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The Distorted Disposition Toward Homeownership

Housing is traditionally an asset that retains its market value across time, unlike a car which proves to preserve hardly any of its original value over its lifetime of use. 

The reason that property is so valuable in the San Francisco Bay Area, for instance, where property values ubiquitously outstrip the values of the homes built on them, is not because the houses are so elegant, but principally because of downzoning and vertical restrictions on development, the sky-high levels of government-backed credit made available at ultra low rates of interest to buyers who foresee untenable rates of real returns or unmanageably expensive total costs of ownership. 

Throughout the 1960s, before the end of Bretton Woods and the fiat frenzy that resulted in the dollar losing two-thirds of its real value over the 1970s and even further bouts of massive inflation during the following decades, the median sales price of homes in the United States climbed by a tepid 5% per annum. Since 1971, this same metric shows roughly 15% growth per annum through Q1 of this year. 


This means that homes used to serve as a mere inflation hedge, again preserving the real value of their respective homeowners' original investment, assuming proper maintenance of the property over that term. 

Today, Americans are far more comfortable taking on long-term debts and higher loan-to-value ratios, even up to 125%, with little down and jobs based on record-low levels of profitability, while FHA and HUD kick in added emphasis by buoying the asset prices with even further credit advanced by the taxpayers, or through monetization, to bid up or formalize the price floors of these assets. 

Meanwhile, homebuyers aren’t necessarily planning to use the mortgage as the “death pledge” it was originally intended to serve. 

Instead, they perceive the investment as a guaranteed beat on the market, a highly liquid asset through reverse mortgages and HELOCs that make homeownership even more desirable than alternative investments that produce the actual capital that really enables the expansion of the supply of goods and can therefore serve as true income-generating assets. 

So in this sense, homeownership is not purely an investment but a liability in the sense that it costs money and resources to maintain it. Government has irrevocably altered the general consensus on this market by making it so easy to finance and therefore so simple to offload to a greater fool at that later date. 

With the requisite rise of interest rates, the eventual budget cuts to FHA and HUD and the stark realization of uninsured accounts, credit will surely contract in the real estate and mortgage markets, and the existing mortgages will be secured by assets of diminishing value, yielding tighter lending standards that are balanced against the true time value of money and the inherent risk of default, not just against the guarantee of government bailout or the believed appreciation of the underlying asset.

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