Skip to main content

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.

Comments

Popular posts from this blog

America's Civil War: Not "Civil" and Not About Slavery

Virtually the entirety of South and Central America, as well as European powers Britain, Spain and France, peacefully abolished slavery — without war — in the first sixty years of the nineteenth century.  Why, then, did the United States enter into a bloody war that cost over half of the nation’s wealth, at least 800,000 lives and many hundreds of thousands more in casualties?  The answer: the War Between the States was not about slavery.  It was a war of invasion to further empower the central government and to reject state sovereignty, nullification of unconstitutional laws, and the states’ rights to secession.  It was a war that would cripple the South and witness the federal debt skyrocket from $65 million in 1860 to $2.7 billion in 1865, whose annual interest alone would prove twice as expensive as the entire federal budget from 1860. Likewise, it was a war that would witness a five-fold increase in the number of civilians employed by the federal government, as federal gove

Into the Wild: An Economics Lesson

There is a great deal of substance behind the Keynesian motif, “In the long run, we’re all dead.” If this is your prerogative, your axiom, we are destined to differ on matters of principle and timeline. Surely, any quantity or decided cash figure is relevant exclusively to the available produce yielded by its trade. The current valuation thereof, whilst unadulterated, corroborates a rather stable, predictable trend of expectations, whereas its significance wanes once reconfigured by a process of economic, fiscal or monetary manipulation.  Individuals, vast in their interests and their time preferences and overall appetites, are to be made homogeneous by an overarching system which predetermines the price floors, ceilings and general priorities of life. Of course, all of this exists merely in abstract form. However, the supposition proposed by those who champion the agenda of “basic needs” fails to complement the progress achieved by the abolition of presumed guilt by the sole mis

Cullen Roche's Not So "Pragmatic Capitalism"

In his riveting new work Pragmatic Capitalism , Cullen Roche, founder of Orcam Financial Group, a San Diego-based financial firm, sets out to correct the mainstream schools of economic thought, focusing on  Keynesians, Monetarists, and Austrians alike. This new macroeconomic perspective claims to reveal What Every Investor Needs to Know About Money and Finance . Indeed, Roche introduces the layman to various elementary principles of economics and financial markets, revealing in early chapters the failed state of the average hedge fund and mutual fund operators -- who are better car salesmen than financial pundits, Roche writes --  who have fallen victim to the group think phenomenon, spawning the nearly perfect positive correlation to the major indexes, and thus, accounting for tax, inflation, and service adjustments, holistically wiping out any value added by their supposed market insight.  Roche also references popular studies, such as the MckInsey Global Institute's report whi