The problem has been popularly summarized as "housing cannot be both affordable and a good investment."
Of course that might be an oversimplification. Housing has been an investment class as long as it's existed and yet there hasn't been an affordability crisis like this since at least before WWII. What's different now?
Housing that you live in (aka "consume") has not been a particularly good investment, IMO. What confuses many people into thinking that it is is that you often end up holding it for a long period of time, paying down the mortgage and when you go to sell, you have a large gain, where you started with a very small downpayment. For most people, that gain is also tax-free, so it seems like a magic windfall.
The problem is that over that long a period of time, inflation may have halved the purchasing power, meaning your gain is a paper one, you spent a lot of years fixing and maintaining the house, paying taxes and insurance, working on the yard, maybe did some remodeling, etc. If you'd instead invested in the stock market any surplus over renting, you often would have come out ahead.
Most people would find a way for that surplus to turn into lattes, vacations, new cars, and large TVs rather than into shares of VTSAX, so for them, homeownership is a good idea, not because it's a better investment than equities, but because it's a better savings vehicle than nothing.
I'm a homeowner and very happy about that fact for our family (for lifestyle reasons), but even in a steeply rising market (Cambridge, MA), my other investments have performed much, much better (even including the 2007/2008 crisis).
What's your investment strategy? I recently started a Roth IRA and started maxing it out each year, but I don't know what else to do with my savings (that are extra over my ~6mo salary buffer + emergency fund, I mean). Dumping it all into something like VTSAX is something I've thought about for a while, but I'm not sure how well it works for long-term investment/"making my money work for me".
Mega backdoor Roth is capped at $35000 (highly unusual to be able to fully fund this amount, since it requires a 401(k) that is structured to support it).
Backdoor Roth / direct contribution is capped at $5500 a year.
So in a perfectly optimal world of all the right situations, you could put up to $40,500/yr into a Roth IRA.
Currently, I'm getting about $15k into my Roth IRA annually (got lucky with the properly structured 401(k) plan at work) and I feel pretty fortunate about that.
Yes, but read the "mega backdoor Roth" technique. It allows many people to effectively contribute much larger sums into Roth IRAs, even though there is a $5500 "front door" limit.
If you have a low current marginal rate and a lot of money to stash away for retirement (that might be a semi-uncommon combination), it's absolutely something to look into. I have a high marginal rate, so I haven't done it.
So it's basically opening a Trad IRA, putting money into it, then immediately rolling it into a Roth IRA? I thought the contribution limit was across all IRAs you own, so you still wouldn't be able to put any extra into the IRAs in general?
This is complicated and weird. I might hold off until I understand it better.
Don't get hung up/paralyzed into doing nothing for fear that something slightly better might be available if you did hundreds of hours of research. The most important thing is to get started, IMO.
Just to be clear. The Mega backdoor Roth requires a 401k that allows After-Tax Contributions. Most won't let you do that. Their software will say "that contribution percentage you have selected will result in more than $18k/year in contributions and that isn't allowed" or you'll get to the end of the year and they'll just refund you the extra contributions. Which also doesn't help you.
i haven't read the suggested bogleheads book, i expect it's good. but there's also a bogleheads wiki with a bunch of stuff for free. https://www.bogleheads.org/wiki/Main_Page
> Most people would find a way for that surplus to turn into lattes, vacations, new cars, and large TVs rather than into shares of VTSAX, so for them, homeownership is a good idea, not because it's a better investment than equities, but because it's a better savings vehicle than nothing.
This is often not true.
I know its a popular belief with alot of millennial but anyone who has looked at a rent buy calculator quickly realizes for many areas (not the bay area / inflated housing markets beyond what the fundamentals support) buying still makes more sense than renting.
For instance, I'm considering a $325k purchase in an area where the equivalent rent is $1700/month.
There sure are many situations where buying trumps renting. The point in general is that buying is often overvalued and renting is undervalued.
One thing this calculator also cannot take into account is risk: if you lose your job, or get hit by an economic crisis like the one on 2008, you have an added catastrophe. But even discarding that, there are always situations where its better to buy.
> One thing this calculator also cannot take into account is risk: if you lose your job, or get hit by an economic crisis like the one on 2008, you have an added catastrophe. But even discarding that, there are always situations where its better to buy.
Of course. But if you invest your money you take the same risks also. There is a limit to how much risk you can really avoid long term.
I've lived in houses before, stuff tends to break over time....keep that in mind. As long as more than $3600 worth of stuff doesn't break within 5 years you are good. Probably depends partially on the age of the house.
> If you'd instead invested in the stock market any surplus over renting, you often would have come out ahead.
Why do you assume there is a surplus over renting? If renting gives you that much if a surplus versus buying the equivalent property either your local market is seriously out-of-whack or you have a really sweet deal from your landlord.
There's a massive surplus in the Boston/Cambridge/Arlington market right now, thanks to cheap money (low interest rates on mortgages).
That's before considering the optional upgrades that people tend to do to owned houses that they don't do when they are renting. (A functional kitchen with white appliances and laminate counters in a rental is a functional kitchen. Same kitchen in a house is a drive to install granite countertops, subway tile, pendant lights, and stainless steel appliances. Scratched wood floors and 5-year old beige paint are fine in a rental, etc.)
> There's a massive surplus in the Boston/Cambridge/Arlington market right now, thanks to cheap money (low interest rates on mortgages).
If that is the case, landlords are leaving money on the table.
> That's before considering the optional upgrades that people tend to do to owned houses that they don't do to rentals. (A functional kitchen in a rental is a functional kitchen. A functional kitchen in a house is a drive to install granite countertops, subway tile, and stainless steel appliances. Scratched wood floors and 5-year old beige paint are fine in a rental, etc.)
That is a separate issue, though I think someone who is not disciplined enough to avoid vanity upgrades to their property is probably not disciplined enough to maintain a significant investment balance either.
Edit:
Just took a quick look at Cambridge on realtor.com, and I would classify that as a textbook out-of-whack market. The rents are stupid low compared to the sale listing prices. In contrast, rents in my part of northern New Jersey are roughly the same, but sale prices are less than half. Hell, even Manhattan isn't that out-of-whack. I don't think you should be taking that as typical.
Maybe they are, but I doubt as a large class they're all similarly stupid. I think it's because their available rent is capped by desirable tenants buying property because of low interest rates. "Desirable" in this case meaning those who consistently pay rent on time and therefore likely have credit scores of 750 or better so can readily get a 4% or lower mortgage, which drives bidding wars for properties, which increases purchase/listing prices, which increases the surplus for just renting.
I agree with your edit that our local market is out of whack. It's what's kept me from buying investment property at all.
RE is location based. I live in one of the top places to move to in the US, and bought a house in 2011. I would have a hard time finding an equivalent place to rent for my mortgage cost right now, and would have a hard time affording my same house if buying it today. Of course, I had to do some maintenance and there is friction if I want to move, but even then rent would be more expensive in monetary and personal terms (can't do what I want with my space).
I'm renting in East Boston right now and my parents are getting the idea in their heads to try and snatch up property in the area before it really starts to take off (read: gentrify). On the one hand, I kinda get what they're trying to do, but on the other, what you mentioned here and in the parent comment makes me a little hesitant to agree with them.
The difference now is that we have seen a big uptick on inequality in American. People that are well off not only drive up housing prices, they also use their political clout to avoid the construction of affordable housing in order to maintain the value of their homes. It is a double effect that makes a big difference. Also, Americans got used to the idea that their personal home is wealth, which is a misleading and dangerous idea.
Maybe its a soft-cap on commute times? People were fine driving 20 minutes instead of 10, 30 instead of 20 and so on if it meant they got to live in nice suburbs. But now staring down the barrel of an hour commute or more people aren't willing to continue moving further and further out. Purely speculation of course.
Dramatic increases in lifespan have produced a home owning class that would normally have died years ago, locking up a large chunk of the housing stock. Also NIMBYs.
It surprised me when I moved to the US from Canada how many elderly planned to stay in their homes. In Canada it felt like many people downsized to smaller condos, at least in the city.
In California prop 13 freezes property tax assessments at time of purchase, so many elderly people are paying less property tax on their house than they would on a newly bought condo.
Prop 13 will go down as one of the biggest blunders in legislative history IMHO.
I get the complaint that people were being taxed out of their homes and that's not good, but in the end it just shifts the tax burden from the old to the young.
And it's extremely Regressive. Out of 2 people who bought the same house, the guy who bought it 30 years ago, made 2 million dollars, but is taxed 10 times less!
> Prop 13 is outright generational theft from younger people by older generations.
It's actually theft by corporate (or family chain) long-term property owners from everybody else; it doesn't favor individuals of particular ages (especially since the parent-child residence exception was adopted.)
It disfavors people who choose to live somewhere other than a home they (or their parents before them) have lived for a long time, but it disfavors old people who choose to move just as much as young people who do so.
Another factor that is present in some places (at least here in Seattle) is that certain regulations discourage condo construction relative to building rental units. Essentially, there is a stricter inspection process for any units that are to be sold. The law was well-intentioned, but has led to crazy things like 10-20k luxury apartment units being built per year with none of them available for purchase.
To be fair, moving is a pain, you'd be giving up an investment you've held for decades, and you may have settled down into an area and not want to move around. Plus, maybe there just aren't many other options where you live.
I'm not elderly, but that's a few reasons why they wouldn't downsize.
Cash compensation for most percentiles has stagnated since the 80s. There's a lot of mooted reasons for that -- increasing fringe benefit costs, demographic changes, Cowen's technological plateau, decline of labor unions, etc., etc., etc. -- but the upshot is that we have a ratio where the numerator has continued its growth pattern but the denominator has not.
NIMBYs are part of the problem, but there are also well-meaning (if poorly executed) safety and zoning regulations that drive up the cost. Rules like parking minimums, disability accommodations (i.e elevators) and minimum square footage requirements all contribute to increasing pricing. We have to decide as a society whether housing should be considered a luxury, and those who can't afford things like elevators and parking spots should be forced to live in a tent on the street or not.
Most of those are well intentioned laws to fix actual problems, but the lawmakers didn't take into consideration that not all developments would have those problems. The parking thing is a good example. It basically just says you need to have a space for most people in the building to park so they don't fill up the street parking for the entire block all of the time. A very valuable rule for suburban development where most units will have at least one vehicle. Not so necessary for downtown units where most of the apartments won't own a vehicle.
Or there are just cases where the developer is complaining about having to build parking, but if they had built the building as they wanted the parking would have been a total nightmare, not only for residents but also for everybody else in the neighborhood. In other words they're being forced to consider the actual cost of their actions instead of pushing them off on the community and pocketing the profits like in the good old days.
If you could designate a building "car free", and have all local street parking be permit parking, AND don't hand out permits to people living in "car free" buildings, it seems like it would fix the problem. But I don't know how practical it is to do this.
The city is in charge of handing out parking permits. When you apply for a permit they check their list of "car free" buildings. If you're in a car free building your application is denied. Aside from filing an extra form with the city, the developer saves tens of thousands of dollars per space: https://sf.curbed.com/2016/6/8/11890176/it-costs-38000-to-cr...
Federal regulations apply in San Francisco, CA as much as they do in Binghamton, NY. You'd think withdrawal from broad swathes of the country to a few hub cities is the problem, driven by ever increasing automatization and volatility in the labour market.
I totally agree on the hub cities phenomenon. I've been noticing it for 15+ years. I've talked to older people (>50) and they say that no-- when they were in their 20s and 30s you did not have to be in one of about eight cities to advance your career. Your career could advance in St. Louis, Cincinnati, or Phoenix. Stuff actually happened in places other than the big coastal cities.
I don't know the explanation for this, but IMHO it's one of the absolute worst trends of the early 21st century. It's also the opposite of what the Internet was supposed to do. I'm supposed to be able to live in some tiny town in West Virginia and have a broadband Internet line and work alongside people in NYC. Technically it's possible but the culture has shifted radically toward hyper-concentration of all innovation and advancement into a few places.
I think it's due to the fact that no one stays with the same employer for more than four years. Back then, you could look forward to a decades-long career with the same company (my father-in-law was with IBM all his life) - you joined Dow out of university and could expect to stay with them for 20 years. But who would even consider moving to Midland, MI nowadays? It's a godforsaken place an hour north of Flint! You can't risk buying a house in a one-company town! So we all submit to the Boston or Bay area commute madness.
Historically hosuing has not been an investment where people could expect a BIG payout after ten years. It was a good, conservative investment but not a money maker as it is now.
We have external money moving into US property. I wonder how much the Pacific Northwest's recent surge is due to Chinese investment moving on from Vancouver.
Of course that might be an oversimplification. Housing has been an investment class as long as it's existed and yet there hasn't been an affordability crisis like this since at least before WWII. What's different now?