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mattaudio
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Re: The economics of housing

Postby mattaudio » June 15th, 2015, 1:41 pm

"Wealthy suburbanites" is an illusion, for the most part. People are leveraged to their eyeballs to have a $400k home with two expensive cars in the garage. Those are the places that literally have no future, if interest rates creep up towards double digits. Heck, even 6-7% mortgage rates would erode a large share of that purchasing (borrowing) power.

Sure, it may look great at first for the people who can hold out and cash flow their low interest rate mortgage payments. Especially if their current cost of capital is less than future inflation. But what happens to the value of their asset? That's the crazy thing about valuation as it relates to speculation - as things look fine and values creep up, there's a steady appreciation in value. But, if suddenly the cost of money goes up and pushes people's housing budgets down, it's the higher segments of the mainstream housing market ($400-$800k) that will crumble. When the majority of buyers of a $400k home today have a $300k budget in a year or five due to interest rates, those homes suddenly become $300k homes (or worse, if things spiral downward). It will get ugly, fast.

Regarding your second point... it's too late to steer the Titanic out of the way. All we can do at this point is to try and slow the ship down a little to minimize how fast the water comes in. We can't avoid the sinking at this point. We need to have an honest triage process, and realize that there are plenty of areas that may well have no future. And instead of propping those areas up to protect people, we need to be honest with people about that reality and do whatever we can to soften the transition.

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Re: The economics of housing

Postby David Greene » June 15th, 2015, 2:35 pm

When the majority of buyers of a $400k home today have a $300k budget in a year or five due to interest rates, those homes suddenly become $300k homes (or worse, if things spiral downward). It will get ugly, fast..
Indeed. That's the other part of this culture we need to disrupt: this idea of house as investment. I didn't buy a house expecting a return. I figure if I get $0 for our house, it will be no worse than if I'd spent that money on rent and I got some enjoyment of the house in the process. Any money I get out of the house is cream. Now, that doesn't mean I don't care about property values at all, as I certainly do expect to get some money back when we sell the place. I'm just not staking our financial future on it.

xandrex
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Re: The economics of housing

Postby xandrex » June 15th, 2015, 2:39 pm

I don't think I'm being cold. If someone is really going to lose their house due to the loss of a tax break, then it's more than likely they are going to lose their house for some other reason. The tax breaks for SFHs are super-regressive.

I'd be in favor of phasing in elimination of the tax breaks. Immediately eliminate the break for people making $80k+ and then gradually move down from there. Give people time to plan, sure. But we have to get off this gravy train.
But we’re not just talking real estate taxes (though that plenty of people have argued against in city council meetings for fear of losing their homes right here in the none-suburban area we call Minneapolis). FISHMANPET mentions a higher gas tax and things like imputed rent (okay, that’ll likely never happen). Things that you mentioned like ending freeway expansion. These aren’t bad things. Few on this site are against these things. But to pretend that ending this will someone no be a shitstorm for the thousands and thousands of service workers out in the suburbs who will need to be there so long as business exists out there, to wipe our hands clean because all these people just know that they’re somehow rigging the system is schadenfreude. The rich can move into the city or a close suburb if things go wrong. They’ve got the resources. You need to phase things in unless you really want to just abandon the poor.

This isn’t some call for continuing what we’re doing now. It’s being sensible that there are real people out there who work hard and maybe bought property there because it was near their job at the time and it was all they could afford and it had good schools and was a safe place for their kids to play. If the storm (or iceberg in my last metaphor) is coming, then why not be decent humans and try to help each other out rather than smirk and think, “Hey, at least it wasn’t me.”

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Re: The economics of housing

Postby xandrex » June 15th, 2015, 2:41 pm

"Wealthy suburbanites" is an illusion, for the most part. People are leveraged to their eyeballs to have a $400k home with two expensive cars in the garage. Those are the places that literally have no future, if interest rates creep up towards double digits. Heck, even 6-7% mortgage rates would erode a large share of that purchasing (borrowing) power.

Sure, it may look great at first for the people who can hold out and cash flow their low interest rate mortgage payments. Especially if their current cost of capital is less than future inflation. But what happens to the value of their asset? That's the crazy thing about valuation as it relates to speculation - as things look fine and values creep up, there's a steady appreciation in value. But, if suddenly the cost of money goes up and pushes people's housing budgets down, it's the higher segments of the mainstream housing market ($400-$800k) that will crumble. When the majority of buyers of a $400k home today have a $300k budget in a year or five due to interest rates, those homes suddenly become $300k homes (or worse, if things spiral downward). It will get ugly, fast.

Regarding your second point... it's too late to steer the Titanic out of the way. All we can do at this point is to try and slow the ship down a little to minimize how fast the water comes in. We can't avoid the sinking at this point. We need to have an honest triage process, and realize that there are plenty of areas that may well have no future. And instead of propping those areas up to protect people, we need to be honest with people about that reality and do whatever we can to soften the transition.
I’m not talking about your over-leveraged Joe and Jane Larson out in Minnetonka. There are plenty of actually-wealthy families in the Twin Cities, and they’ll be just fine, mortgage interest deduction or not. Sure, their housing values might plunge, but a family with a comfortable six-digit income (not exactly a rare thing in any number of suburbs) can take a loss if they need to. Sure, it’ll hurt. But they’ll recover (maybe one less vacation…oh darn). Value isn't even all that important until you need to sell. Otherwise, you've got an asset you can actually use. But who’s going to want to live in a ticky-tacky suburban development by the (apparently crumbling) highway, which more closely mimics the cheaper developments? Nobody. Those people don’t really have a choice. They’re stuck. Maybe they’ve bought too much house, but I’d rather help them improve their situation before things get really bad.

If you read my Titanic metaphor, I don’t mention steering. I’m not claiming you can avoid some of the repercussions (though, like everyone who cries about Social Security being “bankrupt,” I think it’s an over-the-top reaction to an admittedly serious problem, but one that can be mitigated if we take the right steps). There very well might be places that don’t have a future, but I’d rather give people in those places a fighting chance to get out while they can and in a way that doesn’t destroy working- and middle-class families. Yes, there will be pain, but to accept that as a given is callous. Fight to help every person and every family. I don’t care if they’re overleveraged, under water, rich, poor, whatever – it’s schadenfreude to build a system, have people buy into it, know that it will all come crashing down, and still shrug your shoulders.

And that’s really where I’m differing with you and David, at least in this conversation. There’s plenty of pointing the fingers at people here, but surprisingly little at the system. We’ve built one that encouraged the far-flung suburbs. Because everyone likes their slice of the American Dream and isn’t as well versed in infrastructure lifecycles as Streets.mn, people buy that vinyl-sided home in Rogers.

I think plenty of our beliefs line up closely enough. It’s the approach. And if that’s where we have to agree to disagree, then so be it.

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FISHMANPET
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Re: The economics of housing

Postby FISHMANPET » June 15th, 2015, 3:01 pm

I honestly can't imagine a way to engineer a soft landing. I mean, a huge swath of property is going to lose a ton of its value. Even if we "slowly" phase out things like Mortgage interest deduction and slowly raise gas taxes, prices will still plummet rapidly on property. So either the property owner eats the loss, or the public eats the loss. But how much money would that cost? I mean, how much would it cost, right now, to just buy all of Woodbury. Well, I looked it up, and it's $7.9 billion. $156 million of that is agricultural land, but no idea what percent of area that is. So the land in Woodbury most likely has value as agricultural land, but I can't find enough data in 5 minutes to say what Woodbury would be worth as agricultural land, but waaaaaay less than $7.9 billion.

So how do we eat probably $7 billion or more of loss in a single community? We could just foreclose the entire city and seize every property and wipe out any mortgage debt, no idea what that would cost. But for $7 billion we could rebuild heavy rail to Woodbury and turn it into a real place.

And that assumes people would even want that. I mean, honestly, I just have no idea. I don't really care about the smug shitlords that call the city "Murderapolis" but there are plenty of decent folks that through no fault of their own will be completely destroyed, and many of them will just not be able to survive without some kind of massive reallocation of societal resources.

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Nick
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Re: The economics of housing

Postby Nick » June 15th, 2015, 3:25 pm

As someone who is old enough (???) to have read Jim Kunstler throughout the mid-aughts, I'm pretty wary about warning people of this impending spectaclar crash.
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David Greene
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Re: The economics of housing

Postby David Greene » June 15th, 2015, 3:29 pm

FISHMANPET mentions a higher gas tax and things like imputed rent (okay, that’ll likely never happen). Things that you mentioned like ending freeway expansion. These aren’t bad things. Few on this site are against these things. But to pretend that ending this will someone no be a shitstorm for the thousands and thousands of service workers out in the suburbs who will need to be there so long as business exists out there, to wipe our hands clean
That's not at all what I'm suggesting. I did say we should phase it in. I also have long said we need transit in the suburbs, for exactly the reasons you state.

Ending these things isn't going to plunge the suburbs into chaos overnight. Hopefully they will get people to change behavior over time.

I'm all in favor of more support for service workers and the like.

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Re: The economics of housing

Postby David Greene » June 15th, 2015, 3:39 pm

But who’s going to want to live in a ticky-tacky suburban development by the (apparently crumbling) highway
Why is the highway crumbling? I didn't say no maintenance, I said no expansion.
Those people don’t really have a choice. They’re stuck. Maybe they’ve bought too much house, but I’d rather help them improve their situation before things get really bad.

There very well might be places that don’t have a future, but I’d rather give people in those places a fighting chance to get out while they can and in a way that doesn’t destroy working- and middle-class families. Yes, there will be pain, but to accept that as a given is callous. Fight to help every person and every family.

And that’s really where I’m differing with you and David, at least in this conversation. There’s plenty of pointing the fingers at people here, but surprisingly little at the system.
Pretty much all of the finger-pointing here is at the system. Yes, I'll also point fingers at the typical overleveraged wealthy suburban homeowners. They knew what they were getting into.

For the people truly stuck (and there will be a lot of them) we absolutely should do what we can to help them. Some of that is already happening with TOD around our budding light rail system, our investments in arterial BRT and general improvements to the transit system. Getting more affordable housing out there could also help, or it could backfire. I'm not sure which.

The truly hard part is figuring out what to do with people who live *and* work in the suburbs. They're presumably living close to their jobs, but those jobs might move. Some suburban areas will survive as they are better-built as relatively mixed-use. The acres and acres of large-lot homes? Not so much. Frankly, I'm less worried about those folks. But what about the people working at the Eagan outlet mall? Those are the folks we need to pay attention to.

There will be pain. There's no way to avoid that. We can try to direct it toward those most able to bear it. Accepting that is the first step toward making change.

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Re: The economics of housing

Postby David Greene » June 15th, 2015, 3:43 pm

I honestly can't imagine a way to engineer a soft landing. I mean, a huge swath of property is going to lose a ton of its value. Even if we "slowly" phase out things like Mortgage interest deduction and slowly raise gas taxes, prices will still plummet rapidly on property.
Is that a certainty? What would lead you to that conclusion?
As someone who is old enough (???) to have read Jim Kunstler throughout the mid-aughts, I'm pretty wary about warning people of this impending spectaclar crash.
Having never read Kunstler, I'd like to hear more about this.

mattaudio
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Re: The economics of housing

Postby mattaudio » June 15th, 2015, 3:47 pm

Kunstler is awesome. And Nick, since you are downplaying his doom and gloom, let me remind you that the title of one of his books is "The LONG Emergency." This will take a while.

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Re: The economics of housing

Postby Rich » June 15th, 2015, 3:55 pm

Over six years starting in 2006, Twin Cities home values dropped by 35%. That’s something like $200 billion in household wealth wiped out - the equivalent of a million median-priced homes. Yet we’ve recovered reasonably well, no? Is the suburban economy as fragile as some on this forum think?

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Nick
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Re: The economics of housing

Postby Nick » June 15th, 2015, 4:02 pm

Kunstler is awesome. And Nick, since you are downplaying his doom and gloom, let me remind you that the title of one of his books is "The LONG Emergency." This will take a while.
He isn't not funny but having read Clusterfuck Nation or whatever every week for over a year, he was certainly predicting a sudden collapse any day now.

He did call the entire subprime mortgage thing years before anyone else, so point there, but maybe the world is more resilient than we thought.
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Re: The economics of housing

Postby mplsjaromir » June 15th, 2015, 5:45 pm

Kunstler and those of his ilk fail to acknowledge or maybe realize, that universally debts=assets. At some point if homes are valued significantly lower, then a decision will have to made by underwriters whether or not to write down asset values or to act otherwise. I doubt that it would behoove lenders to evict millions of people from their homes.

A scenario in which new financing is no longer available to sprawl, for individuals and local governments seems more likely.

By all means make sure that your own situation is robust enough to handle the future you see coming, and continue to advocate for policies equipped to handle what you see coming.

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Re: The economics of housing

Postby David Greene » June 15th, 2015, 9:15 pm

Over six years starting in 2006, Twin Cities home values dropped by 35%. That’s something like $200 billion in household wealth wiped out - the equivalent of a million median-priced homes. Yet we’ve recovered reasonably well, no? Is the suburban economy as fragile as some on this forum think?
The state has recovered a bit but wages still keep falling and have been since the '70's. Many people lost their homes in the collapse and I doubt they're feeling particularly recovered.

On top of that, the suburbs bore less of the brunt because of our policy of heavily subsidizing them. We need to eliminate those subsidies because they are killing our state and its people. We've now deferred road maintenance for how many decades? We literally cannot afford what we have. The whole thing's going to come crashing down unless we start doing things to make the change we need to make.

The suburban economy isn't going to disappear overnight but it's certainly going to change and in many places it will shrink. We should try to avoid that happening all at once. But understand that it's already happening. Why else is poverty rising in the suburbs?

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Re: The economics of housing

Postby min-chi-cbus » June 16th, 2015, 7:43 am

What book did everybody apparently read to come to the same conclusion: that the American Dream as we know it is putting a choke-hold on America's economy and without rapid urbanization/sustainable development we will all perish under an even-worse economic DEPRESSION? I have always believed since the Great Recession started that America took the "easy" road by trying to limit the impact of the economic collapse, and we WILL all pay for it one way or another, and probably soon. But, the reasons I think so have more to do with how the Fed handles the Federal Funds Rate and less to do with suburban sprawl....although I can definitely see the link between the two. However, even though this is the way I am leaning, I certainly don't think it's a proven fact, and I am not doing that much with my money or lack of it to soften the blow of any impending economic collapse.

Should I? Just wanna be confident about the Kool-Aid we're drinking.

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Re: The economics of housing

Postby acs » June 16th, 2015, 8:36 am

The suburban economy isn't going to disappear overnight but it's certainly going to change and in many places it will shrink. We should try to avoid that happening all at once. But understand that it's already happening. Why else is poverty rising in the suburbs?
Oh come on now, there isn't such thing as a separate suburban economy and an urban economy. I guarantee you all use the same banks for your mortgages, use the same currency, are affected by the same interest rates, commodity prices ect. The urban and suburban economy are largely one in the same, all economics is globally connected now. When/if the Chinese real estate market collapses we'll feel that in Minneapolis too. There is no escaping it.

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Re: The economics of housing

Postby FISHMANPET » June 16th, 2015, 8:43 am

We are all connected but my Minneapolis property taxes don't pay for services in Eden Prairie and all the other suburbs, at least not to the degree which they pay for their services. If a suburb can't meet its financial obligations and is forced to raise taxes to the point where it drives people out, yeah, that place will die. The point is that the car dominated sprawl is not financially sustainable forever.

We are all connected but in many arbitrary ways we are all separate.

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Re: The economics of housing

Postby David Greene » June 16th, 2015, 11:05 am

I am not doing that much with my money or lack of it to soften the blow of any impending economic collapse.

Should I? Just wanna be confident about the Kool-Aid we're drinking.
I look at it like climate change (but lacking the scientific consensus). Even if we're not sure there will be an economic disaster, the benefits of planning for it are good in and of themselves. I mean, people seriously argue that we shouldn't clean up our polluting act because climate change (in their minds) might not be real. Seriously? It's damn good to clean up pollution no matter what! Same with getting finances in order to ride through the inevitable downturns, job losses, etc.

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Re: The economics of housing

Postby David Greene » June 16th, 2015, 11:06 am

Oh come on now, there isn't such thing as a separate suburban economy and an urban economy. I guarantee you all use the same banks for your mortgages, use the same currency, are affected by the same interest rates, commodity prices ect.
I'll just point out here that no, NOT all of us are operating in the same economy. That's why we have disparity problems.

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Re: The economics of housing

Postby David Greene » June 16th, 2015, 11:10 am

What book did everybody apparently read to come to the same conclusion: that the American Dream as we know it is putting a choke-hold on America's economy and without rapid urbanization/sustainable development we will all perish under an even-worse economic DEPRESSION?
Peter says it well. The suburbs cannot sustain themselves, which is why we're subsidizing them.

Every new sewer, even freeway expansion, every acre of farmland developed worsens the situation. That cannot continue forever. If the population keeps growing, the suburbs will have to densify to survive. If the population shrinks, pieces of suburbia will die due to lack of humans.

It's probably more accurate to say the suburban development model will die. Suburbs can very well survive if they transform themselves into sustainable communities. Some are doing just that and they're going to weather the storm better than others.


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