Great! Maybe home prices will become affordable for folks looking to enter the market. Although the U.S. needs to get its act together and enable the development of much more housing and automation in the market to make homes actually affordable to folks. I don't want to get too philosophical but I think a big part of the American dream was being able to own a home for you and your family and that is out of reach for so many people right now, in no small part due to NIMBY regulations but also overregulation of processes that prevent automation and more in the industry (among many other factors).
Labor inputs make up a portion of a homes cost, so working to automate pieces of the homebuilding process that would lower that cost would lead to decreased prices
For a typical suburban American home, 80% of the cost is labor and 20% is materials. This rule of thumb even applies in small cases - replacing the floor will likely cost you 5x more to have it done for you vs what the materials cost at Home Depot
> Great! Maybe home prices will become affordable for folks looking to enter the market
Well the problem with that is that housing busts are usually associated with rescission (can't buy a house without a job) and rising interest rates (can't borrow the money anymore).
Yes, indeed--although weirdly the jobs report out today was quite good (372,000 over the expected 250,000) so this might be a somewhat different type of recession if there is one. But yes, interest rates will rise and make long-term mortgages much more expensive for new borrowers.
It would've been arguably true in 2015 or so. But then we had years of high job growth, high median wage growth, and generally great economic conditions, right up until COVID, and then we actually recovered very quickly from COVID.
Like, is inflation high? You bet. Could we go into recession? We absolutely could. Did we have the last 8 years of costs going up and raises only happen to slightly offset cost of living? Absolutely not.
The overall median for non-supervisory workers in the United States, not just tech. I'm sure that there is some industry that has had hard times in the last eight years, but overall we've seen growth.
Helps to show that it's not an effect dominated by the very rich, and thus throwing off the average, and also that it's not that hourly wages have stagnated but people work more hours -- since they're broadly similar, we should feel strongly that it is a real increase in "normal people's" actual wages.
There are more data available if people want to look for it. This is a surprisingly complex subject for something that initially sounds simple, so it helps to get a few different views into it, but the upshot is: since the teens, people have been paid more.
EDIT to add: People are just slow to update on this. If you look at the world in 2014, then it seems a lot more reasonable to be skeptical that normal people will ever get a raise. Then, you'd had basically 15 year of stagnation, before that a little rise, and then more years of stagnation at a lower level.
Yes the pandemic has caused falling wages. You surely noticed that 2020 is kind of a weird year? And inflation is currently causing wages to fall further.
"normalize" does not mean anything because there is no base rate of interest. the Fed underpins the whole thing as it provides the reserve balances for our currency.
>"AFAIK, we have been in a recession since 2008. IMO we never really got out of it."
That's complete nonsense. The National Bureau of Economic Research, the body which officially declares recessions in the US, defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."[1]
Aside from the 2020 pandemic dive, there has been positive GDP growth every year since 2008.[2]
Jobs are the last domino to fall. The strong jobs report was actually bad for some segments of the economy(i.e. the stock market) because it enables the fed to continue tightening. The fed has two mandates: strong employment and stable prices. Right now, prices are not stable. The strong jobs allow them to focus on bringing stability back to prices. That means tightening. Unemployment will likely need to top 5% before the fed backs off. We are just getting started in the tightening cycle.
Yes, but get ready to go in if that's the case. People waste the opportunity to get in at a lower price since they think it will go down even more when it's going back up. Just remember that you'll be unlikely to buy at the bottom. Just buy when you need to buy and hope for the best.
Yeah absolutely! But even people like cover have to work around ridiculous regulations for the type of homes they can create and where they're allowed to put them. If you look at one of the main callouts for benefits, one is "We take care of zoning research, design, permitting, manufacturing, project management, and installation." So 2/6 of these are regulatory related benefits (zoning research, permitting) even for a relatively simple structure that will go in a backyard. Govs need to do much more to enable automation at scale for all parts of the construction process and for all types of dwellings
Yes, again and again and again. But the price trend has been to go up higher after the crash than the last all time high, if you pick the right area. Places where there are plenty of jobs and people want to live there. It's likely to be a long wait though.
Another bait-and-switch headline for an article with no data or insights.
> …the numbers don’t work anymore.
What numbers? None were given as an explanation for a “bust” except for a mortgage rate that is less than 6% and an increase in home prices since January.
We are not in 2008. The market may cool but the economics of home purchases are still pretty strong: lack of supply and increased demand from the large generation now ready to buy houses.
The Fed did a study on the housing market and found that there is no supply issues with housing, rather the housing bubble was caused by too much demand from cheap debt.
Housing increased 30% over the last two years, and I seriously doubt anyone's wages increased by that much. Add inflation and increased interest rates and things will have to come down.
location, location and .. location. These overview numbers are as real as having 2.5 children! Here in the San Francisco Bay Area -- poster child for terrible outcomes in housing -- nothing stated above rings true. The whole State is gridlocked in anti-building systems. specific example: when a massive 2017 fire burned more than 3200 homes in the Santa Rosa area, more than a billion dollars eventually was paid out in settlements, yet now five years later, less than two thousand homes have been rebuilt. Is that due to more than a third of the all owners choosing that? hardly likely..
Bad example. Australia is even more fire prone. The planning rules which say "sorry you can't build here now" have a solid scientific basis. Building fire resilient is hugely more expensive and not building to code is stupid.
I get that there's a lot of anger about Californian building regs but post fire lower build back levels isn't the peg to hang this on.
wrong Sir, but only in this way -- there are more sq km in California than in plenty of entire countries (not AU). The regulations you refer to are the "Wildland-Urban Interface" which is Federally mandated .. Santa Rosa is a relatively settled place and (mostly) not in that so-called WUI.
On the other hand, Australia does indeed bear some resemblance to California in places due to drought and also, the flammable Blue Gum, here called Eucalyptus Tree. The answers here are multi-layered.
> The Fed did a study on the housing market and found that there is no supply issues with housing, rather the housing bubble was caused by too much demand from cheap debt.
It did not find that there is no supply issue with housing, but rather that we can't attribute the most recent housing run up to unique supply issues starting in 2020.
Somewhat obvious to anyone with eyes. Doesn't mean new construction wouldn't lower prices.
It was definitely a poorly and lazily written article. I think the big news is really the NAR's affordability index. Another article from today in the same publication has a bit more data:
Where I'm at, there's still a lot of houses around that have not been occupied since 2008. Not for sale, not maintained, not recoverable. I have this feeling that somebody somewhere is sitting on those places (and paying the property taxes!) and valuing them much higher than the true worth.
If so, there's probably still holdover from the last crash to cause splash in the next one.
This "formula" was what big banks used to solidify their mortgage backed securities 12 years ago. Instead of letting houses default, they would buy them up.
So imagine you're BoA and in one town you back 5000 mortgages. Let's say 500 of those are about to default. You've already sold "paper" that includes all 500 of those loans, some of which may have been in the AAA tranche. In order to keep your AAA tranche from collapsing, you buy those 500 houses outright and sit on them, providing the illusion that your securities are healthy. It's cheaper and simpler.
The downside is, when the market collapses, BoA is still stuck with 500 houses and will have to sell them eventually. They don't care. They're just trying to hold on to them until the securities they sold mature. Once that happens, all bets are off and they dump the houses into a depressed housing market.
Housing prices are going to collapse. Badly. You can bet on it.
Sell every bit of real estate you own. Now. If you can.
Rent for a year or two. Then jump back in when it hits bottom. You'll pocket a ton of cash and then have the same or better property at a significantly lower cost.
It can be (mildly) emotionally scaring for young children to move houses. I mean, they'll get over it, but it can be a lot of crying in the short term. And that's not even getting into the costs associated with moving out and moving back in, and probably taking your vacation time for the year to do so instead of going somewhere fun.
It's not just a dollars and cents issue when it's your actual home.
The way to get mortgage on vacant land is to buy some with a house on it (bank often won’t care if you’ve combined parcel, etc) - then they consider it a house.
>"Rent for a year or two. Then jump back in when it hits bottom. You'll pocket a ton of cash and then have the same or better property at a significantly lower cost."
It's my understanding that this is what a lot of people who sold their homes recently at the top of the market are doing exactly this. And this is one of the things that is driving up the prices of rents. If you pocketed a substantial windfall you are probably fine with paying an inflated rental price while you wait out the market. It's hard for me to imagine anything will be different in two years if all of these same people waiting out the market plus first time home owners all attempt to get back in to the market at the same time. Isn't it just the pandemic housing rush all over again?
No. The securities aren't necessarily the length of the mortgages. Traders will offer to buy AAA tranches for 5 years or 2 years. There is no set length. A lot of times these are used to back municipal bonds which get setup for 5 to 10 years to help small cities borrow and build infrastructure. It's all intermingled and why our financial system did not learn any lessons from 2008.
An interesting perspective I heard recently from a housing developer: rising interest rates may cause housing to get more expensive, not less.
Getting a loan now for developing multifamily or single-family properties is significantly higher than it was last year. That means fewer projects are starting. Rent has already been rising, but may rise even faster next year as new supply dries up.
Single family houses may go down in price -- but we all know that isn't really what people care about if they're buying. They usually care about their monthly mortgage payment. And, obviously, that is likely to go up with raising rates, unless there is a very significant downturn in home prices.
The Fed's primary tool is interest rates -- but while we could use a cooling of investment into bubbly areas (like, maybe tech equities and crypto) -- we still desperately need more investment into housing. It's a shame that they will likely move in tandem and we'll just get less investment in everything.
I'm not sure I understand the point being made here. Are you simply saying that higher rates means a higher monthly payment, and that the amount that prices have fallen is still not enough to offset the increase in the mortgage payment? That's fairly obvious.... for now.
Their argument is that there are fewer houses being built. In the long term, this will constrain supply far more than rising interest rates will push down prices.
How does saying that demand increased more than supply reduced in 2020 contradict the idea the the overall size of supply in in-demand parts of the country is lower than the overall size of demand in those areas? Like, if you look at 50-year price histories in SF or LA, how can you conclude that supply has kept up with demand?
I think we've now just seen that same pattern catch up with more places. I know people in Austin and Houston who were complaining that prices were already getting too high before 2020. That's where the folks priced out of CA were going even then.
I think the point is that given typical demand, the amount of supply would have been sufficient to not cause meteoric price increases. Demand exploded due to incompetent monetary policy driving a speculative mania, and that demand was what gave the appearance of a supply constraint. Until recently housing starts were at a 10 year high, and they are still on the higher-end of the past decade: https://fred.stlouisfed.org/graph/?g=Rzky
I don't know the LA market, but there is a scenario where both supply and demand could remain constant and yet housing prices could still rise, and that's if the income of housing buyers rises. And if the income rises disproportionally, then buyers with relatively lower income can become displaced by higher income people buying additional homes to rent. Even though base demand remained the same, and supply in the sense of actual houses remained constant, a relative scarcity was created by the inequality in purchasing power between the wealthiest buyers and people lower on the income scale. And this can happen even if the lower income tier has actually increased its income over time, simply because it hasn't increased at the same rate as the wealthier segment.
If I'm following, this scenario is basically "as the higher income/wealth people invest more of their money into more property, prices and rent can both continue to increase even if demand is fixed until the lower-income people are spending 100% of their disposable income on rent"?
Which is not entirely dissimilar to the general discussion around gentrification - those who can afford to pay more can displace those who can't - but a sort of special case that doesn't require migration.
Seems like there would be some sort of game theory aspect - this only works if something close to every landlord is pushing prices up?
I think what we're really seeing is more the high-migration "gentrification" case yet applied to populations that normally aren't who you think of as being the ones on the receiving end of gentrification: the 100M-dollar-buyers are pushing out the 10M-dollar-buyers are pushing out the 1M-dollar-buyers from California and then they go to Texas and push out the 500K-dollar-buyers... and it continues to flow out to touch everyone else too.
It doesn't contradict that. The paper looks at the national housing market, which ignores individual market dynamics. Supply constraints still exist, but they don't explain the national increase in housing prices over the last 18 months.
I don't see how home prices can really fall enough to keep the cost of housing equal as interest rates rise. Because don't higher rates also disincentivize sellers and create more of a supply shortage as well, by taking more homes off the market, apart from disincentivizing new construction? I'm admittedly a little daft at economics but... e.g. I've got a fixed rate mortgage around 4%. Suppose I wanted to sell and I think we're at the top of the housing market... my options would be to buy something else now at the top of the market and pay a higher interest rate, or rent for a year until prices come down and probably still pay a higher rate.
Certainly, low mortgage rates drove home prices way up... but does that mean high rates could drive them down? I mean, maybe over a long period of time as existing mortgages get paid off (?) but for now while the vast majority of mortgages out there are lower than the going rate, won't that just keep constraining the supply and prevent the price of houses from dropping significantly?
This is pretty close to the most common counter-argument I've seen to the "this is another 2000s housing bubble" claim - the bubble burst when people had to sell or got foreclosed on, people taking out the mortgages today, or purchasing in cash, appear to be in much better financial shape to weather things and not have to sell.
You'll still have sales - some people will die, some people will have to move for various reason, etc - but how much it will fall seems like a very hard to predict question.
A TON of investment properties were purchased over the last few years, so those may be sold as investors need to balance out the huge losses they took on stocks, crypto, etc.
With rising rates, the counter pressure on prices from buyers may not exist in large enough supply to prevent the investors selling from driving prices down.
Rents aren’t dropping - so the investment properties are likely going to be better off held as inflation helps push down the cost of those mortgages vs rental income.
Just anecdotally, a friend who took an enormous shellacking in crypto told me the other day he's glad he'd bought two rental houses before getting into DeFi. He seems totally disinclined at this point to make any high risk moves with what remains of his savings. I suppose if he had to sell that would be another thing, but I don't think most even-marginally-sane people in that position are going to sell property and chase higher returns in the market.
Purchasing cash wasn't really straight handing over a fat stack to the seller. A lot of "all cash" purchases were people who got loans through non-traditional means. So instead of getting a regular mortgage, they got financing through an institution who offered cash to the seller but is still a loan to the buyer.
Rising interest rates would reduce demand at higher price ranges, for example, causing a drop. At the end of the day costs are only part of the equation.
There is some logic to the idea that rising rates makes supply-side issues worse across the board because it curtails investments needed to resolve those supply issues.
I don't think that means the fed is doing the wrong thing though. Fixing our energy bottlenecks will take a decade or more(regardless of rates. refineries and nuke plants take 10+ years to build), so pulling back demand to be in line with that supply seems like the right thing to do. It will hurt, but it is better than entrenched inflation and wage-price spirals.
> They usually care about their monthly mortgage payment.
True, but not for me. I care about price, because the price never changes yet I can always refinance. Also, your initial assessed value, at least in California, is a big factor in the lifetime(or more) amount of property taxes you'll be paying. I would much, much rather have lower prices and high interest rates.
Overall I think housing will sort itself out. We already have plenty of units in the pipeline. Also, we're going to grudgingly transition, as a nation, towards more efficient, higher density housing whether we like it or not. Energy prices combined with policies to combat AGW will, over the long term, incentivize more urban living. I'm not a fan of it, being a suburban lover, but it is what it is.
Not a problem if you can service the debt. Sure, you could be missing out on other investments with that cash, but if you buy conservatively it's not a bad plan. One thing I haven't seen anyone predict is sustained high interest rates. More than likely, rates will be back down below 5% in a couple years as the fed tries to restart the economy it crashed.
And people often forget that rates go down at the same time people get laid off and the market crashes and house prices go down.
If you're unfortunate enough to be out of work, you won't be able to refinance your loan. And if you're upside down on your loan, you can't refinance either.
> And people often forget that rates go down at the same time people get laid off and the market crashes and house prices go down.
This is really difficult to describe as a general trend due to endogenous actors like the Fed.
Recessions can co-occur with low rates as the Fed expands to try to spur investment in the economy. They can also co-occur with high rates that choke investment.
> Also, we're going to grudgingly transition, as a nation, towards more efficient, higher density housing whether we like it or not.
After seeing how pandemics can sweep though dense areas, I think many people want no part of being forced to live in high density areas. Quite the opposite actually.
You can measure that desire in how much people bid per sqft for housing - and they bid far more in dense places. The impact of people who fear the next pandemic has not changed that at all.
That's not what that measures, since you can look at the denser residential areas in large cities like Houston or smaller cities like Detroit, Baltimore, St. Louis etc and find the opposite. Only when you mix in downtown commercial districts that have residential housing (typically stacked on top of stores) do you see that. But the denser inner ring neighborhoods outside of a commercial zone are generally much cheaper than more spread out suburban neighborhoods where people typically want to live.
> Single family houses may go down in price -- but we all know that isn't really what people care about if they're buying.
But sellers do care deeply about this number. If they added on a $50k garage, they want to see that money come back. It may cause some potential sellers to decide to become landlords instead.
if you as an owner have a <3% rate loan you are beating inflation permanently anyways, never really need to sell. Hold onto it as long as you can and rent it out.
In Romania we have the First House mortgage which has lower rates than a normal one. It might make sense to have special rates for people who don't own a house yet
This already exists in the US. My guess is many financialization programs in Europe are modeled (or improved) off of existing ones in the US given that we were the loan/financialization innovator for most of the 20th century.
FHA program is the federal name and is not just for first time buyers, but then states will have FHA options that are discounted for first time buyers.
Some specific states and localities also have programs to help first time homeowners, Nevada used to have an incredible one that only required something like 5% down but I don't see it anymore (they do still have other programs)
The housing developer seems to be a purely supply-side economist.
The argument that ever lowering interest rates lead to "affordable" homes is not evident in any real world data that I've looked at. Evidence points to the contrary.
Houses are always priced at what people can afford to pay for them. The median price of a house is directly linked to size of the mortgage a couple working for median wage can be cleared to loan by a bank.
5% mortgage rate? For a $200k home that's $10k per annum to cover the interest.
2% mortgage rate? That $200k home is now $500k. The devious detail here is that the time to pay off the loan changes completely.
The $200k home can be paid off in 25 years with $670/mo plus interest.
The $500k home? 62.5 years with $670/mo plus interest.
It gets even better - assume the 5% mortgage rate equals 5% inflation rate.
In a high inflation, high interest rate environment, the $200k home is devalued by 5% per annum. Assuming wages keep up with inflation, the $670/mo payment is smaller and smaller piece of the total income.
A couple earning $100k together per year spend $18k or 18% of their (pre-tax) income on their $200k home during the first year. If their income stays the same but is corrected for inflation, 25 years later their income will be $338k in inflated dollars but their mortgage payments will be $18k / $338k = 5.3% ! Eaten by inflation!
Compare this to a scenario where another couple buys a $500k home in a low interest rate, low mortgage rate environment. During the first year, their payment is equal to the other couple. After 25 years of 2% inflation/interest rates/mortgage rates assume their wages keep up with inflation as well. The couple's combined income will be $164k in inflated dollars. The mortgage payment will be 10.9% of their total income.
The "2%" couple pays over twice as much as share of their income as the "5%" couple after 25 years and the "2%" couple is expected to keep paying the loan down 2.5x longer (62.5 years vs 25 years).
This is basic high school math with nothing fancier than exponentials, so I'll leave the equations as an exercise to the reader.
As someone who has been in FAANG quite a while, I can afford a house. But in Silicon Valley I can only look at 50-60 year old neighborhoods where the original owners were postal workers, grocery store managers, truck drivers. People that today couldn't qualify for a fraction of the necessary mortgage. This sure doesn't feel like economic progress.
Agglomeration effects. Those postal workers could certainly afford homes elsewhere, but the economic value of having lots of tech workers together in the same place is higher than the marginal (in the economic sense!) postal worker living here.
Everyone keeps talking about this, but I still honestly don't believe it's going to happen. Obviously this is anecdotal, but I just know way too many people who have been holding out, saving money, for years waiting for prices to drop. There are so many people I know with a hoard of wealth just waiting for their chance to get in on a cheaper market.
Just seems like there is so much demand for housing and the fact that investment funds are now buying homes en masse as investments just makes me think the market will remain expensive.
I can’t help but think investment funds are eyeballing those little war chests and wanting to capture those funds and the economic productivity that produced them.
On the face of it this seems good - everyone can buy more house for the money - compared to the crazy run-up of prices the last two years, but ... at the end of the day I expect a lot of people to still be priced out even at the low end given the amount of supply and lack of building for decades.
It will take at least a decade to fill the backlog of housing shortages from the past decade. On top of that, it is now more expensive to build because rising interests make loans more expensive and some materials are still expensive after the shocks to the supply chain.
I don’t see any scenario where a home becomes trivial to afford before 2032. People should just start getting used to the fact that it’s going to be an expensive purchase.
I've been following this story very closely for 18 months now, via: Housing blogs by various data-driven analysts (conscious of possible bias), Popular news (CNBC, Bloomberg), Industry news (housingwire, therealdeal), Visits to many dozens of homes, Watching listings on realtor and other places, Some YouTube commentators (yes, I know I know), Talking to a couple of agents (one in the city, one in the place-where-people-from-the-city escape to.
Here's what I think so far that's talked about:
- It's gotten too expensive with the interest rates. Even people who can afford it are raising eyebrows - if you do the math, on a 500K loan you're paying 600+ more a month in interest alone. Next, many people cannot afford it anymore.
- People lost a hella lotta money in the stock and crypto markets. I know I did. People feel poorer. Even worse if a fraction of your income is in stock (looking at you, FAANGies). That's less down payment money.
- Sellers have ridiculous expectations. I heard a phrase recently, there are two types of sellers, those who know there's a downturn and they better price accordingly and lower prices, and those who haven't realized it yet.
Here's what isn't often talked about but I believe is true:
- Many, many people bought second homes. Some of these people take advantage of hybrid remote, some of them are taking advantage of Airbnb profits. Alas! Companies are calling people back to the office (there is ENORMOUS pressure from government and business groups due to the economic effects of people not being in the office -- NYC has a ~ 7 percent unemployment rate!). Next - inflation is eating into desire for renting Airbnbs. Next - people who lost a lot of money in the markets may sell those homes.
- If you're thinking about selling in the next year or two, you better list Now. That's the bottom line, and people are realizing that.
- The "historic low inventory" I think is media propaganda. Yes, it's technically true, but inventory isn't all inventory, it's for sale inventory. There's nothing endemic about that.
- The crash appears to be gestating in a few boom-and-bust "remote work is here to stay" hotspots like Phoenix, Austin, Boise...
And there are the institutional investors. Some think they're in it for the long-haul (private equity funds are for 10+ years, right). Some think they're going to dump at the first sign of trouble (appreciation is no longer happening, and yield-wise there are alternatives like bonds now).
Conclusion - I think buyers will have a lot of relief coming up, especially if you're a buyer with a good down payment and a lot of cash cushion.
Edit - I've been here long enough, I should learn better list markup etiquette.
Re: housing inventory, go use google news to read articles from 2006 on the housing supply. They said the exact same thing to justify the prices. Then 2008 hit and suddenly we had plenty of supply.
I think there is also a tremendous amount of leverage in the system, albeit different from 2008. Now you have people who followed internet financial gurus and built up large portfolios of rental properties(>$100M in many cases). These folks may soon face issues servicing their debt as vacancies shoot up and their cash flows dry up. We're really in the very early stages of the correction. Remember, 2000 took 2 years to crash, 2008 took 18 months. We have no idea what the next year will bring.
YouTube-wise I've grown fond of "Wealthion" which has interviews with analysts in the financial industry, not all with the same views (although there's pessimism these days). And they're not gold bugs like Kitco News.
If I understand it correctly the article is simply saying there will be a bust because of raising interest rates. Is that it? The article argues that a sharp reversal and bust will happen but doesn’t provide any rationale for why it would happen. No technical reason given other than that houses are not affordable.
You also have to factor in that the fed will try to push unemployment above 5% to rein in inflation.
Overall, expect a slower economy over the next year or two, and along with it, slowing price increases and, in some cases, price reversals.
If we repeat the 70s, expect this to cycle, with periods of inflation followed by periods of tightening.
Further, houses are just way too damn expensive relative to disposable incomes from a historical perspective. Personally I don't expect a crash, but I do expect a softening in most markets followed by stagnation.
Yes, that's enough reason. Higher interest rates makes house affordability even worse. Given that interest rates aren't likely to come down something else has to give and that's price. Also, once people see prices falling they get scared and are less likely to buy so the prices fall further. Add to that the likely job loss and you have the makings for a housing bust. How deep? No one knows.
Interesting enough, this is what the FED is looking for when they increase interest rates to reduce inflation. They can't control supply but they can reduce demand with higher interest rates.
My worry is that as financing becomes more expensive, institutional demand will replace retail demand. Institutional demand will be driven by a constrained supply which will in turn drive up rent prices.
I fear a future where houses are nearly exclusively bought by institutional investors because the amount of capital needed to secure a reasonable mortgage will soar and banks in turn will view the retail buyer as too much risk because of the need to have very high income for 30 years.
Somehow pressuring banks to give ridiculous money to people they clearly shouldn't so they can all bid against each other is not a long term solution. In fact, it's a solution that we have seen fail numerous times.
Institutional demand has two drivers that I know of: chasing appreciation or chasing yields. Appreciation is finished. So that leaves cap rates. How much can you keep raising rents? What are vacancy rates going to be? Maintenance costs? At a certain point something like a bond is less hassle and risk.
I don't know what percentage of these institutional rentals are intended to be held forever, or in long term funds, etc. versus part of a trade like other assets when financial conditions like debt costs change.
Housing in the USA has been relatively cheap for a very long time. I think those times are over.
The local news has been reporting on this bust in the Seattle area but median prices are barely down from a year ago. People are still lucky if they can get pre-purchase inspections. Californians, Texans, Midwesterners, Southerners still moving here in droves. My sister in law back in the midwest just spent 400k on a house in the middle of nowhere in Southwest Michigan. Welcome to the new order.
I find it interesting that some religions forbid interest in loans. I think they are into something as it's evil to first lend someone money at say 2%, then increase it to 4% interest. Inflation is created by "printing" more money, usually when a bank issue a loan "new" money is created. This "new" money leads to increasing prices aka inflation.
Almost all goods on the market today are auto-made by robots in a factory, meaning it almost doesn't cost anything to produce, and the prices for goods are solely determined by how much people are willing to pay. People are willing to pay 2x for a house, but not 2x for a good. Then at some random point in time news sites starts to print articles about inflation (maybe because of a temporary shortage in some raw material) and sellers of goods decide it's a good time to increase prices, because people are now willing to pay more due to "inflation". This freaks out people who has lended money to others and starts to liquefy their assets. This causes inflated prices to go down. It's self correcting. But then there's interest rates that is just evil as it screws with the economy.
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[ 3.7 ms ] story [ 206 ms ] threadWell the problem with that is that housing busts are usually associated with rescission (can't buy a house without a job) and rising interest rates (can't borrow the money anymore).
https://www.cnbc.com/2022/07/08/jobs-report-june-2022-.html
AFAIK, we have been in a recession since 2008. IMO we never really got out of it.
We will either bust hard and go into an actual depression, or we will forever stave off a true depression by…
Working for the same wage for years and years while costs go up and raises only happen to slightly offset cost of living.
We’ve been doing that for about 8 years now
It would've been arguably true in 2015 or so. But then we had years of high job growth, high median wage growth, and generally great economic conditions, right up until COVID, and then we actually recovered very quickly from COVID.
Like, is inflation high? You bet. Could we go into recession? We absolutely could. Did we have the last 8 years of costs going up and raises only happen to slightly offset cost of living? Absolutely not.
https://econbrowser.com/archives/2021/08/yet-more-alternativ...
Helps to show that it's not an effect dominated by the very rich, and thus throwing off the average, and also that it's not that hourly wages have stagnated but people work more hours -- since they're broadly similar, we should feel strongly that it is a real increase in "normal people's" actual wages.
There are more data available if people want to look for it. This is a surprisingly complex subject for something that initially sounds simple, so it helps to get a few different views into it, but the upshot is: since the teens, people have been paid more.
EDIT to add: People are just slow to update on this. If you look at the world in 2014, then it seems a lot more reasonable to be skeptical that normal people will ever get a raise. Then, you'd had basically 15 year of stagnation, before that a little rise, and then more years of stagnation at a lower level.
Wages are noticeably down since 2020.
WSJ and others prefer to report nominal wages (unless the article is about business costs), but you don't have to fall for the scam.
https://jabberwocking.com/wages-continue-to-plummet/
But 2014-2020 was very different.
Times like this make me glad to be in the US though. As bad as it gets here, it will be far worse in the developing world and Europe.
What do you mean by "continued stimulus"? There is no natural rate of interest.
That's complete nonsense. The National Bureau of Economic Research, the body which officially declares recessions in the US, defines a recession as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales."[1]
Aside from the 2020 pandemic dive, there has been positive GDP growth every year since 2008.[2]
[1] https://www.nber.org/news/business-cycle-dating-committee-an...
[2] https://www.macrotrends.net/countries/USA/united-states/gdp-...
> …the numbers don’t work anymore.
What numbers? None were given as an explanation for a “bust” except for a mortgage rate that is less than 6% and an increase in home prices since January.
We are not in 2008. The market may cool but the economics of home purchases are still pretty strong: lack of supply and increased demand from the large generation now ready to buy houses.
https://www.federalreserve.gov/econres/feds/volatility-in-ho...
Housing increased 30% over the last two years, and I seriously doubt anyone's wages increased by that much. Add inflation and increased interest rates and things will have to come down.
I get that there's a lot of anger about Californian building regs but post fire lower build back levels isn't the peg to hang this on.
wrong Sir, but only in this way -- there are more sq km in California than in plenty of entire countries (not AU). The regulations you refer to are the "Wildland-Urban Interface" which is Federally mandated .. Santa Rosa is a relatively settled place and (mostly) not in that so-called WUI.
On the other hand, Australia does indeed bear some resemblance to California in places due to drought and also, the flammable Blue Gum, here called Eucalyptus Tree. The answers here are multi-layered.
https://www.srcity.org/DocumentCenter/View/25294/CWPP-WUI-Ma...
Isn’t too much leveraged speculation what causes every bubble? Cheap debt fuels leverage and speculation/FOMO foments demand.
It did not find that there is no supply issue with housing, but rather that we can't attribute the most recent housing run up to unique supply issues starting in 2020.
Somewhat obvious to anyone with eyes. Doesn't mean new construction wouldn't lower prices.
https://archive.ph/N6Ys7
If so, there's probably still holdover from the last crash to cause splash in the next one.
So imagine you're BoA and in one town you back 5000 mortgages. Let's say 500 of those are about to default. You've already sold "paper" that includes all 500 of those loans, some of which may have been in the AAA tranche. In order to keep your AAA tranche from collapsing, you buy those 500 houses outright and sit on them, providing the illusion that your securities are healthy. It's cheaper and simpler.
The downside is, when the market collapses, BoA is still stuck with 500 houses and will have to sell them eventually. They don't care. They're just trying to hold on to them until the securities they sold mature. Once that happens, all bets are off and they dump the houses into a depressed housing market.
Housing prices are going to collapse. Badly. You can bet on it.
Sell every bit of real estate you own. Now. If you can.
Rent for a year or two. Then jump back in when it hits bottom. You'll pocket a ton of cash and then have the same or better property at a significantly lower cost.
I say cash in and buy something later. A lot of people will lean towards stability, but a savvy financial person would sell sell sell.
It's not just a dollars and cents issue when it's your actual home.
Land is a totally different market and hardly affected at all by interest rates since almost nobody will give you a mortgage for vacant land.
Even if the house is on a hunner acre wood.
It's my understanding that this is what a lot of people who sold their homes recently at the top of the market are doing exactly this. And this is one of the things that is driving up the prices of rents. If you pocketed a substantial windfall you are probably fine with paying an inflated rental price while you wait out the market. It's hard for me to imagine anything will be different in two years if all of these same people waiting out the market plus first time home owners all attempt to get back in to the market at the same time. Isn't it just the pandemic housing rush all over again?
Did you consider those that got 30 year 2.5% mortgages that will need to take out 6-6.5% mortgages currently & possibly higher in 1-2 years?
So if those were 30 years mortgages the collapse should be fairly far away?
Getting a loan now for developing multifamily or single-family properties is significantly higher than it was last year. That means fewer projects are starting. Rent has already been rising, but may rise even faster next year as new supply dries up.
Single family houses may go down in price -- but we all know that isn't really what people care about if they're buying. They usually care about their monthly mortgage payment. And, obviously, that is likely to go up with raising rates, unless there is a very significant downturn in home prices.
The Fed's primary tool is interest rates -- but while we could use a cooling of investment into bubbly areas (like, maybe tech equities and crypto) -- we still desperately need more investment into housing. It's a shame that they will likely move in tandem and we'll just get less investment in everything.
The old "it's a supply constraint" argument will not age will IMO. FWIW, the fed agrees:https://www.federalreserve.gov/econres/feds/volatility-in-ho...
I think we've now just seen that same pattern catch up with more places. I know people in Austin and Houston who were complaining that prices were already getting too high before 2020. That's where the folks priced out of CA were going even then.
Which is not entirely dissimilar to the general discussion around gentrification - those who can afford to pay more can displace those who can't - but a sort of special case that doesn't require migration.
Seems like there would be some sort of game theory aspect - this only works if something close to every landlord is pushing prices up?
I think what we're really seeing is more the high-migration "gentrification" case yet applied to populations that normally aren't who you think of as being the ones on the receiving end of gentrification: the 100M-dollar-buyers are pushing out the 10M-dollar-buyers are pushing out the 1M-dollar-buyers from California and then they go to Texas and push out the 500K-dollar-buyers... and it continues to flow out to touch everyone else too.
Certainly, low mortgage rates drove home prices way up... but does that mean high rates could drive them down? I mean, maybe over a long period of time as existing mortgages get paid off (?) but for now while the vast majority of mortgages out there are lower than the going rate, won't that just keep constraining the supply and prevent the price of houses from dropping significantly?
You'll still have sales - some people will die, some people will have to move for various reason, etc - but how much it will fall seems like a very hard to predict question.
With rising rates, the counter pressure on prices from buyers may not exist in large enough supply to prevent the investors selling from driving prices down.
Something like this: https://www.homelight.com/cash-offer
Rising interest rates would reduce demand at higher price ranges, for example, causing a drop. At the end of the day costs are only part of the equation.
I don't think that means the fed is doing the wrong thing though. Fixing our energy bottlenecks will take a decade or more(regardless of rates. refineries and nuke plants take 10+ years to build), so pulling back demand to be in line with that supply seems like the right thing to do. It will hurt, but it is better than entrenched inflation and wage-price spirals.
> They usually care about their monthly mortgage payment.
True, but not for me. I care about price, because the price never changes yet I can always refinance. Also, your initial assessed value, at least in California, is a big factor in the lifetime(or more) amount of property taxes you'll be paying. I would much, much rather have lower prices and high interest rates.
Overall I think housing will sort itself out. We already have plenty of units in the pipeline. Also, we're going to grudgingly transition, as a nation, towards more efficient, higher density housing whether we like it or not. Energy prices combined with policies to combat AGW will, over the long term, incentivize more urban living. I'm not a fan of it, being a suburban lover, but it is what it is.
If you're unfortunate enough to be out of work, you won't be able to refinance your loan. And if you're upside down on your loan, you can't refinance either.
This is really difficult to describe as a general trend due to endogenous actors like the Fed.
Recessions can co-occur with low rates as the Fed expands to try to spur investment in the economy. They can also co-occur with high rates that choke investment.
Never reason from a price change
After seeing how pandemics can sweep though dense areas, I think many people want no part of being forced to live in high density areas. Quite the opposite actually.
So there is no correlation.
But sellers do care deeply about this number. If they added on a $50k garage, they want to see that money come back. It may cause some potential sellers to decide to become landlords instead.
Example for California: https://www.calhfa.ca.gov/homebuyer/programs/index.htm
https://business.nv.gov/Homeowner/Homeowner__Assistance_Prog...
Seems to me the best way to get markets to allocate more capital towards housing would be to eliminate costly restrictions on building.
The argument that ever lowering interest rates lead to "affordable" homes is not evident in any real world data that I've looked at. Evidence points to the contrary.
Houses are always priced at what people can afford to pay for them. The median price of a house is directly linked to size of the mortgage a couple working for median wage can be cleared to loan by a bank.
5% mortgage rate? For a $200k home that's $10k per annum to cover the interest. 2% mortgage rate? That $200k home is now $500k. The devious detail here is that the time to pay off the loan changes completely. The $200k home can be paid off in 25 years with $670/mo plus interest. The $500k home? 62.5 years with $670/mo plus interest.
It gets even better - assume the 5% mortgage rate equals 5% inflation rate. In a high inflation, high interest rate environment, the $200k home is devalued by 5% per annum. Assuming wages keep up with inflation, the $670/mo payment is smaller and smaller piece of the total income.
A couple earning $100k together per year spend $18k or 18% of their (pre-tax) income on their $200k home during the first year. If their income stays the same but is corrected for inflation, 25 years later their income will be $338k in inflated dollars but their mortgage payments will be $18k / $338k = 5.3% ! Eaten by inflation!
Compare this to a scenario where another couple buys a $500k home in a low interest rate, low mortgage rate environment. During the first year, their payment is equal to the other couple. After 25 years of 2% inflation/interest rates/mortgage rates assume their wages keep up with inflation as well. The couple's combined income will be $164k in inflated dollars. The mortgage payment will be 10.9% of their total income.
The "2%" couple pays over twice as much as share of their income as the "5%" couple after 25 years and the "2%" couple is expected to keep paying the loan down 2.5x longer (62.5 years vs 25 years).
This is basic high school math with nothing fancier than exponentials, so I'll leave the equations as an exercise to the reader.
[0]: https://www.washingtonpost.com/us-policy/2019/02/06/people-l...
Just seems like there is so much demand for housing and the fact that investment funds are now buying homes en masse as investments just makes me think the market will remain expensive.
But who knows, I hope I'm wrong!
I don’t see any scenario where a home becomes trivial to afford before 2032. People should just start getting used to the fact that it’s going to be an expensive purchase.
Here's what I think so far that's talked about:
- It's gotten too expensive with the interest rates. Even people who can afford it are raising eyebrows - if you do the math, on a 500K loan you're paying 600+ more a month in interest alone. Next, many people cannot afford it anymore.
- People lost a hella lotta money in the stock and crypto markets. I know I did. People feel poorer. Even worse if a fraction of your income is in stock (looking at you, FAANGies). That's less down payment money.
- Sellers have ridiculous expectations. I heard a phrase recently, there are two types of sellers, those who know there's a downturn and they better price accordingly and lower prices, and those who haven't realized it yet.
Here's what isn't often talked about but I believe is true:
- Many, many people bought second homes. Some of these people take advantage of hybrid remote, some of them are taking advantage of Airbnb profits. Alas! Companies are calling people back to the office (there is ENORMOUS pressure from government and business groups due to the economic effects of people not being in the office -- NYC has a ~ 7 percent unemployment rate!). Next - inflation is eating into desire for renting Airbnbs. Next - people who lost a lot of money in the markets may sell those homes.
- If you're thinking about selling in the next year or two, you better list Now. That's the bottom line, and people are realizing that.
- The "historic low inventory" I think is media propaganda. Yes, it's technically true, but inventory isn't all inventory, it's for sale inventory. There's nothing endemic about that.
- The crash appears to be gestating in a few boom-and-bust "remote work is here to stay" hotspots like Phoenix, Austin, Boise...
And there are the institutional investors. Some think they're in it for the long-haul (private equity funds are for 10+ years, right). Some think they're going to dump at the first sign of trouble (appreciation is no longer happening, and yield-wise there are alternatives like bonds now).
Conclusion - I think buyers will have a lot of relief coming up, especially if you're a buyer with a good down payment and a lot of cash cushion.
Edit - I've been here long enough, I should learn better list markup etiquette.
Re: housing inventory, go use google news to read articles from 2006 on the housing supply. They said the exact same thing to justify the prices. Then 2008 hit and suddenly we had plenty of supply.
I think there is also a tremendous amount of leverage in the system, albeit different from 2008. Now you have people who followed internet financial gurus and built up large portfolios of rental properties(>$100M in many cases). These folks may soon face issues servicing their debt as vacancies shoot up and their cash flows dry up. We're really in the very early stages of the correction. Remember, 2000 took 2 years to crash, 2008 took 18 months. We have no idea what the next year will bring.
Can you share some of those blogs you would recommend?
YouTube-wise I've grown fond of "Wealthion" which has interviews with analysts in the financial industry, not all with the same views (although there's pessimism these days). And they're not gold bugs like Kitco News.
Overall, expect a slower economy over the next year or two, and along with it, slowing price increases and, in some cases, price reversals.
If we repeat the 70s, expect this to cycle, with periods of inflation followed by periods of tightening.
Further, houses are just way too damn expensive relative to disposable incomes from a historical perspective. Personally I don't expect a crash, but I do expect a softening in most markets followed by stagnation.
Interesting enough, this is what the FED is looking for when they increase interest rates to reduce inflation. They can't control supply but they can reduce demand with higher interest rates.
I fear a future where houses are nearly exclusively bought by institutional investors because the amount of capital needed to secure a reasonable mortgage will soar and banks in turn will view the retail buyer as too much risk because of the need to have very high income for 30 years.
Somehow pressuring banks to give ridiculous money to people they clearly shouldn't so they can all bid against each other is not a long term solution. In fact, it's a solution that we have seen fail numerous times.
Unless government addresses this, the future is one in which you live in a home owned by a corporation.
I don't know what percentage of these institutional rentals are intended to be held forever, or in long term funds, etc. versus part of a trade like other assets when financial conditions like debt costs change.
The local news has been reporting on this bust in the Seattle area but median prices are barely down from a year ago. People are still lucky if they can get pre-purchase inspections. Californians, Texans, Midwesterners, Southerners still moving here in droves. My sister in law back in the midwest just spent 400k on a house in the middle of nowhere in Southwest Michigan. Welcome to the new order.
You're referring to Wednesday's Seattle Times piece[1], I assume? Median prices are still way up from a year ago. They're down from last month.
[1]: https://www.seattletimes.com/business/real-estate/king-count...