I think that was the point. There are many markets that are overheated and it was time to turn down the temperature. 5% should help.
(We lived through 18% in the 80's. This is barely tapping the brakes.)
What these stats often miss, including this one at a glance, is that they're looking at average housing cost across the entire country. Housing in Detroit is definitely a lot cheaper than it was 20 years ago, but in Seattle and Portland and Denver and places people actually want to live, it's soared. These stats also often don't address how many people in a household are working and how that's changed over time. There's a lot more dual incomes for a "household budget" in 2014 than there was in 1984. If your household income has nearly doubled, and you're going from 35% of your household budget to 41%, this could mean the cost of housing has actually doubled or more.
35 % on a single income vs 41 % on a double income. That's "antifragile", as they say, an unsafe position to be in, especially when the next recession is on the doorstep.
Me? Trying to find a property to buy in Western Massachusetts that's affordable on one income. Not looking good.
What kind of salary can you get in LCOL cities, and will you have to move when you change jobs? The withdrawal from the countryside has been ongoing for a long time. In the 1980's one might have joined Dow in Midland, MI or Upjohn in Kalamazoo, and expected to retire with them. Nowadays, job tenures are short, and one would think that this is reflected in demand.
You realize the Upjohn plant in Kalamazoo is now Pfizer's largest manufacturing site in the US? They actually did the final packaging of their Covid vaccine there.
I have a friend who has worked there for 20 years. He's not making Bay area wages, but he also bought his house for $150k a decade ago (houses are now ~$250k). Public schools are great.
There is no way to "have your cake and eat it too". Large cities are expensive because that's where people want to live and wages are high. In exchange housing is highly priced.
There are plenty of smaller cities with affordable housing. Sure, you might be limited to a handful of employers and yeah, your wages will never be at coastal levels, but that's the trade off.
At the same time, the higher interest rate will causes existing home-owners to "stay put" rather than jump to another home and pay 5% (unless they are down-sizing and able to make a cash offer).
Tell me about it. I have the worst timing: started building a house in November, so I bought near the top, and then when it came time to get financing (I close next month), it's the first time that rates have risen significantly in years.
you might correct with this assessment, currently the geopolitical situation of the US dollar is headed for an existential crisis as Russia-centric countries like BRICS, some european countries and Saudi are now looking to move away from pegging to USD.
It's not clear whether they will succeed but should be enough of a threat that the only way to combat an attack on USD would be to raise rates significant enough on top of the pressure from inflation (nobody is buying that we have only 8% inflation, many economists are putting it at about 17%, which is absolutely unprecedented and we can no longer print money, somewhere around over half of the current USD supply was printed post 2020!!!! this is not sustainable!)
Recall that in the 70s, 80s, we had double digit interest rates.
14%: The GDP was 3.2% in 1979, unemployment was 6.0%, and inflation was 11.3%.
and the next year immediately:
20%!!!!: The GDP was -0.3% in 1980, unemployment was 7.2%, and inflation was 13.5%.
Even through out the 90s we had 6% to 9% range with inflation at around low single digits!
In fact it took from 1979 to 2002 for rates to come low to what we have had
1.25%: The GDP was 1.7% in 2002, unemployment was 6.0%, and inflation was 1.6%. The following tables have data taken from The Federal Reserve.
it rose to 4, 5% again until 2008 hit and you know the rest.
0.25% !!!: In 2008, The GDP was 0.1%, unemployment was 7.3%, and inflation was 3.8%. As of Dec. 16, 2008, the target funds rate became a range, represented in the tables by the upper limit.
and during those times, real estate markets struggled while booming in emerging markets.
Yeah the house I signed a contract on in November was about 25% cheaper the previous year, though it's gone up another $20k since then (the same house in the same community)
Home prices will just go down soon so that average monthly payment for new buyers stays about the same as for the old ones with "high home price" + "low rate" combo. Of course, in a transition period a handful of people will be unlucky enough to be stuck with "high home price" + "high rate" combo.
Why? I know we aren’t supposed to apply anecdotal experience to macroeconomics, but I have 6 different friends and 3 coworkers in my department who have all bought multiple houses. They did this because debt was so cheap and they essentially bought as much house as they could. They ALL plan on flipping or renting. I have a feeling that losing access to cheap debt is going to have a bigger impact than people realize. None of these people would have bought these houses if they couldn’t get a 3% interest rate and a 30 year loan.
I bought all the house I could, not because I plan on flipping or renting but because the money supply is ridiculous. So much money has been pumped into the economy that I firmly believe inflation is here to stay. If inflation stays that will put upwards pressure on price of everything, houses included too.
FYI, you can still finance a house if you make an all cash offer. I just did that myself. You just need to set the closing date far enough out to get the loan settled.
I think that's true too. Home prices should work like bonds.
However it will likely keep going and then crash more than fizzle.
As long as the interest rate is below the rate of inflation, you'll make money by borrowing money and trading that money for something pegged to inflation, like a house.
This will work in the short term, and so I think people will keep buying.
You're just speculating. Have you ever considered that home prices didn't go up, that inflation went up. Perhaps what needs to balance things out, isn't home prices coming down, but wages going up to keep up with inflation?
Such events have happened in other countries, and if it happens here, home prices will keep going up, wages will go up, and folks will at best be able to afford the same things but most likely less.
it’s cute how people predict the housing market going down / crashing every time something happens.
I don’t think a crash will happen (maybe it’s going down, maybe not, but definitely not a crash) and I believe we are moving in a direction where less and less people will own the home they are living in. It’s sad really but this is what late stage capitalism looks like.
As for people that want to buy a home? buy one if you can afford it. don’t try to time the market, don’t worry about crashes and bad deals. Just do it. In 10 years what happens right now will not matter.
Your graph proves my point. It's lower than right at the 2005 peak, by 3% (though only 1% in 2020), but still higher than any point before 2005, thus near record highs.
If there were a crisis in home ownership you'd expect it to be at historic lows.
> It’s sad really but this is what late stage capitalism looks like.
This is what capitalism hamstrung by government regulation looks like. In many areas builders can't respond to demand and make a profit due to heavy regulation of construction.
> less and less people will own the home they are living in
as long as the rent isn't increasing faster than inflation, why should there be a problem?
You don't need to own the home to live in a home. And if you own the home, it doesn't mean the cost of shelter isn't paid by the owner (it's just more invisible a payment).
they wont go down that much, but inflation will keep going up and in australia we've had very poor wages growth while hiding unemployment rates under a cover of "part time and casual" jobs. (ie very very low unemployment but not talking about how so many people have to work multiple jobs to get by.)
> 1. There is a fixed amount of realestate that must be shared by a growing population.
U.S. Population Grew 0.1% in 2021, Slowest Rate Since Founding of the Nation [0]
> 2. Inflation means the cost of everything is increasing
I agree on this one
> 3. Local governments spend a lot of effort maintaining high real-estate values.
Increase in total inventory increases local government overall income and solidifies the need for their own bureaucracy. (i.e. local government would love for their little kingdom to grow to the sky, in my experience... my experience being Morgan Hill, CA)
You are right but they are linked. The proportion of people who don't take a mortgage as a fraction of buyers isn't that high I think? (myth of the all-cash foreign buyer)
That is exactly the point. Though a relationship exists, the mindset that believes “it’s now more expensive” is the mindset that creates financial instability through decisions and behaviors made over time in more markets than just housing.
I don't think it's a myth — well the "foreign buyer" part is probably in the noise.
Talk to a realtor in any U.S. locality (I happen to be working with a realtor in a mid-west state) and ask them how many homes are seeing all-cash offers.
I suspect it is also institutional/corporate buyers and people who cashed out of their home-in-expensive-region and are moving to less expensive communities.
Building a home as definitely become more expensive, supplies have become more expensive all over the line. But financing has also become more expensive, and will probably continue if/when the fed raises the interest rate.
This is not true, there are a multitude of resources out there to assist in purchasing a home with little to no equity or down payment. This does not help though, when the base cost of housing itself is on the rise. If you had paid literally any amount of attention to the housing market in the past 2 years you would have noticed this trend.
I concur. In Canada, 10% YoY would be a welcome change. It’s been more like 25-35% YoY in many, many markets (including tertiary markets with stagnant economies).
In Canada, the govt is pulling the brakes via policy (foreign buyer ban, non-resident tax, etc.) amid the rise in rates. Unlike the US, we have max 5 year fixed rate mortgages for the most part. The govt initiatives are a drop in the bucket but the impact of rate increases is very concerning. On the flip side, govt policies are fueling the fire as they help first time buyers with more tax incentives. I wonder if anyone in charge passed econ 101.
As others have commented, the rate increase in the US is nuts. People were paying the max monthly payments their income would give them in some markets (e.g. Bay area). With rates doubling so fast, I worry about fiscal solvency of anyone who did not get a long-term locked rate.
Mortgages in Canada are typically amortized over 25 years. The 5 year term is the length of your contract with your current lender. Once that is up, you can renew with them or shop around for a better deal or better service.
At once point in the not-too-distant past we had mortgages with 40 year amortization periods but they eventually pared that back down to 25 years - unless you put 20% down, in which case you can push it to 30 years.
In Sweden there is a rule that new loans must be amortized 1% per annum (2% if your principal is more than 60% of the value), so I guess that’s basically saying “pay it in 100 years”?
Edit: actually the rule is 1% if principal to value is above I think 40%, so not even that is true. We are basically not expected to pay it off entirely unless we want to.
Max amortization in Ireland is years to retirement age, which is pretty much universally at 65. This was a bit of a shock when buying a house, but it does help push the principal/interest split in the right direction. No idea how that works if you need to relocate at 55+. Mortgages can be fixed rate for a few years, but are typically month to month adjustable. If you do opt for a fixed rate, it's generally lower than the adjustable, but there are penalties for selling before the term is up, or refinancing out of it.
Why would you listen to a realtor about financing? Rather, why would the realtor be pushing financing terms? Shouldn’t you be able to find a bank or credit union with typical 15/30 year fixed rates?
As for your first question, I don’t know why anyone would other than home buying is an emotional process. As for why realtors would push it: they want to close deals. Plain and simple.
It’s not that you can’t find fixed rate, it’s that ARM rates would be lower and you can get more house for your payment. As the sibling commented, realtors want to close.
Obviously you’ll just refinance in a few years when rates go back down to zero or your house is worth 80% more /s
Also, second home 30 year fixed rates spiked in February for some reason I forget so I just got a 10/1 ARM myself as the rate was like 1% lower or something than a 30 year fixed.
This works until inflation starts stressing enough of the populace to the point they bubble over in fury. I think we’ve seen steps towards this recently as the have-nots stage freedom rallies.
Being house rich on paper but not being able to afford groceries isn’t a trade off anyone wants.
They're not pulling the brakes hard enough, it's just still insanely stupid out there.
As it is now, I could sell my little hobby farm here in Ontario and buy several properties in Edmonton where my family is and real estate is still a bit depressed (cuz oil prices were low for so long). But I'm tied down here.
That's crazy, I'm glad I, and a number of my friends, refinanced in 2020-2021 for rates in the 2.25-2.75 range. Going from 2.25 (my rate) to 5 would result in ~$300 more a month on my mortgage.
congrats! but risk is obviously that property prices as a whole will start to deflate but if its your primary residence and you are going to live in forever it will be fine, you are on the hook for whatever you bought the property for vs market price.
people that were using cheap mortgages to purchase additional properties with the aim of flipping it, who were also leveraged, are screwed.
the last bit of bad news is that property prices may not rise for people who buy the dip, we are entering into a global recession and the world's biggest real estate market have declined with no hope of making a comeback.
> people that were using cheap mortgages to purchase additional properties with the aim of flipping it, who were also leveraged, are screwed.
They'll convert to rentals and make back any acquisition overpayment over time. Even if we hit a recession, with so many people having left the workforce and continuing to leave over time through retirement, rental demand should remain firm.
If they refinanced in 2020 then they likely bought in 2019 or earlier. If prices fell to 2019 levels it would be a crash —- and probably merit all sorts of government response including lowering interest rates. No one that entered the market before 2020 is “screwed”.
Housing prices even in the markets hit hardest by 2008 recovered in ten years. You aren’t stuck living in your current home forever.
If you bought an investment property then relax, there’s no indicator that rents are going to decrease anytime soon.
If only the younger generations had more political power, there’d be no government intervention in the event of a crash. The older generations that bought houses and then pulled ladders up in order to politically engineer constant wealth growth should be left to deal with it on their own for once. The house of cards is going to completely collapse eventually, so the sooner the better.
The GFC hit during my early 20s. And I remember the zeitgeist of people my age during that time.
Many young people put off home ownership specifically because we watched slightly older friends lose their shirts on their houses. I remember specifically one friend who had to save up to sell their house, not only was he selling for 20% less than he bought for, but he was making $20k in out-of-pocket concessions to the buyers. Popular opinion was that houses were too risky.
Plus, there was the issue of, we all either were laid off recently, or had friends who had been laid off. It's kind of hard to think about long term planning with that hanging over you head.
So when the house of cards collapses, young people won't be the beneficiaries. They will suffer long-term because they lack the experience and context to internalize concepts like business cycles. I remember my mom telling me to use the $8000 first buyer credit from the government to buy the house across the street from her for $78,000. That house is how worth a quarter of a million. But I didn't buy it because I was worried about layoffs or further market collapse.
haha thought you were talking about 80s and 90s. real estate was considered very risky and nobody were seeing it like stocks as interest rates were double digits. that was the prevailing attitude and why many chose to rent because it was the renter's market as real estate market did not recover post japanese real estate bubble deflationary
Same - I refi'd to lock in at 2.65 in September 2020. I consider myself very fortunate. In the 1980s my parent's rate was something like 18% - it was crazy...but it did keep the housing cheap.
My parents also mention the 18% loan time when they bought their home - that was the advertised rate - but in the state there were incentives that brought the rate down to something like 8%. I can't imagine their state would be the only one offering first time home buyer incentives to keep the local market going.
I got hit from a 1.9% to 2.5% change while in the process of closing last month :( About $150 per month wasted, meanwhile natural gas and electricity prices are also going to the moon (as a Europoor).
I got in just under the wire, closed at 3.125% (refi from 4% 2yrs ago). Considering rates in the 80s were like 11% it's still all "relatively" cheap financing, but home prices per se are another thing altogether.
I can't see institutional investors selling. If house prices fall, they are going to hold on to houses to prevent the losses from being shown on their books. If rent prices fall, they are going to focus on appreciation to cover the losses (and taking advantage of favorable tax treatment that landlords enjoy).
Really, the only way it makes sense for an institutional investor to sell is if the prices reach so high, then plateau, such that even the most optimistic projections show there's not much money to be made in rents+appreciation over the next 10 years.
> If house prices fall, they are going to hold on to houses to prevent the losses from being shown on their books.
And yet Zillow did the exact opposite of this very recently. Also, after Zillow did so, everyone on real estate forums seemed to explain that it's so so obvious that this would happen ("of course, with carrying costs, they had to sell")
It's almost like no one knows the future but backwards rationalizes whatever happens as obvious.
hahaha. nope. why would they do that when the inventory is so limited? the only solution that I think could work is rezoning + building more. That’s the only thing that could dampen this mad market.
It doesn't really affect them because the tenant is defacto paying the mortgage, and there is no shortage of tenants. It will just further increase rent rates during the next rental contract renewal, but buried in with all of the other regular inflation (increase in building materials for repairs, labor rates, etc).
5% isn't so bad. I bought during the rate spike of 18 at around 5%, then had to watch as rates immediately fell again and I couldn't refinance until my mortgage "seasoned" for 10 months.
Back during the housing boom, rates were 5-6%. So I'm not sure that this will cool the market all that much.
The issue is the doubling of housing prices though, not the interest rates. Historical evidence suggests that 5% is more than low enough to fuel a house-building boom.
Plus, if you buy into the idea that interest rates dictate housing prices, then 5% rates should lower housing prices. I personally don't see this happening in our specific climate, but there's ample evidence that the two are negatively correlated.
Agreed. Which is why I don't think 5% is that bad. It's barely above the average rate between the GFC and the pandemic (~4.25%). But inflation is much, much higher.
The nominal rate should be important right now. The nominal rate in the before times was like 4% interest - 1-2% inflation. Now the nominal rate is 5% with 7-12% inflation.
Normal people are absolutely going to start factoring inflation into the equation. Especially if inflation continues to drive wage growth.
I concur. I am looking forward to hearing the response to the justification of the last two years that it was ok for prices to go up because interest rates had fallen and payments were the same. Seemed like bullshit to me then and now with rates increasing I don’t think prices are going to collapse to “keep payments the same”.
5% is bad after sellers got used to high sales prices at 2% (with lower rates, more of the payment goes to principal). They took away the punch bowl and the party is over. The rate itself (5%) historically is not high.
I believe it was 3-5 year ARM's they were getting which had much lower rates at the time. A lot where taken out in 2002 and on. When those rate reset higher starting in 2006-2007 things started to unravel fast.
This is probably because banks consider home loans a riskier investment. With inflation high, there's the risk that the home loan could become seriously devalued. Also, the CoL increase due to inflation could outstrip pay increases, making homeowners more prone to default.
"Luxury" buyers are less sensitive to interest rate increases due to the amount of cash they can deploy.
If more housing stock isn't injected amidst a housing shortage, raising interest rates will disproportionately affects Buyers who really need affordability. Crappy deal.
In cities like Seattle or Austin or Denver, 5% mortgage rates are unlikely to cool the market off in any meaningful way.
> Unlike rates on credit cards or other types of loans, mortgage rates move early and dramatically in anticipation of what the market expects
Interesting piece of information for tracking economic movements. I wonder what the ratio is on adjustable rate mortgages vs. fixed. If there are a lot of ARM out there then there might be potential for a bubble popping where people can't afford the mortgage and fixed rates are also higher where a re-fi won't help.
According to [1], ARMs have multiple caps on their interest rates. They cannot be freely floated along with prevailing interest rates. Rather, they have a cap on how much the rate can go up at each adjustment period, and a cap on the maximum total increase over the lifetime of the loan. So if you had an ARM at an initial rate of 3%, you're probably gonna hit 5% very soon. But even if inflation hits early 1980s levels and the Fed acts similarly by mercilessly raising rates, ARM borrowers won't see their rates go anywhere near >20%.
Additionally, lending standards over the last decade were nowhere near as loose as before the financial crisis. Though apparently they were beginning to ease in Q3 and Q4 of last year. [2]
All this to say, I'm sure you're right, borrowers at the margins of lending standards will have a much harder time, and we'll see an increase in foreclosures. But it shouldn't the tsunami that we saw in '06-'09.
One does wonder though, with the trend of increasing economic headwinds (inflation, ongoing supply chain bottlenecks, etc.), how close we are to a recession.
Looking at historic US housing data, during periods of rate increases prices did not drop, with 2008-2009 being the exception. However, during the previous recessions price discovery was difficult, one needed to go through an agent who interfaced with disjoint MLS systems. I suspect that price discovery through zillow/corelogic might cause faster repricing in the housing market today.
Second home purchases in the reached historic levels over the last two years. There is a lot of inventory that could be listed quickly in comparison to owner occupied homes.
It's not clear that a correction will happen though, wage increases, in particular at lower incomes can sustain higher rates and higher prices for homes below the median. At the high end most buyers are likely asset rich and can also sustain higher prices. The price segment that may be most vulnerable due to higher rates is in the middle.
For European readers, a bit of useful context that surprised me when I moved to USA. Most Americans buy their homes on 30-year mortgages with fixed interest rate. So rate increases generally only affect those buying, not those who already own.
In Europe (at least the parts I'm familiar with), it's more common for mortgages to be on adjustable rates, basically the European Central Bank rate + a fixed margin. This has been an excellent deal for the past 10+ years, as the ECB rate sunk below zero.
(I have a mortgage in Finland that I took in 2011, and for many years I've paid zero interest on it because ECB rate + the loan margin added up to a negative rate. Sadly my bank clamps it at zero.)
Canada is more like Europe in this sense, too. The American mortgage market is a bit weird from a distance.
Here you have your choice between a variable rate mortgage (floats at BoC rate +- some %) or a "fixed" rate on a term (e.g. 3% for 5 years) and then you renew at whatever rate is current at the end of the term.
30 fixes only exist in the US thanks to government intervention in the mortgage market to underwrite that risk for the banks.
In most western countries, fixed mortgages do exist, but the bank has to go out and buy the relevant interest rate swap in the open market, so availability fluctuates & is biased towards short term fixes. Most people are either on a variable rate or are on a short term fix that expires in a couple of years.
I remember when interest rates hit 15% in the UK in the 80s. My parents did worry they were going to lose our house!
In the past (when high rates were a thing) by being more cautious about their purchases.
Certainly that's how my wife and I have been, while everyone else has been partying and living potentially well beyond their means. Guess we're suckers.
In this context, what is beyond ones means? IS buying a house at a 5% rate when 10% would be too much beyond your means?
In a place like California, that 5% change could be half of your salary. If the cautious approach is only buy a house if you can handle a 2-3X rate hike, then individuals would never own and perpetually rent from companies.
Well, in Canada the majority (68.55%) are homeowners, not renters, so no, that's not how it's working. Toronto and Vancouver housing markets are as bad as (or worse than) the Bay Area for housing prices, especially when you factor in people's incomes.
In reality, higher rates or the risk of them puts downward pressure on housing prices. A huge component of the price of homes comes from the easy availability of the actual product: housing loans. Almost everyone out there just gets the biggest mortgage that the bank approves them for. They go to the bank and say "what will you give me" and then go look for prices around that cost. Or get in bidding wars up to that level. And the banks are so underwritten by government guarantees that they're willing to take big risks here. It just drives prices higher and higher.
We never had the 2008 housing price crash that happened in the US, and things have just continued to climb. It's possible that we'll have a huge crash at some point, it's well overdue. But I've given up on waiting for that to happen.
Doubling interest rates doesn’t double the cost of a repayment mortgage. If you’re buying on an interest-only mortgage then you’re very exposed to interest rate rises though.
That was pretty much what happened that led to the 2008 housing crash. A lot of people bought houses over leveraged on a variable rate that went up and couldn't afford to make payments on their mortgage.
It does affect people who already bought a home, because when interest rate changes, home price will change too. It's not a problem when equity increases, but in the other direction it could be.
I think that's related to another somewhat unique feature of the American housing market: home equity loans seem to be quite popular. (I.e. loaning money against the paid-off equity in your primary residence. That's a financial product that I've never even heard of in my home country.)
If you're on a fixed-interest mortgage, you don't plan to move and you don't have a home equity loan, it seems to me that you don't need to care at all about interest rate and home price fluctuations.
That's interesting. Generally those would be called Adjustable-Rate Mortgages in the US and they are seen as pretty toxic. A major cause of the 07-08 crash can be attributed to those loans and their rates suddenly skyrocketing over a short period of time to the point that millions could no longer afford their monthly payments and defaulted.
High mortgage rates mean that is only more expensive for “poor” people, while the wealthy will continue on their merry way. The US desperately needs a land-value tax as a step towards making home ownership costly and depreciating, removing the home-as-investment angle. Who wants a nest egg that means giving up your dwelling in the case of actually needing to liquidate it anyway? (Oops, got expensive medical bills? Now you’re sick _and_ homeless!)
Actions like this will unfortunately destroy a lot of older middle-class wealth in the short-term, but longer term it would hurt the upper-classes the most (and even short-term it’s not like the upper classes haven’t been winning every transaction anyway). And the longer we let this problem fester, the more lives we disrupt of the younger generations who have seen countless ladders pulled up in front of them.
States have property taxes. You can argue how they're implemented, every state is different, but to completely dismiss that they exist doesn't help. If your solution is to unfortunately destroy a large group of people than maybe you don't have the best solution.
The easiest argument against current property taxes is that they have completely failed to prevent the current situation. They do not properly incentive the efficient use of land, so mini-kings get to sit in their mini-castles and argue against densification while looking down on the new-comer peasants.
And the current situation is already “destroying” peoples lives as their courses into “normal” adulthood are interrupted and delayed, so it’s somewhat a question of who feels the effects. The difference with devaluing homes is that people may lose some wealth, but they still have a home! Investments are supposed to risky, that’s why you make money off of them sometimes; so let’s make it that way for houses.
I fail to see how to tax land at a rate that would hurt rich cash loaded people/corporations and still make homes affordable. If your plan works to the point people can afford the taxes on the cheap homes then the rich people can also afford to have neighborhoods of rentals. Please present your idea though, maybe I'm not understanding.
It's not about hurting rich people. Where is this class warfare idea coming from?! It's about making the best use of the land.
A land tax encourages building denser housing and therefore increasing the number of homes available to people, putting downward pressure on housing (and rent)
prices.
A land tax does not go up if the dwelling on it go up in value/price. It encourages replacing single family homes with denser dwellings.
there's nothing wrong with being against densification. Cities like SF and Seoul would be a nightmare for me to live in because I hate cities and being around a lot of people.
I can't speak for everywhere, but I live is a very high tax rate in the north east and of cousre the larger the high or more land, the higher the taxes. The town I live in some houses, which generally don't exceed 1 acre lots can have taxes in excess of 100,000k a year. This is really as close to a land tax in action I can see. There are few empty lots, no one is sitting on land, and you can be sure no one is building large apartment buildings - the taxes would be extremely excessive. To add to that, the high taxes have not encouraged investment from the town itself to build infrastructure that would support more efficient use of land. Sure there are roads. The schools are well funded, its the north east which tends to have excellent investments into schools. Not only am I close to New York city, so not out on the woods or anything, I am also on well and septic. There is no municipal water or sewer. This has the added point of making building affordable housing next to impossible, which was likely not the reason for well and septic, but is now a reason not to add it for NIMBY. So while a land tax to punish the rich would help make people feel better, with what I see it will enrich some, but not benefit who you think would benefit.
>and you can be sure no one is building large apartment buildings - the taxes would be extremely excessive
With a land tax the taxes wouldn't increase if large apartment buildings were built on it because the tax amount is solely based on the value of the land and not the property on it.
>So while a land tax to punish the rich would help make people feel better, with what I see it will enrich some, but not benefit who you think would benefit.
First, people don't propose a land tax to punish the rich. Second, it's not about benefitting specific individuals (picking winners and losers). It's about benefitting everyone by ensuring the optimal use of the land.
The person we replied to proposed to do this to specifically hurt the upper class. He even acknowledged that doing so would unfortunately destroy the middle class in order to hurt the rich
I was going off the original reply where it was, I understand you don't see it that way. All zoning is local is a term used, and back to my case this sounds like a tax on land, not the building. In that case, all land is the same, perhaps high regardless of the building. So for this town, we have some lots at 1/2 acre, most at 1 acre. Well + septic. If one want to build denser housing it needs to break zoning that is local which says lots must be 1 acre (some are grandfathered in) with a 36 ft set back from the property line and no more than 30% build up of the land. A federal or state rule could do that, but what that doesn't account for is the water aquifer which perhaps can't handle spitting into 1/4 acre lots and quadrupling the town population. Plus 4x septic systems could but an undue strain on the area. A law could be passed to force a sewer system and a municipal water system which would not be cheap. This is one small town and to get a dense population we are talking millions in infrastructure spending to get to a point that can handle a dense population to better use the land. There are just so many factors in each area, each being unique to the area, that makes efficient land use more complicated. I also haven't even got into environmental protection, water run off and other pollution issues that are also addressed in zoning.
Why? Who would this system benefit? You destroy the housing market to replace it with rich landlords owning apartment buildings and charging increasing amounts of rent to more poorer people who accumulate no equity. In your get sick scenario, you are still homeless but owe massive medical bills.
After paying off the medical bills with appreciating uome ownership, your credit is still good, and you can eventually buy another house. All your land-value tax does is punish wealth accumulation. What is the reform you wish to create? How does this help anyone?
Not OP, but guessing he means wealthy people have more opportunities to buy without financing when the cost of financing seems to overtake other opportunities.
It's an entirely legitimate use of tax to disincentivize behavior that is a social net negative. That it's overwhelmingly the upper class that would be hit by it only means that they're the ones benefiting tremendously from everyone else's suffering.
Part of the reason people like Trump have very fancy residences is because they are exempt under bankruptcy laws. So he can store his wealth as gold plating on his toilet, file for bankruptcy, get out of all the loans he can't pay, then continue on with his lackluster investing. I bet even a tax on the value won't remove that very lucrative use of it.
What a principal residence as an investment does for most middle to upper-middle class Americans is force them to save some money so that they have some amount of wealth when they retire. I don't know if that is important or not, since it's not very liquid and has dire consequences if you lose it.
> Part of the reason people like Trump have very fancy residences is because they are exempt under bankruptcy laws. So he can store his wealth as gold plating on his toilet, file for bankruptcy, get out of all the loans he can't pay, then continue on with his lackluster investing
A real issue, but a bad example. Trump has never declared personal bankruptcy. A few of his 500 businesses have gone bankrupt, but all that happens when an LLC goes bankrupt is that the owners lose their investments and creditors take over the company.
i wish people would stop falling over themselves to post any random factoid about trump they read on facebook 7 years ago, it's very often missing context or just flat out wrong and really diminishes the quality of conversation that can be had
I'm not sure why you're being downvoted so heavily. It's true, SALT deduction limits did hit the rich and now that may be undone [0] (regardless of what you think of Trump and regardless of whether Trump did it to punish blue states)
Any serious conversation about changing the equation needs to start from the perspective of capacity utilization. We certainly need to increase the number of housing units, however, if the utilization rate remains the same or drops, you've really not created any new housing. In southern California we see new projects being built that are $3,600 / month for a 600 sqft 1br/1ba apartment in mediocre neighborhoods or next to freeways. From a bay area perspective, this may seem cheap, but wages are lower here and IPO opportunities are not as rich. Looking at public documents for the REIT that owns one of these aforementioned luxury properties showed a 40% occupancy rate, which wasn't a surprise given the price.
So until municipalities want to really study the overall capacity and exactly how it is being used, changing tax policies will be unlikely to address whatever the real issue happens to be. Our problem is not simply "supply and demand", it's more subtle than that.
If I were still in the multi-family residential marketplace I'd be buying and converting to short-term rentals in cute neighborhoods. It would be the highest and best use of capital deployment under current legal structures.
Wouldn't a SANKEY diagram showing incoming units and utilization of such units be a nice way of seeing the problem and making adjustments? Having such data would be fascinating.
No it hasn't become more expensive due to hitting 5%, though it may be more expensive for other reasons. The market will equilabrate.
There's a couple who live at the peak of the bell curve that defines your market. They can spend $X,000 per month on a house. 2.5% vs 5% just changes how much of their money goes to paying down principle vs the interest. With that the price of the house will fluctuate to account for this reality.
I don’t have hard data on this; however, I believe that cash buyers are minority, maybe even significant minority. It would be awesome if someone could share concrete numbers on this.
It's quite depressing. Attempting to buy since August. When I started my rate was 2.7 and today it's 5.2 and climbing extremely fast in the past month. Inventory continues to be a problem. There just has been so little on the market. What's interesting in my observation is the rate increases have actually created even more competition. People are straight up desperate right now.
Also now that overlapping showings are happening I spend nearly every viewing with 2-5 realtors who are showing over zoom to buyers looking to move from a HCOL to my city (Denver). I found it hard enough to make a major decision after a 20 minute viewing, but to do so over a poorly narrated zoom/facetime walkthrough? Can't imagine.
Honest question do you need a home right now? I too have been looking and when interest rates jumped I decided I was going to sit on the sidelines for the next 1 to 2 years and just stack cash/invest in various markets.
I did some back of the envelope calculations comparing housing in my area vs market. Taking the long view, accounting for property taxes and mortgage interest payments, housing did not beat the market.
I did. Where I live you can rent cheaper than a mortgage payment (plus tax and insurance) by about $1000 per month, so owning has an additional $12,000 per year cost based on that alone.
Did you account for the fact that equity gains in real estate for primary residences in the US are tax free? Your equities, even long-term, are taxed at a non-zero rate.
Just to clarify the capital gains you have on the sale of your primary residence isn't tax free. You get the first $250k free for an individual and more for a married couple. This is very generous and better than you get for equity investments for sure, but once your gain exceeds those amounts it is taxed at normal capital gains tax rates.
Good question. And one I've been asking myself as the rates increase. One problem here is rents are increasing just as astronomically as houses. Mortgage/taxes/insurance on a 3/2 house with my downpayment might be 3500-4500 and an equivalent rental might be 3000-5000+ and are very scarce (most rent day of listing). Purely financially right now it prob doesn't make sense, but from other perspectives I def have strong urge to own still.
If this helps stops high earners from buying second or third homes, as seems common in the sections of the software engineer community in my area, I am all for it.
Maybe this marks the start of a return to rational pricing of capital? It's a bit too late for a lot of older folks who were counting on interest from savings accounts to fund their retirement, but maybe we can start encouraging saving again for the future?
I hope this brings the price of housing back down to earth. A house is a depreciating asset in any sane world. It requires constant maintenance.
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[ 50.5 ms ] story [ 361 ms ] threadhttps://www.brookings.edu/wp-content/uploads/2016/08/where_d...
Percent of income spent on housing for low income households went from 35% (1984) to 41% (2014).
So higher, yes, but it wasn’t “much smaller”.
Me? Trying to find a property to buy in Western Massachusetts that's affordable on one income. Not looking good.
Women entering the workforce happened mostly by the late 70’s.
Housing prices on the other hand - mostly stable until the 1980's, and then shelter became an investment vehicle: https://fred.stlouisfed.org/series/LNU01300002
The prediction is that we will have a period of monetary inflation to deal with the problem of asset inflation.
The real issue is people in HCOL cities think their experience is the same across America.
Plenty of places in the US where housing is still affordable.
I have a friend who has worked there for 20 years. He's not making Bay area wages, but he also bought his house for $150k a decade ago (houses are now ~$250k). Public schools are great.
There is no way to "have your cake and eat it too". Large cities are expensive because that's where people want to live and wages are high. In exchange housing is highly priced.
There are plenty of smaller cities with affordable housing. Sure, you might be limited to a handful of employers and yeah, your wages will never be at coastal levels, but that's the trade off.
And what's with buyer incentives? They are just a conduit from the taxpayer to Big Finance.
So the supply problem is not addressed.
Might make new construction cheaper though?
And we should be happy to have been born after others earned all the wealth.
https://youtu.be/bUl5rSpfCeI
It's not clear whether they will succeed but should be enough of a threat that the only way to combat an attack on USD would be to raise rates significant enough on top of the pressure from inflation (nobody is buying that we have only 8% inflation, many economists are putting it at about 17%, which is absolutely unprecedented and we can no longer print money, somewhere around over half of the current USD supply was printed post 2020!!!! this is not sustainable!)
Recall that in the 70s, 80s, we had double digit interest rates.
and the next year immediately: Even through out the 90s we had 6% to 9% range with inflation at around low single digits!In fact it took from 1979 to 2002 for rates to come low to what we have had
it rose to 4, 5% again until 2008 hit and you know the rest. and during those times, real estate markets struggled while booming in emerging markets.Source? I have not seen any place saying that besides garbage websites like shadowstats.
However it will likely keep going and then crash more than fizzle.
As long as the interest rate is below the rate of inflation, you'll make money by borrowing money and trading that money for something pegged to inflation, like a house.
This will work in the short term, and so I think people will keep buying.
Such events have happened in other countries, and if it happens here, home prices will keep going up, wages will go up, and folks will at best be able to afford the same things but most likely less.
I don’t think a crash will happen (maybe it’s going down, maybe not, but definitely not a crash) and I believe we are moving in a direction where less and less people will own the home they are living in. It’s sad really but this is what late stage capitalism looks like.
As for people that want to buy a home? buy one if you can afford it. don’t try to time the market, don’t worry about crashes and bad deals. Just do it. In 10 years what happens right now will not matter.
If there were a crisis in home ownership you'd expect it to be at historic lows.
This is what capitalism hamstrung by government regulation looks like. In many areas builders can't respond to demand and make a profit due to heavy regulation of construction.
as long as the rent isn't increasing faster than inflation, why should there be a problem?
You don't need to own the home to live in a home. And if you own the home, it doesn't mean the cost of shelter isn't paid by the owner (it's just more invisible a payment).
1. There is a fixed amount of realestate that must be shared by a growing population.
2. Inflation means the cost of everything is increasing. Why wouldn’t that provide significant upward pressure on homes?
3. Local governments spend a lot of effort maintaining high real-estate values. You can’t fight city hall.
If someone can just afford a $800,000 mortgage payment at 2% they won’t be able to afford $800,000 at 6%.
U.S. Population Grew 0.1% in 2021, Slowest Rate Since Founding of the Nation [0]
> 2. Inflation means the cost of everything is increasing
I agree on this one
> 3. Local governments spend a lot of effort maintaining high real-estate values.
Increase in total inventory increases local government overall income and solidifies the need for their own bureaucracy. (i.e. local government would love for their little kingdom to grow to the sky, in my experience... my experience being Morgan Hill, CA)
[0] https://www.census.gov/library/stories/2021/12/us-population...
Few understand this.
Talk to a realtor in any U.S. locality (I happen to be working with a realtor in a mid-west state) and ask them how many homes are seeing all-cash offers.
I suspect it is also institutional/corporate buyers and people who cashed out of their home-in-expensive-region and are moving to less expensive communities.
I don't think there's any myth there.
https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index
As others have commented, the rate increase in the US is nuts. People were paying the max monthly payments their income would give them in some markets (e.g. Bay area). With rates doubling so fast, I worry about fiscal solvency of anyone who did not get a long-term locked rate.
At once point in the not-too-distant past we had mortgages with 40 year amortization periods but they eventually pared that back down to 25 years - unless you put 20% down, in which case you can push it to 30 years.
Edit: actually the rule is 1% if principal to value is above I think 40%, so not even that is true. We are basically not expected to pay it off entirely unless we want to.
<5% of mortgages are ARMs in the US.
Obviously you’ll just refinance in a few years when rates go back down to zero or your house is worth 80% more /s
Being house rich on paper but not being able to afford groceries isn’t a trade off anyone wants.
As it is now, I could sell my little hobby farm here in Ontario and buy several properties in Edmonton where my family is and real estate is still a bit depressed (cuz oil prices were low for so long). But I'm tied down here.
people that were using cheap mortgages to purchase additional properties with the aim of flipping it, who were also leveraged, are screwed.
the last bit of bad news is that property prices may not rise for people who buy the dip, we are entering into a global recession and the world's biggest real estate market have declined with no hope of making a comeback.
They'll convert to rentals and make back any acquisition overpayment over time. Even if we hit a recession, with so many people having left the workforce and continuing to leave over time through retirement, rental demand should remain firm.
If they refinanced in 2020 then they likely bought in 2019 or earlier. If prices fell to 2019 levels it would be a crash —- and probably merit all sorts of government response including lowering interest rates. No one that entered the market before 2020 is “screwed”.
Housing prices even in the markets hit hardest by 2008 recovered in ten years. You aren’t stuck living in your current home forever.
If you bought an investment property then relax, there’s no indicator that rents are going to decrease anytime soon.
Many young people put off home ownership specifically because we watched slightly older friends lose their shirts on their houses. I remember specifically one friend who had to save up to sell their house, not only was he selling for 20% less than he bought for, but he was making $20k in out-of-pocket concessions to the buyers. Popular opinion was that houses were too risky.
Plus, there was the issue of, we all either were laid off recently, or had friends who had been laid off. It's kind of hard to think about long term planning with that hanging over you head.
So when the house of cards collapses, young people won't be the beneficiaries. They will suffer long-term because they lack the experience and context to internalize concepts like business cycles. I remember my mom telling me to use the $8000 first buyer credit from the government to buy the house across the street from her for $78,000. That house is how worth a quarter of a million. But I didn't buy it because I was worried about layoffs or further market collapse.
not to mention 1 out of 2 GEN-Z and 1 out of 4 millenials are hodling crypto, the situation is far more bleak than ever before.
So yeah, just got footing as an adult, then bye bye economy.
the can cannot be kicked any more.
good
I can't see institutional investors selling. If house prices fall, they are going to hold on to houses to prevent the losses from being shown on their books. If rent prices fall, they are going to focus on appreciation to cover the losses (and taking advantage of favorable tax treatment that landlords enjoy).
Really, the only way it makes sense for an institutional investor to sell is if the prices reach so high, then plateau, such that even the most optimistic projections show there's not much money to be made in rents+appreciation over the next 10 years.
they sell if they see another, higher return opportunity.
And yet Zillow did the exact opposite of this very recently. Also, after Zillow did so, everyone on real estate forums seemed to explain that it's so so obvious that this would happen ("of course, with carrying costs, they had to sell")
It's almost like no one knows the future but backwards rationalizes whatever happens as obvious.
Back during the housing boom, rates were 5-6%. So I'm not sure that this will cool the market all that much.
I'm sure - if allowed - we could see something similar. But IIUC this type of financing isn't currently plausible.
Plus, if you buy into the idea that interest rates dictate housing prices, then 5% rates should lower housing prices. I personally don't see this happening in our specific climate, but there's ample evidence that the two are negatively correlated.
The nominal rate should be important right now. The nominal rate in the before times was like 4% interest - 1-2% inflation. Now the nominal rate is 5% with 7-12% inflation.
Normal people are absolutely going to start factoring inflation into the equation. Especially if inflation continues to drive wage growth.
If more housing stock isn't injected amidst a housing shortage, raising interest rates will disproportionately affects Buyers who really need affordability. Crappy deal.
In cities like Seattle or Austin or Denver, 5% mortgage rates are unlikely to cool the market off in any meaningful way.
Interesting piece of information for tracking economic movements. I wonder what the ratio is on adjustable rate mortgages vs. fixed. If there are a lot of ARM out there then there might be potential for a bubble popping where people can't afford the mortgage and fixed rates are also higher where a re-fi won't help.
[1]https://www.cbsnews.com/news/mortgage-rates-4-percent-adjust...
Additionally, lending standards over the last decade were nowhere near as loose as before the financial crisis. Though apparently they were beginning to ease in Q3 and Q4 of last year. [2]
All this to say, I'm sure you're right, borrowers at the margins of lending standards will have a much harder time, and we'll see an increase in foreclosures. But it shouldn't the tsunami that we saw in '06-'09.
One does wonder though, with the trend of increasing economic headwinds (inflation, ongoing supply chain bottlenecks, etc.), how close we are to a recession.
[1] https://www.bankrate.com/mortgages/federal-reserve-decision-...
[2] https://www.pymnts.com/loans/2021/banks-loosen-lending-stand...
Second home purchases in the reached historic levels over the last two years. There is a lot of inventory that could be listed quickly in comparison to owner occupied homes.
It's not clear that a correction will happen though, wage increases, in particular at lower incomes can sustain higher rates and higher prices for homes below the median. At the high end most buyers are likely asset rich and can also sustain higher prices. The price segment that may be most vulnerable due to higher rates is in the middle.
In Europe (at least the parts I'm familiar with), it's more common for mortgages to be on adjustable rates, basically the European Central Bank rate + a fixed margin. This has been an excellent deal for the past 10+ years, as the ECB rate sunk below zero.
(I have a mortgage in Finland that I took in 2011, and for many years I've paid zero interest on it because ECB rate + the loan margin added up to a negative rate. Sadly my bank clamps it at zero.)
Here you have your choice between a variable rate mortgage (floats at BoC rate +- some %) or a "fixed" rate on a term (e.g. 3% for 5 years) and then you renew at whatever rate is current at the end of the term.
In most western countries, fixed mortgages do exist, but the bank has to go out and buy the relevant interest rate swap in the open market, so availability fluctuates & is biased towards short term fixes. Most people are either on a variable rate or are on a short term fix that expires in a couple of years.
I remember when interest rates hit 15% in the UK in the 80s. My parents did worry they were going to lose our house!
Certainly that's how my wife and I have been, while everyone else has been partying and living potentially well beyond their means. Guess we're suckers.
In a place like California, that 5% change could be half of your salary. If the cautious approach is only buy a house if you can handle a 2-3X rate hike, then individuals would never own and perpetually rent from companies.
In reality, higher rates or the risk of them puts downward pressure on housing prices. A huge component of the price of homes comes from the easy availability of the actual product: housing loans. Almost everyone out there just gets the biggest mortgage that the bank approves them for. They go to the bank and say "what will you give me" and then go look for prices around that cost. Or get in bidding wars up to that level. And the banks are so underwritten by government guarantees that they're willing to take big risks here. It just drives prices higher and higher.
We never had the 2008 housing price crash that happened in the US, and things have just continued to climb. It's possible that we'll have a huge crash at some point, it's well overdue. But I've given up on waiting for that to happen.
If you're on a fixed-interest mortgage, you don't plan to move and you don't have a home equity loan, it seems to me that you don't need to care at all about interest rate and home price fluctuations.
Actions like this will unfortunately destroy a lot of older middle-class wealth in the short-term, but longer term it would hurt the upper-classes the most (and even short-term it’s not like the upper classes haven’t been winning every transaction anyway). And the longer we let this problem fester, the more lives we disrupt of the younger generations who have seen countless ladders pulled up in front of them.
And the current situation is already “destroying” peoples lives as their courses into “normal” adulthood are interrupted and delayed, so it’s somewhat a question of who feels the effects. The difference with devaluing homes is that people may lose some wealth, but they still have a home! Investments are supposed to risky, that’s why you make money off of them sometimes; so let’s make it that way for houses.
A land tax encourages building denser housing and therefore increasing the number of homes available to people, putting downward pressure on housing (and rent) prices.
A land tax does not go up if the dwelling on it go up in value/price. It encourages replacing single family homes with denser dwellings.
there's nothing wrong with being against densification. Cities like SF and Seoul would be a nightmare for me to live in because I hate cities and being around a lot of people.
With a land tax the taxes wouldn't increase if large apartment buildings were built on it because the tax amount is solely based on the value of the land and not the property on it.
>So while a land tax to punish the rich would help make people feel better, with what I see it will enrich some, but not benefit who you think would benefit.
First, people don't propose a land tax to punish the rich. Second, it's not about benefitting specific individuals (picking winners and losers). It's about benefitting everyone by ensuring the optimal use of the land.
After paying off the medical bills with appreciating uome ownership, your credit is still good, and you can eventually buy another house. All your land-value tax does is punish wealth accumulation. What is the reform you wish to create? How does this help anyone?
LVT doesn't punish wealth accumulation, it punishes monopolies
Using equity for cheap money to buy more equity makes perfect sense.
What a principal residence as an investment does for most middle to upper-middle class Americans is force them to save some money so that they have some amount of wealth when they retire. I don't know if that is important or not, since it's not very liquid and has dire consequences if you lose it.
1 - it lowers your monthly costs (no house payment/rent to pay)
2 - it provides some protection against inflation so even in bad inflation, your housing cost won’t change.
A real issue, but a bad example. Trump has never declared personal bankruptcy. A few of his 500 businesses have gone bankrupt, but all that happens when an LLC goes bankrupt is that the owners lose their investments and creditors take over the company.
You know what really killed the rich? SALT deduction limits in the Trump tax plan. That policy actually caused the rich to pay more in taxes.
That's why CA tried to work around it by trying to classify property taxes as a charitable donation.
Wait and see, the Dems will pass a new sweeping tax plan that won't include the SALT deduction limit and they'll claim that it taxes the rich more.
[0] https://www.washingtonpost.com/outlook/2021/11/05/salt-tax-d...
So until municipalities want to really study the overall capacity and exactly how it is being used, changing tax policies will be unlikely to address whatever the real issue happens to be. Our problem is not simply "supply and demand", it's more subtle than that.
If I were still in the multi-family residential marketplace I'd be buying and converting to short-term rentals in cute neighborhoods. It would be the highest and best use of capital deployment under current legal structures.
Wouldn't a SANKEY diagram showing incoming units and utilization of such units be a nice way of seeing the problem and making adjustments? Having such data would be fascinating.
There's a couple who live at the peak of the bell curve that defines your market. They can spend $X,000 per month on a house. 2.5% vs 5% just changes how much of their money goes to paying down principle vs the interest. With that the price of the house will fluctuate to account for this reality.
Also now that overlapping showings are happening I spend nearly every viewing with 2-5 realtors who are showing over zoom to buyers looking to move from a HCOL to my city (Denver). I found it hard enough to make a major decision after a 20 minute viewing, but to do so over a poorly narrated zoom/facetime walkthrough? Can't imagine.
Plus stocks are almost immediately liquid and have almost no transaction and no maintenance costs and no annual property tax.
I hope this brings the price of housing back down to earth. A house is a depreciating asset in any sane world. It requires constant maintenance.
I wonder if rates readjusting pops the housing bubble though.