There is something happening in the housing market at the lower end; I think neither new nor sudden, but more a confluence of forces accumulating over the years. I think I’m looking at results that I’m sure I can’t properly put a name on. Maybe that is because it’s just the way things always go and it has no definitive mathematical name/formula/characterization other than being Adam Smith’s “Magic of Compounding” as viewed from the other side; the cost to the payer as opposed to the benefit pay-out received by the investor. Maybe I’m making much ado about nothing, but what I see is scary (to me) from a financial side, of the future for my grandchildren. To wit:
The housing market seems normal enough, going up and down with economic conditions leading the way and dragging the housing market as thought it was a dragon’s giant tail; sometimes moving up or down or sideways; sometimes the end cracking like a whip. There is something missing and sooner or later it needs to change for the better or the housing market will become like the yacht market, -upper class, only.
There are lots of homes for sale in the middle & upper reaches of the market, but few or none in the 1st time buyer market. If you can’t buy the first one, you can’t participate in the “Magic of Compounding” that is a function of owning property that is rising in value as the cost of everything in the marketplace is rising, concurrently, in price. Accumulating enough value for you to buy #2, a bigger/better/more expensive home 20 or 30 years down the road is an iron-clad necessity and just a savings account won’t do it. You have to live somewhere and you have to pay for that. Either the landlord or you as your own landlord will be accumulating the value of the monthly payments you make. The Magic of Compounding. I can’t speak to how this works in other countries. I don’t know how to compare living standards in USA with other countries, or national attitudes about how people live/should live. So I won’t, I’ll just stick with here in USA.
They have been building larger and larger homes here since the 70s; and fewer and fewer “starter” homes. That has helped the middle market. I bought my first house for $35k in April, ’73, with a 7 ½%, 30 year mortgage on ~$25k; by October the rates had zoomed to a breath-taking 10 ½% and so I was pleased with myself. My wife & I worked, put the standard 20% down and qualified easily for the $235/monthly payment with total yearly earnings of ~$25k. The whole mortgage totaled $105k in payments but the conventional wisdom was/is the house would over that same amount of time increase faster and higher, so it was a positive move and I would benefit in the end. That proved to be true, sort of. In 2005 the house was worth $135k. Unfortunately we got less in 2009 when we sold it in the heart of the The Great Recession housing bust. It was a great time to be a buyer, so we took the trade-off which was a good choice, now in retrospect. I bore you with these details so as to have a baseline with which to compare today’s starter-home market.
There were plenty of nice, new and otherwise homes available then, and they built lots of all sizes at that time. That was the earliest age of the govt interference in the marketplace with rules for more & more aspects of housing. Each rule brought with it a cost; costs rarely go down with time for govt mandates because, if for no other reason, the govt updates/upgrades their demands so the total amount of these non-customer-demanded add-ons eventually becomes burdensome. The result was/is predictable: the cost of land preparation, et al, adds to the basic price of any size home, and that price becomes a fixed starting point. A builder has to put out all the costs of land acquisition, improvements to govt spec installing roads, (now separate) drainage & septic sewers, water, electric, etc. utilities, build model homes as showrooms and all that needs to be financed until he can sell some. That can easily be five years of putting out money and getting nothing in. That alone limits who can build what. Most all of those costs are the same no matter what size house he builds, so there is some mathematical formula that tells him and the lending institution what the dollar-size of the homes need to start at. If you put up $10,000,000 out of pocket expenses and loans, you need a return worth your while. Can’t argue with the math; starter homes now are $300k many places and they don’t even use the term in many places.
My 7 ½% mortgage sounds high today, and people are balking at 6%. I guess the difference is in how much my wife and I made versus what people make today. It was the cost of doing business back then, but now with the lack of lesser priced homes the net cost is a different kind of math. We didn’t earn much, but lived in a 30 ft trailer for 5 years and saved lots that way. It was incredibly cheap then and by comparison today. Scraping together 20% of $300k ($60k) doesn’t seem to work for people who also have today’s tuition mortgages, which are outrageous by any standards. We didn’t have that; we paid tuition & books in cash at the beginning of the semester. If you couldn’t afford it, you went to a cheaper school.
Today, people get saddled with huge tuition mortgages under advice of school advisors who are not disinterested parties; they don’t guide or demand students understand the cost-benefit relationship of Basketweaving BS degrees versus the employment market for same; and are ultimately salesmen for snake oil. If a banker did that he would go to jail, after being fired and sued by the bank.
The confluence of govt mandated very high prices steering builders into building houses that cost too much for first time-buyers, and the pool of first time-buyers being contaminated with govt issued tuition mortgages without consideration of earning potentials mean (to me) the end of first time buyers or at least the great diminishment of same such that it can never exist again unless and until the govt relents on both issues and allows builders to build ordinary & cheap, AND lets banks, et al, make cost-benefit analysis demands on tuition borrowers. Then, and only then can the market re-build; in umpteen years.
There is another factor that has contaminated the marketplace: the Fed keep interest rates too low much too long. It was doing the various administrations bidding; stated or not. Govt borrows at whatever the rates are and they like to pay lower interest. But that’s not good for the economy writ large. The “normal” market interest rate needs to provide savers with as much benefit as it provides borrowers. Rates that are too low encourage excessive borrowing and punish savers. So, you get less saving, too. The Fed appointments need to be single term with no possibility to be fired for some number of years so they would be serving only one master, and not the guy who might grant them another term or appointment. One shot & out; leave a record of good, bad or indifferent management. Serve only the whole country’s best interest.
