How reasonable is it to expect a 22 year old to be able to take out a mortgage, given their age and likely lack of any meaningful down payment?
When I was 22 all I had was about $5K in savings, less than a year of experience at my first full-time salaried position and student loan debt to pay off. I imagine any reasonable loan officer would deny me on the spot for a mortgage given my liabilities and lack of proven ability to make payments.
For most of the '60s, inflation was below 2%, while interest rates were 3 to 5%. Inflation started picking up north of 3% in 1967, and interest rates climbed along with it, to 8%.
High interest rates (especially above inflation) create an incentive to save money, and keep property prices low. The higher borrowing costs keep the bid prices of property down, and the positive real interest rate means people don't need to speculate on assets like real estate to save their money.
I see similar arguments with vehicle prices, where vehicles are more expensive, but they are higher build quality, have more features (heated seats, blind-spot warning, etc.), so it's not technically correct to use the term "inflation" since the product is different.
But it still feels wrong to say that this isn't a concern and to dismiss it with that argument, since people still need entry-level options, even if we tout the new bells and whistles we've added to the houses or vehicles over the past few decades.
Saying "housing prices are ridiculous" followed by, "but you get more features!" is no consolation to the family looking to get their foot in the door of the housing market.
Do you have a citation for that claim? I searched for it but didn't find a great source - the one I found put homeownership at ~22yo in 1960 at less than 20%.
Also, it's quite a risky assumption as an individual that one's able to make a long-term profitable bet against an army of professional investors that dedicate lots of resources towards making profitable bets in the same market.
As an individual, one is most likely to outperform other non-commercial individuals. It's rather likely in a complex investment environment that money will flow upward from the less well informed and less well equipped investors towards the big players.
Which is why individuals should be extremely cautious where they invest .. lots of options can probably be summed up as: individual lends big player their money gets negligible real return, while big player makes orders of magnitude bigger return.
Why would asset diversity be considered prudent rather than being an incompetent means to chase mediocre returns?
It's not necessarily high leverage, since you don't know anything about the person's balance sheet. It matters a lot more how much (and what type of) debt the person has, not so much how much debt the real-estate has. Their monthly debt payment to income ratio may be low for example, such that the mortgage isn't a problem at all (and it's an inexpensive way to borrow while inflation is high and mortgage rates are well below that rate of inflation, which is a historical oddity for the US).
Diversification-as-mantra is for people that don't know what they're doing and don't know where to focus. This is what morons on television preach, and other pop investment experts, because they too have no idea what they're doing, they just know that spewing out "diversify" won't get them fired and it seems safe (mediocre returns are anything but safe).
The typical person is incapable of being an expert at many asset categories. It is possible, over time, to become an expert at one or a few however, including real-estate. If you acquire competency at real-estate investing, it will pay off handsomely over time (as with equity investing). Unless you're born wealthy or acquire a lot of money in some other way, you're going to start off buying one property. Certainly one can reasonably debate the amount of down-payment to start with on that first property, depending on personal finances.
The most prudent investment path is to focus on an area narrowly, concentrate at becoming good at a thing, develop as much skill at something as possible. That competency is your safety, not diversification (which is primarily useful when you have little to no skill and need to spread your investments around widely because you don't know what to focus on to generate superior returns for yourself; this is why someone like Warren Buffett advises the average person to just buy a low cost index fund, it's because they're incompetent investors ill suited to managing anything on their own - they simply do not have the skill to do so - and the index fund provides relatively safe generic diversification in the stock market, and the matching returns for that as well).
Asset diversification is important because we don’t get the average expected return from a portfolio, we get the actual returns from only one roll of the dice.
Since you can be foreclosed upon and walk away, your downside is capped at the money you put into the property (and however much you value your credit rating for the following seven years). Your upside isn't strictly capped. So for certain high-earning, low-net-worth individuals (say, a 22yo programmer), the expected value for such a risk is high enough that there's a good argument for rolling the dice.
only in non-recourse states, of which there are twelve. if you don't live in one of those, the downside is still capped, but it's the full purchase price of the house.
it's not a good idea to yolo invest like this unless you really know what you're doing.
True, but those twelve comprise a large portion of the country (mainly since they include Texas and California).
Honestly, in most states your greater risk is likely that a renter just stops paying and you have limited or slow recourse options. But like most undiversified investments, it's possible everything could go to zero (see Detroit).
Right now, you can borrow a large amount of money (larger than pretty much any other loan type) at a low fixed interest rate and pay the bank back less than what they loaned you in inflation-adjusted terms. It's basically free money at this point, and one if the reasons I don't sweat my rapidly deflating salary as much as I otherwise would be.
Oh yeah - that's generally a horrible investment compared to the market as a whole. In essence, you end up losing so much of your profit through taxes and you've managed to take on a business now that requires your time. Land lording is generally a terrible investment unless it's done at a scale and professionally. Not saying you don't make money on it - but that same money is probably better in an index fund for 30 years.
Because in the long term, property values can only go up, given the political power of NIMBYs, all levels of government bending over backwards to protect paper wealth of boomers, and low interest rates.
especially now where in all likelihood you are going to overpay for the property, and at anytime the government just decides that your tenants can stop paying rent for a year or more, but you still need to make your mortgage payments, property tax payments and keep insurance and the heat on etc.
Some people do well with rental properties over the long haul, I wouldn't touch it with a ten foot pool these days - especially if you live in a state where tenants have more rights than the owners of the property.
