Does an overinflated housing market shift wealth downward

Say you live in a city where you bought a house for 200k back in the 90s and now the house is worth a million.

When the house is a million, generally only the 1% can afford it correct? I don’t think a household with 100k in income can get a mortgage for a 1 million dollar house.

But that house was bought in the 90s by a fairly middle class or upper middle class family. Now its being bought from them by a member of the 1%, who transfers a million in their wealth to the middle class family.

So does an inflated housing market shift wealth downwards, or does the wealth just end up going back up the ladder eventually when the new owners charge large amounts for rent?

A million homes bought by middle class families all over the west for low six figures a few decades ago going for a million each is a trillion in wealth transfer if they sell their houses to the 1%.

The problem is that the people selling their overvalued homes also have to buy in a market of overvalued homes because inflation devalues uncapitalized money. In the case of the current residential real estate bubble, it is largely being driven by speculators and investors buying defaults or people who cannot afford to continue their mortgage under a “Greater Fool” theory that values will continue going up indefinitely. In other words, real estate driven by speculation is not “wealth transfer”.


Do you have evidence that these houses are being bought by the 1%? Because around me, where there are only a few houses as cheap as a million, houses for sale are being bought by reasonably normal people who are struggling to afford them - and by people from overseas paying cash or speculating. The 1% buy much more expensive houses in higher class neighborhoods.

Or if those homes are bought by the 1% they’re being bought as “investments” where they’ll either be torn down to build even more expensive homes or rented out to the sort of families that used to own them.

Also, unless you’re in California, massive increases in housing prices also come with higher real estate taxes, which can drive middle class and retired people out of town.

One way it is shifting some money is in some cases Low Middle Class towns are seeing an infusion of Upper Middle Class buyers. So now retiring or downsizing home owners in these towns are moving to cheaper areas or smaller homes and pocketing some significant money.

I know of two local towns where this very true. One I moved into.

The previous owner bought in the 90s and was nearly mortgage free when she sold to us. She moved to a senior’s place and pocketed a goodly amount of cash to help her retirement.

The other possibility is that instead of a 1%er buying the house, nobody buys it. The increase in value is purely illusory, and has no effect other than raising the property taxes on the homeowner. Meanwhile, when a 1%er does buy a house for whatever the inflated price is, they don’t have to pay any property taxes at all on it.

The thing about the 1% is that by definition, there aren’t very many of them, so how many houses are they really going to need? The middle class who purchased those $200,000 homes in the 1990s outnumber them by 30:1, so good luck finding someone to buy your 30 year old house.

Per @Broomstick , they don’t have to live in them.

And it’s not necessarily individuals. Corporate investors bought something like 15% of home in 2021Q1.

Can you link to where you read that? I would like to read it. The percent surprises me with the market the way it has been.

They’re trading $1M in their wealth (or maybe just $200k, the rest borrowed) for $1M worth of house. So I’m not sure how to consider this. My net worth already considers the value of my home and the debt on it. It’s (estimated) value has been increasing. But that doesn’t constitute a transfer.

I shouldn’t have written “corporate”. Institutions and businesses. Could be a pension fund.


Thank you, that article and your correction makes a lot of sense.

Around here houses stay on the market 3 days max. So they sure as hell are getting bought. I’m in California so the new purchaser is going to pay a lot more property tax than the old owner was, but even in other places your basis for your tax bill does not go up every year.
How do you think a 1%er avoids property tax? The various ways they avoid income taxes don’t work for property taxes.

Tax abatements. Around here, the city has decided that the best way to grow the tax base is to not collect it for 15 years.

Possibly, but those who cannot afford it still have to buy a house, and they’ll be buying a smaller and cheaper house that used to cost a fraction, or renting, and some of those houses will have been held by real estate investors.

And of course, as already has been mentioned, the sellers will need to buy in the same market, so they’re not pulling one over on the 1%.

Really? Is it just on new developments or is it the first 15 years when you buy a home?

I think that it triggers on the combination of new ownership and either new construction or significant renovation. The net effect is a blight of expensive housing that’s designed to last over a decade before falling apart, and which never generates any taxes, while at the same time any old house that’s still occupied gets assessed at about three times its realistic market value to make up the shortfall.

Here is an article about a private investment company looking to automate the purchase of $1.5B of homes to rent out through short-term rental services like Airbnb:

In general, I doubt this shifts wealth downward.

Someone who bought a house a few decades ago and is selling it now is likely much older than the person buying it now. On average, older people are a lot richer than younger people, and I expect that that difference is going to swamp other effects.

Someone who bought a now-$1m house for $200k 30 years ago probably had lower income then (even adjusted for inflation) than the person buying the $1m house now, but they also have had 30 years of income and other investment growth, which likely makes them wealthier than the new buyer.