This is a curious fact for folks who are hypothesizing another 2008-style real estate meltdown.
People need to live somewhere, every day.
Wages and cost of living have an innate balance, that sometimes swings more one way or the other, but by definition can't exceed certain limits: e.g. we can't all make US minimum wage and afford SF rents / home prices.
And you know what a great investment during inflationary periods is? Debt! Specifically, fixed-rate debt.
And you know what the easiest to obtain source of large amounts of long-maturity, fixed-rate debt in most countries is? Mortgages.
Yes, but some of this is based on federal lending which cares more about stability of the loan rather than interest rate. Many banks don't care what the interest rate is because they are simply in it to collect the fees and then sell the mortgage to someone else like Fannie Mae and Freddie Mac.
In the case of FHA loans (which are the ones that taxpayers would be considered 'most on the hook for'), there has been a lot of reform around trying to avoid that scenario.
Lenders get audited on underwriting more strictly than before. If it turns out a loan didn't meet guidelines, the lander may have to buy the loan back and/or pay penalties.
Also, FHA's Mortgage insurance fund is in a much better spot thanks to rule changes around MIP (FHA's equivalent to Conventional PMI.) Last report I think they had 1.2T to cover losses in value with that fund. That's about 10% of -all- household debt in the country.
> Wages and cost of living have an innate balance, that sometimes swings more one way or the other, but by definition can't exceed certain limits: e.g. we can't all make US minimum wage and afford SF rents / home prices.
So reading your comment gave me a thought.. Why? To pose a question, why does it matter that people need housing? (Matter, in the sense of - have an impact).
Ie, it will only have an impact if something will correct it, right? And what would correct it? Normally i'd say "Well people can't afford homes, so the prices will lower" - but people haven't been able to afford homes for a long time, i thought. This tweaks some already janky numbers, but i fear it doesn't tip the apple cart. If "people" (in the common sense) aren't propping the housing market up then their lack of participation in this market wouldn't change much, no?
Ie, i wonder if the people who were offering cash and driving up housing prices yesterday will be doing the same thing tomorrow. Mortgage rates don't matter much to cash rich, no?
I remember seeing a report that some of the cash offers are actually the mortgage equivalent of payday loans (we'll front you the cash for a premium interest rate)
Obviously, there's not a whole lot of data around this, but interest rates have normally been a very big sledgehammer by which to hit asset prices.
There are many other ways to downsize. Young without kids share the same 2br, children live with parents, many people live in trailers close to work, etc. This is already happening, with more price pressure more people will go this route, or more to the area with less zoning and more smaller cheaper condos.
But why have prices soared in just a few years while the population barely grew?
Something else seems to be driving up prices other than just "people need a place to live", and I don't see any inherit reason as to why housing prices cant go down 20-30% just like the stock market.
Demand significantly outstrips supply in desirable areas. It's not just about population growth, it's about where that population chooses to live and how much of the population are looking to buy a home.
> Just checked, and except Alaska all states saw at least a 20% increase in the last 2 years (and quite a few had 30-50% increases)
Which goes to my last point, the population of people wanting to purchase a home has grown.
> So if mortgage rates go higher that should mostly likely drop, no?
I don't know why so many people try to boil down markets to "A therefore B" statements. These are complex systems with 100's of different inputs plus 10's of millions of individual actors.
Interest rates don't affect just the buy side, but also the supply side. If supply drops in proportion to demand, then the marginal house will still maintain these high price levels. We could also see a pullback in less desirable areas and a leveling off or even a continued increase in prices in desirable areas. There are many different scenarios that can play out, and yes, prices could pull back...but by how much? My best guess is that prices level off or have a small pull back.
> Which goes to my last point, the population of people wanting to purchase a home has grown.
It seems pretty clear to me that the issue is more that the number of people wanting to sell a home has shrunk; active listings are way down in every state.
> But why have prices soared in just a few years while the population barely grew?
No one is selling; supply (active listings) is way down over the last few years, and the buyers (the ones that actually get to complete a transaction, given the few units on the market) are the relatively price insensitive, so market clearing prices are way up.
Click through any of the state listings and check the charts:
If that's the case, I think this type of collective "hodl" mentality usually breaks down very quickly when even small pressure is applied as people would always try to cash out if they suspect the market has topped, but that's just a hunch.
> People need to live somewhere, every day.
> we can't all make US minimum wage and afford SF rents / home prices.
This is true. SF also has one of the worst homeless problems in the first world.
It’s easy to think the problem will be confined to a few particularly bad cities and things will stay balanced at a lower amount elsewhere. The reality is there really is no reason it won’t become the standard, or even the minimum.
Home sellers and landlords are demanding increasingly ridiculous prices and they’re more than happy to let properties sit empty for years than they are to lower prices a single dollar. I’m not sure if it’ll be resolved so easily.
Every year the passes in which prices go up means having to buy at a higher price. After a certain point, even if the market does correct, you may still never have a chance to buy at the original price you wanted but waited. It's not like gold or bitcoin, in which prices can crash and take forever to recover. Housing prices tend to be much more stable and recover from crashes faster, so this means fewer bargains can be found. You have to hold your nose and buy at a high price, often.
So as mortgage rates rise, prices will be under tremendous pressure, because monthly payments will be increasingly out of reach for more and more of the market. At some point it seems there are only two possible outcomes: either the whole thing tips over and we see a significant price correction ala 2008, or we get hyperinflation (without asset price appreciation) to bring wages and purchasing power in line with nominal asset costs (ie houses still cost $1M+, but a new Honda costs $200k and minimum wage is $50/hour).
Anyone see this differently, or feel confident which way we’re headed?
core upper-tier housing in California only slowed in price, even at the worst weeks of that era, while low-tier, obviously cheap housing and especially condos, tanked. It is well-documented in Zillow charts and others.
If we take path 2, then you would expect the stock market NOT to crash as it is currently doing... and if it would take that path, now would be a great moment to buy in, right? Since the prices it would stabilize should be inflation adjusted at the moment.
There is a third outcome, which is that mortgages continue increasing with rents not following suit, making buying homes unaffordable for increasing numbers of people. Currently there is a "mortgages must be cheaper" rule enforced by many landlords who refuse to rent out their properties for less than the mortgage. But if new landlords, say wall st, show up, who buy houses in cash, then it might cause an increase in purchase prices without an increase in rents.
Yes. The Fed's low interest rate policy has been a huge tax on those prudent investors who held safer assets like cash and T-bills. At the same time, they maximally rewarded extreme gambling in the markets. That's why we live in world that somewhat resembles the 80s TV show "20 minutes into the future" -- all just crazy schemes and advertising plastered everywhere. Who knows what comes next.
House prices may have doubled (even that sounds high), but in a lot of places condo prices are down to where they were 5 years ago, with listing prices often being reduced from the initial price. This is the opposite of what you hear about houses where they are being sold above list price.
In any discussion about housing prices in the Bay Area it's important to distinguish between condos and houses. The markets are very different because lots of new condos are being built while the supply of houses is (mostly) fixed.
Single family homes in Marin, yes. Our last rental was sold in 2022 for 1.57, in 2017 in the exact same condition for 1.05m, in 2010 pre remodel .57m.
Not sure about rental data but it was already crazy expensive to rent in Marin in 2014. I’ve seen no noticeable increase while prices have more than doubled.
In a durably desirable area, I would feel comfortable taking a mortgage in the same range as projected inflation. If you think inflation will stay at 7%, a 5.5% mortgage interest rate is no barrier at all to buying for an investor.
Institutional investor purchases of residential real estate may be largely all cash offers, but the money that funds those purchases come from a mix of debt, rental earnings and invested capital.
I think it’s worth pointing that out because they are more susceptible to interest rates moving because their debt is short term. We may see institutional investors start to divest their real estate holdings if interest rates rise and their margins get squeezed.
What asset classes do you think they will move into as they exit RE? Why not just de-leverage a bit and stay in RE, which is more inflation-proof than many other investments?
I'd prefer a fourth (unrealistic) option where we go to legislative war against house ownership by any entity that isn't going to live there. Land area is a finite natural resource and owning more than you can use is as perverse as selling off acres of the ocean or cubic miles of the atmosphere.
no need to be unrealistic - there’s plenty of cheap land (at least in the US) - there’s people that live in Alaska or North Dakota or upstate NY (or whatever inhospitable climate you can choose)
> Currently there is a "mortgages must be cheaper" rule enforced by many landlords who refuse to rent out their properties for less than the mortgage.
That is traditionally how houses were priced — pre-mini depression that is.
People wrote whole articles and books trying to explain how this isn’t the case anymore, how you can lose money every month by subsiding your tenants and still come out ahead because housing prices always go up. It wasn’t even a question anymore and you were guaranteed to come out ahead because the fundamentals of the market had changed. Seriously, no way you could possibly lose money by investing in real estate.
I think we all know how that new economic theory turned out…
This is essentially Toronto. There is a fairly big delta between mortgage payments (with a reasonable downpayment) and rent. If you only care about monthly cash flow, renting is a far better option. For the last decade the wisdom has been that buying a place is a good idea, despite the cash flow delta, due to appreciation. If people no longer believe this to be true, there could be a sharp shift in the housing market. Perhaps we’re seeing the beginning of that.
a correction would imply that housing prices are inflated by artificial factors, rather than actual demand. it seems like that's mostly not true, and house prices are high because the demand is simply outpacing supply.
i don't see any reason to expect that the status quo can't continue and simply get worse. inequality between the homeowner class and the renter class will continue to grow. the wealthy will get to participate in the ownership market, and it'll be irrelevant for everybody else. as long as homes are treated as an investment commodity and investors can expect significant returns without having to rely on rental income, the rent market and the ownership market can be detatched from each other.
> a correction would imply that housing prices are inflated by artificial factors, rather than actual demand.
One of those Silicon Valley house buying companies, forgot which one, took a $500 billion haircut a few months ago for their algorithm driving up prices above actual demand.
Haven’t heard anything since but I can guarantee they didn’t dump those houses at market prices, they said they were going to bundle them up and sell in bulk but don’t know how that’s working out for them.
Zillow. And yes, that happened. But also it ended, and if that was a significant factor I would have expected to see an impact in housing prices when they exited the market. Instead it made absolutely no difference.
Consumers started spending less. Target has already announced that they are reducing prices. Compared to last year, there are a lot more items on clearance in the clothing stores. There are only 20 or so ships are waiting at the LA port.
Whirlpool has started laying off assembly line employees as demand softens.
I expect to see the 50 year mortgage (still 20%, still no prepayment penalty) at suspiciously low rates introduced by Freddie and Frannie soon. No politician wants to be the one in office when the music stops.
We probably will see 40 Year loan Mods from FHA by EOY, they've been getting guidelines around those ready for some time. But that is a stopgap for borrowers that are falling behind, not for buyers hoping to get into a home.
If I had to guess any can-kicks will be more gradual. 'First time homebuyer' grants would be a good candidate for tweaks on things like maximum income. I spent much of my 30s in a weird spot where I was just out of the range of eligibility for such programs, and it would have made a huge difference.
> still 20%
PSA: You don't -need- 20% down. I will say, if it's anything other than a starter home, you probably -should- have 20% down. But the biggest mistake I made in my 30s was worrying more about getting that 20% than just getting into the game. If I would have gotten in back in 2016, I would have been able to refi into a conventional anytime between 2019-2021 and come out ahead.
Don’t forget the option where BlackRock and friends buy up all the housing slack with the printed trillions they were given and we get a go at “You will own nothing and be happy.”
I think it's much more likely prices will continue to march higher for years to come. Don't see any reason for things to change. Still huge demand for certain area/neighborhoods.
There is simply far too much housing inventory for companies to own absolutely everything. There is also the prospect that if prices climb so high that the middle and lower class residents are priced out, homeless encampments will take over absolutely everything, while unoccupied inventory slowly deteriorates. I am not a market analyst, but if you look around even at some of the most prestigious retail neighborhoods, the effect of engineered inflation on the housing market has already displaced so many people that even the wealthy are not safe in venturing out to shopping districts and nightlife spots.
It's a self defeating cycle that needs to be reigned in. No matter how many fences people build around their homes, and how much security they hire. If the majority is forced into desperate living situations, they eventually revolt and redistribute wealth.
It is really government's responsibility to reign this in by lowering income taxes, taxing the rich and corporations properly, by reinforcing fair wages, and in many other ways, but even people in those positions of responsibility are asleep at the wheel of accountability, and also lining their own pockets.
Eventually, we as consumers need to stop contributing to these cycles of hysteria by not buying those overpriced homes, and working to develop the communities we're currently in. Individuals need to avoid greed impulse as landlords and stop dramatically raising rent and for companies to prevent artificial price inflation too (gouging), understanding that it will create a better eco system over time for us all.
Globalism of information and companies has led to harmful results in many ways, it has also driven us to a point where price controlling monopolies have far too much power, and too much overhead to keep costs down, and to keep world-wide distribution and value up for goods reliably.
There are literally thousands of overconfident investors now (many faking success and many that inherited their wealth) sitting on vacant properties, failing companies, and losing money on business ideas, yet posting about their extravagant lives and fake symbols of their business skill along with terrible investor advice on social media.
Along with Crypto, NFT, and investment scams that are regularly promoted by big industry, this drives the greed and ignorance that in turn affects current investment and ultimately business failure. We need to call this practice out, or face experiencing the market chaos and even deeper crashes that will indeed come.
One factor to consider is that as inflation erodes stock market prices, investors will exit equities in favor of real estate. These buyers can pay cash and therefore won't care about mortgage rates like homeowners do.
This article tries to put the blame partially on Ukraine. These media outlets are just extensions of the democrat party. The amount of money printed in the past 2 years, along with Covid shortages, are causing inflation. Stop blaming someone else, own it, and fix it.
The money printing far, far, far predates the present administration. It's been going on for at least 15 years, and many argue it started after the 1987 crash. The big question is whether this is finally when the music stops.
So glad I ignored the doom and gloom headlines about housing bubbles. Maybe there will be a correction, but prices will have gone up so much that buyers will still come out ahead, such as in the Bay Area, even if there is a correction. Home in some neighborhoods selling for $3 million vs $2 million just 5 years ago.
Don't worry, they'll be 25 milion in 20 years. 50 million in 40 years, and a cool 100 million in 60 years. There's definitely lots of room for asset prices to rise. One could argue infinitely. Your property will definitely always rise way above inflation with no possible reason for correction.
71 comments
[ 3.0 ms ] story [ 140 ms ] threadPeople need to live somewhere, every day.
Wages and cost of living have an innate balance, that sometimes swings more one way or the other, but by definition can't exceed certain limits: e.g. we can't all make US minimum wage and afford SF rents / home prices.
And you know what a great investment during inflationary periods is? Debt! Specifically, fixed-rate debt.
And you know what the easiest to obtain source of large amounts of long-maturity, fixed-rate debt in most countries is? Mortgages.
The banks are going to price in their forward expectations of inflation into their interest rates. They won't just hand you cheap money and eat it.
In the case of FHA loans (which are the ones that taxpayers would be considered 'most on the hook for'), there has been a lot of reform around trying to avoid that scenario.
Lenders get audited on underwriting more strictly than before. If it turns out a loan didn't meet guidelines, the lander may have to buy the loan back and/or pay penalties.
Also, FHA's Mortgage insurance fund is in a much better spot thanks to rule changes around MIP (FHA's equivalent to Conventional PMI.) Last report I think they had 1.2T to cover losses in value with that fund. That's about 10% of -all- household debt in the country.
So reading your comment gave me a thought.. Why? To pose a question, why does it matter that people need housing? (Matter, in the sense of - have an impact).
Ie, it will only have an impact if something will correct it, right? And what would correct it? Normally i'd say "Well people can't afford homes, so the prices will lower" - but people haven't been able to afford homes for a long time, i thought. This tweaks some already janky numbers, but i fear it doesn't tip the apple cart. If "people" (in the common sense) aren't propping the housing market up then their lack of participation in this market wouldn't change much, no?
Ie, i wonder if the people who were offering cash and driving up housing prices yesterday will be doing the same thing tomorrow. Mortgage rates don't matter much to cash rich, no?
Obviously, there's not a whole lot of data around this, but interest rates have normally been a very big sledgehammer by which to hit asset prices.
You assume people also had to pay rent or mortgage. There was already very long moratorium on evictions...
Americans have lots of space to downsize from detached large houses with big lots while cutting on rental/mortgage costs.
Something else seems to be driving up prices other than just "people need a place to live", and I don't see any inherit reason as to why housing prices cant go down 20-30% just like the stock market.
Is there a state that hasn't seen major price increases?
Edit: Just checked, and except Alaska all states saw at least a 20% increase in the last 2 years (and quite a few had 30-50% increases)
> how much of the population are looking to buy
So if mortgage rates go higher that should mostly likely drop, no?
Which goes to my last point, the population of people wanting to purchase a home has grown.
> So if mortgage rates go higher that should mostly likely drop, no?
I don't know why so many people try to boil down markets to "A therefore B" statements. These are complex systems with 100's of different inputs plus 10's of millions of individual actors.
Interest rates don't affect just the buy side, but also the supply side. If supply drops in proportion to demand, then the marginal house will still maintain these high price levels. We could also see a pullback in less desirable areas and a leveling off or even a continued increase in prices in desirable areas. There are many different scenarios that can play out, and yes, prices could pull back...but by how much? My best guess is that prices level off or have a small pull back.
It seems pretty clear to me that the issue is more that the number of people wanting to sell a home has shrunk; active listings are way down in every state.
No one is selling; supply (active listings) is way down over the last few years, and the buyers (the ones that actually get to complete a transaction, given the few units on the market) are the relatively price insensitive, so market clearing prices are way up.
Click through any of the state listings and check the charts:
https://fred.stlouisfed.org/release/tables?rid=462&eid=11293...
If that's the case, I think this type of collective "hodl" mentality usually breaks down very quickly when even small pressure is applied as people would always try to cash out if they suspect the market has topped, but that's just a hunch.
Actually, outside of the US, most mortgages are floating-rate.
This is true. SF also has one of the worst homeless problems in the first world.
It’s easy to think the problem will be confined to a few particularly bad cities and things will stay balanced at a lower amount elsewhere. The reality is there really is no reason it won’t become the standard, or even the minimum.
Home sellers and landlords are demanding increasingly ridiculous prices and they’re more than happy to let properties sit empty for years than they are to lower prices a single dollar. I’m not sure if it’ll be resolved so easily.
Anyone see this differently, or feel confident which way we’re headed?
There's a ton of middle ground between your two scenarios. 2008 was the biggest housing price crash in history.
I think we see a recession, modest asset price decline, and then stagnant home prices and stock market returns for 10 years.
This is the mythical soft landing that central bankers always seek and never achieve.
While the drive towards lower interest rates has made that money come out of savings accounts and drive up all asset prices
Just moved into a bigger place with a pool for $100/m more than my last rent (Marin county).
We want to buy, but our monthly cost would literally double to own the house we are in now.
In any discussion about housing prices in the Bay Area it's important to distinguish between condos and houses. The markets are very different because lots of new condos are being built while the supply of houses is (mostly) fixed.
Not sure about rental data but it was already crazy expensive to rent in Marin in 2014. I’ve seen no noticeable increase while prices have more than doubled.
I think it’s worth pointing that out because they are more susceptible to interest rates moving because their debt is short term. We may see institutional investors start to divest their real estate holdings if interest rates rise and their margins get squeezed.
no need to be unrealistic - there’s plenty of cheap land (at least in the US) - there’s people that live in Alaska or North Dakota or upstate NY (or whatever inhospitable climate you can choose)
We don’t need more rules
That is traditionally how houses were priced — pre-mini depression that is.
People wrote whole articles and books trying to explain how this isn’t the case anymore, how you can lose money every month by subsiding your tenants and still come out ahead because housing prices always go up. It wasn’t even a question anymore and you were guaranteed to come out ahead because the fundamentals of the market had changed. Seriously, no way you could possibly lose money by investing in real estate.
I think we all know how that new economic theory turned out…
i don't see any reason to expect that the status quo can't continue and simply get worse. inequality between the homeowner class and the renter class will continue to grow. the wealthy will get to participate in the ownership market, and it'll be irrelevant for everybody else. as long as homes are treated as an investment commodity and investors can expect significant returns without having to rely on rental income, the rent market and the ownership market can be detatched from each other.
Stimulus payments, $9 trillion fed balance sheet, historically low interest rates. All in the process of stopping / reversing.
https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
One of those Silicon Valley house buying companies, forgot which one, took a $500 billion haircut a few months ago for their algorithm driving up prices above actual demand.
Haven’t heard anything since but I can guarantee they didn’t dump those houses at market prices, they said they were going to bundle them up and sell in bulk but don’t know how that’s working out for them.
Any more than in the past?
https://www.statista.com/statistics/183648/average-size-of-h...
Average people per residence has gone down over the last decade from 2.58 to 2.51 - so I'm not sure where you draw this conclusion.
That graph is primarily why I believe there's speculation mania and other things going on.
Consumers started spending less. Target has already announced that they are reducing prices. Compared to last year, there are a lot more items on clearance in the clothing stores. There are only 20 or so ships are waiting at the LA port.
Whirlpool has started laying off assembly line employees as demand softens.
New mortgage applications are down by 21%.
We probably will see 40 Year loan Mods from FHA by EOY, they've been getting guidelines around those ready for some time. But that is a stopgap for borrowers that are falling behind, not for buyers hoping to get into a home.
If I had to guess any can-kicks will be more gradual. 'First time homebuyer' grants would be a good candidate for tweaks on things like maximum income. I spent much of my 30s in a weird spot where I was just out of the range of eligibility for such programs, and it would have made a huge difference.
> still 20%
PSA: You don't -need- 20% down. I will say, if it's anything other than a starter home, you probably -should- have 20% down. But the biggest mistake I made in my 30s was worrying more about getting that 20% than just getting into the game. If I would have gotten in back in 2016, I would have been able to refi into a conventional anytime between 2019-2021 and come out ahead.
I mean by that token you should have just bought eth and now you could have had many houses paid off. Hindsight is 20/20.
It's a self defeating cycle that needs to be reigned in. No matter how many fences people build around their homes, and how much security they hire. If the majority is forced into desperate living situations, they eventually revolt and redistribute wealth.
It is really government's responsibility to reign this in by lowering income taxes, taxing the rich and corporations properly, by reinforcing fair wages, and in many other ways, but even people in those positions of responsibility are asleep at the wheel of accountability, and also lining their own pockets.
Eventually, we as consumers need to stop contributing to these cycles of hysteria by not buying those overpriced homes, and working to develop the communities we're currently in. Individuals need to avoid greed impulse as landlords and stop dramatically raising rent and for companies to prevent artificial price inflation too (gouging), understanding that it will create a better eco system over time for us all.
Globalism of information and companies has led to harmful results in many ways, it has also driven us to a point where price controlling monopolies have far too much power, and too much overhead to keep costs down, and to keep world-wide distribution and value up for goods reliably.
There are literally thousands of overconfident investors now (many faking success and many that inherited their wealth) sitting on vacant properties, failing companies, and losing money on business ideas, yet posting about their extravagant lives and fake symbols of their business skill along with terrible investor advice on social media.
Along with Crypto, NFT, and investment scams that are regularly promoted by big industry, this drives the greed and ignorance that in turn affects current investment and ultimately business failure. We need to call this practice out, or face experiencing the market chaos and even deeper crashes that will indeed come.
Don't forget about property taxes. They can also go up quickly, and they almost never go down.
.