All Financial Wisdom

Housing is the Key to Wealth

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Over the past couple days, there have been lots of talks and discussions about Matthew Rognlie, a 26 year old Economic graduate from MIT.  He wrote a paper called "A Note on Piketty and Diminishing Returns on Capital."  These 47 pages are decently technical, but that is expected.  His paper resonates ideas on income inequality and provided various points on what is "wrong" with how things are now and possible ways to figure out how to spread the wealth.

Zahra Taneez wrote an article for Benzinga.com and stated 5 interesting points from the paper.  I added my analysis after each point:

  1. "Software, robots, and other modern investments all depreciate in price as fast as the iPod. Technology doesn't hold value like it used to, so it's misleading to believe that investments in capital now will give rich folks a long-term advantage."  With the computer industry following Moore's law and coming out with new things constantly, things being just a year or two old are now almost obsolete.  Think about your smart phone.  Every two years we celebrate and purchase a new one because it is "too slow", yet we spend a couple hundred dollars each time to secure the latest and greatest.
  2. "Land/housing is really one of the only investments that give wealthy people a long-term leg up."  Land is a definite resource.  Despite fluctuations in market value, there is always a need of land.  Housing can be manufactured and improved in value, but it does not evolve or become obsolete within a short time frame.  It takes years for a house to become inhabitable.  Technology revolutions will not likely remove the need of housing.  There are turn of the century houses standing and being lived in throughout the world.
  3. "It might be wiser to redirect anger towards those who get in the way of new housing, rather than rely on taxes to solve our problems."  When it comes to housing, people generally take a lot of pride and ownership from it.  They like to have a pretty, well-kept up home.
  4. "Just 14% of homes are affordable to middle-class families. In the once diverse Mission District, where many young tech workers are now relocating, it's hard to find a new home for less than $1.5 million."  That fact of just 14% of homes are affordable to the middle-class is very interesting.  Does this mean that our country is now a renter/landlord market instead of the homeowner market so clearly defined decades ago?  I find this rather interesting.
  5. "The government should focus more on housing policy and less on taxing the wealthy, if it wants to properly deal with the inequality problem."  One thing that every person needs is a place to sleep.  If it is renting a place, or owning a place, it can be place where investment can happen.

 

References:

http://www.mit.edu/~mrognlie/piketty_diminishing_returns.pdf

http://www.benzinga.com/news/15/03/5364430/26-year-old-mit-graduate-may-have-cracked-the-code-to-income-inequality#ixzz3VycDFQov

https://medium.com/the-ferenstein-wire/a-26-year-old-mit-graduate-is-turning-heads-over-his-theory-that-income-inequality-is-actually-2a3b423e0c

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