[HN Gopher] A Lego model of financial capitalism
___________________________________________________________________
A Lego model of financial capitalism
Author : Dogwash24
Score : 147 points
Date : 2024-04-05 11:10 UTC (11 hours ago)
(HTM) web link (www.asomo.co)
(TXT) w3m dump (www.asomo.co)
| dgfitz wrote:
| https://web.archive.org/web/20240405111833/https://www.asomo...
| steve_gh wrote:
| Really clear. Recommended.
| Supermancho wrote:
| The Lego model has a scale problem. Some of those arrows are a
| LOT bigger than others. It's not a minor issue when discussing
| the economy, as a whole.
| bombcar wrote:
| A variation of this is why owning your house has (historically in
| the USA) been such a "deal".
|
| Because you put 20% down (or less) in cash, borrow the rest, and
| the appreciation goes to you. At 20% down, if the house goes up
| 20% you've doubled your money. At 5% down, it's 4x (minus
| transactional costs).
|
| As long as you ignore all the other aspects, like inflation,
| maintenance, etc, you have a pretty darn good return on paper.
| triceratops wrote:
| It's actually safer than almost any other debt financing. Even
| in bankruptcy creditors can't take your house.
| bombcar wrote:
| Yes - the benefits for single family home ownership are so
| insanely high it's hard to come up with situations where it
| is _not_ the way to go (usually involving not being in an
| area for long enough to overcome transactional costs).
|
| In California on a purchase loan you literally can't lose -
| the bank can only take the house, it's non-recourse.
| 01HNNWZ0MV43FF wrote:
| I just don't think it makes sense from outside the system.
|
| If the benefits are so great, why can't the benefits be
| shared and even increased if I live in a condo in a row of
| condos? Then we have fewer outside walls to insulate, we
| can all pitch in for a manager to handle exterior
| maintenance, we can pool parking, maybe get some solar
| panels using that nice big shared roof space...
|
| I agree the benefits _as the system is set up now_ are
| obvious. I don't think those benefits _should_ exist
| because I don't think they make sense or fall out from
| first principles.
|
| And this isn't a communist thing, I think that single-
| family homes just look like an inefficiency. As a
| capitalist, why am I paying to heat and cool extra walls?
| triceratops wrote:
| Most of these benefits apply to condos too.
| supportengineer wrote:
| What sets condos apart (in the same general location) is
| the monthly HOA fees. Monthly condo fees could range from
| $200/month to $4,000 a month or more. When buying a place
| with a HOA you really need to do your due diligence. As
| part of the process you will receive a copy of the HOA's
| financial statements. You need to dig into those and look
| at common areas like the streets and the pool and look to
| see how much expected lifetime remains, the current
| estimated future costs, and the level of the reserves (do
| they have money in the bank or not).
| zdragnar wrote:
| This is the reason my elderly parents still live in an
| oversized home for their current needs. They've looked at
| downsizing to a townhome or condo, but comparing
| everything they would lose to sharing noise through
| walls, HOA fees despite still being responsible for
| mowing and shoveling snow, and everything else it just
| doesn't make sense for them.
| lotsoweiners wrote:
| > As a capitalist, why am I paying to heat and cool extra
| walls?
|
| Paying to heat and cool "extra walls" is worth it to me
| for privacy and noise reasons. I also use the space for
| my gardening hobby, storage, and as an extension of my
| garage for diy woodworking projects. Money well spent in
| my opinion.
| marcusverus wrote:
| When in doubt, math it out:
|
| https://www.nytimes.com/interactive/2014/upshot/buy-rent-
| cal...
| tomrod wrote:
| Paywalled
| paulddraper wrote:
| > it's hard to come up with situations where it is not the
| way to go
|
| One mistake is buying excessive amounts of house (and not
| renting it).
|
| Ownership is no-brainer inasmuch as it also replaces your
| rent (or provides income).
|
| ---
|
| EDIT: Another situation is short-term (< 12-18 month)
| rental.
| financetechbro wrote:
| The fancy word for this is LBO
| triceratops wrote:
| I think a rental property would be more like an LBO. The bank
| takes into consideration the income potential of what you're
| buying when underwriting the loan. Obviously your credit-
| worthiness still matters too.
| game_the0ry wrote:
| It also why leveraged losses can be so devastating - the same
| works in reverse.
|
| When your home depreciates, you lose the down payment and you
| are still on the hook for the debt.
|
| That's what happened during 2008 GFC when home prices went
| down.
| elpakal wrote:
| Are you still on the hook for the debt, though? I though
| that's what bankruptcy was for
| iamthirsty wrote:
| Just because you go legally bankrupt doesn't mean the debt
| magically disappears.
| compiler-guy wrote:
| In many states a home loan is "non recourse", which means
| that in a default the bank gets the house and nothing
| else. The debt is completely discharged.
| game_the0ry wrote:
| But your credit score will still take a hit.
| LanceH wrote:
| They don't like it when you play by the rules.
| toomuchtodo wrote:
| You're eligible for a new mortgage within ~3 years after
| foreclosure with an FHA mortgage, 7 for conventional.
| This is known as waiting periods wrt mortgage
| underwriting guidelines. Credit score might impact the
| rate, but on the property ladder might be than not, have
| to model both ways (appreciation, cost of debt service,
| reserves, rent, etc).
|
| (Strategically defaulted on property after buying at the
| peak before 2008 GFC)
| travem wrote:
| The following page provides a good overview for the US
| https://www.uscourts.gov/services-
| forms/bankruptcy/bankruptc...
| supportengineer wrote:
| >> you lose the down payment
|
| This loss isn't recognized unless you sell. If your house
| loses value but nothing else in your life has changed then
| "Just keep swimming" and historically you will win in the
| long term.
| swexbe wrote:
| The history of financial markets is about 3-4 lifetimes
| long. That's not a lot of history to go on.
| JeremyNT wrote:
| Maybe _on aggregate_ but the devil here is in the details.
|
| Plenty of people buy houses in "on the rise" areas and reap
| the benefits as desirability increases, it's true. Even
| market crashes like in the mid/late 00s don't impact their
| long term prospects. But there are also dilapidated cities
| and small towns in this country that have fallen from their
| heights never to recover.
|
| It's easy to look back after owning your home for a decade
| and conclude it was all inevitable, but the "home
| ownership" bet is one that the house you're buying in will
| be in a desirable area in the future. This isn't always
| going to be true, and it's a real risk.
|
| And yes there are protections from being on the hook for
| the full levaraged amount. You can walk away from an
| underwater mortgage, but if you put in a large down payment
| you're kissing that goodbye, and it's still a pretty big
| disruption in your life even if it's one you can recover
| from.
| 01HNNWZ0MV43FF wrote:
| The house going up 20% is its own oddity. My living here
| doesn't attract more business or residents to the neighborhood,
| it doesn't really improve the value of the land except for my
| fractional contribution to keeping a nice grocery store open
| nearby.
|
| I suspect in many cases home ownership is just subsidized.
| Might be Director's Law at work.
| https://en.wikipedia.org/wiki/Director%27s_law
| bombcar wrote:
| It a lot of factors but the main drivers are inflation and
| desirability. In places where the desirability is basically
| neutral, houses do what you would expect and "used" ones sell
| at a moderate discount to new construction.
| toomuchtodo wrote:
| They aren't making more land.
| bckr wrote:
| Aren't they? Isn't that what sprawl is? Obviously, not
| literally creating more physical land, but developing
| land into useable land.
|
| They're making more useable land.
| pixl97 wrote:
| Sprawl has its own cost growth function. Bigger roads,
| bigger water distribution, bigger sewers, bigger runoff,
| etc. And typically you develop the easiest and best land
| first then expand in the more and more difficult to
| develop. This inflates costs as time goes on.
| paulddraper wrote:
| They are making more valuable/liveable land.
|
| Land itself is cheap as dirt.
|
| Level land in Wyoming for $350/acre (so $70/house at
| median lot size). [1]
|
| (Does it lack transportation, utilities, stores, schools,
| and jobs? Yes. Because those make land valuable.)
|
| [1] https://www.land.com/property/80-acres-in-Sweetwater-
| County-...
| phkahler wrote:
| Home prices have an inverse relationship with interest rates.
| Housing cost as a percent of income has been relatively
| stable in the U.S. lower interest rates mean you can borrow
| more for a given monthly payment. Interest rates had a 35+
| year slide from 1980 to 2005. It's been really weird since
| then.
| staplers wrote:
| My living here doesn't attract more business or residents to
| the neighborhood
|
| On the contrary, try getting internet, sewer, water,
| electrical, or gas hookups in a rural area and let me know
| the cost.
| tel wrote:
| To make matters stronger there are significant tax benefits
| (the public subsidizing private home ownership) and the US's
| 30y fixed rate loan is startlingly good, especially since you
| have a refinancing option. The risk of these loans is again
| subsidized by the public.
| RHSeeger wrote:
| > As long as you ignore all the other aspects, like inflation,
| maintenance, etc, you have a pretty darn good return on paper.
|
| That's a pretty significant amount of things to ignore. When
| you include closing costs (10-15k in NY) and insurance, you're
| underwater on your house for a pretty long time.
| paulddraper wrote:
| Historically, conventional wisdom has been two years to
| recoup the overhead.
|
| Obviously depends on market volatility, and I've no idea if
| there's a more accurate # now.
| zdragnar wrote:
| I've heard 5-7 years, but that may be with much lower than
| the 20% down.
| mitthrowaway2 wrote:
| Insurance and maintenance are costs of shelter, though.
| That's an exchange for the benefit of enjoying a roof over
| your head -- it shouldn't be considered a financial loss from
| an investment perspective. If you were renting out the
| property instead of living there, the renter would be paying
| those costs through their rent.
| RHSeeger wrote:
| My apologies, I meant interest and maintenance.
|
| And I would say that maintenance certainly counts as a
| financial loss when you're considering the property from an
| investment perspective. If it was a paper investment
| (stock/bond/whatever), it wouldn't exist. It's part of that
| specific investment.
| mitthrowaway2 wrote:
| My point is that unless you're living in the woods, you
| have to pay for maintenance. Maintenance has a cost, but
| not an opportunity cost. If you choose to invest in tech
| or gold or whatever instead of a home, then you're still
| paying indirectly for maintenance for whatever structure
| you're occupying.
|
| At least as a homeowner you do have the freedom to
| advance or defer certain maintenance work according to
| your budget.
| staplers wrote:
| If it was a paper investment
|
| Those have "maintenance" fees too at most brokerages.
| civilized wrote:
| Appreciation is a good deal for speculators and flippers, but
| for normal homeowners it isn't worth much. If all house prices
| double including my own, the money I make selling my house just
| goes into buying a new one.
| mitthrowaway2 wrote:
| It still matters to normal homeowners who eventually intend
| to downsize before they die. Or if they borrow further
| against the rising value of their house to finance other
| investments at a lower rate than they otherwise could borrow
| at. But yes, it matters much more to speculators or investors
| who own rental properties.
| gizmo686 wrote:
| The presence of leverage means that appreciation still favors
| you. Assume you buy a $100k house, with a 30 year mortgage at
| a 6% interest rate and a 20% down payment. You then buy an
| equivalent house.
|
| Over the course of those 5 years, you will spend $28.77k in
| principle and interest, reducing your loan balance from $80k
| to $74.44k
|
| At 0% appreciation, you sell, giving you $25.56k in equity,
| then buy another $100k house at 20% down leaving you with
| $5.5k in cash.
|
| At 2% appreciation, you sell, giving you $35.96k in equity,
| then buy another $110.4k house at 20% down leaving you with
| $13.88k in cash.
|
| At 4% appreciation, you sell, giving you $47.22k in equity,
| then buy another $121.66k house at 20% down leaving you with
| $23.00k in cash.
|
| At 6% interest, the difference between the 80k loan and
| 97.328k loan is $103.89 a month, or about $1.25k a year. Set
| asside $6.23k from your surplus to cover the marginal P&I
| cost for 5 years and you are left with $16.77k cash.
| Subtracting the $5.5k of equity you woupd have had at 0%
| appreciation, and a 4% appreciation rate netted you $11.27k
| over just 5 years.
|
| Given your 20k initial investment, that is a net return of
| 56.35%. Which is an annualized return if 9.35%.
| karaterobot wrote:
| The appreciation presumably does not include all the money
| you spent just maintaining the house, or all the fees
| involved in both buying and selling. And the costs don't
| include remodeling the new house so that it's got the
| things you liked about the old one, or the cost of moving.
| I'm not arguing home ownership is a bad investment, it's
| been a good one for me. But every time I look into the
| actual cost of trading up houses, the calculation gets
| really complicated, and doesn't look as cut and dry as it
| did on the back of the envelope.
| gizmo686 wrote:
| Those are all costs you would neef to oay regardless of
| appreciation.
| photochemsyn wrote:
| You can tell this is fluff because it discusses commercial real
| estate without ever mentioning the many tax shelters that
| politicians have created for their real estate developer donors,
| e.g.
|
| > "What are the most common tax benefits of investing in
| commercial real estate?
|
| > "The most common tax benefits of investing in commercial real
| estate include accelerated depreciation, mortgage interest
| deductions, and tax advantages for an investor's heirs.
| Accelerated depreciation allows investors to write off the cost
| of their investment over a shorter period of time than the
| asset's useful life. Mortgage interest deductions allow investors
| to deduct any interest they pay on a commercial mortgage off of
| their federal income taxes. Lastly, tax advantages for an
| investor's heirs can lead to a massive difference in returns,
| especially over an extended period of time."
|
| https://www.commercialrealestate.loans/blog/the-top-10-tax-b...
|
| If the market really goes belly-up, then the government will step
| in to bail out the 'fearless entrepreneurial capitalist
| investors' as with the subprime collapse, the covid collapse, the
| Silicon Valley Bank collapse, etc. Then the cheerleaders of
| capitalism stop complaining about socialism, at least for as long
| as it takes for them to deposit their government welfare checks.
| digging wrote:
| > You can tell this is fluff
|
| What does that even mean? It's not a marketing page, it's just
| a simplified, introductory lesson.
| coretx wrote:
| It lacks point -7- !
|
| Rentseeking. Setup a unhealthy / worthless business. Next lobby a
| politician who legislates value for your firm out of thin air.
| Very legal, very lucrative, very common.
| B1FF_PSUVM wrote:
| I went off to his https://www.asomo.co/p/the-war-on-informality
| essay, and found it a good read - the graphic illustrating the
| small monetary interaction then and now hits hard.
| hgomersall wrote:
| He's written loads of good stuff!
| DesiLurker wrote:
| I guess citizen's united & regulatory capture would be the
| KraGle.
___________________________________________________________________
(page generated 2024-04-05 23:00 UTC)