I see a lot of expensive houses being built in my area. A LOT. And the weird thing is that they’re being bought pretty quickly. Are these people just making more money than me? If so, what are they doing for a living? Or are they just living house poor? How exactly are they affording these places?
Edit: For reference, my neighborhood is starting to become popular (because the other popular neighborhoods have priced most people out of affording places there). The normal price of newer homes here is $700k. My home, built in 1965, which is 2500sq ft on a quarter acre of land, is $500k.
With respect, you’re missing the point.
Sellers don’t determine price. Buyers do. “Investors” (big, small, whatever) are selling homes at those prices (or renting, or VRBOing) because there are customers ready to buy the next available unit. If customers aren’t willing to buy at that price, then the seller will lower the price. Or never build the big house in the first place. Or never renovate. Who would spend money on an investment when nobody will buy it?
They can only sell for those prices because buyers are ready to buy.
Economists have a concept of “economic value”. Regardless of price, “economic value” it what the next buyer is willing to pay for an item RIGHT NOW. People have a lot of weird ideas about what the “value” of something is, and they’ll include all sorts of non-monetary factors because they think value is a feeling or concept of utility that particularly applies to them. They value “walkability” or “views” or “quaint antique design”, or whatever.
But inasmuch as “value” has any objective meaning, the best one economists have managed to come up with is economic value – the price that a unit of something will sell for at this very moment. And I humbly suggest that the economic value of housing in your area something is determined entirely by the buyer: the person or entity that is willing to buy the next available unit of housing.
If those buyers can’t outbid all the other buyers, then they weren’t going to get a home anyway. This has nothing to do with the seller.
You and the other guy are talking about two different things. You’re trying to explain supply and demand in a very factual way, the other guy is explaining to you how this is hurting actual people who need somewhere to live.
They haven’t missed the point at all but are talking about the human element here.
The “investors” are the buyers/customers, and they aren’t reselling these houses–they’re renting them out. It’s mostly corporations increasingly doing over the last 15 years or so (I think it started around the 2008 financial crisis). They have the capital to do it and so regular people are being priced out more and more as this practice keeps driving up prices.
It didn’t used to be this way. Even in my “cheap” area, when I bought my house back in 2005 all but one house on my block were owner-occupied. Now, more than half the houses are rentals because whenever one came up for sale it was bought by a rental company. This is a serious crisis that needs to be addressed.
Renting them out is still selling them, just another kind of selling. The company can only charge rent if there is a renter willing to pay. Again, the buyer determines price – if rent is too high, there will be no renters.
Renting them out is not selling, it’s an ongoing income source for the owner. The renter does not determine the price when the alternative is to move elsewhere or live out of your car. There’s simply not enough housing–supply is limited. It’s not a simple equation like a factory adjusting the output and price of its widgets. If things were as simple as you say, there wouldn’t be such a severe housing crisis in the US. Just search for US housing crisis, there are thousands of articles explaining what’s going on.
The renter is the person who pays the rent, not the person who can’t afford it. If someone gets evicted because they can’t pay rent, they are replaced with someone who will.
You’re on the right track, though. Over-regulation, opposition to new construction, and opposition to multi-family construction are the reason buyers are willing to pay more and more in HCOL areas.
Part of the problem is it’s still more profitable to build an expensive property and wait a couple years to find a buyer who can afford it than to build an affordable property which will sell right away.
True, there is a “frictional” effect on occupancy rate, that causes property to be idle for some time. I’m about to buy a house that was built by somebody else, but they decided they couldn’t afford it, and backed out, so it’s been sitting there new & idle for a couple of months.
When there is a lot of economic dislocation, or major demographic changes, that frictional rate of idle property may spike up (e.g. in the wake of the 2008 recession/real estate bubble, when some owners decided they would rather wait for recovery than find a buyer at a huge discount), but it’s a transient effect.
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If the first time buyer cannot afford a house, it means another buyer showed up with a higher offer. It doesn’t really matter who owns the house.
Did I ever say anything about the seller? The problem is that investors are buying homes and not selling them. They are only renting them out.
There’s no meaningful difference in value between selling and renting. You pay a mortgage, or you pay rent, both represent the economic value of the property.
Suppose some entities step in and buy literally every property, and convert everything to rentals. The “price” of a rental is still what the next occupant is willing to pay. Nothing has really changed, except the way payments are handled.
If the price is too high, people leave the area. If the price is low, people flock to the area. This is true whether buying or renting.
This tells me all I need to know about how little you understand the situation. The equity gained by buying a house and paying a mortgage instead of rent is one of the primary ways that families can get beyond living paycheck to paycheck. Investors buying homes in which they will never live deprives people of the opportunity to earn that equity for themselves. Instead, people are stuck paying rent, which is effectively paying for the landlord to gain that equity.
I’m intentionally simplifying. Take all the concerns about ownership vs. renting, etc, and ask yourself: at the end of the month, what is someone willing to pay to put a roof over their head?
I can buy a car, or I can lease a car. I can buy a crane for my construction business, or I can rent a crane. I can buy an office building, or I can lease an office building. I can buy a house, or I can rent a house.
The function of a car, a crane, an office, or a house is not different based on how I structure the payments. I’ve got a budget, I need a car. I’ve got a budget, I need a house.
Sure, there are long term social implications of ownership vs. renting, clearly. But the economic value of a car or a house doesn’t depend on how one pays for it. I could pay cash money up front, I could take out a loan, I could rent. I could trade a supercar for a house, or mine gold to build a house. It doesn’t really matter. The opportunity cost of committing all the cash up front is similar to the interest on the mortgage, which is in turn similar to rent. Any method I might use to pay for it can be converted into a perpetuity… which is similar to rent.
That was the point of the hypothetical. That’s why economists say, if you want to know the economic value of something, find out the price of rental. That’s a quick baseline to the economic value. The seller – be they corporation, hedge fund, or private owner – doesn’t actually determine that value, the next buyer does, based on what they are willing to pay. If you’re not willing to pay, then you’re not the next buyer.
I’m aware. Turns out, if you remove enough nuance from a situation you can make it seem like whatever you want!
But paying a mortgage is not just paying for a roof over your head. It is working toward owning the shelter forever. You are paying for two different things simultaneously, versus paying only for the monthly shelter while allowing the investor to own the shelter forever. They are two fundamentally different things.
So, yes, the value of shelter from an economic view can be estimated looking at rent. And if you want to remove the nuance until unfettered capitalism seems like it’s going to work for the average citizen, then sure, all you need to think about is supply and demand. But those of us who live in the real world care about the long-term social and economic effects of allowing investors to control housing for the middle and lower classes.
What about “able to pay?” Leaning on the market to set all of these values with no regulation means that the only people able to own property are the ones who start with capital and everyone else is SOL. I’m not ok with that.
It means the same thing, unfortunately.
I’m not telling you how it should be, I’m telling you how it is. You can study rent control & related types of restrictions for how it might be different. But if homes are being priced out of your range in your geographic area, that’s because there are other buyers or renters willing to pay more, not because the house is owned by a corporation or a private citizen. The seller doesn’t decide how much the buyer or renter is willing – or able – to pay.
Because the alternative is to be homeless.
Or leave the area for lower prices somewhere else.
So quit your job and pay hundreds, maybe even thousands, of dollars to move somewhere different where you no longer have a source of income and don’t know anyone?
I’m not saying I like it, that’s just how it is. As a consumer of housing, like anything else, when you can’t afford what you want you have to get something less.
No, this is not how it is. In order to rent an apartment you have to show proof of income, and people who can’t afford a studio apartment where they live also cannot afford to move. What you are suggesting is literally not possible. You might as well tell someone to grow wings and make a nest in the clouds.
You can’t afford steak, you eat chicken, you can’t afford that, you eat beans. You can’t afford that, you’re in trouble.
I didn’t create the system, man. I get it, it’s hell to be poor. But corporations buying and flipping homes doesn’t have much to do with the plight of people who can’t afford studio apartments. If somebody else is ready to pay a higher rent than you are for the same apartment, they’re gonna get it. Doesn’t matter whether the landlord is a friendly grandma or a faceless megacorp, nobody is gonna willingly sell something for less.