Effects of a homebuying subsidy on home prices

[mpaer]

Some sort of combination of sweat equity and cost subsidized program like Habitat for Humanity is the best way to create new houses without causing the prices to remain less impacted. I'm just skeptical about how it could be done unless you roll it out like a WPA or Conservation Corp maybe forgiveness of education debt for labor participation? Otherwise if everyone knows you have an extra $25K the price is cost plus $25K.

Its a heck of a good model Maybe Federal $$ could be used to give State/Locals grants to buy the land

 

[UNCatTech]

This isn't going to be terribly responsive but not completely off topic. First, contractors are a lot more competitive than collusive and pricing ranges are so different what he said wouldn't really happen directly. It would more likely manifest as upselling. That was my experience in 40 years of carpentry and such.

Some of the current costs are going to come down. The question will be if they are passed along. Both technology and green energy prices will decrease effectively as they continue to mature. I have no idea why people seem to be blind to how much new tech and new code requirements have added to home costs. I'll bet my son's new house has 3 miles of speaker and computer network wiring , solar batteries and a computer room that would run a small business. Of course , much of that is excessive and he knew it but even adjusted for inflation, he could have bought a three bedroom house for that money in 1968.

Also, in 68, you may or may not have had to have any insulation, any form of heat, any solid sheathing or an enclosed foundation.

We stopped and looked at a house last weekend.
It had a network closet, and it was just like what we have at work. They said it was wired for every smart device, cameras, etc. It had to have had 40 network cables terminating into a fully functioning firewall switch. Not your normal house router, a very nice firewall and switch.

Of course, this house was listed at $1.5M. 6 br, 7.5 bath. It was very nice. On top of a small mountain, you could see for miles from the back door.

But I've seen very nice networks in lesser price houses also.

 

[UNCatTech]

Some sort of combination of sweat equity and cost subsidized program like Habitat for Humanity is the best way to create new houses without causing the prices to remain less impacted. I'm just skeptical about how it could be done unless you roll it out like a WPA or Conservation Corp maybe forgiveness of education debt for labor participation? Otherwise if everyone knows you have an extra $25K the price is cost plus $25K.

I agree. My wife and I were musing about winning the $800M lottery and starting such a program.

We also thought about entry level rentals that had some kind of incentive, like live there a year and get $1K toward a down payment, 5 years get $5K toward a down payment.

 

[UNCatTech]

Its a heck of a good model Maybe Federal $$ could be used to give State/Locals grants to buy the land

That would probably help.

Land is something else. The neighborhood that's going in behind my neighborhood, based on quarter acre lots the land cost alone was $45K a lot, without development. Figure $20K a lot in development and you're at $65K without starting to build. There are just so many variables in the housing market.

 

[UNCatTech]

No mention of land prices? Depending on location, houses that would have been considered starter homes years ago now sit on a lot that is sometimes worth 2,3 times the value of the house. Owners just renovate and add on. If/when sold, the house is torn down and a mini mansion or 2 replace it depending on lot size..

We see this a lot. People will come in buy the house and land, remove the old house and build new.

Considering that the existing house/land has the utilities and other initial building cost built into the price, it seems to work out for many.

Of course, it looks interesting to see a $1M 5 br house next to a 30 year old 900 sq ft house.

 

[mpaer]

That would probably help.

Land is something else. The neighborhood that's going in behind my neighborhood, based on quarter acre lots the land cost alone was $45K a lot, without development. Figure $20K a lot in development and you're at $65K without starting to build. There are just so many variables in the housing market.

And yea a"good Plan " would factor in alot And its complicated
Town A wants to use the land that is down wind from a chemical plant that nobody wants
Town B is willing to give some incentives to the Old Wahrehouse district to sell the land-cause actually in X years it might be a pricey potion for high rises and Starbucks
The feds should tell Town A to go to hell and work hard with Town B

 

[UNCatTech]

I think a better use of federal money would be to directly build public housing again. If they can dramatically increase housing supply at a low cost, it will have a domino effect on the cost of other rental housing.

Public housing - Wikipedia

en.wikipedia.org

They would need to overcome the stigma of public housing. Yes, it sucks that we humans will look down on someone that needs help, but just like the statistics show that the stigma is enough to keep some students from accepting free school lunch, I would imagine that there could be a stigma with public housing.

Also, once they build public housing, who manages it? Will it be like other competitive apartments, or will it be price controlled and limited occupancy based on income?

 

[tarheelbillie]

If that creates an incentive for builders to build starter homes rather than McMansions or other types of housing, that could be a perfectly acceptable outcome.

A big part of the current problem is that a builder can build a larger house and/or add on amenities and collect a much larger profit. For instance, let's say that a builder could build a starter home (say 1400 sq ft) that would go to market at $160k. It'd cost them about $140k to do all the things to acquire the land and build that house and so they'd make about $20k on that house once all is said and done. Or they can take the same property and build a 2000 sq ft house with some upgrades that would cost them 175k and an extra week or two to build and they could sell that house for $225k. Most builders, being motivated by profit, will build the bigger house and take the additional revenue (an extra $65k) for a fairly small additional investment ($35k + a small time increase). The profit for each ends up being $20k on the starter home vs $50k on the bigger/nicer house.

But if the builder knows there is an incentive for building the starter home, that can shift their rational choice toward starter homes. Let's say that now there's a $25k government assistance for folks who aren't currently homeowners to get into a "starter home" (which would have to be defined). Now building that 1400 sq ft house becomes much more attractive to the builder because they can now reasonably charge $180-185k for that same house because the government is picking up $25k of the tab for the buyer. If the new market price for that house is now $180k, that gives them $40k profit on the $140k investment to build the starter home (28.6% ROI as compared to 22.2% for the bigger/nicer house) and incentivizes them to focus more on starter homes.

(Note: The numbers here are completely fictional, but they serve to illustrate the point. The breakeven point for builders would vary on market conditions in each market so there's no real way to make an across-the-board example that works in real numbers.)

See this in every new development here. Homes are so large that the project looks like apartments with driveways.

 

[SmilingJack]

And yea a"good Plan " would factor in alot And its complicated
Town A wants to use the land that is down wind from a chemical plant that nobody wants
Town B is willing to give some incentives to the Old Wahrehouse district to sell the land-cause actually in X years it might be a pricey potion for high rises and Starbucks
The feds should tell Town A to go to hell and work hard with Town B

The appraisal theory of allocation that most lenders I deal with is that the Lot should be @25-30% of the total value. So $50,000 lot $200,000 house. This is the cycle that IMHO has ratcheted up the $1-2 million market. So donated land or some sort of combination of localized density surrounded by open spaces would help with the environmental and economical feasibility. All that's above my pay grade but I think we need to get together and figure it out.

 

[UNCatTech]

I believe, from what I've read, that we have to overcome the lower margins on smaller starter homes.

If land development of the lot is the same no matter if there is a 1K sq ft home or a 2500 sq ft home, and the builder will make more on the 2500 sq ft home, we know which direction he will probably choose.

One concern I have, that I believe was mentioned, is that a down payment subsidy is only going to help the first person receiving it, when they sell, they are not going to give the next owner an equal down payment subsidy, they are going to increase their profit on the sale.

 

[mpaer]

The appraisal theory of allocation that most lenders I deal with is that the Lot should be @25-30% of the total value. So $50,000 lot $200,000 house. This is the cycle that IMHO has ratcheted up the $1-2 million market. So donated land or some sort of combination of localized density surrounded by open spaces would help with the environmental and economical feasibility. All that's above my pay grade but I think we need to get together and figure it out.

And there are smaty motherducking Legislative staffers that have worked on this stuff for years-seen the pitfalls etc Guys way above our pay grades

 

[SmilingJack]

And there are smaty motherducking Legislative staffers that have worked on this stuff for years-seen the pitfalls etc Guys way above our pay grades

Yep and trade lobbies like HBA and NAR would have to be appeased perhaps through apprentice trade job subsidies. They'd get a break on the labor costs as well as more competent tradesmen? If we don't get young folks on the path of building equity then the wealth division will continue to destabilize society.

 

[mpaer]

Yep and trade lobbies like HBA and NAR would have to be appeased perhaps through apprentice trade job subsidies. They'd get a break on the labor costs as well as more competent tradesmen? If we don't get young folks on the path of building equity then the wealth division will continue to destabilize society.

Amen

 

[superrific]

There are unstable equilibriums. Think local max value. And neutral equilibriums. Think saddle point. In addition to stable equilibriums (which you are talking about), which you can think of as local min value.

Yes, there are, but that's not how the phrase is used in economics to my knowledge. Or, maybe to put it differently, perhaps there just aren't unstable equilibria in a macroeconomy, or at least not in the models of that macroeconomy that I have seen.

 

[SmilingJack]

Another big problem is that the houses got bigger even though families got smaller. I'm not getting into the economic nomenclature nuance with Super as once you get beyond Eastwing framing hammers I'm not sure I can help. I'm just saying that we'll need to relearn what we once knew that less is more.

It's kinda like wanting affordable Mercedes and we're going to need to sell "cozy" to get to affordable.

 

[finesse]

Another big problem is that the houses got bigger even though families got smaller. I'm not getting into the economic nomenclature nuance with Super as once you get beyond Eastwing framing hammers I'm not sure I can help. I'm just saying that we'll need to relearn what we once knew that less is more.

It's kinda like wanting affordable Mercedes and we're going to need to sell "cozy" to get to affordable.

I still have the same Estwing 28 oz framing hammer I bought in 1980. Used it regularly until I retired in 2018. Wore both of us out in the process.

 

[stankeylegjones]

Yes, there are, but that's not how the phrase is used in economics to my knowledge. Or, maybe to put it differently, perhaps there just aren't unstable equilibria in a macroeconomy, or at least not in the models of that macroeconomy that I have seen.

I’m not an economist (I’m a mathematician), so I can’t give you a lot of information on this, but from a very quick google search it appears that unstable equilibrium exist in macroeconomics, and the phrase is used as indicated in my previous post.

 

[superrific]

My definition is exactly what equilibrium is. You are describing a special case where the the function that models the system happens to have a same state with those two different inputs. But that's a specific characteristic of the function and not "everything generically tries to get back to where it was". If I move the ball to the other side of the hill it rolls down that side, it doesn't "try to get back to where it was"

(I do see where you're attempting to make the case about the housing market function has a similar characteristic and do want to dive back into this more fully but I have to run now, I'll chew it over and get back)

OK, I was talking about the concept of equilibrium in economics. When an economist talks about an equilibrium, s/he is almost always referring to an attractor basin, so to speak. For instance, consider a basic IS-LM model. That's a form of supply-demand curve in which the curves represent Investment/Savings and Liquidity/Money. The equilibrium output (i.e. GDP) is the output associated with the intersection of those two graphs.

Now, suppose the Fed changes the monetary policy. That causes the LM curve to shift. In response, the IS curve shifts back and the system returns to equilibrium, at a different GDP and/or interest rate perhaps, but it's still back in equilibrium. Unless the underlying factors have changed, the economy will tend to return to its steady state.

Unstable equilibria are rare in macroeconomics, to the best of my knowledge, as are multiple equilibria (which are more common in financial economics).

 

[mpaer]

I still have the same Estwing 28 oz framing hammer I bought in 1980. Used it regularly until I retired in 2018. Wore both of us out in the process.

Love it

 

[superrific]

I’m not an economist (I’m a mathematician), so I can’t give you a lot of information on this, but from a very quick google search it appears that unstable equilibrium exist in macroeconomics, and the phrase is used as indicated in my previous post.

OK. I'm familiar with unstable equilibria in game theory, and game theory has applications in economics but is (I think -- you can tell me) actually math. I'm not familiar with it in macro. I read a few links and the concept appears to be theoretical in nature. It occurs when supply and demand are inverted -- i.e. supply is downward sloping and demand is upward sloping. I don't know anything about downward supply. Demand can slope upwards in special circumstances (e.g. Veblen goods with conspicuous consumption), but it's rare enough that I can't imagine it would ever be incorporated into a macro model.

Anyway, it appears that I overstated my case. Let me revise: I was referring to the concept of equilibrium as commonly and standardly used in macro- and micro-economics. I should not have generalized to the concept of equilibrium entirely.