Hmm, I notice that we’re making exactly opposite prediction types on two different assets. Last year I made a momentum prediction on the stock market (real returns to be around 7% in line with history), you made a regression to local trends argument (<2% growth in line with recent slow growth of underlying factors). In real estate here I’m making a regression to the mean argument (I expect housing to under perform because it has been over performing by quite a bit over the last 20 years. ) and you’re making a momentum argument...
Regression to the mean arguments tend to be reference class tennis, since regression to a particular mean is just an argument for momentum on a different time scale. In either case there’s an argument to be made about ceilings on asset prices (earnings on stocks, ability to service monthly payments on mortgages). In both cases there’s a reversion to mean argument to be made when recent growth has brought the asset price much closer to a relevant ceiling.
I think in both cases people have been surprised by how much the ceiling has gone up? In stocks corporate earnings have become much larger than people would have predicted at the same time that stability was increasing which means people were willing to accept higher multiples on those earnings. Housing is somewhat downstream of this. The strongest markets have been subject to very cash rich buyers, both tech workers and foreign capital pushing mortgages up to levels that wouldn’t be affordable to most. Living in a city turned out to be a better deal (decreasing crime and pollution and increased earnings power) than thought so people are willing to accept longer payback times on houses. There’s a question about which is more constrained and likely to hit a wall sooner. If corporate earnings go down raises and new entrants will slow down, lowering the amount of cash entering these markets. Elasticity to shocks compared between asset classes might be the thing.
edit: thinking about it a bit more, it seems like corporate profits have a lot more headroom than house prices. When house prices get too high more people do in fact rent and just choose to retire elsewhere after making massive salaries. There is less political will to force people to pay more for housing than there is to maintain corporate monopolies that ensure lack of new entrants. Companies also eventually start building housing (as google is doing now) because the calculus flips on paying workers more vs giving them more benefits (esp b/c tax structuring). I guess with corporate profits eventually people start doing more illegal end runs around monopolies.
I’m not really making a claim about momentum, I’m just skeptical of your basic analysis.
Real 30-year interest rates are ~1%, taxes are ~1%, and I think maintenance averages ~1%. So that’s ~3%/year total cost, which seems comparable to rent in areas like SF.
On top of that I think historical appreciation is around 1% (we should expect it to be somewhere between “no growth” and “land stays a constant fraction of GDP”). So that looks like buying should ballpark 10-30% cheaper if you ignore all the transaction costs, presumably because rent prices are factoring in a bunch of frictions. That sounds plausible enough to me, but in reality I expect this is a complicated mess that you can’t easily sort out in a short blog post and varies from area to area.
If you want to argue for “buying is usually a terrible idea, investors are idiots or speculators” I think you should be getting into the actual numbers.
The actual numbers are somewhat idiosyncratic but my main point is that in the process of investigating the numbers most people don’t evaluate downsides because they don’t occur to them. Once these costs are taken into account the marginal buyer will flip on the decision. In extremely hot markets you are much more likely to be like the marginal buyer rather than the average buyer.
Hmm, I notice that we’re making exactly opposite prediction types on two different assets. Last year I made a momentum prediction on the stock market (real returns to be around 7% in line with history), you made a regression to local trends argument (<2% growth in line with recent slow growth of underlying factors). In real estate here I’m making a regression to the mean argument (I expect housing to under perform because it has been over performing by quite a bit over the last 20 years. ) and you’re making a momentum argument...
Regression to the mean arguments tend to be reference class tennis, since regression to a particular mean is just an argument for momentum on a different time scale. In either case there’s an argument to be made about ceilings on asset prices (earnings on stocks, ability to service monthly payments on mortgages). In both cases there’s a reversion to mean argument to be made when recent growth has brought the asset price much closer to a relevant ceiling.
I think in both cases people have been surprised by how much the ceiling has gone up? In stocks corporate earnings have become much larger than people would have predicted at the same time that stability was increasing which means people were willing to accept higher multiples on those earnings. Housing is somewhat downstream of this. The strongest markets have been subject to very cash rich buyers, both tech workers and foreign capital pushing mortgages up to levels that wouldn’t be affordable to most. Living in a city turned out to be a better deal (decreasing crime and pollution and increased earnings power) than thought so people are willing to accept longer payback times on houses. There’s a question about which is more constrained and likely to hit a wall sooner. If corporate earnings go down raises and new entrants will slow down, lowering the amount of cash entering these markets. Elasticity to shocks compared between asset classes might be the thing.
edit: thinking about it a bit more, it seems like corporate profits have a lot more headroom than house prices. When house prices get too high more people do in fact rent and just choose to retire elsewhere after making massive salaries. There is less political will to force people to pay more for housing than there is to maintain corporate monopolies that ensure lack of new entrants. Companies also eventually start building housing (as google is doing now) because the calculus flips on paying workers more vs giving them more benefits (esp b/c tax structuring). I guess with corporate profits eventually people start doing more illegal end runs around monopolies.
I’m not really making a claim about momentum, I’m just skeptical of your basic analysis.
Real 30-year interest rates are ~1%, taxes are ~1%, and I think maintenance averages ~1%. So that’s ~3%/year total cost, which seems comparable to rent in areas like SF.
On top of that I think historical appreciation is around 1% (we should expect it to be somewhere between “no growth” and “land stays a constant fraction of GDP”). So that looks like buying should ballpark 10-30% cheaper if you ignore all the transaction costs, presumably because rent prices are factoring in a bunch of frictions. That sounds plausible enough to me, but in reality I expect this is a complicated mess that you can’t easily sort out in a short blog post and varies from area to area.
If you want to argue for “buying is usually a terrible idea, investors are idiots or speculators” I think you should be getting into the actual numbers.
The actual numbers are somewhat idiosyncratic but my main point is that in the process of investigating the numbers most people don’t evaluate downsides because they don’t occur to them. Once these costs are taken into account the marginal buyer will flip on the decision. In extremely hot markets you are much more likely to be like the marginal buyer rather than the average buyer.