Thread by @ReformedTrader

1/ Zillow Talk: Rewriting the Rules of Real Estate (Rascoff, Humphries)

"The democratization of real estate data is profoundly important. The enemy of truth isn't the lie but the myth. This book deploys data to replace folklore with facts." (p. 9)

amazon.com/Zillow-Talk-Re…

2/ "In 1950, the average number of residential square feet per person in the United States was less than 300. By 2000, that figure had climbed to almost 900—both because homes got a lot bigger and families got a bit smaller." (p. 10)

More on this:

https://twitter.com/ReformedTrader/status/1385769690115428353

3/ "In 1970, companies used to plan for 600 sq.ft. per employee. Today, thanks to technology, collaboration, and the near-extinction of office libraries, secretaries, and “computer rooms,” the average number of office square feet per person has shrunk to less than 100." (p. 10)

4/ "It turned out that gigantic, complex models weren’t the best approach. We found that we could actually get much more accurate data by deploying hundreds of relatively simple models." (p. 15)

More on this:

https://twitter.com/GestaltU/status/1110908075333038081

5/ "They factor in lot size, number of bedrooms, & other elements that might affect home value.

"Small models can weigh those variables based on hyper-local history. Instead of treating states like homogenous markets, they can account for value differences from street to street.

6/ "Every single night, our computers build 1.2 million models. Then those models are deleted. The next night, another 1.2 million models are built based on the new conditions of a brand-new day to catch conditions as soon as they shift. That’s how we get the Zestimate." (p. 15)

7/ "The US stock market is worth more than $18.7 trillion. If you can believe it, though, the housing market is even bigger. According to recent estimates, the value of America’s housing stock is more than $25.7 trillion." (p. 21)

8/ "In Hollywood’s eyes, young professionals—from Friends to Seinfeld—should rent, while families ought to own. This notion has been seared into our consciousness.

"Thinking about homeownership is rooted in sentiment—not statistics." (p.28)

More on this:

https://twitter.com/ReformedTrader/status/1411112122751148036

9/ "In our data, homes adjacent to the city center tend to gain value more quickly than homes in the city center: the gap between homes in central neighborhoods and outlying neighborhoods shrinks over time.

"Home values usually radiate out from the city center over time." (p.36)

10/ "The easiest way to find a hot neighborhood is to look for restaurants, cafés, parks, and an enviable nightlife. But plenty of people also to live in the next neighborhood over, where they still can access these advantages while enjoying cheaper housing.

11/ "As more people set down roots in those surrounding neighborhoods, chefs and coffee enthusiasts start opening businesses to cater to this new clientele.

"Because these surrounding neighborhoods tend to be somewhat underdeveloped, home values have quite a bit of room to grow.

12/ "Once they take off, their homes tend to appreciate in value even more quickly than the ones in the premier neighborhood.

"Many of the New York neighborhoods that showed outsized growth were located along subway and rail lines." (p. 39)

More on this:

https://twitter.com/ReformedTrader/status/1401565518981517314

13/ "Neighborhoods are most likely to gentrify if they have older homes, low homeownership rates, and access to more popular neighborhoods. Factors like the local median income and education level are correlated as well but are much weaker indicators for eventual gentrification.

14/ "Neighborhoods with low homeowner-occupation in 1980 were much more likely to gentrify in the future. In part, this was because people who did own these properties were more open to selling to developers. Developers had an easier time moving in & renovating the housing stock.

15/ "Neighborhoods in many city centers have been growing for years and can probably only make marginal improvements. But neighborhoods with very old homes—and therefore plenty of homes with renovation potential—have a lot of room to grow." (p. 46)

16/ "Starbucks equates with Venti-sized home appreciation. It appears to not just be an overall coffee shop effect but specific to Starbucks.

"Properties within a quarter mile of a Starbucks tend to start out more expensive but also appreciate faster than U.S. housing overall.

17/ "We tracked values of homes in a tight ring within a quarter mile of Starbucks and compared those very-adjacent homes to houses in a ring between a quarter- and a half-mile from a Starbucks. (We did so for only the five years after the Starbucks location actually opened.)

18/ "The adjacent homes beat out the nearby homes. Those houses closest to Starbucks appreciated a little more than 21% over 5 years, while the houses slightly farther away only appreciated just less than 17%." (p. 52)

19/ "On average, bottom-tier homes (the cheapest 10% in a ZIP code) do neither better nor worse than the others.

"But buying the worst house in the *best* neighborhood can backfire. The more affluent a neighborhood vs. its metro, the worse the bottom 10% homes perform." (p. 58)

20/ "In California, jumping from a 5-to a 6-rated district requires a 9.9% increase in home value vs. a 47.9% increase to move from an 8 to a 9 on the GreatSchools scale.

"So on the lower end of the school quality spectrum, it’s easier to “trade up” for better schools." (p. 66)

21/ NOTE: The nicer the neighborhood, the lower the cap rate (higher implied cost of owning over renting).

This is an opportunity for renters. For the same cost, you can own a house in a somewhat nice area or rent in a *very* nice area with great schools.

https://twitter.com/ReformedTrader/status/1412167866212765861

22/ "But pricey neighborhoods aren’t the only places with good schools. In fact, all across the country, you can find excellent schools in relatively cheap adjacent neighborhoods.

"There are many affordable neighborhoods that feed into excellent school districts." (p. 67)

23/ "We leave our jobs, on average, after 4.6 years. Before divorce, the average marriage in the United States lasts eight years. Yet consumers make the most important financial decisions of their lives based on the assumption that they’ll live in the same house for thirty years.

24/ "The United States is just about the only country with a thirty-year or longer fixed-rate mortgage with no-prepayment penalties (Denmark being another example). As much as we take the fixed-rate mortgage for granted, globally speaking, it’s anything but ordinary.

25/ "The government provides a guarantee to create incentives for banks to make fixed-rate mortgages widely available. This has taken the form of two government-sponsored enterprises, Fannie Mae & Freddie Mac, and other mortgage programs sponsored by the FHA and VA, among others.

26/ "As a result, the U.S. ranks highest among advanced economies in government participation in mortgage markets, according to a 2011 IMF report. The U.S., a paragon of free market capitalism, has the highest government involvement in mortgage finance of any country." (p. 72)

27/ "Even a seemingly tiny difference in interest rates can add or subtract tens of thousands of dollars to financing costs.

"Adjustable-rate mortgages won’t be the right choice in all cases, but home buyers should find out whether they’re the right choice in their case." (p.74)

28/ "We compare sale prices of the average foreclosure and similar non-foreclosures with their estimated home values to determine the extent to which foreclosures are actually discounted.

"The actual amount a buyer saved when purchasing a foreclosed home in 2012 was only 7.7%.

29/ "That’s a far cry from the 25-35% often cited. At the height of the recession, the actual foreclosure discount was fairly close to what the conventional wisdom suggests. In September 2009, the RFD peaked at 23.7%. Since then, it’s been on a steady downward track." (p. 88)

30/ "Ask the home inspectors you are considering for sample reports. Ideally, you want to read a report on a good house, and—importantly—one on a problematic house, too. Good inspectors will have these on hand, and the best have them featured front and center on their websites.

31/ "Home inspectors typically don’t perform tests for radon or mold, inspect for termites, or check the soil.

"A good home inspection report will clearly state the problem, explain its significance if it’s not obvious, and recommend a course of action.

32/ "Reports that suggest additional inspections should raise eyebrows. Because additional inspections cost time and money, good inspectors will not make these recommendations unless they are needed—otherwise, they may be written specifically to cover the inspector's hide.

33/ "Attend the inspection. A good report provides detailed notes with feedback on maintenance options, but some things are easier to understand in person. Ask your inspector to point things out to you as you walk the property so you have a better understanding of any issues.

34/ "Whenever possible, follow your inspector wherever he goes—whether it’s onto the roof, into the basement, or down the crawl-spaces. He should note things that you need to be aware of calmly and impartially." (p. 94)

More on this:

https://twitter.com/ReformedTrader/status/1409243176217366530

35/ "We compared thousands of pairs of home values across a wide spectrum of home improvements. This allowed us to zero in on the impact of individual renovations and determine, on average, how much a particular improvement increases the resale value of a home.

36/ "It may seem counterintuitive that upscale improvements return less than mid-range renovations. After all, if spending some money is good, then shouldn’t spending more be better? We think the reason has to do with function versus fashion and the law of diminishing returns.

37/ "Take a bathroom in bad shape—dripping sink, busted mirror, broken toilet, and a shower that won’t turn on. Restoring this bathroom to a serviceable state, a mid-range renovation, should increase the value of a home, since it completely changes the livability of the property.

38/ "The same goes for windows. A mid-range upgrade improves functionality—keeping out the cold better and saving on bills—but has little amenity value.

"An upscale renovation doesn’t make the windows work any better and doesn’t increase the value of the home as significantly.

39/ "Also keep in mind that these numbers don’t factor depreciation into the equation. Home renovations will decrease in value the older they are.

"Our resarch shows that, each and every year, you lose about $2,600 of the incremental resale potential attributable to a remodel.

40/ "If you spent $5,000 on a mid-range bathroom remodel, $8,000 on new upscale windows, and $16,000 renovating your basement, you can expect your home’s resale value to increase by $24,310. Just one year later, however, you’ll capture less than $22,000 of that benefit." (p. 102)

41/ More on this:

"Remodeling.hw.net Cost vs. Value Report: If you do a remodel, don't expect to get your money back when you sell. The "Cost Recouped" estimate for every major project is less than 100%."

https://twitter.com/ReformedTrader/status/1417334069482823680

42/ "If a house is described as “unique” in its listing, it can sell for as much as 30-50% less than expected.

"Our database shows that homes described as “unique” tend to need work. If a home is described as a “unique opportunity,” for instance, that’s a negative signal.

43/ "If you line up listings that use age-describing words like “modern” with the construction dates of the homes they characterize, you can see clear trends.

"Even words like “traditional,” “timeless,” and “well-maintained” indicate older homes.

44/ "Words like “cozy,” “charming,” “cute,” and “quaint” are just as loaded with hidden meanings.

"When we crunched the numbers, we found that most sellers listing a small home will mask its true dimensions in these pleasant-sounding euphemisms." (p. 109)

45/ "The table below quantifies the effect that some of the most common descriptive words had on final prices when compared to expected values.

"What’s driving the increase in sale price isn’t necessarily the adjective itself but an underlying truth about the home." (p. 112)

46/ "If you’ve got it, flaunt it. Don’t be shy. Don’t be the guy with the granite countertops and landscaped backyard who sells his house for less just because he was too bashful to mention them in his listing.

47/ "Buyers want to know details, and extra words can give them additional information about whether a house is worth the trek to see it in person.

"Homes listed with more words are more likely to sell above their expected price." (p. 115)

48/ "At a certain point—around 250 words—additional words won’t help. Those extra words won’t hurt your final price, but it will waste your creativity to write a novel-length listing. Instead of just adding words, you’d be better off taking that time to choose the right words.

49/ "Don’t waste words on vague euphemisms. Instead, stress quality features like granite countertops and stainless-steel appliances. Mention all parts of your home that have recently been upgraded. Describe concrete features that distinguish it from the place next door." (p.116)

50/ More on this:

Real Estate Agent Remarks: Help or Hype?

https://twitter.com/ReformedTrader/status/1417933899255074816

Expertise Value Added in the Real Estate Market
"Using objective qualifiers ['cherry cabinets' rather than 'cozy fireplace'] is correlated with higher sale prices."

https://twitter.com/ReformedTrader/status/1417529594958073856

51/ "Nationally, home sales reach their peak in June. In the last week of June alone, national residential real estate transactions are 40% higher than the average throughout the year. In colder (warmer) climates, the peak comes a bit later in the summer (earlier in the spring).

52/ "March is the most popular time to buy and sell in Miami. In Chicago, sales are strongest in June and again in August.

"We see a spike in visitors making contact with agents through Zillow in the early spring, ramping up in the third week of April, and continuing into July.

53/ "That spike in agent *inquiries* translate into actual home *sales*. After the April spike in agent contacts, sales reach their highest levels nationwide just nine weeks later, at the end of June." (p. 120)

54/ "There is a spike in newly listed homes between the third week in February and the beginning of March. Sellers try to position themselves to take advantage of strong spring and summer demand. But with new listings popping up at once, there are a lot of options for buyers.

55/ "In our data, homes listed in the last weeks of March sold the fastest and for the most money. Interestingly, these “magic weeks” came before the peak in agent contacts (May and June) but just after the peak in newly listed homes (late February and early March).

56/ "Though there were more listings for buyers to look through after the peak in new listings, the very newest listings—those posted after the peak, at the end of March—appeared at the top of the search results for prospective buyers who sort by listing date.

57/ "Many buyers have already sifted through the available listings several times before they start getting serious about buying. By that point, those older listings will start looking stale, while relatively new listings receive more attention, more offers, and more money.

58/ "In 2011 and 2012, for instance, sellers who listed at the end of March didn’t just sell faster than average. They sold for 2% more than the average listing.

"In our data, listings in the Bay Area during this time frame translated into a 5.9% premium for sellers.

59/ "Peak listings shift earlier/later depending on climate, as do agent contacts. In Atlanta, for instance, the best week to list in 2011 was the third week in March. That same year in Boston, however, sellers had the best outcomes when they listed in the second week of April.

60/ "Despite regional, largely weather-driven variations, if you’re selling your home, make sure you list after the first major influx of new listings for the year.

"These favorable windows can and will shift each year according to when new listings and agent contacts peak.

61/ "Think about how an unusually warm winter in an especially cold city might shift the window of opportunity forward by a week or two from the year before.

"At the beginning of the home sales season, keep your eye on new listings in the neighborhood where you’re selling.

62/ "Monitor them as they ramp up and, most importantly, take note when they begin to slow down. That’s when you know the time has come to put your home on the market." (p. 125)

63/ "For areas where less (more) than 10% of the population is of Chinese descent, having an “8” as the last non-zero digit results in a negligible price difference (a sales price 1.5% more than the home’s value).

"The number “8” sounds like “wealth”—and actually leads to it!

64/ "Homes that have a listing price that ends in “4” sell for less than expected (0.4% less in non-Chinese areas vs. 1% less in Chinese areas).

"Listing at $158,000 instead of $154,000 may help to attract a buyer and add a little luck into your real estate adventures." (p. 131)

65/ "We tracked more than a million homes listed for sale and found that 47% end up cutting their list price in order to sell. On average, sellers overprice their homes by 6.9%. However, a small percentage of homes are so dramatically overpriced that sellers reduce price by 15%.

66/ "When a listing is overpriced, it tends to sell for less than its estimated market value. In fact, the more a home is overpriced, and the larger the price cut it needs to sell, the bigger the impact on the final sale price.

67/ "For example, a house that undergoes a price cut of 10% has, on average, a sale price that is nearly 2% less than its estimated value. That’s a 4% spread between homes that are priced correctly and those that are overpriced.

68/ "Those correctly priced and needed no price cut spent an average of 107 days on the market as of the beginning of 2013—although this number changes over time depending on market conditions. Listings that need a 10% price cut spend an average of 220 days on the market.

69/ "Sellers who price at the real, fair market value tend sell faster and for 2% *more* than the home is worth." (p. 136)

Counterpoint:
"Much of the effect of brokers on selling prices may reflect encouraging sellers to set lower initial asking prices."

https://twitter.com/ReformedTrader/status/1418237527819837440

70/ "Dave and his wife when they started to notice a strange pattern: They would charge $0.98 or $1.02 for a bottle of wine, and it would sell fine. When Dave set the price at 99¢, however, the wine jumped off the shelves.

"In 1982, Dave opened America's first 99¢ Only Store.

71/ "In one study, researchers looked at a women’s clothing retailer and found that products sold 8% more when they were priced to end in “.99” instead of “.00.”

72/ "In another experiment, researchers marketed the exact same item for thirty-four dollars, thirty-nine dollars, and forty-four dollars. The thirty-four-dollar and forty-four-dollar products sold in about the same quantity, but the thirty-nine-dollar product out-performed both.

73/ "On average, a home will sell for more—and often, sell faster—if its original price ends in a “9” instead of a “0.”

"The psychological power in a home price resides in the last digit that isn’t a zero. $149,000 and $149,900 are both examples of strategic home prices.

74/ "Our data shows that for identical houses with the same estimated $150,000 value, the one that initially is priced for $149,000 (vs. $150,000) will ultimately sell for an average of $2,175 more. This dynamic works at many different price points, for all kinds of homes.

75/ "First we looked at homes with a “9” in the thousands place (e.g. $110,000 vs. $109,000, $850,000 vs. $849,000). After they were sold, we compared each home’s final price to its estimated value. In almost every case, the home with the “9” sold for slightly more.

76/ "The amount gained by using psychological pricing is greater than the discount. In other words, the risk a seller takes by cutting a thousand dollars from their asking price is usually rewarded with more than a thousand dollars added on to the final price.

77/ "The percent effect of the number “9” on sale price does begin to diminish as homes become more expensive.

"But it also becomes less costly for the seller to offer this discount as the price goes higher. Shaving $1,000 off of a $1,000,000 price is only a 0.1% discount.

78/ "Homes using psychological pricing in the thousands digit sold anywhere from four days to a full week faster (3% of average days on market).

"Putting a “9” at the end even has power when the price is only $100 less—$100,900 vs. $101,000, for example.

79/ "Most people who look online sort their results by price. So let’s say that you plan to put your home on the market for $150,000. If you price it at $149,900 instead, your listing will show up higher in their search results when sorted from low price to high." (p. 144)

80/ "Real estate agents specialize. Some focus on helping you buy a home, while others focus on selling.

"If an agent moves a lot of homes every year, that’s an indicator that she can sell yours, too.

"The top 10% (1%) of seller’s agents sell 41% (8.7%) of homes in the U.S.

81/ "(These are percentages of the total number of homes sold, not total dollar value.)

"Real estate 1-percenters sell at least twenty-two homes every year. 10-percenters sell seven homes every year. Compare that to the median agent, who sells a two homes every year." (p. 150)

82/ "Agents with greater than ten years of experience sell twice as many homes as those who have been on the job fewer than five years.

"Agents who’ve been working for a period of between five and ten years sell one-and-a-half times more homes than the agents who are new.

83/ "Experience can be a doubled-edged sword. Everyone wants the most experienced agent, so these agents almost always have the most clients, and each one gets a little less attention. Unsurprisingly, all of this extra business can slow an agent down.

84/ "Compared to the newbies with less than five years’ experience, agents who have been at it for ten to thirty years usually take a week longer to sell a home. Agents with thirty or forty years’ experience take two extra weeks.

85/ "Our data shows no statistical difference in final sale price between a home sold by a thirty-year veteran vs. a three-year rookie, accounting for the extra time on market.

"Experience might bring wisdom, but it doesn’t necessarily put more cash in your pocket." (p. 151)

86/ Study w/ similar conclusions:
Incentives and Performance in Real Estate Brokerage

https://twitter.com/ReformedTrader/status/1417665207858462722

Counterpoint:
Impact of Agent Experience on the Real Estate Transaction

https://twitter.com/ReformedTrader/status/1417604361203638278

Expertise Value Added in the Real Estate Market

https://twitter.com/ReformedTrader/status/1417516527134199818

87/ "Men are ruthless appraisers but more stubborn on price. Women, on the other hand, are more optimistic on pricing, but also more likely to drop the price to close a deal.

"On average, homes sold by women agents spend 2% less time on the market.

88/ "(It’s worth noting that male agents sell an average of 4% more homes every year than female agents.)

"The difference between the genders is incredibly small but is statistically significant. When we control for home attributes, women sell for higher prices and sell faster.

89/ "Buyers and sellers have written >600,000 reviews of local real estate agents they’ve worked with on Zillow. On top of the written reviews, people also have the chance to grade their agent on “local knowledge,” “process expertise,” “responsiveness,” and “negotiation skills.”

90/ "For every category, the agent receives a score from 1 to 5, with 5 being perfect. We lined these grades up against real sales data for each agent: it turns out these ratings are actually a pretty accurate way to predict how an agent will do.

91/ "For instance, agents with a perfect “Responsiveness” rating of 5 sell homes 27% faster, on average, than agents with a responsiveness rating of 1. This amounts to an average of 106 days vs. 145 days on market.

92/ "The story is similar with “local knowledge” scores. Agents with a perfect local knowledge rating sell 57% more homes than agents who rate only a 1. On average, the most knowledgeable agents sell eleven homes each year, while less knowledgeable agents sell only seven.

93/ "Agents who are actively involved with other agents and consumers (who have participated at least five times in our online forums, answering questions from ordinary people) sell 33% more homes, on average, than agents who haven’t participated.

94/ "We keep track of whether agents work with their clients to find loan officers, contractors, and other service people. Agents who provide five of these kinds of endorsements tend to sell an average of 20% more homes every year." (p. 155)

95/ "Homes on named streets ('Elm St.') tend to be more valuable than similar homes on numbered ones ('10th St.') by 2% nationwide.

"The four most common street suffixes for homes are the four least valuable suffixes." (p. 167)

96/ "First, a developer looks at how streets in surrounding communities are named and then picks a theme for the new community's yet-to-be-named streets (“Caribbean,” or “Equestrian,” or “Presidents of the US.”)

"The developer puts together a list of preferred names.

97/ "The list is submitted to the county or municipality, which cross-checks it against a list of existing streets for any names that sound similar, so as not to inadvertently confuse emergency personnel." (p. 174)

98/ "Negative equity makes the local housing market volatile. Homeowners are trapped, so the supply of available housing decreases, leading to price spikes as potential buyers are compete for a smaller pool of homes. The cycle of volatility leads to even more volatility.

99/ "Partly, these markets are volatile because they have high employment flexibility. They’re the kind of places people can move to when times are good but empty out when the jobs aren’t there.

"Las Vegas, for instance, is unusually dependent on consumer spending." (p. 191)

100/ "The “Sand States” have warm weather year-round and are magnets for retirees & second-home buyers. When people are flush with extra cash, they flood in. There’s a lot of open space, making it relatively easy to build dream homes instead of buying from existing housing stock.

101/ "Every national economic hiccup is multiplied several times over in these markets. These desirable locations also attract a disproportionate number of foreign buyers who want a vacation home, either to use or to rent out as an investment.

102/ "Some of them buy because they have kids going to college in the area, and they want to give them a place to live.

"42% of people shopping Zillow for Phoenix homes from abroad are Canadians. Another 15% are from India, Australia, and the United Kingdom (close to 5% each).

103/ "Canadians make up the largest group (28.6%) of foreigners searching for homes in Riverside. Chinese users were next biggest (6%) in May 2013. In Las Vegas, Canadians constitute the greatest percentage of foreign shoppers (25%), followed by British (6.7%) and Chinese (4.8%).

104/ "Foreign home buyers bring inherent instability into the market. They can be driven to buy more homes when times are good—or retreat entirely—due to economic factors on the other side of the world.

"Markets can be cursed by their own desirability." (p. 193)

105/ "Expect a significant amount of short- and medium-term ups and downs. Don’t assume that a booming market is going to continue. And remember that any national or global trend has the potential to destabilize your local market." (p. 195)

106/ "In 2007 Walk Score was created to promote walkable, livable neighborhoods. A literal Walk Score®—on a 100-point scale—was assigned to every address in America, measuring how many amenities (restaurants, grocery stores, parks, schools, etc.) are located around a given home.

107/ "Walk Scores® are displayed on all homes’ pages on Zillow.com.

"Home prices in more walkable areas have historically offered higher returns and recovered faster from market downturns." (p. 212)

108/ "That still doesn’t tell us whether walkable amenities are actually what people are paying for (vs. things like proximity to big-city entertainment). Using log-linear hedonic regressions, we controlled for other variables & came to the classic economist’s answer: It depends.

109/ "You might choose a slightly less walkable area of Chicago: that would give you a home with 2,537 more square feet, another bathroom, or a commute nearly 20 minutes shorter. Or you could keep the cash you’d save from living in a less walkable area and use it for a new car.

110/ "In areas not classified as at least “somewhat walkable,” higher Walk Scores® translate to lower home values.

"In Cleveland and Baltimore’s “car-dependent” neighborhoods, homes in those areas that are 15 points more walkable yield 8.25% and 8.4% less in home value." (p.216)

111/ "In 2003, Congress passed the American Dream Down Payment Act *unanimously*. Homeownership was (and still is) such a popular and powerful idea that every single Republican and Democrat in Congress got behind “W”’s bill.

112/ "The bipartisan bubble, like the housing bubble, was destined to pop. A lot of the folks Bush tried to help ended up in dire straits, and many of the neighborhoods he hoped to rejuvenate became foreclosure wastelands." (p. 224)

More on this:

https://twitter.com/ReformedTrader/status/1360687381351788546

113/ "Based on our analysis of home values, subsidies for low-income families to buy in low-income neighborhoods may ultimately hurt the people they purport to help. This policy doesn't just fail to create wealth; it can destroy it." (p. 224)

Thread:

https://twitter.com/ReformedTrader/status/1257849272231317504

114/ "Buying a home is a gamble. It’s a gamble that we will want to keep living in one place—and keep making the mortgage payments that come with it—for years into the future. The problem is that people who live paycheck to paycheck sometimes can’t afford that gamble.

115/ "Instead of locking themselves into a mortgage, they are sometimes better off with flexibility to adapt to changes they might face in the future.

"Job mobility is especially important to people w/ smaller savings accounts, who can’t afford time without a paycheck coming in.

116/ "Being tied down with a home and a mortgage makes that kind of strategic move is much more difficult. It also can be much harder to deal with other catastrophic events. Maybe one of your children gets sick, and you wind up footing a ten-thousand-dollar hospital bill.

117/ "At a moment of crisis, it might make sense to reduce some of your expenses. If you rent, you can always move into a cheaper place. But if you own, you’re stuck with that monthly mortgage payment—and a big, unexpected expense can wreak havoc on your budget.

118/ "Declining home values and negative equity can be disastrous. People are trapped, unable to sell, watching their savings dwindle away every month. Homes that were supposed to secure their financial futures destroy them instead." (p.224)

More on this:

https://twitter.com/ReformedTrader/status/1411112122751148036

119/ "Home values are more volatile at the lower end of the housing spectrum." (p. 227)

NOTE: Demers and Eisfeldt find that cap rates and price appreciation are higher in lower-priced areas. Risk is higher but appears to be compensated by higher returns.

https://twitter.com/ReformedTrader/status/1394000687692849152

120/ "We assume homeownership equals better citizenship in spite of the fact that research suggests otherwise." (p. 228)

NOTE: Bucchianeri gets similar results. Homeowners also seem to derive pain from their homes & to be less happy when they are at home.

https://twitter.com/ReformedTrader/status/1409273272328282113

121/ NOTE: The following section on the mortgage interest deduction (MID) was written prior to 2016.

"The mortgage interest deduction is an accident, a historical fluke, a vestige from a bygone era that still casts a multi-billion-dollar shadow.

122/ "The legislators who first enacted the MID might be surprised to see the proportions it has taken on.

"As a result of a credit boom, when Reagan reformed taxes in 1986, the Treasury recommended that all consumer interest deductions, such as credit-card debt, be eliminated.

123/ "(At the time, you could deduct your unpaid credit-card balance.) These deductions were axed—except for the MID. Reagan earlier had declared, “the taxing power of government… must not be used to regulate the economy or bring about social change.”

124/ "But thanks to lobbying by the National Association of Realtors, he decided on one exception—boosting homeownership.

"Even amidst the most sweeping tax reform effort in a century, “the mere thought of tampering with [the mortgage interest deduction] was unpatriotic.” "

125/ "Most Americans won’t be affected at all if the MID disappears. In 2013, 46% of Americans (mostly low-income, unemployed, and retired people) paid no federal income tax.

"Only one-third itemize their deductions: the MID is irrelevant to all but about one in six Americans.

126/ "If you subtract the 20% of itemizers who rent or have paid off their homes, the pool of potential beneficiaries is even smaller. Only two in every fifteen Americans, roughly 13%, take the mortgage interest deduction every year. The effects would be nearly all on the coasts.

127/ "Of the top 100 ZIP codes likely to be hardest-hit, the mean home value is $865,241. The federal government is spending $100 billion/year to help those who live in almost million-dollar homes.

"It’s ironic that the MID is sold to as a policy designed to help the little guy.

128/ "Nearly 75% of tax filers claiming the MID had incomes over $200,000, for an average tax savings of $2,221. The remaining 25% who filed taxes and took advantage of the MID saved less than $114 on average.

129/ "In those ZIP codes, the avg house is 27% larger than in surrounding counties. We don’t just subsidize luxury; we purchase sprawl." (p. 235)

NOTE: Cap rates are negative in some of those areas; a house could plausibly be described as a luxury good.

https://twitter.com/ReformedTrader/status/1407469742231670784

130/ "A sizeable portion of the one hundred most-affected ZIP codes do have median household incomes of $75,000 or less, but nearly all of them are located in and around the New York metro area—an extremely expensive region with many renters." (p. 235)

131/ "In the coastal housing market, prices are propped up by the federal government, which has a long history of bailing out homeowners whose properties have been destroyed by tropical storms and hurricanes. Homes have been rebuilt again and again by government agencies.

132/ "Now federally regulated mortgage lenders are penalized if they don't require flood insurance for properties in Special Flood Hazard Areas (and the government subsidizes the premiums, leading to moral hazard as people keep rebuilding homes in high-risk areas).

133/ "Properties with multiple NFIP claims account for 1% of all insured properties but up to 30% of flood claims.

"The NFIP program is only effective if we stop incentivizing the rebuilding of homes in high-risk areas. It makes for good politics but is bad policy." (p. 245)

134/ "Homes near Whole Foods or Trader Joe's aren't just more valuable; they also gain value more quickly. (Trader Joe's stores are clustered in California, where all homes are generally more expensive.)

135/ "These stores don't just pick areas that are already on the upswing. They often locate in neighborhoods that are lagging behind the rest of the city.

"But it's possible that both chains are just great at forecasting which locations are about to start gaining value.

137/ "The first thing Whole Foods looks for is a spot where about 200,000 college-educated people can drive in under 20 minutes. The company also considers population density, demographics, and real estate costs.

138/ "Education level tells you what a city block is likely to look like in the future, once artists, writers, and other urban pioneers have attracted a middle-class community." (p. 258)

139/ Depreciation of housing capital, maintenance, and house price inflation

https://x.com/ReformedTrader/status/1420210484364464135