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If the price of gasoline or food, or even college dropped 20%, most of us would be overjoyed.
So why is it considered a catastrophe when housing prices drop?
Isn’t it funny how falling home prices are automatically assumed to be a bad thing? Yet a decrease in food prices, college, and gasoline would be good?
We have been systematically taught that housing is a good investment and that prices must go up. Ask your parents why they bought their house. One of the top 3 reasons will almost certainly be, “It was a good investment.” However, for many people in many situations, it is not. In fact, housing is can be a terrible investment. It shouldn't be looked at as an investment, it is shelter. No more than a car should ever be purchased as an investment.
Yet the illusion persists, whether it’s people begging to buy a million-dollar house with no research, or people saying things like, “I wish I’d bought more real estate” after incurring a paltry 1.2% return rate over several decades.
As a result, you get media reports that implicitly echo the cultural assumption that housing is a good investment. The way they describe the housing market — oops, “housing recovery” — influences and reflects our cultural assumption. Let’s take a look at a headline from a major national news publication:
"Housing prices rise by highest percentage ever. More news that the housing market is recovering."
Interesting…it’s a “housing recovery” when prices are getting expensive. Would you say that with toothpaste?
Also interesting: Why is it a painful decline when young people and other first-time buyers get more affordable housing, lower their debt burden, have more discretionary income not tied up in servicing mortgage debt?
What if we discard the assumption? Let’s try the following:
prices are become more out of reach for young people. Young paying their future earning to the old.
Or…prices reach a new level of expense, draining families of income for things like education, heath care and spending.
Affordability declines for first-time homebuyers.
As Warren Buffett said in his 1997 Chairman’s Letter to Shareholders,
“If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.
This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
For young people, every time the market goes down, you should be cheering for your own individual finances. You can acquire investments at lower prices and you have a long time for the market to grow.
Yet, paradoxically, lower housing prices do represent a clear risk to the American financial system, whose growth is predicated on consumer spending, which is in turn strongly influenced by housing prices. That’s why this obsession is so serious and confusing to many. Lower home prices actually increase discretionary spending. (Excluding foolish HELOC induced lifestyles of course)
Just because virtually every media presentation celebrates the “rapid increase” in housing values doesn’t mean that applies to you. “Higher house prices = good” is a cultural assumption and a very negative one indeed.
And it's not good for the long-term health of the economy. A rapid rise in real estate makes it unaffordable for first time buyers and encourages risky lending and speculation. Plus, it's just another sign that your economic growth in your economy is extension of credit, consumption and little else.
If you look at the real-estate markets that fared best in the housing bubble collapse you'll also see metro areas that didn't really have to rebound from the recession. That's to say their local economies weren't heavily dependent upon construction for growth.
Gas and food are consumable goods. When they're gone, they're gone. A house is a financial investment. When you're done with it, you can recoup your investment plus hopefully make a profit. Home prices were so low after the crash that lots of people were losing a good chunk of their initial investment, let alone not making a profit at the sale. They need to go back up--not as high as they were--but to a more reasonable level. As more people are getting back into the housing market, demand is going up, and the prices are starting to rise again.
Gas and food are consumable goods. When they're gone, they're gone. A house is a financial investment. When you're done with it, you can recoup your investment plus hopefully make a profit.
Yes, housing relies on what is known as the greater fool theory, and your explanation fully supports that.
Greater fool theory:
The greater fool theory (also called survivor investing) is the belief held by one who makes a questionable investment, with the assumption that they will be able to sell it later to "a greater fool"; in other words, buying something not because you believe that it is worth the price, but rather because you believe that you will be able to sell it to someone else at an even higher price.[1]
It is similar in concept to the Keynesian beauty contest principle of stock investing.
The greater fool theory relies on market optimism and market momentum concerning a particular stock, an industry, sector, or the market as a whole.
If the price of gasoline or food, or even college dropped 20%, most of us would be overjoyed.
So why is it considered a catastrophe when housing prices drop?
Isn’t it funny how falling home prices are automatically assumed to be a bad thing? Yet a decrease in food prices, college, and gasoline would be good?
We have been systematically taught that housing is a good investment and that prices must go up. Ask your parents why they bought their house. One of the top 3 reasons will almost certainly be, “It was a good investment.” However, for many people in many situations, it is not. In fact, housing is can be a terrible investment. It shouldn't be looked at as an investment, it is shelter. No more than a car should ever be purchased as an investment.
Yet the illusion persists, whether it’s people begging to buy a million-dollar house with no research, or people saying things like, “I wish I’d bought more real estate” after incurring a paltry 1.2% return rate over several decades.
As a result, you get media reports that implicitly echo the cultural assumption that housing is a good investment. The way they describe the housing market — oops, “housing recovery” — influences and reflects our cultural assumption. Let’s take a look at a headline from a major national news publication:
"Housing prices rise by highest percentage ever. More news that the housing market is recovering."
Interesting…it’s a “housing recovery” when prices are getting expensive. Would you say that with toothpaste?
Also interesting: Why is it a painful decline when young people and other first-time buyers get more affordable housing, lower their debt burden, have more discretionary income not tied up in servicing mortgage debt?
What if we discard the assumption? Let’s try the following:
prices are become more out of reach for young people. Young paying their future earning to the old.
Or…prices reach a new level of expense, draining families of income for things like education, heath care and spending.
Affordability declines for first-time homebuyers.
As Warren Buffett said in his 1997 Chairman’s Letter to Shareholders,
“If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.
This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”
For young people, every time the market goes down, you should be cheering for your own individual finances. You can acquire investments at lower prices and you have a long time for the market to grow.
Yet, paradoxically, lower housing prices do represent a clear risk to the American financial system, whose growth is predicated on consumer spending, which is in turn strongly influenced by housing prices. That’s why this obsession is so serious and confusing to many. Lower home prices actually increase discretionary spending. (Excluding foolish HELOC induced lifestyles of course)
Just because virtually every media presentation celebrates the “rapid increase” in housing values doesn’t mean that applies to you. “Higher house prices = good” is a cultural assumption and a very negative one indeed.
Because people forget that a home is only an asset at the point at which they sell it. While they are actually living in it, it is a liability. While you're living in a house, rising prices mostly means higher property taxes.
Housing prices should at least keep pace with inflation, and when they do, that's a sign of health in the economy. This doesn't mean that homeowners are hoping to sell a "questionable investment at a higher price to a greater fool." That means that they hope they made a sound enough investment that it kept up with inflation and they didn't LOSE money.
Often "turning a profit" in real estate is nothing more than keeping up with the local and national market and inflation rates. For instance, say I buy a house for $100,000 and in ten years sell it for $200,000 -but then I have to buy another house in the current market, so to buy an equitable home, I need to spend $200,000.
Because it is an investment, so it is good for people who own a house. It isn't good for people who don't own a house.
My house just appraised for 86% of what I bought it for in 1995. That's after $50K of improvements. I would have to say it was a lousy investment if that's what it was. I no longer look at a house as an investment. It's just a place to live. If I stay in mine for another 18 years, I MIGHT get out what I paid into it NOT COUNTING interest and taxes when I sell.
A house is not an investment. It's a place to live. "Owning" just happens to be cheaper than renting. If I rented my house, it would cost me another $400/month.
They push an agenda that bcs they sell an overpriced Mcmansion to a retired dr. that the economys booming again.
Myopia.
Look at some of the state forums, you will see this over and over.
Its like reading Wikipedia to learn about microeconomics. Most realtors are clueless.
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