I suppose I?m about to commit yet another heresy here. After all, it?s likely that most people think that rising house prices are a wonderful thing. But as is my happy little way, I?m going to take the counter position to this belief.
While everyone is cheering on ever higher house prices, it?s likely that most have at least some realization that there?s a darker side. In the spirit of true contrarianism, let?s camp out on that reality for a bit.
What are some of the problems?
Rising House Prices Make Housing Unaffordable
The most obvious problem with rising house prices is that they work against would-be homeowners. The higher house prices go, the less affordable housing becomes. What?s more, it?s clear that rising house prices ultimately result in a higher percentage of household income being allocated to shelter.
High house prices also correlate to rising rents. More people are forced to stay in rental situations as house prices climb. That increases demand for rental units, driving up rents. That in turn makes it more difficult for renters to accumulate the down payment necessary to buy.
The chart below tracks housing prices in the US going back to 1975. It?s based on an index of January 1, 2000 = 100. As of August 2017, the index stands at 195.05 which indicates that house prices have nearly doubled in 17 years.
The chart confirms that house prices are now higher than they have been at any time in history. The have fully recovered from the Financial Meltdown which cut prices by about 30% from the peak of the last housing market in 2006 to the bottom in 2012.
If we go back to January 1975, when the index stood at 25.25, we see that house prices have increased by nearly eight times in the past 42 years. Meanwhile, real wages have remained flat for decades.
Rising House Prices are Translating into Less Homeownership
The chart below shows the rate of homeownership in the US going back to 1965. It reflects the percentage of households that own the home they live in. The rate peaked out at just over 69% in 2004. It sat at 63.4% in 2016. That?s statistically similar to the 63% rate that existed in 1965.
If we can superimpose the chart below over the chart above, we would find that the rate of homeownership began to decline two years before the 2006 price peak, and has fallen ever since. This confirms that rising house prices are hurting homeownership.
Unnaturally low mortgage rates and down payment assistance programs have failed to keep up with rising house prices. This is forcing more people become permanent renters.
Who Actually Benefits from Rising House Prices?
The general assumption is that while rising house prices hurt aspiring homeowners, they?re an unmitigated blessing to current homeowners. But is that really true?
Real estate appreciation is like a magic potion for home equity. As the value of your property rises, so does your equity.
But there are three reasons why this is an illusion:
1. Dead equity. Equity that sits in a house essentially does nothing. That?s because it isn?t cash and cannot be readily spent for other purposes. You can?t use it to buy the things that you need, nor can you invest it in other assets to generate additional income and growth.
The other two problems involve efforts to get access to the equity.
2. Borrowing against the equity. You can take a loan against the property and convert the equity into cash. But in doing so, you create a corresponding liability that also requires a monthly payment. One problem is solved, but another is created.
3. Selling the property. You can always sell your home to get the equity. But even if you do, you?ll most likely need the cash to purchase another property of equal or greater value. That puts you into the homeownership catch 22 situation, where you?re simply moving equity from one property to another.
#3 helps to identify the only group of homeowners who actually benefit from higher house prices. That?s people who are going to sell their home in the near future, and use the cash for unrelated purposes. This frequently describes retirees who are trading down to either a smaller house or to move into a rental situation.
But apart from that lone group, no one actually benefits from higher house prices. And that one group certainly doesn?t describe the vast majority of homeowners.
Rising House Prices Cause Higher Property Taxes and Homeowner?s Insurance
The most tangible financial effect of rising house prices is a negative one for most homeowners. Both property taxes and homeowner?s insurance are tied to property values. As house values rise, both expenses also increase.
This means that the carrying cost of the typical home will slowly but steadily rise the more that the house increases in value.
My mom is a real-life example of this. My parents purchased their house in 1962. They paid off the mortgage in 1978. But just a few years later, the property taxes had increased to the point where they were higher than the combined mortgage and property tax bill when the home was originally purchased. By the time my mom sold the house the real estate taxes were over $1,000 per month. The original combined monthly payment was less than $300.
So much for paying off your house. In many high cost states and metropolitan areas the elderly are often forced to sell their homes for lack of ability to pay real estate taxes.
We can write that off to that favorite catchall ?inflation?, but property taxes have been rising at a faster rate than the general inflation rate. This is especially true when compared to the heavily suppressed Consumer Price Index (CPI).
?And Higher Mortgage Payments
This doesn?t affect current homeowners, as long as they don?t increase the indebtedness on their homes. However we know many do, resorting to using the family homestead as an ATM machine. But that?s largely a self-inflicted wound.
More specifically, higher prices raise the cost of homeownership for new home buyers. The mortgage amount and monthly payment will be higher on a house that?s selling for $250,000 that was only worth $200,000 two or three years ago.
This not only raises the cost of homeownership for new homeowners but it also shuts out a large number of people.
Rising House Prices Can Set Up a Real Estate Crash
The first chart presented in this article shows that house prices crashed by 30% between 2004 in 2012. The fact that they crashed before means that it can happen again. The higher house prices go, the more likely a crash is to happen.
You can cheer on rising house prices as much as you want, but nothing goes up in value forever. Unless you plan on selling your house at the next market peak ? assuming you?ll know when that is ? you run the risk of being on the wrong side of a major price shift.
Rising Prices Can Force People and Businesses Out of a Community
Many communities across the country have been experiencing ?gentrification?. Dictionary.com describes gentrification as:
??the buying and renovation of houses and stores in deteriorated urban neighborhoods by upper- or middle-income families or individuals, raising property values but often displacing low-income families and small businesses.?
What we?re seeing in much of suburban America is not so much buying and renovating properties. What?s more common is doubling, tripling or quadrupling of property values in communities simply because they?re desirable.
Renovation means that the properties are being improved. But when prices rise on properties that have not been improved, that?s just pure inflation.
There are whole bunch of reasons for that phenomenon that are beyond the scope of this article. But I want to focus on the net effect of this type gentrification.
In communities that are experiencing rapidly rising prices, working-class and middle-class families are being displaced. As the cost of living in these communities increases people are forced out. They?re gradually replaced by upper middle income and upper income households. Eventually the nature of the community changes. It?s no longer a ?typical American middle-class community?, but a bastion of the elite.
One of the first casualties of such communities are families with children. They?re forced to move to more affordable communities. Even more significantly, couples who are contemplating having families are forced to look elsewhere. They simply can?t afford the price structure in the desirable community.
A Real World Example of Rising House Prices Displacing Families
The New York suburb that I grew up in is a case in point. When I was in high school there were 1,300 kids in the school. But about a dozen years later, after local house prices had at least tripled, the student body dropped to just over 400. That?s a decline of nearly 70%. There was even talk of closing the school, and merging with another district.
At another time and place a decline of this magnitude and in such a short space of time would have been blamed on The Plague.
The optimist will say that rising house prices were a sign of the town?s increasing prosperity. But it?s also obvious that it changed the very nature of the community. When I grew up it was a comfortable suburban enclave. But it wasn?t elite. The houses were all the same years later. The only thing that changed was that property values had risen dramatically. They?re even higher now.
This was hardly an isolated situation in the 1980s and 1990s. Communities in and around New York City and other high-priced cities experienced the mass exodus of families with children. They were replaced by high income singles, couples with no children, empty-nesters, and retirees.
Part of the reason for the flood of people moving into the Sunbelt states are young families who are essentially economic refugees. They move from large cities with high and rising property values to Sunbelt communities with lower and more stable prices.
My wife and I were part of this group. We didn?t even contemplate having children until we moved to Georgia in 1993. It proved to be an excellent move.
High Price Levels Choke Off the Vitality of a Community
If you don?t have children ? or if you don?t like them ? you might think that the exodus of families with children isn?t a serious problem. But the bigger issue is that communities with declining populations of young people tend to become socially stagnant.
Young people add a certain vitality to a community. They?re out and about, and generally more involved in what?s going on locally than adults are. As well, parents tend to be more concerned and involved with local activities when they have kids in the school system.
But when those families leave, households tend to disappear into themselves. They live in a community but they?re not part of it. Inter-action between people is much more restrained. People don?t know their neighbors, and rarely engage with others in public spaces.
The population is gradually replaced with people of a very similar demographic. They tend to be childless, college educated and employed in corporate America. This creates a sameness of thinking and behavior that eventually overwhelms independent thought and activity.
Conformity becomes the order of the day as residents try to either keep up with their neighbors or even outperform them. Because that?s what you do in the corporate world. Diversity in its truest sense comes to be seen as a threat that needs to be stopped at the border.
The band Rush made a song in the 1980s called Subdivisions that perfectly describes that conformity, though it ironically tells it through the eyes of high school kids. The telling verse, repeated throughout the song: Conform or be cast out. But this part of the song captures the spirit:
?Growing up it all seems so one-sided
Opinions all provided
The future pre-decided
Detached and subdivided
In the mass production zone
Nowhere is the dreamer or the misfit so alone?
Rising House Prices Change the Nature of Business in a Community
It?s not just families with kids who get forced out of high-priced areas. Traditional businesses ? the kinds that provide the products and services that people actually need ? are also forced out. They?re replaced by high-priced boutiques that appeal primarily to the prosperous and childless. Gone are the butcher, the baker, and the candlestick maker ? the very people who may have built the community.
Commercial property values and rents also rise, which is what forces out the traditional businesses. The boutiques that replace them are less enduring. They come in the latest boom, and fold with the next recession. This is completely unlike the traditional businesses that may have been in the community for decades and represented part of its very identity.
Gone is the traditional family, the middle class, the factory worker, and often the retiree. Gone also are the shopkeeper, the craftsman, the artist, and the musician. They simply can no longer afford to stay. That sucks the life out of the community, and robs it of its soul.
An excellent example of how this plays out in a very large city is I Left Vancouver Because Vancouver Left Me. In it, author Jessica Barrett described the massive cultural changes that took place in that city as a result of its legendary real estate price spiral. This article could easily have been written to describe New York, San Francisco, Boston, Washington DC, and any number of other overpriced cities.
One of the problems with rising house prices is that it?s official policy. No, no one in Washington DC is likely to have sat down and made a formal decision in that direction. But what do you call a conglomeration of artificially low interest rates, generous tax deductions for mortgage interest and property taxes, and any number of affordable mortgage programs and down payment assistance programs?
It all points toward a doctrine that no one officially admits exists, but clearly does.
Rest assured that this will be a self-correcting problem. As the saying goes, What goes up, must come down. The higher it goes, the bigger the fall.
Enjoy the rising price trend, if in fact you do. But don?t be blind to the problems that it?s causing. As a society, we?re paying a very real price for a phenomenon that?s benefiting a relatively thin slice of the population.
Me and my family live in a fairly affordable community, at least by the standards of the Northeast. It?s actually a small city. There are certain neighborhoods here that are higher-priced. But much of the price level is moderate, and some is even lower.
The mix serves to create a more eclectic community that?s far more interesting and inspiring. I realize that many people love rising house prices, and aspire to live in higher-priced communities. But I think that process requires making trade-offs that many are not aware they?re making.
What do you think of rising house prices? Do you think they?re generally a benefit to society? If so, what are those benefits? Or like me, do you see hidden problems?