Other reasons why housing prices rise

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Submitted by Escoguy on September 5, 2016 - 10:27pm

Much of our discussion is based on comparing todays market with that of 10 years ago. Interest rates are a factor as well as a growing population and lack of new construction.

I think there are other reasons why housing prices can go up and be more sustainable than in the past and it has to do with general consumption patterns:

1. products like cars/computers last longer and have more features (replacing a car that lasts 10-15 years is a real discretionary purchase)
2. longer lifespans (older persons buy fewer things) but still need housing
3. some cultures embrace multi generational housing arrangements
4. glut of consumer products at ever cheaper prices
5. systems to reuse consumable items: Goodwill stores
6. renewable energy/solar/electric vehicles eliminates energy bills
7. wide range of tax credits/government benefits/food stamps
8. discounts for food at many fast food places
9. cheaper transportation/Uber/Lyft

In effect, some of these trends mean that housing has the potential to absorb excess funds which in the past would have been spent on other items which are either no longer needed or have a longer lifespan. Or which can be bought cheaply.

Or conversely, there are opportunity to save everywhere else by economizing except for housing where policy limits urban redevelopment and new supply so the money flows to the item which has the tightest supply constraint.

Submitted by gzz on September 5, 2016 - 11:00pm.

I completely agree. The same trend of physical things becoming cheaper and better drives college tuition and medical care to keep rising faster than inflation.

---some cultures embrace multi generational housing arrangements---

This factor is negative for housing however, as "household formation" is a very strong driver of housing prices.

Submitted by XBoxBoy on September 6, 2016 - 8:48am.

For the most part I disagree with the items you've listed.

Items may last longer but we just buy more of them or new items that weren't available in the past. Think cellphones. Twenty years ago almost no one had one. You phone bill was not much at all. Now you have a family of four paying $200 a month for phones. Also in the past tv came over the air for free. Now, $100 a month is probably the average.

People spend significantly more at restaurants and eating out now than they did in the past. Eating out and/or eating already prepared food cost more and is much more common now.

Reuse centers like Goodwill are not new. These places have been around for years.

Renewable energy is still not cheap. You still have to pay for the solar system. I would seriously question if spending on energy is dropping for reasons other than declining oil prices.

Certainly here in CA prop 13 combined with longer lifespans has lead to house hording so I won't argue with that, but I doubt food stamps or most govt benefits have impacted house prices.

I don't know if cheaper transportation will cause prices to go up or down. An argument could be made that as Uber and Lyft roll out autonomously driving vehicles we could see a lot of job loss due to automation. That in turn could cause housing to drop precipitously. Not convinced that will happen but worth considering.

Submitted by FlyerInHi on September 6, 2016 - 11:32am.

Depends where you want to live.

1) interest rates. lower rates makes it easier to buy.. but low rates also encourage investor interest in real estate for the cash flow.

2) Demographics. Educated professionals and immigrants want to live in gateway glamour cities.

Compare that to after WWII when people were moving to new suburbs. That trend reversed in the late 80s.

3) Subsidies. After WWII there were lots of subsidies for housing (Fred Trump made a fortune off of housing subsidies), including freeway construction to get people to edge cities and new suburbs.

Today, the gas tax to fund freeways can hardly keep up with maintenance, least of all fund new construction to new supply of land.

The auto industry is no longer the top driver of the economy. GM doesn't have as much lobbying power to encourage the automobile.

Submitted by The-Shoveler on September 6, 2016 - 2:31pm.

Actually people really DO want to live in suburbs but land use restrictions and labor shortages are what is really holding back new inventory.

Mostly there is a lot more household formation than new inventory being added so it becomes a classic supply and demand thing.

Millennials seem to have very little interest in construction jobs so there is your labor shortage.

And yes they DO want to buy cars, (we were just having record car sales), they just dropped off a smidgen and you get everyone who is trying to convince everyone else that they should not own cars trying to make an issue that does not exist.

Submitted by SoCalBakerman on September 6, 2016 - 4:14pm.

I live in Escondido, and you cant swing a dead cat without hitting a construction worker with a lifted truck and a Glamis sticker, so just from observations I really don't see a labor shortage, as for land use restrictions I agree but only that it is hard to build large housing tracks, infill not so much.

Also, you could build the houses off site in a factory and just truck them in, just look at Blu Homes, they make great looking prefab houses better than most of that Temecula track stuff.

Lastly, I am shocked that Row homes are not making a come back, they built some in downtown Escondido and look great and sold pretty fast, and you don't have that Apartment/ Condo problem like the people stomping overhead or lack of parking.

Submitted by FlyerInHi on September 6, 2016 - 4:25pm.

Shoveler, here's an article on Costco and changing demographics.

http://www.msn.com/en-us/money/companies...

I don't disagree with you, the suburban lifestyle still has allure that's why some places are expensive. But the good locations on the edge of gateway cities are already expensive, and expanding further requires freeways. The model today is toll roads which adds to housing costs.

Again, it depends where. Educated people and immigrants want to be in and around coastal gateway cities.

Look at the period after WWII where younger cities flourished. Now, the educated tech savvy class wants to be in established gateway cities. New multi-family products makes it more palatable. In contrast, after WWII to the 80s, people were abandoning city tenement housing for the suburbs.

Do you think Scaredy's kids will get married and start families in Temecula? Or will they move to LA, NY, SF, or maybe North Park or UTC in San Diego?

Submitted by flyer on September 6, 2016 - 6:31pm.

"Most workers don’t have enough money to retire
Total savings and investments, 2015

Less than $1,000 28%
$1,000 - $9,999 17%
$10,000 - $24,999 12%
$25,000 - $49,999 9%
$50,000 - $99,999 10%
$100,000 - $249,999 10%
$250,000 or more 14%

Source: Employee Benefit Research Institute"

From the horrendous stats above, apparently, most people are not placing their excess funds in retirement savings.

Unbelievable, especially when you consider it is estimated that most couples will need $250K to cover medical expenses alone between the ages of 65-85, even if you have Medicare and supplemental insurance.

Submitted by njtosd on September 6, 2016 - 11:35pm.

FlyerInHi wrote:

Again, it depends where. Educated people and immigrants want to be in and around coastal gateway cities.

Brian - I just shouldn't read stuff you write because my blood pressure spikes every time one of your ridiculous statements dribbles onto one of these threads. Have you ever been to Chicago? Or Ann Arbor? Or Detroit or anywhere other than the coasts?Frankly, it's easier to find smart, well educated people in many areas of the Midwest than it is around here. Do you know where the TOP school for musicians is in the country??? I'm sure you would say New York or maybe Los Angeles where the coastal intelligentsia congregate. But no, the answer is Bloomington, Indiana - (University of Michigan is in the top 5, just behind Julliard). In fact, just took a look and, according to the FIRST article I pulled up, Ann Arbor is the most educated city in the country http://www.forbes.com/pictures/fjle45igl...

You remind me of New Jerseyans who would say "Jersey is the BEST". And then you'd ask them if they ever lived anywhere else and they'd say no. Just once, please evaluate one of your ridiculous pronouncements before it makes its way here.

Submitted by FlyerInHi on September 7, 2016 - 12:15am.

njtosd, I was making a broad statement. University towns are included in what I mean by desirable cities.
In fact I have a cousin who works at Indiana university. And I know that cook engineering is there. It's an ok town. Very boring! But guess what? University towns are expensive!

Submitted by The-Shoveler on September 7, 2016 - 5:48am.

I completely disagree on the Costco article.

Just like the Auto industry pessimist after 7 years of good sales and sales records they have one bad quarter and suddenly it is the end of an era in america LOL.

Talk to builders, if there are enough construction workers they can't find them.

Submitted by flyer on September 7, 2016 - 6:26am.

Excellent points, nj. My wife, who attended a music conservatory in Paris, has friends who attended Juilliard, Eastman, Yale and Oberlin, as well as the relatively newly named (2005) Jacobs School in Bloomington, which boasts Joshua Bell as one of its most famous attendees, and now faculty members.

Submitted by spdrun on September 7, 2016 - 7:33am.

You remind me of New Jerseyans who would say "Jersey is the BEST".

Problem with the country outside of NJ, NYC, LA, and Miami, all of which are about 40% foreign-born is, in a nutshell ... TOO MANY AMERICANS. I'd sooner live abroad than in a city that's mostly US-born.

Americans are too often brainwashed by US media, fearful, and spoiled. I love that I can go to parts of NYC and barely hear any English spoken.

Submitted by FlyerInHi on September 7, 2016 - 8:44am.

Immigrants and savvy people with a 21st century global outlook like large metros for the diversity of opportunities. It's not about the number of educated people per capita that would exist in college town, but how large metro attract people with means/jobs.

It's all about growth. You need more people wanting to buy houses in order to have fast housing appreciation.

Another thing is that because of relative peace around the world immigrants have cash from their home countries for down payment. Sure, Syrian refugees don't have cash. But people from China, Korea, Mexico, even Guatemala have savings.

Submitted by FlyerInHi on September 7, 2016 - 8:52am.

The-Shoveler wrote:
I completely disagree on the Costco article.

Just like the Auto industry pessimist after 7 years of good sales and sales records they have one bad quarter and suddenly it is the end of an era in america LOL.

Talk to builders, if there are enough construction workers they can't find them.

Actually Sears reflects the end of the post WWII middle-class order. Sears is an interesting case study.

Costco and Walmart reflect the 80s on. That will change also. I think change is happening faster and that's creating anxiety for people who can't or won't adapt.

Submitted by barnaby33 on September 7, 2016 - 9:40am.

I found the article interesting in what it doesn't mention, the opposite end of the spectrum. Costco faces competition not just from people who don't drive as much and have smaller places but have services which deliver the basics and more importantly, the high margin luxury goods at their convenience, at home. Things like Amazon Prime. Costco was a new invention 20 years ago, bulk for the upper middle class masses. Now there are retailers competing away some of their customer base. The suburbs may be dying but it'll be a long slow death. I doubt Costco will go away anytime soon.
Josh

Submitted by The-Shoveler on September 7, 2016 - 10:27am.

Not all American suburbs are created equal.

for SoCal most Suburbs within an hours commute of the major cities usually continue to grow into major cities themselves (100-300K population) and create Jobs and new suburbs.

I don't see that trend slowing at all at least for SoCal.

I can never find a parking space for either the Carlsbad or Temecula Costco no matter what time of day I go there.

Here is my pick for the next surprise growth story.
"OceanSide"
OK laugh if you want but you heard it here first LOL.
anyway IMO.

Submitted by FlyerInHi on September 7, 2016 - 11:12am.

Shoveler, true, in Cali, the county equals the metro area.
As long as we attract foreign and domestic inmigrants and the population grows we will have high prices.

Zoning restrictions will continue to push sprawl. I can see Ikea opening a store in temecula/Murietta to support all the new housing along the 215 (I regret not buying during the Great Recession). Ikea could not expand the SD store and had to setup an offsite warehouse.

Sure, each market is different, but we are speaking very broadly about the suburbs here. I can see Costco closing some stores in other parts of the country as people move to online shopping.

Submitted by Escoguy on September 7, 2016 - 11:28am.

xbox

We pay $80/month for 4 lines with t-mobile and don't have a land line.
In the 1980s, I often paid more per month for international calls which are now free with Skype. While I may upgrade my iPhone 6S in two years, from a technical perspective, it should last at least 4 years. So the upgrade is discretionary.

We pay $12/month for netflix and don't have cable, plus $46/month for internet.
This is about $20/more than a basic cable package 15 years ago. Again, this is a choice to add more channels.

Solar panels can be leased for less than $100/month. I've put them on five properties and while I paid cash, financing still allows a zero down user to realize over 50% reduction in utility bills.

I drive for Uber part time and usually earn about $300/week for about 10 hours of part time work and can definitely say that passengers are thrilled with the lower cost of transport. My car gets 50+ Mpg so the benefits get spread around.

As far as losing my Uber job, if they can make transportation cheaper than it currently is, then I'd benefit from that as well as I might not need two cars any more or 3 or 4 when my kids start driving. Most drivers do this part time as a side job. So don't really see that being a huge drag, plus it would be phased in over a few years at least.

So the points I've outlined if done correctly would allow a family to save several thousand dollars/year if the right choices are made. With interest rates as low as they are, I currently pay 12K/year on a 417K loan (30yr fixed at 3.1%).

So while I appreciate the counter points, perhaps I should qualify it by saying a family that makes deliberate choices to realize the savings potential can more easily fund a home purchase with savings from these items.

Good luck

Submitted by poorgradstudent on September 7, 2016 - 2:32pm.

University towns are notoriously tough to get jobs in unless you work for the University. That's part of what keeps housing in many university towns somewhat reasonable.

Submitted by spdrun on September 7, 2016 - 2:42pm.

University towns are often near cities and other job concentrations.

Nothing wrong with working for a university -- not everyone needs to teach. There are a lot of peripheral jobs.

Third option is: students often have parental units with deep pockets. Start or buy a business catering to them.

Submitted by XBoxBoy on September 7, 2016 - 4:10pm.

Escoguy. I won't disagree with your premise that if a family makes frugal choices they can then spend more for a home purchase. The issue as I see it is that most people don't make the frugal choices that you and your family are making. Thus most people can't easily spend more on housing.

Mind you I don't think we're really in disagreement here. It more a case that I don't think the points you made will make much of an impact. However, the bottom line is that due to low supply and peoples strong desire to live in places like San Diego home prices are probably not going down but up. I just think it's straightforward lack of supply coupled with low interest rates. (Which of course you mentioned right off the bat in your original post.)

Submitted by flyer on September 7, 2016 - 6:02pm.

Looking at the debt-to-savings ratio in this country, as well as the retirement savings stats I posted earlier in this thread, it's clear that most people are not leaning toward making frugal choices in life.

These stats seem to infer that many prefer living beyond their means, and they may be able to float their preferred lifestyle during their working years, but they may find their overspending strategy does not work out well later in life.

That's why I have to agree that low interest rates, lack of building, and high employment rates are still the most decisive factors fueling the continuing housing boom, vs. other reasons for the rise in prices.

It will be interesting to see what happens if/when any of these elements noticeably fluctuate.

Submitted by FlyerInHi on September 7, 2016 - 6:19pm.

People are putting their retirement into their houses.
When they need to access the money, they will need to sell. Not a bad deal if buyers continue to come.
That's also why there're not too many San Diego natives except for families who lived within their means. Over the years, I have seen many families move away. Kids grow up and move first.

Submitted by svelte on September 7, 2016 - 6:57pm.

njtosd wrote:
FlyerInHi wrote:

Again, it depends where. Educated people and immigrants want to be in and around coastal gateway cities.

Brian - I just shouldn't read stuff you write because my blood pressure spikes every time one of your ridiculous statements dribbles onto one of these threads.

haha, I thought the same thing. what a ridiculous statement! Educated people and immigrants want to be in coastal gateway cities. WTF?

Submitted by Escoguy on September 7, 2016 - 8:16pm.

xbox,

Thus the value of the discussion. Forums like this remind me that perhaps only a few households make decisions in the manner I think is rational in today's environment.

I.e. when times are good, everyone spends money, when times are bad, people cut back. Ideally, more would do the opposite to even out cyclical movements in the economy and create more balance.

So it's really a shame that frugal behavior isn't more widespread. Or that more stretched households don't pay down debt when times are good.

If there is a downturn, a shift in consumption patterns may provide a buffer for those willing to make moderately tough choices.

So back to the premise, if the majority are not frugal today, frugal behavior may not be driving prices higher but if there is a slowdown, switching to a more economical consumption pattern may help mitigate against a downturn (assuming of course employment levels aren't seriously affected).

On balance, I think that the rapid rise in real estate prices would be a strong incentive to not have to be forced to sell in a future downturn (whether by short sale or foreclosure).

I'd like to think that after the pattern of the last ten years, that new buyers would do "whatever it takes" to not lose their now larger down payments. Because there could be a strong recovery again and it would be hard to get back in.

Submitted by njtosd on September 7, 2016 - 11:48pm.

FlyerInHi wrote:
njtosd, I was making a broad statement. University towns are included in what I mean by desirable cities.
In fact I have a cousin who works at Indiana university. And I know that cook engineering is there. It's an ok town. Very boring! But guess what? University towns are expensive!

You didn't say desirable cities. You said "coastal gateway cities". By gateway I assume you mean major arrival departure points. Other than Chicago, the places that I mentioned really don't qualify.

Re: Bloomington being expensive - it sounds horrible with a cost of living 7.9% below the national average: http://www.forbes.com/places/in/blooming... and a lower than average crime rate. Or University towns generally - speaking of the MM house in another thread at 850,000 - this house in AA looks like a steal, especially when you figure in the quality of the schools and the classmates that inhabit them: http://www.zillow.com/homes/for_sale/Ann...

Your "oh, I have a cousin" comment reminds me of a line from Holidays in Hell by PJ O'Rourke. Cab occupant in Lebanon says "why are they leveling an anti-tank gun at us?" to which the cab driver responds "Oh yes, I have a cousin in Detroit!". Same level of responsiveness. So I will say it again - have you actually spent any time in any of the places that you so quickly dismiss?

Submitted by flyer on September 8, 2016 - 1:18am.

FlyerInHi wrote:
People are putting their retirement into their houses.
When they need to access the money, they will need to sell. Not a bad deal if buyers continue to come.
That's also why there're not too many San Diego natives except for families who lived within their means. Over the years, I have seen many families move away. Kids grow up and move first.

Don't know any financial pro who would suggest that, unless you plan to leave CA, and no one we know (including us) is depending on the equity in our home(s) to fund our retirement.

True, if kids relocate, some may wish to join them elsewhere, but, other than that, imo, it's not a good plan if you have to give up your dream home or sell to survive. If so, that may indicate you spent your life living beyond your means.

Submitted by FlyerInHi on September 8, 2016 - 9:00am.

njtosd wrote:
So I will say it again - have you actually spent any time in any of the places that you so quickly dismiss?

I know Bloomington, Indianapolis and Columbus, OH pretty well. Columbus, IN has some nice architecture.

Those cities are doing pretty well because they attract people from other smaller cities that are doing badly. it I had to live there, I could make it work.
As far as housing, it depends where you want to live in those cities. The university towns are substantially more that surrounding areas.

Sorry that I can't qualify everything I say. But I will say it again, as a general rule, savvy educated people and immigrants prefer coastal gateway cities.

Detroit has a major airport. But it's not a gateway city. Chicago qualifies, but it's not that desirable. Nearby Toronto is more on the level of LA and NYC as a desirable city.

While I'm at it I will qualify and say that Houston, Dallas, Austin, Atlanta, Phoenix, Las Vegas are doing well in attracting population. Housing is reasonable.

Washington DC metro is now a gateway city. Portland, OR is small, not quite a gateway city, but very desirable.

San Diego is a gateway city because of the border and proximity to LA.

Maybe I should say "glamour city" for desirable city that attracts population willing and able to pay for expensive housing.

Submitted by FlyerInHi on September 8, 2016 - 9:26am.

flyer wrote:
FlyerInHi wrote:
People are putting their retirement into their houses.
When they need to access the money, they will need to sell. Not a bad deal if buyers continue to come.
That's also why there're not too many San Diego natives except for families who lived within their means. Over the years, I have seen many families move away. Kids grow up and move first.

Don't know any financial pro who would suggest that, unless you plan to leave CA, and no one we know (including us) is depending on the equity in our home(s) to fund our retirement.

True, if kids relocate, some may wish to join them elsewhere, but, other than that, imo, it's not a good plan if you have to give up your dream home or sell to survive. If so, that may indicate you spent your life living beyond your means.

You know, in Vegas, there are countless california "refugees". They have nicer homes in Vegas but they would rather live in lesser homes in Cali if they could. The demographic changes speak for themselves as far as people selling and moving away.

Submitted by njtosd on September 8, 2016 - 10:46am.

FlyerInHi wrote:
njtosd wrote:
So I will say it again - have you actually spent any time in any of the places that you so quickly dismiss?

I know Bloomington, Indianapolis and Columbus, OH pretty well. Columbus, IN has some nice architecture.

In other words, "no".

The reason you have to add so many qualifications to the ridiculous things you say is that the sweeping generalizations that you would like to believe don't exist.

Chicago isn't that desirable? Let's see, the best architecture in the country, the best orchestra in the country, one of the top five art museums in the country, some of the best restaurants in the country (according to Food and Wine, Chicago, Los Angeles and NY each have only one restaurant in the top 10 http://time.com/4360535/best-restaurants...), Second City (the source of pretty much everyone Saturday Night Live ever made money from), the University of Chicago (fourth in the world for Nobel prizes and 10 spots above CalTech), CBOT, Mercantile Exchange and actual MANUFACTURING rather than all of the funny money that exists on the coasts. Who'd want to live there?

Show me one, just one, study that backs up what you say. Your pronouncements are never very data driven - mostly Brian driven. And we know what you think - how about some facts?

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