If the price of toothpaste or a burrito dropped 20%, most of us would be thrilled.
Last week, I asked you to identify the cultural assumption in this screenshot. Here’s what I was thinking of:
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?
- American culture believes that home ownership is a right that everyone should have (it’s not).
- 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.”
- 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.
- 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?
- People who have money waste their money (also known as “It’s OK when I spend my money on something for fun, but not you” — see comments)
- Immigrants are better at money than you are
- People who spend $20,000+ on their weddings are dumb (same as above — see comments)
What money assumptions have you noticed?
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