Housing Issues (f/k/a Harris Economic Agenda Speech)

[grimes70]

This is true but under current law if I hold until my death and pass on to my heirs then they get the stepped up basis which wipes out the depreciation and allows my children to begin depreciating on the same asset again, thereby giving the cash flow of that asset a boost upon inheritance.

Hope you are not taking the back and forth the wrong way. I think it's great you have the smarts and wherewithal to do all this. My oldest friend does similar so I understand.

But, and I believe you will agree, the financial and other considerations you make in buying a house for pure investment purposes (even so far as inheritance) are much different than those of Jack and Dianne trying to figure out how to buy a little pink house to start a family in. (apologies to JM)

 

[heelinhell]

Hope you are not taking the back and forth the wrong way. I think it's great you have the smarts and wherewithal to do all this. My oldest friend does similar so I understand.

But, and I believe you will agree, the financial and other considerations you make in buying a house for pure investment purposes (even so far as inheritance) are much different than those of Jack and Dianne trying to figure out how to buy a little pink house to start a family in. (apologies to JM)

giving you a thumbs up for the JM reference

 

[UNCatTech]

I'm hardly an expert in this field, but based on what I've read since the pandemic and just from my own personal observations in a very rapidly-growing suburb, it seems as if two of the major problems (beyond high interest rates and an enormous surge in housing prices) that are keeping many people - especially younger couples and families - from buying a home is that 1) Few contractors are building smaller starter homes anymore, instead nearly all of the money is in big McMansion homes that fewer people, especially young couples, can afford. And many communities now don't want starter homes for various reasons mentioned earlier. And 2) starter homes that exist are increasingly being bought by investors and companies and sold or rented at jacked up prices. Many of these groups aren't even located in the area and know nothing about the region, they're solely in it to maximize profits by limiting the number of homes available, thus keeping rents and/or sales prices higher than they should be.

I'm sure more knowledgeable folks will correct me if I'm wrong, but just based on what I've read and heard and seen this appears to be two of the biggest problems limiting homeowning right now. I know younger people who live in older starter homes (built 1970s/1980s) in our suburb and they say they are constantly getting junk mail/spam emails/texts and offers from investors to buy their homes on the spot, and some people in their neighborhoods have sold their homes, which are being turned into rental properties at ridiculous prices.

The investors also go in with cash and no contingencies and are ready to close quickly, something most individuals can't compete with.

I spoke with a builder of a neighborhood near me. He was planning on selling each unit individually until an investor came in and purchased them all to rent.
For him it was great, one closing and no haggling or any of the other issues with selling over 100 units, but for buyers it took a neighborhood out of the equation. The rents on the homes are crazy, $2250 and up, for a 2 BR, 1 BA, single car garage town home.

 

[haroldminer]

The investors also go in with cash and no contingencies and are ready to close quickly, something most individuals can't compete with.

I spoke with a builder of a neighborhood near me. He was planning on selling each unit individually until an investor came in and purchased them all to rent.
For him it was great, one closing and no haggling or any of the other issues with selling over 100 units, but for buyers it took a neighborhood out of the equation. The rents on the homes is crazy, $2250 and up, for a 2 BR, 1 BA, single car garage town home.

There are also lots of Chinese buyers here making getting certain types of housing nearly impossible.

 

[mpaer]

The pension fund for Australian federal employees is buying properties (Katy Tur )

 

[UNCatTech]

Well, in theory, the mortgage payments + taxes + repair costs should be higher than rent. And then it's a question whether you can a better return on the principal you are paying down or other investments.

The big issue really is tax. That's what pushes home ownership over rent for a lot of people.

I understand the discussion of investments in comparison to paying down principal, but I don't believe this is in the equation for most people.

Why would mortgage + Taxes + repair cost be higher than rent, for equal houses? A rental unit is going to have those same cost plus the cost of management and profits.

I can understand Harold's point if mortgages are double rents in his state, but where I live, I don't see that even though with interest going up it is more common than it used to be. For a home, if the owner is paying a mortgage, they are recouping that in rent, so I can't see how companiable homes can be cheaper to rent.

If the comparison is between a home and a non-equivalent home or apartment, then the rent could be less, but you are getting what you are paying for.

Ultimately people have to choose what works best for them. I have a college friend that has always rented because he moves very often and it's much easier for him to not have to sell a house each move. I know some people at work that rent simple because they don't care for working in the yard or some of the other things that come with home ownership. It's all about choice there is no one perfect solution or situation.

But, back to the original argument, we have a housing need in this country. I've read about homeless people who actually have jobs, but don't earn enough to get themselves out of their cars and into any housing. That doesn't make sense in a country as rich as this one.

 

[UNCatTech]

There was a significant problem before the housing crisis and before COVID, but those 2 large-scale events did make it much, much worse.

By problem are you referring to affordability or supply?

My understanding is that supply was not in a bad position prior to the housing crisis. I'm not talking about affordability.
The way that the housing crisis impacted supply and then covid impacted an already lacking supply it will take 15-20 years building at 125% of normal rates to recover.

 

[Enigma94]

Hope you are not taking the back and forth the wrong way. I think it's great you have the smarts and wherewithal to do all this. My oldest friend does similar so I understand.

But, and I believe you will agree, the financial and other considerations you make in buying a house for pure investment purposes (even so far as inheritance) are much different than those of Jack and Dianne trying to figure out how to buy a little pink house to start a family in. (apologies to JM)

Yes, we are on the same side. You are correct that those considerations are different as I’ve said multiple times and everyone’s situation is different. I’m on the side of getting more affordable housing built so more people can participate in home ownership as I believe there are significant benefits but of course everyone has to make the best decision for themselves.

 

[superrific]

Why would mortgage + Taxes + repair cost be higher than rent, for equal houses? A rental unit is going to have those same cost plus the cost of management and profits.

Because 1) the repair cost for a landlord should be lower if the landlord has many properties and 2) more importantly, your mortgage payment includes pay down of principal which the landlord won't have.

 

[Calheel]

Because 1) the repair cost for a landlord should be lower if the landlord has many properties and 2) more importantly, your mortgage payment includes pay down of principal which the landlord won't have.

When comparing costs, you really shouldn't include principal repayments. It should be (interest + upkeep/maintenance + insurance + property tax + HOA) - (income tax deduction + appreciation) vs. (rent - profit made on unspent principal)

In my neck of the woods, anyone who bought a house between 2003 and 2020 is way ahead of anyone renting. For anyone wanting to get into the home market now, it requires independent family wealth. There is virtually no way to (1) afford a new home, and (2) make it pencil out over rent.

 

[UNCatTech]

Because 1) the repair cost for a landlord should be lower if the landlord has many properties and 2) more importantly, your mortgage payment includes pay down of principal which the landlord won't have.

I don't understand why a landlord would not have pay down of principal?

Unless you're referring to these investment firms that can pay cash for the property up front. The people I know that have 1, 2, or 3 properties have mortgages where they are paying down principal. Additionally, they were all required to put more down up front, and they have a different homeowners policy.

 

[UNCatTech]

When comparing costs, you really shouldn't include principal repayments. It should be (interest + upkeep/maintenance + insurance + property tax + HOA) - (income tax deduction + appreciation) vs. (rent - profit made on unspent principal)

In my neck of the woods, anyone who bought a house between 2003 and 2020 is way ahead of anyone renting. For anyone wanting to get into the home market now, it requires independent family wealth. There is virtually no way to (1) afford a new home, and (2) make it pencil out over rent.

If one has a loan for a rental property do those not typically have higher interest rates than an owner occupied mortgage?

 

[superrific]

I don't understand why a landlord would not have pay down of principal?

Unless you're referring to these investment firms that can pay cash for the property up front. The people I know that have 1, 2, or 3 properties have mortgages where they are paying down principal. Additionally, they were all required to put more down up front, and they have a different homeowners policy.

Because pay down of principal is not a cost. In a competitive marketplace -- which, in my experience, real estate is -- then it would not be factored into the rent.

Now, there is that antitrust enforcement action going against landlords using the electronic pricing system, so maybe rents aren't as competitive as they were. Also, my experience is primarily in NYC which is an incredibly liquid and competitive real estate market. So maybe this doesn't apply everywhere.

 

[superrific]

When comparing costs, you really shouldn't include principal repayments. It should be (interest + upkeep/maintenance + insurance + property tax + HOA) - (income tax deduction + appreciation) vs. (rent - profit made on unspent principal)

In my neck of the woods, anyone who bought a house between 2003 and 2020 is way ahead of anyone renting. For anyone wanting to get into the home market now, it requires independent family wealth. There is virtually no way to (1) afford a new home, and (2) make it pencil out over rent.

Right. The principal repayments are in the mortgage, which is why it should be higher than rent.

Basically, the landlord is making a real estate investment. When you buy a house, so do you. If you rent a house, you should in theory have leftover cash compared to owning and you can invest that for a different return. Maybe higher, maybe lower.

 

[Calheel]

If one has a loan for a rental property do those not typically have higher interest rates than an owner occupied mortgage?

Yes. Owner occupied loans are usually better rates.

 

[UNCatTech]

Because pay down of principal is not a cost. In a competitive marketplace -- which, in my experience, real estate is -- then it would not be factored into the rent.

Now, there is that antitrust enforcement action going against landlords using the electronic pricing system, so maybe rents aren't as competitive as they were. Also, my experience is primarily in NYC which is an incredibly liquid and competitive real estate market. So maybe this doesn't apply everywhere.

Ok, that's completely over my head. But I still would not believe a landlord would want to take a loss in setting the rent price.

I was listening to a podcast last week about price controls. In the podcast it was mentioned that NYC and San Fransisco both have government price controls on rents. They made a compelling argument that this actually hurt competition.

 

[Duke Mu]

The investors also go in with cash and no contingencies and are ready to close quickly, something most individuals can't compete with.

I spoke with a builder of a neighborhood near me. He was planning on selling each unit individually until an investor came in and purchased them all to rent.
For him it was great, one closing and no haggling or any of the other issues with selling over 100 units, but for buyers it took a neighborhood out of the equation. The rents on the homes are crazy, $2250 and up, for a 2 BR, 1 BA, single car garage town home.

 

[SnoopRob]

By problem are you referring to affordability or supply?

My understanding is that supply was not in a bad position prior to the housing crisis. I'm not talking about affordability.
The way that the housing crisis impacted supply and then covid impacted an already lacking supply it will take 15-20 years building at 125% of normal rates to recover.

Affordability and supply are linked.

Supply was insufficient before the housing crisis. But it was much worse at lower cost levels than at higher cost levels (relative to market, of course). But the housing crisis and COVID have made the supply issue much worse at all cost levels of housing.

Creating affordable housing - such a lower cost apartments and starter homes - is greater than just adding supply, it entails adding the "right kind" of supply.

 

[Enigma94]

Right. The principal repayments are in the mortgage, which is why it should be higher than rent.

Basically, the landlord is making a real estate investment. When you buy a house, so do you. If you rent a house, you should in theory have leftover cash compared to owning and you can invest that for a different return. Maybe higher, maybe lower.

Maybe I’m misunderstanding, but I don’t think what you are saying is correct. The mortgage for a real estate loan will always be less than the rent. Lenders require there to be a proper debt service coverage ratio, in multi family lending it’s typically around 1.25x, meaning the NOI has to be 1.25 times more than the mortgage payment. NOI is calculated as the revenue from the rent minus operating costs, which includes maintenance, taxes and insurance. In professionally managed properties it also includes management fees, payroll, landscaping, etc. Basically any operating cost. They will also typically add a reserve for repairs, which basically means you are funding an escrow to cover big ticket items that inevitably come up (ie roof replacement). But the rent always covers the mortgage in project financed deals.

Now there are some large PE companies and REIT’s that can finance using their balance sheet to secure debt. Loans to them can be interest only and in some cases on project financing you can get the first year or so interest only, but generally speaking real estate loans are amortizing and the rent covers the payments. There are tons of variations off of these basic concepts, but this is typically how the real estate finance market works.

 

[heelslegup]

Like the tax cuts by Republican Pres before him, the Trump tax cuts 1) increase inequality 2) blow up the deficit, 3) contribute to inflation by giving the super wealthy even more unneeded momey to spend, 4) cause a crassh which Dems have to clean up and 5) take away funds which could be used to help middle and lower classes.

You get a couple hundred billion at least every yeaqr to spend on worthy programs if you do this to the Trump tax cuts: 1) let the personal tax cuts lapse for peope earning over 400k, and 2) the corp tax rate was 32%, Trump movied it to 21, move it back to the 27/28 which Dems wanted