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.
(Source: FRED Economic Data from the National Association of Realtors)
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.
(Source: FRED Economic Data from the US Census Bureau)
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?
Amen?
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.
Final Thoughts?
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?
It will be interesting to see what the new tax law proposal ends up doing to housing prices, even though mortgage interest is still deductible. I wonder how many people actually pay enough interest to make it deductible in lieu of the increased standard deduction. Personally, we have no interest expense so no deduction there. Our real estate taxes are above $14,000 so the limit at $10,000 will hurt us. The medical deduction is eliminated so while our deductions in the past exceeded the new $24,000 standard deduction, now it will not and we may be hurt by the new law, depending on what the tax rates end up being. It will be interesting to see how it all falls out.
Hi Kathy – $14k for real estate taxes??? OMG!!! I suspect that any tax changes won’t be in our favor. They’re usually designed to increase tax revenue in the guise of reform (just as ACA increased HI premiums in the name of reform). I have to crunch the numbers to see how it will affect my family. But we won’t know until the final version is passed. I expect major changes in the current draft.
In a way it’s good if they get rid of some of the more generous deductions. That will let the masses see what’s really going on. Deductions encourage consumption for the purpose of creating tax breaks. But what we need is tax policy that enables people to live better and improve their finances. I don’t like policy that encourages people to go deep into debt to buy a house or pay for college under the veil of a tax break.
If these sweeteners are taken away, people might see what taxes really are, and demand rates that are low enough that deductions aren’t so important.
Rising housing prices are impacting us in the short term as well. In Fulton county, GA (home of Atlanta) the value of homes rose sharply this year, prompting an outcry from homeowners that ultimately resulted in a delay in mailing county property tax bills, as well as a rollback of taxed values to the 2016 levels. Of course, property taxes fund schools. Last week, the courts had to issue the county a temporary collection order to allow the property tax bills to be mailed, because the GA Department of Revenue has yet to approve the County’s tax digest. In the meantime, 1,200 teachers have been furloughed, field trips are cancelled, and there has been talk of needing to close some of the schools altogether for lack of funds. I can only imagine that other counties are struggling with similar issues – so yeah, rising home prices aren’t always a positive thing.
Hi Mary Ann – I lived in Fulton County for 21 years. This seem eerily similar to 2008 when they did the same thing. Furlough employees, cut programs, threaten all kinds of hellfire and brimstone – but they also built Johns Creek HS to the tune of $85 million. I’m wondering if this is a legitimate problem or another fiscal tantrum.
I have been following the rise in property values in Fulton County since leaving three years ago. From what I’ve seen, prices on the Northside now rival those in high cost metros like NY, DC and Boston. That’s not good for Atlanta, since cheaper housing has always been one of the big draws there. If it’s no cheaper to live in Atlanta than, say New Jersey or California, it will have economic reprecussions.
I’ve often said that the only cost of living in New Hampshire that’s higher than GA is housing. Once you get past housing, the cost of living here is actually a bit lower. Especially since there is not income tax or sales tax. But if housing in ATL has increased to the levels I’ve seen…I’m really glad we made the move!
We bought our house right before the crash in ’05, but here in Madison WI, we were a bit insulated from price declines due to the seat of government and the university here. But in the last couple of years the frenzy has resumed and now we have watched the much smaller house next door to us sell twice in the last 2 years for above the price that we paid for our home! According to Zillow, our house is worth about 100K more than what we bought it for, but as you say, what can you do with the dead equity? Property taxes are definitely going to be an issue. In Wisconsin, we have Gov Walker who has held the line on property taxes, but here in Madison, he is enemy #1. So, they tend to raise the taxes as much as they can by law, so I have not seen the relief that other parts of the state. And don’t get me started about what they spend the money on.
Yes, what comes up, must go down, but will the corresponding taxes go down with it? Ha – don’t make me laugh!
Hopefully, we can hold out for just enough to get the kids out of the house and we can retire somewhere warmer with less cost of living.
Hi Kevin – You may get relief on property taxes if house prices drop. It was fairly common after the housing meltdown. People appealed their values and got their taxes lowered. Of course, don’t expect that to be the declared policy. Each homeowner has to fight the battle individually. Government officials never cut taxes, since they see them as the Ultimate Solution to All Problems.
Also, don’t be so sure that someplace warmer will be cheaper. The same fiscal problems are taking root everywhere. It may just be warmer, and not much else.
The United states government has made a complete mockery of the U.S. housing market.
That cracks me up. The first thing that seems to be always threatened is your kids. Somehow the city, state or whomever throw around all this government speak about how your kids will be short changed or they won’t get educated if they can’t squeeze out another 10,20 or 30 million out of raping it citizens for more money.
If you really think about it ask yourself why does home prices go up? they get older. They wear out just like anything else. They should go down in value.
Low interest rates and cheap lending policy’s are all designed to keep people in slavery for the rest of there lives.Keep them spending. Keep them in debt. Keep them running on the hamster wheel so we can do what ever we want. People are too busy trying to survive.
The only way owning a home is worth it is if it puts money in your pocket. Like having a rental in it or it housing a business that puts money in your pocket. Otherwise it is a boat anchor that sucks money out of your pocket.
You buy a home. You get to pay for 30 years. You get the honor of having to pay high priced home owners insurance. You get to pay school tax even if you don’t have kids.
You get your assessment raised even if you did nothing to improve your home. You pay back three times what you borrowed. Oh and you have to fix everything when something breaks.
You right Kevin.
There is nothing good about rising housing prices. I forgot. Once you sell your home you have to pay the New York state government for that also.
If it isn’t enough it has drained your pocket for 30 years but we have to pay a tax on it when we sell. Why?
If I didn’t own my home outright I would rent for the rest of my life. My business is located in it also so it puts money in my pocket.
Housing is one of the biggest shames in American history. We have all been brainwashed to think owning a home is good.
So summing it up.
Rising housing prices only help government. Higher prices mean higher taxes when your valuation goes up. Higher home prices higher estate tax you pay when you sell.
It does not help joe citizen in anyway.
Let’s say your lucky enough to walk away with a nice return. Unless you dump it into some tax free shelter you personal income taxes raise when you suddenly are in a higher tax bracket due to a sudden windfall of cash.
Hi Timothy – I actually wrote an entire article about buying a house with income potential. That’s what middle class families did for centuries, until after WW2, when a house became strictly shelter and later a tradable commodity.
My own sense is that the shift from income toward shelter only was an attempt by the middle/working class to portray themselves as richer than they are. Like the wealthy, they wanted to behave as if the economic use of a house was no longer important. Of course, the spread of the suburban subdivision, many with HOAs, fell right into that pattern. Now there are few options to find a place with an economic use. You either have to go out to rural areas, or to the inner city areas of older cities.
It’s ironic that the middle class unconciously reduced their options, while all the while thinking they were increasing them. But that’s where the term “sheeple” comes into the equation. Group think is very destructive, but all too easy to create.
I just read it the article you wrote.
It’s perfect.
I actually own a mixed use building. It houses my family. It houses my mother in law on the first floor and it houses a business.
The money generated from it pays all the taxes and puts money in my pocket. Their is no payments. It is owned free and clear.
I also have two large vacant lots that I have bought that were next door to my building. It now has a garden. I also have two garages on the property. One which I rent. The other I use.
And yes it is in the city.
15 years ago I tried to do the single family home thing. I lasted three months and sold it. It drained so much money from me.
To me Kevin this is not only the best way but the smartest way to live.
This is what I talk about all the time. We have to think outside the box when it comes to this stuff. Money, housing.
Their are plenty of ways still to not only survive but still get ahead but it requires living different than the brain washed way we have been sold by the so called American dream.
If you can’t tell I am very passionate about particular topics.
I think about 15 or 20 years ago I finally started questioning alot of things that I grew up believing. The suburbs worked for a time. It is not really sustainable over the long haul for most people.
Like you said before WW2 most people lived in multi unit dwellings with income or owned farmland that produced not only food but enabled people to make a living also. That’s good use of land and resources.
If you think about suburb living really closes you off to different ways of living. It forces you into that group or herd that you speak of.
The taxes in the suburbs are two to three times what they are in the city. The suburb I grew up in had 20 policeman on the force. They all make now between 80 to 100000 a year. Mostly they hand out traffic tickets and chase kids off parks and break up keg parties in the fields.
They’re property assessments go up every three to five years they’re taxes go up every year but nobody seems to question it. Everybody thinks it’s good.
Sometimes I’ll go to my sisters who lives in one of these suburbs and I see over priced houses sitting on small lots. People have at least two 20 to 50 thousand dollar vehicles in the driveway. She pays 13000 a year in property taxes. I wonder how they do it. I know some of these people. I know what they do for a living. It’s not enough to live that lifestyle. They think I am the idiot.
She wastes so much time driving around. There is no other way. She has to get all here food in a supermarket. There is no other way.
Thats just a few examples of how it chokes off your way of living and forces you into the herd.
I’m rambling. Maybe I should just start my own blog. LOL
Or you can write an article or two for this site. What you said “They?re property assessments go up every three to five years they?re taxes go up every year but nobody seems to question it. Everybody thinks it?s good.” That’s the group think I’m referring to. Anyone who thinks having their taxes increased is a good thing has “drank the Kool Aid”. They’re into herd thinking, not what’s best for themselves. I’ve seen exactly that kind of thinking time and again, and it gets more foreign to me with each passing year. And yes, it’s very common in suburban subdivisions and in large organizations.
No, Tim. Keep rambling. You are correct, and you have a lot of good points, just like Kevin. I enjoy and learn reading your replies.
Hi Tim – You hit the nail on the head with “Their are plenty of ways still to not only survive but still get ahead but it requires living different than the brain washed way we have been sold by the so called American dream.” There’s a better way to live, but we first have to admit that we’ve been indoctrinated to think in certain predictable ways. But we don’t have to think that way. We can pursue our own course – trust our gut – and it will usually lead us in the right direction.
My bigger picture fear is that most people no longer trust their gut. They live in fear of making mistakes. Like some would consider your 3 months in the suburbs as an unacceptable mistake. But so what, we learn and we move on. You’re in a better situation for having moved on. That’s what we need more of. For people to do what they think is right – even if it doesn’t fit the social norm. That’s the beginning of real change. We don’t have to sit around and wait for the culture to get it right, we can choose to do the right thing on our own. Each of us. That’s the beginning of a better life.
There are advantages and disadvantages to almost everything in life. I really like your presentation of the potential downside in rising housing prices. While the actions of the government may be well intentioned, they still distort the market and make it harder on many trying to buy for the first time.
Hi Michael – It’s ironic that government action – intended to make housing more affordable – actually produces the opposite outcome. We’ve needed a relentless array of tax breaks, low interest rates and special incentives to make housing affordable in the face of the relentless array of breaks intended to make it affordable. Its convoluted .
For my own part I don’t believe that government is really so interested in making housing affordable (if they were it would be affordable). I believe the real reason is the appearance of stoking affordability as cover for greasing the building industry. In doing so they stimulate the economy, which is the real motivation for the incentives. Of course, like all distortions, the price booms lead to busts, since all booms do is move future consumption into the present.
I think there are more disadvantages to rising house prices, but then that’s why I wrote the article. The best thing government can do to improve affordability is to get out of housing completely. But that would be like asking them to stop breathing.