Housing Bubbles, Taxes, Leverage, etc. And What It Means For The Biosphere


What does housing have do with wisdom? Everything. We used to be called cavemen…When we were more honest. 

Owning real estate has, in many nations and states, a taxation aspect. Consider California’s top real estate areas. The prices of houses there doubled, or trebled, in the last ten years. Purchase such a house now: one will have to pay 2% of the cost of the house, as a tax, annually. Typically. 

So say the house was worth 500K ten years ago. That means one has to pay $30,000 tax, every year, after purchasing that same house at inflated 2021 prices. Then say the worth of the real estate market collapses by 50% as it has done several times in the past in the hot areas. The house price will collapse down to 750K, but the new owner still has to pay the 30k annual tax. It gets worse when one considers leverage. The same house would have been, typically, purchased with 20% down (typically wiping out most of a middle class family saving, after closing costs, etc.). So suddenly these savings are wiped out at any 20% downturn in real estate… The same 300K could have been saved and invested at the typical 7% financial markets provide with. The typical leverage of one to five of real estate guarantees sharp downswings, as observed: owners who were speculating by buying real estate always try to get out fast enough to prevent the wiping out of their principals.  

Meanwhile President Biden says he will not raise taxes for people making less than 400K in income, and went to the Glasgow climate conference in an 85 car fossil fuel caravan (several jumbo jets carried all that)… But an inflation of 10%, pretty much guaranteed at this point, lowers that promise, in constant dollars, down to 360K… Those below 360K will not be spared, especially if very poor and on government assistance: because the assistance they get will suddenly be worth 10%… LESS!

To cool inflation, interest rates will have to go up, and average interest rates are typically much higher. That will make purchasing a house much more expensive, and the market will have to correct accordingly.

Usually real estate is viewed as an edge against inflation, and often works well that way… But not in a massively overbought market: right now one can get, typically, only a fraction of housing ownership cost by renting the owned property, a sure indication that the real estate market can only go down. 

***

The preceding was a comment upon an essay of the very clever Robert J. Shiller, a 2013 Nobel laureate in economics, Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. Shiller is the author of Irrational Exuberance, Phishing for Phools: The Economics of Manipulation and Deception (with George Akerlof), and Narrative Economics: How Stories Go Viral and Drive Major Economic Events.

And now for the connection with wisdom…

The well connected phools who lead the biosphere (into catastrophe) are meeting in Scotland, to enjoy electricity made from coal plants. Neanderthals used coal… 100,000 years ago. The pretext is the Conference Of Parties 26 (COP26), 

Guess what? Housing, especially the individual family home, anglospheric people are fanatical about, is a big part of the climate problem. Americans of course are all into that kind of luxury. Apartments use only a third of the energy of individual houses, recent French government data show. Meanwhile in politically correct Berkeley immensely overpriced houses are the object of bidding wars and get sold for up to 100% above the already grotesque asking price. (This depicts the… typical case, of a house which was purchased for 1.6 million dollars five years ago, got proposed for sale at 2.75 million, was the object of a bidding war, and got finally sold for 4.25 million… roughly 50 years of family income, PRE-tax…)

So a house which is an average house for the USA (300 square meters), luxurious for the rest of the planet, can end up being sold for 60 times the average US family income… To which have to added gigantic real estate taxes….  

Of course Berkeley liberals are fake and more than slightly deranged, I know them well, having lived among them and their corrupt descendants, for decades… so they may as well splurge into housing frenzy, it goes with their territory…

When one will get serious about the climate, housing frenzies will have to be washed out, and go down the drain of climate correctness...

Patrice Ayme

***

From Robert Shiller: According to the latest S&P CoreLogic Case-Shiller Home Price Indices, US home prices rose at a record rate of 19.7% in the last year, and now look very unstable. They might increase further for a while, but that may be followed by serious declines….

…”investing in housing in booming locations may not be as safe a long-term bet as many seem to think. Prospective US home buyers might logically assume that their tenure in a house will outlast any interruption to an upward trend in home prices, enabling them eventually to benefit from new highs. After all, real home prices in the United States fell by 36% nationally from December 2005 to February 2012, because of the Great Recession, but then increased by 71% to a level 10% above their 2005 peak.

However, I have been arguing for years that the US housing market’s performance since 2005 is not the only relevant example of long-term home-price trends. My historical data show that real US national home prices were sometimes lower in the 1990s than in the 1890s. Over that century, cities spread out to cheaper land, and building tools, technology, and transportation became more efficient.

So, let’s imagine that, for the past 1,000 years, home prices had beaten the US stock market’s average 7% annual return (after reinvesting dividends) in the twentieth century. During that time, these home prices, after compounding, would have increased by a factor of 24 followed by 28 zeroes.

But hardly any homes from a millennium ago remain today, and hardly anyone would want to live in those that have survived. Furthermore, the land they sat on is often no longer valuable. In Biblical times, for example, Ephesus in western Turkey was a coastal city with magnificent buildings. But its once-valuable harbor has since silted, so that the city’s ruins are now miles from the sea.

… buying a house with a mortgage serves as a self-control mechanism that helps people to save more. The discipline imposed on young homeowners by regular amortizing mortgage payments is a key driver of retirement saving. And buyers can hedge some of their risk in the home price index futures market.

Make no mistake: homeownership clearly has its benefits. But people who really want to buy now need to be sure that they can accept what could be a rather bumpy and disappointing long-term path for home values.

Tags: , , , , , , ,

7 Responses to “Housing Bubbles, Taxes, Leverage, etc. And What It Means For The Biosphere”

  1. D'Ambiallet Says:

    Seems to me that you are focused on implicit racism in housing. Right?

    Like

  2. Don Kemerling Says:

    Patrice Ayme: I recommend moving to Kansas, but prices are rising here too. Still not near CA levels

    Like

    • Patrice Ayme Says:

      Don Kemerling: One can move 20 miles up the freeway and get half the price, or even a third… But these 20 miles take an hour during traffic hourS (7 hours a day). This is the HOUSING policy of local cities which is to blame.

      Like

  3. Gmax Says:

    So when does the bubble collapse? Please tell us oh great oracle, pretty please. When Zillow stock collapses?

    Like

  4. ianmillerblog Says:

    In NZ we have a property bubble too, in part thanks to money printing and dismal interest rates. A further factor has been that new builds need Council approvals and many of the councillors are property investors, so they made the fee process hugely expensive, their excuse being that they were getting income for the Council. Ho Ho. Self interest had nothing to do with it? Really? However, now inflation has reared its head and interest rate increases are inevitable. The bubble has a lot of potential to burst.

    Like

    • Patrice Ayme Says:

      The conflict of interest of city councils and other politicians here in California, is awesome. So is the media control by the owners of the world, the plutocrats. Paradoxically, it’s the Murdoch media which gives a breath of objectivity. I used to be anti-Murdoch, call him Murderoch, in 2003 and before… BUT, after he became US citizen, he was clearly ostracized by the US Deep State, as an Aussie, and he didn’t like it…
      Recently at some point I was trying to find an hotel which would accept my dog… To my horror, I discovered the (large and expensive) hotel was owned by the present governor of California… A so-called “Democrat”….
      The self-described “progressives” have no problem being led by individuals (Pelosi, Feinstein, etc.) who made hundreds of millions WHILE in office… Typically they transfer to their immediate family to claim just 100 million or so… rather than a billion…

      Like

What do you think? Please join the debate! The simplest questions are often the deepest!

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


%d bloggers like this: