"We have a housing shortage, so home prices will not decline"

HawkeyesAndCubs1023

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Three disclaimers:

1. I do not have a graduate degree, only an undergrad.
2. I am not an economist
3. Real Estate trends are geographic, and do not hit all 50 states equally

With that said I read this morning that in the month of May, mortgage applications across the U.S. were the lowest in 22 years. So in addition to the lowest demand for mortgages in over two decades, we have the following:

  • Housing prices have risen continually since 2010, and have skyrocketed the last 2+ years. Anecdotally, my home (which is in a hot market) is currently worth more than double what we paid for it not even 6 years ago.
  • Interest rates are rising (albeit from historic lows)
  • Housing prices, and average monthly housing costs, have risen substantially higher than wages, making homeownership affordable for an even smaller portion of the population.
  • We have broad inflation challenges
  • Stock markets are down considerably YTD (Dow around 12-15%, NASDAQ 20%, S&P 15-17%)
  • Revolving credit is at record highs
  • Depending upon which poll you read, a vast majority of Americans are pessimistic about the economy

At the same time, a number of people (primarily those who work in real estate) continually claim that housing prices will not materially decline because we have "such a shortage of homes."

My simpleton point of view, informed by the bullet points above, is as follows:

  • The cost of housing has risen substantially faster than wages and therefore, many people who would like to buy a home will be unable to do so until prices decline.
  • While there may be a housing shortage, people who want to buy houses are not living on the street, they are renting.
  • Unless homes continue to be purchased by institutional investors, demand is going to continue to plummet to the point where prices will have to drop

Can somebody please explain why this "housing supply shortage" will supersede all of the universally agreed-upon bullet points above, and continue to keep housing prices high?
 

artradley

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None of the factors you mention directly affect the price of houses. In the end, if demand is greater than supply prices will not go down. Interest rates increase? You would expect demand to go down. Housing prices have gone up faster than wages? You would expect demand to go down. People are pessimistic? You would expect demand to go down.

However, despite all of these factors, demand is higher than supply. If for no other reason than because supply chain issues are still depressing the ability of builders to produce new homes. So prices are not going down. Because supply vs demand overrules everything else.

Of course, that's not to say that eventually all of those factors won't -- possibly even soon -- cause demand to go below supply. But until then prices will not go down.
 
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HawkeyesAndCubs1023

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None of the factors you mention directly affect the price of houses. In the end, if demand is greater than supply prices will not go down. Interest rates increase? You would expect demand to go down. Housing prices have gone up faster than wages? You would expect demand to go down. People are pessimistic? You would expect demand to go down.

However, despite all of these factors, demand is higher than supply. If for no other reason than because supply chain issues are still depressing the ability of builders to produce new homes. So prices are not going down. Because supply vs demand overrules everything else.

Of course, that's not to say that eventually all of those factors won't -- possibly even soon -- cause demand to go below supply. But until then prices will not go down.

Fair point -- but wouldn't a two-decade low for mortgage applications indicate decreasing demand?
 
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Feb 9, 2013
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Anecdotal, but a realtor friend of mine said that in the last month she has been getting invited to all sorts of builder promo events. The last two years they didn’t bother. She said they seem a little freaked about the slowdown and the notion of holding onto inventory.
 

Tfxchawk

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Jun 22, 2021
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Three disclaimers:

1. I do not have a graduate degree, only an undergrad.
2. I am not an economist
3. Real Estate trends are geographic, and do not hit all 50 states equally

With that said I read this morning that in the month of May, mortgage applications across the U.S. were the lowest in 22 years. So in addition to the lowest demand for mortgages in over two decades, we have the following:

  • Housing prices have risen continually since 2010, and have skyrocketed the last 2+ years. Anecdotally, my home (which is in a hot market) is currently worth more than double what we paid for it not even 6 years ago.
  • Interest rates are rising (albeit from historic lows)
  • Housing prices, and average monthly housing costs, have risen substantially higher than wages, making homeownership affordable for an even smaller portion of the population.
  • We have broad inflation challenges
  • Stock markets are down considerably YTD (Dow around 12-15%, NASDAQ 20%, S&P 15-17%)
  • Revolving credit is at record highs
  • Depending upon which poll you read, a vast majority of Americans are pessimistic about the economy

At the same time, a number of people (primarily those who work in real estate) continually claim that housing prices will not materially decline because we have "such a shortage of homes."

My simpleton point of view, informed by the bullet points above, is as follows:

  • The cost of housing has risen substantially faster than wages and therefore, many people who would like to buy a home will be unable to do so until prices decline.
  • While there may be a housing shortage, people who want to buy houses are not living on the street, they are renting.
  • Unless homes continue to be purchased by institutional investors, demand is going to continue to plummet to the point where prices will have to drop

Can somebody please explain why this "housing supply shortage" will supersede all of the universally agreed-upon bullet points above, and continue to keep housing prices high?
People are living places now. Rising inflation on mortgage rates will price everyone out even with the runup on the cost of homes. Anyone thinking differently should invest in Dutch tulips.
 
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Tenacious E

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Fair point -- but wouldn't a two-decade low for mortgage applications indicate decreasing demand?
I think that's what he said. At base, price is determined where a supply curve and demand curve intersect. Things like the interest rate can push the demand curve to left, bringing price down assuming the supply curve remains static. But countervailing forces can keep the price the same as it relates to both the supply curve and the demand curve.
 
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Tenacious E

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Anecdotal, but a realtor friend of mine said that in the last month she has been getting invited to all sorts of builder promo events. The last two years they didn’t bother. She said they seem a little freaked about the slowdown and the notion of holding onto inventory.
Car salesmen are going to have a rude adjustment some day as well once they actually have to start selling cars again and they are not pre-ordered.
 

artradley

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Apr 26, 2013
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Anecdotal, but a realtor friend of mine said that in the last month she has been getting invited to all sorts of builder promo events. The last two years they didn’t bother. She said they seem a little freaked about the slowdown and the notion of holding onto inventory.

The only anecdote I have right now is resales in our new housing community have, for the last year, usually sold within a week and usually above asking price. A few weeks ago a home went on the market for $635k, which had originally been bought new for $425k in 2018. I just saw it is still on the market and they dropped the price to $600k. I think we might be on the early stages of a slow down in demand.

We only have about 100 homes left to build before the community is complete. Hopefully the developer can get them all sold before things go south - I'd like to have construction over with in the next year.
 
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kc78

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The real problem though is hedge funds and REITs are buying up housing like crazy. It is distorting the market tremendously and there probably needs to be something to put in place to control that a bit. We don't need hedge funds owning housing this way
This. We're seeing a problem in our neighborhood where corporations are coming through and buying tons of the initial supply. So rather than homeowners buying the housing there, at least 1/3 of our homes are owned by investment groups. That's a bit frustrating as those renters and corporations have little interest in actually making the neighborhood better. I wish this wasn't allowed, but it's the way things are.
 

artradley

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This. We're seeing a problem in our neighborhood where corporations are coming through and buying tons of the initial supply. So rather than homeowners buying the housing there, at least 1/3 of our homes are owned by investment groups. That's a bit frustrating as those renters and corporations have little interest in actually making the neighborhood better. I wish this wasn't allowed, but it's the way things are.

I am in a brand new HOA with 500 homes completed out of 650 planned, deep in the suburbs. We haven’t seen the investors yet, but I am pushing hard to put rental restrictions in place to keep it from happening.
 

86Hawkeye

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Three disclaimers:

1. I do not have a graduate degree, only an undergrad.
2. I am not an economist
3. Real Estate trends are geographic, and do not hit all 50 states equally

With that said I read this morning that in the month of May, mortgage applications across the U.S. were the lowest in 22 years. So in addition to the lowest demand for mortgages in over two decades, we have the following:

  • Housing prices have risen continually since 2010, and have skyrocketed the last 2+ years. Anecdotally, my home (which is in a hot market) is currently worth more than double what we paid for it not even 6 years ago.
  • Interest rates are rising (albeit from historic lows)
  • Housing prices, and average monthly housing costs, have risen substantially higher than wages, making homeownership affordable for an even smaller portion of the population.
  • We have broad inflation challenges
  • Stock markets are down considerably YTD (Dow around 12-15%, NASDAQ 20%, S&P 15-17%)
  • Revolving credit is at record highs
  • Depending upon which poll you read, a vast majority of Americans are pessimistic about the economy

At the same time, a number of people (primarily those who work in real estate) continually claim that housing prices will not materially decline because we have "such a shortage of homes."

My simpleton point of view, informed by the bullet points above, is as follows:

  • The cost of housing has risen substantially faster than wages and therefore, many people who would like to buy a home will be unable to do so until prices decline.
  • While there may be a housing shortage, people who want to buy houses are not living on the street, they are renting.
  • Unless homes continue to be purchased by institutional investors, demand is going to continue to plummet to the point where prices will have to drop

Can somebody please explain why this "housing supply shortage" will supersede all of the universally agreed-upon bullet points above, and continue to keep housing prices high?
Your logic makes sense to me.
 

Titus Andronicus

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These surveys of the housing stock always measure everything in units.

What would happen to the argument that we have a housing shortage if we based everything on square footage?

What is the current square footage of living space per person in the U.S. today compared to ten years, twenty years, and thirty years back? I have a feeling that such a comparison would show a significant increase in the housing stock v. population growth.

Even in NYC, the trend appears to be to make the individual units larger in new towers.
 
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MepoDawg#

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Watched a report on the NBC nightly national news the other night that 33% of homes purchased in the month (can’t remember which month) were purchased by investors/corporations. They’re buying these homes at higher prices out from under individuals then charging them rent higher than what the mortgage would be if the individual had purchased the house. It’s not a good thing.
 

eb05

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corporations ruined political funding and now they are coming for the housing market. i wish there would be some legislation to stop this from happening but neither side seems to care.
 
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onlyTheObvious

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Rent charged by the corporations isn’t coming down.
People will have to move further out until they can afford rent. This isn’t something new.

people may also have to settle for less house, I know that daddy’s princess that needs the new 3000 square foot home with a suburban in the garage and a boat in the third stall of the garage 48 hours after graduating college might be pissed but so be it.

free money from the government isn’t coming.

also builder might want to consider building small homes.
 

Tfxchawk

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Watched a report on the NBC nightly national news the other night that 33% of homes purchased in the month (can’t remember which month) were purchased by investors/corporations. They’re buying these homes at higher prices out from under individuals then charging them rent higher than what the mortgage would be if the individual had purchased the house. It’s not a good thing.
Companies doing this will get burned badly. The issue isn't the individual right now....it's the fact that these assholes will crash the economy based on their data models telling them they can run the housing market up infinitely.
 

MepoDawg#

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People will have to move further out until they can afford rent. This isn’t something new.

people may also have to settle for less house, I know that daddy’s princess that needs the new 3000 square foot home with a suburban in the garage and a boat in the third stall of the garage 48 hours after graduating college might be pissed but so be it.

free money from the government isn’t coming.

also builder might want to consider building small homes.
Like I said, it isn’t good and will hurt the economy at some point. There will be another housing crash and it’ll hurt individuals and corporations alike thanks to corporations running up prices and rent. But yes it’s all on the individual.
 

StormHawk42

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People will have to move further out until they can afford rent. This isn’t something new.

people may also have to settle for less house, I know that daddy’s princess that needs the new 3000 square foot home with a suburban in the garage and a boat in the third stall of the garage 48 hours after graduating college might be pissed but so be it.

free money from the government isn’t coming.

also builder might want to consider building small homes.
I know this is typical sentiment and there is definitely some of that going on but I think it’s overblown. Houses that cost $150k a few years ago are well over $225k by now. Hell, townhomes in Des Moines are going for $250k+.

Our home was our first and we paid $220k for it and it would sell over $300k right now.

So yes some new buyers have unrealistic expectations but the market hasn’t cooperated either and corporations and REITs buying up starter homes to drive the price up is keeping some good buyers out of the market.
 

onlyTheObvious

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Like I said, it isn’t good and will hurt the economy at some point. There will be another housing crash and it’ll hurt individuals and corporations alike thanks to corporations running up prices and rent. But yes it’s all on the individual.
Learned nothing from last crash. Handing out risky loans with too little equity (down payment).

but why learn when Uncle Sam is willing to pay for mortgage companies stupidity.
 

Mister Hawkeyes

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People will have to move further out until they can afford rent. This isn’t something new.

people may also have to settle for less house, I know that daddy’s princess that needs the new 3000 square foot home with a suburban in the garage and a boat in the third stall of the garage 48 hours after graduating college might be pissed but so be it.

free money from the government isn’t coming.

also builder might want to consider building small homes.
Tell us you're a Boomer without saying you're a Boomer. I think the type of individual you just described doesn't actually exist, especially not in the middle and lower class. Maybe you're in the 1% and had to fight and claw to get there and hate seeing fellow 1%'ers give their kids everything, but due to your poor grammar I highly doubt that. I think what's really going on is you watch too many shows like Keeping up with the Kardashians and My Sweet 16 where you see billionaire's throwing lavish parties for there kids and buying them things your parents could never afford, just like 99% of the country. Just a heads up, and I know this may hurt you deeply, but what you see on TV isn't always real. There is a housing issue in this country right now and it sounds like you're almost happy about it. You do realize hedge funds and corporations buying 33% of the available houses is not a good thing right?
 

onlyTheObvious

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Tell us you're a Boomer without saying you're a Boomer. I think the type of individual you just described doesn't actually exist, especially not in the middle and lower class. Maybe you're in the 1% and had to fight and claw to get there and hate seeing fellow 1%'ers give their kids everything, but due to your poor grammar I highly doubt that. I think what's really going on is you watch too many shows like Keeping up with the Kardashians and My Sweet 16 where you see billionaire's throwing lavish parties for there kids and buying them things your parents could never afford, just like 99% of the country. Just a heads up, and I know this may hurt you deeply, but what you see on TV isn't always real. There is a housing issue in this country right now and it sounds like you're almost happy about it. You do realize hedge funds and corporations buying 33% of the available houses is not a good thing right?
Not a boomer by definition.

what city are you referencing where it’s $300,000 for a basic house? If you are willing to commute 30 minutes there are plenty of options around Des Moines that are affordable so obviously that isn’t what you are talking about.

can we audit their life’s choices? Can we look at their car choice, career choice, college choice, spending habits?

I don’t give a damn what people do but when you start asking for government handouts you invite scrutiny from those you want money from.
 
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Watched a report on the NBC nightly national news the other night that 33% of homes purchased in the month (can’t remember which month) were purchased by investors/corporations. They’re buying these homes at higher prices out from under individuals then charging them rent higher than what the mortgage would be if the individual had purchased the house. It’s not a good thing.
This is a terrible trend. Seems to me it will create a class of permanent renters and exacerbate existing wealth disparities.
 

Titus Andronicus

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Three disclaimers:


  • Unless homes continue to be purchased by institutional investors, demand is going to continue to plummet to the point where prices will have to drop
One of my insights gained from 40 years on Wall Street was that if you had something that everyone thought was hot but had run out of traditional or prospective buyers (Junk bonds, mortgage-backed bonds are the best example.), you securitized it, by buying it in size, putting it into a pool or portfolio, and selling interests in this to the world in small denominations. The buyers were told that this was a first-time opportunity, when in reality, they were destined to be the ultimate bag holders.

Just how "Institutional" are these investors. My hunch is that there is a newly organized company in each case as opposed to say the "state of Iowa employees' pension fund" doing the buying. This newly formed company will have been organized by one of the big hedge funds or investment banks.

So, if your broker calls you with a first-time opportunity to buy in on the ground floor of a new age, new idea on how to profit from the hot real estate market and offers you pass-through ownership in newly constructed real estate, be cautious.

..................................

Edit:

Such attempts to game a "hot market" are what brought down both Bear Stearns and Lehman Brothers, and made Merrill Lynch susceptible to a (government imposed) takeover by B of A.

Each of these companies got caught with huge inventories of mortgages after the bond/mortgage purchase phase and prior to the securitization, marketing, and sales phases. When this stuff was marked to market when the buyers failed to materialize, they did not meet minimum capitalization requirements.

... and bingo! Just like that their shareholders became the bag holders.
 
Last edited:

Mister Hawkeyes

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Not a boomer by definition.

what city are you referencing where it’s $300,000 for a basic house? If you are willing to commute 30 minutes there are plenty of options around Des Moines that are affordable so obviously that isn’t what you are talking about.

can we audit their life’s choices? Can we look at their car choice, career choice, college choice, spending habits?

I don’t give a damn what people do but when you start asking for government handouts you invite scrutiny from those you want money from.
Who is asking for government handouts? You keep saying this but I haven't heard any sort of cry or demand for government handouts. The only thing I've seen as far as request for government involvement is those who believe it's wrong for hedge funds and corporations to outbid the everyday tax payer for a house. Hell, I'd be willing to bet the only time there will be demand for government handouts is when those same hedge funds and corporations are unable to rent those properties out and now they are stuck with an empty house.

Don't side with corporate America on this one, man. Don't fall into that trap. Your fellow tax paying Americans are getting screwed right now, yet you're worried about Daddy's princess living in Beverly Hills.
 

BioHawk

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People are living places now. Rising inflation on mortgage rates will price everyone out even with the runup on the cost of homes. Anyone thinking differently should invest in Dutch tulips.
giphy.gif
 

BioHawk

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The real problem though is hedge funds and REITs are buying up housing like crazy. It is distorting the market tremendously and there probably needs to be something to put in place to control that a bit. We don't need hedge funds owning housing this way
What are they doing with these places? How are they making money off them?
 

cfbfan23

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This is a terrible trend. Seems to me it will create a class of permanent renters and exacerbate existing wealth disparities.
Countries with lower home ownership rates than the U.S. (65.3):

23px-Flag_of_France.svg.png
France
64.12019[2]
23px-Flag_of_Brunei.svg.png
Brunei
652019[28]
23px-Flag_of_Sweden.svg.png
Sweden
64.52020[2]
23px-Flag_of_New_Zealand.svg.png
New Zealand
64.52018[29]
23px-Flag_of_the_United_Kingdom.svg.png
United Kingdom
632018[30]
23px-Flag_of_Saudi_Arabia.svg.png
Saudi Arabia
62.082019[31]
23px-Flag_of_Japan.svg.png
Japan
61.22017[32]
20px-Flag_of_Denmark.svg.png
Denmark
60.82019[6]
23px-Flag_of_Iran.svg.png
Iran
60.52017[33]
23px-Flag_of_Turkey.svg.png
Turkey
58.82019[2]
23px-Flag_of_South_Korea.svg.png
South Korea
56.82015[34]
23px-Flag_of_Austria.svg.png
Austria
55.32020[2]
23px-Flag_of_South_Africa.svg.png
South Africa
54.32017[23]
23px-Flag_of_Germany.svg.png
Germany
51.12019[2]
23px-Flag_of_East_Timor.svg.png
East Timor
49.92007[35]
16px-Flag_of_Switzerland.svg.png
Switzerland
41.62019[2]
23px-Flag_of_the_United_Arab_Emirates.svg.png
United Arab Emirates
282017[36]
23px-Flag_of_Nigeria.svg.png
Nigeria
252019[14]
23px-Flag_of_Hong_Kong.svg.png
Hong Kong
22.12021[37]
23px-Flag_of_Fiji.svg.png
Fiji
102019[38]
 

cfbfan23

HR All-American
Mar 29, 2002
3,904
7,074
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MepoDawg#

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Gold Member
Oct 29, 2012
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Learned nothing from last crash. Handing out risky loans with too little equity (down payment).

but why learn when Uncle Sam is willing to pay for mortgage companies stupidity.
Learn from your username. It’s obvious what’s happening will have an impact, but yes it’s not the entire problem though it is a major one.
 

BioHawk

HR Legend
Sep 21, 2005
38,967
40,107
113
Countries with lower home ownership rates than the U.S. (65.3):

23px-Flag_of_France.svg.png
France
64.12019[2]
23px-Flag_of_Brunei.svg.png
Brunei
652019[28]
23px-Flag_of_Sweden.svg.png
Sweden
64.52020[2]
23px-Flag_of_New_Zealand.svg.png
New Zealand
64.52018[29]
23px-Flag_of_the_United_Kingdom.svg.png
United Kingdom
632018[30]
23px-Flag_of_Saudi_Arabia.svg.png
Saudi Arabia
62.082019[31]
23px-Flag_of_Japan.svg.png
Japan
61.22017[32]
20px-Flag_of_Denmark.svg.png
Denmark
60.82019[6]
23px-Flag_of_Iran.svg.png
Iran
60.52017[33]
23px-Flag_of_Turkey.svg.png
Turkey
58.82019[2]
23px-Flag_of_South_Korea.svg.png
South Korea
56.82015[34]
23px-Flag_of_Austria.svg.png
Austria
55.32020[2]
23px-Flag_of_South_Africa.svg.png
South Africa
54.32017[23]
23px-Flag_of_Germany.svg.png
Germany
51.12019[2]
23px-Flag_of_East_Timor.svg.png
East Timor
49.92007[35]
16px-Flag_of_Switzerland.svg.png
Switzerland
41.62019[2]
23px-Flag_of_the_United_Arab_Emirates.svg.png
United Arab Emirates
282017[36]
23px-Flag_of_Nigeria.svg.png
Nigeria
252019[14]
23px-Flag_of_Hong_Kong.svg.png
Hong Kong
22.12021[37]
23px-Flag_of_Fiji.svg.png
Fiji
102019[38]
Interesting that countries like Japan and China aren't included here. Are those tiny concrete boxes in the sky considered to be condominiums and not apartments? And are condominiums considered to be the same as a free standing home? Because while high density housing is certainly more efficient and cheaper, I hated living in dorms and apartments for a reason.
 
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cfbfan23

HR All-American
Mar 29, 2002
3,904
7,074
113
Oman 83 2014[16]
Estonia 81.4 2020[2]
Norway 80.3 2019[2]
Latvia 80.2 2019[6]
Mexico 80 2009[17]
Thailand 80 2002[18]
Malta 79.8 2019[6]
Czech Republic 78.6 2019[6]
Malaysia 76.9 2019[19]
Spain 76.2 2019[6]
Egypt 76 2019[20]
Trinidad and Tobago 76 2013[21]
Greece 74.6 2020[2]
Kenya 75 2019[14]
Slovenia 74.6 2020[2]
Portugal 73.9 2019[2]
Brazil 74.4 2008[22]
Iceland 73.6 2018[2]
Italy 72.4 2019[2]
Belgium 72.3 2018[6]
Luxembourg 70.9 2019[2]
Finland 70.7 2020[2]
Ireland 68.7 2019[2]
Netherlands 69.0 2019[6]
Argentina 68.9 2017[23]
Canada 68.5 2018[24]
Cyprus 67.9 2019[6]
Israel 67.3 2014[25]
Australia 65.5 2016[26]
 

Mister Hawkeyes

Team MVP
Feb 3, 2013
211
579
93
What are they doing with these places? How are they making money off them?
1. House is listed for $250,000
2. Individual bids $252,000 (Monthly payment around $1,700)
3. Hedge fund bids $275,000 (Monthly payment around $1,800)
4. Hedge fund wins bid and now owns the house.
5. Hedge fund now rents out the house for $2,500
6. Hedge fund profits.
7. Rent in the area now goes up for everyone.
 

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