Blogging Bayport Alameda

October 23, 2015

Priced out

Filed under: Alameda — Lauren Do @ 6:03 am

So I’m not trying to pick on any particular commenter but since this commenter so kindly posted the year she purchased her house and how much she purchased her house, it is helpful in context to the larger conversation about housing costs in the Bay Area (and Alameda).

According to the commenter in 1988 she purchased her home for $225,000.  If the “market” were a constant thing with supply being created to keep up with demand then one could assume that housing would cost the same (with inflation calculated in) today as it did in 1988 and that families today could simply save their pennies, dig deep and work hard — just like their parents — to afford a piece of the american dream: to purchase a house.  Now I’m sure that house is a comfortable house that most families could be very comfortable in.     This home, let’s say it’s in Central Alameda, is probably worth — based on recent listed prices for standard homes — around $750,000.

But according to the inflation calculator it should only cost $452,558.11.

Screen Shot 2015-10-22 at 4.13.29 PM

The problem is we’ve done such a terrible job of keeping supply consistent with the demand we get completely out of whack pricing for housing which should be affordable, but has quickly not become for the average family.

When you have teardowns in San Francisco selling for more than $1 million there’s something clearly wrong with our housing market.  Unlike some people, I’m not praying for the next housing bubble or tech implosion in order to normalize prices.  I like the economy doing well, it means that people have jobs and are employed.  The solution to the lack of affordable housing is not to pray that everyone except for you loses their jobs so that the housing market takes a nose dive.  The solution is to understand the the Bay Area has under built for its growing population and workforce for too many years to ignore it much longer.  Expecting people to move to Modesto or commute from Manteca is not sustainable either.

I’m not suggesting that Alameda take an inordinate share of the burden, but it should recognize that it has a burden and shouldn’t dismiss its responsibility by our leaders opining that there is “too much housing” when every thing tells us the complete opposite.  Recent reports have shown that in the Bay Area metro it’s much cheaper to rent than to buy, but as we hear that renters are unable to retain their rentals because of costs, it’s not clear who will be able to afford to live in the Bay Area much longer.

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19 Comments

  1. You’re confusing cost and value. The market is never a constant thing. Supply is never equal to demand. A house is “worth” what it sells for. Any other calculation of value is just pie in the sky.

    A comparable house that I sold in 2014 after owning it a comparable period (25 years), sold for a price yielding an annual return on investment of 3.3%. Not particularly spectacular, and not all that much more than inflation over a comparable period. I could have done much better in the stock market. But I chose to own a house in Alameda, and bought at a time when housing prices were considered outrageous! Prices are still outrageous now, and … prices in Alameda will still be outrageous 25 years from now. It’s a great place to live.

    Comment by Tom Schweich — October 23, 2015 @ 7:34 am

  2. There was also a recession in 1988. Some of you are probably too young to remember, but in 1987, the stock market collapsed in spectacular fashion. I suspect real estate followed suit. I’m not sure that comparing relative values in 1988 (during a recession) and 2015 (during a boom) accurately reflects market conditions. Anyone who says there is “too much housing” is a moron, but anyone who disregards the unique transportation issues in Alameda given that we live on an island with only a few points of ingress/egress is also not being realistic.

    Comment by Oh the Irony! — October 23, 2015 @ 9:28 am

  3. re 1:

    Agree completely and in addition, the numbers aren’t as crazy one might think.

    Assuming a purchase at 225M on 1/1/88 and a current value of 750M, that’s approx a 4.37% compounded rate of appreciation*.

    The CPI Year over Year Urban Consumers Index NSA, which is a generally accepted benchmark of inflation, the average inflation rate over that same time period is 2.7%. The “inflation calculator” above assumes 2.52%. Not far off, and the difference might be easily explained by differences of yield convention calcs; close enough.

    Neither mid 4’s nor mid 2’s would be considered an especially noteworthy investment return, but there’s even more to consider beyond that, especially costs of carry and relative value. A house typically doesn’t produce income but rather consumes quite a bit: interest, property taxes, insurance, repair & upkeep, etc. For example my own home is up about 200M or so 10 years after purchase but interest, property taxes have more than that (and there have certainly been expenses well beyond those). I’m not complaining, we’re happy in this house, but it’s worth noting that price appreciation and the wealth building that hopefully follows it are far less than many people think.

    One factor that has been a big driver of home and other asset prices since 1988 has been a steady decline in interest rates in that period, from over 10% to less than 4%, making it far easier to carry a loan and therefore pay up for a house. A 200M 30yr mortgage at 10% has a P&I of about $1750. At 4% it’s approx $950.

    During this time Alameda also became a more “upscale” locale, for lack of a better term. It can be argued that this is irrational, that the city was just as desirable in ’88 as now, but it cannot be denied that it has happened. Little wonder the house has appreciated 2% or so faster than CPI even before considering the supply demand imbalance mentioned in the intro.

    I could cite many more factors but the point is simply that there’s a whole lot more to it than meets the eye.

    Comment by dave — October 23, 2015 @ 9:41 am

  4. we bought a house in 1988 ( in Oakland) on which I lost sweat equity because we dumped it to move to Alameda ASAP , but we paid similar amount in Alameda about twenty five years ago also and if we had sold in 2014 we would do much better than 4%. Sorry for your loss Tom. The metrics causing this incredible dislocation are such an anomaly that we will never be able to build our way out, but that does not mean that we shouldn’t try to build as much affordable ( subsidized and relatively affordable market) as possible.

    Comment by MI — October 23, 2015 @ 9:43 am

  5. At what point in our history did the house we live in become the method in which families accumulate wealth? We have all been properly programmed to view the house we live in as an investment vehicle, if you are lucky enough to be an owner and not a renter. Housing costs should reflect a balancing point with average incomes in an area. That balancing point has done nothing but move up in the Bay Area in recent decades, which means the same amount of “hard work and good choices” it took in 1988, now only earns you about half the value of the same house.

    3. You left out the one, giant thing that counteracts those carrying costs on your investment, er, home. Mortgage interest deduction. AKA- the biggest giveaway to rich people that I can possibly imagine in the tax code. Since when do we need to pay wealthy people (the ones who pay most of the federal income taxes) to think that it is desirable to own their home? The benefits sell themselves. But, just like prop. 13, a program that is sold as helping middle class folks attain and keep their homes turns out to mostly save multi-millionaires gobs of money in taxes, so that the workers they derive their incomes from get less in the way of government services like quality schools, roads, health care and police protection.

    Comment by BMac — October 23, 2015 @ 10:15 am

  6. 5

    I left it out for several reasons, the first being brevity. Another than even after tax it’s still a significant cash expense, and an dollar spent today is worth considerably more than a hoped-for appreciated dollar many years in future.

    You should also note that while mortgage interest deduction can benefit “multi-millionaires,” those folks are much less likely to have a mortgage on their home to begin with. Middle class folks are much more likely to have such, and much more likely to have most if not all their income taxable at ordinary rates rather than at the special rates for cap gains and dividends that so many of the afore-mentioned enjoy vis. their working compatriots. Consider also the AMT hit which has become virtually automatic for W2 earning CA homeowners and the supposed benefit of this deduction tilts much more heavily toward middle class homeowners than you think it does.

    There are solid arguments against the mortgage interest deduction. I’ll watch to see if you make one.

    Comment by dave — October 23, 2015 @ 10:33 am

  7. 7. “those folks are much less likely to have a mortgage on their home to begin with.” LOL. You think so? I think they follow the advice of their money guys and finance it specifically to take advantage of the deduction.

    Comment by BMac — October 23, 2015 @ 10:49 am

  8. Despite all the “investment banker/real estate agent” arguments put forth by Dave and others, Lauren’s basic points are correct, and they are backed by national, state, and local research:

    ” we’ve done such a terrible job of keeping supply consistent with the demand we get completely out of whack pricing for housing which should be affordable, but has quickly not become for the average family…the Bay Area has under built for its growing population and workforce for too many years to ignore it much longer. Expecting people to move to Modesto or commute from Manteca is not sustainable either.”

    The idea that homeowners’ ability to make a good investment trumps the right of most people to live in affordable housing is an unacceptable social and moral tradeoff. And forcing valuable employees of existing businesses to relocate to less-expensive metropolitan areas makes zero economic sense. The lack of housing throughout the Bay Region and there state is clear: now we need to do something about it–other than sit inside our investment homes with smug statistics about our right to make a good return on the shelter of we (temporarily) have custody–otherwise called ownership. (You can’t take your good investment with you into there next life, even from Alameda.)

    Comment by Jon Spangler — October 23, 2015 @ 10:57 am

  9. 7. The mortgage interest deduction benefits households earning more than $100,000 or more WAY more than everyone else. That’s why it’s such a sacred cow in high income/housing cost states like California, New York and New Jersey.

    http://www.cbpp.org/research/mortgage-interest-deduction-is-ripe-for-reform

    The mortgage interest deduction costs $70 billion per year. It’s the nation’s largest public housing program. The entire HUD budget is less than $50 billion. Furthermore, the mortgage interest deduction has no limit. It will just grow infinitely with no justification and at significant drain on the nation’s finances. Meanwhile HUD has to make a case to Congress not to cut its budget, in the interest of providing housing assistance to people who actually need it.

    Comment by Larry Witte — October 23, 2015 @ 11:05 am

  10. Did you read #3, Jon?

    In no way did I say the right to make a good investment trumps others’ rights, in fact I make the point that it’s not a particularly good investment. I also make the point that the appreciation noted is to be expected even before supply/demand imbalance. Please consider re-reading both #3 and #9.

    Comment by dave — October 23, 2015 @ 11:05 am

  11. 10

    People making “over $100,000” and “multi-millionaires” are not really the same group, there’s only a small overlap in that Venn. However much some of the latter benefit, a far larger proportion of the former actually do.

    Comment by dave — October 23, 2015 @ 11:08 am

  12. #5, Item #1, I agree with you when you say that “… the same amount of “hard work and good choices” it took in 1988, now only earns you about half the value of the same house …” I would differ with you, though, as to the cause, and point to stagnated real wages as the cause of the disparity rather than the price of the housing.

    Item #2, I disagree with you on the point of including tax effects from the home mortgage interest deduction in an investment analysis, because the tax effects are the result of a financing decision (how to buy the house) and not the result of the investment decision (whether to buy a house or rent).

    Comment by Tom Schweich — October 23, 2015 @ 11:34 am

  13. Where is CBKJ when you need some truth about inflation numbers?

    Affordability isn’t about subjective experience–buying your first house always seems scary. Trying to look at this objectively, it seems to me that income/price is the best measure of how affordability has changed. A quick bit of searching led me to this:

    http://www.burbed.com/2015/03/30/median-home-price-to-median-income-ratio-in-san-francisco-bay-area/

    It’s nowhere near as entertaining as MI’s video, and it’s focus is on SF and the South Bay, but I think it’s informative nonetheless. The median house price to median income ratio has risen from about 4.5 to over 9 since 1996. It’s probably not such a big change in the East Bay (haven’t time to Google more) but housing is a lot more expensive for people now compared to before.

    I don’t get arguments about how this is explained by Alameda being a great place to live. Has it really changed for the better that much since the 1990s? I mean, we have a Trader Joe’s and a couple of restaurants that serve edible food now, but still…

    Supply does need to be addressed, along with transit infrastructure to allow greater density. The mortgage interest deduction is crazy public policy, as is Prop 13. And maybe a tech crash would help too.

    Comment by BC — October 23, 2015 @ 11:38 am

  14. The only people really benefiting from the mortgage interest tax deduction are the banks that are collecting the mortgage interest.

    When people are looking to buy a house, they calculate how much the mortgage interest tax deduction will give them back on a monthly basis and add that to the amount of monthly mortgage they can afford. I did this myself when purchasing a home.

    Presto-change-o…through the power of supply and demand, all the houses go up in price an equivalent amount of the benefit being provided to home-buyers through the mortgage interest deduction. The federal and state governments “deduct” this from homebuyers’ taxes, but then the homebuyers turn right around and give it to the banks.

    Does this benefit home-sellers through higher prices? Not if the home-seller is going to purchase another mortgage-interest-tax-deduction-inflated price house.

    Of course, just like Prop 13, this has gotten all homeowners in a fucked-up trap. Even if you recognize that it is ultimately screwing homeowners in favor of banks, taking it away would royally screw people who have mortgaged homes, who would see their market values drop immediately. The more recent the purchase, the more raw the screwing.

    So just like Prop 13, to get out of the trap, it seems like the only fair way to end it would be in some sort of a phased, slow approach.

    Comment by brock — October 23, 2015 @ 3:09 pm

  15. The whole real estate industry benefits–it’s a subsidy leading people to invest in real estate over other (arguably more productive) types of investment. I’m not quite sure it all goes to the banks and real estate industry–people may first decide the house they want and be happy they pay less due to the subsidy, rather than increase the amount they spend–that’s what I did, as I wasn’t seeking to buy as expensive house as I could. It helps owners over renters too, so has distributional impacts. But, yes, removing any distortion will have effects as the price inflation it causes will go away.

    Comment by BC — October 23, 2015 @ 3:18 pm

  16. 15. Of course, any changes to Prop 13. or the Mortgage Interest Deduction would have to be phased in over, probably, 10-15 years to be fair.

    Comment by BMac — October 23, 2015 @ 5:29 pm

  17. The other factor fueling the housing price boom is ‘cheap money’. Once the Fed starts raising rates it will slow a little as the numbers will eliminate the ability to purchase for some. Really there are many sections of the Country where housing has not yet recovered. The Bay Area is unique in some ways due to High Tech salaries. We have Companies like Apple, Facebook and Goggle who are sheltering Billions of $$$ overseas to avoid Taxes. There should be some way for them to repatriate this money if it can be used for Housing for their Employees or even the General Public. If they can build giant Campuses why can they not include Housing?

    Comment by frank m — October 25, 2015 @ 7:21 am

  18. 11: Dave, yes I did. Note that I referred to others–including people outside of this blog–who make the argument that real estate is an excellent investment. If you do not want to own my critique you don’t have to. You *were* referring to home ownership as a justifiable financial investment, which is a relatively recent historical phenomenon…

    I mostly had in mind the REITs that own large Bay Area rental complexes where the rents are going up 20% to 35% per year. They are trumpeting their great profitability to current and potential investors.

    Comment by Jon Spangler — October 26, 2015 @ 11:09 am


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