Author Topic: Why are high home prices seen as desirable?  (Read 11695 times)

Offline awaken_D_M_golem

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Re: Why are high home prices seen as desirable?
« Reply #40 on: March 15, 2014, 03:30:58 PM »
+1 ... "lie to me, I promise I believe."


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Offline Frogman55

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Re: Why are high home prices seen as desirable?
« Reply #41 on: May 07, 2014, 10:40:57 AM »
One aspect that seems to have been missed: It's not necessarily high prices that are good, it's rising prices that are seen as good. Admittedly, this ties back into the 'spending is good, saving is bad' economic theories (which are an argument in and of themselves; from a macro perspective the ideal is for people to spend precisely 100% on a fairly frequent basis, but this is a good case of pragmatic realities not accommodating themselves to ideals), but bear with me:

People who don't have a mortgage [should, under the spending is good theory,] like rising prices. Sure, they're paying more on property taxes, but frankly property taxes are peanuts compared to most living expenses. In return for those higher prices, their net worth is higher, which in turn means better credit, which means easier loans, lower interest on those loans, and all the benefits that come with. If a person has a mortgage, then their net worth will still increase, as the principal on that mortgage isn't tied to the actual worth of the home. A high price isn't a big deal, what helps is when the price rises after you buy.

The reverse is the same: falling prices means that peoples net worth goes down, which makes it harder to get loans, and the loans you do get are worse. The possibility of people ending up under water (at which point they are truly screwed) makes this significantly more problematic. Again though, spending power falls with home value.

Of course, this isn't looking at those who don't have a home; but the theory is that increased spending helps everybody (the more that is bought, the more is made, the more are paid, the more is bought, etc.), hence the concept of trickle down economics (I also feel compelled to point out that while Bush and Co. redefined trickle down to refer to the top 1%, Reagan was mostly talking about the middle class, he was talking about well paid factory and union employees who's affluence can help everyone - a big difference to the current perception of the phrase).

Offline brujon

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Re: Why are high home prices seen as desirable?
« Reply #42 on: May 07, 2014, 02:33:35 PM »
Frogman55 - I'm beggining to like you more and more.

Talking about people who don't OWN their houses, rising prices is a very, very bad thing for them. It also affects negatively all the businesses where the business owner is renting the space for his business. Just the other day, i was reading in the NYTimes that the number of libraries in New York is dwindling down, and the most impact is being seen on the highest-priced neighborhoods, like Upper East Manhattan. The business rent there is getting so absurd, the only kind of business that can thrive are those that generate pure or almost-pure profit, like most boutiques and high-couteur - shops made for the rich to expend their excess. Some kid in china weaves the cloth, they put a stamp in it, and suddenly it goes from costing 1$ to make, to be sold at 200$.

Bookstores don't generate a lot of profit. Bookstores thrive on constant influx of costumers. Most Bookstores nowadays also have cafés that serve some drinks and some food. Coincidence? No. It's there because it boosts their revenue a lot, and they need it badly. High prices determine the kind of business that can exist in a given area. If the prices are too high, than most business can't thrive there. There's also the side-effect of rising home prices: rising rent.

Tenants are subjected to yearly rent adjustments. Most of the time, the adjustments aren't too much of a worry. But in a rising-home-price situation, rent adjustments can, and will, make the tenants leave. It causes an exodus of non-house owners, simply because once you hit a certain threshold, the kind of person that would have the kind of money to pay that high a rent, has enough money to BUY and OWN his own house. Rising home prices are very, very bad for those who depend on renting a place to have a ceiling, and, while at first beneficial to landlords, rising home prices can also mean they lose their tenants and can't find new ones, which generates a financial impact in his life. He's forced to either continue to pay the expenses for the houses without it generating any profit, which further impacts his financial life, while HOPING that the price rise trend continues long enough for him to turn a profit even though he had to expend a lot of money to maintain that house until it grew enough in value to be worth selling.

High home prices also generate speculation. Some times, too much speculation. The New York Times had another interesting story on Upper East Manhattan, that began with a russian billionaire. Said billionaire paid a previously unheard-of sum of money for a place in Upper East Manhattan with a view to Central Park. Oh, yes, the place was immensely beautiful and very spacious, with all the luxuries you can imagine. Still, the amount he paid - some US$ 85.000.000,00 - led other brokers to steeply raise their prices on their homes in the same area. Guess what happened. Prices soared, clients vanished, and brokers where left sucking on their thumbs and asking, "what the hell? Why aren't people buying it? They have the money for it, goddamnit!". Well... That's why you don't raise the price on EVERY HOUSE in a neighborhood because one shmuck decided to grossly overpay for ONE house in that neighborhood. What followed was, of course, a sudden and sharp decline on pricing in the area, reaching up to 40% decrease from previous (over)estimated market levels...
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Offline Frogman55

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Re: Why are high home prices seen as desirable?
« Reply #43 on: May 07, 2014, 03:24:47 PM »
Why thank you brujon. I appreciate that.     :D

And yeah, there are lots of reasons why trickle down doesn't actually work as well as people want it too. One of the big problems with economics in general is that it is both zero-sum and not zero-sum. Not to mention that people are messy.

The invisible hand works. It really does. Except when it doesn't. What's good for GM is good for America. Also true. Except when it isn't. When the tide rises, everyone moves up. True, but some people drown.

So rising prices are good for homeowners, but only until prices fall. A homeowner who got out right before that Manhattan bubble burst made out like a bandit. Everyone else got hosed by the falling prices.

As to renters, it's worth noting that nothing forces the landlords to raise prices. The landlord is paying a mortgage, which is still locked in and not related to home prices. Sure, many landlords will raise rents in order to make greater profit; but driving away tenants is really their own fault and not the fault of changing prices.

But yeah, being a renter when prices are rising kinda sucks. I should also note that I know of a house that needs new paint and carpet, has 3,400 square feet, four bedrooms, 3 baths, two car garage, and 1/2 acre lot that you can get for a hair over 20,000$ dollars. You just have to move to Utah County.  ;)

Offline altpersona

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Re: Why are high home prices seen as desirable?
« Reply #44 on: May 07, 2014, 03:32:01 PM »
rental property 'value' is based on its rent... its free money if you can get someone to buy off on it...
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Offline FlaminCows

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Re: Why are high home prices seen as desirable?
« Reply #45 on: May 07, 2014, 04:45:37 PM »
It's not necessarily high prices that are good, it's rising prices that are seen as good.

People who don't have a mortgage like rising prices. Their net worth is higher, which means lower interest on loans. If a person has a mortgage, then their net worth will still increase, as the principal on that mortgage isn't tied to the actual worth of the home. A high price isn't a big deal, what helps is when the price rises after you buy.

The reverse is the same: falling prices means that peoples net worth goes down, which makes it harder to get loans, and the loans you do get are worse. Again though, spending power falls with home value.

Of course, this isn't looking at those who don't have a home; but the theory is that increased spending helps everybody (the more that is bought, the more is made, the more are paid, the more is bought, etc.)

The two largest kinds of debts people take are business loans and mortgages. Most business people limit their liability and do not put their homes as collateral, and if you are buying a house, the larger loan offsets the lower interest rate. Higher home prices only reduce borrowing costs for people who do not need to borrow: the people who own their home and do not have a mortgage. Those people are more likely to have investments than debts. They are also extremely rare.

Increased spending does not equal increased buying when rising prices are the cause. Imagine that tomorrow, all prices double. Spending has increased 100%, how many more things did you buy? That is an extreme example, but it demonstrates the idea. Rising prices are a bad measure of economic growth because they do not show you if people have better things than before. If prices rise faster than wages then the quality of everyone’s life is going down, not up.
 
When you spend more on your home, by paying a higher rent or by making larger mortgage payments, you have less to spend on everything else. This negatively affects the whole economy, except for the real estate industry. You buy fewer goods and services, and the businesses suffer for it.

The only case where a house’s price should rise faster than inflation is if there is some tangible increase in the usefulness of the property. Otherwise, prices will drop eventually. People see the price drop as “bad” and the price increase “good”, but the price drop is a correction, and the price increase a lie.

Spending is good when spent on the things that make life better. Anything else is growth on paper, not in reality.
« Last Edit: May 07, 2014, 05:07:20 PM by FlaminCows »

Offline StreamOfTheSky

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Re: Why are high home prices seen as desirable?
« Reply #46 on: May 07, 2014, 05:06:23 PM »
One aspect that seems to have been missed: It's not necessarily high prices that are good, it's rising prices that are seen as good. Admittedly, this ties back into the 'spending is good, saving is bad' economic theories (which are an argument in and of themselves; from a macro perspective the ideal is for people to spend precisely 100% on a fairly frequent basis, but this is a good case of pragmatic realities not accommodating themselves to ideals), but bear with me:

People who don't have a mortgage [should, under the spending is good theory,] like rising prices. Sure, they're paying more on property taxes, but frankly property taxes are peanuts compared to most living expenses. In return for those higher prices, their net worth is higher, which in turn means better credit, which means easier loans, lower interest on those loans, and all the benefits that come with. If a person has a mortgage, then their net worth will still increase, as the principal on that mortgage isn't tied to the actual worth of the home. A high price isn't a big deal, what helps is when the price rises after you buy.

The reverse is the same: falling prices means that peoples net worth goes down, which makes it harder to get loans, and the loans you do get are worse. The possibility of people ending up under water (at which point they are truly screwed) makes this significantly more problematic. Again though, spending power falls with home value.

Of course, this isn't looking at those who don't have a home; but the theory is that increased spending helps everybody (the more that is bought, the more is made, the more are paid, the more is bought, etc.), hence the concept of trickle down economics (I also feel compelled to point out that while Bush and Co. redefined trickle down to refer to the top 1%, Reagan was mostly talking about the middle class, he was talking about well paid factory and union employees who's affluence can help everyone - a big difference to the current perception of the phrase).

Others did a good job replying already, but I just wanted to add that what you say doesn't match reality.  If housing rose gradually and calmly over a long period of time, on par or just a bit better than inflation, there wouldn't be a problem.  Instead, it's a roller coaster, it shoots up high, then crashes, and repeats.  I've seen the median housing price went up 11-12% last year, and it's been going up quite well the past few years, too.  In a time of tiny inflation and flat to declining wages, that's INSANE.  Not to mention that younger people have less/no jobs and crushing student loan debt so they can't buy right as the largest generation in (American) history is retiring...  There's no sound reason for it to be going up like that, but it is...because housing is seen as an investment first and foremost in this country, so everyone wants to get the maximum return they can as soon as they can.  Hell, boom and bust cycles are great for investors; it helps them to buy low and sell high.  I'm glad you mentioned trickle down economics, because that's really what this is...  The federal reserve keeps the savings rate in the tank which keeps mortgage interest rates low (and also handily makes bank accounts pay near 0 to force people into the stock market...) which spurs higher home prices.  It's a joke.

What *is* actually happening is we're no longer able to actually gain anything from diligently saving, we're either priced out of housing or over-pay for it and thus have to join the bandwagon hoping we don't go "underwater" when a correction inevitably happens, and if we do rent we get to face stiff monthly payments as supply and demand works its magic the way it should be in the housing market if it weren't being so heavily manipulated.

Having the home as collateral to take out credit/debt is an interesting perspective, I can see that...  Still sounds like it's more likely to lead someone to borrow more than he should if anything, though...

Also, since the thread got revived anyway, some more recent CNN articles.
I really hope this guy is right
The federal reserve wetting its pants at the thought that home prices might stop skyrocketing
« Last Edit: May 07, 2014, 05:17:06 PM by StreamOfTheSky »

Offline Frogman55

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Re: Why are high home prices seen as desirable?
« Reply #47 on: May 07, 2014, 05:34:00 PM »
One aspect that seems to have been missed: It's not necessarily high prices that are good, it's rising prices that are seen as good. Admittedly, this ties back into the 'spending is good, saving is bad' economic theories (which are an argument in and of themselves; from a macro perspective the ideal is for people to spend precisely 100% on a fairly frequent basis, but this is a good case of pragmatic realities not accommodating themselves to ideals), but bear with me:

People who don't have a mortgage [should, under the spending is good theory,] like rising prices. Sure, they're paying more on property taxes, but frankly property taxes are peanuts compared to most living expenses. In return for those higher prices, their net worth is higher, which in turn means better credit, which means easier loans, lower interest on those loans, and all the benefits that come with. If a person has a mortgage, then their net worth will still increase, as the principal on that mortgage isn't tied to the actual worth of the home. A high price isn't a big deal, what helps is when the price rises after you buy.

The reverse is the same: falling prices means that peoples net worth goes down, which makes it harder to get loans, and the loans you do get are worse. The possibility of people ending up under water (at which point they are truly screwed) makes this significantly more problematic. Again though, spending power falls with home value.

Of course, this isn't looking at those who don't have a home; but the theory is that increased spending helps everybody (the more that is bought, the more is made, the more are paid, the more is bought, etc.), hence the concept of trickle down economics (I also feel compelled to point out that while Bush and Co. redefined trickle down to refer to the top 1%, Reagan was mostly talking about the middle class, he was talking about well paid factory and union employees who's affluence can help everyone - a big difference to the current perception of the phrase).

Others did a good job replying already, but I just wanted to add that what you say doesn't match reality.  If housing rose gradually and calmly over a long period of time, on par or just a bit better than inflation, there wouldn't be a problem.  Instead, it's a roller coaster, it shoots up high, then crashes, and repeats.  I've seen the median housing price went up 11-12% last year, and it's been going up quite well the past few years, too.  In a time of tiny inflation and flat to declining wages, that's INSANE.  Not to mention that younger people have less/no jobs and crushing student loan debt so they can't buy right as the largest generation in (American) history is retiring...  There's no sound reason for it to be going up like that, but it is...because housing is seen as an investment first and foremost in this country, so everyone wants to get the maximum return they can as soon as they can.  Hell, boom and bust cycles are great for investors; it helps them to buy low and sell high.  I'm glad you mentioned trickle down economics, because that's really what this is...  The federal reserve keeps the savings rate in the tank which keeps mortgage interest rates low (and also handily makes bank accounts pay near 0 to force people into the stock market...) which spurs higher home prices.  It's a joke.

What *is* actually happening is we're no longer able to actually gain anything from diligently saving, we're either priced out of housing or over-pay for it and thus have to join the bandwagon hoping we don't go "underwater" when a correction inevitably happens, and if we do rent we get to face stiff monthly payments as supply and demand works its magic the way it should be in the housing market if it weren't being so heavily manipulated.

Having the home as collateral to take out credit/debt is an interesting perspective, I can see that...  Still sounds like it's more likely to lead someone to borrow more than he should if anything, though...

Also, since the thread got revived anyway, some more recent CNN articles.
I really hope this guy is right
The federal reserve wetting its pants at the thought that home prices might stop skyrocketing
Like I said, there are some problems with the core assumptions, but I do think that increases in worth based on home ownership are the reason why high rising prices are seen as desirable. The problem comes back to the issue that spending as much as you can spend isn't as good as economic modeling often makes it look. Full spending is kinda the economic equivalent of a frictionless environment in physics and engineering. Sure, it's helpful when teaching the basics, but try to design anything around it and you'll be lucky if you don't die in flames.

Offline oslecamo

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Re: Why are high home prices seen as desirable?
« Reply #48 on: May 07, 2014, 05:59:04 PM »
What *is* actually happening is we're no longer able to actually gain anything from diligently saving, we're either priced out of housing or over-pay for it and thus have to join the bandwagon hoping we don't go "underwater" when a correction inevitably happens, and if we do rent we get to face stiff monthly payments as supply and demand works its magic the way it should be in the housing market if it weren't being so heavily manipulated.

Pretty much this, not just for housing, but for economy overall. "Free" market really isn't. The guys with more money can and do bend/break the rules when they feel it's convenient for them.

After all, with all the talk about crisis this and that, the luxury market is still going stronger than ever. Heck, just remember that when BP had that massive oil spill a few years ago, their CEO was all like "Complain louder peasants, I can't hear you over  the sound of my yacht racing!"

Offline StreamOfTheSky

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Re: Why are high home prices seen as desirable?
« Reply #49 on: May 07, 2014, 06:42:54 PM »
I've been trying madly to find a Daily Show clip from a few years back about the housing bubble and how in Canada it just rises in small increments over time and they don't have crashes.  But... no luck.

So instead, I dug up an even older video, that sums up the economic collapse and how people presumably finance "the American dream" nowadays.  Great commercial, albeit for the exact opposite reasons I'm sure the company intended...  I think it might have even pre-dated the crisis, which would make it quite prescient.
« Last Edit: May 07, 2014, 06:44:56 PM by StreamOfTheSky »

Offline awaken_D_M_golem

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Re: Why are high home prices seen as desirable?
« Reply #50 on: May 07, 2014, 07:45:31 PM »
I figure ... (remember who's I figure this is)

(click to show/hide)
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Offline brujon

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Re: Why are high home prices seen as desirable?
« Reply #51 on: May 07, 2014, 07:59:35 PM »
I figure ... (remember who's I figure this is)

(click to show/hide)

Ain't hard to get good insulation in a house. Cheap particle wood & Drywall combine for inexpensive but sufficient insulation. Glasses, though, to have good insulation need to be double-layered and that's expensive. Alternative is, acrylic instead of glass. Cheaper and harder to break windows - just as much light passes through, but acrylic is terrible at conducting heat, so it stays trapped in. In summer days, hot showers can be provided by passive solar heating. A bunch of black tubes looped can give you plenty of hot/lukewarm water to bathe with in the summer days. For nights & winters, if you want inexpensive heating, you can go for a wood-fired boiler and feed it discarded furniture you pick up for free at dump sites and garage sales. It's amazing how much wood is just discarded, thrown away. You can burn it and give it some purpose. Not too environmentally friendly, i'm afraid, but a good way to go about if you're just saving money like crazy... I can muster some more ideas, i think. Many youtube videos show inexpensive housing solutions. It's pretty awesome, but some things are very roundabout and make you question whether it's worth all the trouble for what money you save...
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Offline FlaminCows

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Re: Why are high home prices seen as desirable?
« Reply #52 on: May 07, 2014, 08:27:03 PM »
Particleboard and drywall might work as insulation for Brazil, but in the northern States and Canada that will not be enough. We need a thick layer of foam and fibreglass to sit comfortably in the winter. Besides, the price of the house itself is usually the least of one's worries. Here in Toronto, I saw a house I would consider a threat to human safety, an abomination to be purged with fire, a ruin so hideous even ghosts would refuse to haunt it, go for half a million dollars because it was close to the central street.

Offline awaken_D_M_golem

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Re: Why are high home prices seen as desirable?
« Reply #53 on: May 08, 2014, 05:04:27 PM »
... you can go for a wood-fired boiler and feed it discarded furniture you pick up for free at dump sites and garage sales. It's amazing how much wood is just discarded, thrown away. You can burn it and give it some purpose. Not too environmentally friendly, i'm afraid ...

I have a friend (non d&d lol) that does this, except for the boiler part.  But yeah his rationale is Recycling > Iffy Combustion.  Actually I think he doesn't care about the 2nd part at all.  He goes to the local furniture manufacturer, and takes their scrap for free.  Sure the temps necessary to burn off glues, hidden plastics and other pollutants, is strictly Powerplant material.  He don't care.
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Offline awaken_D_M_golem

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Re: Why are high home prices seen as desirable?
« Reply #54 on: May 08, 2014, 05:08:39 PM »
... Here in Toronto, I saw a house I would consider a threat to human safety, an abomination to be purged with fire, a ruin so hideous even ghosts would refuse to haunt it, go for half a million dollars because it was close to the central street.

Heh yeah.  Rising home prices for the "win".

I live super rural.  The local college has people commuting from hours away.  Dude, your car cost 50 cents per mile to operate.  'Nother dude was using a double door double rear axle big honkin' truck, to commute.  Consumer Reports says his truck cost $1 per mile and he drove 100 miles a day exactly.  He coulda bought a house instead.  Or his kids college fund.
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Offline Unbeliever

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Re: Why are high home prices seen as desirable?
« Reply #55 on: May 08, 2014, 06:18:34 PM »
Where's this 100% spending theory coming from?  I'd imagine that any theory would want you to bank for the future or against shocks.  But, that might be the sort of thing that is omitted from the theory for tractability purposes.  It'd just surprise me if there was a theory that actually wanted you to spend your entire endowment all the time.  If it did, that'd probably be an artifact of simplification or the way they set up the timeline of the model (e.g., the world ends after period 3, which isn't the way it actually is).

Offline Frogman55

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Re: Why are high home prices seen as desirable?
« Reply #56 on: May 08, 2014, 06:50:30 PM »
Where's this 100% spending theory coming from?  I'd imagine that any theory would want you to bank for the future or against shocks.  But, that might be the sort of thing that is omitted from the theory for tractability purposes.  It'd just surprise me if there was a theory that actually wanted you to spend your entire endowment all the time.  If it did, that'd probably be an artifact of simplification or the way they set up the timeline of the model (e.g., the world ends after period 3, which isn't the way it actually is).

It's a gross oversimplification. The idea is that if people only ever spend 99% of their wealth, then 1% is lost to the economy. i.e. every bit that isn't spend is growth that doesn't happen - this is why spending is good. In reality, it gets messy for a bunch of reasons. People can argue about how often all those dollars should cycle - yearly, monthly, decade-ly (decennaly? I'm not sure what word works for decades and don't feel like looking it up)? Also, once you have a set period, then some dollars are going to cycle multiple times, while other dollars don't move at all. And again, this is the 'frictionless surface in a vacuum' concept in economics. Real engineers account for friction, and real economists account for a cushion against economic shocks. The problem is that there aren't as many real economists as there are real engineers, (partly because many 'economists' are really journalists or businessmen, not actual academics who've delved into the actual math and variables. And partly because the variables are much harder to test and pin down in economics than it is for physics, meaning that 'real' economists are more like those physicists working on string theory than the physicists making faster airplanes).

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Re: Why are high home prices seen as desirable?
« Reply #57 on: May 08, 2014, 07:24:35 PM »
I just finished my undergraduate in economics.  One of the first things we're taught is "people are rational."  The problem is, people are not rational.  Or at least, not as rational as we'd like them to be.  The hardest part of economics is guessing how people will react to certain stimuli. 
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Offline FlaminCows

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Re: Why are high home prices seen as desirable?
« Reply #58 on: May 08, 2014, 07:25:27 PM »
I have never seen anyone argue for spending everything you own. Is there anyone that actually believes it, or is it the sort of theory that exists only so that people can point to it and say "I'm not one of those guys"?

I have seen "spending is good for the economy", but not "spend everything you get for the economy, go go go!" After all, every time you "save" you are lending money to the bank and the bank is lending it to someone else, so even if you are not spending your wealth right now somebody else is.

Offline altpersona

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Re: Why are high home prices seen as desirable?
« Reply #59 on: May 08, 2014, 07:37:58 PM »
if your cost of living is at or above your income, you spend everything you make.

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