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I don't give Zillow too much credibility. The value is very close to what my house appraised for two months ago. It is nice to see the values rise.
It is, why? If you are planning to move up to a bigger house, that next house will be that much more expensive, you've lost ground.
I never understood why people continually repeat the mantra that home prices rising are universally a good thing. Its only good if you plan to sell and move somewhere cheaper. If your house rises in price, while the next one you plan to buy declines, then you are ahead. Otherwise you are deeper in debt, paying more for the "move up" item, paying more in taxes, insurance, etc. Rising home prices are a generational transfer of wealth from the young to the old.
A 20% rise on a 300K home gets you 60K, but if you move up to what was a 500K home, its now a 600K home. You are behind and would have been better off to have bought the most expensive home right from the start. Of course, you'll be hoping for the next greater fool to buy your now 600K home at 750K, and so forth and so on. As bubble blows.....
It is, why? If you are planning to move up to a bigger house, that next house will be that much more expensive, you've lost ground. I never understood why people continually repeat the mantra that home prices rising are universally a good thing. Its only good if you plan to sell and move somewhere cheaper. If your house rises in price, while the next one you plan to buy declines, then you are ahead. Otherwise you are deeper in debt, paying more for the "move up" item, paying more in taxes, insurance, etc. Rising home prices are a generational transfer of wealth from the young to the old. A 20% rise on a 300K home gets you 60K, but if you move up to what was a 500K home, its now a 600K home. You are behind and would have been better off to have bought the most expensive home right from the start. Of course, you'll be hoping for the next greater fool to buy your now 600K home at 750K, and so forth and so on. As bubble blows.....
Thanks for brining this up, Zephyr. I've been biting my own tongue because I didn't feel like arguing with people about it, but I totally agree. Whenever I hear about rising real estates value, I think, "oh great… same house, more tax". And it used to be a lot worse before I owned a home because I saw myself getting closer and closer to getting priced out while older guys on exclaimed, "Good News!". Also, like you said, even if you are in a position to profit from it, is just means that your next house will be that much more too. I honestly don't know why that sort of thinking is so universal. It benefits a few people who are in the market for profit and had good timing or older folks who bought decades ago in high-growth markets and actually WANT to sell and move to a lower cost geo. (but if you added up all the inflating prop. taxes they paid against it for all those years, it may not seem like that much of a profit for them either) For everyone else, it seems like they just like the IDEA that their house is worth something because it makes them feel good. It all goes back to greed again, IMO. People want to know that whatever they have is worth the most it possibly can be whether that's actually beneficial or not.
Incidentally, I think the same thing when I hear a weather forecaster saying: 'Good News: it's gonna be hot, dry and sunny AGAIN this week…" HOW IS THAT GOOD NEWS? Good news is a foot of snow or a couple inches of rain every day, day after day, for 8 months out of the year. And then you can really enjoy the nice weather when it comes because it means the whole place isn't about to dry up and blow away. Honestly, people have no idea what's actually good for them.
It is, why? If you are planning to move up to a bigger house, that next house will be that much more expensive, you've lost ground.
I never understood why people continually repeat the mantra that home prices rising are universally a good thing. Its only good if you plan to sell and move somewhere cheaper. If your house rises in price, while the next one you plan to buy declines, then you are ahead. Otherwise you are deeper in debt, paying more for the "move up" item, paying more in taxes, insurance, etc. Rising home prices are a generational transfer of wealth from the young to the old.
A 20% rise on a 300K home gets you 60K, but if you move up to what was a 500K home, its now a 600K home. You are behind and would have been better off to have bought the most expensive home right from the start. Of course, you'll be hoping for the next greater fool to buy your now 600K home at 750K, and so forth and so on. As bubble blows.....
I personally think that rising home prices are generally bad all around. The higher the home prices get, the less amount of people can afford them. We have our current generation of high school/college kids who are never going to be able to afford a house. This causes them to finance huge sums of money just to have a house. This stretches them thinner and in turn gives them less expendable money to put into the economy.
I'm not saying the million dollar homes should be 100,000, but when your average home 3/2, 1500 sqft, are selling for over 300,000, how many true middle class families can afford this.
Now lets think about the rental market on houses. People who rent will look at the value of their home and generate a rental amount based on the value. They won't look at their actual mortgage amount.
I'm really worried to see how the market will be in about 20 years. I wouldn't be surprised if it turns into a China type atmosphere where you have people living in dorm-like settings being provided by their employer.
I think one missing factor is interest rate. What if you have a current loan of $250,000 at 7% and you could trade up to a $300,000 loan at 4.0% you could save $200 a month.
I think one missing factor is interest rate. What if you have a current loan of $250,000 at 7% and you could trade up to a $300,000 loan at 4.0% you could save $200 a month.
True, but by the same token you could just refinance the same $250k loan and save $310 a month. You are correct that interest rates are important, but so is principal. There's a structural danger in letting prices float upwards just because rates are low.
The low rates certainly are part of what is sustaining current prices and even price growth despite an economy that's fairly stagnant in terms of income. If incomes don't rise when rates finally push back north of 5-6%, it's going to be another squeeze on the housing market.
Average buyers will no longer be able to afford the monthly payment at the new current prices, and sellers will go back into the same shell we've seen the past 4-5 years of just holding properties off the market hoping the trend comes back around in their favor.
Ironically many sellers will eat ongoing year-year losses in maintenance/tax etc. to avoid acknowledging a large single loss in the sale. Meanwhile buyers/renters will suffer because supply is 'artificially' suppressed. That's not exactly a healthy market dynamic for the typical buyer or seller.
I think one missing factor is interest rate. What if you have a current loan of $250,000 at 7% and you could trade up to a $300,000 loan at 4.0% you could save $200 a month.
I see what you are saying, but a couple of problems. If home prices are rising, you going from a 250K loan to a 300K loan, probably buys you LESS house, but more debt. As another poster responded, just refi the existing debt and pocket the savings.
Two, pretty much everyone who could refi, has at this point, so nothing more to gain, and if a gain in price is all interest rate driven, they many people who just bought will be in a bad spot once rates decline, or even stay stagnant since we hit 3% lows already. There just isn't any more rate "umph" to keep driving up prices.
Three, if you are desiring to "move up", your new house will cost MUCH more than before because the same percentage gain on a larger house equates to MUCH more actual dollars owed. You've lost out by not going full bore and getting the biggest most expensive house you could possibly get, which is sadly what many people did in the last great real estate run up (the last bubble)
In a rising market, you are better off to just buy the most expensive, biggest house you can possibly qualify for since you will make far more money getting a gain on a higher priced property.
In a rising market, prudence and restraint are penalized, which is why bubbles grow and grow till they pop. The cycle continues, but in the end, most people, especially younger people are poorer because of it.
Unfortunately there are so many people incentivized to drive the market to bubble proportions, it is probably destined to go there again. Who are some of the people who want to see it:
The government wants prices through the roof because it means more taxes and fees
Existing owners hoping to sell to greater fools
Realtors generating ever higher commissions
Banks, bigger loans equal bigger fees
Appraisers, interior decorators, etc etc etc.
Of course the problem is that resale Real Estate is a non productive asset class, it is a consumable, it generates no new wealth or products, it takes consumption to sustain and draws from other parts of the economy. It only "helps" the economy through the taking on of debt to fund additional consumable spending. However, as shown above, with that many snouts in the trough, you can see why the mantras are spoken over and over again. The only time new wealth is created is when a NEW home is built on unimproved land. But reselling the same house for 20% (flipping) is simply inflation and while it makes the seller better off, it is a net loss for the economy. You are just paying more money for the same thing.
I bought my house in 1998, it is worth many times what I paid for it. Is that wealth creation? No, it's inflation. I have done about 40K of updates, but my home is nearly $1M more than I paid for it. I pity the next generation who will be life long debt serfs to just get a basic home near centers of employment. We've had a huge fetish for RE ever since the dot com bubble burst. Sadly, the 90's were the last time wages were growing.
Real estate inflation is another insidious form of generational wealth transfer from the young to the old.
Last edited by GoldenZephyr; 11-22-2013 at 02:40 PM..
I bought my house in 1998, it is worth many times what I paid for it. Is that wealth creation? No, it's inflation. I have done about 40K of updates, but my home is nearly $1M more than I paid for it. I pity the next generation who will be life long debt serfs to just get a basic home near centers of employment. We've had a huge fetish for RE ever since the dot com bubble burst. Sadly, the 90's were the last time wages were growing.
Real estate inflation is another insidious form of generational wealth transfer from the young to the old.
I couldn't agree more. Long term studies of RE prices show that the average rate of return on housing is slightly better than inflation. The way to invest in RE is to own an investment property outright and rent it for market rate. Your personal home is not an investment but a large hedge against inflation. A debt serf who choses to live to pay a mortgage that will never end (continually moving up the "property ladder" or uses interest only loans) is a fool.
IMHO, those buying in Denver at the peak, and this isn't it, will be proven fools once again as Denver is a boom-bust town with a government backstop. The last boom in Denver went far longer than I thought it would (it broke in '07 and I thought it would in '05) and didn't flush enough bad debt out of the market. I never really saw new housing starts halt on the east side of town much like they did in Pheonix and for me, that's what was necessary to reset the market.
Denver and Seattle, IMHO, has an unsustainable mortgage affordability and needs to get back inline with incomes. Unfortunately, CO has thrown the door open to CA and all the ills that come with it. They may have gotten what they asked for, one last boom before the bust. Don't squander this one.
I couldn't agree more. Long term studies of RE prices show that the average rate of return on housing is slightly better than inflation. The way to invest in RE is to own an investment property outright and rent it for market rate. Your personal home is not an investment but a large hedge against inflation. A debt serf who choses to live to pay a mortgage that will never end (continually moving up the "property ladder" or uses interest only loans) is a fool.
IMHO, those buying in Denver at the peak, and this isn't it, will be proven fools once again as Denver is a boom-bust town with a government backstop. The last boom in Denver went far longer than I thought it would (it broke in '07 and I thought it would in '05) and didn't flush enough bad debt out of the market. I never really saw new housing starts halt on the east side of town much like they did in Pheonix and for me, that's what was necessary to reset the market.
Denver and Seattle, IMHO, has an unsustainable mortgage affordability and needs to get back inline with incomes. Unfortunately, CO has thrown the door open to CA and all the ills that come with it. They may have gotten what they asked for, one last boom before the bust. Don't squander this one.
While I agree that it is a bad idea to view your primary residence as an investment, saying that Denver's market needs a correction like Phoenix had shows a complete lack of understanding of this market. The run up in pricing in Phoenix was much more dramatic than it was here so the crash was also much more dramatic.
There is too much investment money in Denver right now, and it is making it very hard to find properties with reasonable cap rates, but that doesn't mean that things are overpriced. It just means that there are a lot of investors with a lot of cash and very few safe places to put it. Clearly they are saying that Denver real estate looks like a fairly safe bet.
I think you also make a great point about how to make money from investment property. It's my model, but as I state above, finding that property right now is increasingly difficult.
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