Area from Japan?
Reducing the ability of the neighborhood to prevent you from building housing on your property is probably the opposite of eminent domain; you could argue that enabling excessive NIMBY's is essentially eminent-domain-like taking of your property to do what the (local) government wants instead of what you want.
That $400K house the county is selling. Is it a direct comp to the $1M house the other seller is offering? If it is, where’d the county get the land so much cheaper than the market? If they had a bunch of county-owned land from original incorporation, great, but is giving it away at that price (presumably via a lottery process) the best thing for residents of the county, or is $750K a more prudent use of the people’s resources?
Note that I’m weighing this up as an alternative to the GP’s doomsday scenarios. Given those scenarios spending on fixing the housing crisis seems like the most prudent action for a government.
If public housing was done on a mass scales (like it has been in the past/other countries) you wouldn’t need a lottery process, just a wait period. A lot of people are renting and can afford to wait a year or two. In the status quo we simply can’t buy at all, we forsee renting for the rest of our lives, and are at risk of not even affording that as rent goes up exponentially.
Also if they do 1) just imagine how much interest payment that would mean for US Govt and all the dollar denominated debt. I think a mere rate raise to 5% will cause the US Treasury to have to pay for another military.
Not only less debt, but surplus payroll taxes from Social Security were flowing in and basically landing on the government balance sheet. (Via a special non-marketable bond series)
We no longer have a surplus there, and the issues around it were kicked down the road 39 years, when we had a Senate run by adults instead of the current pack of dull knives.
The military stuff will just get cut. We separately run 4 of the top ten air forces.
We could have a dual/varied interest rate policy where different rates are set for different policy ”targets”. Tltros - targeted long-term refinancing is one example in Europe. Banks receive extra yields on government debt for lending that money in specified ways.
> "1. Raise interest rates and stop printing. Crazy inflation stops, but asset prices crash and we enter a major recession or depression. The end result will likely be unrest and blood in the streets."
no, blood and unrest is an unlikely end result of this scenario, though vested interests would really like us to think that. the more likely outcome is a redistribution of wealth toward the lower 99% (concomitantly with a shrunken pie), since the wealthy and powerful have the most, and the most inflated, assets in the first place. that's what they're protecting as if our lives depended on it. that's what the infrastructure+extra spending bills are about, not us little folks. this is why the deflation approach is so threateningly disfavored, because it would flatten the wealth curve.
retirement savings don't affect day-to-day decisions or welfare, and most folks will not be selling their home, especially not in a recession, so those are both non sequiturs. long-term assets, particularly for the middle class, are relatively recession-resistant.
~17% of people right now are living off their retirement and that percentage will increase as baby boomers hit retirement age.
Remember 2008 when a bunch of houses were underwater, cash strapped poor families could neither make payments nor sell to get out, and the whole thing was awful? Yeah that didn't really help wealth inequality.
most households at/near retirement (55+, according to the fed reserve) are doing fine with an average net worth over a million (note that that's all the boomers), and almost none of them are still paying off mortgages. they aren't losing houses nor going without meals. moreover, social security income is inflation protected, as essentially is medicare, so poor elderly are no worse off. again, that's a disingenous argument, the kind often made by politicians seeking political gain, not general welfare.
Please avoid accusing opponents of bad faith, it's distasteful and childish.
If you have "enough" for retirement and then we have a depression where your retirement significantly drops.. that sort of seems like you may no longer have enough. That money needs to last you 20 some years.
Also your claim that most retirees have "an average net worth over a million" appears to be flatly untrue [1]. Please provide a citation.
Significant amounts of retirees are still paying on their mortgage [2] and are affected by changes in the housing market. This especially is important for reverse mortgages.
Social security income does adjust for inflation, but it does so infrequently and is not always a major part of many peoples retirement plans.
A depression or recession would be worse for the common person than any 1%er.
Population grows exponentially, housing grows quadratically (as circles around towns and cities). About 20 years ago the two curves had met and since then they've been rapidly diverging.
Interest rates on treasury notes need to rise, period the end.
Yes, I understand the implications and entailment, but don't care about the risks. The cure has side-effects, yes... we get it, but low interest rates is cancer that cannot be allowed to become systemic new-normal nonsense. 10 or 20 years from now is when we see the lagging effects, and of course the problem we have now is short-term thinking.
I agree your generation is pretty f-ed (even here in "socialist" Netherlands) and I hope they will raise taxes on my generation until something good can happen for yours. At least here they are really cracking down on my generation owning multiple homes and renting them to yours for a super high price, among other things.
That said, your generation is digital native, you don't need to live in an expensive city, you can collectively decide to work remote from cheaper (and perhaps more beautiful locations). Our generation will eventually start dying. You need to be creative. I'm sorry. Tell me what to do...
I'm 25, and I live in The Netherlands as well. My parents managed to buy a house for 110k with government subsidies back in the 90s, they didn't need a deposit, they didn't even need any money. All they had to do was earn just above minimum wage, and they could include any costs from the buying process into the mortgage. Their house sold for 475k last year, a 90s starter home for low incomes. My grandparents had it even better, their house cost 40k in the 60s, of which 40% was paid for directly by the government through subsidies.
I'm in the top 1.4% of income in the country, yet I cannot buy a house, because I don't have the savings required to overbid by 100k. There's a lot of things causing this overbidding, my parents for example sold their house because they wanted something smaller, but because they now had 475k in the bank, they were able to overbid by 80k on a house listed at 250k which ruins any chances for younger people to buy them. There's no way I can match this, let alone less fortunate people of my generation. I'm currently renting for 1600 a month, my landlord rented the place out to pay for his new house's mortgage. They're unwilling to sell it to me, because they plan to retire here in the next 10 years. The house is worth 300k in the current market, it's a very small starter home, but I literally had no other option because there's absolutely nothing available. And this is in a small town in the east of the country, my commute is over an hour as I work in the west.
There's nothing your generation can do, apart from just owning one home. It's not your fault, it's horrible policy making (such as getting rid of the VROM ministry) among other things.
Yeah I'm happy I have a nice home but we also have some annoyances (minor compared to yours), we have been ready to move on to a bigger property for about 5 years now, very little comes up though. And when it does, we are often too late (they cap at 80 viewers for example, this is talking about 500k+ properties, I swear, 10 years ago you got a couple of viewers for each property, the realtor told me back then he negotiates with 1 person/couple at a time (unimaginable now!) and I think the number of properties for sale in my city easily dropped by 60% over the last 10 years).
Recently we finally got to view a nice property with some land (more rural, 545k) and someone overbid by 105k without and further reservations on the contract. So we are also pretty stuck.
Still it baffled me that when I talked to my bank I can probably sell my 2012 bought house (195k, modernized for 50k) for 330k! And then, I can repurpose my old mortgage to make it repayment-free ("overgangsregeling"), bla bla bla, and I can move to a 600k property with an increase of only 250 euro net per month. It's crazy!!! Yeah your generation doesn't pay transfer-tax but that's a drop in the bucket. Add to that that increasing a bid by 20k only costs you about 60 euro net per month (low rent, 30 years mortgage) and you get into a crazy bidding race really easily.
I feel like we need to build many more affordable houses ("starterswoningen", 200-300k). But I guess that 400-700k properties are where the money is at.
I'm now thinking about buying land and putting a prefab or standard house on it. Still, land is also not easy to find.
Edit: Oh a nice fact about my house: The woman living in it before us bought it for 19500 Guilders (~9k euro's) in the sixties...
We definitely need to build more houses, if you look at Topotijdreis and start from around the 50s-60s, increment by 10 years until now, you'll see that we haven't built anything to house my generation. The homes that were built, are large single family homes, not starter homes. The starter homes that we're meant to move into, are still occupied by the generation that grew old in them (born 30s-40s). Those 60s neighborhoods though are now slowly disappearing and replaced with more large single family homes bought by my parent's generation, with their starter homes being rented out to afford their mortgage. The system is completely broken and most of my parent's generation have been told not to pay off their mortgage, I'm curious what will happen when interest rates rise to 5%+ (or even 10%+ like in the 80s), so many of them will be forced to sell because so many are upside down in interest-only mortgages still.
Fortunately, people of my generation tend to earn better than their parents, so maybe in 10-20 years we'll see a situation it's completely turned around? Parents living with their children?
There's definitely enough houses if we take ageing into account (when people born in the 30s and 40s are starting to die off) but since COVID isn't the grim reaper my generation was silently hoping for, there's nowhere for us to go apart from staying with our parents or renting for insane prices.
dead-middle millennial here. Many of my friends been buying house circa 2016-2018 back when you can still get a 5-10k euro discount, even in Randstad/Eindhoven area. Not anymore. I was just start looking to buy a house and I was just giving up after 4 months and several attempts at bidding with crazy competitors.
I think most people were simply owning 1 house and doesn't benefit much from this housing crisis. Like you said, people who want to go out can't get in to a new house either. We're at the lowest point in NL history with fewest vacant properties available. So taxing all the property owner wouldn't do justice. However, I hope the government start to impose a progressive tax on entities owning multiple properties (hello Chinese/Prince/BlackRock investors?). They're the ones who benefitted the most from this situation. Though realistically, seeing how the current government track records, I kinda feel helpless that they'll help the younger generation. I even feel bad for Gen Z whose racking up student debt on top of it.
>your generation is digital native, you don't need to live in an expensive city
Which is what gets said almost routinely, yet companies are still calling employees back to the office and we're not centralized enough to fight this without some heavy repercussions. Or worse, the majority just doesn't care enough to fight it and continues to invest into this ratrace.
This is even worse considering half these companies love to market their environmental campaigns, social responsibility and whatever, and then they conveniently forget or sidestep the obvious solution.
The underlying reason for the bubble isn't gone. If it crashes it will bounce back up. To be fair, China's real estate sector is dying slowly as we speak.
> but asset prices crash and we enter a major recession
This sort of idea is often posted but rarely do anyone explain why. Asset prices do not have this effect on the brick-and-mortar economy that most people live in.
There was massive inflation in the 70ies and it appears that what you describe hasn't happened. In fact, at least in theory inflation decimates the savers and helps the borrowers (well, if you borrow before it really picks up I guess).
Also, housing-to-income ratio in the USA is (used to be?) one of the lowest in the developed world. Housing is relatively cheap, including in many non-depressing places with jobs (e.g. Chicago, SLC or San Antonio, of the ones I know thru someone who lives/moved there)
There are many middle ways possible, but generally these problems arise because a small, connected group gains significantly and now, while everyone else suffers in minor or delayed ways.
Those systems then keep to one extreme until things break, and as you say, blood on the streets.
But it's worth bearing in mind that there are solutions that'll work for everyone, just that history shows you don't (usually) get to have nice things until things have gone catastrophically wrong and the old system been swept away.
What I hope for is someone to create a fiscal black hole. The more money that is spent to delay the bubble busting, the wider the blast radius will be. Once its size is several multiples of the world GDP, that's when the real fun begins.
> It doesn't even really seem like any of the high paying jobs are enough to keep up with this insane market.
Compared to two years ago, it’s much more likely that you can get paid a coastal tech salary yet live in an affordable city. These still exist in America. Here’s one that I just pulled out of a hat: Ames, Iowa. College town. Median house price $265k, which you can have for less than $1k/month with a 30 year mortgage at todays ridiculously low rates. There are hundreds of places like this across the country. You don’t need to live in the Bay Area, Seattle, NYC or Austin anymore.
Part of the problem is/was, that you probably were going to buy a house anyway. So if you get the high paying job in 'crazy real estate' location, then the bank will loan you money to buy the crazily inflated house, because everyone is gambling on it rising further.
Just the asset price rise could rival a full wage in certain areas/times.
So the cities were actively pulling people into them because of their stupidly high property prices and so worsening the problem in a bubble like spiral.
On the other hand, if this bubble does pop, it'll be the people who just recently bought in that will carry the brunt of it, so maybe now is a good time to not relocate and wait for the pop. Could have said that 10 years ago though.
The aFef is broken and two years behind the open market in terms of interest rates. Its like a broken record to see such mismanagement repeat every decade.
The baby boomers will all die off during your lifetime. There aren’t enough people left to absorb all of their houses. I assume at some point there will be a tremendous glut of empty houses on the market which should dramatically lower prices.
That seems like a slow, one-time correction given immigration and perhaps even before then, demographic shifts changing what types of houses are needed and boomers retiring off the sale prices of their houses. Yes, things don’t normally go up forever, but it’s shocking how much things have gone up and continue to go up, in all financial asset classes. While renting is still seen as an option for many, there will be a market to buy houses (shrinking the “glut” to buy at the low) and pay a bit extra to then rent the house and make some money before selling it again. More interesting to me is whether business real estate will have any kind of dip, given recent work from home, but I also can’t see how that makes residential any less attractive for investment over the long run, unfortunately.
That's what Ivy Zelman and crowd are predicting as well [0]
Predicting future demographics is hard through, because there are so many variables. Current birthrates in America are down but immigration is compensating. However, if the economy starts faltering we could see the desire to move to America go down as well.
> I assume at some point there will be a tremendous glut of empty houses on the market which should dramatically lower prices.
If there are no shocks in the housing market, there will be more than enough investor funds to soak up all boomer housing stock. Rentals and AirBnB will be dominant in a self-perpetuating way, as far as I can tell.
You can participate in wildly inflating markets by other means than buying a home. If you have a high income job, invest your money into things that grow with inflation.
It isn't actually clear if housing is driving inflation or responding to it. Lower mortgage rates can goose prices and demand a bit but can't come close to accounting for current pricing levels. Even at 0% down payments are not trivial... and fed backed mortgage support tops out around the 600-800k mark depending on market.
You can try to fight the market, complain about the market, or position yourself to take advantage of it (using the best info available at the time). When everyone was doom-saying the Fed in 2009 and complaining that everything was fake valuation, a new crash was coming soon, etc. I got fed up and ignored them. Piled my retirement account into stocks. That has paid off quite well.
Also if you find an opportunity you believe in make a bet. I bet $7k on Tesla's IPO. Last week I sold less than half my holdings for $100,000 and plan to keep the remainder. Lots of people had negative things to say but I took a closer look and put my nickel down. Years ago after Apple hit me 700 it fell by around half. I bought the dips at 450, 400, 350, etc. That also did extremely well for me.
Find opportunities and make moves. Fighting the fed and the market means you'll miss huge upside - often so much upside that even when your negative prediction eventually comes true you'd have been better off holding through the downturn when all is said and done.
> All I can do at this point is raise my fist to the sky and say fuck the fed, fuck the financial system, fuck the greedy rich, fuck BlackRock, and fuck you.
Polish your resume, practice stupid useless whiteboard problems, move to the Bay Area, and work for a FAANG company. Keep the same lifestyle you have now. If you work moderately harder than average you can easily have $2m cash in the bank within 10 years or less - even after paying Bay Area cost of living.
Then start writing $20k checks to your house rep's re-election campaign. Guess what? They'll take your calls. Write $50-100k checks and your senator will too. It is surprisingly cheap (in the grand scheme of things) to buy access to political power. That's how the current system got where it is: those hedge fund managers have been writing campaign checks since they were junior associates at a big bank. As a result Congress hears from them and cares about their concerns more than the average rabble.
Anyone in Congress who doesn't do that and isn't independently wealthy either fails to get re-elected (no money to spend on events, travel, ads, ground game) or has no actual power because the party won't give them committee assignments since they aren't bringing any money in for the party's own election efforts (this is how parties enforce discipline).
Unlike most working Americans it is within the grasp of many HN readers to do this sort of thing and make an actual difference. Do you care enough to move? To change jobs?
Full disclosure: I'm just now in a position to start writing checks so I'll let you know how it works out in 10 years.
That's what I thought when I was 24. By 34 I bought the house I'm writing this from for what I thought was an extravagant amount of money, and by 44 I'd paid it off. It is now 3.5x the price I paid. That price was 2x of what the original owner paid a decade before me. I did have some money when I bought the house (obviously) but it still seemed insane. And I think that's actually sort of by design. It's the largest purchase most people will make in their lives, and there is one million ways to screw it up, so of course it feels insane and uncomfortable. And yet, people manage to scrounge up enough money and courage to buy real estate somehow.
Which is to say, if you're on this site, chances are you'll be able to afford a house, just not at the price you like. Your income will track inflation much better than that of Joe Autoworker or Jim Farmer.
The big downside for you is going to be that most tax brackets aren't revised upward with inflation, so you might find yourself paying nutty effective tax rates that you're voting for right now. :-)
1. Raise interest rates and stop printing. Crazy inflation stops, but asset prices crash and we enter a major recession or depression. The end result will likely be unrest and blood in the streets.
2. Do nothing, keep printing. Inflation picks up massively. The economy keeps humming along but young people, including myself, are permanently priced out of home ownership and many other things. We enter a new era of cyberfeudalism, which probably involves some blood in the streets.
It seems like they are going with option 2. I am 24 years old and I can't say I'm particularly excited. It doesn't even really seem like any of the high paying jobs are enough to keep up with this insane market. All I can do at this point is raise my fist to the sky and say fuck the fed, fuck the financial system, fuck the greedy rich, fuck BlackRock, and fuck you.