Why rising home prices are unsustainable

One thing this experiment has highlighted is that on days like today, when I’m not feeling very clever, it’s hard to write.  Here I am, sitting with a cup of English breakfast, wanting to say something about the economy and knowing that it won’t sound very articulate.  But I’m turning over a new leaf: I’m going to more strictly adhere to my initial resolution and write anyway.

Rising housing prices – rising in real terms, after accounting for inflation – are unsustainable without an equivalent rise in the salaries of new generations.  If housing prices rise 5% a year in real terms for one generation, the home that cost one generation a reasonable downpayment and mortgage payment will stress the savings and budget of the next with an interest-only mortgage.

Home owners demand rising home prices.  In fact, without them, we worry that the economy is in trouble.  The government and Fed do what they can to provide them, through policy and interest rate changes.   Over the last generation we saw housing prices rise across the U.S., with some exceptions, because of economic intervention, not because of a lack of supply, overwhelming demand, or increased housing quality.

Current homeowners benefited from the increase.  The next generation wanted in on the easy wealth that appeared to come from owning a home – it worked for their parents, it seemed consistent, wouldn’t rising housing prices happen forever?

But it’s a ponzi sceme in a sense – housing prices can continue to rise only as new generations of home owners stretch themselves further and further to own their first home.  What enriched one generation inevitably makes it harder for the next to make ends meet.

I know housing prices have been all over the place in recent years.  In my opinion, in many places they’re still too high to make home ownership affordable for many.

I’ve got some tea left… I think it can make sense to own a home if you’ll be paying less in interest on your mortgage than you would be on rent.  But I’ll also say do not count on there being capital appreciation.  It’s not inevitable.  That should be clear to us right now, but I wouldn’t be surprised if some people hope that over the long run, housing prices will continue to rise, as they did for so long.  It’s true that governments are motivated to creating rising housing prices, so as far as they are successful, there may be money to be made.  But as the coming generations can stretch only so far financially, housing appreciation is unsustainable over the long term.

The tea is gone… hopefully this was fairly coherent.  I also know that while not everyone shares this viewpoint, it’s been written about before… ah well.  At least I wrote today.  I hope that for someone who reads this, something about this post was new and interesting.