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Maybe Houses Should Be — Gasp! — A Depreciating Asset
The annual pace of US home price growth across 20 large metro areas picked up a third month at the e
Your sentiment could come straight out of the Atlantic article I read on how Progressives froze the American Dream.
The notion being that before we started protecting housing it was a rotating asset more aligned with the auto market. That is homes were constantly being torn down and built better to incentivize those with the means to leave their existing homes and cause them to devalue older properties creating a circle of housing affordability.
Enlightening read if anyone is interested – https://www.theatlantic.com/magazine/archive/2025/03/american-geographic-social-mobility/681439/?gift=YwCmpcxUgNAYD-oV2wySqVwGZLjRH5DURU7QdIc6ya8&utm_source=copy-link&utm_medium=social&utm_campaign=share
Thank you for the link. From the link: “But over the past 50 years, this engine of American opportunity has stopped working. Americans have become less likely to move from one state to another, or to move within a state, or even to switch residences within a city. In the 1960s, about one out of every five Americans moved in any given year—down from one in three in the 19th century, but a frenetic rate nonetheless. In 2023, however, only one in 13 Americans moved.
The sharp decline in geographic mobility is the single most important social change of the past half century, although other shifts have attracted far more attention. In that same span, fewer Americans have started new businesses, and fewer Americans have switched jobs—from 1985 to 2014, the share of people who became entrepreneurs fell by half.”
I had not realized that mobility in general was dropping as of the 60’s, but I’m from the tail end of the boomer demographic (so just a kid in the 60’s). My home has doubled in assessed value since first purchased 20 years ago, but I’m not feeling particularly wealthy as that assessed value is just an abstraction. After severe layoffs in my part of the tech industry, I was indeed migratory during the 2010’s as jobs were getting centralized to specific areas of the country (and outside reasonable commute range).
The decrease in entrepreneurship is sad – one has to look for work that can’t be outsourced overseas. Interestingly, in my own neighborhood, the demographics are slowly changing from tech/finance management to self-employed landscaping/plumbing/electrical repair (inspiring my thesis about finding work that can’t be sent overseas).
Entrepreneurship is increasingly difficult (despite what all those LinkedIn entrepreneurs would have us believe). All those small businesses have higher costs for labor and stiffer competition from the big guys. Add on the increasing cost of housing, medical expenses, education, etc. and the math on taking the leap doesn’t add up like it used to unless you’ve got family to support you.
As an aside, my brother was talking to our cousin recently about his support for Republicans. We grew up in a very rural area and my cousin is following in his dad’s footsteps as a farmer. His perception is that Republicans may give huge tax breaks to the rich, but they make it easier for people in the middle class as well. He views regulations as a burden on farmers; therefore, Republicans are better for him.
If you look at farmland though, you see the same dynamics as in housing. Prices keep going up to ridiculous levels which makes it virtually impossible to get into farming if you don’t have a parent who can get you in the game. My dad is a retired farmer who was able to buy his own land without support from his parents (he worked hard but did get lucky to ride the wave of land value increases and decreasing interest rates from the early 90s onward – he would’ve gone bust just like my grandpa did if that hadn’t happened), but I can’t think of anyone in my generation who was able to get into farming back in my hometown.
I don’t think these rural folks realize that a big part of what makes it impossible to get into the profession is the way tax cuts and wealth concentration inflate asset prices to the point of absurdity. The small tax cuts and deregulation might feel good in the moment, but they put the dream of entrepreneurship farther and farther out of reach as rent-seeking becomes the norm and the industrial farms pollute their water.
Something often forgotten is the role health insurance plays in discouraging entreprenurial activity. Quitting a job and starting your own business often means forgoing health coverage. Thanks to Obamacare, that has become a little less risky than back when the private market was free to reject you or take your eyeball out if you or a family member had a “pre-existing condition.”
A shortage of family doctors and some specialists in many areas also adds to the risk of pulling up roots and moving. “Ah yes, well, we are taking new client appointments five months out.”
`Should Be”? What a concept…
There should be no hunger or disease, and world peace…
Correct. —> https://heisenbergreport.com/2025/01/31/utopia-forgone/
The inflation adjusted value of housing looks like a flat line for quite sometime. I don’t see a collapse in nominal prices except in some pandemic moonshot markets. Only a commodity price collapse or a deep recession or depression would alter that forecast. That seems unlikely. On the other hand, I agree with the comment that owning a house is a sure fire wealth builder. Over a long period it is due to the gradual debt paydown and forced savings that entails. But with mortgage rates north of 6% it is a big lift to expect nominal prices to increase more. Just as stocks a challenged by high real rates, so are residential real estate.
Meaning I agree that housing is not a layup to build big wealth. It’s a nice to own your own a home for non financial reasons for many. But don’t expect big returns.
I agree, I have owned five houses in my life. One had been owned by a slob but it was cheap enough so we bought it and fixed it up a bit. The other four we all new when we bought. The first three were all in the same price range, all 1500 sq’, 3B, 2BA jobs, all priced at just 30k during the period 1970-1982. Paid 8.5%-9% for their mortgages and sold them all at just hat we had in them. Didn’t make a nickel on any of them. We built our fourth house in 1982 in a steep recession. We stole for what it cost that year. The mortgage was hefty again, 8.5%. We owned it for 27 years, nice lot, lots of landscaping, an office each for my wife and top of the line finishings. When all was said and done we made five or six grand. We dumped the mortgage after five years so we did make some money nice investing 22 years of payments. I bought my current house 16 years ago for cash, put in some more to make it really work for me. I plan for it to be my coffin, so no profit their either. My first book was a real estate principles text. When I was finished and taught the course a couple times I was convinced to never consider a personal residence as an investment (especially when you make the calculations properly). Sadly, I was the first author to do that and it killed my sales. Everyone copied the good parts and the authors with bigger reps used my stuff to sell the heck out of their books. Que sera.
The analysis might better be phrased in fhe alternative. Breaking even on selling your homes means that you effectively spent nothing on housing for those timeframes. How much might you have spent in renting versus buying? How much would you have earned on your cash instead of buying a home investing in non housing alternatives? Having lived in areas where housing prices have gone both up and down I don’t have any preconceived notion that housing prices go to the sky. I don’t believe this is a new phenomenon of unaffordable housing. I felt this way in the 70s in LA where chasing a down payment seemed like the impossible dream up until housing collapsed with the end of the vietnam war and associated collapse of the war industry in SoCal.
Did you ever cross paths with J. Graaskamp, aka “Chief”?
No. UCLA grad. Long time ago and far far away.
Auchincloss ignores the housing functions of i) shelter stability, ii) savings, iii) leverage, iv) compounding, v) tax incentive.
Buying a house with a standard 30Y fixed mortgage (let’s assume buyer is neither over-extended nor top-ticking, because there is always a way to eff up a good thing) means:
i) shelter at a fixed price (no rent inflation, except in a secondary way from insurance, maintenance, property tax, etc) with the rights of ownership (can add occupants, increase sq ft, have pets, sublease, no fear of groundless eviction)
ii) a portion of the monthly payment is forced savings, and that portion grows yearly
iii) participate in asset price growth with high leverage (and non-recourse hence can opt-out from major asset price loss)
iv) compounded over decades, even a modest rate of asset price growth can result in substantial wealth accumulation – before the leverage
v) home ownership is tax advantaged, similar to other forms of retirement saving (IRA, 401), and via FNM/FRE is subsidized as well (in the type and rate of mortgage available)
Given his background(economics, MBA), he should know better.
Perhaps his personal background (wealth, privilege) may inform his mistaken belief that the average household has “myriad [other] ways to build wealth”. Maybe he can suggest tax advantaged, subsidized investment vehicles with leverage . . . for the household that has limited discretionary income after shelter cost, not related to the Kennedys, Harvard alum, etc.
To keep beating on Auchincloss, he also seems to ignore that for normal people – who have mortgages, aren’t buying houses for cash etc – the share of wallet consumed by housing is as much a function of rates as of prices. Suppose a $500K house at 7% mortgage rate, the bite from wallet can go down 20% if price falls to $400K or if rate falls to 5%. He also seems to assume that wallet size is fixed, i.e. no income growth.
His soundbite “You can’t have housing be a commodity that declines as a share of wallet over time and have housing be an asset that you expect to appreciate over time” is thus wrong. Get deficit and inflation under leash, bring rates down, grow labor share of income, and you can indeed have both.
Not the kind of appreciation we’ve seen post-pandemic, that is unnatural and will reverse, but reasonable appreciation suitable for the retirement savings function that most of his constituents need from their largest asset.
As the Typical Outlier noted above, (“My home has doubled in assessed value since first purchased 20 years ago, but I’m not feeling particularly wealthy as that assessed value is just an abstraction”) the increased home value is nice but useless if you cannot monetize it. However it does increase your property taxes and insurance rates. No different than having an early Picasso hanging on your wall.
“the increased home value is nice but useless if you cannot monetize it- I thought that is exactly what people are doing!
Accessing the increased value of their homes by loading up with home equity loans and then using the loan proceeds to go on vacation and buy “stuff”.
“Get deficit and inflation under leash”
If Congress wanted to do this, it wouldn’t be hard- over time, privatize the functions of the post office (including the almost 25,000 leased properties) and sell off the over 8,400 owned properties. The proceeds could be used to not only eliminate budget deficits but also could be used to pay down the outstanding debt of the Federal Government.
If NASA is effectively privatized, why not the post office?
Interest rates would then likely decline.
Hmm. Would you pay for the US Postal Service ($79BN rev, about breakeven) as much as you’d pay for UPS ($91BN rev, $9BN EBIT) or FDX ($88BN rev, $6BN EBIT)? Consider a privatized USPS will be saddled w/ obligation to deliver mail to serve every address no matter how remote at a very low price (UPS delivers nothing to nowhere for the 73 cent price of a first class stamp). I think I’d pay maybe half as much for USPS as I would for FDX and a third of what I’d pay for UPS (the first small package company in the world). So maybe the privatization would net the taxpayer $30BN for the business? Not sure why selling the properties would net much, as the USPS has to use those facilities and they are not usable for anything else.
How does a young couple with excellent paying jobs afford a home in CA competing against investors who own multiple rental homes with cash to buy quick without a mortgage? Crazy, but should investors who are motivated to raise rents, which drives home prices higher, making it harder for first time buyers, get the same tax advantages as a first time buyer? Maybe, if an investors didn’t get all the favored tax advantages competition to purchase homes would be more balanced. I remember my buying a home process, 90% of my competitors were investors, real estate brokers/flippers! I have a friend who owns 78 homes, down from 120+, another who is down from 15 to 9, and several who only own 3-5 rental homes. I live in a neighborhood (townhomes HOA) that investors buy 75% of sales, neighborhood is turning rental. I have given up, I too will rent, move to smaller home in old age. I actually wish prices would collapse as my assets are 65% market and 35% real estate and new buyers can afford a home. My top charity is homeless women support!
Large investors (e.g. any related entities owning more than X residential units – I’d put X at 10 or 20 or so) should get none of the subsidies and tax advantages that individuals get, and should pay surcharges. There is no societal benefit, and great societal harm, if ownership of housing to shifts from households and middle class to institutions and wealthy.
Yep, this is why I hate prop 13 with a passion. Supporters claim it’s necessary so poor old grandma doesn’t lose her house. If that’s the case, it could easily just be applied to someone’s primary residence (never mind the massive equity gains grandma is sitting on while paying 1/10th of the property taxes that her neighbor is paying just because they didn’t buy a house when they were 3 years old). Prop 13 advocates (read: wealthy property owners) do a great job of scaring voters about how they’ll lose their Prop 13 benefits if they dare modify it even slightly.
California is the best (worst) state in the union when it comes to enriching homeowners via home appreciation at the cost of everyone else.
I don’t have a problem with Prop 13’s general concept. But seems that some underpayment of property tax should be recovered from the house when it is sold, after granny passes.
I read a study pre-pandemic that the percentage of total property taxes paid by commercial real estate has declined since the passage of Prop 13.
I think the effect of commercial real estate being included in the proposition has been under appreciated by CA voters from 1978 until this day.
Dayjob, +1 on Prop 13.
John L, regarding the USPS privatization- I do not think that the USPS should continue to exist in the same (disfunctional) manner in which it currently operates.
With you John!
“Maybe houses should be a depreciating asset”.
This is one of your comments that becomes even more insightful the more I think about it. The truth is that houses always have been a depreciating asset. My parents, who didn’t have much money when they were young, were able to afford to build a home because my dad designed it, selected inexpensive materials and did a fair amount of the work himself. We moved in when I was 4 and for the first 2years, the living room had plywood floors until they could afford the carpet (my mom was pretty awesome- I learned to roller skate in there!) No sod, grass seed, etc. You get the idea.
The original construction (2 story, 2100 sq. ft., 3 bedrooms, 1 1/2 bath house) cost about $15,000 to build in the 1960’s. The lot was $5,000. Nice neighborhood then and still is. Over the next 55 years, they spent over $175,000 replacing roof, remodeling kitchen, waterproofing basement, adding a patio and a second bathroom,etc. This doesn’t include any work my dad did himself (it was a lot).
In 2023, I sold the house for $265,000. The land value was probably somewhere between $125,000-$150,000. Therefore, the implied value of the house was $110,000-$140,000.
Houses depreciate.
It is the land that has the potential to appreciate. Those lucky people who bought in CA communities along the coast 20-30 years ago, own land that has become much, much more valuable. The house sitting on that land has to continually be rebuilt. An ongoing maintenance project.