Housing can’t be both affordable and a good investment
CityLab
Daniel Hertz
19 November 2018
abridged

Promoting homeownership as an investment strategy is a risky proposition. No financial advisor would recommend going into debt in order to put such a massive part of your savings in any other single financial instrument—and one that, as we learned just a few years ago, carries a great deal of risk.

for your home to offer you a real profit

In order for your home to offer you a real profit, its price would need to increase faster than the rate of inflation. Let’s pick something decent, but not too extreme—say, annual increases of 2.5 percent, taking inflation into account. So if you bought a home for $200,000 and sold it ten years later, you’d be looking at a healthy profit of just over $56,000.

San Francisco

The wonderland of ever-increasing housing prices is San Francisco. Data suggests that San Francisco owner-occupied home prices have been growing by just over 2.5 percent since 1980.

That gives you a profit of just over 25 percent. But compound interest is an amazing thing, and the longer this consistent wealth-building goes on, the more out of hand housing prices get. In 1980, Zillow’s home price index for San Francisco home prices was about $310,000 (in 2015 dollars). By 2015, after 35 years of averaging 2.5 percent growth, home prices were over $750,000.

But this sort of wealth building is predicated on a never-ending stream of new people who are willing and able to pay current home owners increasingly absurd amounts of money for their homes.

It is, in other words, a massive up-front transfer of wealth from younger people to older people, on the implicit promise that when those young people become old, there will be new young people willing to give them even more money.

And of course, as prices rise, the only young people able to buy into this Ponzi scheme are quite well-to-do themselves. And because we’re not talking about stocks, but homes, “buying into this Ponzi scheme” means “able to live in San Francisco.”

This means that the two stated pillars of American housing policy—homeownership as wealth-building and housing affordability—are fundamentally at odds.

doesn’t care that much about affordability

Mostly, American housing policy resolves this contradiction by quietly deciding that it really doesn’t care that much about affordability after all.

While funds for low-income subsidized housing languish, much larger pots of money are set aside for promoting homeownership through subsidies like income tax exemptions on profits from the sale of primary residential homes.

Since at least the second half of the 20th century, the vast majority of actually affordable housing has been created via “filtering”: that is, the falling relative prices of market-rate housing as it ages, or its neighborhood loses social status, often as a result of racial changes.

Low-income affordability, where it does exist, is predicated on large portions of the housing market acting as terrible investments.

And to the extent that low-income people do find a subsidized, price-fixed housing unit to live in, that means that they won’t be building much equity, even as their richer, market-housing-dwelling neighbors do.

Community land trusts typically provide subsidized or reduced price ownership opportunities to initial buyers, and assure longer term affordability by limiting the resale price of the home. In other words, CLT-financed homes remain affordable only because they restrict how much wealth building the initial owners are allowed to capture.

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