Historically ~30% of all listings were adjusted down. That makes sense when listings are about price discovery. IIRC currently about 15% of listings have a downwards price correction. That is VERY hnusual, and yet still a meaningful portion of secondary market.
If a house is being rented it means I can't buy it, supply is low. That's what I understood housing supply meant when talking about house prices. Renting is not a factor, it's another market.
Even assuming the markets were separate, if corporations were buying up tons of housing stock and flooding the rental market with it... shouldn't rents be going down?
Not sure if it's different in the US, but in Australia rental incomes for residential property are a tiny percentage of the value of the investment and most of the money is made through leveraged capital gains.
For example, I pay $24k a year on a house worth around $1.4m. This gives a return of around 1.7%, which is nothing compared to cap notes (5%) or dividends (~4%).
However, someone buying our house would only need to put down 20% up front, and could reasonably expect to see the price raise by 5-10% a year if trends continue. So that $280k deposit could theoretically return $500k+ over the course of 5 years because of the high leverage. The rental return over that period would only be $120k - not even enough to cover the interest repayments on the loan.
Of course, that's assuming trends continue. If prices started falling by 5-10% per year, that $280k deposit would turn into a $500k+ loss and the investors would be absolutely fucked.
I agree with you but to add another point, if house prices were to decrease significantly then loan margins would kick in for homeowners too.
And with low interest rates, low wages(vs house price) for so long the margins for that are tight for a lot of (silly?) people who borrowed "as much as they could".
It seems like:
- house prices up, investors win.
- house prices down, homeowners lose.
It will be interesting to see how it plays out but at this stage either side of political argybargy are doing SweetFA and advertise policies to do more of the same.
Theoretically, the market going up or down shouldn't make any difference at all to most owner-occupiers.
If they hold onto the house, short-term fluctuations don't affect the eventual sale price. If they buy a new property in a similar market after selling the old one, then the "losses" on the old house are made up for by the "savings" on the new property.
It's only people who downsize or leave the property market altogether that would be affected by a short-term dip.
(The caveat being, of course, that this completely handwaves away human psychology! Being "underwater" on the mortgage would definitely make a lot of people stressed and anxious.)
This is absolutely not true. “Investor” properties account for about 18% of secondary home sales. 90% of those sales are to individuals with 1-4 properties. The remaining 10% of investor sales, ~2% of the total, is ALL of the professional invesotr purchases. Its billions of dollars, in a trillion dollar market.
I’ve heard this but I’ve not experienced it. If corporations are buying houses and using it as rental income, they’re probably losing money. Ignoring vacation rentals, detached homes are among the hardest to rent.
Some data would be nice. I've followed real estate investments for a while, and renting houses is fairly poor if you paid all cash for the house. The math is easy to do.
Most RE investors I know who do this make good money only if they buy a significantly undervalued house - often one that is unsellable. They buy it, put in $50K to repair it, and then rent it out.
Those who buy regular houses at 20% down and rent it out have a target of $200/mo net profit. Clearly, they're not buying $600K houses at $120K down to get a measly $200/mo out of it.
RE investing - especially the rental market - is very nice in that it's pretty simple math and very transparent. Anyone can plug in the numbers and see what they'll get. Generally, in places where houses go for $800K, the rent will likely not even cover the loan payments. So then you play the game of taking a long term sustained loss in the hope of appreciation. But as someone else pointed out, this makes sense only if you're paying about 20% down and not with paying full cash.
Buying houses with all cash is almost always a very poor investment.
Random example in my area: Houses in a certain neighborhood are selling for $900K. They rent for $3.5K/mo. Assuming no costs, it would take 21 years to get the money back. Even with rent appreciation, it would take well over 10 years. Over that period, even including appreciation of the house, you're almost guaranteed to get better returns with the S&P500.
Isn't this one of those "If everyone is crazy, you're crazy" situations? If every house is overvalued by some metric, then maybe the metric is wrong. People's perceptions of value are a large part of the actual value(meaning what someone would really pay) for things like housing that should depreciate over time.
So a slightly more sophisticated analysis would be "how does housing appreciation in each market compare to stock market appreciation over the same time period" - but the description in the article leaves that out, looking just at historical incomes/costs/rents. In a world where homebuying is increasingly out of reach of a larger percent of people, you'd expect it to be more disconnected with average or median income/rent, and more pegged to higher percentiles.
I mean, just about every house has an owner that lives in it.
Homes are expensive. Most people just can’t afford a big slice of land and home. They have to accept they will have to make do in an apartment that may be shared. Should the home they deserve just magically appear?
You can look at the percentage of people in the under 45 bracket, and it's been trending down for decades. The total is probably remaining high because the lifespan was going up.
What does this mean, exactly? They do have the right to purchase on at fair market value for structure + land - it's just they can't afford it. The land is crazy expensive.
I'm assuming "have one commissioned" is suggesting something about supply/zoning, but it's not clear to me what, exactly - if someone could afford to build or buy a house 3 miles from Dallas, should they also have the right to pay the same price to build something in the middle of Dallas?
Fair is the key word. The present government enforced scarcity is neither a free nor a fair market. A free market lets participants take the economically optimal choice[0]. A fair market cannot require kowtowing to the arbitrary and capricious whims of a planning board.
Ergo I hold that the respective governments and their zoning/construction policies are trampling on the individual right to a fair market and worse are creating grotesque amount of economic inefficiency, and by extension social damage, in the process.
[0]Trivially: adding units to a lot to capitalize on a high price of land relative to materials + labor.
Who is going to build these structures? Tradesmen today are already overbooked. And they’re going to work on projects that pay the best. That’s probably not affordable housing projects at scale.
The point is between land, materials, and labor, a lot of people can’t afford what they think they deserve.
They could be overvalued relative to rent which is a much more compelling case, since renting a property is a near exact (not perfect, but close) substitute for owning one, on a practical utility level.
Where I live (not USA), monthly rent is about 0.1% - 0.2% of the price value of an apartment. For example, I pay about 350 USD/month and the owner is (trying) to sell the apartment for 180,000 USD.
Stocks would be an obvious point of comparison. They’re down but real estate prices remain up.
The argument for overvalued housing is that everyone got antsy during the pandemic and wanted to change houses and change neighborhoods, but that will settle down now that the pandemic is waning.
Tech stocks seem to be falling because the pandemic-driven surge of screen time is fading now that the pandemic is waning.
So: is real estate entirely different from stocks? Or will it see a similar post-pandemic slump but just has more lag?
Tech stocks falling won't necessarily lower home prices. The number of tech employees is growing rapidly, but the number of houses for sale isn't, so if ten years ago it was enough to win the bidding war against the top 10%, now you compete with the top 5% and their finances, even with lower stocks, are a lot better. By 2050 it will be a competition among the top 1%.
The Moodys analysis, as I understand it, is house prices relative to median incomes in a market.
I don’t think it’s a fluke that the overvalued markets correlate to regions that a lot of tech has moved over the pandemic like Boise, FL, TX and Nashville.
If they’re measuring current house prices to 2020 and 2021 tax data then they may be missing an influx of income in the denominator as well.
Well, according to the University of Michigan Survey of Consumers, the "buying conditions for houses" index has reached its lowest point since 1982, with 68% of respondents saying it is a bad time to buy in the March 2022 survey. A year ago respondents were equally likely to say that prices were low or high, now 20x more respondents say that prices are high.
Not when you have a populace that is by definition average & in need of a place to live/start a family, but have an external investor class of the foreign ultra rich or Wall street douche canoes buying everything up because fuck you & they can.
Crazy if you believe most of our nation should be essentially indentured servants for basic housing.
"essentially indentured servants" is a bit rhetorically distracting, don't you think? Let's pin that down. What's a reasonable amount of work that a human should be expected to do to live? Not just housing, but food, and whatever else.
Banks will loan some people billions at rates half of which they would give you, if they even gave you a loan. Thus they can buy everything for inflated prices.
There are multiple ways to value an asset other than its current price. One is cash flows: if you rented it, how much money would you get? Another is historical norms: if historically a city with N million jobs providing average income X can only support housing prices of Y, then one could conclude that housing is overpriced relative to the ability of people to pay for it.
The HCOLA house my wife owns in which we live would rent for ~5,000 a month as it is inside our respective city beltway, in a good school district, in a low crime, historic area. When we got married $5,000 is pretty close to our much smaller apartment rental costs, summed. The vacancy rate is pretty low, and the demand is strong.
Like all real estate calculations though, this is completely local.
You’re assuming that the people who buy house in an area work in the area. People who are able to work remotely statistically have jobs that pay more. They can live anywhere. A $700K house is a steal for even a mid level person working at BigTech who use to live on the west coast.
Because for all that today's sales prices are driven by that consensus, you can do math on the expected future income stream (including imputed rent) (adjusting it for interest rates and inflation and risks) and determine that it comes up a bit short by most measures.
I think there's a more concrete measure of value: house prices related to income. Historically (Robert Shiller has a chart for the US going back to 1890) house prices (and mortgages and rents) have maintained a stable relationship with income. Occasionally that relationship is strained but it has usually fallen back in line. One exception to this was the extraordinary, ongoing, support to the financial system post-2008. House prices and other financial assets have ballooned in relative proportion to wage income. That's more than a perception of value, that's a matter of social stability as most people depend on the same paycheck for not only housing but food, medicine, etc, as well as housing.
That would work if the supply of houses has kept up with populations growth, and just as importantly, the desired location of where people want to live.
If there's housing scarcity, then prices will rise far ahead of ability to pay. That's the source of a lot of other types of today's inflation, for example, cars.
> If there's housing scarcity, then prices will rise far ahead of ability to pay.
Housing costs tend toward people's ability to pay, otherwise folks default. That's why the banks ask you about your income and credit worthiness, they want to know you'll be able to pay the mortgage and not default. If money costs increase faster than income, folks won't be able to afford as much money (as high a price).
Housing costs do tend towards ability to pay, and when there's scarcity, that "ability to pay" starts cutting out those with the lowest incomes, since they do not get the housing.
That's how housing costs can increase faster than the income of an area, it's the market displacing those with lower incomes, and readjusting to only house the wealthiest.
Add in that housing prices are distinct from the housing costs, and that leases only change rent occasionally, and lots of people are owners and have fixed costs, and prices can rise quite a bit faster than incomes.
Population may have flattened, but a toooooon of people were looking to move suddenly to new areas, which is another way that scarcity is created.
Your chart is the number of units under construction, but that high number doesn't translate into more new homes than ever before, because completions have been massively delayed. So there's a lot of homes sitting half finished as they wait for supply chain crunch's to resolve. And to compare this to numbers from the 80s means normalizing for length of construction, something which is getting delayed more and more.
Overall, construction has massively constructed since 2008, and even before that it had been trending down for a long time.
The connection between interest rates and housing prices is weaker than I would have expected (it certainly exists, just not to the extent I imagined) and oddly enough it takes a couple years to show up: https://www.bis.org/publ/work665.pdf
I suppose it makes sense. They say not to spend more than 1/4 (or 1/3) of your income on housing but if a house costs 2/5 of your income you're probably not going to set up a tent and wait for interest rates to come down.
There’s no rule that you should be able to afford a house on a middle class income. In fact in many countries, particularly in Western Europe, it’s unimaginable that you would be able to afford a detached, single family home on a middle class income. Lots of people in that situation will live in apartments, row houses, or condos for the rest of their lives.
Total population / total land area is an irrelevant statistic for country comparison. By population-weighted density the United States isn't significantly less dense than Western Europe.
Unfortunately, directly comparable, prepared numbers are difficult to come by. The 3 most memorable sources I've found are:
* https://theconversation.com/think-your-country-is-crowded-th... - Discusses (introduces?) the concept of "lived density" and provides graphs for Europe. I'm not sure how well the author was familiar with related work regarding population-weight density, which seems to be the more correct term.
* https://arxiv.org/abs/2005.01167 - A COVID-19 pandemic-related paper which incidentally includes comparable population-weighted density metrics for both Western Europe and the United States.
I haven't looked into things since 2018 (excepting taking note of the 2020 COVID-19 paper), but IIRC census.gov has some population-weighted density numbers somewhere based on MSA and census block (tract?) proximity. It's not easily comparable to available European statistics, but it might be a good place to start if you want to play around with U.S. density numbers.
Maybe there have been better resources published since the above.
That’s a sweeping comparison. I’ve visited both and my take would be that Europeans have a higher standard of living than Americans. But that’s just a hunch, I’d be interested to see a breakdown by specific metric and class.
I’m not sure GDP is a reliable national wealth indicator in countries with very high levels of inequality and cost of living. Certainly not as a comparator. Plenty to google on that too. This isn’t a criticism of your point - more that we need a better set or metrics to evaluate “wealth”.
You can't compare Western Europe to the US. Maybe to specific regions or super-urban areas, e.g., the LA to SD corridor or the Bay Area.
In which case the two are comparable: there are few if any middle-class families in the bay area that own their homes except by inheritance or some other luck (gift, lottery). Even condos and other high-density housing are all but completely out of reach for all but the top 10% of income earners. And those condos are almost all studios or 1- or 2-bedroom units that are very tiny.
"... there are few if any middle-class families in the bay area that own their homes except by inheritance or some other luck ..."
This is a ridiculous statement.
There are plenty of middle class (by Bay Area standards) folks who have bought houses in Fremont and San Pablo and San Leandro and Hayward.
In fact, even in Marin there are parts of Novato and weird pockets of West Marin (Forest Knolls ?) where this was, and continues to be, done.
They are boring places and middle class folks working boring jobs have purchased homes there year in and year out for the past 25 years. Yes, they had to make choices and sacrifice some things for other things in order to do this.
Perhaps the ability to do that is comparable to a lottery win ?
I’m surprised anyone has heard of Forest Knolls! I grew up there.
It definitely used to be weird and relatively affordable for the middle class but not really any more.
Last year someone bought a house in the neighborhood for $1.3 m. It was worth $350k when my parents moved to the area about 25 years ago. The new owners have a pair of new Porsches in the driveway. Maybe that counts as middle class in the Bay Area these days but it’s still not obtainable for the vast majority of Americans.
$350k in 1997-dollars means that 25 years ago, it was worth $627k in today-dollars.
Adjusting for inflation, it's doubled in real value over 25 years, which works out to <3% APR. It's a decent return, but we've also ignored 25 years of property tax and maintenance. (on the other hand, we've also ignored 25 years of effective rent)
I guess the point I'm trying to make is that $1.3M isn't worth what it used to be but it sounds big in our head because we remember a time when a dollar went a lot further than it does today.
Just running some numbers into affordability calculators. Buying a house at $350k probably had your annual income between 70-80k which was about the top 1/3 of households 25 years ago. That was middle class. To afford $1.4M you're looking at an annual income around 350k. That's about the top 2%. Even if you stretch your budget more and have a hefty down payment you're still going to probably be in the top 5% of income to buy that house.
You wrote: <<there are few if any middle-class families in the bay area that own their homes except by inheritance or some other luck (gift, lottery).>> That is a bold, sweeping statement with no supporting evidence provided.
I Googled for about 10 seconds to find some statistics about Bay Area homeownership.
Zoomable map to visualise California homeownership (very cool!): https://dig.abclocal.go.com/california/homeownership-maps/BayArea_homeowners_zip_map.html
Homeownership Rate (5-year estimate) for San Francisco: https://fred.stlouisfed.org/series/HOWNRATEACS006075
At a glance on the first link (zoomable map), the Bay Area looks similar to SoCal (LA/OC/SD). Why do people think homeownership is so low in areas of California with lots of good jobs? It isn't. To be clear: I doubt people on this discussion are interested in homeownership rates in extreme suburbs (2+hours away) and rural areas.
Don’t forget to mention they still have full health coverage in the EU.
It’s not possible to afford housing or robust healthcare in the US.
Keep in mind there’s no rule we have to tolerate either.
Imagine being a teenager in the US, having just seen how essential workers are treated, knowing in all likelihood your future is an “essential worker”.
NHS Health Check is the equivalent of the Medicare Annual Wellness Visit. It's recommended every five years, starting at age 40, for people without pre-existing conditions.
For people with pre-existing conditions it begins at a younger age and is recommended more frequently, based on the determination of your GP Surgery.
You should get your first invitation to an NHS Health Check around the time of your 40th birthday.
I’ve waited longer for basic treatment in the US than I did anywhere else in the world and still paid exponentially more.
And all that extra time and money got me was people saying “You should be glad it isn’t socialized health care!” Yeah. If it were, I would’ve gotten treated faster and cheaper.
Both of these things are true. I don’t want to fully derail the larger discussion, but having lived in both EU and US and used healthcare in both, basic care is significantly better in the EU than the US on nearly every facet. The exact reverse is true for specialized care.
Non-essential surgeries tend to have longer wait times (such as hip replacements in elderly people), but conversely, essential care is accessible to everyone at no cost and in a timely manner.
I live in Canada, and recently had appendicitis. My appendix was removed less than 24 hours after symptoms began, and 10-12 hours after I arrived at the hospital. I walked in to the ER (after a very painful car ride), they asked me some questions and gave them my health card, they said how much, I said 7, they did blood tests and I had a CT scan, I waited a few hours, and then I was wheeled up to the operating room, after which I spent the night in the hospital and discharged the following morning. Not once did the question of insurance or payment come up, and I even had a private room after the surgery.
What you describe in your last sentence is one of the reasons I went with Kaiser. Yes, there are still co-pays for most treatments and prescriptions, but they have in my experience never been more than $20. This includes an elective procedure. It seems to share some aspects of the Canadian system you described, such as longer wait times for non-essential care, and a relative lack of choice in which doctor you see. But to me that is an acceptable trade-off for care where no single visit has cost me more than I would have spent on lunch that same day, and has been consistently of high quality.
> Non-essential surgeries tend to have longer wait times (such as hip replacements in elderly people)
Something ridiculous like 70% of lifetime healthcare spending in the US occurs in the last two years of a person's life (half-remembered number from like 10 years ago). The uncomfortable truth is that we spend way too much on hail-mary treatments for people who are almost certainly going to die, and too much on useless shit like knee replacements for the elderly, and far too little on the earlier stages of their life. But nobody wants to tell the elderly "no" because they vote.
Obamacare had the right idea with "death panels". A lot of treatments that happen near the end aren't medically justified by quality-adjusted years-of-life or similar metrics. And that money comes out of the healthcare of younger people, whom the US treats like shit compared to the elderly. Because they don't vote.
But nobody likes the optics of "pulling the plug on grandma".
I replied to that comment as well. Affordability of housing the EU (or Japan, or China, or India, etc) isn't really that relevant to the situation in the US.
Based on your green account name, it appeared you were new to HN. I commented because the site guidelines include:
> “ Eschew flamebait. Avoid unrelated controversies and generic tangents.”
Your comment, “Don’t forget to mention they still have full health coverage in the EU.” was doing exactly what the guidelines ask us not to.
My hope was that bringing attention to this would help deflate the impending generic argument about health care and help you improve future conversations on the site.
It's not a ToS, they're guidelines. You're not legally bound, relax.
The point of these guidelines is that _generally_ most people follow them and it stops this place going to garbage like every forum before it, and allows it to stay a place for professionals to discuss topics, rather than us vs them flamebaiting and boring jokes.
You're totally welcome to go, but you're also welcome to stay. If you step back and calm down, you might find you like it here :).
> There’s no rule that you should be able to afford a house on a middle class income
Here in the US, if one was asked to define “middle class” from a lifestyle perspective, probably the first thing that comes to mind is “homeowner.” I don’t think it’s possible to separate home ownership from class distinctions in the US social strata.
Case in point, home ownership rate has remained largely stable for decades at around 65% of the population. That’s despite incomes being more varied in relation to actual value over time.
I was told that middle class in the US is the class that owns tools that they use to augment or repair their home, whether owned or rented. Poorer and you don't have time between jobs to do it or the spare income for the tools, so it doesn't get done. Wealthier, and you just hire it done, because it isn't worth your labor rate.
That’s an interesting take. It sounds intuitively correct, other than the part about “owned or rented”. Generally speaking in the US, the one major advantage to renting is it’s the landlords responsibility to take care pf the property, and on the flip side you are usually not allowed to modify or augment it in any way.
So I’d say if you extended it to incorporate that understanding, it’s pretty accurate.
Most of those cities have a lot more density. They were designed before cars existed. I wonder what a fresh piece of earth chopped up and designed for the future would look like economically.
> There’s no rule that you should be able to afford a house on a middle class income.
This isn't really an ownership issue, it is an occupancy issue. Monthly rent needs to cover the expenses of a property including any mortgage, property taxes, etc as well as maintenance, so rents wind up tracking house prices. If you can't house the middle class, a) they're not really middle class and b) you have a societal problem.
The Case-Schiller price index is at all time highs across almost every real estate category. As my friend would put it, a dollar is not worth a dollar. A pack of gum and a house are going to value that same dollar differently for you but, as you said, you only have so many dollars :(. As it is I don't think many people will ever own a home in the near term.
One major problem I see with comparing housing prices to income is that most homebuyers in the US are using leverage (a mortgage) to buy their home, and the last 15 years or so have seen comparatively low mortgage rates compared to the several decades beforehand.
Housing prices have been able to balloon because debt has been very, very cheap. Whether or not that will continue remains to be seen.
A majority of consistent voters own homes and want house prices to increase. That means most politicians want house prices to increase. The government dominates all aspects of residential lending.
> A majority of consistent voters own homes and want house prices to increase.
Are there actually data that say that? I'd only expect data to exist on the first half, but there may also be data (as opposed to a fairly good supposition) from the second.
If we ignore the word majority (since that will vary by jurisdiction I'm sure) and say that homeowners are more likely to vote and pay particular attention to issues that affect their home's price then this recent paper does provide some support: https://www.andrewbenjaminhall.com/homeowner.pdf
I'll say from personal experience, it does change your perspective. If a sewage treatment plant moves in next door, I can't move like a renter can. It's a feeling of real vulnerability that I didn't fully understand until I felt it.
I understand the NIMBY-ism. I do wonder how much people care about the value of their house going up if they don't plan to sell soon. There are advantages to your home being less valuable and the only disadvantages come if you want to leverage your home more, refinance (not likely with rates going up) or sell it.
If they didn't care except when they were selling, that makes the effect of them being more consistent voters on zoning issues hard to explain.
I think this idea of wanting your house price to be low to avoid property taxes then suddenly increase the value when it's time to sell is like the idea of having your employer pay a trust so you can collect food stamps 11 months of the year then the trust pays you all your money in December.
It might be possible and it wouldn't shock me if a few people do it but it's not the normal approach.
> the effect of them being more consistent voters on zoning issues hard to explain.
No one wants to live next to a dump. That's why it affects property values. Because it also effects living conditions.
Meanwhile, a lot of people never plan to sell their home. Yes, if you plan on moving soon, you care about property values going up. If your horizon is 10 years, 20 years, or your kids selling the place? Less so.
This comes up a lot. But it's wrong, or at least incomplete. People who want to live in their house don't want the value of that house to go up, because then their taxes go up.
There are laws like California's prop 13 which allow some demographics of consistent voters and home buyers to have their cake and eat it too by insulating them from property tax increases as their home value increases.
Most people who own are moderately content for their house to stay somewhat stable in price.
They definitely don't want it to go down, especially below the loan amount; but tools like Zillow make it way too easy to book "paper profits".
If you bought for $100k and later noticed Zillow say your house as $250k, and now it's saying $200k you can feel like you lost out even though you're still "up" - something that was more difficult before as you'd have to try to compare similar homes for sale.
How many people in this day have actually decided "Hey, I want to be in this one house for the rest of my life."; moreover how many are actually presented with that option? I live in a boom town so I can't really say one way or another, but it strikes me that very few people born of recent generations have the impetus or place enough faith in the systems they're reliant on to yield the security necessary for that sort of commitment - and it's not a new development, and it's not necessarily specific to my locale, but is rather a shift in principals of business and government.
So while I understand your argument I'm reticent to accept it on the basis of the concerns mentioned above. Settling down permanently is not the same proposition it was fifty years ago. My grandma grew up in Denver, the rapidity that it grew with was apparently astounding and that growth drastically altered the culture and the landscape, what were once dirt roads are now median-divided 3-lanes with cookie cut houses lining them as far as the eye can see. If you can imagine not wanting to live there with the rapidly accelerating growth and the headaches that come with it, you're not alone.
There are also economic concerns, which can be highly unpredictable, and these are considerations I'm sensitive to. I've watched commodity fluxuations result in massive layoffs time and time again. When given the requisite information to make a decision on whether or not to sell, it's plain to see that it's a benefit to have pricing steadily increasing, whether it's to avoid the wave of sells when an industry reels back or shutters, or when one is intent on moving to greener pastures, or at least a better home in a more agreeable neighborhood.
I'd pay taxes which, given the parent statements terms, would roughly equivocate them with asset price insurance before I stuck my neck out to get burned or blown up.
As rates rise to more normal historical levels, and purchasing power diminishes, who will people sell their homes to? Prices will eventually have to come down.
This is the argument that homes are currently overvalued.
This is the exact same phenomenon as with the stock market. Yields progressively moving towards zero means more and more leverage driving PE ratios and prices to extremes.
Given that we've rediscovered fiscal stimulus and inflation as a result, I have a feeling that era is dead. You can't have low rates in an inflationary environment.
The specific chart I picture was originally in a 2005 article in the NYT, but it is reproduced as the second chart on the Wikipedia page [0] for the Case-Shiller index. Note also that page's section on 'Key events and episodes.'
One criticism I have of Shiller is his index looks at comparable houses across time. This under estimates appreciation due to the housing stock itself becoming more luxurious. In my area, houses are about 500 sqft larger than a generation ago and have amenities like AC and often a granny unit.
> This under estimates appreciation due to the housing stock itself becoming more luxurious.
How so? Large, luxurious, houses get counted just the same way as small houses. If you mean that new houses that have not been resold aren't a factor in the index and that this biases it against the latest housing, OK. But even new houses tend to be priced in line with comparable sales, linking them to history in a way compatible with how the index is calculated.
The US is rotating from housing as commodity investment to housing as intergenerational asset, something which has happened in a lot of other countries already (see e.g. Western Europe, mentioned in other comments here).
House prices will remain up because any gain from sale will be plowed into the next home. It's a ratchet upward. Higher mortgage rates are somewhat irrelevant in this dynamic, because the home itself is not an asset to get capital gain from, but a claim to shelter a family for an _indefinite_ period of time in a chosen location.
USA was inoculated for a very long time, because horizontal expansion over cheap land allowed for expansion of supply. That era is over. Car and highway technology is no longer adequate to expand cheaply and still remain within viable commuting distance.
There really is no limit on how high home prices relative to income can be. When meemaw dies, her inheritance will fund the downpayment of little Sally. That's the perpetuum mobile in Europe, which the US is now cranking up as well.
Rents may still remain affordable, but home prices will detach.
Houses in the US couldn't serve as intergenerational asset simply because they are built of wood with average livespan of ~70 years. While in Europe houses are generally build of brick or cement and last centuries.
My (paid for) house in the Bay Area was built ~70 years ago, and it’s just fine, thanks :)
As a European living over here for the last two decades, I agree that European houses are generally sturdier (my parents house pre-dates the USA, I don’t expect mine to last that long), but when you’re spending 6 figures on something, looking after it is a good policy. Catching problems early is the key - as soon as you notice something, fix it and fix the cause…
Don’t know how it is in most of Europe, but I think that, in the UK, you don’t actually own the land your house sits on; Lord Such-and-Such owns it, and collects rent from you.
In the US, we own the land, and that is usually the real value. I’m the proud owner of a 0.125-acre New York postage stamp. It’s in a fairly affluent area, so is fairly valuable. In Wyoming, they’d laugh at it.
You don’t really own it. That’s just a legal construct. If you have to pay rent to the government (property taxes) to “keep” it then you don’t really own it
In Virginia, you need to pay taxes for your car (at least, you used to. Not sure if they still do). This was different from registration, and applied, even if your car is sitting in your driveway without plates.
I think they also used to charge tax for significant-value property, like computers.
You're paying taxes, yeah? And if you were to overlook those tax payments, what would become of your supposed ownership? And subject to eminent domain? Not to mention the many laws of the lands and social expectations besides.
In that sense, you don't own your body either: At any time, the government could send goons to shoot you or jail you or harvest your kidneys. Even if you leave the country, they could put a bounty on your head or send assassins.
Sure, there's courts and laws, but they pick the judges and can choose to change the laws. They could pass a constitutional amendment tomorrow giving themselves the right to harvest your kidneys, the same way local counties can pass a law at any time raising your property taxes.
And, even if you argue that you have rights under the current government, empires don't last forever. 300 years from now, who's to say barbarians won't be ransacking the house you left to your kids? In that sense, your rights are only contingent on the barbarians being too scared to attack, and not absolute.
So if your argument is, "You can't own a house because the government could take it away", it seems like you have no hope and no possible policy change would give you any "true rights" to anything.
While you have governments that can legally steal everything from you just because they can, you'll never really be free.
That said, there are degrees of freedom.
Property taxes in the US are very high so I consider it an inferior degree of freedom compared to owning a house in a country where I don't have property taxes.
The more corporation / income tax I have to pay the less free I am, hence why I'll move to a country which charge less corporation / income tax.
Sure, I'm still owned by the government because they have soldiers and guns and I have none - but at least I can live my life as close as possible to how I'd like to live it.
It is possible to fix this situation once and for all: abolish the government and its idea of legitimacy, let people organise their own defence from the goons of other countries by paying voluntarily.
You won't end up with a much different system, you'll still have some people not paying anything and some people paying more to defend their community - but at least I would pay voluntarily what's needed for my defence without enriching the politicians, fake intermediaries with empty promises, and it wouldn't be coerced out of me under threat of fines and imprisonment.
That was, at least the common narrative goes, the fundamental basis for most if not all states. Mutual defense. And it's hardly any different today. There have been many cases of non-state societies who did organize their own protections. But to try and connect the dots with such factions (many of which are still functioning today) and the modern man is an error. We're talking societies with scribal and priestly classes which in no ways exist in the modern era, when the global average literacy sits at 83% and the mindblowing advancements we've seen in the last two decades alone is a force multiplier for autonomous organization that is totally unprecedented, like most of all of the advancements seen since the seminal moments of the industrial revolution.
But ultimately your negative outlook on the human condition is your own, 99% of daily life proceeds under conditions of total anarchy, authority and security are entirely illusory and we pay incredible costs to maintain those illusions, not in terms of liberty alone, but in toil and life itself. It leaves little left to live for, read the Death of Ivan Illyich if you want a better understanding of what I mean.
> 99% of daily life proceeds under conditions of total anarchy, authority and security are entirely illusory and we pay incredible costs to maintain those illusions
Those costs are totally worth it. I'd rather live in a nation with liberal democracy and property laws, than whatever more "pure" or original model you seem to have in mind.
You say that but history has lots of examples of people taken in by such egalitarian societies and doing an about-face, and when the European societies took in people, they more often sought to return.
In any case, what I'm talking about is democratic and does not forego property rights, in fact it could give you stronger property rights. But you didn't read the grandparent.
To be clear, anyone can own the freehold that you’re leasing the property from. The mention of ”Lord Such-and-Such” could give you the idea that this is some antiquated construct where all lands are somehow truly owned by the nobility, but that’s not how it is.
In the UK, there is a concept of Freehold and Leasehold. In the former case you own the land under and everything built on it. In most of the country you buy the Freehold.
The Leasehold gives you ownership of the building but not the land under it. You lease the land from the owner. I've personally considered this form of "ownership" a trap. It has become more common in recent years as a way for sellers to screw buyers. Particular in the London area where demand is always extra high.
It’s not incorrect, either. I phrased it carefully, to indicate that I don’t know for sure. It describes my grandparents’ house, in Liverpool (I assume it was a “leasehold.” I never knew the official name). I know that my mother did not inherit their house, but there may have been other factors, involved.
Technically, I guess I don’t “own” my own land, either, but I pay (significant) taxes on it (because I “own” it, according to the taxing authorities. They don’t tax the bank; they tax me). The taxes are assessed on the total value of the land and the building, and location^3 is a fairly significant coefficient.
Land is a weird (but frequently lucrative) investment. You can’t lock it in a safe, and, if your neighbors start a hog farm, you can’t just pick it up and move away.
> I think that, in the UK, you don’t actually own the land your house sits on; Lord Such-and-Such owns it, and collects rent from you.
This isn't quite right.
There's something kinda like that called leasehold, where you basically own an extremely long lease on a property (typically 70+ years, often up to 999 years), with the freehold (outright ownership) sitting beneath it. Generally it's used on apartment blocks and certain new-builds in specific areas (e.g. they're more common in London, but outright banned in Scotland outside of some pre-existing edge cases). There's a good chance the whole thing will be functionally reformed out of existence in the near future (see here https://commonslibrary.parliament.uk/leasehold-reform-in-eng...).
But in any case, the vast majority of UK property is sold freehold, or as you put it "we own the land, and that is usually the real value".
The only reference I had, was my grandparents’ “named” house, in Liverpool (It was actually a pretty nice place, near the beach, for what that’s worth, in Liverpool).
I remember my grandmother, explaining it to me, and that was what I got from it.
I was too young to have a decent frame of reference, though.
The really old homes I’ve seen in Europe are made out of wood oddly enough. Of course, when the house was built in the 1400s, it is probably a ship of Theseus. Well, most homes that are around for a whole have to be maintained, even (especially) if they are made out of concrete or brick.
All houses need maintenance and upkeep to survive.
My wood frame house in Oakland was built in 1896. Clearly it lasted longer than 70 years. Brick is a terrible building material in California, due to earthquakes.
My brick house in Amsterdam was built in 1886. However, the piles it sat on were wood, which decayed, and the house sank 8 cm.
Both needed new foundations, both were gutted and remodeled on the inside to update them to modern standards.
> USA was inoculated for a very long time, because horizontal expansion over cheap land allowed for expansion of supply. That era is over.
True.
> Car and highway technology is no longer adequate to expand cheaply and still remain within viable commuting distance.
False. The US has mind-boggling amounts of land available. What's changed is the ability and desire to build on it. Used to be, the government would pay you (in land, anyway) to build a house. We gave railroads untold amounts of land to develop it.
These days, to build a house you pay the government for all manner of permits, studies, etc. -- and that's if they even let you build in the first place! Zoning laws prohibit new construction in overwhelming amounts of the country, especially in the most expensive areas. In NYC and SF, most existing buildings would be illegal to build under current zoning rules.
What makes building housing expensive is policy, not a lack of "cheap land".
I don't know if the same applies in Europe, perhaps not. In both Europe and the US land has long been the primary vehicle for intergenerational wealth transfer (think estates and productive land, not housing, though -- middle-class homeownership is an extremely recent phenomenon).
> The US has mind-boggling amounts of land available. What's changed is the ability and desire to build on it.
Times have changed and most people don't want to live in marginal lands that are available in mind boggling quantities. In addition, the reason that a lot of cities were built a few generations ago in the hinterlands was because manpower was needed for resource extraction industries, which have since either become highly automated or fallen into secular decline. We are no longer a nation of farmers and miners.
> most people don't want to live in marginal lands that are available in mind boggling quantities
That's not "times have changed" -- people have never wanted to live on marginal lands, that's why the government paid people to move there.
> a lot of cities were built a few generations ago in the hinterlands
Few cities are built in the hinterlands for the purposes of resource extraction; cities grow where trade is, but yes there are definitely towns that have vanished because we don't as many farmers and miners.
The SF Bay Area is dominated by single family homes on large lots. Yes, SF proper has a high density, but the surrounding areas really don't, and not for lack of demand: developers who would build more housing are literally stymied at every turn, and this is not an accident, it is an intentional plan to reduce the availability of housing and keep it expensive, to avoid "traffic", "crowding", and "changing the character of the neighborhood".
> What makes building housing expensive is policy, not a lack of "cheap land".
I am flummoxed every time the discussion of housing prices shows up. Seems like 95% of everyone who comments is completely clueless to the most basic aspects of it.
In the vast majority of Western regions, high home prices are caused by a deliberate decision not to allow building enough homes to match demand, in the places where people want to live. It's really that simple.
In itself, this is a state of affairs we could accept as the current democratic consensus, but it's really stupid when most discussion of the problem pretends that the root cause is something else.
I agree with current zoning and permitting is harmful. I can't wait for a better urban life here, with services and amenities in proximity, which more homes closer together would enable. I don't think it will meaningfully reduce cost of home ownership. Infill development is more expensive, and the dynamics at play (if I'm correct) are moving to a European model. Generally pointing in a direction of demand having really high ceilings(the estates of those dead boomers are really going to help with that, the biggest wealth transfer in history is only just starting), and supply will be incredibly responsive to changing conditions, since a home is a claim to a location, sellers will only sell when they can buy again into the existing market.
It's very possible I'm wrong. We'll see what the rate hikes will do to home prices in the next 2-4 years, and already we're seeing relaxing of zoning in many metros, so we'll see the effect of that in 5-10.
Fertility rates are dropping, and national population growth is slow across the West -- the problem is generally where the housing is rather than how much there is in aggregate. Old estates in the hinterlands are cheap, that's not where the wealth transfer is happening. Google will yield you some fantastic estates across the UK and Western Europe costing less than half of a modest 2br ranch-style home in Palo Alto.
> I don't think it will meaningfully reduce cost of home ownership.
More housing would absolutely meaningfully reduce the cost of home ownership. Just look at cities like Detroit and Pittsburgh that, for a time, had a surplus of housing and a declining population: houses became super super cheap.
What's happening now is that housing stock is increasing 0.5% per year, while city population is increasing 5% per year, and then policymakers are turning around and saying "look, we're building more housing, and prices keep rising, it's not working!" -- of course, because cities need to build enough housing to satisfy demand, not just "more housing". Each year we have a new housing deficit, the housing "debt" goes up. To reduce prices, you need to build more than the demand is, which we are so far from doing it is laughable.
> Infill development is more expensive
This, too, is per policy. The sweet spot price-wise for construction costs alone is 4-5 story apartment buildings; outside parts of SF, Manhattan, and a few other inner cities, we aren't there yet. But the cost of infill development these days also includes (1) drafting environmental impact reports; (2) multiple sets of meetings with neighbors to convince them not to oppose your plans; (3) delay and stalling tactics from well-heeled neighbors who oppose your plans anyway (see: CEQA); (4) extensive requirements on insulation, window area, solar panel inclusion, etc. that push costs upwards; and finally (5) years of paying property taxes while you attempt all of the above to get your plans approved. That's leaving out (6) extremely high labor costs for construction, because construction workers need housing too, and their rent is also super high.
We are not going to see meaningful change until we remove at least some of the constraints on housing construction and new supply can begin to exceed new demand. In California, lawmakers are starting to wake up to the problems, but solutions are slow to come.
I like your thesis, but the problem is we only need to look back 15 years to see that housing has had massive corrections before.
I think you're underestimating buyer sentiment. In Canada all it took was a couple rate increases in April for housing prices in the 'burbs of Toronto to drop ~20%.
Housing can go from "hot" to "not" really damn quick when prices start their downhill trajectory. What was suddenly a "must have, hot asset" becomes a "fool's game" when people get burned badly.
And based on social media posts, people are getting burned badly in Canada right now.
Thanks, I'm sensitive to that, and it's a great point, in the US for sure the 2008 correction was felt for years.
US will likely continue to see rate increases in the next couple years. We'll see if that is going to affect home prices here. Let's check back in 2025 :)
I’ve seen the houses being built and “intergenerational asset” is an almost laughable assumption (not by you, but by the American public). Yes the land is worth $$, but I would be surprised if a currently-priced $300k home lasts more than 20 years without needing a $50-100k injection and who knows what labour and materials will actually cost by then.
Yes and no. I would agree, but housing is, for the most part, fungible (at least for people with tech salaries). If I sold my house, I could pay for rent in my high-cost area for the better part of a decade with just the income off the sale. I am starting to think I might be crazy not to sell and pocket the money: I could rent down the street and pay rent off my salary while that large pile of money collects rent. A house isn't a particularly liquid asset, and half a house worth of liquidity seems like a safer position in the current market.
We'll find out over the next 6-12 months. At some point, a lot of home buyers started shopping by payment without regard to total price. With interest rates near their lowest in anyone's lifetimes that was workable.
With interest rates rising, as buyers who haven't locked in lower rates begin looking at the current payments on offer, they will have to look at lower priced homes or drop out of the market. If this boom has been driven primarily by buyers flush with cash, foreign or domestic, then prices should remain high. Payments are largely irrelevant to cash buyers. Any buyer using debt will be forced into lowering their ceiling of properties they can afford. Home prices should then fall.
Home prices will fall if rentals fall, otherwise no one will want to sell and low market supply will keep prices where they care. But with rising interest rates, sustained demand for rental can be expected.
The concept of the cash buyer is a bit of a farse as well. What usually takes place is a cash offer. They just need to proof of funds to do this. But then, they get financing to close. Nobody in their right mind is putting that sum of cash in real estate when they could borrow at 2% or whatever it was before the recent run up. The mortgage interest even has favorable tax treatment so it’s effectively much less. Oh and the actual cash can also grow tax deferred. I really don’t understand why you’d actually put a large sum into a house when interest rates were as low as they were.
Actually there a lot on business owners that can’t get mortgages because they don’t don’t have stable income reported on a w2. It can often be easier to buy cash and refinance than try to get a purchase mortgage
Not true at all. If you are self employed getting underwritten can be a nightmare.
We had savings galore but they wouldn't count it for a variety of reasons (withdrawn from biz account in last 90 days, biz account showed slight decrease because of covid), then calcs with old place and new together are hard.
Sometimes if you just leverage equity in old place you will be moving from + hard money + savings, you can do a cash offer, then sell off old place (we had a preemptive offer 4 days in well over asking - bay area).
Now you only have to be underwritten for one property (before selling old property they included both in calculations which made it hard). We got a 3% rate, then used that to settle up everything back to the way it was.
Because for some people, it’s not about maximizing financial returns, but to have only their name in the deed and not the bank. Zero hassling with banks is freedom.
The ultimate endpoints of personal wealth are… home equity itself (down payments) and cash flow (retirement). There are also major purchases like college but compared to housing they’re pretty small. A fancy private education costs just 10% ($250k) of a decent 3BR in a walkable neighborhood ($2.5m).
It seems like home equity is actually a pretty safe and efficient form of cash flow. Even with a cheap mortgage, the payments I need to make each year are about 5% of the principal, which is of course more than the standard 3-4% safe withdrawal rate for investment. The mortgage interest deduction is relevant, but the mortgage is also the reason I would need to realize so much taxable income in the first place. There are no taxes on imputed rent or home equity. Living in a paid off home, you can appear to the income tax system and even some means-tested programs (those that consider income not wealth) as a pauper.
Because housing so dwarfs all other expenses, it is not clear to me why growing my principal at the expense of housing-sized cash flow would be a good tradeoff.
> . At some point, a lot of home buyers started shopping by payment without regard to total price.
At a N-year fixed interest rate, it's smarter to shop by payment without regard to total price. All the more if you can avoid a large downpayment. After all, that's what matters, right?
> At some point, a lot of home buyers started shopping by payment without regard to total price
Isn't this how everyone has always shopped for housing? House prices are just a Present Value calculation. For example, if you can afford $3,000/mo over the next 25 years and you have a copy of Excel or OpenOffice calc handy:
Affordable house price at a 5% mortgage rate: =PV(0.05/12,25*12,-3000,0) => $513K + [your down payment]
Affordable house price at a 2.5% mortgage rate: =PV(0.025/12,25*12,-3000,0) => $668K (30% higher) + [your down payment]
Atm, here in the UK interest rates are basically back to where they were in late 2019, but housing is still priced 20% higher. This is due to the chronic lack of housing stock and shifting buying patterns
The interest rate hasn't even gotten to 1% yet and these things take time to filter through to the market. And it is worth pointing out that as you can see from the link below the UK has had rates at less than 1% since the GFC.
Sure, we've had sub 1% zero rates since 2009, but over that 13 years the cost of housing has tripled. Even going to 2% over a couple of years could be devastating to home equity when people are so leveraged.
The money supply expands primarily by debt, and it relies on people paying back the debt with actual value (or dollars representing the actual value).
When tightening, there arent enough dollars in circulation to do that.
But the bankers get the actual value (homes, collateral, liens on income) regardless. Lenders dont keep seized collateral on their balance sheet, so they sell it at the best price (and they dont need the max price because they already made so much on interest payments). So they push prices down in their firesales.
For the tightening money supplt and people trying to find dollars, think of it like the poison map closing in on Call of Duty Warzone.
Overvalued not necessarily mean the value of current stock has to drop. This is - an ongoing for at least decade now - cry that we don't build enough and we don't built fast enough. Pandemic obviously didn't help either.
So I don't consider articles like that a bell ringing "sell sell sell". Until we are overwhelmed with new constructions coming up everywhere, there will be more people willing to buy, than to sell.
Anecdotally, we decided with wife to pull a trigger on $380k house in Florida (decent ZIP code) just a month before COVID hit, in March 2019. We had 90 days to cancel with $2,500 penalty, pandemic scared us with possibility of builder being lawfully able to be stuck on a construction site for up to 3 years. But eventually we decided to go on because we got tired of renting. By end of 2021 I got offer for $475k, cash, and someone "stole" our plans and our builder built exactly same house next street for $450k (we went inside everything was the same so same options were selected). Then "correction" should come and everyone expected Jan-April 2022 to be a 25% cool off since market rose so much. Well, our "correction" was that prices stopped going up, that's it. Now just few days ago I got an offer by mail (they find your address and mass-mail you) for "amazing amount, just to call". Out of curiosity, I called and was told upon doing title and lean research, an Executive Manager can show up overnight with $525,000 check.
Cheap and easy credit has driven house prices up with people continuing to pay very large sums only because they anticipate capital gains. Many buyers just want a home but wouldn't pay these prices if capital gains were out of the question.
If we reach debt saturation due to higher interest rates or some other economic shock then capital gains are not so certain. In that situation it would be a wondrous trick for prices to somehow 'levitate' and not fall.
With investors and home buyers no longer anticipating capital gains - even anticipating falls - what sets the price?
I would say two things. For investors, the income potential of the asset - in this case rent. For home buyers, the cost of servicing a loan relative to the cost of renting (with a markup to account for the additional benefits of ownership over renting).
What are interest rates now? What were they two years ago (pre-covid)? Price falls are likely to take us back to where we were when we had similar interest rates, perhaps further if sentiment shifts enough.
In NZ this is playing out now. 20% down in Auckland city already. That happened within a few months of the peak. 30% would take us to pre-covid prices, but interest rates are likely to reach higher levels than they were then. How long they stay elevated is the million dollar question. Regardless, I think we'll see falls somewhere between 30-50% in NZ in an astonishingly short amount of time. Ireland saw -50% over five years, but that was with the support of global QE and falling rates.
EDIT: Of course we just don't know what central banks and politicians will cook up to try to kick this one down the road again. Thankfully, the correction looks almost inevitable this time. Perhaps inflation is the answer - as unpalatable as it is?
OTOH not everyone is crazy and not everyone is participating in this market. The only people playing are those who can afford to pay at these prices. Huge numbers of people are sidelined and can't afford to even put in an offer. IMO either those people on the sidelines manage to save or generate enough to jump into play or prices fall to meet the buyers when there are simply no more high income people who can pay those prices within a given local market, since high income people are ultimately a finite entity given how there are a few and finite amount of high income jobs in a given market to support these payments. Even with remote work shifting that regional effect some, I can't imagine there are enough people migrating to cause crazy long term effects outside of already supply constrained popular places (like Tahoe/other skiing etc).
Renters aren't really active participants like homeowners and sellers are, they are passively beholden to the market. For example, they aren't actively setting prices the way home buyers do when they try and put in a bid. They are passively setting prices perhaps, but once again the only reason why these drum ups are also possible is because there are renters who are willing to pay at these prices because they are compensated enough to pay these prices.
Plenty of people are on the sidelines in this situation too, either in waiting in a rent controlled apartment perhaps, or opting to add another roommate and keep rent low in the face of an increase which also removes this new roommate from entering the market for themselves and contracts further the number of renters who are out shopping for apartments on the market at these prices.
Eventually, housing costs begin to outstrip income. Starts at the bottom and goes up. In South Bay a quarter million of household income can’t get you a modest family home. Simple single family homes go for $3M.
It's wild. Single family houses are being listed at $2M-$3M and going for $1M over asking. And the houses would often be considered fairly modest anywhere else in the country.
I imagine a lot of buyers can afford this by selling their existing homes. Or perhaps they socked away a huge nest egg during after an IPO or over the duration of the stock market run up.
But new homebuyers would need to earn about $750k+/year for the foreseeable future for this to make financial sense. That could be a risky wager over the next few years.
If I were paying a mortgage with equity rather than salary I’d be nervous right now. There has to be a non trivial amount of people in that situation, and the stock market tanking means some people will not have the planned upon income. Then what?
i agree. and the other paradox i keep thinking about is everyone says houses are too expensive it’ll to buy, but every house sells within 1-2 weeks on the market
I thought that was weird also until I became a homeowner (in Seattle). There are two other townhomes in my cluster, both are owned but unoccupied most of the time. My neighbors have other homes, one is technically owned by parents in China (who might occupy it someday, my wife is Chinese so chatted about it with the person who occupies it occasionally). It might be totally weird luck, but maybe those houses are being bought by a small segment who are acquiring multiple ones?
I don't know how it works in the US, but in France, when you buy an apartment or house, you pay about 8% to the state (notary / attorney fees), that participates in the inflation I guess
In the US, you pay about 6.5-7%. You pay 5.5 to 6% to the two agents (buyer and seller agents) and about 1% in closing costs (title insurance, etc).
It has always seemed wildly inefficient to me. Especially the “buyer agent” who gets a couple percent entirely for escorting the buyer through homes and submitting an offer.
The buyer’s agent might show someone dozens of properties all around town and not get a sale. The seller’s agent has it much easier: an almost guaranteed sale, and for what effort? They just hire a photographer, help choose a listing price, and maybe do one open house. I’d rather be a seller’s agent any day.
My buyer’s agent could be replaced by giving me access to MLS and lockboxes.
My seller’s agent, on the other hand, was super useful and irreplaceable except by another smart human. I felt like he got us top dollar for the house based on how he renovated, staged, photographed… much more money than we expected.
Also, my experience was I set a budget, put my stuff in truck, left my house a dirty mess, handed the agent my keys, and left town. Then he did all the renovating/etc, posted it, collected offers, and we got paid.
who's everyone exactly? it's moody's saying that homes in 97% of //cities// are overvalued. or, in other words, moody's is predicting a sudden drop in house prices in basically all american cities.
is it not typically the case that, before the price of something goes off a cliff, most people think it's worth the going price?
your first sentence is quippy, but i don't think it's saying anything.
> If every house is overvalued by some metric, then maybe the metric is wrong.
We're seeing people moving, and supply limits are influencing both rental prices and purchase prices. It's a weird housing market.
The question of the rationality of the valuation is:
1. Do you expect these migration patterns to continue?
2. If so, when do you expect new construction to pick up the slack for demand?
3. How bad of a recession is the Fed going to cause to break inflation?
> housing that should depreciate over time.
It does, amusingly. Housing stock ages and units you build now will generally be worth less in 10-20 years. Land is the thing that can appreciate in value.
Where I live a house across the street that was estimated at $800K just sold for $1.3M. Our house went up 25% in 6 months. There's not enough inventory in good low crime areas. Even in less safe places we see close to zero houses for sale, and if one appears, it's sold in a week. And there won't be inventory any time soon, because residents don't want tall buildings here.
10% drop - yeah, good luck, noone will notice that.
I live in a blue collar neighborhood of a west coast city. I’ve done extensive work to update my home, I’ve added features like central air, new floors, new lighting, and landscaping. It’s like a new house (though it was built in 1955). Both Zillow and Redfin tell me my house is worth roughly double of what I paid for it in 2015. That’s without even considering the upgrades I’ve done. A 10% drop from the current estimate is meaningless when most homes are worth 50-150% more than what they were worth 10 years ago.
I can’t help but think of that saying “the market can stay irrational longer than you can stay solvent.” Yes, prices in many markets are very high and appreciating at a rapid clip, but if there are buyers, competition, and houses are continuing to move quickly, then it’s a bold statement to say they are overvalued and that we should predict a significant decline.
Well in this case it’s more like the market can stay irrational longer than you can stay homeless. Secure shelter is something that everyone needs to live, and in our economy you further need to find one close enough to your workplace. Thus, even if you think prices are crazy, you still must pay them.
In situations like this, where demand is for a vital good and supply constrained, the government should be carful about managing the market. From what I can see, US politicians do care about the housing problem but their solutions thus far just exacerbate it by injecting guaranteed loan money and driving up prices.
> but if there are buyers, competition, and houses are continuing to move quickly,
They’re not though. Thats the whole problem.
Asset bubbles can inflate the paper value and there might still be some trading activity. But if nobody can actually buy the asset, it’s pretty much useless.
That is what they are saying though - people are actually buying the assets? All anecdotes I have seen recently say that houses go off market very quickly.
They may be going off the the market very quickly now. That’s exactly how asset inflation works. People living in their homes that are suddenly worth millions of dollars aren't going to sell their homes now necessarily. When they do get around to selling it the market might not be the same.
People are buying them though. I think the problem is people think they’re richer than they are and don’t want to live in the places their income and wealth suggest they should. Previous generations handled this better.
People are very opposed to the idea that they can’t buy a house where they grew up, or in an area they feel is comparable. Which I suppose I can understand.
But to your point — things change, you aren’t rich enough, it sucks, get over it.
But so much of the new age groups is sold the dream HARD by social media ala Instagram. Aspirationalism is far worse than it was with previous generations.
> if there are buyers, competition, and houses are continuing to move quickly, then it’s a bold statement to say they are overvalued and that we should predict a significant decline.
No, for the simple reason that (most) people buy homes with mortgages. Take a look at the 30 year mortgage interest rate over the past few months.
The total cost to own a newly purchased home is what matters, not the actual sale price. That's mostly paid by the bank.
Even if buyers are prepared to absorb the massive increase in total cost of ownership necessary to keep prices moving upward, it probably doesn't matter because many prospective buyers will no longer even satisfy the mortgage DTI qualification at current prices.
You may object that some are buying with cash. While that's true, it's not enough of the market to sustain prices.
So this is not entirely correct. If I am not mistaken 30% of buyers are cash buyers, hence they do not care about the mortgage rate.
Second, the big issues is with houses supply. The high rate basically lock most current sellers which have very low mortgage rate (compared to 5%), hence reducing the supply more.
Many of the cash buyers are either proxies (Ribbon, etc) or turn right around and get a mortgage. One of the touted benefits of real estate is enhanced leverage with equity as the collateral. "Cash" on an offer is more of a waiver of financing contingency, it does sound cool though.
Too many people seem to think 'cash deals' in real estate equate to a guy showing up with a louis vutton bag full of 100s that's been collecting dust in their shoe closet
It's just an indication of a lack of nuance in the deal-making, lack of contingencies (i.e. I'll give you $XYZ for your house as soon as I get $ABC for my house - agreed?!)
I disagree. Until now there might have been 30% buyers with cash, but with rising interest rates that will stop being the case if house prices stay up.
People with large sums of spare money always look for ways to park their money. Interest based products (term deposits, bonds etc.) will now become more attractive, diverting some cash flows away from housing.
The interest on most interest based products will not rise as fast as inflation and so I'm not sure they will be "more attractive" (at least compared to real assets).
Alternatively with interest rates higher, buyers might think they can't get a higher return than the interest rate on the mortgage, thus lowering the opportunity cost of paying all in cash.
"Cash buyers" may very well have a mortgage, but they have enough assets/collateral that the bank is willing to give them carte blanche (ie the bank will waive inspection, because if there is a major flaw that makes the house uninhabitable, they'll just collect some other asset of yours).
> If I am not mistaken 30% of buyers are cash buyers, hence they do not care about the mortgage rate.
Not necessarily. For anyone who's been working at FAANG and amassed certain amount of financial independence, the advice generally ran along the following scenario:
1) Secure a pledged-asset loan against your stock portfolio. That reduces the need to sell anything and trigger capital gains.
2) Shop around for real estate and submit a cash based offer to signal that you can close quickly.
3) Finalize the transaction.
4) Shop around cashout refi loans with fixed rates. Refi. Cashout. Repay the asset-backed loan.
Why would anyone pay cash for a house when even a horrendous mortgage rate is still only 6%? That cash is earning 10% easily with zero effort. Put 15 minutes of effort in and open a Betterment account and you’re likely getting closer to 20%. Cash buyers make no sense to me.
What are you getting? Are you looking at time weighted or money weighted? I just checked and I’m getting an average of 21.6% across 7 different portfolios on betterment (annualized, not cumulative).
I'd reference the Nikkei 225 circa 1990 [1]. That graph is not inflation adjusted. Up to 1990 everybody thought Japan was well on its way to becoming the world's largest economy on an exponential and unstoppable economic acceleration. And it was unstoppable. Then it stopped.
I am not saying this will be the case, but rather that we're at what is likely the largest inflection point in modern history, and trying to predict where the world will be at in 10 years has become effectively impossible.
"Just get 20% returns easily" LOL! The fact that you would not only think that type of return is consistent and "easy", but literally think that you should go into debt betting on that, is laughable. If it was guaranteed money, everyone would be doing it.
I doubt the 10%+ year over year increases will be sustained with increased mortagage rates.
That's a long way away from predicting a crash or even a significant decline in prices, though. That would require a lot more inventory, and all those folks with 3% mortgages are going to be in no hurry to sell, and the stats on their mortgage amounts vs incomes looks WAY better than it did in 2007.
The problem is that supposedly, since 2020, the Fed has printed somewhere between 40-80% of all dollars in existence (The M1).
So my question is, if there is twice as much money in the system, but the same number of assets, why would it be shocking that housing continues to inflate?
M1 is a useful tool to understand why the prices of consumer goods have increased but not at all useful to understand home buying power.
People regularly sell stocks, bonds, and other homes in order to produce the down payment for a mortgage and have done so since long before 2020. M1 does not measure any of these.
The set of homebuyers and the set of stimulus recipients in a lot of these markets are non-overlapping, too.
Crypto, on the other hand, is something I know was sold for a downpayment by several of my acquaintances, which is acting as its own form of "money supply increase" since they spent orders of magnitude less to acquire it. The anti-inflation tool creates its own inflation by turning into "new money." :)
Housing is a notoriously illiquid asset with high transaction costs. In addition, the percent that turns over each year is an incredibly small percent of all homes (and homes aren’t fungible, each one is unique, so comparables are imperfect).
That makes price discovery harder and means that the market price can lag what is a sustainable long-term price.
I would agree. I think the fact that mortgage rates have essentially doubled in the last 3 months, but housing prices continue to climb tells you we’re not even close to the ceiling.
If someone buys an asset for $100B that yields one penny per year with no growth - it is safe to say it's overvalued / a speculative investment. It does not mean that someone won't buy it for $200B tomorrow.
The thing is I don't think it is bold at all. Housing being overvalued seems perfectly obvious consequence of negative or near-zero interest rates. One side effect of those policies is that the mortgage rates were artificially lowered.
A lot of people buying houses unfortunately don't really look at aggregate home ownership cost and focus (incorrectly) on monthly payments. So, because they can afford the monthly payment, they think they can afford the house. This of course works works until the music stops.
> The economist said a given housing market is considered overvalued if property costs in the area are "well above" the historical relationship between home prices and incomes, rents and construction costs.
Which, no surprise there, prices are up in a lot of places!
Whether or not that is "overvalued" or suggests a crash coming seems a lot more complicated. Would historical trends hold if historical conditions have changed? Mortgage rates rising are one of those things you'd expect to certainly arrest some of that price acceleration. If everyone who moved to Boise decides to move out of Boise, that's another one. (Though if a bunch of folks moved back from Boise to SF, that's not gonna cool down the also-seen-as-somewhat-overvalued SF market!)
Maybe a bunch of folks are just spending a bunch of crypto winnings, naturally causing inflation but not necessarily leading to a crash. ;)
I used to believe such things and then I did a median income vs price per square foot worldwide comparison and it turns out the United States is one of the cheapest, if not the, cheapest place in the world when it comes to the “affordability” (median income vs price per square foot).
I think the issue is that the United States has been too cheap and finally that era of abundance at a low cost is coming to an end.
Many apartments (condos in the rest of the country) in Manhattan are structured as co-ops with huge monthly obligations. The sales prices are lower because you can easily be committing to $2000 a month in payments to a co-op board. The total monthly outlays bring the numbers back in line.
The bigger reason is you can buy a house with 20% down (or less) in the US, where that is nearly impossible just about anywhere else in the world
Edit: I should say anyone can buy a house for 20% down or less. In much of the world some can do this, but credit is not extended to nearly as many of the population as it is in the US
I wish you well but the way things look, you’re completely fucked. Your interest rates have been so unsustainably low for so long. And now things are going up fast and will likely continue to due to rapid inflation.
In the US, 15, 20, and 30 year fixed are boring standard mortgages, with various adjustable rate mortgages available from 1-10 years (and even some interest only products, where you’re essentially just renting the property from the bank and not building any equity).
Agreed except for your mischaracterization at the end. An I/O mortgage is a leveraged asset speculation you live in, without the “forced low interest savings” of traditional mortgages.
Historically, real estate has always appreciated at a health rate except during a handful of tail events. It’s less speculation and more allocating capital elsewhere versus dead capital in your home (and if the interest rate spread between the note and your other investment growth opportunities is significantly robust to make the effort worth while).
20% down (80% loan-to-value (LTV)) is the standard minimum for avoiding mortgage insurance. If you're willing to pay a mortgage insurance premium, 5% down (95% LTV) is not uncommon AFAIU, especially for large, "jumbo" mortgages, at least in coastal California. (Elsewhere it's probably the case that jumbo mortgages require a greater equity stake, not lower. Coastal California is a little unique. While prices are nuts, the risk of a significant valuation crash is negligible compared to, say, Nevada or Florida, so issuing banks are more comfortable with the additional risk and seemingly more eager to have that asset in their portfolio.)
Also, in case there's some confusion, "deposit" and "down payment" are distinct. In American real estate parlance a deposit is earnest money (often 5% of the initial offer) to bind the seller into closing--the process of finalizing contracts among all involved parties, and transferring assets. A deposit might be forfeited if the buyer pulls out. A minimum down payment is the minimum equity a mortgagee (e.g. bank) requires the borrower to hold in the property as a condition of making the loan.
> that is nearly impossible just about anywhere else in the world
I don't know about "anywhere else in the world" but I can guarantee you that
you can buy a property everywhere in EU with a 20%.
Also, property taxes in EU are generally lower than US.
I keep saying that americans, pay lots of taxes, they are simply not aware of it.
Yeah it’s true. Property taxes are so low in the UK. With “free” healthcare and almost no property tax, it’s easy to retire young. But it’s harder to make retirement money.
Higher average wages, but not do much higher median wages. Unless those rich people who are driving up the average are giving their money away, the ones who are closer to the median are in a sore spot.
No...average is always average, median is always median. Newspapers often mislabel the numbers they are reporting, but the distinction is always made clear in the data. See:
> The average annual wage in 2019 in the US was $51,916.27, and the median annual wage was $34,248.45. The median wage is the wage “in the middle,” while average refers to the measure of central tendency for all the data.
One issue with this is that it just reflects a certain amount of space bloat - if it's impossible to find anything that's not 50% larger than in a certain other country, but it's 50% less per sqft... you get more space, but it's not more within your reach.
Square feet aren't a great affordability measure (they tend to come in rather larger lumps).
In any case, why not just continue the era of abundance? We aren't really running short on space, and there is at least some indication that the lack of housing availability is a policy failure (rather than an expected outcome of some physical process or limit).
We lack space in the few urban areas people want to live in. If people were flexible about where they wanted to live, you’d think that the cheap land/lightly zoned places would prosper, but they don’t.
For sure. I grew up in the deep south outside ATL and houses there are still "cheap". They're certainly outpacing the poor folks who were born and raised there, but you can still snag a house with an acre or so of land in the 100,000s.
Beautiful land too. Forests, creeks, and wildlife.
most of US cities have no public transportation, weird parking zonning rules that making it impossible to have small commercial scene and lack of parks.. just handful of cities are actual cities, not just offices for suburbs.
Price/area is a flawed metric. People are not only buying square feet but also houses they can live in and houses with a certain number of bedrooms and other features. A better model would assign a part of the price to a 0-room 0 square feet house, a part of it to each room, and only a part to the size of the house.
The biggest affordability issue I see is that nobody builds starter homes for sale. In most areas, you can easily find a small 1br or 2br apartment to rent, but you can't buy a similar apartment. If you have to continue renting for years after you have settled down, because you can't buy anything smaller than 1000 square feet, it's harder to afford buying that 1000+ square foot house.
Some parts of the US have pretty high price per square foot and pretty low median incomes within that neighborhood though, so looking at things nationally hides a lot of the nuance that is important to understand the whole. Overcrowding is common among low income people in the U.S. as it is anywhere else in the world. I can take you to parts of CA that will make you think I'm referring to central america and not california with that abbreviation, and these aren't far from cushy white collar jobs and expensive white collar owned homes, sometimes within a couple miles or so. OTOH in areas where housing is considered cheap the poor often aren't faring much better, since social safety nets are either worse or nonexistant and wages (and sometimes even available unskilled labor) amounts to little after the mandatory costs paid in these areas (perhaps car dependency due to a lack of reliable transit to commute to work).
Moody's, who starred in the 2007 / 2008 bubble? Yeah, there's a credible source.
Futhermore, attributing this run up to Covid is revisionist history. The Fed has been goosing the economy for too long. Even my dog knows this. And that has assisted those who are investing in residential homes (because office space has been slipping into the shitter).
This is Moody's and its WS family getting out in front of what's coming. Hear it enough times and we'll believe it.
I picture that vertical M2 supply graph from March 2020 whenever I hear ‘overvalued’ when it comes to real assets.
The money has changed, not the property. I’m now curious how undervalued it really is and what a huge accounting trick it was to play on everyone over the past two years.
Its because they changed the definition of m2 in may 2020 not because anything fundamentally changed - not sure why people keep thinking this.
>Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.
The change increased M1 by moving common components of M2 downstream into M1. It's why M2 is all anyone should track. And a "definition change" is not in fact the primary reason for a large increase in the money supply in 2020.
Are You trying to argue that nothing happened in 2020 that caused us to increase the money supply?? We did 4 trillion in stimulus while doing the hardest quantitative easing we have ever done.
Where I live, in an affluent town on the east coast, homes have been going for 50%+ over ask. And the asks were high.
Something is broken. Homes that wound have been listed at $1,000,000 in 2019 are going for $1.750,000 today. Interest rates going up should cool it off but I fear it will break much of the rest of the economy. There was a massive mismatch in executive policy and fed policy and here we are.
What’s the mismatch? Biden got a trillion or two in handouts and Powell bought up all the bonds. Now Biden is taking a step back (not completely but not another trillion) and Powell said he’ll start selling.
Halting rent and college tuition paybacks while also spending trillions for people not to work and businesses to not open while the fed also cut interest rates continuously.
Any landlord who finds themselves so burdened by missed rent payments ought to just sell their properties. The market's never been better. They can use the windfall to start a real business instead.
Pretty sure the covid stimulus passed while trump:Biden was/is president is like 2:1.
Not giving either one a pass though because Biden reappointed Powell and failed to give Powell the political direction to raise rates late last year when it was obvious inflation was anything but transitory.
The Federal Reserve is independent of the executive branch's political aims. Its mandate is to keep inflation and unemployment in check with the tools it has at its disposal (interest rates, balance sheet).
> The Federal Reserve is independent of the executive branch's political aims.
That's the theory anyway.
The fed chair is appointed by the president and still has some accountability to the political machine. It is independent in many ways but it is not truly independent.
> Its mandate is to keep inflation and unemployment in check
Yes and now it is also trying to fight climate change, wealth gaps, and other "ESG" goals.
Even if you’re right that’s kind of misleading. Trump’s stimulus and Powells actions were basically necessary to prevent another 2008style economic collapse. Biden’s came as “voluntary” unemployment was already high and during a recovery. Either way that was another example of the fed and exec branch working together. However anyone’s feelings are about politics and the things said, us policies were quite competent during the pandemic.
For anyone interested trillion dollar triage is a great book.
> “Inflation is always and everywhere a monetary phenomenon...” - Milton Friedman
It turns out years of suppressing rates combined with dumping many trillions of dollars onto a supply constrained economy causes a rise in prices. Huh... You'd think the trained professionals at the fed would know this by now, but they continue to believe they can defy reality.
The crux of MMT is the idea that spending creates money and taxing destroys money, so deficits are made up and only inflation matters. Doesn’t seem like a “so much for” moment for MMT, which also predicts this if there’s too much money in the economy. The real question is whether there’s political appetite for the MMT-prescribed treatment here, which is to significantly raise taxes. I’m guessing no.
The essence of MMT as I understand it is that money is made up so the government should spent as much as necessary for infrastructure, essentially creating money, and in order to cut off inflation it should tax money and just... do nothing with it, just destroy it.
I know that MMT is very hated but it seems very compelling.
The government has a money source and a money sink, and the idea that input and output must balance is an anachronism dating to days of physical currency. Under MMT, the government spends the amount it needs to spend to fulfill its obligations, and taxes the amount it needs to tax to prevent inflation. Under this model the purpose of taxation is not to collect money so that it can be spent (since government spending comes from the money source), but rather to collect money so that it can be destroyed by feeding it into the government's money sink. In a growing economy with a growing population it's implausible that balancing inflow and outflow would be ideal, since over long time scales that would result in the number of dollars per person and per unit of economic activity to decrease, leading to deflation.
High immigration + no construction -> High demand + low supply. Then on top of that you have record inflation with stagnant wages.
The market is being completely rational. What "overvalued" here means is "are homes expensive compared to local wages" not "are homes irrationally expensive." Normally this would drive construction but the market is distorted by credit such that new construction is less economical (a result of 2008.)
This also forms a feedback loop: people are giving up on labor since housing consumes more than they make, driving up the price of construction, driving up the price of housing. It's likely the dollar will crash before middle/lower class hosing will.
US immigration is cratering, it's a national crisis nobody cares about.
The supply constraint is old but its not why housing is high - housing prices are high even in places where there is a lot of construction. Monetary policy explains it a lot better, and it predicts that at some point the trend will reverse.
It's not exactly all about supply and I talked about that in my original comment but maybe that needs clarification. Yes the prices are high because supply is limited, normally that would drive construction but because the prices are so extremely high and interest rates so low almost everyone has to buy housing with credit. One of the many problems with this is that lenders get to be picky about what exactly people are allowed to buy and one of the things they don't like is people financing new construction. The result is people who could otherwise afford to construct new housing (and construct it in more efficient ways) for themselves in less populated places being forced to compete for the already short supply.
Perhaps legal immigration is but immigration overall is very high.
I've hit my quota, here's my reply: illegal immigrants still have to live somewhere So they're going to take housing off the market. They manage to rent houses in various ways (employers, government programs, ngos etc.)
I'm places like California, illegal immigrants can get state issued drivers license and open bank accounts, and that ignores the simplicity of renting or owning a house in another's name
People keep repeating these statements about underbuilding or lack of supply as if they're backed by data, but it's just he said she said. Number of housing units to households is the same as it was in the year 2000, and in line with historical levels.
Home price gains were driven by a low rate induced speculative frenzy. It's inflationary psychology at work. E.g. people spin narratives about why you need to buy now to avoid being priced out, thus everybody starts to panic buy making the prophecy self fulfilling in the end.
But this never ends well. At the root of every bubble is some collective narrative that "justifies" its existence
High construction in Idaho does nothing for housing in New York. National construction rate averages are pointless. Gotta break it down by geography and locations of (in-person) jobs.
Housing is fungible in a remote work world. So construction in cheaper locales can help reduce costs in HCOL areas. E.g. people migrate from CA to FL, reduces number of households in CA. Not for local jobs of course
But anyway, beyond fungibility, demographic trend is towards population decline. Spread between population growth and rate of new home construction is at an all time high.
And even CA recently passed a law allowing densification on certain SFH plots
As long as going to the same bar as your boss during happy hour leads to a promotion, career progression + economic opportunity will be tied to geography. Barely any companies operate like Gitlab does.
Demographic decline is a much bigger problem to solve, not something that should stop us from taking action.
Asking prices are just advertising to get your foot in the door. If an asking price of $1 were to start a bigger bidding frenzy than one that's 30% underpriced, sellers would list homes for a buck.
In my city, 10 years ago, a nice starter home was around 150k. Now you can’t buy a dump for less than 200k. And those same nice starter homes are 250k+. It’s not hard to imagine why. People flipping burgers can easily make 40k per year now just in base pay. A single person working an incredibly low end job now makes enough money to get approved for nearly 200k loan.
Right, and for good reason. It used to be the case that houses were affordable on a basic salary. That hasn’t been the case for a long time for a lot of people. (And to be fair, still isn’t in urban areas.)
The combo of slightly higher wages, more young people moving out, and low interest rates does mean more people have the opportunity. And that’s not a bad thing. If you cancel any of those factors, you’re blocking access to people who would love to own a home.
I think the factors that should change are supply and investors. It’s not like we live in an era where housing is cheap and bountiful. Clearly it’s severely constrained. The other part is investment. With low interest rates, it’s easy to justify a house as an investment vehicle.
Legislatively, it needs to be easy to build and hard to buy more than one property.
Highly dependent on the area. If that city is say Indianapolis or Toledo it would easily pay all your bills and buy you a house. If that city is San Francisco it's enough to buy some lube for the moonlighting profession you'll have to do to make rent.
It is also a vicious cycle. If you want to hire construction workers in a place like Seattle, you have to pay them enough so they can live in the area.
There’s something happening with Euro/JPY vs USD that is forcing a significant inflow into US assets. It’s going to continue because: (1) EU kicked the can for far too long and they cannot meaningfully raise rates without facing the realities of the debt crisis of 2010-12, and now made impossible due to Ukraine, and (2) Japan is committed to driving down the yen even further. USD is king and real-estate will reflect that reality.
The weak yen is going to help Japan win back manufacturing from China. China is in a very tough spot right now. Between "zero covid" and losing mfg due to monetary and political reasons China may be reaching a local maximum for a while.
Doubtful. The rental market has stayed consistent with incomes. VERY few people have seen their incomes rise 25% in the past year. Most urban markets have seen that kind of growth in house prices.
Yet another asset crash would annihilate whatever assets millennials have happened to acquire. This would leave the millennial generation largely asset free as they enter their 40s except for inheritance.
It would likely trigger larger economic shifts that could cause job loss, tank the market, etc. Hard to buy homes if you have no income or have your investments obliterated before you can sell.
A majority of "normal" buyers in the past couple of years have been millennials. Sure there are cash buyers and corporate buyers but outside of that, this has been younger buyers stretching their budgets while interest rates are low. A crash in housing prices while the jobs market cools could easily end in disaster for them.
Millennials have so far been a bi-modal generation in terms of economic outcomes. Effectively going through college debt birth lottery, and a career lottery.
If your a millennial who managed to get through the lottery and have assets, then you are likely heavy in housing and stocks. If assets crash, these individuals will lose out - but ultimately be at the same point as their peers who never accumulated assets.
It will add yet another economic catastrophe to the list, as people generally form businesses in their 40s and 50s we likely wont see much in the way of SMB formation.
I'm guessing that is location dependent, though it has changed recently, many people I've known (admittedly college educated or further, corporate tech) have been homeowners since their early-mid 20s. (millenial)
I guess it is this site but I always see SF Bay Area mentioned, everyone knows it is an outlier. Guess there's a lot of other cities in similar positions.
I'm not in the US, but can only think of one person in my rough age and social circle that is renting (and that was because he split with a partner and she bought his share of their house). Fairly middle class cohort, mix of public and private schooling. Average house price here is about $1m, though most would have bought earlier and cheaper.
Anyone younger and buying now would be up against it. I think housing affordability is one of the biggest issues we have.
Not sure about the US, but in Canada (where the median house is 2x the US), home ownership rates among under 40's is a couple percent lower than in 1989 (mostly due to longer period of education before entering the workforce).
That doesn't stop social media from flagging a "millennial crisis".
A housing crash only matters if sell your house during the crash. Prices will eventually come back up. And your fixed rate mortgage gets cheaper every year due to inflation. Certainly some people will have not choice but to sell. But a millennial should be able to ride out a crash - don't read the news and don't stress.
Housing should never have been an asset to make piles of money on. That's how we're in this mess to begin with. We need a place to live. The first priority for a house is to HOUSE someones. That should matter first and foremost.
Investors should be forced to legally go fuck themselves. Same with flippers. Same with landlords. All of these just add extra cost and exfiltrate equity for some rich person to get richer. (I've lived with landlords for 40 years. My hatred is deep here. They've taken my money, built their equity, and charged 1.5x more than the housing would have cost. Damn straight I'm angry.)
there's few cases where landlords of a form make sense - dense housing is needed in cities. Treat them like cooperatives, or do like utility companies where this service is guaranteed and here's the cost. But companies should not be able to unduely profit on the fact that people have to live.
Would you rather hold cash or a home during a period of inflation. Most people wisely chose to put it in a house. With a 7% compound interest rate, your money doubles every 10 years. With a 7% inflation rate, I believe it halves in the same time frame. Perhaps it's not that houses are worth more, it's that money is worth less. A 350k house in 2010 should be 700k now if the real inflation was 7%. And at least where I live, that checks out. However, employers haven't raised wages to keep up with this new reality.
Or we might see a level of inflation not seen in decades. The kind of inflation we saw before the fall of Communism. Where communist governments kept printing more and more money while working people could buy less and less with it. It got so bad that eventually they just barely had enough for food.
This is an artifact caused by the fact that the house book is thin and so is rapidly depleted by a few moves from a HCOL to LCOL area, but the incomes there don't rise to match.
Essentially, a few hundred rich people moving from SF to some smaller town won't move SF's housing cost but will skyrocket the small town housing cost. However, the few hundred rich won't boost the income significantly.
This is a data artifact made from the fact that "prices" are determined by what's on the book and "income" is determined as a whole. The difference between what's on the book vs. the whole is best illustrated by San Francisco, where most people pay far less for a 1 br apartment than the "going rate for a 1 br apartment".
Even the repeat-sales method for home pricing is not immune to this data artifact because we don't use a new-job method for income. This causes decoupling of the fundamentals when you get the remote-work revolution.
Yes. I mean some places have laws freezing property taxes but in most places yes. My state switched to something like Zillow-based assessments that they did for every house in my county this year.
It’s kind of funny thing that interest rates did but the escrow portion of my mortgage payment is bigger than the principal and interest.
Maybe some people are. Property taxes are state by state. But that's not the way they do property taxes where I live.
Where I live, they have an amount of taxes they need to collect, and then they divide that up based on property values. If the value of everyone's property doubles, they still need to collect the same amount of property taxes, so everyone's property taxes stay the same.
I guess in some places, they just do it based on property value, and when house prices skyrocket, the government just says, "Score!".
I believe in some states, there's a limit to how much the tax-assessed value can increase in a year. So even if the housing prices double, they may only be able to increase taxes by a couple percent.
They may be overvalued but don't see how they could fall without forced sales. At start of pandemic borrowers got mortgage repayment holidays in Australia - so didn't have to sell if you got into financial trouble. Yesterday one of major bank bosses telling borrowers to call the bank if rising interest rates and cost of living getting people into difficulty. Somehow they will work it out whatever that means.
Price formation is complicated - think about the fact 5-6m home sales a year, at the price for 80-90m homes, if the composition of those buyers and sellers changes, that changes the “implied” price for everyone
Housing definitely is sticker than stocks - but that is a sleigh of hand. Buyers unwilling to lower prices are taking themselves off the market, not sustaining the market price.
Volume would go down, and whatever is sold will be done at a much lower market price.
Argentina had a RE bubble in 2017, and property prices dropped 40% since. It has happened, it is happening, and it will happen again.
Moody's who quite famously engaged in what should be criminal conspiracy regarding the rating of MBS [1] leading up to 2008 that cost pension funds, mutual funds and investors billions of dollars makes further statements about the housing market.
Sorry but I don't put a lot of stock in what Moody's says about anything.
There's pretty strong evidence that the rise in house values is structural not speculative. This is essentially the constraint of supply. There are multiple causes of this including:
1. The US building very few new homes 2010-2020. There are lots of reasons for this. A big problem is the type of housing being built, particularly in urban center where like NYC where the vast bulk of new housing units are ultra-luxury condos;
2. Permissive policies allowing the rich to park money in real estate. This particularly includes foreign nationals from places like China, India and Russia; and
3. An increase in people owning multiple properties. These include second homes, vacation homes and short-term rentals (most notably for AirBnB). There's strong evidence that AirBnB in particular has huge negative impacts on a lot of metropolitan areas.
A lot of tempted to blame Blackrock and other instituationl investors as constraining suply. this is completely overblown. These account for less than 1% of US homes.
You might be right. But I just want to add that this housing asset bubble is global in nature.
We here in Canada have been running the interest rate increase experiment ahead of the US. We've also had a much worse run up in housing prices. There are rundown shacks in Oshawa, Ontario selling for more than nice homes in Los Angeles. Where the hell is Oshawa? That's the whole point, it really doesn't matter but it's a former General Motors factory town about 1 hour east of Toronto.
Two months ago the real estate bulls were saying what you were saying now about supply. But the numbers are in for major areas like the greater Toronto area after a single 50 bps increase this past quarter like the one the Fed just dropped down south. Some suburbs of Toronto have already seen median prices drop 10-20% off their January/February 2022 peak prices [1].
The volume of home sales has plunged 41% in Toronto [2] as the market absorbed the 0.5% interest rate hike. And we haven't seen anything yet. A huge chunk of the buyers today have pre-approvals with interest rates from 75 bps ago. Around June 1 these buyers need to commit to a purchase to provide enough time for their lenders to close the deal at the old interest rates before those expire. The Bank of Canada is also expected to make a further 50 bps to 100 bps jump in rates in early June.
Anecdotally, there are already horror stories of over leveraged buyers -- perhaps amateur investors or a family that stretched themselves to the limit to buy -- only for their deal to fall through because the banks won't appraise the home at what they agreed to pay for it.
As a wannabe first time homebuyer myself, I've heard every argument you've said repeated ad nauseum up here in Canada the past half year by real estate bulls -- who I might add, have been totally right in their assessment of our crazy market which could only go up for perhaps the past 15 years -- only for the market sentiment to completely change overnight within a month or two of the 0.5% interest rate hike.
I think the biggest factor whether or not prices have room to fall is how built out an area is to its zoned capacity and how many jobs there are in the given metro area. Job growth incurs population growth with incurs development. Development will continue if there is sufficient population demand. In cities like LA, job growth has triggered huge surges in the population over the past century, and in turn this triggered development to the limits of zoned capacity. LA is 92% built out (1). In other words, all the low hanging fruit of how much can actually be built has been built already, and what's left in that 8% are probably the edge cases that for one reason or another have been picked last by developers for development because they are not going to very easily receive financing by lenders who are going to want to see penciled out and sound business plans before loaning money, not the crap in the remaining 8% of zoned capacity that is hardly going to generate a profit.
In order to stand a chance of working our way out of this, we need to make it easy to build in terms of what happens at city halls to make more supply increasing projects viable in the eyes of lenders. We need to increase the zoned capacity of our job centers so they can actually support the workers they employ versus force the lowest earning workers to far flung commutes or into living multiples per bedroom. It's like a law of physics. Make it possible for developers to build and supply will expand like a gas to fill available zoned capacity until demand incurred by labor are met, and prices should not appreciably rise if there is no need to enter bidding wars far above ask.
There's also strong differences in density - in the US it's often either single family homes or apartment high-rises; but if the City of Los Angeles had the 5-10 story wall-to-wall houses that Paris has it could see a population of 22 million, compared to the current 3.8.
Going for the metro area could be even larger.
One huge advantage places like Paris have is that they've been dense for so long that there is older housing available in dense areas; in the US any new density will be new construction, and therefore tend to aim at the luxury/higher-cost buyer.
There is a lot of this middle density already in places like the city of LA. This is a good map showing the true density of different parts of the city (1). The darkest blue are about as dense as the densest parts of paris (50k/sqmi). The model is already there in American cities, it just needs to be expanded to more neighborhoods especially near the job centers which are increasingly in these low density suburbs over transit connected urban cores. This also makes it more challenging to serve transit to more people when only a small portion of your workforce is traveling along any given corridor and in multiple directions). This is an older map not showing the more recent rail lines, but it shows how jobs are distributed across the county unevenly and how convoluted the commutes can grow to be in order to get to these different job centers across the county from the dense housing areas which don't always overlap the dense job centers (2).
This is part of the confusion people often have - what LA needs isn’t metro connections to the dense areas - it needs metro to light areas that can then be redeveloped into denser.
But the sprawling setup doesn’t help make it easy.
We've been hearing the 'under-supply' argument for over a decade in NZ. StatsNZ shows that in the last 30 years the number of private residences relative to households has increased considerably (roughly 3.5% difference to about 6.5% from memory).
Our housing market is in deep trouble right now. Big falls in the major cities over the past few months (-20% in Auckland city). Listings where I am are up from 1000 this time last year to 3000. Prices are falling. Rentals up significantly too with prices falling.
A speculative boom creates excess demand. Just like Ireland did, we are seeing that the problem was not on the supply side, but the demand side. Speculative vacancies are now being revealed.
767 comments
[ 5.0 ms ] story [ 384 ms ] thread"Housing" is the market, and renting and buying are two options for people in the market.
For example, I pay $24k a year on a house worth around $1.4m. This gives a return of around 1.7%, which is nothing compared to cap notes (5%) or dividends (~4%).
However, someone buying our house would only need to put down 20% up front, and could reasonably expect to see the price raise by 5-10% a year if trends continue. So that $280k deposit could theoretically return $500k+ over the course of 5 years because of the high leverage. The rental return over that period would only be $120k - not even enough to cover the interest repayments on the loan.
Of course, that's assuming trends continue. If prices started falling by 5-10% per year, that $280k deposit would turn into a $500k+ loss and the investors would be absolutely fucked.
And with low interest rates, low wages(vs house price) for so long the margins for that are tight for a lot of (silly?) people who borrowed "as much as they could".
It seems like:
- house prices up, investors win.
- house prices down, homeowners lose.
It will be interesting to see how it plays out but at this stage either side of political argybargy are doing SweetFA and advertise policies to do more of the same.
If they hold onto the house, short-term fluctuations don't affect the eventual sale price. If they buy a new property in a similar market after selling the old one, then the "losses" on the old house are made up for by the "savings" on the new property.
It's only people who downsize or leave the property market altogether that would be affected by a short-term dip.
(The caveat being, of course, that this completely handwaves away human psychology! Being "underwater" on the mortgage would definitely make a lot of people stressed and anxious.)
Don't let NIMBYs think that that is the problem. We need more housing.
Most RE investors I know who do this make good money only if they buy a significantly undervalued house - often one that is unsellable. They buy it, put in $50K to repair it, and then rent it out.
Those who buy regular houses at 20% down and rent it out have a target of $200/mo net profit. Clearly, they're not buying $600K houses at $120K down to get a measly $200/mo out of it.
RE investing - especially the rental market - is very nice in that it's pretty simple math and very transparent. Anyone can plug in the numbers and see what they'll get. Generally, in places where houses go for $800K, the rent will likely not even cover the loan payments. So then you play the game of taking a long term sustained loss in the hope of appreciation. But as someone else pointed out, this makes sense only if you're paying about 20% down and not with paying full cash.
Buying houses with all cash is almost always a very poor investment.
Random example in my area: Houses in a certain neighborhood are selling for $900K. They rent for $3.5K/mo. Assuming no costs, it would take 21 years to get the money back. Even with rent appreciation, it would take well over 10 years. Over that period, even including appreciation of the house, you're almost guaranteed to get better returns with the S&P500.
;)
Homes are expensive. Most people just can’t afford a big slice of land and home. They have to accept they will have to make do in an apartment that may be shared. Should the home they deserve just magically appear?
Just under 2/3 of US homes have an owner that lives in it.
Look at the percentage of houses bought by PE vs individuals in 2021.
https://www.redfin.com/news/investor-home-purchases-q3-2021/ Real-Estate Investors Bought a Record 18% of the U.S. Homes That Sold in the Third Quarter
yes, I know 18% < 1/3. But I also know that 18% > 6%, which was the figure in 2000.
the trend is pretty obvious.
They should have the right to purchase one, or have one commissioned, at the fair market value for materials, labor, and land.
I'm assuming "have one commissioned" is suggesting something about supply/zoning, but it's not clear to me what, exactly - if someone could afford to build or buy a house 3 miles from Dallas, should they also have the right to pay the same price to build something in the middle of Dallas?
Ergo I hold that the respective governments and their zoning/construction policies are trampling on the individual right to a fair market and worse are creating grotesque amount of economic inefficiency, and by extension social damage, in the process.
[0]Trivially: adding units to a lot to capitalize on a high price of land relative to materials + labor.
The point is between land, materials, and labor, a lot of people can’t afford what they think they deserve.
It doesn't make sense to me, but whatever.
Stocks? Cars? Forex? IP? Crypto?
Genuinely curious because everything is more expensive than it was before.
If everything is overvalued, then nothing is overvalued [relatively]
Could it be that maybe peoples work is under valued relative to the value they help create?
The argument for overvalued housing is that everyone got antsy during the pandemic and wanted to change houses and change neighborhoods, but that will settle down now that the pandemic is waning.
Tech stocks seem to be falling because the pandemic-driven surge of screen time is fading now that the pandemic is waning.
So: is real estate entirely different from stocks? Or will it see a similar post-pandemic slump but just has more lag?
S&P 3400 in Jan 2020, 4146 today.
Dow 28,600 to almost 33,000 today.
Nasdaq 9000 to 12,300 today.
I agree with the sentiment though, in which case maybe the currency in which the assets are denominated is overvalued.
I don’t think it’s a fluke that the overvalued markets correlate to regions that a lot of tech has moved over the pandemic like Boise, FL, TX and Nashville.
If they’re measuring current house prices to 2020 and 2021 tax data then they may be missing an influx of income in the denominator as well.
The question is less about today than how risky and how profitable an investment it would likely be relative to other investments.
Crazy if you believe most of our nation should be essentially indentured servants for basic housing.
Something like that, I think.
https://river.com/learn/terms/c/cantillon-effect/
Banks will loan some people billions at rates half of which they would give you, if they even gave you a loan. Thus they can buy everything for inflated prices.
We need to end the fed.
Like all real estate calculations though, this is completely local.
San Francisco is currently 52.
In HCOL areas, renting tends to be cheaper than owning because home price reflect not only cash flow, but expected appreciation as well.
https://smartasset.com/mortgage/price-to-rent-ratio-in-us-ci...
No.
Hopefully you aren't using that justification to do something stupid.
just no?
group consensus and participation shapes nearly every human endeavor; why do you think that this round-a-bout consensus (97%) is unrelated?
If there's housing scarcity, then prices will rise far ahead of ability to pay. That's the source of a lot of other types of today's inflation, for example, cars.
Housing costs tend toward people's ability to pay, otherwise folks default. That's why the banks ask you about your income and credit worthiness, they want to know you'll be able to pay the mortgage and not default. If money costs increase faster than income, folks won't be able to afford as much money (as high a price).
That's how housing costs can increase faster than the income of an area, it's the market displacing those with lower incomes, and readjusting to only house the wealthiest.
Add in that housing prices are distinct from the housing costs, and that leases only change rent occasionally, and lots of people are owners and have fixed costs, and prices can rise quite a bit faster than incomes.
And new home construction is at an all time high.
Scarcity of inventory is not at all the same thing as scarcity of housing. This has been a powerful narrative in driving FOMO buyers though.
https://fred.stlouisfed.org/series/UNDCONTSA
Your chart is the number of units under construction, but that high number doesn't translate into more new homes than ever before, because completions have been massively delayed. So there's a lot of homes sitting half finished as they wait for supply chain crunch's to resolve. And to compare this to numbers from the 80s means normalizing for length of construction, something which is getting delayed more and more.
Overall, construction has massively constructed since 2008, and even before that it had been trending down for a long time.
I suppose it makes sense. They say not to spend more than 1/4 (or 1/3) of your income on housing but if a house costs 2/5 of your income you're probably not going to set up a tent and wait for interest rates to come down.
Unfortunately, directly comparable, prepared numbers are difficult to come by. The 3 most memorable sources I've found are:
* https://theconversation.com/think-your-country-is-crowded-th... - Discusses (introduces?) the concept of "lived density" and provides graphs for Europe. I'm not sure how well the author was familiar with related work regarding population-weight density, which seems to be the more correct term.
* https://ssrn.com/abstract=3119965 - A low-level analytical discussion regarding population-weighted density as a metric.
* https://arxiv.org/abs/2005.01167 - A COVID-19 pandemic-related paper which incidentally includes comparable population-weighted density metrics for both Western Europe and the United States.
I haven't looked into things since 2018 (excepting taking note of the 2020 COVID-19 paper), but IIRC census.gov has some population-weighted density numbers somewhere based on MSA and census block (tract?) proximity. It's not easily comparable to available European statistics, but it might be a good place to start if you want to play around with U.S. density numbers.
Maybe there have been better resources published since the above.
Specific breakdowns are harder to find, but top of line numbers are pretty easy to find in a minute on Google: https://datacommons.org/tools/timeline#place=country%2FUSA%2...
In which case the two are comparable: there are few if any middle-class families in the bay area that own their homes except by inheritance or some other luck (gift, lottery). Even condos and other high-density housing are all but completely out of reach for all but the top 10% of income earners. And those condos are almost all studios or 1- or 2-bedroom units that are very tiny.
Plenty of middle class people bought nice homes they could afford in the bay area in the 90s. Although I suppose you could consider this "luck".
I suppose you could consider this "bad luck".
This is a ridiculous statement.
There are plenty of middle class (by Bay Area standards) folks who have bought houses in Fremont and San Pablo and San Leandro and Hayward.
In fact, even in Marin there are parts of Novato and weird pockets of West Marin (Forest Knolls ?) where this was, and continues to be, done.
They are boring places and middle class folks working boring jobs have purchased homes there year in and year out for the past 25 years. Yes, they had to make choices and sacrifice some things for other things in order to do this.
Perhaps the ability to do that is comparable to a lottery win ?
Adjusting for inflation, it's doubled in real value over 25 years, which works out to <3% APR. It's a decent return, but we've also ignored 25 years of property tax and maintenance. (on the other hand, we've also ignored 25 years of effective rent)
I guess the point I'm trying to make is that $1.3M isn't worth what it used to be but it sounds big in our head because we remember a time when a dollar went a lot further than it does today.
I Googled for about 10 seconds to find some statistics about Bay Area homeownership.
At a glance on the first link (zoomable map), the Bay Area looks similar to SoCal (LA/OC/SD). Why do people think homeownership is so low in areas of California with lots of good jobs? It isn't. To be clear: I doubt people on this discussion are interested in homeownership rates in extreme suburbs (2+hours away) and rural areas.It’s not possible to afford housing or robust healthcare in the US.
Keep in mind there’s no rule we have to tolerate either.
Imagine being a teenager in the US, having just seen how essential workers are treated, knowing in all likelihood your future is an “essential worker”.
Then watch Congress scapegoat Facebook.
But you’re right, you’ve put me off on the whole idea. Good effort. There’s no way around artificial scarcity.
For people with pre-existing conditions it begins at a younger age and is recommended more frequently, based on the determination of your GP Surgery.
You should get your first invitation to an NHS Health Check around the time of your 40th birthday.
https://www.nhs.uk/conditions/nhs-health-check/what-is-an-nh...
And all that extra time and money got me was people saying “You should be glad it isn’t socialized health care!” Yeah. If it were, I would’ve gotten treated faster and cheaper.
I live in Canada, and recently had appendicitis. My appendix was removed less than 24 hours after symptoms began, and 10-12 hours after I arrived at the hospital. I walked in to the ER (after a very painful car ride), they asked me some questions and gave them my health card, they said how much, I said 7, they did blood tests and I had a CT scan, I waited a few hours, and then I was wheeled up to the operating room, after which I spent the night in the hospital and discharged the following morning. Not once did the question of insurance or payment come up, and I even had a private room after the surgery.
Something ridiculous like 70% of lifetime healthcare spending in the US occurs in the last two years of a person's life (half-remembered number from like 10 years ago). The uncomfortable truth is that we spend way too much on hail-mary treatments for people who are almost certainly going to die, and too much on useless shit like knee replacements for the elderly, and far too little on the earlier stages of their life. But nobody wants to tell the elderly "no" because they vote.
Obamacare had the right idea with "death panels". A lot of treatments that happen near the end aren't medically justified by quality-adjusted years-of-life or similar metrics. And that money comes out of the healthcare of younger people, whom the US treats like shit compared to the elderly. Because they don't vote.
But nobody likes the optics of "pulling the plug on grandma".
It seems like a thread-derailing comment likely to drag down the quality of discussion.
> “ Eschew flamebait. Avoid unrelated controversies and generic tangents.”
Your comment, “Don’t forget to mention they still have full health coverage in the EU.” was doing exactly what the guidelines ask us not to.
My hope was that bringing attention to this would help deflate the impending generic argument about health care and help you improve future conversations on the site.
It was just an attempt to be helpful.
https://news.ycombinator.com/newsguidelines.html
If the HN communities behavior is to point to a TOS I didn’t agree to at sign up, I’ll go ahead and logout and stay away
That’s some bait n switch, end run around norms, patronizer enabling, dark pattern nonsense.
The point of these guidelines is that _generally_ most people follow them and it stops this place going to garbage like every forum before it, and allows it to stay a place for professionals to discuss topics, rather than us vs them flamebaiting and boring jokes.
You're totally welcome to go, but you're also welcome to stay. If you step back and calm down, you might find you like it here :).
Here in the US, if one was asked to define “middle class” from a lifestyle perspective, probably the first thing that comes to mind is “homeowner.” I don’t think it’s possible to separate home ownership from class distinctions in the US social strata.
Case in point, home ownership rate has remained largely stable for decades at around 65% of the population. That’s despite incomes being more varied in relation to actual value over time.
So I’d say if you extended it to incorporate that understanding, it’s pretty accurate.
This isn't really an ownership issue, it is an occupancy issue. Monthly rent needs to cover the expenses of a property including any mortgage, property taxes, etc as well as maintenance, so rents wind up tracking house prices. If you can't house the middle class, a) they're not really middle class and b) you have a societal problem.
https://www.longtermtrends.net/home-price-median-annual-inco...
Housing prices have been able to balloon because debt has been very, very cheap. Whether or not that will continue remains to be seen.
What’s the smart bet on what will happen?
Are there actually data that say that? I'd only expect data to exist on the first half, but there may also be data (as opposed to a fairly good supposition) from the second.
I'll say from personal experience, it does change your perspective. If a sewage treatment plant moves in next door, I can't move like a renter can. It's a feeling of real vulnerability that I didn't fully understand until I felt it.
I understand the NIMBY-ism. I do wonder how much people care about the value of their house going up if they don't plan to sell soon. There are advantages to your home being less valuable and the only disadvantages come if you want to leverage your home more, refinance (not likely with rates going up) or sell it.
I think this idea of wanting your house price to be low to avoid property taxes then suddenly increase the value when it's time to sell is like the idea of having your employer pay a trust so you can collect food stamps 11 months of the year then the trust pays you all your money in December.
It might be possible and it wouldn't shock me if a few people do it but it's not the normal approach.
No one wants to live next to a dump. That's why it affects property values. Because it also effects living conditions.
Meanwhile, a lot of people never plan to sell their home. Yes, if you plan on moving soon, you care about property values going up. If your horizon is 10 years, 20 years, or your kids selling the place? Less so.
That's the real reason California has Prop 13
They definitely don't want it to go down, especially below the loan amount; but tools like Zillow make it way too easy to book "paper profits".
If you bought for $100k and later noticed Zillow say your house as $250k, and now it's saying $200k you can feel like you lost out even though you're still "up" - something that was more difficult before as you'd have to try to compare similar homes for sale.
So while I understand your argument I'm reticent to accept it on the basis of the concerns mentioned above. Settling down permanently is not the same proposition it was fifty years ago. My grandma grew up in Denver, the rapidity that it grew with was apparently astounding and that growth drastically altered the culture and the landscape, what were once dirt roads are now median-divided 3-lanes with cookie cut houses lining them as far as the eye can see. If you can imagine not wanting to live there with the rapidly accelerating growth and the headaches that come with it, you're not alone.
There are also economic concerns, which can be highly unpredictable, and these are considerations I'm sensitive to. I've watched commodity fluxuations result in massive layoffs time and time again. When given the requisite information to make a decision on whether or not to sell, it's plain to see that it's a benefit to have pricing steadily increasing, whether it's to avoid the wave of sells when an industry reels back or shutters, or when one is intent on moving to greener pastures, or at least a better home in a more agreeable neighborhood.
I'd pay taxes which, given the parent statements terms, would roughly equivocate them with asset price insurance before I stuck my neck out to get burned or blown up.
This is the argument that homes are currently overvalued.
Or, as an alternative, market is going to freeze.
Given that we've rediscovered fiscal stimulus and inflation as a result, I have a feeling that era is dead. You can't have low rates in an inflationary environment.
https://fred.stlouisfed.org/series/CSUSHPINSA
Case-Shiller Index?
https://www.spglobal.com/spdji/en/index-family/indicators/sp...
You’re looking for this:
https://fred.stlouisfed.org/graph/?g=n9xI
[0] https://en.wikipedia.org/wiki/Case%E2%80%93Shiller_index
How so? Large, luxurious, houses get counted just the same way as small houses. If you mean that new houses that have not been resold aren't a factor in the index and that this biases it against the latest housing, OK. But even new houses tend to be priced in line with comparable sales, linking them to history in a way compatible with how the index is calculated.
Can attitudes and norms on what % income spent on housing change? As people attain a higher standard of living, can this trend up?
House prices will remain up because any gain from sale will be plowed into the next home. It's a ratchet upward. Higher mortgage rates are somewhat irrelevant in this dynamic, because the home itself is not an asset to get capital gain from, but a claim to shelter a family for an _indefinite_ period of time in a chosen location.
USA was inoculated for a very long time, because horizontal expansion over cheap land allowed for expansion of supply. That era is over. Car and highway technology is no longer adequate to expand cheaply and still remain within viable commuting distance.
There really is no limit on how high home prices relative to income can be. When meemaw dies, her inheritance will fund the downpayment of little Sally. That's the perpetuum mobile in Europe, which the US is now cranking up as well.
Rents may still remain affordable, but home prices will detach.
As a European living over here for the last two decades, I agree that European houses are generally sturdier (my parents house pre-dates the USA, I don’t expect mine to last that long), but when you’re spending 6 figures on something, looking after it is a good policy. Catching problems early is the key - as soon as you notice something, fix it and fix the cause…
In the US, we own the land, and that is usually the real value. I’m the proud owner of a 0.125-acre New York postage stamp. It’s in a fairly affluent area, so is fairly valuable. In Wyoming, they’d laugh at it.
I think Japan is similar.
You're right that most of the value of the property is in the land and not the building though.
I think they also used to charge tax for significant-value property, like computers.
How much do you really own?
Sure, there's courts and laws, but they pick the judges and can choose to change the laws. They could pass a constitutional amendment tomorrow giving themselves the right to harvest your kidneys, the same way local counties can pass a law at any time raising your property taxes.
And, even if you argue that you have rights under the current government, empires don't last forever. 300 years from now, who's to say barbarians won't be ransacking the house you left to your kids? In that sense, your rights are only contingent on the barbarians being too scared to attack, and not absolute.
So if your argument is, "You can't own a house because the government could take it away", it seems like you have no hope and no possible policy change would give you any "true rights" to anything.
While you have governments that can legally steal everything from you just because they can, you'll never really be free.
That said, there are degrees of freedom.
Property taxes in the US are very high so I consider it an inferior degree of freedom compared to owning a house in a country where I don't have property taxes. The more corporation / income tax I have to pay the less free I am, hence why I'll move to a country which charge less corporation / income tax.
Sure, I'm still owned by the government because they have soldiers and guns and I have none - but at least I can live my life as close as possible to how I'd like to live it.
It is possible to fix this situation once and for all: abolish the government and its idea of legitimacy, let people organise their own defence from the goons of other countries by paying voluntarily.
You won't end up with a much different system, you'll still have some people not paying anything and some people paying more to defend their community - but at least I would pay voluntarily what's needed for my defence without enriching the politicians, fake intermediaries with empty promises, and it wouldn't be coerced out of me under threat of fines and imprisonment.
But ultimately your negative outlook on the human condition is your own, 99% of daily life proceeds under conditions of total anarchy, authority and security are entirely illusory and we pay incredible costs to maintain those illusions, not in terms of liberty alone, but in toil and life itself. It leaves little left to live for, read the Death of Ivan Illyich if you want a better understanding of what I mean.
Those costs are totally worth it. I'd rather live in a nation with liberal democracy and property laws, than whatever more "pure" or original model you seem to have in mind.
In any case, what I'm talking about is democratic and does not forego property rights, in fact it could give you stronger property rights. But you didn't read the grandparent.
I've never heard this before. Is this actually true? Is this some background technical legal truth that isn't noticed in practice?
I'm sure Roman Abramovich's mansion is freehold as are all those semidetached houses on the outskirts with a 55 minute commute to the centre.
In the UK, there is a concept of Freehold and Leasehold. In the former case you own the land under and everything built on it. In most of the country you buy the Freehold.
The Leasehold gives you ownership of the building but not the land under it. You lease the land from the owner. I've personally considered this form of "ownership" a trap. It has become more common in recent years as a way for sellers to screw buyers. Particular in the London area where demand is always extra high.
Technically, I guess I don’t “own” my own land, either, but I pay (significant) taxes on it (because I “own” it, according to the taxing authorities. They don’t tax the bank; they tax me). The taxes are assessed on the total value of the land and the building, and location^3 is a fairly significant coefficient.
Land is a weird (but frequently lucrative) investment. You can’t lock it in a safe, and, if your neighbors start a hog farm, you can’t just pick it up and move away.
This isn't quite right.
There's something kinda like that called leasehold, where you basically own an extremely long lease on a property (typically 70+ years, often up to 999 years), with the freehold (outright ownership) sitting beneath it. Generally it's used on apartment blocks and certain new-builds in specific areas (e.g. they're more common in London, but outright banned in Scotland outside of some pre-existing edge cases). There's a good chance the whole thing will be functionally reformed out of existence in the near future (see here https://commonslibrary.parliament.uk/leasehold-reform-in-eng...).
But in any case, the vast majority of UK property is sold freehold, or as you put it "we own the land, and that is usually the real value".
The only reference I had, was my grandparents’ “named” house, in Liverpool (It was actually a pretty nice place, near the beach, for what that’s worth, in Liverpool).
I remember my grandmother, explaining it to me, and that was what I got from it.
I was too young to have a decent frame of reference, though.
Here for example is a 1000+ years old church in Vienna: https://en.wikipedia.org/wiki/St._Rupert%27s_Church,_Vienna
1. there is housing that is >100 years old all over the US, some of it the most expensive in the country.
2. Brick and cement houses are certainly not maintenance free and crumble apart over time
3. Most of the value is the land, not the house
My wood frame house in Oakland was built in 1896. Clearly it lasted longer than 70 years. Brick is a terrible building material in California, due to earthquakes.
My brick house in Amsterdam was built in 1886. However, the piles it sat on were wood, which decayed, and the house sank 8 cm.
Both needed new foundations, both were gutted and remodeled on the inside to update them to modern standards.
True.
> Car and highway technology is no longer adequate to expand cheaply and still remain within viable commuting distance.
False. The US has mind-boggling amounts of land available. What's changed is the ability and desire to build on it. Used to be, the government would pay you (in land, anyway) to build a house. We gave railroads untold amounts of land to develop it.
These days, to build a house you pay the government for all manner of permits, studies, etc. -- and that's if they even let you build in the first place! Zoning laws prohibit new construction in overwhelming amounts of the country, especially in the most expensive areas. In NYC and SF, most existing buildings would be illegal to build under current zoning rules.
What makes building housing expensive is policy, not a lack of "cheap land".
I don't know if the same applies in Europe, perhaps not. In both Europe and the US land has long been the primary vehicle for intergenerational wealth transfer (think estates and productive land, not housing, though -- middle-class homeownership is an extremely recent phenomenon).
Times have changed and most people don't want to live in marginal lands that are available in mind boggling quantities. In addition, the reason that a lot of cities were built a few generations ago in the hinterlands was because manpower was needed for resource extraction industries, which have since either become highly automated or fallen into secular decline. We are no longer a nation of farmers and miners.
That's not "times have changed" -- people have never wanted to live on marginal lands, that's why the government paid people to move there.
> a lot of cities were built a few generations ago in the hinterlands
Few cities are built in the hinterlands for the purposes of resource extraction; cities grow where trade is, but yes there are definitely towns that have vanished because we don't as many farmers and miners.
The SF Bay Area is dominated by single family homes on large lots. Yes, SF proper has a high density, but the surrounding areas really don't, and not for lack of demand: developers who would build more housing are literally stymied at every turn, and this is not an accident, it is an intentional plan to reduce the availability of housing and keep it expensive, to avoid "traffic", "crowding", and "changing the character of the neighborhood".
I am flummoxed every time the discussion of housing prices shows up. Seems like 95% of everyone who comments is completely clueless to the most basic aspects of it.
In the vast majority of Western regions, high home prices are caused by a deliberate decision not to allow building enough homes to match demand, in the places where people want to live. It's really that simple.
In itself, this is a state of affairs we could accept as the current democratic consensus, but it's really stupid when most discussion of the problem pretends that the root cause is something else.
It's very possible I'm wrong. We'll see what the rate hikes will do to home prices in the next 2-4 years, and already we're seeing relaxing of zoning in many metros, so we'll see the effect of that in 5-10.
> I don't think it will meaningfully reduce cost of home ownership.
More housing would absolutely meaningfully reduce the cost of home ownership. Just look at cities like Detroit and Pittsburgh that, for a time, had a surplus of housing and a declining population: houses became super super cheap.
What's happening now is that housing stock is increasing 0.5% per year, while city population is increasing 5% per year, and then policymakers are turning around and saying "look, we're building more housing, and prices keep rising, it's not working!" -- of course, because cities need to build enough housing to satisfy demand, not just "more housing". Each year we have a new housing deficit, the housing "debt" goes up. To reduce prices, you need to build more than the demand is, which we are so far from doing it is laughable.
> Infill development is more expensive
This, too, is per policy. The sweet spot price-wise for construction costs alone is 4-5 story apartment buildings; outside parts of SF, Manhattan, and a few other inner cities, we aren't there yet. But the cost of infill development these days also includes (1) drafting environmental impact reports; (2) multiple sets of meetings with neighbors to convince them not to oppose your plans; (3) delay and stalling tactics from well-heeled neighbors who oppose your plans anyway (see: CEQA); (4) extensive requirements on insulation, window area, solar panel inclusion, etc. that push costs upwards; and finally (5) years of paying property taxes while you attempt all of the above to get your plans approved. That's leaving out (6) extremely high labor costs for construction, because construction workers need housing too, and their rent is also super high.
We are not going to see meaningful change until we remove at least some of the constraints on housing construction and new supply can begin to exceed new demand. In California, lawmakers are starting to wake up to the problems, but solutions are slow to come.
The NYC number is 40%, according to the NYT. But close enough and here are some nice maps breaking my down why those buildings couldn’t go up today.
https://www.nytimes.com/interactive/2016/05/19/upshot/forty-...
I think you're underestimating buyer sentiment. In Canada all it took was a couple rate increases in April for housing prices in the 'burbs of Toronto to drop ~20%.
Housing can go from "hot" to "not" really damn quick when prices start their downhill trajectory. What was suddenly a "must have, hot asset" becomes a "fool's game" when people get burned badly.
And based on social media posts, people are getting burned badly in Canada right now.
US will likely continue to see rate increases in the next couple years. We'll see if that is going to affect home prices here. Let's check back in 2025 :)
So it could also be that 97% (or close) of wage earners in the U.S are underpaid?
Or I guess it could be a combination of some underpaid, some overpriced.
20 years from how as a renter your ongoing costs will be high.
20 years from now as a home owner with the mortgage lower and inflation on everything higher, your ongoing costs will be low.
Owning a house is an exercise in deferred gratification, similar to owning most businesses.
With interest rates rising, as buyers who haven't locked in lower rates begin looking at the current payments on offer, they will have to look at lower priced homes or drop out of the market. If this boom has been driven primarily by buyers flush with cash, foreign or domestic, then prices should remain high. Payments are largely irrelevant to cash buyers. Any buyer using debt will be forced into lowering their ceiling of properties they can afford. Home prices should then fall.
We had savings galore but they wouldn't count it for a variety of reasons (withdrawn from biz account in last 90 days, biz account showed slight decrease because of covid), then calcs with old place and new together are hard.
Sometimes if you just leverage equity in old place you will be moving from + hard money + savings, you can do a cash offer, then sell off old place (we had a preemptive offer 4 days in well over asking - bay area).
Now you only have to be underwritten for one property (before selling old property they included both in calculations which made it hard). We got a 3% rate, then used that to settle up everything back to the way it was.
California also have firms like Reali (https://reali.com/how-to-guide-cash-offer/) that do a cash offer on new place, then you sell old place and buy from them.
This might be unique to the insanity of the CA market in last 2 years. I think it is cooling down thankfully?
It seems like home equity is actually a pretty safe and efficient form of cash flow. Even with a cheap mortgage, the payments I need to make each year are about 5% of the principal, which is of course more than the standard 3-4% safe withdrawal rate for investment. The mortgage interest deduction is relevant, but the mortgage is also the reason I would need to realize so much taxable income in the first place. There are no taxes on imputed rent or home equity. Living in a paid off home, you can appear to the income tax system and even some means-tested programs (those that consider income not wealth) as a pauper.
Because housing so dwarfs all other expenses, it is not clear to me why growing my principal at the expense of housing-sized cash flow would be a good tradeoff.
At a N-year fixed interest rate, it's smarter to shop by payment without regard to total price. All the more if you can avoid a large downpayment. After all, that's what matters, right?
Isn't this how everyone has always shopped for housing? House prices are just a Present Value calculation. For example, if you can afford $3,000/mo over the next 25 years and you have a copy of Excel or OpenOffice calc handy:
Affordable house price at a 5% mortgage rate: =PV(0.05/12,25*12,-3000,0) => $513K + [your down payment]
Affordable house price at a 2.5% mortgage rate: =PV(0.025/12,25*12,-3000,0) => $668K (30% higher) + [your down payment]
Atm, here in the UK interest rates are basically back to where they were in late 2019, but housing is still priced 20% higher. This is due to the chronic lack of housing stock and shifting buying patterns
https://www.propertyinvestmentproject.co.uk/property-statist...
I have no idea where interest rates are going to end up however I wouldn't assume that the relevant reference point is late 2019 to now.
When tightening, there arent enough dollars in circulation to do that.
But the bankers get the actual value (homes, collateral, liens on income) regardless. Lenders dont keep seized collateral on their balance sheet, so they sell it at the best price (and they dont need the max price because they already made so much on interest payments). So they push prices down in their firesales.
For the tightening money supplt and people trying to find dollars, think of it like the poison map closing in on Call of Duty Warzone.
So you can base housing prices on that outcome.
So I don't consider articles like that a bell ringing "sell sell sell". Until we are overwhelmed with new constructions coming up everywhere, there will be more people willing to buy, than to sell.
Anecdotally, we decided with wife to pull a trigger on $380k house in Florida (decent ZIP code) just a month before COVID hit, in March 2019. We had 90 days to cancel with $2,500 penalty, pandemic scared us with possibility of builder being lawfully able to be stuck on a construction site for up to 3 years. But eventually we decided to go on because we got tired of renting. By end of 2021 I got offer for $475k, cash, and someone "stole" our plans and our builder built exactly same house next street for $450k (we went inside everything was the same so same options were selected). Then "correction" should come and everyone expected Jan-April 2022 to be a 25% cool off since market rose so much. Well, our "correction" was that prices stopped going up, that's it. Now just few days ago I got an offer by mail (they find your address and mass-mail you) for "amazing amount, just to call". Out of curiosity, I called and was told upon doing title and lean research, an Executive Manager can show up overnight with $525,000 check.
Weird times...
If we reach debt saturation due to higher interest rates or some other economic shock then capital gains are not so certain. In that situation it would be a wondrous trick for prices to somehow 'levitate' and not fall.
With investors and home buyers no longer anticipating capital gains - even anticipating falls - what sets the price?
I would say two things. For investors, the income potential of the asset - in this case rent. For home buyers, the cost of servicing a loan relative to the cost of renting (with a markup to account for the additional benefits of ownership over renting).
What are interest rates now? What were they two years ago (pre-covid)? Price falls are likely to take us back to where we were when we had similar interest rates, perhaps further if sentiment shifts enough.
In NZ this is playing out now. 20% down in Auckland city already. That happened within a few months of the peak. 30% would take us to pre-covid prices, but interest rates are likely to reach higher levels than they were then. How long they stay elevated is the million dollar question. Regardless, I think we'll see falls somewhere between 30-50% in NZ in an astonishingly short amount of time. Ireland saw -50% over five years, but that was with the support of global QE and falling rates.
EDIT: Of course we just don't know what central banks and politicians will cook up to try to kick this one down the road again. Thankfully, the correction looks almost inevitable this time. Perhaps inflation is the answer - as unpalatable as it is?
Plenty of people are on the sidelines in this situation too, either in waiting in a rent controlled apartment perhaps, or opting to add another roommate and keep rent low in the face of an increase which also removes this new roommate from entering the market for themselves and contracts further the number of renters who are out shopping for apartments on the market at these prices.
I imagine a lot of buyers can afford this by selling their existing homes. Or perhaps they socked away a huge nest egg during after an IPO or over the duration of the stock market run up.
But new homebuyers would need to earn about $750k+/year for the foreseeable future for this to make financial sense. That could be a risky wager over the next few years.
It has always seemed wildly inefficient to me. Especially the “buyer agent” who gets a couple percent entirely for escorting the buyer through homes and submitting an offer.
My seller’s agent, on the other hand, was super useful and irreplaceable except by another smart human. I felt like he got us top dollar for the house based on how he renovated, staged, photographed… much more money than we expected.
Also, my experience was I set a budget, put my stuff in truck, left my house a dirty mess, handed the agent my keys, and left town. Then he did all the renovating/etc, posted it, collected offers, and we got paid.
You either believe the market is efficient or you don't.
is it not typically the case that, before the price of something goes off a cliff, most people think it's worth the going price?
your first sentence is quippy, but i don't think it's saying anything.
We're seeing people moving, and supply limits are influencing both rental prices and purchase prices. It's a weird housing market.
The question of the rationality of the valuation is:
1. Do you expect these migration patterns to continue? 2. If so, when do you expect new construction to pick up the slack for demand? 3. How bad of a recession is the Fed going to cause to break inflation?
> housing that should depreciate over time.
It does, amusingly. Housing stock ages and units you build now will generally be worth less in 10-20 years. Land is the thing that can appreciate in value.
10% drop - yeah, good luck, noone will notice that.
In situations like this, where demand is for a vital good and supply constrained, the government should be carful about managing the market. From what I can see, US politicians do care about the housing problem but their solutions thus far just exacerbate it by injecting guaranteed loan money and driving up prices.
They’re not though. Thats the whole problem.
Asset bubbles can inflate the paper value and there might still be some trading activity. But if nobody can actually buy the asset, it’s pretty much useless.
But to your point — things change, you aren’t rich enough, it sucks, get over it.
No, for the simple reason that (most) people buy homes with mortgages. Take a look at the 30 year mortgage interest rate over the past few months.
The total cost to own a newly purchased home is what matters, not the actual sale price. That's mostly paid by the bank.
Even if buyers are prepared to absorb the massive increase in total cost of ownership necessary to keep prices moving upward, it probably doesn't matter because many prospective buyers will no longer even satisfy the mortgage DTI qualification at current prices.
You may object that some are buying with cash. While that's true, it's not enough of the market to sustain prices.
Second, the big issues is with houses supply. The high rate basically lock most current sellers which have very low mortgage rate (compared to 5%), hence reducing the supply more.
Too many people seem to think 'cash deals' in real estate equate to a guy showing up with a louis vutton bag full of 100s that's been collecting dust in their shoe closet
It's just an indication of a lack of nuance in the deal-making, lack of contingencies (i.e. I'll give you $XYZ for your house as soon as I get $ABC for my house - agreed?!)
People with large sums of spare money always look for ways to park their money. Interest based products (term deposits, bonds etc.) will now become more attractive, diverting some cash flows away from housing.
Not necessarily. For anyone who's been working at FAANG and amassed certain amount of financial independence, the advice generally ran along the following scenario:
1) Secure a pledged-asset loan against your stock portfolio. That reduces the need to sell anything and trigger capital gains.
2) Shop around for real estate and submit a cash based offer to signal that you can close quickly.
3) Finalize the transaction.
4) Shop around cashout refi loans with fixed rates. Refi. Cashout. Repay the asset-backed loan.
If those 30% who are cash buyers kept their cash locked up in their houses, you wouldn't see household mortgage debt (that includes refi) skyrocket https://www.emarketer.com/newsroom/index.php/us-mortgage-deb...
I am not saying this will be the case, but rather that we're at what is likely the largest inflection point in modern history, and trying to predict where the world will be at in 10 years has become effectively impossible.
[1] - https://www.macrotrends.net/2593/nikkei-225-index-historical...
That's a long way away from predicting a crash or even a significant decline in prices, though. That would require a lot more inventory, and all those folks with 3% mortgages are going to be in no hurry to sell, and the stats on their mortgage amounts vs incomes looks WAY better than it did in 2007.
So my question is, if there is twice as much money in the system, but the same number of assets, why would it be shocking that housing continues to inflate?
People regularly sell stocks, bonds, and other homes in order to produce the down payment for a mortgage and have done so since long before 2020. M1 does not measure any of these.
Crypto, on the other hand, is something I know was sold for a downpayment by several of my acquaintances, which is acting as its own form of "money supply increase" since they spent orders of magnitude less to acquire it. The anti-inflation tool creates its own inflation by turning into "new money." :)
That makes price discovery harder and means that the market price can lag what is a sustainable long-term price.
It is not a prediction on future prices.
If someone buys an asset for $100B that yields one penny per year with no growth - it is safe to say it's overvalued / a speculative investment. It does not mean that someone won't buy it for $200B tomorrow.
A lot of people buying houses unfortunately don't really look at aggregate home ownership cost and focus (incorrectly) on monthly payments. So, because they can afford the monthly payment, they think they can afford the house. This of course works works until the music stops.
> The economist said a given housing market is considered overvalued if property costs in the area are "well above" the historical relationship between home prices and incomes, rents and construction costs.
Which, no surprise there, prices are up in a lot of places!
Whether or not that is "overvalued" or suggests a crash coming seems a lot more complicated. Would historical trends hold if historical conditions have changed? Mortgage rates rising are one of those things you'd expect to certainly arrest some of that price acceleration. If everyone who moved to Boise decides to move out of Boise, that's another one. (Though if a bunch of folks moved back from Boise to SF, that's not gonna cool down the also-seen-as-somewhat-overvalued SF market!)
Maybe a bunch of folks are just spending a bunch of crypto winnings, naturally causing inflation but not necessarily leading to a crash. ;)
I think the issue is that the United States has been too cheap and finally that era of abundance at a low cost is coming to an end.
Edit: I should say anyone can buy a house for 20% down or less. In much of the world some can do this, but credit is not extended to nearly as many of the population as it is in the US
With government assistance programmes it can be even 5% down but you'd have to qualify for some protected category.
[1] https://en.wikipedia.org/wiki/Euribor
Good luck!
Also, in case there's some confusion, "deposit" and "down payment" are distinct. In American real estate parlance a deposit is earnest money (often 5% of the initial offer) to bind the seller into closing--the process of finalizing contracts among all involved parties, and transferring assets. A deposit might be forfeited if the buyer pulls out. A minimum down payment is the minimum equity a mortgagee (e.g. bank) requires the borrower to hold in the property as a condition of making the loan.
I don't know about "anywhere else in the world" but I can guarantee you that you can buy a property everywhere in EU with a 20%. Also, property taxes in EU are generally lower than US.
I keep saying that americans, pay lots of taxes, they are simply not aware of it.
> The average annual wage in 2019 in the US was $51,916.27, and the median annual wage was $34,248.45. The median wage is the wage “in the middle,” while average refers to the measure of central tendency for all the data.
https://policyadvice.net/insurance/insights/average-american...
https://dqydj.com/household-income-percentile-calculator/
[0] https://data.oecd.org/hha/household-disposable-income.htm
In any case, why not just continue the era of abundance? We aren't really running short on space, and there is at least some indication that the lack of housing availability is a policy failure (rather than an expected outcome of some physical process or limit).
Beautiful land too. Forests, creeks, and wildlife.
The biggest affordability issue I see is that nobody builds starter homes for sale. In most areas, you can easily find a small 1br or 2br apartment to rent, but you can't buy a similar apartment. If you have to continue renting for years after you have settled down, because you can't buy anything smaller than 1000 square feet, it's harder to afford buying that 1000+ square foot house.
Futhermore, attributing this run up to Covid is revisionist history. The Fed has been goosing the economy for too long. Even my dog knows this. And that has assisted those who are investing in residential homes (because office space has been slipping into the shitter).
This is Moody's and its WS family getting out in front of what's coming. Hear it enough times and we'll believe it.
The money has changed, not the property. I’m now curious how undervalued it really is and what a huge accounting trick it was to play on everyone over the past two years.
>Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.
https://fred.stlouisfed.org/series/M2SL
The change increased M1 by moving common components of M2 downstream into M1. It's why M2 is all anyone should track. And a "definition change" is not in fact the primary reason for a large increase in the money supply in 2020.
Smart source: https://fredblog.stlouisfed.org/2021/01/whats-behind-the-rec... Gonzo source: https://gonzoecon.com/2021/04/m1-and-m2-have-changed/
You are unbelievably far off base.
Something is broken. Homes that wound have been listed at $1,000,000 in 2019 are going for $1.750,000 today. Interest rates going up should cool it off but I fear it will break much of the rest of the economy. There was a massive mismatch in executive policy and fed policy and here we are.
They decided to test MMT and it failed so badly.
Not giving either one a pass though because Biden reappointed Powell and failed to give Powell the political direction to raise rates late last year when it was obvious inflation was anything but transitory.
That's the theory anyway.
The fed chair is appointed by the president and still has some accountability to the political machine. It is independent in many ways but it is not truly independent.
> Its mandate is to keep inflation and unemployment in check
Yes and now it is also trying to fight climate change, wealth gaps, and other "ESG" goals.
For anyone interested trillion dollar triage is a great book.
Say it with me:
> “Inflation is always and everywhere a monetary phenomenon...” - Milton Friedman
It turns out years of suppressing rates combined with dumping many trillions of dollars onto a supply constrained economy causes a rise in prices. Huh... You'd think the trained professionals at the fed would know this by now, but they continue to believe they can defy reality.
We are about to pay for 12 years of easy money policies.
I know that MMT is very hated but it seems very compelling.
The market is being completely rational. What "overvalued" here means is "are homes expensive compared to local wages" not "are homes irrationally expensive." Normally this would drive construction but the market is distorted by credit such that new construction is less economical (a result of 2008.)
This also forms a feedback loop: people are giving up on labor since housing consumes more than they make, driving up the price of construction, driving up the price of housing. It's likely the dollar will crash before middle/lower class hosing will.
The supply constraint is old but its not why housing is high - housing prices are high even in places where there is a lot of construction. Monetary policy explains it a lot better, and it predicts that at some point the trend will reverse.
It’s all about supply.
Boise property prices are definitely going up due to SF’s housing dysfunction.
I've hit my quota, here's my reply: illegal immigrants still have to live somewhere So they're going to take housing off the market. They manage to rent houses in various ways (employers, government programs, ngos etc.)
https://fred.stlouisfed.org/series/UNDCONTSA
People keep repeating these statements about underbuilding or lack of supply as if they're backed by data, but it's just he said she said. Number of housing units to households is the same as it was in the year 2000, and in line with historical levels.
Home price gains were driven by a low rate induced speculative frenzy. It's inflationary psychology at work. E.g. people spin narratives about why you need to buy now to avoid being priced out, thus everybody starts to panic buy making the prophecy self fulfilling in the end.
But this never ends well. At the root of every bubble is some collective narrative that "justifies" its existence
But anyway, beyond fungibility, demographic trend is towards population decline. Spread between population growth and rate of new home construction is at an all time high.
And even CA recently passed a law allowing densification on certain SFH plots
Demographic decline is a much bigger problem to solve, not something that should stop us from taking action.
The averages say otherwise and I would bet continue to do so if we check-in, in a decade.
*I'm currently a beneficiary of this, and I hate it. I dont want my HOME to be overvalued.
The combo of slightly higher wages, more young people moving out, and low interest rates does mean more people have the opportunity. And that’s not a bad thing. If you cancel any of those factors, you’re blocking access to people who would love to own a home.
I think the factors that should change are supply and investors. It’s not like we live in an era where housing is cheap and bountiful. Clearly it’s severely constrained. The other part is investment. With low interest rates, it’s easy to justify a house as an investment vehicle.
Legislatively, it needs to be easy to build and hard to buy more than one property.
If your a millennial who managed to get through the lottery and have assets, then you are likely heavy in housing and stocks. If assets crash, these individuals will lose out - but ultimately be at the same point as their peers who never accumulated assets.
It will add yet another economic catastrophe to the list, as people generally form businesses in their 40s and 50s we likely wont see much in the way of SMB formation.
Anyone younger and buying now would be up against it. I think housing affordability is one of the biggest issues we have.
That doesn't stop social media from flagging a "millennial crisis".
Investors should be forced to legally go fuck themselves. Same with flippers. Same with landlords. All of these just add extra cost and exfiltrate equity for some rich person to get richer. (I've lived with landlords for 40 years. My hatred is deep here. They've taken my money, built their equity, and charged 1.5x more than the housing would have cost. Damn straight I'm angry.)
there's few cases where landlords of a form make sense - dense housing is needed in cities. Treat them like cooperatives, or do like utility companies where this service is guaranteed and here's the cost. But companies should not be able to unduely profit on the fact that people have to live.
No, they've instead raised wages to attract employees, which they have to do because of the labor "shortage".
Essentially, a few hundred rich people moving from SF to some smaller town won't move SF's housing cost but will skyrocket the small town housing cost. However, the few hundred rich won't boost the income significantly.
This is a data artifact made from the fact that "prices" are determined by what's on the book and "income" is determined as a whole. The difference between what's on the book vs. the whole is best illustrated by San Francisco, where most people pay far less for a 1 br apartment than the "going rate for a 1 br apartment".
Even the repeat-sales method for home pricing is not immune to this data artifact because we don't use a new-job method for income. This causes decoupling of the fundamentals when you get the remote-work revolution.
It’s kind of funny thing that interest rates did but the escrow portion of my mortgage payment is bigger than the principal and interest.
Where I live, they have an amount of taxes they need to collect, and then they divide that up based on property values. If the value of everyone's property doubles, they still need to collect the same amount of property taxes, so everyone's property taxes stay the same.
I guess in some places, they just do it based on property value, and when house prices skyrocket, the government just says, "Score!".
Wouldn't want to live in one of those states.
Volume would go down, and whatever is sold will be done at a much lower market price.
Argentina had a RE bubble in 2017, and property prices dropped 40% since. It has happened, it is happening, and it will happen again.
Sorry but I don't put a lot of stock in what Moody's says about anything.
There's pretty strong evidence that the rise in house values is structural not speculative. This is essentially the constraint of supply. There are multiple causes of this including:
1. The US building very few new homes 2010-2020. There are lots of reasons for this. A big problem is the type of housing being built, particularly in urban center where like NYC where the vast bulk of new housing units are ultra-luxury condos;
2. Permissive policies allowing the rich to park money in real estate. This particularly includes foreign nationals from places like China, India and Russia; and
3. An increase in people owning multiple properties. These include second homes, vacation homes and short-term rentals (most notably for AirBnB). There's strong evidence that AirBnB in particular has huge negative impacts on a lot of metropolitan areas.
A lot of tempted to blame Blackrock and other instituationl investors as constraining suply. this is completely overblown. These account for less than 1% of US homes.
[1]: https://www.ft.com/content/6457f28a-d9fa-11e6-944b-e7eb37a6a...
We here in Canada have been running the interest rate increase experiment ahead of the US. We've also had a much worse run up in housing prices. There are rundown shacks in Oshawa, Ontario selling for more than nice homes in Los Angeles. Where the hell is Oshawa? That's the whole point, it really doesn't matter but it's a former General Motors factory town about 1 hour east of Toronto.
Two months ago the real estate bulls were saying what you were saying now about supply. But the numbers are in for major areas like the greater Toronto area after a single 50 bps increase this past quarter like the one the Fed just dropped down south. Some suburbs of Toronto have already seen median prices drop 10-20% off their January/February 2022 peak prices [1].
The volume of home sales has plunged 41% in Toronto [2] as the market absorbed the 0.5% interest rate hike. And we haven't seen anything yet. A huge chunk of the buyers today have pre-approvals with interest rates from 75 bps ago. Around June 1 these buyers need to commit to a purchase to provide enough time for their lenders to close the deal at the old interest rates before those expire. The Bank of Canada is also expected to make a further 50 bps to 100 bps jump in rates in early June.
Anecdotally, there are already horror stories of over leveraged buyers -- perhaps amateur investors or a family that stretched themselves to the limit to buy -- only for their deal to fall through because the banks won't appraise the home at what they agreed to pay for it.
As a wannabe first time homebuyer myself, I've heard every argument you've said repeated ad nauseum up here in Canada the past half year by real estate bulls -- who I might add, have been totally right in their assessment of our crazy market which could only go up for perhaps the past 15 years -- only for the market sentiment to completely change overnight within a month or two of the 0.5% interest rate hike.
[1]: https://preview.redd.it/w61ns3b7jgx81.jpg?width=1024&auto=we...
[2]: https://www.bnnbloomberg.ca/toronto-home-sales-plunge-41-in-...
In order to stand a chance of working our way out of this, we need to make it easy to build in terms of what happens at city halls to make more supply increasing projects viable in the eyes of lenders. We need to increase the zoned capacity of our job centers so they can actually support the workers they employ versus force the lowest earning workers to far flung commutes or into living multiples per bedroom. It's like a law of physics. Make it possible for developers to build and supply will expand like a gas to fill available zoned capacity until demand incurred by labor are met, and prices should not appreciably rise if there is no need to enter bidding wars far above ask.
1. https://la.curbed.com/2015/4/8/9972362/everything-wrong-with...
Going for the metro area could be even larger.
One huge advantage places like Paris have is that they've been dense for so long that there is older housing available in dense areas; in the US any new density will be new construction, and therefore tend to aim at the luxury/higher-cost buyer.
1. https://i.redd.it/v84al8v4ymp11.png 2. https://i0.wp.com/thesource.metro.net/wp-content/uploads/201...
But the sprawling setup doesn’t help make it easy.
Our housing market is in deep trouble right now. Big falls in the major cities over the past few months (-20% in Auckland city). Listings where I am are up from 1000 this time last year to 3000. Prices are falling. Rentals up significantly too with prices falling.
A speculative boom creates excess demand. Just like Ireland did, we are seeing that the problem was not on the supply side, but the demand side. Speculative vacancies are now being revealed.
Maybe it has something to do with all the money that has been printed, and the insane low interest rates