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It seems that the fad these days is the idea that real estate in better neighborhoods such as those with good schools, will appreciate by more each year, even in percentage terms.
But let's think about this for a moment. Let x1 = the price of a house in a mediocre neighborhood today, x2 = the price of the same in 10 years; y1 = the price of a house in a good neighborhood today; and y2 = the price of the same house in 10 years' time.
The 10-year compound (not annualized) appreciation, expressed as a fraction, for house "x" is (x2/x1) - 1. The figure for house "y" is (y2/y1) - 1.
If the idea in the first sentence of this post holds true over the next 10 years, then
(x2/x1)-1 > (y2/y1)-1
With some algebra, and the commonsense assumption that all prices are positive, this inequality implies that
(x2/y2) > (x1/y1)
In words, this means that
(Future ratio of home prices) > (present ratio of home prices).
This can be interpreted as a trend: The ratio of home prices between good/not-so-good areas goes up with time.
This is clearly un-sustainable, because the price ratio cannot keep going up without bound: Is it really plausible that in 50-100 years, homes in good neighborhoods in the same city will be (say) 40X the value compared to those in mediocre areas, even if the ratio today is (say) 2.5:1?
Think about what type of future economic inequality that would imply.
So the fad mentioned in the first sentence of this post seems to be essentially a high valuation of future neighborhood inequality, and by extension, income inequality.
AKA an inequality bubble.
What am I missing?
Last edited by ncole1; 05-16-2015 at 08:04 AM..
Reason: typo fix
Not everyone is chasing the same neighborhood characteristics. For example, childless couples aren't going to fixate on good schools unless they plan to have kids in future. To the extent employment is dispersed, those seeking proximity to work will have multiple target neighborhoods. To the extent other things are equal, a lower-priced neighborhood will attract buyers.
In that context, yes, a soaring neighborhood price rise is unsustainable because those soaring prices detract from the neighborhood's attractiveness to new buyers. Every homebuyer has SOME price differential they're not going to (or be able to) pay.
i.e. if neighborhood A is regarded as an '8' and neighborhood B is regarded as a '7', every homebuyer has SOME price differential they are unwilling to pay.
e.g. if neighborhood A costs $20,000 more than neighborhood B, many buyers would be happy to pay the extra $20,000 to live in A, while if neighborhood A costs $200,000 more than neighborhood B, most buyers would be unwilling to pay $200K more for neighborhood A, and would be content to buy a home in B.
Neighborhood home pricing does not exist in a vacuum, and home prices in a neighborhood can continue to rise only as long as homebuyers are willing and able to pay it.
the math only works because you choose y2 and y1, and x2 and x1... if you called them a,b,c,d with no numbers attached to it, you can't really say (c,d)>(a,b)... the numbers are just there to "mislead" into thinking y2 is larger than y1 because 2>1 but you weren't using the numbers to indicate that the future house is twice as expensive as today house.
Quote:
With some algebra, and the commonsense assumption that all prices are positive,
If your assumption that all price changes are positive, then yes, things get more expensive... You'll end up with prostitution inequality too, because they want more, and food inequality, and water inequality, and hey I can sell you air in a can, how about air inequality (aka look at air quality in US vs China, that's an inequality too)
and yes, population density does drive up prices, have you seen the million dollar "flats" in Asia/Europe/NY? Sure, there is going to be inequality... how do you want to fix it? Cram more people into the same square foot? You can't, not really... It's either, they develop more land or build higher/or underground. Guess what, the richer guys will want the top of the "building" and will pay for it.
So you aren't really "missing" anything, you are just now learning that the people pay for what they want (including the rich), and that in turn increases prices... you know, how economics work. You're just upset because you aren't one of the rich? Is that what your inequality is about? Or do you want to run the people with money out of the area? That doesn't do the area any good either. Even if eveyone had the same amount of money, you can't fit 100 people into the same house even if all 100 can pay for it.
It seems that the fad these days is the idea that real estate in better neighborhoods such as those with good schools, will appreciate by more each year, even in percentage terms.
Certainly no hard and fast rule about that. Some important factors I can think of are:
The current price delta.
The current difference in quality.
The importance of those differences.
Wealth/income demographics.
Transportation.
Age demographics.
The future change in these factors.
For the last few decades we've been experiencing a large increase in income disparity, which has favored the best neighborhoods, but will that persist? Will it get more extreme or less? How about the % of households with school age children and the number of kids?
I tend to think it will make little difference somewhere in the middle range. Predicting the future is not easy.
Certainly no hard and fast rule about that. Some important factors I can think of are:
The current price delta.
The current difference in quality.
The importance of those differences.
Wealth/income demographics.
Transportation.
Age demographics.
The future change in these factors.
For the last few decades we've been experiencing a large increase in income disparity, which has favored the best neighborhoods, but will that persist? Will it get more extreme or less? How about the % of households with school age children and the number of kids?
I tend to think it will make little difference somewhere in the middle range. Predicting the future is not easy.
My sense is that as the best neighborhoods are bid up, gentrification expands spatially because not everyone can move into the best neighborhoods.
i.e. as top-tier neighborhoods soar out of reach, those priced out will move into second-tier neighborhoods etc. Portland is so hot right now that gentrification is expanding into unexpected neighborhoods.
the math only works because you choose y2 and y1, and x2 and x1... if you called them a,b,c,d with no numbers attached to it, you can't really say (c,d)>(a,b)... the numbers are just there to "mislead" into thinking y2 is larger than y1 because 2>1 but you weren't using the numbers to indicate that the future house is twice as expensive as today house.
What???
Ok, fine, instead of y2, y1, x2, and x1, I will use a,b,c,d (respectively). It makes no difference.
(c/d) - 1 > (a/b) - 1
Add 1 to both sides:
c/d > a/b
Multiply both sides by d:
c > ad/b
Divide both sides by a:
(c/a) > (d/b)
which is the same as I had before when I said
(x2/y2) > (x1/y1).
Quote:
Originally Posted by eyeb
If your assumption that all price changes are positive, then yes, things get more expensive...
Uh, no!!! It only requires that d > 0 and that a > 0 , so that the sign of the inequality under multiplication by d and division by a remains the same.
Quote:
Originally Posted by eyeb
You'll end up with prostitution inequality too, because they want more, and food inequality, and water inequality, and hey I can sell you air in a can, how about air inequality (aka look at air quality in US vs China, that's an inequality too)
and yes, population density does drive up prices, have you seen the million dollar "flats" in Asia/Europe/NY? Sure, there is going to be inequality... how do you want to fix it? Cram more people into the same square foot? You can't, not really... It's either, they develop more land or build higher/or underground. Guess what, the richer guys will want the top of the "building" and will pay for it.
So you aren't really "missing" anything, you are just now learning that the people pay for what they want (including the rich), and that in turn increases prices... you know, how economics work. You're just upset because you aren't one of the rich? Is that what your inequality is about? Or do you want to run the people with money out of the area? That doesn't do the area any good either. Even if eveyone had the same amount of money, you can't fit 100 people into the same house even if all 100 can pay for it.
All of these remarks are totally beside the point and irrelevant.
i.e. as top-tier neighborhoods soar out of reach, those priced out will move into second-tier neighborhoods etc. Portland is so hot right now that gentrification is expanding into unexpected neighborhoods.
Right, eventually some kind of pseudo-equilibrium will be achieved, and newly improved areas may surpass the old ones if they develop more desirable features.
Gentrification only works in a town that is popular and growing. Take Detroit for instance. You need an influx of people with money (or just money) to drive that appreciation.
I'm not sure how far the ratio will keep increasing, but I don't think we're near the end of it yet.
If anything, desirable areas are often becoming more desirable, and worse areas less desirable. How big this delta gets is debatable, but I don't see the overall trend changing for the foreseeable future.
I'm not sure how far the ratio will keep increasing, but I don't think we're near the end of it yet.
If anything, desirable areas are often becoming more desirable, and worse areas less desirable. How big this delta gets is debatable, but I don't see the overall trend changing for the foreseeable future.
It's just driven by growing income and wealth inequality. As long as that continues to grow, the neighborhood inequality will as well. Of course, that's absent any other changes. With civil unrest being pretty tense right now with low-income areas like Baltimore and Ferguson rioting, it's just going to make those areas even less desirable. Bad time to be a home owner or real estate agent in Ferguson. Values are plummeting as the residents destroy the city and houses aren't selling. Same thing happened in Watts/Compton and it took decades to recover.
That's going to have a different impact somewhere like St. Louis where the county population has flat. It's relatively easy to up and leave a dying area like Ferguson. Somewhere like Oakland that's harder to do.
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