Entrepreneurs would be better off if houses were $1 each not $1m each because our wealth comes from our businesses. However, for much of the past century most of the wealth accumulated by middle class America has come from their real estate investments. It's common for an urban or suburban house bought for $50,000 in the 1960s - 1970s to now be worth $500,000. So it actually is a triumph for many Americans when housing prices go up. Until of course they rise too quickly and we have a crash.
I believe this common perception rests upon a conflation of wealth, asset, and income.
Middle class America received high incomes for a period of time, and converted a chunk of it into an asset in the form of residential housing, then thought it had substantial wealth embedded in that asset. Not so.
Residential housing can be somewhat modeled by the purchasers/debtors as a put option that the debtor's income will not fall below a certain floor (sufficient to service the note), with a 7 to 10-year expiration date (the average age of a mortgage in the US before it is extinguished). If the residential housing is purchased outright, then it is a put option on the area's prevailing wages, which in turn supports the valuation.
The housing structure and property itself is much more wage-linked asset than wealth that intrinsically generates income. It is wealth only in a derivative sense, as a high-latency indicator of prevailing wages in the area when it changes ownership.
To cheerlead for housing prices to go up as an unalloyed good is to misplace the context of why it goes up in the first place. For a certain phase of economic development, it can be good because of the cascading economic benefits that arise from the growth such pricing deltas signal. For America, at its current stage of economic, technological and demographic development, in its place in the world economy, it is at least highly debatable whether housing prices going up actually leads to much positive externality economic benefits as before.
It sounds like you're saying that since the valuation of housing is primarily based on the wages of the surrounding population it should not be considered wealth. And that we shouldn't praise rising prices because we're not sure if they have a positive effect on the overall economy. But how is this different from any other investment if stocks, businesses, bonds, currency, etc all have these same properties? Or do they not?
Also what is your definition of wealth? Even though most people don't receive income from their houses (unless it's a 2nd house), I think the intent to pass it on as an asset to their family would classify it as wealth since it would then be an abundant resource as opposed to necessary shelter.
And if we got rid of housing as an investment what does the middle class have left? I'd love to see more people get into business either as an entrepreneur or an investor the risk and upfront cash means it's not for everybody. CD's and bonds are safe but no longer give the returns they used to.
I appreciate the cordial discussion; this is a subject that in my experience touches a lot of raw nerves, so it is difficult to find people who can discuss the topics with a friendly tone.
I believe the answer to many of your questions can be addressed by seeking the answer to another question. How did the upper 10% (mostly the upper 0.1%), manage to capture over 90% of the income gains in the past few decades in America?
Consider that in a typical residential single family home in one of the hot real estate markets like SV, most of the valuation is embedded in the land and not the improvements. You can confirm this by checking the values SFH's are insured for; the insurance companies aren't stupid. If homes really appreciate in value, then their intrinsic utility modulo their location is expected to rise, and their insurance valuations to correspond. They don't.
In other words, most people aren't improving their houses to the extent justifiable by the inflation of the valuation placed upon them over time. The inflation goes into the dirt. There are two entities that mostly benefit from this: the local property tax assessment jurisdiction, and the bank. The upside for them in this arrangement is much more immediate than for the typical home debtor. A junior beneficiary is the real estate agency. Under very specific circumstances, a new home developer also stands in line to financially benefit before the home debtor does.
A home debtor's financial upside is mostly realized at the tail end of the life cycle of the transaction, when they sell (there is a significant sidebar here on whether or not selling is desirable). Most US federal tax filers take the standard deduction and even the MID doesn't benefit them.
If some outlier upgraded a house to boast its own energy production (like with solar and biogas), sewage treatment (like with constructed wetland), highly-automated integrated cycle aquaponics/vermicomposting/agriculture setup, and so on, and was able to sell a surplus production/handling capacity to their neighbors, I will grant that such a house has intrinsic wealth and its improvements justify an increasing valuation. But absent that kind of actual productive capability, most houses only sell based upon prevailing wages.
This is a very bad arrangement for the middle class because it strands a lot of capital into dirt for financialization purposes, instead of actually improving the house itself. If that stranded capital was put to use in upgrades that make a house easier to maintain, longer-lasting, more sustainable, more economical to operate, just about anything other than inflating a principal number so the returns from a percentage on that principal increase, then the middle class would actually immediately benefit from their houses.
The middle class in aggregate is not organized enough to generate on demand such an aggregate comparative advantage that they temporarily possessed about 5-6 decades ago anytime soon again, and waiting for history to hand it another such comparative advantage would be folly. My guess at a solution is for individuals within the middle class to find their own localized and organized comparative advantages.
This is kind of going far astray of HN's charter, so to pull us back towards a more HN-friendly territory, I will leave this response at the following. For the majority of actors in most real estate transactions for residential real estate for occupancy by owner, very few benefit from an increasing price that is misaligned with thirty-year sustainable prevailing income trends. In the specific HN-oriented context of technology business owners and employees, each dollar spent on residential housing not spent on improving the future valuation of employees and owners can be considered a flat, deadweight loss to the venture. I would personally much rather have my capital (of all sorts) working for me in my venture or directly improving my valuation where I have far more relative control over the outcome, than stranded in dirt and subject to the capriciousness of prevailing wages where I have far less relative control.
"One of the most important impetuses to the rise of financialization was the end of the post-World War Two Bretton Woods system of fixed international exchange rates and the dollar peg to gold in August 1971."
