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Why do we assume that higher house prices = good?

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If the price of toothpaste or a burrito dropped 20%, most of us would be thrilled.

Burrito

So why is it considered a catastrophe when housing prices drop?

Last week, I asked you to identify the cultural assumption in this screenshot. Here’s what I was thinking of:

20100302-kaktjeriih5g69h8xqpxp5982

Isn’t it funny how “home prices falling” is assumed to be a bad thing?

You never know how American your assumptions are until you go to another country. That’s because in the United States, we have been systematically taught that housing is a good investment and that prices must go up. Ask your parents why they bought their house. One of the top 3 reasons will almost certainly be, “It was a good investment.” Yet I’ve shown very clearly that for many people in many situations, it is not. In fact, housing is often a terrible investment.

Yet the illusion persists, whether it’s my friend wanting to buy a million-dollar house with no research, or people saying things like, “I wish I’d bought more real estate” after incurring a paltry 1.2% return rate over several decades.

As a result, you get media reports that implicitly echo the cultural assumption that housing is a good investment. The way they describe the housing market — oops, “housing recovery” — influences and reflects our cultural assumption. Let’s take a look at a headline from a major national news publication:

Interesting…it’s a “housing recovery” when prices are getting expensive. Would you say that with toothpaste?

Also interesting: Why is it a painful decline when young people and other first-time buyers get more affordable housing?

Alice in Real Estate

What if we discard the assumption? Let’s try: For each of these screenshots from major media sources, I’m including the opposite cultural assumption below it.


Or…prices could become more affordable for young people


Or…prices reach a new level of affordability


Affordability grows for first-time homebuyers


Housing market bargains continue for young people, first-time homebuyers

As Warren Buffett said in his 1997 Chairman’s Letter to Shareholders,

“If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period?

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.

This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

Why “higher house prices = good” persists

Deep-seated beliefs like this exist for multiple reasons. What might some of them be?

  1. American culture believes that home ownership is a right that everyone should have (it’s not).
  2. Since most newspapers are written by and read by older people — whose wealth is predominantly (and mistakenly) tied up in their houses, it only makes sense that real estate prices “should” increase. As a result, you see words like “recovery” and “crash” rather than “bargain.”
  3. Unlike toothpaste or other commodities, there are ancillary effects of changes in real-estate prices. If one house price declines in a neighborhood, there are spillover effects that affect nearby houses. This is why neighbors and realtors will do anything to prevent a house from being sold at a low price, including throwing in things like cars and TVs instead of lowering the list price.
  4. Crooked organizations like the National Association of Realtors and banks use every trick in the book to prevent house prices from actively reflecting the market price. Remember how, in Chapter 6 of my book, I described example after example of how Wall Street firms use disingenuous tricks like survivorship bias to obscure how poorly performing most of their funds are? The same is true of real estate. Where there’s lots of money in commissions, there is virtually always shady behavior, obscured facts, and whispered promises that never turn out to be true.

In fact, this cultural expectation goes to the very highest levels of the U.S. government. In a speech, President Obama said:

“This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild,” Mr. Obama told a crowd here, in one of the communities hardest hit by the housing crisis. “It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

It’s fascinating, but unsurprising, to hear the President’s explicit goal is to “shore up housing prices for everyone” — and, you could argue, maintain unaffordably high rates for most young people.

It’s not that simple

For young people, every time the market goes down, you should be cheering for your own individual finances. You can acquire investments at lower prices and you have a long time for the market to grow.

Yet, paradoxically, lower housing prices do represent a clear risk to the American financial system, whose growth is predicated on consumer spending, which is in turn strongly influenced by housing prices. That’s why this crisis is so serious and confusing. (See the President’s full remarks here.)

Just because virtually every media presentation decries the “rapid decline” in housing values doesn’t mean that applies to you. “Higher house prices = good” is a cultural assumption.

You can read more on my page about real estate investing.

* * *

What other money assumptions are there?

I’ll start:

What money assumptions have you noticed?

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80 Comments

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  1. The one assumption that a lot of people have is:

    ‘People with money only have money because they are greedy and selfish.’

    And I totally missed what you saw in that picture when you posted it last week!

    • I really think the writer misunderstood the fundamentals of our modern economy. This isn’t mercantilism- i wonder if he even knows how we measure the wealth of a nation.
      The point is that if we have a big budget deficit then intetest rates rise which makes the rates of loans for businesses go up and causes a domino effect making rates of almost everything rise – and that causes the price of houses to fall.
      Take a basic economic course before you berate American economics. You missed the entire point – prices of housing lowering is a clear reflection of our budget deficit and overall economic growth, which im sure you don’t know how to measure as well.

  2. The difference between a house and a burrito is that buying a burrito, you usually do not plan to sell it on (or pass on to your children).

    I think the assumption you talk about stems from viewing house prices as one of the indicators of how the economy fares. It makes sense, to some degree – the stock is limited (especially in desirable locations with no space for new houses), so house prices reflect how much people are willing/able to pay. They rise when people have a lot of money, fall when people can pay only so much. So the journalists are probably writing more from the “state of economy” point of view, not houseowners’ point of view.
    BTW if you have only house you live in, prices don’t matter much – if you want to move, you may sell your house for more (less) than you bought it for, but your new house will cost you correspondingly more (less). It’s the investors with multiple properties who have a real reason to get excited about price changes, but I do not think they are the majority.

  3. Even if real estate is not as a lucrative investment, say it brings you 1-2% annually, its a safer investment.

    If the stock market crashes, you’re left without stocks and without income.

    But if the real estate market crashes and you lose everything, at least you know you have somewhere to live. In my eyes, that is worth much more than the few % extra you get from stocks.

  4. This is a really good insight towards a principle of American economics that, you are right, has two sides, either of which making very good points.

    A good corollary to this is the price of gas and oil… we cheer if the price of gas goes down but we panic if house values go down. I guess it’s mainly because the average American doesn’t own much of a stake in the oil market.

    This is part of why I think many people get confused with the idea of the economy needing to expand and panic when prices stagnate. As long as wages are keeping proportional pace with prices, who cares about the specific figures?

  5. It is also worth remembering that in reality rising house prices do not actually mean the value of the house it going up, it simply means more dollars are required to purchase the house which is a direct result of inflation or put another way, the devaluation of the dollar because of the amount of “funny money” being injected into the system by banks, the federal reserve and the government.

    Just a point to think about. Great site Rammit.

    • No the price of houses rising is a result of our economy growing to fast like in 2009 where houses were seling in 4 hours so the prices rise – you cant build a house in four hours. Thats why we have fiscal stabilization policies. That is litteraly designed to stabilize the economy when it is going too fast or too slow. For example the expansionary policy will increase spending or lower taxes to get the economy moving at a faster pace when it is moving too slow. Thats almost the same reason (and applys to the same example) why we have supplemental spending – which is an addition or change in the current spending plan in case of the unexpected.

  6. It’s pretty normal behaviour.. everybody goes fear and loss.

    Not..wow what will we all gain. If more people can buy houses, more people get employed, builders will need extra workers, since most of use fix,repair change a house as soon as we’ve moved into it.

    It’s always about me,me,me. I’m about to lose something. After all the media cheer at house price rises and bemoan any falling of anything. The masses just follow.

    Happy Travels

    A

  7. Ramit, how is this a cultural assumption? This is true in other places too. In India, the builders even throw in all sorts of freebies to avoid lowering their prices so people can continue with the assumption that the house prices are rising or stable.

  8. One cultural assumption that I find annoying is “A car is a depreciating asset”. A car isn’t an asset; it’s an appliance. Once I figured that out, cars got a lot easier for me. I drive a paid for minivan, because that’s the appliance that my family needs right now.

  9. thekevinmonster Link to this comment

    Buying a house means you can control your own house. Renting an apartment, on the other hand, means you have to follow the landlord’s rules.

    So far, I like having a house, since it’s my responsibility. If the cat ruins something, I can replace it with something better. If the cat ruins something in an apartment, the landlord has to replace it and chide me for breaking the rules.

    On the other hand, house prices going down means that you’re stuck when you go to sell a house. Houses are so expensive that if the value drops and you need to move, you’re stuck underwater, owing the bank a massive amount of money due to the difference between your loan value and your home’s selling price.

    When you go to sell a car, that’s often not so much of a problem. You can easily pay off a car within 5 years even though the value depreciates so sharply. A house turns into a long-term investment because you simply need to break even or better to avoid financial ruin.

  10. You said it right when you said that the newspaper was written with the interests of its readers, the majority of them presumably already own their own houses, in mind. The newspaper doesn’t care about the young or the renters because that is not their intended audience. The problem is when the president shares that prejudice.

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