Monday, April 29, 2013

Why Would You Want HIGHER House Prices?

Gary Gibson
Activist Post

It's odd, but Americans get happier when the roofs over their heads get harder to afford. Over the past hundred years or so, Americans have come to see houses not just as another commodity which should be getting cheaper over time thanks to market forces, but as a government-aided "investment" that makes them better off by getting more expensive!

But the unadulterated truth is that housing is just another basic appliance, like a washing machine or a car, but more essential. Society grows richer when the market's efficiencies makes appliances more affordable, not when government intervention makes them harder to afford.

Here is a brief list of things that make our life better when they become cheaper relative to incomes:

  • Gas
  • Electricity
  • Clothing
  • Designer clothing
  • Shoes
  • Healthy groceries
  • Gourmet food
  • Restaurant meals
  • Cars
  • Luxury cars
  • Cell phones
  • Smart phones
  • Desktops
  • Laptops
  • Information

Housing belongs on this list, too. Yet only one in a hundred million people understands that. That's because government has had a decades-long indoctrination program that has taught its citizens to look at homes for personal use as "investments" instead of a consumption. And as with "education", government has been artificially inflating the cost of housing in a mix of propaganda and easy lending policies.

This is how most of the world thinks: "My electricity bill is half what it used to groceries cost about 1/3 less...I paid half as much for a better smartphone this year and I get twice as much data and call time for the same price as I did in my last contract...and my rent/mortgage is twice as much as it was ten years ago...Hooray!"

A basic necessity becoming less affordable

We are at the point where the population actually gets depressed when their mortgages and rents fall. Their economic sense is so debased that they see more affordable housing as a sign of economic contraction. That's because the government has gotten the general population on the bandwagon of debt-based proxy ownership.

Understand that there are government departments set up specifically to facilitate increasing housing and schooling prices through the debt: Fanny Mae, Freddy Mac and Sally Mae. The Federal Reserve government-created cartel is designed to make general prices go up via money supply inflation, but those three agencies make sure that housing and schooling (not the same thing as education) prices rise faster than just about everything else.

Home "owners" are actually renters: primarily from the municipality which collects rent in the form of real estate taxes forever and also from the banks who collect rent in the form of interest for decades. In other words -- and despite the propaganda you've heard -- housing is NOT an investment. It is a consumption item, just like food or a car or oil.

Housing is an only an investment if you don't consume it yourself but instead rent out its use at a profit. We all can easily see this with cars which we understand as things that we use up and which lose value over time. Cars are only investments if you rent and lease them out at a profit. So if you're Budget Rent-a-Car or Kia Motors, cars are an investment. If you're you, using the cars you rent, lease or own, then cars are consumption. And so it is with the real estate you occupy.

The car market, however, doesn't have its version of Fanny, Freddy or Sally (yet). Free of government shenanigans the housing market (and schooling market) would actually resemble the car market (in a totally free market, all markets would resemble the electronics market with everything getting more affordable over time against a stable currency). That is to say, a fairly large percentage of the population would be able to buy their houses outright while another fairly large percentage would be able to put down 0 to 50% and pay the rest off within 5 to 15 years.

How can I make such a claim? Because prior to the past century of government distortions via loan price-fixing and guarantees, that's exactly how the housing market worked. The 2011 article "American Dream, Downsized" summed it up well:
"We've gone through 50 years of homeownership being the American Dream, and in those 50 years, homes didn't do anything but appreciate," said Bill Miley of real estate research firm Metrostudy. 
Homeownership is a long-held dream for many Americans, but a century ago, it wasn't accessible for most. Often, the only way to buy was to pay cash or take out a pricey loan with a large down payment. 
Government policy helped change that. From the beginning of the federal income tax, people have been allowed to deduct their mortgage interest. In 1938, the government established the Federal National Mortgage Association, known as Fannie Mae, to provide local banks with federal money to finance home mortgages, creating the 30-year mortgage with fixed interest and leading to more housing loans. 
After World War II, the GI Bill helped veterans secure low down-payment loans with low interest rates. Suburbs sprang up, and the US homeownership rate climbed above 60 percent from 45 percent in the first half of the century. 
The US had become a nation of homeowners. 
Meanwhile, the government continued to encourage home buying through tax breaks and programs that push homeownership for low-income earners. 
Then came the real estate boom. Credit was cheap and easy to obtain, risky products such as adjustable-rate mortgages crowded the market, and by the mid-2000s, homeownership rates had spiked to nearly 70 percent. 
"If you had a pulse," Miley said, "you could get a loan."
Home ownership would have increased on its own without government help. That's because the free market would have made home-building cheaper with new mass production techniques and thus driven down prices.

In a free market, house prices and rents would be getting cheaper with time and use, just like any other appliance you might buy. Unless it is drawing an income via rents (whether you rent the entire space or just part of it), a house is durable consumer good of declining value for which you should get less later on under normal conditions (minus any drastic capital investment for improvement). In the meantime it will cost you money in maintenance at the very least and some of those maintenance bills could be enormous.

Then there is the fact that "owning" your living space actually means you are on the hook for local extortion payments (real estate taxes) and years of debt, and you have a large, immovable object providing an essential function (shelter) whose equity and use can be stripped from you if the authorities decide you owe them or some plaintiff money. Let us recall the basic supposition of this newsletter: the US is on an unalterable path toward a full police state and economic conditions are only going to get worse as the government pours in more force and fraud inputs to keep the system going.

Why, under these circumstances, would you buy into an artificially propped up market that saddles you with impressive debt while whatever equity you may build becomes illiquid, highly visible, and easily confiscated?

So, Should You Ever Buy a House?

To figure out if and when you should a house, consider things from a free market perspective, because the free market fundamentals will always eventually trump whatever shenanigans the government and central bank try to pull.

Buying a house in a free market would probably confer slight financial and emotional advantages over leasing, just like owning a car is often a better move than leasing a car. Buying could be part of a longer-term cost control strategy, i.e. get the house paid off and never have to worry about a monthly payment again (though it would be foolish to pretend that maintenance won't require a not insignificant diversion of income every month).

Only during the bubble years were 20-somethings so strongly urged to buy their homes with borrowed money. Before that the mainstream advice urged people to consider buying a home only if they would be in that home for the long haul. The ideas of a starter home (instead of just renting till an ideal home could be afforded) and then of buying with intention of flipping were both inevitable outcomes of the warped housing market swelling with longer mortgages and more debt.

Again, correctly thinking of a house as a tool like a car instead of wrongly thinking of it as an investment goes a long way in preventing some bad decisions. But to take things further, we really have to throw out the buckets of misconception when it comes to what a house ought to cost in the first place.
Currently the median house price is over three times the median income. This is almost as ridiculous as the five to nine times valuation during the bubble years. As a very general rule of thumb, you really shouldn't buy a house that costs more than you make in a year.

That may seem a little shocking. And many would protest that they could never find adequate housing in a safe area with that kind of guideline. But that's the ratio to keep in mind if you don't want to be a debt slave dependent on a bubble supported by the federal government and its pet banking cartel.

[Editor's Endnote: This article is excerpted and condensed from an article that originally appeared in TDV Homegrown.]

Gary Gibson, The Dollar Vigilante’s Editor, cut his teeth writing for liberty and profit as the managing editor of the now-defunct Whiskey & Gunpowder financial newsletter. He now writes for and edits The Dollar Vigilante. In his capacity as managing editor of TDV’s monthly subscription letter TDV Homegrown, Gary insists on playing Russian Roulette by basing himself in the USSA heartland so he can round up information on how the TDV readers stuck in the USSA can best survive and profit in the increasingly turbulent times in the morally and financially bankrupt empire.


This article may be re-posted in full with attribution.


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Anonymous said...

I wonder what the price of housing would be if the millions of foreclosed houses the banks are sitting on hit the market?

Shadowfax said...

I could never understand buying land that you have to pay property tax on and submit to building codes.

That's why I really like living on my sailboat.
I can do anything I want to it without worrying about municipal inspections.
If my landlord(the marina)pisses me off I can move to another or just go sailing.
I am completely independent with diesel heat,propane stove,woodstove,solar panels,batteries.I have a better location and views than the million dollar chipboard palaces up the street

Anonymous said...

I live in an area that is 95% "built out." To say housing should be getting cheaper, like Chinese toaster, is absurd because with no more land left to build on, there is only more and more demand and no more supply. This naturally drives the price up.

Why do I want home prices to go up? Because for 45 years, I have fixed up houses, put in lots of money and sweat equity, with the idea that when I retired, I would own my home. Alas, 45 years of hardwork and investment evaporated almost overnight when the banksters and fraudulent credit agencies created a trap door for equity builders like myself. Today, my 45 years of work leaves me with zero equity. My plan to sell my house, upon retirement, and buy a cheaper house with my 45 yrs of equity collapsed.

Plan B is at 72 I have gone back to work and saved enough to buy a cheap house in Arizona for 1/5th of what my mortgage on my current house is. I will rent out my current house and hope the market improves and sell it when my mortgage, every penny of which was used to improve my property, explodes in 4 years. Hopefully, I will salvage some small equity out of my 45 yrs of work so that I have a small stash for emergencies in my old age.

You could argue that I made a bad financial investment, but when a situation is universal and effects 100 million households who have lost many trillions in equity, the fault is not personal but systemic.

If my house has not recovered enough to provide any equity, I will just get rid of it. 45 years of hard work, creating a paradise (I bought it after the 89 earthquake in the Bay Area, built the house, planted fruit trees, build rock walls and pathways, etc etc. All refi $ was used to make it more beautiful. But then prices dropped 50% and I had no equity left. Therefore, I am hoping prices continue to rise so that I can have a little savings to see me through my last decades.

In 2005, American families owned about 70% equity in their homes; by 2010, that had fallen below 50% and the banks owned the majority equity. Only with rising prices can most families regain some part of the trillions that vanished with the housing bust.

My Arizona house cost 70K and I am rehabbing it with about 10K...I will have a mortgage of $212 a month. When my current mortgage on my primary house adjusts, the cost will be above 2K a month.
My pension is $1700 a ,month.

Many seniors like myself h have had their retirement plans destroyed by loss of equity built up over a lifetime. I have resorted to Plan B....but probably my 45 yrs of equity building has been mostly wiped out. For that reason, we seniors are hoping prices rise so we can someday retire.....the young folks need the jobs we are now holding down.

Derek said...

A very interesting post and one that too many people will just brush aside.

In general, goods of any sort should* get cheaper over time. I remember seeing a chart showing that common goods were often cheaper a decade on throughout most of the 1800's.

That's the way it should work. A healthy economy not dependent on inflation should experience a currency that strengthens, not one that continues to weaken.

When we think about the price of important goods, like a home, why would we ever want one to be more expensive?

It's backwards thinking, but the prevailing "wisdom" of the day. It doesn't show any sign of slowing either.

Anonymous said...

Should never do adjustable rates, nor improvements that you haven't money for.

Anonymous said...

This article is highly illogical. It consistently references market principles, but ignores the most obvious, supply and demand.

What happens as the population in an area grows? The area itself doesn't grow. More property isn't magically created. If a city, such as Boise starts adding population, the only logical outcome is an increase in property values. Those who live close to the city will see their property values explode as a short commute is desireable. Those who live on the outskirts will see their farmland's value explode as more housing is needed, and thus more raw land as close to the city as possible. Cost of construction goes up as population growth occurs, because virtually every resource used to build a house is a finite resource.

Also, while the construction of a house has been streamlined in many ways, it is still a labor intensive, individual, one off project.

As for the comparison to 100 years ago, the only thing the author illustrated is that we're better off today. 100 years ago, the vast majority of the population rented from the likes of JP Morgan, the Rockerfellers, and so on. The inability to borrow money to purchase a home simply made homeownership a desire that was out of reach for most Americans.

For a blog who's next article is entitled "The more illegal immigrants that go on food stamps, the more JP Morgan makes", I would assume you'd be opposed to the idea of returning to a time when a handful of people controlled the housing of the majority of Americans.

Anonymous said...

completely agree with May 1 Anonymous.

this article completely ignores the most important part of buying a home... the property (real estate). Houses depreciate, property (real estate) appreciates.

Jim Stout said...

This article was so insightful. I personally never buy houses when the market is on the upswing. Especially with all of the roofing services in Omaha, NE. A lot of the places out there need a lot of work.

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