mead berger shevtsova garfinkle michta grygiel blankenhorn bayles
Money
Housing Is America’s Preferred Wealth-Creating Machine

Since the Spring of 2013, when the overhang of the housing crisis had mostly worn off, Americans have consistently seen real estate as the most productive vehicle for their savings over the long run, according to a new Gallup poll:

Since the 1940s, a central pillar of American social policy has been to make it easier for the average American family to buy a home with a small downpayment and an affordable monthly payment based on a 30-year fixed-rate mortgage. This system has been responsible for the creation of trillions of dollars in assets for middle class and lower middle class Americans, and in most American families housing represents their single greatest financial asset.

One of the causes of the continuing disparity between black and white family net worth is the lingering effect of the redlining and other discriminatory practices that largely excluded African American families from the benefits of federal housing policy for much of the postwar period.

With the large millennial generation now reaching the age of household formation, it’s vital that we make sure that the great wealth-creating machine is ready for them. There are still major obstacles: NIMBY land use policies block too many people out of the housing market. And the country lacks the necessary infrastructure to construct a Third Ring of Suburbs—that is, another wave of housing construction further out from city centers.

This shouldn’t be treated as an afterthought. It is mission critical: The millennial generation needs a seat at the table and a piece of the pie.

Features Icon
Features
show comments
  • D4x

    Aging housing stock is the biggest infrastructure challenge. Those millenials will be buying housing that is structurally unsound, patched up by unlicensed contractors, and a Dodd-Frank reform that incentivizes fraud by sellers, and appraisers. Speaking from the Potemkin housing market bookends of 2006 & 2016.

    • Andrew Allison

      Nah, the biggest challenge is being able to navigate the crumbling roadways to get to the house. There is a problem with housing that is structurally unsound, and/or patched up to look good for a few months, but it’s easily solvable by getting an inspection. I also, perhaps naively, have more faith in independent appraisers that you appear to, independent being the operative word.

      • D4x

        Inspectors can not find structural failure that the Seller fails to disclose. Or other mysteries that …never mind. This thread is a big trigger.

        • Andrew Allison

          Of course they can, that’s their job and, like appraisers, if they fail, their out of it. Furthermore, undisclosed problems are a liability of both the seller and the selling agent.

    • ——————————

      In many/most parts of the country the majority of the housing stock isn’t that old…but then that would depend on what you consider as “old”….pre WWI?, or pre WWII?
      Anything built from the 40’s on up is built with modern building methods, and much cheaper and easier to repair or remodel than what was built from the 30’s on back….but then a lot of those built before the 40’s were built with higher quality materials than what is being used today.
      Buying an older home that needs repairs can often get you into a house for less than new construction, even when adding in the upgrade costs.

      “patched up by unlicensed contractors to look good for a few months”
      There are no licensing requirements here in Texas, but you must have some bad flippers out your way….

  • ——————————

    Bloated and unnecessary zoning, building, and licensing requirements are the biggest problem.
    I have built homes in 4 different states, and the one I am in now (Texas), has the cheapest selling price per square ft, by far. There are no zoning laws, no licensing requirements, (except plumbing and electrical), and no permits required (unless building in a large city)…and I haven’t seen a house collapse, or anyone put a mechanic shop in the middle of a residential neighborhood in all the years I have been here….

    • LarryD

      Rent-seeking and “I’ve made mine, now pull up the drawbridge”. All worse in blue states.

  • Boritz

    Existing home owners can’t afford to pay taxes on the homes they bought decades ago. It’s impossible to see how any but the elite members of a newer generation are going to come up with a down payment and monthly payments for piTi.

    • Andrew Allison

      Right. The genius of California’s Prop. 13 (passed over the vehement opposition of State and Local government) is that it recognizes that people typically buy as much house as they can afford including property tax, and that skyrocketing property values can make their home unaffordable. Absent Prop. 13, we wouldn’t be able to afford the property taxes on our home and would be forced to join the exodus from California.

  • Gerald

    My experience may be different than others, but I would question the premise that housing is always a good investment. It depends upon the location, the residential tax burden, mortgage interest rates, maintenance costs, etc. My wife and I have owned (at least within the boundaries of mortgage interest rates and tax regimes) 6 homes in Ohio, Texas, Connecticut, Texas again, Louisiana and Georgia. As a Fortune 500 CFO, I have kept good records and calculated the return on investment and quite frankly it is about the rate of inflation. Perhaps I am not a good investor, although I have done will in the stock market, but nevertheless home ownership has certainly not been a lucrative investment. My advice to young people would be to save money until they really need to own a home (family growth, etc.) and to invest in market index funds as opposed to real estate, unless your family situation offers real estate at a bargain price.

    • ——————————

      In most markets rent is a waste of money, it just puts the money in someone else’s pocket, and the cost of a home goes up while the rent is being paid…so you lose double.

      Also, you cannot do as you please to a rented house, the landlord can terminate at any time, and you don’t get the psychological advantage of it being ‘yours’.

      • Pait

        The transaction cost of buying is significant – buying is not worth it unless one keeps the property for a significant amount of time.

        Of course when you rent you pay someone for the use, but so it is with paying interest.

        Also, there is no guarantee that prices will go up – if you believe in markets, then you have to agree that the current price reflects the best estimate of future prices.

        The satisfaction of owning is the reason it tends to cost more than renting, at least in the short run.

        • ——————————

          I guess I should have put the qualifier regarding length of time, as it is true that if you move often then you would lose money if you owned.

          There is the mortgage interest deduction, and capital gains exemption (if you live in for 2 years)…that also adds a lot of value to owning.
          I have been in home construction, among other things, for most of my life, so I get an immediate built-in 25%+ equity every time I build myself a new house to live in, so for me it’s a no-brainer.

          If people buy/build smart (often they don’t), and don’t do upgrades that have a low rate of equity return at the sale, I think for the ‘average’ person, owning is a better investment than rent….

          • Pait

            When you work on construction, the money you make is not return on investment, but rather payment for your work.

            Your comments suggest that you chose correctly your line of work as a home builder rather than as an investment adviser 😉

          • ——————————

            Regarding my building a home for myself about every 2 years, it was just an example of how I treat home ownership.

            I am well aware of the difference between ROI and Earned Income. In my case it is nice to be able to pay no taxes on 25%+ gain on an asset as valuable as a home, and do it every 2 years. Since I build a number of homes a year, another 1 in the mix means I spend very little of my time during the construction…so my ROTI on it is quite high.

            No I would never consider myself a financial advisor…which is why I have always had one.
            Are you a financial advisor, BTW?

          • Pait

            Not an advisor, but I have learned to recognize the scent of bad advice 😉

            It seems you manage to take advantage (good for you!) of one of the distortions built into the tax code – unearned income pays less than earned income, an unfortunate consequence of the decades-long movement to punish salaried workers and subsidize heirs, heiresses, and idle free-riding capitalists. Oh well – you found a way of making money out of this even while actually doing something useful.

          • ——————————

            A lot of self-employed people in the building and construction business do it. It’s a great way to build tax-free wealth in addition to ones normal Earned Income…not exactly what the government had in mind I am sure when they created that tax code…but the good part of it (in most markets), is that it causes more homes to be built and sold into the housing market.

          • Pait

            Yes, it may distort markets somehow, by leading money into one business instead of another. Of course individually you are free to exploit the intended or unintended consequences of the code to your advantage! And in this particular case, in a productive use of your work and capital.

    • Andrew Allison

      You are right that housing is not always a good investment — especially if you move frequently (not only are you sometimes forced to sell at an inopportune time, but the selling- and buying-costs take a significant bite). On the other hand, my first house cost $100K to build, 90% of which was financed, in 1974. After half the proceeds of the 1991 $1M sales price to my ex, I used my half to buy another one currently worth about $1.3M. I confess to having been more lucky than smart. I assume, incidentally, that you included the rent not paid in your calculation.

    • J K Brown

      Hey, no fair keeping records, accounting for all the costs and adjusting for inflation.

      On the other hand, most people would rather spend their earnings now rather then invest in an index fund, but their mortgage payment requires them to store some of their earnings in a generally inflation adjusted asset. And you can sometimes win if they decided to use the area your home is in for something more productive like shopping, industrial, or chop large plots into suburbs. Of course, that generally means you have to sell and move further out. Or when on a pension, you can defer non-critical maintenance to extract your “profits” by not having housing costs in your old age. Of course, you must live in that house regardless of what has happened to the neighborhood.

  • markterribile

    We hear another condemnation of ‘redlining’. The banks saw that neighborhoods were going to decline and refused to lend money with that real estate as security. Why did they refuse? WHY DID THEY TURN AWAY BUSINESS THAT CAME TO THEIR DOOR?

    Why? Because their first duty was to protect the people whose money the banks would be lending: their depositors. If you found that the bulk of your bank’s assets were in declining real estate, what would you do?

    The fault lies with the agent that triggered that decline: government. The ‘anti-poverty’ programs of the sixties, especially The Great Society, expanded poverty and created an epidemic of ilth.

    The banks were acting on the problem that government caused. They were its first victims, not its perpetrators. But they made it impossible for the Left to bury its failures, so they had to be put on trial for the crime of Truth.

    • Andrew Allison

      Note the timescale (. . .”much of the post-war period.”). Sadly, I suspect that the real reason was, in fact, racism.

      • markterribile

        In NYC and Chicago?

        Thomas Sowell disagrees with you, by the way, and I consider him an expert.

        Two other things happened in the postwar period: expansion of suburbs, which would have drawn mortgage money away from the older neighborhoods, and the progressive agenda slum clearances, which destroyed neighborhoods of the working poor, which were labelled ‘blighted’ even though they represented the life savings of hard-working people.

        What banker wants to risk mortgage money in neighborhoods that may be condemned wholesale with only a mockery of just compensation?

    • ——————————

      “The fault lies with the agent that triggered that decline: government. The ‘anti-poverty’ programs of the sixties, especially The Great Society, expanded poverty and created an epidemic of ilth.”

      The blacks had been declining neighborhoods long before the 60’s and it’s social programs. It is not the government’s fault that a group of people can’t seem to figure out how to assimilate or behave.

      I do however, agree with the rest of your comment….

      • Anthony

        Your comment is both historically and factually wrong. But never let facts stand in the way of bigotry in search of justification.

        • ——————————

          Actually your comment is both historically and factually wrong. But never let facts (or legitimate history) stand in the way of a social justice warrior in search of justification….

          • Anthony

            My statement stands; believe what you choose but legitimate U.S. data (facts) reveals otherwise. And in a public forum for an audience not blinded by bias, countervailing real information (to be verified if one really chooses) is readily available. ” I’m done on this.”

          • ——————————

            Thanks for sharing professor gobbledygook!

          • Anthony

            Gobbledygook (you got it right this time) remains default description of the simplistic name caller when real thought disappears (or you’re beyond your depth) – but you’re welcome.

          • ——————————

            No “real thought is required” when engaging with you. Even though you make an attempt to be TAI’s self-described academic aristocracy, you are actually quite simple…and your insecurity shows during your exchanges…which is why I find you quite amusing and like messing with you.

            Here is a test professor G…let’s see if you can pass.
            See if you can avoid replying to this comment. Now I know it will be hard for you because you ALWAYS have to have the last word, but let’s see if you can.
            Come on…you can do it now!

          • Anthony

            Go to bed!

          • ——————————

            If you wanted a “rest”, you would not have responded, right?…and you would have passed the test, too!
            But alas…you responded, so you got an F on the test…sorry professor G….
            Do you want to take another test and try not responding to tbis comment?

            Here, let’s try it again….

          • Anthony

            My friend, I asked you to give this one-sided idiocy a rest (I can go on until I decide wasting time is no longer amusing). Now, no offense intended, that decision in 10th grade (and skill/skills obtained as a result) foreclosed adequacy being transferable to specific domains – a word to the wise semotic. Good night!

          • ——————————

            See professor G, you must have the last word!
            Now isn’t that what I told you so long ago? See how visible you are!

            Oh, and no worries about ‘taking offense’. I find your attempts to show intellectual dominance a thinly veiled charade covering your insecurity…..

          • Anthony

            Once and for all, you told me nothing (either you’re lying or mistaken – neither would be surprising). And if last word (which is absolutely infantile and 10th grade) is your other default position, go at it (and make it last for “all time”). Again, good night.

          • ——————————

            But professor G!…if you view it is infantile and 10th grade, why do you keep doing it?
            You see for me it is simply exposing someone for what they really are, not what they pretend to be. It’s a lot more fun to do face to face, but doing it on the net gives me a bit of a grin too.

            Now I will let you have the last word…because of course, you WILL NOT be able to resist replying to this comment.
            But that’s okay…I have achieved my objective with you…and everyone will read it here tomorrow….

            Oh, and good night to you too!

          • Anthony

            It’s not a matter of having the last say or what anyone reads (for me) but a matter of keeping the “facts” straight. You talk that face to face BS from afar and the strong individualists BS but you’re at bottom a resentful old man who has trouble with changing world. The internet avails you both vehicle to vent personal disappoint projected on others under the make believe that you are exposing something masked (something really what they are). Only thing masked is a 58 year old man (if your assertion that you were in 10th grade in 1974 is to be believed) troubled by where he is and finds rationalization by kidding himself here. I told “you” don’t kid yourself friend. (And this is for you not for anyone else to read but, hey, it’s an open forum). Good luck, whether you comprehend or not, as you need it much more than I.

          • Tom

            Anthony’s right on this one, bro. Either provide some evidence, or shut your cakehole.

          • ——————————

            I knew Tommy boy would get in on this one!
            Look, umm…bro…ghettos are not new since the 60’s. And whites moving out when blacks move in also did not start in tbe 60’s…even my parents and grandparents used to talk about their neighvorhoods changing way back before the 60’s.
            Anyway, the evidence is overwhelming, and empirical to say the least, regarding my first comment…and not just in the US, but Africa, Haiti, and elsewhere. Obviously you are too blind to see it, in your effort to be the kumbaya guy, so I will never convince you.

            You could take a stroll through a big city ghetto, or go to Africa or Haiti. And there is plenty of evidence on the internet if you just get friendly with Google and do your own research…so have at it…bro….

          • Tom

            I’m just curious about what Haiti is supposed to prove, besides the fact that slaves don’t tend to be very good art setting up stable polities, or what Africa is supposed to prove, besides that having outsiders constantly meddling in your affairs for their advantage usually is to your detriment. (Never mind the fact that X group moving out because Y group is moving in says more about X group than Y group) Again, stats? Do you have any?

          • ——————————

            Well Haiti, Africa, etc., goes with the last part of my comment about government not being responsible for peoples behavior….not the US government, nor the other governments who throw billions in aid at countries who are in a perpetual state of self-destruction since the beginning of their existence…and little if anything has changed.
            Regarding groups X and Y, what it says about group X is that that group moves away because they want a safe, clean, and well functioning environment to live and raise their families.
            I lived in, and owned property, in a big city ghetto for 7 years in the 80’s when I was young and single, and I could write a book about the weird things I experienced, including finding a police chalk outline of a guy who was shot outside my entry door. Luckily I lived in a large 3 story commercial building, so I was insulated from the nonsense outside every night.
            If you want to be part of Y group, then I suggest that you do what I did, and live it for a few years.

            As I said before, do your own research if you want historical stats on white flight and the turnover of neighborhoods, or any other stats about blacks…there is plenty of info on the net…I don’t have time to be your library.

            I don’t always say things that are PC, but they are reality…whether people like it or not….

          • Tom

            “Regarding groups X and Y, what it says about group X is that that group moves away because they want a safe, clean, and well functioning environment to live and raise their families…and are also lazy, panicky, collectivist twits.”

            FTFY.
            As to the rest of your comment–the burden of proof is on the accuser.

          • ——————————

            Aw Tommy, just the type of response I would expect from you…so let me correct you…again.
            Being that I live in a world the way it is (reality), and you live in a world the way it should be (fantasy), your acronym should have been FTFM…Fixed That For Myself.

            And BTW, we are in the comment section of a blog, not in a court of law….

          • Tom

            No, you live in the world the way you want it to be, in order to justify your weird obsession with Social Darwinism. Sorry, man. Reason trumps genes.

  • Fat_Man

    First Comment: Housing is not inherently an investment assets. Houses can and do depreciate. Land can maintain value over long periods of time, but if the economy of the place where the land is deteriorates, the value of the land can go down. Land in Detroit anyone? It is really inexpensive.

    For an interesting perspective see: “This Very, Very Old House” By Russell Shorto, Published: March 5, 2006
    http://www.nytimes.com/2006/03/05/magazine/305tulips_shorto.1.html
    ‘Between 1628 and 1973 (the period of Eichholtz’s original study), real property values on the Herengracht — adjusted for inflation — went up a mere 0.2 percent per year, worse than the stingiest bank savings account. As Shiller wrote in his analysis of the Herengracht index, “Real home prices did roughly double, but took nearly 350 years to do so.”‘

    Another comparative view is provided by “Why Are Japanese Homes Disposable?”
    http://freakonomics.com/podcast/why-are-japanese-homes-disposable-a-new-freakonomics-radio-podcast-3/

    “In most countries, houses get more valuable over time. In Japan, a new buyer will often bulldoze the home. … half of all homes in Japan are demolished within 38 years — compared to 100 years in the U.S. There is virtually no market for pre-owned homes in Japan, and 60 percent of all homes were built after 1980. In Yoshida’s estimation, while land continues to hold value, physical homes become worthless within 30 years. Other studies have shown this to happen in as little as 15 years.”

    • Andrew Allison

      It’s hard to separate land from home value, but my 28 year-old property, which is in very good shape, is worth about four times what it cost.

      • Fat_Man

        So your house is not in Japan, nor is it in Detroit. BTW how much have you spent on upkeep? We have spent more than the original cost of our house 31 years ago in maintenance. Just this year we spent $50,00 on repairs to the foundation walls and the sewer system. Further, the CPI is now 224 compared to 100 in November 1885 when we bought the place.

        • Andrew Allison

          Every individual case is different (which was my point) but, since you ask, our biggest expense is the average $6K/year property taxes for the 25 years I’ve owned the home. Our largest single repair was $10K for re-roofing, next was $5K for re-painting, and next $2K for deck repairs. The rest is routine (plumbing, yard work, etc.), which runs about $2.5K p.a. We’ve also spent maybe $5K on new appliances. It cost $456K and Zillow thinks it’s worth $1.35M, I think more like $1.5 (great view), and would rent for over $3000/mo (I was being conservative).

  • Fat_Man

    Second comment: US housing policy follows a template that is used in other policy arenas. That is demand subsidy.

    A social good is expensive and in short supply: e.g. housing, medical care, higher education. The agitation arises for the government to do something about it. The suppliers come to Washington, usually far better organized than the customers, and say that the real problem is that Mr. & Mrs. Middle America cannot afford their ware, but if the government gave the customers tax deductions and tax credits and loans on terms that no sane lender would give, then M&MMA could afford the MacGuffin which would boost the economy put thousands of the suppliers employees to work und so weiter.

    The policy sort of works and often people are happy for a while. But, there are often hiccups along the way. The housing market and its attendant jury rigged financial apparatus has caused at least two major recessions in the past 30 years, one in the early 1990s triggered by the S&L crisis and the Panic of 2008 triggered by the collapse of a housing bubble. These problems are attributed by to malevolent actors amongst the middle men by politicians whose badly designed system is the true underlying cause of the mess.

    The more subtle problem is that demand side subsidy always leads to over investment. The fear of having to write down the investment drives a massive political force that prevents changes in the policy until it is too late for anything to occur but a catastrophe.

    We see this illustrated in housing in the form of too many big expensive houses, too little construction of new affordable houses, and too many people frozen out of too many markets. But, it is clear that the desperate desire of incumbents to maintain the value of their houses will block any effort to alter policy.

    • Andrew Allison

      You’re right, of course, that the mortgage interest deduction distorts housing market valuations by allowing people to purchase otherwise unaffordable houses at taxpayer expense. The ostensible purpose is to allow lower income people to purchase homes, but that’s not what’s happening. Perhaps the mortgage limit should be set at $200K (slightly higher than the median US home price) rather than the current $1M? This would have the socially desirable effect of keeping entry-level housing “affordable” while not subsidizing the purchase of MacMansions.

      • Ofer Imanuel

        200K may be close to the U.S median home, but you can’t buy even a fixer upper single family house in a decent neighborhood in north New Jersey with this.

        • Fat_Man

          Living in New Jersey is its own punishment.

          • Ofer Imanuel

            Hmm – you certainly have a point. Very expensive real estate and property taxes. Too many regulations.
            However, that where my and my wife’s jobs are. Once we retire, we will probably move.

  • Fat_Man

    Third comment: The housing situation is a generational tragedy that will trigger the collapse of a ponzi scheme.

    The housing as investment thesis requires that there always be a solvent buyer to take the big expensive house off your hands. Unfortuanately, the improvident baby boomers who have trusted in this thesis have not only failed to save enough money for their retirements, but they have failed to have enough children to be the buyers of the future.

    Compounding this failure is the failure of another demand side policy, higher education that has saddled the millenials with non-dischargable education debts that will prevent them from buying their parents houses.

    Further, because the boomers did not save there is not enough private capital to create the high paying jobs that would enable the mellinials to afford the mortgages on their parents houses.

    Sorry kids. It sucks to be you. You will however pick their nursing homes and will be able to deny them pain killers — for their own good of course.

  • FriendlyGoat

    The millennials and Generation Z after them certainly should expect a seat at the table and a piece of the pie in the world’s most prosperous nation. Americans, however, have voted to assure that a smaller and smaller portion of them will have it going forward. And living a life alongside a much larger world population is not an insignificant matter. Some will do really, really well in hot fields. Some will be beneficiaries of inheritance over time. But too many are going to find out that the combination of health care costs, education costs and child care costs—–plus job elimination trends—- makes their chances dim for expecting to replay the 60’s thru 90’s experience of the boomers.

  • Pait

    The fact that people tell Gallup that their preference is to invest in real estate does NOT mean it is the best investment – the correlation may well be negative, gold had the highest preference just as its price peaked.

    Much less does it mean that the federal government should give any further special treatment to such investments. In fact it may well be that prudent local regulation is what makes investment in real estate somewhat solid and predictable, which, as we learned from the bubble in the 2000s, left to market forces it is most emphatically NOT.

  • Andrew Allison

    Note that the question posed was “Which do you think is the best long term investment . . . .” Given the 63% home ownership rate and pathetic savings (the median for all American families is $5K http://www.cnbc.com/2016/09/12/heres-how-much-the-average-american-family-has-saved-for-retirement.html) it was a purely hypothetical question for most of the random sample.

© The American Interest LLC 2005-2017 About Us Masthead Submissions Advertise Customer Service