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Ten myths about housing prices in the USA
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2011 May 25, 11:22am 34,180 views 189 comments
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I am not a realtor, just a patriotic American
as soon as i read these words i knew this was going to be more bull by a housing bull.
HousingWatcher
2011 May 25, 11:37am
I agree with most of the points made by the OP. I do disagree partially, however, with the comment that houses are "absurdly cheap compared to every other country in the world." It depends what part of the coutnry you are talking about. Are you talking about Manhattan or Topeka, Kansas? US real estate is both super expensive and super cheap. But it depends where you are.
Done!
2011 May 25, 11:43am
You're preaching to the Choir bub, now all you have to do is create an economy where 8 million Americans a year are credit worthy enough, and has adequate down payments. And it will be back to Stripper Poles, Granite Counter tops, Big Ass Titties and 40% YOY home appreciation.
Where's that little tid bit in your Myth Buster thread?
Yeah, I'm not even wasting time going point by point on this. It's just silly. Yes, high housing costs are awesome, so that people can't spend money on anything else. That would be great for our economy!
Another general fallacy in the account above is that buying and selling used houses is good for economy. It's not! Buying and selling used houses has extremely high transaction costs and is only good for rent-seekers, like realtors, mortgage brokers, banksters, etc.
Residential investment does lead economic recoveries, typically, but that is not the same thing as what's stated above.
HousingWatcher
2011 May 25, 11:50am
"Buying and selling used houses has extremely high transaction costs and is only good for rent-seekers, like realtors, mortgage brokers, banksters, etc."
So then someone should develop a way to sell houses without a realtor. We need a Facebook, but one for selling houses.
I agree with most of the points made by the OP. I do disagree partially, however, with the comment that houses are “absurdly cheap compared to every other country in the world.†It depends what part of the coutnry you are talking about. Are you talking about Manhattan or Topeka, Kansas? US real estate is both super expensive and super cheap. But it depends where you are.
Thanks for the support, HousingWatcher. My comment "absurdly cheap compared" was prefixed by "when comparing size, quality, features, surrounding infrastructure etc". I was referring to comparing similar cities, say New York to Mumbai or Paris. Chicago to New Delhi or Paris etc, and then comparing using the factors that I stated.
Yeah, I’m not even wasting time going point by point on this. It’s just silly. Yes, high housing costs are awesome, so that people can’t spend money on anything else. That would be great for our economy!
You must have missed reading my first myth buster regarding falling housing prices leading to increasing unemployment and lower wages. Spending on other goods and services is falling and the economy is crashing BECAUSE of falling home prices. Rising home prices and inflation helps wipe out loans, so people can then begin to spend on other goods.
thunderlips,
Thanks for taking the time with your detailed comments, and keeping it civil.
On my myth buster #9, please see these links regarding buying cheaper than renting and rising rentals
http://www.huffingtonpost.com/2011/05/24/new-generation-of-renters_n_866032.html
http://www.huffingtonpost.com/2011/01/24/buying-cheaper-than-renting_n_813088.html
Regarding myth buster #8 : As home values rise, home owners feel wealthier, and spend on goods and services, leading to the retail sector creating jobs. As home values fall, the opposite happens as evident over the past 5 years in the USA. People spend less, and retailers cut jobs. Not sure why this is not obvious.
Your comments regarding developed vs developing countries has been made by others too, and I fail to understand why most of you seem to not care about the developing world or its bubbles and want to focus just on the developed world. In the globalized world that we now live in, the rising wealth of these so called developing countries is very relevant to the developed countries. Like I already stated, homeowners in these developing countries are far more wealthy than homeowners in developed countries, thanks to the real estate appreciation in these developing countries. It is only a matter of time before all homes in the developed world are bought by the wealthy from the developing world, and current citizens of the developed world become high rent paying tenants. Rising wealth in developing countries also means rising inflation in the USA, which outsources manufacturing and services increasingly. Without a corresponding rise in our own wealth, we are doomed.
I really doubt that the average home in China or India costs 1 million USD.
Â¥
2011 May 25, 2:21pm
When the current generation is getting utterly destroyed and losing its savings and wealth because of stagnating or falling prices
There is no wealth store in home values. Valuation is not wealth, value is a zero sum transaction from buyer to seller. For home values to go up, buyers must part with more wealth. For home values to go down, sellers will receive less wealth.
Zero sum.
Home prices tripled from 1990 to 2005.
http://research.stlouisfed.org/fred2/series/REABSHNO
The nation was not any wealthier nor did it accrue any "savings" in this appreciation, other than the new construction and rehabs that were made.
The current generation is getting slaughtered by falling home values, but the next generation will benefit.
Valuation is not wealth.
Countries with the most absurd housing price appreciation and bubbles in the past 30 years like India and China, are flourishing with high GDP growth, wage increases etc. Countries where home prices have stagnated or fallen over the past 30 years like in the USA and Japan have collapsed. Enough said…
Yes, the wage increases are pushing the inflation in housing, as is the overall rise in inflation in these economies.
Also, both nations have 2.5 billion people combined.
Enough said indeed. You seem to have a very difficult problem confusing cart and horse in your analyses here.
The truth is that house prices have vastly underperformed inflation, and housing in the USA is vastly undervalued compared to the rest of the world.
Again, we have a cart & horse problem here.
We have been exporting inflation to the rest of the world via our trade imbalances. They run a weak currency, we buy stuff from them, they monetize their current account balance in their currency, and lend our dollars back to us.
Consumer prices may be going up, but consumer prices do not pay the mortgage -- only wages do, and rising consumer prices can actually REDUCE homebuying power, putting DOWNWARD pressure on rents and home values.
This is very obvious if you think about it.
When comparing, size, quality, features, surrounding infrastructure and beauty, homes in the USA are unbelievable and absurdly cheap compared to every other country in the world.
This is very true but there are good reasons for this.
For one, the US is blessed with much productive land and only has 83 people per square mile. Germany and the UK have 600 people per square mile. This increases density and also increases the rental value of land.
For a nation of 300 million people, we only have 275 cities with a population greater than 100,000. We have a median density of 4000 per sq mile in our top 275 cities, this is a ridiculously low 6 people per acre -- IN OUR CITIES.
And these top 275 cities only have around 80 million people in them, leaving 3/4ths the population living in suburbs or rural communities.
What actually happened was that low-income people were allowed to buy dream homes that they could never afford in the first place, thanks to lax lending from banks.
Actually what pushed prices to bubble levels was not the poor people, but everyone, getting access to the new suicide loans.
Alt-A was for PRIME borrowers who wanted to play a bit with the loan, with stated income, pay-option negative-am interest-only etc etc.
All these lending products -- but especially the negative am -- temporarily boosted buyer's ability to pay, especially in combination with the NINJA loans and the HELOC withdrawal money that allowed borrowers to recapitalize their loans not from income but from more debt.
This is what you are missing about what happened last decade, you do not understand that it was the debt bubble that gave us our economic recovery 2002-2007, not the other way around.
http://research.stlouisfed.org/fred2/series/CMDEBT
Myth #7 : Median home prices should be at most 3 times the median income to be affordable
I agree 100% with your analysis here.
Jobs follow only when housing is strong and people feel the wealth effect. So long as housing prices keep falling or stagnate, there will never be a true jobs recovery in America.
Again, cart for horse. Housing is pure consumption. Technically, we could stop building housing now and we'd get by with the existing stock.
God knows we have millions of empty houses sitting and rotting as it is.
Housing powered us out of the tech recession, but the housing bubble was launched with some very significant rule and macro changes that cannot be repeated:
1) the removal of capital gains taxes on housing (to attract more speculation)
2) the fall of mortgage rates from over 7% to under 6% (2001-2003)
3) the Bush tax cuts increasing take home pay (2001-2003)
4) the rise of 80/15 and 80/20 lending
5) the rise of pay option, negative am and suicide lending (2003-2005)
6) the rise of subprime lending (1995-2005)
Increasing real incomes in the employment boom of the late 1990s and the above factors got the appreciation party started, and once it was started the larger economy received HUNDREDS of billions of dollars of stimulus via lending volume.
Here is the bubble in annual lending volume:
http://research.stlouisfed.org/fred2/graph/?g=By
(this is net lending so actual new loans were even greater)
Note that lending peaked at around $1.2T/year in 2006. That was $1.2T of new money hitting the middle-class economy. A flood of cash. We were rich.
But it was all borrowed money predicated on valuations pushed high by suicide mortgages and massive speculative fever.
In this chart:
http://research.stlouisfed.org/fred2/graph/?g=BA
you can see home valuations (red) fall $6T from the bubble. Note that debt has not fallen much at all. We are still in a debt hangover an things are going to get worse before they get better.
Myth #9 : Renting is cheaper than buying in the USA
It doesn't matter if buying is cheaper now as long a the house I want to buy is falling in value more than my rent ($20,000/yr).
Which it is.
Myth #10 : Homes should not be considered investments but merely shelter
They are both. Historically, the return on housing has not been that great, surprisingly.
If you had rented since 1981 and put the principal payment in the stock market instead you'd have bigger returns from an S&P fund than most markets.
Myth #1 : Home prices flat or falling is good for future generations
When the current generation is getting utterly destroyed and losing its savings and wealth because of stagnating or falling prices, they cut back on all spending. This results in the retailers and service providers not making enough sales, which then leads to job cuts and low wages, which then leads to further cutting back in spending, and this cycle goes on with vastly decreased hiring and much lower wages. With competition between the current generation and the next younger generation for the few available jobs, lower wages etc, how exactly is this better for future generations? New college graduates are finding it extremely difficult to get jobs. See these links:
http://www.nytimes.com/2011/05/19/business/economy/19grads.html?_r=1&ref=business
http://www.cnn.com/2011/OPINION/05/19/vanhorn.zukin.jobs/index.html?hpt=C1
All the reasoning here is based on the short term fallout from the housing bubble. None of this supports your long term conclusion for the current generation if house prices continue to fall. If anything the economy is starting to come back despite housing.
The run up in housing prices didn't make Americans wealthier anywhere but on paper. In the short term the current generation is paying the price for spending or cashing in on much of that paper wealth. In the long term the younger generation will be better off when they aren't devoting such a huge portion of their income to one asset. The spending will return, and it will be much better for the younger generation if that spending doesn't come from housing debt.
Welcome to 2006, ladies and gentlemen. What part of "unsustainable" don't you understand?
Wow. This is such a load of crap, it's not even worth "debunking". You need to go to school and take economics 101, for starters. What a clown!
the person writing this is incredibly stupid, or the author is hoping the reader of this tripe is incredibly stupid, but probably both.
WOW! A Chinese guy just knocked on my door and said he will trade me my house for his house in Zhengzhou that is worth $5 million!
My father is a contractor and recently, all his clients have been from overseas. They buy (in cash) and hire him to renovate.
The MLS has now integrated some features for international buyers.
Seems the farmers from China have been listening to your advice. Plant potatoes!
klarek
2011 May 26, 12:23am
This might be the dumbest thread ever made on Patrick.net. It couldn't be more filled with false equivalencies and NAR-like propaganda had it been written by Lawrence Yun himself.
FortWayne
2011 May 26, 12:43am
RobSTL you are just trolling man, it's pretty obvious when you say there was "no housing bubble".
HousingWatcher
2011 May 26, 1:19am
"This might be the dumbest thread ever made on Patrick.net. It couldn’t be more filled with false equivalencies and NAR-like propaganda had it been written by Lawrence Yun himself."
So then discredit the post point by point instead of taking the easy way out.
WOW! A Chinese guy just knocked on my door and said he will trade me my house for his house in Zhengzhou that is worth $5 million!
My father is a contractor and recently, all his clients have been from overseas. They buy (in cash) and hire him to renovate.
The MLS has now integrated some features for international buyers.
Seems the farmers from China have been listening to your advice. Plant potatoes!
Gotta love American; when stupid runs out of steam here, stupid from overseas comes a knocking.
klarek
2011 May 26, 1:28am
So then discredit the post point by point instead of taking the easy way out.
It's already been discredited above. He had two semi-decent/truthful points, and a lot of realtor bullshit. Not worth wasting an hour to shoot down propaganda points that have already been torn to shreds.
"Myth #1 : Home prices flat or falling is good for future generations"
Depends on what "future" generations we're talking about. If we're talking about people who bought homes way over their heads- then yeah- I would agree that falling bubble home prices is bad- for them- because they bought in a false economy. If we're talking people like me and my wife who elected not to play during the housing bubble then yes- falling home prices are a GREAT thing and personally I hope they continue to fall.
"Myth #2 : Home prices rising is bad for the economy"
Its a bad thing primarily because in a few short years the US went from being an economy based more on actual economic production to one that relied almost exclusively on housing debt- which is non productive. This in turn helped to further drain the pockets of the middle class.
Myth #3 : There is low inflation in the USA"
This one I agree with.
"Myth #4 : There was a huge home price bubble in the USA"
Given that my wife and I make close to 200k and were basically priced out of the market where we live is a perfect indication of the existence of a huge bubble. I think the bubble was the frothiest in a great many of the primary 1st tier cities-aka- Boston, NYC, Chicago, SF, LA, SD, and so on. Some areas were cheaper. But the bottom line is that the lion's share of our most economically productive cities were in a huge bubble. Such was the case that there are now a whole slew of rapidly growing 2nd tier cities like Austin, Raleigh, and so on- cities that are attracting a lot of younger families primarily because the 1st tier cities are too pricey.
"Myth #6 : Home prices collapsed in the USA because they had become too unaffordable"
Given that in 2006 as much as 70% of all houses being bought in the Bay Area were using some sort of exotic loan product tells you that prices had not only become unaffordable, but that the only way most people were buying was by using loan products that today no longer exist. If anything, exotic loans inflated prices far beyond even extreme fundamentals. This is why the crash has been especially painful because prices not only had to fall back below levels prior to the introduction of exotic loan products, but they are now falling back to pre-bubble levels in addition to that.
"Myth #7 : Median home prices should be at most 3 times the median income to be affordable"
At the height of the bubble prices were 9 times median income in the Bay Area- or about 3 times as much as the maximum recommended multiplier used for the better part of 100 years. Why that measurement should suddenly increase is beyond me.
"Myth #8 : Jobs recovery will lead to a housing recovery"
The US needs to re-evaluate how it grows its economy. It can't always be about housing because that means growing an economy off the debts and backs of the middle class- which as previously mentioned was already drained of their wealth from the bubble. That scheme isn't going to work unless we get back to having real and meaningful, productive, profitable jobs that puts money back in our pockets. Until that occurs there will be no real housing market recovery- which as far as I'm concerned is fine and dandy. I hope housing stays flat for decades.
"Myth #9 : Renting is cheaper than buying in the USA"
Really depends on the city. I'm paying under $2,000 a month for a 4 bedroom house that would cost me close to $4,000 a month in house payments if I were to buy it.
"Myth #10 : Homes should not be considered investments but merely shelter"
Housing is nothing more than a liability. Very few of today's richest people got rich selling houses back and forth. Most invested in the stock market or worked for companies creating profitable products. Anyone that claims real estate is where its at obviously doesn't know econ 101 and the fact that nation-wide, real estate at best tends to appreciate around 3-4% annually over the long term versus stocks that tend to gain 7-7% annually over the long term. $100,000 invested in stocks will make you a richer person faster than sticking it in a wooden box. Yet because buying houses gives people fuzzy feelings they buy them as "investments".
So indeed- about the only thing a house does is keep your crap dry and give you a place to eat and sleep. If we buy a house its only purpose will be those above things. Oh- and to keep my various collections of weird antiques from getting wet.
HousingWatcher
2011 May 26, 1:33am
"That scheme isn’t going to work unless we get back to having real and meaningful, productive, profitable jobs that puts money back in our pockets. Until that occurs there will be no real housing market recovery- which as far as I’m concerned is fine and dandy."
And if that happens one day you and your wife will lose your jobs along with everyone else. Be careful what you wish for.
And if that happens one day you and your wife will lose your jobs along with everyone else. Be careful what you wish for.
What I'm saying here is that we need to switch our economy back to one that isn't reliant almost entirely on debt. The tech and housing bubble were mere coverups for the underlying problems we currently have- which is the existence of a non-productive economy. Housing should never be the primary driving force behind an economy.
HousingWatcher
2011 May 26, 1:53am
"What I’m saying here is that we need to switch our economy back to one that isn’t reliant almost entirely on debt."
I agree. But that is never going to happen.
Â¥
2011 May 26, 2:16am
I’m paying under $2,000 a month for a 4 bedroom house that would cost me close to $4,000 a month in house payments if I were to buy it.
For a $600,000 home with 3.5% down a 3.25% 5-year ARM the PITI is $3700 but the actual after-tax cost of interest, PMI and property tax is around 70% of 3.25 + 1.15 + 1.2 or ~4%, so the rough rent-equivalent here (not counting maintenance and upkeep) is under $2000/mo!
hmm, I now think the 5/1 FHA ARM is a pretty decent way to go, if home prices don't tank from here, since for this decade I think we'll only see higher treasury rates in response to wage and house inflation.
With a $10T national debt the PTB simply can't afford to raise rates. It's going to have to be an exogenous event, and in that case, there's always the option of letting the bank have the house back.
klarek
2011 May 26, 3:02am
For a $600,000 home with 3.5% down a 3.25% 5-year ARM the PITI is $3700 but the actual after-tax cost of interest, PMI and property tax is around 70% of 3.25 + 1.15 + 1.2 or ~4%, so the rough rent-equivalent here (not counting maintenance and upkeep) is under $2000/mo!
Are you actually arguing that a $600k house will cost less than $2000/mo if you bought it? Lay out your shoddy math more clearly if that's the case.
I now think the 5/1 FHA ARM is a pretty decent way to go
You've moved from one indefensible position of "low down payments are good" to defending FHA ARMs. You're on a roll.
has nobody yelled out TROLL yet??
come on, no one posts this crap on this sort of a website and expects to NOT get hung
For a $600,000 home with 3.5% down a 3.25% 5-year ARM the PITI is $3700 but the actual after-tax cost of interest, PMI and property tax is around 70% of 3.25 + 1.15 + 1.2 or ~4%, so the rough rent-equivalent here (not counting maintenance and upkeep) is under $2000/mo!
-Of course... maintenance and upkeep not being figured in is a significant thing. Last time I checked its around $20,000 for a new paint job, around $30,000 or more for a new roof , and at least 100k for anything major to be done to the foundation. Oh- and don't forget that in many cases the NIMBY laws will prevent you from doing certain things to your home anyway. There is absolutely no way I will ever use an ARM. Using an ARM probably means you shouldn't be buying to start with.
Buying a $600,000 house means you're going to be out at least $4,000 a month if not more. The house in question would be a starter home too. I can buy a nice old house in Austin- a house with character and within walking distance to downtown- for under $200,000. I have no plans on buying in the Bay Area or California.
Rising home prices and inflation helps wipe out loans
Not really. In order for rising home prices to wipe out loans, you have to *sell* the house and keep the proceeds.
If you take out a home equity loan to pay off other loans, you are still in debt, and you owe more money for housing so you spend less on other stuff. If you buy another house with debt, you're still in debt, and you owe more money for housing, so you spend less on other stuff.
If you sell the home, invest the proceeds, and rent, then you are not in debt and have money to spend on stuff other than housing.
Debt is not wealth.
Regarding myth buster #8 : As home values rise, home owners feel wealthier, and spend on goods and services, leading to the retail sector creating jobs. As home values fall, the opposite happens as evident over the past 5 years in the USA. People spend less, and retailers cut jobs. Not sure why this is not obvious.
Confidence is not the same thing as wealth. The fact that people aren't saving because they think their paper winnings on their house might save them is not a good thing. Again, until you sell, you have nothing.
Roofing for 30K, try 5K in San Francisco.
Depends on the roof and the materials. In San Francisco, many houses tend to be tall but not huge in land area, so they have less roofing area. However, even $5K is a lowball. The permitted costs I've seen in SF are $8-10K, and permitted costs usually underestimate the true cost.
klarek
2011 May 26, 3:39am
As home values rise, home owners feel wealthier, and spend on goods and services, leading to the retail sector creating jobs. As home values fall, the opposite happens as evident over the past 5 years in the USA. People spend less, and retailers cut jobs. Not sure why this is not obvious.
So we should fool people into feeling wealthier than they really are? We should manipulate the market to give them phony equity, manipulate them to spend indiscriminately?
I have a better idea: people should spend what they have and on things they actually want and need. Their house should be worth what somebody else is willing to pay (not what the govt is bribing them to pay), and their equity should be derived from that price minus what they paid for the house plus their down payment and principal payments.
These simple, low-risk, fiscally sane, old-school concepts are offensive to those who subscribe to the tenets social engineering and psychological manipulation of the plebs.
Are u a contractor?, heck no.
20,000 for paint job. 500 cost, 19,500/50 hrs = 390 hours to paint? 49 man/days? I’ve never seen a paint job that takes more than 10 man/days.
Roofing for 30K?, umm I paid 3K for labor and bought my own materials (less than 2K).
Believe it or not I used to sell paint for a living so I have some experience in that area. You figure a decent quality exterior paint is going to cost you around $40 per gallon. Figure the average 2-3 bedroom house is going to need around 20 gallons of paint minimum, or $800. Most decent painting contractors are going to do a lot of prep work- meaning scraping, priming, etc etc. These days you have to use a lot of precautions such as setting up barriers, collecting paint chips, and so forth. One of our contractor buyers had a year's worth of work and on average charged between $12,000-$20,000 per house. He did good quality work. That isn;t to say you couldn't just hire a fly-by-night contractor to come in and spray the whole house. A house across the street from me was flipped during the bubble. They came in and sprayed the whole thing- no prep or cleaning. House looked good for about a year. Now it looks like crap.
Actually for the right buyer using traditional 20% down prime floating rate, it can be as low as 1,500 per month including about 200/month in upkeep.
480,000 * (3.25+1.25) * 67% = 14,472
14,472 /12 = 1,206
Insurance 100
Maintenace 194
1,500
... so we're talking about the absolute best-case scenario with a $100,000 down payment? Well sure- why not throw in $200,000 then it'll be even cheaper. Seriously. 100k for a down payment? I can think of about 100 different better things that I could do with 100k... like buying a 150k house in TX for instance instead of putting a down payment on some overrated starter home in the Bay Area.
Â¥
2011 May 26, 4:05am
Are you actually arguing that a $600k house will cost less than $2000/mo if you bought it? Lay out your shoddy math more clearly if that’s the case.
I'd be happy to.
$600,000 house, 3.5% down 4.3% FHA, $579,000 starting principal
Over 30 years:
P&I: $997126 ($2865 x 360) less $579,000 principal leaves $452,500 in total interest costs.
8.5 years of PMI ($6660/yr) is $56,600, for a total interest cost of $509,000. Add in the 1.25% property tax ($7500/yr, $225,000 total) we get a rough cost of ownership of $734,000.
This is all tax deductible, so net the 35.2% tax benefit this is down to $476,000 in total interest and taxes, or $1320 per month on average.
Adding in other ownership costs:
Insurance: $1350/yr
Utilities: $1200/yr
Maintenance Accruals: $2100/yr
that average out to $400/mo this brings the TCO of the $600,000 house to $1720 per month on average over the life of the loan.
If we take out 15 year loan the interest rate falls to 3.5%, PMI payments fall to 3.25 years, this average per-month expense falls to $1500/mo over the first 15 years.
Beats renting!
Â¥
2011 May 26, 4:08am
Buying a $600,000 house means you’re going to be out at least $4,000 a month if not more.
This is counting principal repayment, making this a deceptive comparison.
I actually made this mistake in 2000-2001, deciding to remain renting for $800 instead of taking on a $2500 mortgage payment like I should have.
None of this matters to me. A $600,000 house is still absolutely loonie and there is no way in hell I will ever spend that kind of money on a wood box since that's a good waste of money that earns me more money in investments and stocks. I actually make enough to buy a $600,000 house if I wanted but it goes against my principle. Of course many think its just a swell idea and I'm sure there are many little tricks that can be made to somehow get those payments down ( I'd like to see that) below renting. All I know is that it's not going to be that much longer before we can move out of here and buy a house for cash in a cheaper state and basically have zero debt and lots of retirement savings. Maybe all of the folks who think 600k for a house is a steal will remain here.
Oh- and by the way- I actually LIKE renting. I've got a big back yard, a nice house, garage, live in a safe neighborhood, pay below average rent AND I can pack up and move anytime I want. Sure beats owning!
I actually made this mistake in 2000-2001, deciding to remain renting for $800 instead of taking on a $2500 mortgage payment like I should have.
Your mistake was not renting for $800. Your mistake was not saving $1700/mo in a bank account, and spending it instead. Housing functions as forced savings, but it's not efficient forced savings.
Btw, 30-year fixed rates through a lot of 2000 were above 8% (up to 8.5), so you're talking about a $300K house back in 2000? What does that same house cost now?
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I am not a realtor, just a patriotic American middle-class citizen with a wide international perspective, as I have lived in Asia and Europe for many years. I am one of the few people that believes that housing in the United States is ridiculously undervalued, and always has been, when considering size, quality, features, surrounding infrastructure, median income, etc. I believe that the collapse in housing prices over the past few years has been the most major factor in destroying the American economy, and fear that our great country is stuck in a death spiral. I honestly believe that the housing collapse has hurt the middle class the most. I present these myth busters below purely from an honest discussion and debate perspective, and hope to wake up the masses to the reality of housing within and outside the United States.
Myth #1 : Home prices flat or falling is good for future generations
When the current generation is getting utterly destroyed and losing its savings and wealth because of stagnating or falling prices, they cut back on all spending. This results in the retailers and service providers not making enough sales, which then leads to job cuts and low wages, which then leads to further cutting back in spending, and this cycle goes on with vastly decreased hiring and much lower wages. With competition between the current generation and the next younger generation for the few available jobs, lower wages etc, how exactly is this better for future generations? New college graduates are finding it extremely difficult to get jobs. See these links:
http://www.nytimes.com/2011/05/19/business/economy/19grads.html?_r=1&ref=business
http://www.cnn.com/2011/OPINION/05/19/vanhorn.zukin.jobs/index.html?hpt=C1
Myth #2 : Home prices rising is bad for the economy
There is ample proof around the world to prove this to be a complete and baseless myth. Countries with the most absurd housing price appreciation and bubbles in the past 30 years like India and China, are flourishing with high GDP growth, wage increases etc. Countries where home prices have stagnated or fallen over the past 30 years like in the USA and Japan have collapsed. Enough said...
Myth #3 : There is low inflation in the USA
Food and energy prices have gone up in the past few years considerably. The dollar has lost value against almost all foreign currencies, so assets should be priced higher. Gold is a far better indicator of inflation/falling currency values, and gold has gone up 6 times in the past 10 years, while home prices are now at or below 2000 levels. Even per Case/Shiller, home prices need to at least keep up with inflation. By faking extremely low inflation numbers, the government and economists with ulterior motives have claimed housing to have risen more than inflation. The truth is that house prices have vastly underperformed inflation, and housing in the USA is vastly undervalued compared to the rest of the world.
Myth #4 : There was a huge home price bubble in the USA
See Myth #3 above. Bubbles are relative. The most absurd housing bubbles are in India and China, and not in the developed world. The median single family home price in India's and China's metros is currently over 1 million USD, though the local median annual income in those metros is less than 5000 USD, so it is a median home to median income multiple of 200 in these Asian metros, compared to less than 8 in the United States "bubble" metros even at the peak of the housing price in 2006. Home prices have appreciated about one thousand times (100000.00%) in the past 30 years in India and China, compared to about 3 times in the United States during the same period. Also, these million dollar homes in India and China are extremely small, with no luxury features, and utter squalor all around. When comparing, size, quality, features, surrounding infrastructure and beauty, homes in the USA are unbelievable and absurdly cheap compared to every other country in the world.
Myth #5 : Home price appreciation increases inequality
This is true only in the developing world where only a small percent of the population owns homes. In developed countries where the majority owns homes, the middle class benefits quite a bit from rising home prices. What is happening in the USA now is that the middle class that owned most of the homes is hurting extremely badly from falling home prices and middle class families are getting out of home ownership, while the rich are picking up foreclosed homes at unbelievably low prices and renting them out to the already suffering middle class. The intentional home price collapse in the United States is a conspiracy to transfer massive wealth from the American middle class to the ultra-rich and to buyers from India and China, who can easily buy dozens of luxury homes in America if they sell their small apartments in their Asian metros.
Myth #6 : Home prices collapsed in the USA because they had become too unaffordable
See above myth busters. Homes prices never became "unaffordable" in the USA, especially compared to the rest of the world. What actually happened was that low-income people were allowed to buy dream homes that they could never afford in the first place, thanks to lax lending from banks. As Warren Buffet said recently, it should not be America's social goal to get every family into their dream home, but into a home that they can afford. Housing, especially luxury housing, is not an entitlement, and to expect that palaces of gold should be easily affordable to even the lowest income families is just self-destructive socialistic agenda.
Myth #7 : Median home prices should be at most 3 times the median income to be affordable
This myth/expectation is just plain laughable because the advocates of this multiple never define what the median home is. Should we not divide this at least into apartments, low end homes (1000 sqft or less), middle tier homes (1000-2000 sqft), high end homes (2000 sqft+), and super luxury homes first before we talk about what should be affordable? Then, if the median income cannot easily buy even the apartment or low-end home, you can state the case of unaffordability. Also, how are mortgage rates not part of the calculation of this affordability multiple? Why should this multiple remain "3" whether the mortgage rate is 20% like it was in the 1970s or 4% like it is now?
Myth #8 : Jobs recovery will lead to a housing recovery
Based on all the myth busters detailed above, it is actually the other way around. Jobs follow only when housing is strong and people feel the wealth effect. So long as housing prices keep falling or stagnate, there will never be a true jobs recovery in America.
Myth #9 : Renting is cheaper than buying in the USA
While this may be true in a few places, in most American cities, it is now far cheaper to buy a home than to rent it. Low prices and very low mortgage rates have led to this situation, which is a boon for rich landlords. Rents are also going up in most cities as foreclosed families begin to rent. Beware the bloggers who want median home prices to fall even more from their currently already extremely cheap levels. The goal of these bloggers is to buy those at rock-bottom prices and become very profitable landlords.
Myth #10 : Homes should not be considered investments but merely shelter
State this to any of the billions of people outside the United States and they will kill themselves laughing. Homes have and continue to be the biggest purchase made by most families in the world, throughout history. They are not fools to make it their biggest purchase if it is going to cause them to lose their hard earned wealth.
I know a lot of bloggers on this site will come out attacking my myth busters above. I welcome a civil debate, but please stay away from the needless name-calling, especially if you have nothing to contribute.
#housing