you seem not to be aware of the price difference between old structures and new structures. old structures lose value over time, so naturally they will be worth less than the cost of replacing them with a new structure.
Those houses are worth significantly more than replacement cost now so clearly these factors change over time.
From the buyer's perspective, an existing house is sometimes a bargain and sometimes the new one is. You cannot make a blanket statement that a new house should cost more than an existing or that an older one loses value. There are places where new building is so severely restricted that it has significantly higher cost in terms of permits, fees and taxes. This is why you see existing houses being sold as teardowns before vacant land is used to build on. This is certainly the case in many areas of CA.
this is called "depreciation".
So then you know a little about depreciation schedules but maybe what you aren't aware is that the land value is taken out before you create them. It is the land underneath which becomes more scare in supply restricted areas. A basic premise of economics is: that which becomes more scare, rises in price.
left unmaintained, a structure will depreciate to the point that it is worthless. ceteris paribus,
No chit! The great thing about land is that it requires little maintenance.
an older structure will be cheaper than a newer structure due to improvements in the new structure, cumulative depreciation in the older structure, and a discount for the older structure's ongoing upkeep costs.
If ceritus paribus ever was, one new and one existing that existed in the same location you might be able to make that claim. "Improvements" in the new might simply be downgrades in quality. Masonry buildings become brick veneer over stick built in new construction, solid wood becomes laminate and composite, solid wood windows become vinyl, etc. My sister's 4000 sq foot McMansion has some pretty questionable and untested materials not found in older high quality construction. It is fashionable to buy a new house in an outlying area these days, but this is not always the case.
Older structures frequently exist in areas where the demand is the highest while new structures are being built in outlying locations which are not in demand, making the new house far cheaper than the old. This is what drives people out to the hinterlands to live and why they will put up with a two hour commute.
well, i can't speak for my friends, but i paid my house off many years ago
Isn't it interesting that a sophisticated investor such as yourself doesn't feel they can make a reasonable return with 5% money, that the best you can do with it is leave it in a house. What you don't say is what drives you to live in a fully paid off house. You are risk averse. You aren't alone, the primary driver in RE is that the majority has become risk averse, driving down interest rates. This has fueled the housing boom.
the idea that high home equity in and of itself is somehow meaningful is prima facie ridiculous. your statement is solely dependent on ongoing bubble prices.
My statement is just an acknowledgement that people have chosen, as you have, to leave a large part of their collective net worth in the form of equity in their houses. They could have cashed out like Chris here and exiled themselves to a place they don't want to live, like Salt Lake City or Missouri or Texas, places where RE has lagged the high demand coastal areas. I predict Chris will never be able to afford to buy a house of equal value to the one he sold in Southern CA again.
as the bubble implodes and phantom wealth disappears, what will most assuredly remain is all the debt
Pay down and equity build up is accelerated at interest rates this low. Don't take my word for it, compare the TVM at several interest rate levels. Its one of the reasons lenders are floating up to their eyeballs in cash, its coming back to them at a much higher rate and at massive scale than when the average interest rate was 10%. They can't send it back out fast enough. Money is falling in price far faster than RE is rising. Equity buildups will rise faster than prices will fall in aggregate. This happens in most pullbacks or flat periods, equity rises as people are forced to stay put and just pay down instead of rolling up to a more expensive house. Sure, some wind up far enough underwater to walk away but I doubt it happens on the scale that it happened in Texas during the oil bust. More like the guy here who bought in Cardiff in 1990, he buckled down and paid off and waited until he was enough above to sell.
Your dream of national ruin facilitated by a widespread housing bust will unfortunately turn to rubble. |
