No Such Thing As An Opinion!

October 31, 2013

Why do people pay a huge markup when purchasing a home?


Most of my articles find fault with the logic used by society's thought-leaders.

I want to spend more time examining society broadly.  When you look at society more broadly, structurally, I think that far too many people simply accept the status quo and accept things as they are.  It's not as if they consider the situation and then decide to accept things as they are.  It appears that they don't even question the status quo at all!

When was the last time you ever read a columnist question whether it makes sense for people to work five days a week?  Whether it makes sense to build tall buildings?  Whether it makes sense to work eight hours a day?  Whether it makes sense to attend school?

Going forward, many of my articles will focus on critiquing deeply ingrained aspects of society.  It's time to think out of the box, people!

So, why do people pay a huge markup when purchasing a home?  Why do people bid against others in the hopes of outbidding them?  Why does a four bedroom home cost $50,000 in one city and $250,000 in another?

Why can't a home have a fixed price?  Why isn't a home's selling price equal to the cost of its construction (plus the cost of land) plus a markup of, say, 10%?

Why can't someone choose the home they like, pay the fixed cost, and be done with it?

Well, a home can have a fixed price.  Society has simply gone in the other direction.

There's a very good chance that the current bid system is extremely harmful to the typical home buyer.  The buyer will be part of a low, average, or high-priced market.  In all three scenarios, when it comes to new homes, at least, the selling price will be above the actual cost of construction.  If the buyer is unlucky, he'll be in the more expensive market, meaning he will pay an amount that is far greater than what the house actually cost to construct.

And why is an expensive market a problem?  Well, who makes money when a home is purchased?  The banks, who earn interest from lending money for the mortgages.  For many people, a home is not an investment at all.  Many, if not most people, actually lose money after purchasing a home, because the historical rates of home value increases are more than offset by the mortgage interest paid.

Look at this chart.

From 1950 to 2011, the home price index rose from about 28 to about 124.  That's an increase of only 2.51% per year!  I think it's fair to assume that the average mortgage interest rate over that period was much high than 2.51%!

So, the banks are making money at the home buyer's expense.  Big money. 

High interest charges isn't the only issue.  Related effects, such as stress, limited career mobility, and other factors come into play.

But it doesn't have to be this way!  Why don't we have laws that limit the price of a home to the cost of construction (and land) plus a limited markup?  Why should people who live in high priced markets suffer?  Why should they be forced to pay double or triple the interest costs that someone in an average or low priced market pays?

I could examine related topics in extensive detail.  How would a new system be implemented?  How would it affect current owners of the very homes that are price-inflated?  How would price capping affect neighborhood demographics?  There are many other issues I've thought of.

I've thought about these issues in detail, but would prefer to examine them by exchanging ideas with readers in the comments section.  I'm open to the idea that the current system does have some advantages, but I'm confident that it certainly has many, many disadvantages.

Ask yourself this:

If a referendum on the topic was held, do you really think that people would choose to allow the continuation of a system that allows for ridiculously high home prices?

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