WatchHomes are always deteriorating, due to the 2nd law of thermodynamics, and thus should always be devaluing. It would be irrational to assume otherwise. Nothing on this earth is resistant to entropy. Home buyers can try to fight depreciation with renovations, but the inevitable is going to happen.
This view that homes always maintain their value is irrational. If it were true all homes built in 1890 would still be around today. In fact a very small percentage of these homes are still standing. The few that are left are in very poor shape and are in very poor neighborhoods. Yes their may be a few exceptions, but the outlier never resembles the trend line. It would be safe to assume that a home fully depreciates its value, in the average U.S. housing market, after 120 years.
A vehicle can serve as an analogy to the housing market. A vehicle fully depreciates, under most circumstances, after about 20 years. Yes some people may try to maintain the value of their car by doing upgrades, but nobody would pay the same inflation adjusted purchase price after the vehicle is 10 years old with 85,000 miles. That would just not be rational. Most people would pay around 1/3 the inflation adjusted purchase price for the vehicle.
So, when the average home in 1950 was $7,354 and inflation adjusted is $70,000, why are people paying between $60,000 - 180,000 for these homes? The 1st and 2nd owners of the home built in 1950 didn't absorb any of the depreciation! Maybe homes are not subject to the laws of thermo dynamics (ha-ha). More probably, the 3rd and 4th owners will be the lucky ones to assume the full depreciation of the home.
From the vehicle analogy one would estimate that the home should be worth 1/3 of $70,000 about $23,300. Obviously other variables are acting to influence the values of homes. Increased government intervention would be one major example. One might predict that if the influences from special interest groups (banking, realtors, insurance, home builders, politicians) that benefit from an expensive, highly leveraged housing market were eliminated, the housing market may restore to normal.
It is safe to say that the housing market is fairly socialized. If capitalism were in effect the U.S. government would not be colluding with special interest groups to keep the massive shadow inventory of homes off the market to protect the current highly unsustainable prices of homes. Welcome to “The Road to Serfdom”.
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As orbitron says, this is very simple. The home is inexpensive, it's the land that cost so much, as least here in coastal California. Just look at your homeowners insurance policy and they are only insuring the dwelling, not the land. Only the building burns down or blows away in most instances. Homeowners insurance is very cheap in my opinion and that's why, the are not insuring the ground underneath your house. You might have a million dollar property, but the replacement cost for the insurance company is a fraction of that.
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Monterey, CA
EconPete, you have clearly never been to Europe.
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Lafayette, CA
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Nothing more than painting a house on a regular basis, controlling termites, and maintaining a solid leak proof roof can keep a house in good condition almost forever.
Bigsby mentioned Europe where it's not uncommon for people to be living in structure that are hundreds of years old.
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Dublin, CA
The house cannot be worth $23,000 in bay area because a luxury apartment nowadays (2 bedroom) can easily cost more than that to rent in 1 year. The pricing of the landlords as well as the purchase/paying power of the local population determines buy/rent ratios with regional variations of course.
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lurking says
What you didn't say is that you never even "Own" the property/land that the house sits on. Try not paying property tax for a year or so. See who actually owns the land. You are renting that spot of land from the government, even after you think you have "paid" for it through the mortgage or cash that has exchanged hands from one "owner" to the next.
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Who is the nitwit? ForcedTQ doesn't "own" mulitiple highly taxed, devaluing assets.
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EconPete says
I don't feel that my properties are "highly taxed" by the CA counties, they are not devaluing, and they are paid for cash cows so I don't buy your silly argument. Hint: I may write the checks, but the tenants are paying by virutue of pass through.....you probably couldn't have figured that out on your own.
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Price of house = Price of land + Cost of building & structure less depreciation + cost of home improvements made from time to time less depreciation
Is the land price that is appreciating. In fact, land is more than 80% of the house in SV. You can acquire an old badly maintained house for nearly the price of the land.
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Quote from lurking
"I don't feel that my properties are "highly taxed" by the CA counties, they are not devaluing"
http://www.zillow.com/local-info/CA-home-value/r_9/#metric=mt%3D34%26dt%3D1%26tp%3D5%26rt%3D4%26r%3D9%252C3101%252C1286%252C2841%26el%3D0
Let me guess, all your homes are in Mono County which is the only county that didn't depreciate in value Y-o-Y. ha-ha
Sure looks like a lot of red to me buddy!
Gold, bonds, and stocks all have a zero annual tax rate, other than inflation which is a moot point because real estate is also subject to this tax. Real estate unfortunately is a taxed asset. Therefore relative to other actual investments your assets are taxed heavily.
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Houses made today are built only to last maybe the term of the first 30 year mortgage, more like half of that to give the developer a little time to get away as practically speaking it will be sold three times possibly before it starts falling apart.
When Cannibal Anarchy strikes you want a house that can protect you in a free fire fight that could go for weeks.
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EconPete says
Ah, no, you guessed wrong, as usual. I can't say as if I have ever been to Mono County. When I go to the mountains I prefer Placer, El Dorado, and Shasta counties, but I don't own anything there either. It's all coastal CA metro rentals for me. That's where the money is in my opinion. If you read any of my posts you'd already know that.
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lurking says
Nitwit? You are showing your true colors here. The argument is not tired, and in fact, has not been talked about enough. If more potential home buyers/owners/mortgage holders and rental tenants alike actually thought about this for a minute and really understood the gravity of the property tax system, they would have ammunition to use. Research back to the begining of the property tax in California and see why it was started, what it was funding and how it has evolved. You don't mind paying them after all that research? REALLY? Prop 13 has protected you well it would seem.
Rent Seeking is your game. I will assume your rentals were purchased a while ago, at or below the going rates current for that time. That was your starting point for property taxation. I would also assume that, as rent prices fluctuate upwards, you have continued to raise your rates to stay "competitive." Correct on my assumptions? Well, if so, then your "profit" from said rentals has continued to escalate, all the while your exposure to increased taxation is limited to a 2% increase per year courtesy of Prop 13. So you pass those limited increases on to your tenants for sure as you said, while increasing the profit you see courtesy of limited taxation.
Sure you don't mind paying capped taxes. Rent-Seeking without regard is fun, huh?
My approach, not paying them? Never said I did that, that was an example meant to show you WHO actually owned that property. Most people don't actually think about that. You get it yet?
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Sunnyvale, CA
EconPete says
Marketing, loan terms that make it easier for people to spend more money, and a larger labor pool that includes women. 1950 is about where we got the modern 30 year mortgage.
In the 1920s banks were making 2-3 year loans and life insurance companies 6-8 years. By 1940 the numbers had increased to 10 and 13 years respectively. By 1950 the average mortgage length was 15 years.
In the 1920s loan to value ratios banks were making loans at 50% loan to value ratios and the life insurance companies somewhat lower. After WWII they'd reached 70% and S&Ls would write loans for 75% of property values.
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Monterey, CA
ForcedTQ says
You own the land. Who gets the money when you sell the house? If you weren't charged property tax, then the needed revenue would come from some other tax. Seriously, to say that homeowners don't own their land (after paying off the mortgage) is just a facetious remark.
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Bigsby says
The "Needed" revenue is debatable, and probably should come from another defined source that is not dependent upon someone's ability to pay that is eroded by the "ownership" of an asset that has a value which is ever increasing due to the value of the currency which it is valued in ever decreasing.
If one truly "Owned" something, a "Tax/Fee/Assessment/Charge" which is left unpaid would not preclude the continuance of ownership by said individual.
To "own" land "fee and clear" and live on it is to be an occupant of that land that you have paid a sum (or inherited) to transfer certificate of title to the previous occupant of said land.
I don't see how your argument of "Property Taxes are a necessary revenue source" changes who actually has control of "your" property.
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Madison, WI
Lol, they depreciate after you sign your buyers contract.
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orbitron says
If it was really "land value" than the price of new construction should be low if you own your own lot. It isn't.
Land appreciation alone does not explain the long-term increase in prices.
Part of the difference between 1950s and 2010s housing cost for new construction is that we build bigger and better houses today than the crapholes built in the 1950s. Of course, profit margins are also higher.
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Only CA has expensive land.
Everywhere else, people just build outside of downtown.
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San Jose, CA
Dan8267 says
xenogear3 says
CA desert you can buy for pennies.
New construction cost depends a lot from local labor costs and local permit requirements. Materials cost same everywhere.
Bigger house is actually cheaper per SqFt.
Crapholes are built today as well.
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iwog says
forever meaning like 40 years? Also, Europe actually builds good homes. Solid construction using brick and concrete. The homes in the U.S. are on a completely lower scale. We use 2-by-4's for support beams. Sometimes, when it calls for a 6x6 loading beam I have seen many home builders be okay with just hammering 4 x 2-by-4's together. Ludicrous. When they were building my weekend home I had the construction stop a few times with complains and each time I was correct. I felt bad for the homes that no one were watching being erected.
I am guessing here, but looking at the stock of older homes in the BA, I think the standards were even worse back then.
Comparing a European home to a BA home is like a going to a gun fight with a rubber knife. No contest. American houses will be torn down and built up about 10 times to each European house from my view.
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The answer to the OP's question is really quite simple:
1. the price of housing is only partially dictated by the value of the physical materials that make up the dwelling - - which is the only component subject to physical depreciation (excluding rare cases when land is actually destroyed - - mud slides, etc.). All parts of a car are subject to physical depreciation. With a car purchase, you are not paying for an included product (land) that is not generally subject to physical depreciation.
2. The price of housing, like everything else, is mostly a function of supply and demand for the good in question. What do you think would happen to housing prices is 75% of the world's population died tomorrow? Even though the underlying properties would not depreciate in any physical sense, they would be worth far, far less because demand would drop relative to supply. A more common example is what happens to the price of housing in a community when a major employer decides to locate in that community, bringing jobs to that town? What happens to a factory town when the factory closes? The price people are willing to pay for housing drops, even though physical depreciation does not occur.
note: btw, I do not mean to imply that housing in this county trades in a truly free market. Government intervention warps the supple/demand equation, but does not alter the fundamental concept.
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tjjenkins says
The stench from all the decaying bodies would not be good for house prices though. Especially, the people that rot away unknown in the attic. You'll never get that odor out of the house.
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San Clemente, CA
xenogear3 says
Really? Try any coastal property anywhere in the country. How about the Florida Keys? Or a nice lakefront property in a good area? Land is cheap if it's in an undesirable location. This is true in CA as well.
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tjjenkins says
I like the way you put this. A breakdown in what the core cost components in realty costs are. The Land component will fluctuate as you said due to actual demand of the micro realty climate, population density, ability to pay (wage level), at a much greater rate than the improvement cost on two different properties in two locations with different micro demands. Improvement costs stay pretty close to the same zip to zip (ability to pay has highest bearing on price in this instance). With the actual land, what is being traded, is the right to occupy that land /with real property improvements, wh ich is the right to rent (pay property tax to the government).
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The few that are left [from the 1890s] are in very poor shape and are in very poor neighborhoods.
Huh!? Not only have you never been to Europe, you probably haven't spent much time in the northeastern USA either.
(Incidentally, where I live, in Tokyo, housing really does depreciate fully over about 50 years and is typically unlivable after that much time. My own apartment, built in 1970, has an assessed value of about $12,000, with the land under it worth ten times that much. But in the USA, where well-cared-for prewar and 19th-century homes aren't even mildly difficult to find?)
ForcedTQ, agreed entirely on how property taxes destroy the fundamental principle of ownership. You don't own something if it can be taken from you by another party if you don't fulfill an obligation imposed unilaterally by that same other party. I'd much rather see this tax money raised through estate taxes. That way the owner truly owns his home until death, and the inheritors will pay tax on what is basically unearned income for them.
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ForcedTQ says
Bingo.
It's hardly "ownership" if I have to pay someone a good bit of money every year just for the privilege of keeping it.
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You never get to own it, property taxes almost permanently go up by 3% annually unless you bought at the top of the bubble and saw some temporary decline.
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wthrfrk80 says
This is the best argument for Prop 13 in California. It's like rent stabilization for property owners. Once they've bought the place and moved in, they are protected against arbitrary and confiscatory increases.
Legally, "ownership" of property is commonly called tenancy. For example, a married couple may say that they "own" their home, but their attorney will probably advise them that they hold a "tenancy by the entirety." This terminology goes back to feudal times, when local lords leased land to their vassals. Today, the feudal lord is replaced by the elected government.
Local property tax can extend to personal property, and frequently includes motor vehicles. The difference is, if you decide your local property taxes are too high, you have at least the legal right to pack up your personal property and drive off to some other place. It's difficult to do that with the land.
The economic value of property depends on supply and demand, but demand often depends on tax policy. Subsidized mortgages in the post-WWII era have artificially increased demand for real property, raising prices compared to the interwar period. Also, land values have tended to increase together with economic output, and in many places faster than property taxes. Houses deteriorate (entropy) or become obsolete due to technological progress, while land tends to appreciate. But, if property taxes increase, land values can fall, because the net value of the tenancy is reduced. If Prop 13 is ever repealed, land values might fall significantly.
I still think corporations should be ineligible for Prop 13, even though corporations, like soylent green, are people.
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Corning, NY
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curious2 says
How appropriate.
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Curious2, interesting relationship between easy credit, home prices, and local tax revenue.
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Sebastopol, CA
There have been a couple of long term studies. Shiller did one of SF from 1860 to 2000 or so, which has the obvious problem that not many house built in 1860 are still extant. The other one was IIRC of Amsterdam and covered a 300 year period. That one has more validity to my mind because those are mostly the same structures and the records are excellent. Appreciation was between 1% and 2% over the long term, corrected for inflation. There were long periods of price depreciation in there, timing is important...