My guess for why I was wrong about US housing
Edit/update: this is receiving more upvotes and I think it is worth explicitly pointing out that while housing is up 60% over this time frame, the Sp500 is up 90+%, so this is not intended as a full on refutation of all the points made in the original post.
A few years ago I wrote a post highlighting what I felt were underappreciated considerations in home buying, most of which cut against the standard advice of homes as a major part of your investment portfolio. It garnered a lot of argument, most of which, I felt, boiled down to reference class forecasting over which mean housing would regress to for price trajectory: a more current one, or a more long term one.
Since then, housing has gone up 60+%. And the reason I think I got the reference class wrong is that I missed something very important about the US housing market. Since discovering it I find most people I mention it to are surprised by it.
I was very surprised that the US had the second lowest house price to income ratio in the world. It’s less surprising when you consider that the income side of the equation is quite high, but still. Since then, the US has started dropping down the list and is currently in 6th. But this means hundreds of other countries have more expensive houses relative to local incomes. I was so busy looking at reference classes that are local price trends that I missed the major reference class of the US having started out as an outlier.
Were the US to continue to regress towards the world median of around 12, prices would need to appreciate another 2-2.5x from where they are at currently, which would put the median house at $900k-1.2MM. I failed to appreciate that most of the world has a much sharper property owner class divide and it wouldn’t be all that surprising to see a relatively younger nation move in that direction over time. This also renders it much less surprising that investment firms are buying huge swathes of housing stock, even at the new higher rates.
From Colby who wrote a post also examining such considerations several years ago comments:
”I’m not familiar with this dataset but eyeballing the data and others I’ve seen of international comparisons it seems there’s a pretty tight correlation between price/income and population density, which seems intuitive, and America remains a rather sparsely populated country. The more relevant metric for investment purposes would probably be rental yield, and the figure I see here for US city centers of 10.5% as of 2019 seems totally out of whack with other data I’ve seen. Alex and I recently did a detailed analysis for a client who was considering buying a rental property in the Bay Area and after accounting for all relevant costs the net rental yield he was looking at was well below that on T-bills. SF is more overvalued than most cities and things have changed since 2019, but still. Now, you can find plenty of properties in the US outside the major cities where rental yields are quite attractive, but that’s a point I’ve been careful to make all along, my long held somewhat-anti-homeownership position has always been focused on the major US cities where housing prices are high (and most of our clients/prospects live). Alex has actually bought a few investment properties in middle-of-nowhere parts of the US and he has written/will be writing more about this on our blog.”
Please provide a link to the data. I’d like to find out where specific other countries are on the list, e.g., Germany.
Property Prices Index by Country 2019 Mid-Year (numbeo.com)
This doesn’t seem to account for property taxes, which I expect would change the story quite a bit for the US.
I’d also add that female labor force participation rates will move these numbers around some. Their calculations assume all countries have 50% female participation when calculating income, when it actually varies from 11%-85% or so.
Yeah, and it doesn’t adjust for taxes there either. I thought this was less of an issue when comparing rents to owning though, as the same error should affect both equally.
Indeed, it looks like property taxes average a third of US rates in the EU. Calculating the real cost of ownership over a length of time (thirty years, say) would be interesting.
Thank you.
Great job writing an oops post, with a short and effective explanation. Strong upvote for you!
It’s weird that the US has such a low price to income ratio and thus such a high rental yield. In an efficient market, real estate investors should flock to countries with high rental yields, buying up housing until rental yields equalize. Why hasn’t this happened yet?
I had similar hpusing related “i’m the smartest guy in the room” belief some years back.
I was looking at broad amounts people were retiring on (not enough) in the US and then extrapolated that these older folks would have to sell or get second mortgages just to live.
And since the baby boomers are retiring , I thought (with no more data or numbers to back me) that we would see signifigant downward pressure on housing prices.
But of course as long as this doesn’t happen in large piles , in large numbers of zipcodes and sort of in a short amount of time , then its not an issue.
Over decades in large parts of the world facing demographic challenges yeh. Not here.
Anecdotal, but in the UK, in 1986, as a just graduated PhD I bought a 3 bedroom house for less than 4 times my salary. At present a similar house in a similar location, will cost roughly 10 times a starting PhD salary. House ownership for most young people in the UK is becoming a distant and ever delayed dream.
I was going to write, “surely the relevant figure is how much you pay per month, as a percentage of your income”, but then I looked at the actual image and it seems like that’s what you meant by house price.