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Comment by nemo44x | Hacker News Reader

Buy a "starter house" and begin to build equity. It's how people have always done it. You buy a really small house that isn't in the most desirable location and start making payments into it. Down the road you have built equity and you can sell your starter home and buy a nicer, larger house. You maybe have some family to support then and need more room.

But you see young people renting for 15 years in expensive places of cities because they want to be close to nightlife/etc. and then trying to figure out how to come up with a 15%-20% down payment on a dream house when they're nearing 40 and wondering how anyone does it and complain the system is broken.

They do it by buying a small house in an expensive location and building equity and then upgrading.

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This is also, IMO, part of the problem. As you “move up” more and more undiversified wealth is tied up in your illiquid “investment” leading to overly protectionist policies.

Imagine if 70% of Americans invested their wealth in, I dunno, IBM. Don’t you think that’s going to incentivize some crony policies?

A house/property isn't as illiquid as you think. You can take out loans against it and invest those, often at below or near inflation rates and very often below average market returns. The equity in a home is collateral for more property, investments, etc. I can't sell it on the stock market in an instant, but I can use the equity in my properties for a ton of things.

Right, that’s part of the same problem. Let’s go revisit the IBM stock example and say 70% of Americans wealth is tied up in it.

Now imagine we make a rule that you can’t exit that position. But you can borrow against your unrealized gains. That obliviously incentivizes even more protectionist policy.

Just like with housing, you can rarely fully exit the market because you’ve got to live somewhere. But when people have most of their wealth tied up in a single asset that also acts as a revolving line of credit, it tends to overly inflate the value of that asset. It just makes people protect those unrealized gains that much more or risk being upside down on an asset you can’t sell.

This is completely ignoring the increase in house prices, unless by "not the most desirable location" you mean "move to the middle of Kansas."

The fact is, in many areas, buying any house at all is not feasible for the vast majority of young adults.

> This is completely ignoring the increase in house prices

Guess what, the small and lower cost place you bought 10 years ago went up in price too. So you have equity and you've been in the rising market.

> The fact is, in many areas, buying any house at all is not feasible for the vast majority of young adults.

100% untrue. Buying a house in the place they feel they deserve to live is. You can buy a home that is a 30m commute by train or bus to NYC for <= $400k.

While I agree with the sentiment of your comment, I would need proof of this:

> You can buy a home that is a 30m commute by train or bus to NYC for <= $400k.

Even a door to door commute from Secaucus, NJ station, one stop from Midtown is 20min+. I would say 60min is at least the commute you would need for housing at $400k.

Clifton, NJ is 30m by bus. You can get a Cape Cod there for 400k. Harrison,NJ and other places around Newark are cheap and close. Maybe not door to door but you’re at Penn or WTC by then. Most people that live in NYC aren’t 30m door to door to work.

Currently on Zillow, there are no homes listed for sale in Harrison, NJ for < $400k. The cheapest option is a condo listed for $419k. And it has a $440/month HOA fee.

> the small and lower cost place you bought 10 years ago went up in price too.

Exactly, that's the problem. There exist people who did not buy houses 10 years ago, due to personal failings such as being teenagers at the time. Yet the houses continued to appreciate much faster than inflation and are now out of reach.

> Buying a house in the place they feel they deserve to live is. You can buy a home that is a 30m commute by train or bus to NYC for <= $400k.

A: You absolutely cannot.

B: Why don't they deserve it? Why should would-be buyers be forced out of every major city and even the surrounding areas, due to artificial price increases, when that was never the case for previous generations?

> Why don't they deserve it?

It's not about deserving it... it's basic supply and demand. If the house is desirable, people will bid up the price. People with more money than young adults (older adults with more career experience) can afford to pay more and so will bid up the price on the most attractive housing until they get it.

I gave up air conditioning (among other things) for a few years to help save money for a down payment on my first house. What makes a person who didn't sacrifice/safe more deserving of the house than I (who can afford to pay more)?

A famous person once said "there are a million things in this universe you can have and there are a million things you can't have".

We all can't live in high rise penthouses and lakefront mansions. The whole point of markets and pricing/discovery is to decide who gets what. There's not enough for everyone.

The rise in home prices isn't due to unrestricted market action, though. It's happening because of a patchwork of local regulations making it difficult to build new housing, and other worse concepts like California's neo-feudal Prop 13, on the one hand, and federal government money flowing into the system on the other. It's not supply and demand, it's very artificial and the market is blocked from reacting to it.

> A: You absolutely cannot.

https://www.zillow.com/harrison-nj/

PATH train, 22m to WTC.

Not a bad area either, just not where the whiners who think they deserve prime Brooklyn dream apartment want to live.

“bridge and tunnel crowd” is not a compliment last I checked

30 minutes to <the border of an enormous metropolitan area> is not a very useful metric in practice.

Have you tried buying a "starter house" around Western MA recently? Builder specials start around 200 kUSD, something that is actually move-in ready is at least 50 kUSD more. (Yes, you can try gentrifying McKnight or Upper Hill in Springfield, MA if you want to pay less, lovely Victorians, free bullet holes from the regular shootings included. You go first!)

The advice is completely out of touch because there is a generic undersupply of housing in the US, especially of entry-level housing in areas where the jobs are. What starter houses exist have reached the end of their serviceable lifespan. My starter house in the Midwest (affordable because construction is happening around town, would have preferred staying in MA) has a roof issue and in the medium term 80 feet of sewage pipe will have to be replaced. I was discussing these issues with a builder, and at some point it stops being economical. But meanwhile you need a roof over the head, especially when you own a large dog.

I'm actually angry at the unserviceable advice from people. Please field-test first before opening mouth.

I did what you're saying can't be done.

It's fucking great. The occasional late night poppity pop, the nip bottles in the street, the un-mowed lawns gaurded by un-trained dogs, they all serve as amazingly effective repellent for the types of people who think they know how I or anybody else ought to live.

Good on you! I didn't have the stomach for Upper Hill, not everyone does. (Out of curiosity, where did you buy?)

Not Springfield but basically the same thing. I don't feel like sharing that kind of info here. Go down the list of former industrial cities that make white collar Boston types squeamish and it'll probably be on the list. They're all pretty close to the same in my experience.

A lot of this work you can diy it just seems intimidating. You can absolutely rent a digger and do your own pipe. You can also to your own roof. It’s not really worth it if you make 200k a year but if you make 50 it is.

In a reasonable market where house values just track inflation, you don’t build much equity though.

e.g. If you buy a $200k house with 20% down at 2% on a 25-year amort, over five years you accumulate about $26k in equity not counting your down-payment. In my jurisdiction, standard realtor fees on that would be about $10k, going with the 1% rule of thumb for maintenance would run you another $10k, and property taxes would be another $6k. You’re already at zero net profit before you even have to pay insurance or utilities. (All that isn’t to say that you wouldn’t have lost more money renting.)

I don't know why you are being downvoted. Buying small, building equity, and trading up has always been a thing in home ownership.

It's the same people who voluntarily choose to pay top dollar to go to an out of state university when their local university is just as good and then find themselves 100k in debt and with an unemployable degree and complain the system is broken.

"Buying small" is often no longer possible due to the insane increase in housing cost relative to wages, making that advice out of touch. Going on to blame this on the youth and their nightlives doesn't exactly reverse this impression.

Because this assumes that the value of the property increases more than inflation. And this assumption means that you see and treat the place where you live as an investment.

It doesn't have to increase faster than inflation for it to be a good investment for a leveraged buyer.

Imagine inflation and property appreciation at exactly 5% and an interest-only mortgage (principal paydown is just forced savings, hitting cashflow, but not expenses).

Buyer buys a $500K house, puts $100K down. Next year, the house is worth $525K, meaning that $100K in equity they put down is now $125K, for a 25% increase, even though the value of the property exactly tracked inflation.

These are costs associated with owning a property (taxes, insurance) that come out of the portfolio + others that do not appear in the excel file, such as the risk associated with owning a property that is not covered by insurance, opportunity costs (less flexibility in terms of relocation if better professional opportunities arise elsewhere), and the occasional real estate crisis that can blow away all the gains on paper in a couple of months.

If real estate values do not rise faster than inflation (I would say substantially faster), it would be a very poor investment or not an investment at all.

Yesterday I was reading in the subreddit of the town where I live about people's complaints regarding the absurd cost of living here. It was funny and puzzling that people were saying, "Yes, it's so hard to live here, housing is so expensive. We were lucky to buy 10 years ago for $500,000, now our house is valued at $1.4 million." Not recognizing that they are the problem.

> Not recognizing that they are the problem.

How are they the problem? They bought one house and occupy it as a family. That's fair play by anyone's measure, I'd think.

If more other people want to move into the town than there are units of housing for them and, as a result, bid up the housing that's available, it's not the fault of the people in the town who bought one house 10 years ago and have lived in it for those 10 years.

We bought our place in 2007 (and lived in it continuously). It's worth roughly 2x what we paid for it. That's a CAGR of just under 5% per year. Was that a good investment? Hard to say, but let's look: The S&P total return was a CAGR of 8.5% over that time, but would have been 8.5% CAGR on X (downpayment amount) or about +2.4X. The house was 4.8% CAGR on 5X or about +5.4X.

Along the way, we've spent around 0.8X on repairs, improvements, and maintenance that I can think of and around 1.1X on taxes and insurance. Mortgage interest (after taxes) was another several X. Our house is vastly more pleasing to live in than our old apartment was and we've had two kids and a dog here comfortably for 15 years. The non-financial aspects dominate the financial aspects, but for a property that's appreciated about inline with inflation, it's been OK financially and great psychologically.

They are not the problem directly. There's however just no intrinsic reason for the valuation to go up unless:

* investors bought out most of the housing and made it "scarce" or otherwise inflated prices - tacit cartel is common

* the area has been restructured to make it impossible for non-rich people to live there even if they get the housing for free (gentrification)

* people cannot inherit property as they cannot pay the inheritance tax on the inflated valuation

* there is an external scarcity factor like well paid jobs or at least opportunity for them

Note that lack of space to live or overloaded services actually tends to depress prices.

The statement already implies the people live there for a long time and have focused on the valuation for some reason. They will give their inheritors a problem they cannot pay off and have to try to sell. The ones being able to buy such property are likely to be investors. Now multiply that times a lot and you have the shape of the problem.

> people cannot inherit property as they cannot pay the inheritance tax on the inflated valuation

I don't understand the mechanism by which this would represent a driver for the valuation to go up. This effect would seem to be small in any case, but also tend to reduce (not increase) prices in its small effect, all else being equal. Unless I'm misunderstanding your point somehow.

The valuation is always extrinsic, and as such, a tacit cartel.

Property should depreciate. If you hear that it doesn't, there's a massive structural problem, likely one of the described above.

And these people using the property thinking they're gaining something are not doing anything about it, dooming their heritors.

Buildings should depreciate with wear (in real [after inflation] terms). Land should not, at least not land used for residential purposes.

Land goes up in value. We have more people and more demand.

Structures get repaired and renovated. My house is over 100 years old but I just pumped 700k into it. Does its value not increase?

Homes are expensive to maintain.

It is quite easy to understand why they are the problem. Of course, they are part of the problem, but this is the comment section of a forum and not an official statement from a public figure.

The reason for the absurd rise in housing prices is that not enough housing is being built to meet demand, and the main reason is that homeowners (obviously not all, bear with me if I generalize) and their cartels oppose any new development. It is a problem with a very simple solution, made complicated by people who make money by throwing smoke. A good place to start is to look at how other countries or regions have solved the problem. It is somewhat parallel to homelessness; there is no will on the part of politicians and institutions to solve a problem that is easily solved (from a system perspective).

The housing stock is fixed because certain interests (i.e., homeowners and real estate investors) want their capital to increase in value and/or their neighborhoods to remain sculpted over time. The calculations in the comment are, outside the specific case, largely irrelevant: dilapidated houses infested with rats and mold in desirable locations have increased in value 10-fold over 20-30 years because the housing stock has not increased over time.

Leveraged buyers are more likely to be people that already own houses rather than not though

Everyone who takes a mortgage to buy a property is a leveraged buyer. That’s literally every first-time buyer that I’ve ever known.

Are you implying most first time homebuyers don’t take debt to finance the purchase?

The new play may be buying big and buying the building not the land. Inflation on goods and services is having trouble keeping up with rates

I think a lot of people on this site don’t understand how much materials cost as well as labor today.

This implies that you can buy a starter house. The problem is that they stopped building them, so it’s a decreasing proportion of the houses built. And that’s largely because of increased regulation making it unprofitable to build small instead of large.

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