land value Archives - Amateur Earthling

In my last post, I suggested that while we like to think of housing as an investment, it’s really more like a crappy savings plan, potentially redeemed by the fact that you can live inside the piggy bank. Land can be a profitable speculative investment, but allowing land to appreciate and drag the cost of housing upward in real terms is fundamentally incompatible with housing being affordable.

Economists (including Adam Smith, David Ricardo, Thomas Paine, Henry George, Thomas Friedman, Joseph Stiglitz, and Matt Yglesias) have highlighted the negative impacts of allowing land owners to collect monopolistic “ground rents” but nobody seems to care. So now tens of trillions of dollars worth of real estate in the US is predicated on the idea that landowners get to retain these speculative gains. Barring a glorious Georgist Revolution, this is probably the arrangement we have to work within.

Build, Baby Build!

Luckily, in a city with increasing land values, where property owners get to keep all of those unearned financial gains, there’s an All American Capitalist Solution™ of sorts, which can potentially keep housing affordable, even when land is expensive: build more housing on less land. By building densely, high land costs can be shared across more households, reducing the overall impacts of expensive land, and allowing home buyers & renters to pay primarily for housing instead of land.

Continue reading Density or Exclusion: the Perils of Local Zoning

Housing as an Investment

There’s a powerful cultural narrative in the US that says when you buy a home, you’re not only securing a place to live, you’re making an investment.

When I say “investment” I mean a thing that you can put some money into, and get more money out of later, in real inflation adjusted terms, net of the expenses associated with having the thing in the first place. Houses — as in, physical structures that shelter human beings — are clearly not this kind of thing. Anyone who has had to maintain an older home knows this. Roofs collapse. Pipes corrode. Walls need to be painted. Like bicycles, laptops, and virtually all other durable goods, left to their own devices, houses are depreciating assets: they lose utilitarian value over time. However, we’ve done an incredibly good job of ignoring this as a society. How do we fool ourselves?

We tend to ignore inflation. If you bought a house for $100,000 in the year 2000, and sold it in 2016 for $140,000, even if you didn’t put a single penny into maintenance, taxes, or insurance, you just barely broke even in terms of real purchasing power, if we’re talking about the house purely as an investment.

We tend to ignore the ongoing expenses of homeownership. In practice, you can’t avoid spending money on maintenance, taxes and insurance, but few homeowners record every property expense, and calculate whether they’ve come out ahead upon selling a home. Especially if the building is older “naturally occurring affordable housing”, maintenance costs can easily end up being a few percent of the building’s value each year. Property taxes and home insurance are also substantial expenses, typically less salient to homeowners than the purchase and sale prices of the home.

We can think of inflation and property expenses as cancelling out a fair chunk of any increase in the nominal value of a home. With 2% inflation, and spending 3% of the home’s value every year on maintenance, property taxes, and insurance, a home’s value needs to increase about 5% every year in nominal terms just to cover its own costs. In other words, if you bought a house for $100,000 in the year 2000, and sold it for $200,000 in 2016, you didn’t quite break even — again, if we’re looking at the house purely as an investment.

We tend to notice the accrual of home equity. Ideally, as you pay off a mortgage, the fraction of its value that is covered by your equity rather than the bank’s debt increases! Even if you just break even after accounting for inflation and ongoing expenses, you’ll hopefully have a larger chunk of change on hand to put into buying your next home. Continuing with the example purchase above (grabbing a mortgage calculator off the internet) if we assume a 20% ($20,000) down payment and an $80,000, 4%, 30 year fixed rate loan, after 16 years of payments, the remaining loan amount is about $49,000. So assuming you sell the home at the “break even” price, including expenses, of $200,000, you end up with $151,000 after paying off the loan. This is $131,000 more than you started with, which feels totally awesome! You “invested” $20,000 and “earned” $131,000, more than a 650% increase!

Continue reading What is Housing in the US?