Legal ethics rules in the US preclude a non-lawyer from controlling or supervising the legal judgment of a lawyer, which makes the notion of non-lawyer shareholders problematic.
Not OP. Fed stops raising the benchmark rate. Until it plateaus, asset prices have room to fall. Days listed is a great indicator of mispriced real estate (higher # = asking too much). Those needing to sell will drive declining comps.
Rates are expected to peak at 4.5% to 4.75% in 2023, according to the Fed’s own projections (and might go as high as 5%).
Rents have gone up, and people have locked in historically low interest rates. Very few people actually have to sell, and outside of limited life situations, many will just shift to renting. That is why it is taking so long for prices to drop, and why they very well might never drop enough to match previous affordability before we hit a period of declining rates. If only 10% of owners on the market are actually feeling any financial pain, it is not enough to move the needle on the market price.
We can speculate, but will have to see what job losses look like over the next 12-18 months, Boomers (10k per day retire) trying to downsize or tap their equity to support themselves in retirement, etc before boldly proclaiming sales with seize up as rates climb. Life happens, some people will need to sell, even if that means losing their sweet 2-3% rate. Cash buyers know what these assets are worth at these interest rates, it’s unlikely they’re going to Wile E Coyote over the cliff because mortgage buyers stopped at the edge.
We are in the middle of it. Rates have been going up for a long time, and around here, year over year sales are down 40%. Prices are flat or have taken a very small dip, depending on the submarket. I am not at all convinced this trend will continue beyond a 10-20% drop in prices, nowhere near the 35-50% drop required to reach purchasing power parity depending on where the Fed stops raising rates. A slow, smaller drop is functionally equivalent to prices continuing to go up for many as they have been for so long, but then also gets a certain group of cash buyers who aren't looking for an absolute killing, just good returns, back into the market to slow down further drops.
Of course we don't know the future, and if things really go to the worst due to wars around the world etc, all bets are off. But my opinion is based on things continuing more or less in the current mediocrity for a while, rather than getting significantly worse.
All those people that retired with their nice homes because of historically high asset prices that lost close to 50% of their net worth in the past year or two might need to consider downsizing. Especially once property taxes on their newly inflated home values kick in.
So far the mortgage rates skyrocketing corresponds to an equivalent mortgage that is about 35% lower. Meaning that if you could previously afford a $1 million mortgage, you can now only afford about a $650,000 mortgage with the same payment.
If you don't see a corresponding price drop of 35% then it might be too early.
Cash buyers are not complete idiots. If the mortgage-based buyers they were competing with a year ago have 35% less buying power than why would they spend money they don't need to? The market where I live (Seattle suburbs) has completely reversed in the last year.
A year ago I was surprised if a house lasted more than a weekend, now I'm literally shocked when I see a house sell. I can think of two houses in my area I've seen with sold signs in the last couple months and there's dozens that have been sitting on the market for that time.
Cash buyers are -not- complete idiots, but there was (and still is) some portion of people who think that prices will at best plateau, and thus it's better to 'get in' early still.
> A year ago I was surprised if a house lasted more than a weekend, now I'm literally shocked when I see a house sell.
Around here it has cooled down but the market is still... volatile. Ironically I may or may not be 'up' in value compared to the start of this year. But my state has various taxes and insurance costs that have impacts on relative home value.
Yea likely many cash buyers will sit in a wait and see mode except for amazing properties (like waterfront that is being sold cheaper than expected etc) -- but the ability of the fed to drive housing prices down will probably be seen as a feature rather than a bug to many people -- so I would expect the fed will keep the high interest rates for 2-3 years. There were continual increases from 1977 to 1981 until finally things were reversed.. so interest rates being ~8% + for 3 years would seem cheap compared to the high interest rates of 1981 (hitting 18%). So seems likely housing prices will keep sliding for a while until some sort of equilibrium is found.
I wonder if cash buyers really are that resilient. I assume most people who have that much in assets primarily have it in stocks (rather than actual cash), which have also dropped precipitously this year.
There's been a lot of news coverage lately about how low inventory is going to continue to keep housing prices high, despite mortgages going up.
Basically people with 2%-3% mortgages are going to sit tight, because they can no longer afford a comparable house were they to move. Low inventory means prices won't drop as much as people hope with rising interest rates.
The only wild card here is what will happen with cash buyers, who aren't affected by mortgage rates.
Inventory is already well on its way back to 2020 levels, and is exceeding 2019 levels in some areas. The "shortage" was caused by demand from extremely low interest rates, now that demand has died...the shortage is over. Not to mention, as we head into this recession and life/layoffs continue, people will be forced to sell if they can no longer cover their mortgage.
Listings are still very low compared to pre-pandemic levels not to mention by many metrics there was already a shortage before the pandemic stemming all the way back to the great recession. Some interesting reading:
We're really only a month into the new rates. People who locked in at the sub 6% interest rates were still closing in October. Either we see a dramatic drop in prices or inventory will surge.
Housing affordability has been demolished with these higher interest rates, so sales will drop off a cliff as we're already seeing with mortgage companies doing mass layoffs.
> so sales will drop off a cliff as we're already seeing with mortgage companies doing mass layoffs.
Certainly, but read these articles. the expert economists and firms. While that may be true it is also true that far fewer people will sell their homes and very few homes will be built exacerbating an already 20 year problem of under building. The USA will have a low demand and low supply problem in the short term but the low supply problem is likely to persist for quite some time (just as it has for the past decade).
Likely people will take their houses off the market and rent them out. With mortgage rates going up and liquidity drying up, a lot of prospective buyers are deciding they're going to sit tight in a rental. That puts upward pressure on rents and gives an incentive for sellers whose desired price can't be met with the new rates to just sit tight and collect rental income.
Same thing happened when buyers disappeared in 2020 - most of the more marginal homes just got taken off the market, and either rented for a year or given a fresh coat of paint and some renovations to sell for a few hundred K higher in 2021.
Yeah, with the caveat that '18 and '19 inventory was AWFUL. My friend purchased a house in '17, and I - in '18, and we both to increase our budgets by ~15-20% in order to be able to afford _any_ house that didn't look like an environmental disaster.
Even then, these were 70 year old starter homes.
Basically - if you live in a desirable area, don't expect housing prices to reflect a 35% drop off of the interest rates increasing. Expect to pay roughly 2018-2019 prices, maybe even with 5-10% on top, adjusting for inflation.
> The only wild card here is what will happen with cash buyers, who aren't affected by mortgage rates.
Depends what you mean by cash buyer. There's a few different categories here and people sometimes get confused.
1) Someone who is very wealthy and has enough cash (or cash convertible assets) lying around to buy house without financing. I'd put Bill Gates in this category. I think most people assume that this is what all cash buyers are (albeit not as wealthy as BG)
2) Someone who sold a home that previously appreciated in value and is now able to use the difference (plus some savings) to pay for the next home in cash. For example, you bought in Brooklyn in 1970 and now want to retire in Miami. You can probably sell that first place and have enough liquid cash to buy in Miami. This is sort of like category 1, but not necessarily someone who is wealthy in a way that most people imagine.
3) Someone who has access to some other means of temporary financing. For example, let's say you run a company and have a close relationship with your bank. You might already have a line of credit with the bank collateralized against your business or other assets that you can draw down to get a temporary loan so that you can make a "cash offer", which you then plan to turn around and get a mortgage on. You don't need to be able to afford $600,000 in cash to buy a $600k home. You just need to be able to have some means of financing it in between when you buy the home and when you take out a mortgage. Often times this might be a family member or friend helping out.
4) A real estate investment company that buys houses in cash. Again, you may not actually have the cash around, but you have a banking relationship and the ability to get large amounts of cash on short notice and without the amount of due diligence a mortgage reuqires.
In 2020-2021 when the housing market was at its peak, I suspect that a substantial chunk of "cash buyers" probably fell in category 3. Yes, people had more money and there were lots of bitcoin millionaires, but not enough to hear about multiple cash offers on $500k homes (if you are the sort of person with $500k in cash to spare, you probably want more than a $500k home).
In any case, all of these groups are affected by the current environment. The stock market is down and there are just fewer people in Group 1 right now. Sure, Bezos and Gates are just fine, but the person who had $10M in liquid assets in 2021 might have $7M in in late 2022 and is probably a lot more nervous about taking money out of that. For group 2, the house you are selling isn't gonna sell for as much, so you'll have less money to spend on your next house. For group 3, these people were planning to use financing as a bridge, but the underlying mortgage rates still very much affect you if you plan to take out a mortgage after the sale. And of course, Group 4 is probably the most effected... what kind of person in their right mind is investing in residential real estate right now :)
This whole inventory argument is genuinely confusing to me and I never quite understood why everyone was talking about a sudden inventory "shortage" around 2020. Did a large number of houses suddenly get destroyed? Or was there a sudden massive increase in population?
If neither of those things happened, then in my opinion there isn't actually a "shortage", and the extra demand is maybe just from remote working and low interest rates. If those factors retreat and become less favorable, I presume the demand will retreat and new buyers will crawl back to wherever they were living before and this "shortage" will disappear as quickly as it came.
The sudden inventory shortage was due to the pandemic. Many people took their houses off the market in order to wait and see how things were going to play out. Hiring slowed down as well and many that did change jobs went to remote jobs. You don't usually have a reason to move if you don't have a job change. Then of course lots of people working from home caused more demand for homes as those in smaller apartments or houses decided they needed to upgrade.
I’ve worked (and still currently work) in mortgage software for over a decade and let me tell you it’s pretty bleak right now. This entire industry is boom/bust.
It's unsurprising mortgage volume is down given economic uncertainty and the spiking interest rates. As such, layoffs at mortgage originators seem inevitable.
But here's the lesson I want people to take from this: both Demorats and Republicans are cut from the same neoliberal cloth in that they both serve corporate interests. What do I mean by this? Neither pushes back on the idea that interest rates are the only way to tackle inflation.
This is false.
As we say in the GFC and the pandemic, wha tdo companies do with this money? They pay bonuses, do layoffs anyway (to cut costs) and give money to shareholders, primarily in the form of buybacks.
But what you see is corporate profits are skyrocketing. Inflation is being as an argument to raise prices, which in turns puts pressure on inflation, and all that money goes to the shareholders.
Higher interest rates increase housing costs and put upward pressure on rents (as landlords seek to recoup costs).
The other method by which this can be tackled is with taxation. Some countries have enacted windfall taxes. Taxation incentivizes investment in the business.
Yet there is no serious political will anywhere to be found for this in the US.
1) additional profit from raising prices won't go towards the bottom line, so the incentive to raise price is not as attractive
2) if a company is hell bent on raising prices to capture profit, there is still an incentive to reduce tax liability by re-investing those profits into the company (increasing headcount would benefit the non-ruling class)
> The Inflation Reduction Act imposes a corporate alternative minimum tax equal to the excess of 15% of a corporation's adjusted financial statement income (AFSI) over its corporate alternative minimum tax foreign tax credit.
This is not an impactful tax for any of the affected corporations. They will simply choose the method under which they pay the least and continue their tax avoidance through declared max depreciation et al, as normal. This is the USA and billionaires aren't to be inconvenienced by public policy.
The IRA was a fairly tepid bill (eg the cheaper medicines were very limited in scope and don't come into effect for several years) but the 15% minimum corporate tax rate was one of the less talked about but more impactful measures.
How do I know this? Because of all the resistance that particular measure got from many lawmakers.
So why is that impactful with the corporate tax being lowered to 21% in the Trump administration? 15% is less than 21% so it shouldn't matter right? But it does because the 2017 tax cuts effectively (in a complicated fashion) mostly gave a permanent amnesty on offshored profits. Previously, any repatriated profits were subject to the (then) 35% corporate tax rate. That bill ended that treatment. The replacement was more complicated and a much lower effeective tax rate.
So the 15% minimum actually hits companies who are currently paying less than that on foreign income. It's a good measure.
My comment however was referring to far stronger and likely temporarly measures, such as a windfall corporate tax of, say, 60% (or even higher).
Housing prices are dropping, as would be expected with the interest rate hikes.
House prices are set at the margins, just like any asset. Even if the folks with 3% mortgage rates sit tight and don’t sell, there will still be downward pressure on prices because prices are not determined by non-transactions. There are plenty of listings for those who need to exit the market and liquidate, driving inventory up.
Just a quick glance at Zillow and Redfin will show that Bay Area prices have already retreated 10-15% and in some cases back to 2019 levels. Every other listing has 100k+ price cuts or more.
If you look at the national picture in the USA prices haven't really budged by much at all, it would seem reasonable that they will but when and by how much is the million dollar question:
Yeah I think a correction is likely - haven't seen anyone being nearly that pessimistic (or optimistic probably if you're younger and in the USA) but shifts from 5-15% depending on the market have been predicted by plenty of firms.
I suspect what is happening is that the affordability crunch is causing a noticeable drop in demand in the HCOL areas (hence the pronounced decrease in prices in the Bay Area I noted in the original comment).
The availability of remote work and the retreat of the HCOL population to other areas in the US is likely causing an increase in demand elsewhere, as we have seen as a macro trend since the beginning of the pandemic. This demand will keep supplies low in LCOL areas.
Houses are set on the margin, but that doesn't mean the "lock in effect" doesn't have a net positive effect on prices.
There is heterogeneity of sellers in how much they "must" sell (versus alternates like rent it out, not move at all if they're nearly indifferent between cities, etc). Clearly "lock in" reduces total sellers.
> House prices are set at the margins, just like any asset. Even if the folks with 3% mortgage rates sit tight and don’t sell, there will still be downward pressure on prices because prices are not determined by non-transactions.
YES! There is a sort of delusion that has taken hold of people who became “house rich” in the past couple years. They seem to think that if they don’t sell, their house will still be worth whatever fantasy number they have in their heads.
It does get me thinking about the psychology of these economic cycles and how the transformation of that delusion to acceptance/sadness on an individual level will impact their buying habits and risk taking. On a large scale, it is easy to see this is sort of spiraling into a protracted recession.
Similarly, the delusion of the "house poor" hoping for another 2008 is frankly hilarious.
The difference is, if you picked up a house at 2.7% you will be winning for a long time. There are fewer ARMs, which means a small more protracted "collapse". Housing supply is still non-existent and will be into the near future. Wages will need to keep pace with housing costs in order to provide anyone a chance to succeed. Even after a so-called "recession" in housing they'll still be too expensive. For example, if my house dropped 50% in value, it'd still be way over what I bought it for.
The only deluded people are the ones not holding property. Make no mistake, if you didn't buy/refinance in 2020 you lost out on a literal once in a lifetime opportunity to lock a massive short against the fed.
> you lost out on a literal once in a lifetime opportunity
I don't think anyone can make claims like this, lots of people made the right decision by not buying into an inflated market with job instability around the corner.
I think the correction is needed, any people who didn't overextend will be fine if they intend to stay put for 5-15 years.
Yeah this the thing - somehow those of us who chose not to over-extend in times of exuberance are the ones who lost out? I've been renting for a long time, but my market still doesn't let me buy a home that I could live in with my family for an amount that won't make me lose sleep when rates go up (like everywhere outside the US, most mortgages are ARMs here). Like many of this board, I'm in the upper-echelon of earners in my location, but I refuse to over-extend on a housing loan like many folks in my location.
The only difference is that recently I've resigned myself to the fact that maybe I'll never own in my current location - which even though may be emotionally sad, at least I don't have a crazy monthly payment for a shoebox apartment.
The parent comment is making a really good point (in a roundabout way):
It is just another variation of "timing the stock market". Even if you're correct you can end up losing so much money on the upside that long-term you lose compared to people who buy into a bull market.
Depending on the exact circumstances of when you bought, your mortgage rate, how much prices fall, how long you can hold, and how much prices recover you can still end up losing by not having bought during the run-up.
Here's a made up bay area example:
A house sells for $2m in 2014. Due to rising prices over 8-10 years you end up buying for $3m at 2.5% interest in 2021. The market then tanks by 30%. That puts the house back at $2.1m. Over the following 5 years the market recovers somewhat and the house is worth $2.8m in 2026.
A naive view says "see! it was correct not to buy in 2021! waiting was the correct choice."
But that's not the whole story.
Buying in 2021 means you did not pay $5k/mo rent from 2021-2026. That's $270k. Not all of that will go to principle but some will. And you're 5 years ahead of the mortgage payoff schedule compared to not buying.
Speaking of time value of money... buying in 2021 means you got 2.5-3% interest on your 30 year mortgage. Depending on how things play out buying in 2026 might end up with 4-6% on the same mortgage:
2021 Purchase @2.5%: total interest paid $1.26m
2026 Purchase @4%: total interest paid $2.15m
2026 Purchase @6%: total interest paid $3.47m
In this scenario buying in 2021 ends up with the bank paying _you_ to take the mortgage since inflation is up. If you assume inflation says around 2-2.5% after that you more or less borrow the money for free.
Buying in 2026 costs you around $1m-$2.2m over the life of the loan.
In this example even accounting for the market dropping 30% _and_ not fully recovering it still made more sense to buy in 2021. Remember this is just one example with a lot of assumptions. I'm not saying this is what will happen. I'm merely pointing out that you can predict prices are inflated, wait for them to fall, and end up losing compared to a "sucker" who bought at the peak.
The history between May and August was deleted on Redfin. Either there is a way to pay Redfin to delete history or @lotsofpulp is right, or maybe a convenient bug?
Yeah that's a trick. They take it off the market and then relist which resets the clock. They do this so buyers won't assume there is something wrong with the property due to the price changes.
I might be wrong and have just looked at a couple houses where the data is missing now. I set the Zillow filter to “price reductions”, which Redfin does not have, but I compared a few homes and both listed price changes.
The houses I had favorited with the missing price changes are gone from my Redfin favorites list now (owner decided to remove listing?).
Zillow definitely has better history though, and a filter option to show price reductions.
in the US I find it strange that the mortgage interest rate is almost always fixed for the life of the mortgage. If you took a mortgage at 2% which is well above the Fed's interest rate, then isn't the lender loosing money? Or is that not how it works?
I'm from the UK where mortgages can fixed for a definite period, usually 2-5 years, then it changes to a variable rate mortgage (with the same provider), but there's always the option of choosing variable from the start. The variable part is a margin + the Bank of England base rate.
I now live in Europe and here it's the same, except basically nobody chooses a fixed rate mortgage. The monthly repayments are recalculated every six months using the current EURIBOR rate - which is set by a group of banks themselves, not the European Central Bank (it sounds a lot like a cartel).
Either way, I'm buying a house now when interest is the highest it's been for over a decade, but it doesn't really bother me as it will drop at some point and my monthly payments will go down.
Yeah US has a weird system. The mortgages are packaged up and sold as a bond, so the investor who buys the bond has the interest rate and credit risk. If rates go up the value of these long term bonds go down. The bank or company that sold the original mortgage is protected. https://en.wikipedia.org/wiki/Mortgage-backed_security. It really relies on a lot of government coordination.
> the mortgage interest rate is almost always fixed
It's policy. The New Deal created a secondary mortgage market through Fannie Mae (and later Freddy Mac) that normalized mortgages to 30 year fixed. There are many ways to structure mortgages in the US and not all mortgages are fixed, but the typical mortgage is because those mortgages are the most liquid given the structure of the US secondary mortgage market.
I don't know why you'd want to deal with the European or UK system. It means your housing payment can fluctuate, possibly dramatically, due to actions entirely outside your control.
Mortgages in the US generally don't have a payoff penalty after a certain amount of time (and some don't have one at all) so in a falling interest rate scenario you can simply refinance.
To answer your question: the ultimate buyers (or should I say ultimate lenders) are taking the interest rate upside risk in exchange for stability. Mortgages just don't lose much money. When defaults are high they lose out on future interest and may take principle haircuts but they don't evaporate. Even most of the garbage from the 2007 financial crisis eventually recovered as housing recovered - comparatively few of the actual mortgages were written off.
If you want that kind of stability you can buy US Treasuries to earn 1% (or even less). Or you can get into mortgages and earn 2.5% for almost the same risk. Those rates would be higher today of course since the fed is raising rates.
You might rightly say that LIBOR or whatever rates don't fluctuate that much... in which case the same argument applies to the risk lenders take on in the US market.
It's not clear to me from the article if that 90% down number includes refinances.
It says that the effects are "particularly [pressuring] firms like Rocket Mortgage that thrived on loan refinancings" but I don't know if it's reading in too much to assume that the WF pipeline it's talking about is including both.
(If it includes refis that's still bad news for the mortgage interest but way less indicative of soon-to-fall prices since rates have generally been below the current point for about 20 years, so no small wonder nobody would refi now.)
76 comments
[ 4.2 ms ] story [ 149 ms ] threadHere's the top Google result on the subject: https://abovethelaw.com/2021/05/will-we-soon-see-an-american...
https://www.cms.gov/Medicare/Fraud-and-Abuse/PhysicianSelfRe...
And buying healthcare provider groups has been very popular with private equity in the past decade, there is no requirement for owners to be doctors.
https://www.bloomberg.com/news/features/2020-05-20/private-e...
https://www.ineteconomics.org/perspectives/blog/er-doctor-pr...
How are you planning to determine when the price drop has turned around so that you don’t miss out on a great deal?
Rates are expected to peak at 4.5% to 4.75% in 2023, according to the Fed’s own projections (and might go as high as 5%).
Of course we don't know the future, and if things really go to the worst due to wars around the world etc, all bets are off. But my opinion is based on things continuing more or less in the current mediocrity for a while, rather than getting significantly worse.
If you don't see a corresponding price drop of 35% then it might be too early.
If it's a cash market (bay/Seattle/NYC), might be more resilient.
A year ago I was surprised if a house lasted more than a weekend, now I'm literally shocked when I see a house sell. I can think of two houses in my area I've seen with sold signs in the last couple months and there's dozens that have been sitting on the market for that time.
> A year ago I was surprised if a house lasted more than a weekend, now I'm literally shocked when I see a house sell.
Around here it has cooled down but the market is still... volatile. Ironically I may or may not be 'up' in value compared to the start of this year. But my state has various taxes and insurance costs that have impacts on relative home value.
Basically people with 2%-3% mortgages are going to sit tight, because they can no longer afford a comparable house were they to move. Low inventory means prices won't drop as much as people hope with rising interest rates.
The only wild card here is what will happen with cash buyers, who aren't affected by mortgage rates.
https://twitter.com/RickPalaciosJr/status/158868887009456128...
https://twitter.com/NewsLambert/status/1589036074441281536
https://twitter.com/NewsLambert/status/1589034547697836032
https://fred.stlouisfed.org/series/ACTLISCOUUS
Listings are still very low compared to pre-pandemic levels not to mention by many metrics there was already a shortage before the pandemic stemming all the way back to the great recession. Some interesting reading:
https://usafacts.org/articles/population-growth-has-outpaced...
https://www.usatoday.com/story/money/2022/10/26/housing-mark...
https://www.pewtrusts.org/en/research-and-analysis/blogs/sta...
https://www.fanniemae.com/research-and-insights/perspectives...
Housing affordability has been demolished with these higher interest rates, so sales will drop off a cliff as we're already seeing with mortgage companies doing mass layoffs.
Certainly, but read these articles. the expert economists and firms. While that may be true it is also true that far fewer people will sell their homes and very few homes will be built exacerbating an already 20 year problem of under building. The USA will have a low demand and low supply problem in the short term but the low supply problem is likely to persist for quite some time (just as it has for the past decade).
Same thing happened when buyers disappeared in 2020 - most of the more marginal homes just got taken off the market, and either rented for a year or given a fresh coat of paint and some renovations to sell for a few hundred K higher in 2021.
Even then, these were 70 year old starter homes.
Basically - if you live in a desirable area, don't expect housing prices to reflect a 35% drop off of the interest rates increasing. Expect to pay roughly 2018-2019 prices, maybe even with 5-10% on top, adjusting for inflation.
Depends what you mean by cash buyer. There's a few different categories here and people sometimes get confused.
1) Someone who is very wealthy and has enough cash (or cash convertible assets) lying around to buy house without financing. I'd put Bill Gates in this category. I think most people assume that this is what all cash buyers are (albeit not as wealthy as BG)
2) Someone who sold a home that previously appreciated in value and is now able to use the difference (plus some savings) to pay for the next home in cash. For example, you bought in Brooklyn in 1970 and now want to retire in Miami. You can probably sell that first place and have enough liquid cash to buy in Miami. This is sort of like category 1, but not necessarily someone who is wealthy in a way that most people imagine.
3) Someone who has access to some other means of temporary financing. For example, let's say you run a company and have a close relationship with your bank. You might already have a line of credit with the bank collateralized against your business or other assets that you can draw down to get a temporary loan so that you can make a "cash offer", which you then plan to turn around and get a mortgage on. You don't need to be able to afford $600,000 in cash to buy a $600k home. You just need to be able to have some means of financing it in between when you buy the home and when you take out a mortgage. Often times this might be a family member or friend helping out.
4) A real estate investment company that buys houses in cash. Again, you may not actually have the cash around, but you have a banking relationship and the ability to get large amounts of cash on short notice and without the amount of due diligence a mortgage reuqires.
In 2020-2021 when the housing market was at its peak, I suspect that a substantial chunk of "cash buyers" probably fell in category 3. Yes, people had more money and there were lots of bitcoin millionaires, but not enough to hear about multiple cash offers on $500k homes (if you are the sort of person with $500k in cash to spare, you probably want more than a $500k home).
In any case, all of these groups are affected by the current environment. The stock market is down and there are just fewer people in Group 1 right now. Sure, Bezos and Gates are just fine, but the person who had $10M in liquid assets in 2021 might have $7M in in late 2022 and is probably a lot more nervous about taking money out of that. For group 2, the house you are selling isn't gonna sell for as much, so you'll have less money to spend on your next house. For group 3, these people were planning to use financing as a bridge, but the underlying mortgage rates still very much affect you if you plan to take out a mortgage after the sale. And of course, Group 4 is probably the most effected... what kind of person in their right mind is investing in residential real estate right now :)
If neither of those things happened, then in my opinion there isn't actually a "shortage", and the extra demand is maybe just from remote working and low interest rates. If those factors retreat and become less favorable, I presume the demand will retreat and new buyers will crawl back to wherever they were living before and this "shortage" will disappear as quickly as it came.
At the current rate of 7.5%, it's $4,545.
For that reason, I hesitate to predict a huge downward trend in house prices. In this environment, prices holding steady would be a downward trend.
https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=100&year1=2019...
But here's the lesson I want people to take from this: both Demorats and Republicans are cut from the same neoliberal cloth in that they both serve corporate interests. What do I mean by this? Neither pushes back on the idea that interest rates are the only way to tackle inflation.
This is false.
As we say in the GFC and the pandemic, wha tdo companies do with this money? They pay bonuses, do layoffs anyway (to cut costs) and give money to shareholders, primarily in the form of buybacks.
But what you see is corporate profits are skyrocketing. Inflation is being as an argument to raise prices, which in turns puts pressure on inflation, and all that money goes to the shareholders.
Higher interest rates increase housing costs and put upward pressure on rents (as landlords seek to recoup costs).
The other method by which this can be tackled is with taxation. Some countries have enacted windfall taxes. Taxation incentivizes investment in the business.
Yet there is no serious political will anywhere to be found for this in the US.
2) if a company is hell bent on raising prices to capture profit, there is still an incentive to reduce tax liability by re-investing those profits into the company (increasing headcount would benefit the non-ruling class)
This is not an impactful tax for any of the affected corporations. They will simply choose the method under which they pay the least and continue their tax avoidance through declared max depreciation et al, as normal. This is the USA and billionaires aren't to be inconvenienced by public policy.
How do I know this? Because of all the resistance that particular measure got from many lawmakers.
So why is that impactful with the corporate tax being lowered to 21% in the Trump administration? 15% is less than 21% so it shouldn't matter right? But it does because the 2017 tax cuts effectively (in a complicated fashion) mostly gave a permanent amnesty on offshored profits. Previously, any repatriated profits were subject to the (then) 35% corporate tax rate. That bill ended that treatment. The replacement was more complicated and a much lower effeective tax rate.
So the 15% minimum actually hits companies who are currently paying less than that on foreign income. It's a good measure.
My comment however was referring to far stronger and likely temporarly measures, such as a windfall corporate tax of, say, 60% (or even higher).
House prices are set at the margins, just like any asset. Even if the folks with 3% mortgage rates sit tight and don’t sell, there will still be downward pressure on prices because prices are not determined by non-transactions. There are plenty of listings for those who need to exit the market and liquidate, driving inventory up.
Just a quick glance at Zillow and Redfin will show that Bay Area prices have already retreated 10-15% and in some cases back to 2019 levels. Every other listing has 100k+ price cuts or more.
https://www.zillow.com/home-values/102001/united-states/
https://www.redfin.com/us-housing-market
I think large drops (40-50%) in most regions are likely.
The availability of remote work and the retreat of the HCOL population to other areas in the US is likely causing an increase in demand elsewhere, as we have seen as a macro trend since the beginning of the pandemic. This demand will keep supplies low in LCOL areas.
There is heterogeneity of sellers in how much they "must" sell (versus alternates like rent it out, not move at all if they're nearly indifferent between cities, etc). Clearly "lock in" reduces total sellers.
YES! There is a sort of delusion that has taken hold of people who became “house rich” in the past couple years. They seem to think that if they don’t sell, their house will still be worth whatever fantasy number they have in their heads.
It does get me thinking about the psychology of these economic cycles and how the transformation of that delusion to acceptance/sadness on an individual level will impact their buying habits and risk taking. On a large scale, it is easy to see this is sort of spiraling into a protracted recession.
The difference is, if you picked up a house at 2.7% you will be winning for a long time. There are fewer ARMs, which means a small more protracted "collapse". Housing supply is still non-existent and will be into the near future. Wages will need to keep pace with housing costs in order to provide anyone a chance to succeed. Even after a so-called "recession" in housing they'll still be too expensive. For example, if my house dropped 50% in value, it'd still be way over what I bought it for.
The only deluded people are the ones not holding property. Make no mistake, if you didn't buy/refinance in 2020 you lost out on a literal once in a lifetime opportunity to lock a massive short against the fed.
I don't think anyone can make claims like this, lots of people made the right decision by not buying into an inflated market with job instability around the corner. I think the correction is needed, any people who didn't overextend will be fine if they intend to stay put for 5-15 years.
The only difference is that recently I've resigned myself to the fact that maybe I'll never own in my current location - which even though may be emotionally sad, at least I don't have a crazy monthly payment for a shoebox apartment.
It is just another variation of "timing the stock market". Even if you're correct you can end up losing so much money on the upside that long-term you lose compared to people who buy into a bull market.
Depending on the exact circumstances of when you bought, your mortgage rate, how much prices fall, how long you can hold, and how much prices recover you can still end up losing by not having bought during the run-up.
Here's a made up bay area example:
A house sells for $2m in 2014. Due to rising prices over 8-10 years you end up buying for $3m at 2.5% interest in 2021. The market then tanks by 30%. That puts the house back at $2.1m. Over the following 5 years the market recovers somewhat and the house is worth $2.8m in 2026.
A naive view says "see! it was correct not to buy in 2021! waiting was the correct choice."
But that's not the whole story.
Buying in 2021 means you did not pay $5k/mo rent from 2021-2026. That's $270k. Not all of that will go to principle but some will. And you're 5 years ahead of the mortgage payoff schedule compared to not buying.
Speaking of time value of money... buying in 2021 means you got 2.5-3% interest on your 30 year mortgage. Depending on how things play out buying in 2026 might end up with 4-6% on the same mortgage:
2021 Purchase @2.5%: total interest paid $1.26m 2026 Purchase @4%: total interest paid $2.15m 2026 Purchase @6%: total interest paid $3.47m
In this scenario buying in 2021 ends up with the bank paying _you_ to take the mortgage since inflation is up. If you assume inflation says around 2-2.5% after that you more or less borrow the money for free.
Buying in 2026 costs you around $1m-$2.2m over the life of the loan.
In this example even accounting for the market dropping 30% _and_ not fully recovering it still made more sense to buy in 2021. Remember this is just one example with a lot of assumptions. I'm not saying this is what will happen. I'm merely pointing out that you can predict prices are inflated, wait for them to fall, and end up losing compared to a "sucker" who bought at the peak.
You can see the same house on Zillow list at $1.1M in Jun, and then re-list at $900k in Aug, and then at $800k in Oct.
But Redfin intentionally removed it in the past couple months, and now they only show the most recent list date and price.
Redfin: https://www.redfin.com/CA/San-Jose/1488-Sunland-Ct-95130/hom...
The history between May and August was deleted on Redfin. Either there is a way to pay Redfin to delete history or @lotsofpulp is right, or maybe a convenient bug?
https://redf.in/sITdQm
https://www.zillow.com/homedetails/26-Pinewood-Ct-San-Mateo-...
This one has a listing from Jan 2022 that is missing in Redfin, but shown in Zillow:
https://redf.in/hX47mx
https://www.zillow.com/homedetails/4922-Leigh-Ave-San-Jose-C...
I cannot tell if this is intentional or not, but in all cases, Zillow has shown more data than Redfin.
The houses I had favorited with the missing price changes are gone from my Redfin favorites list now (owner decided to remove listing?).
Zillow definitely has better history though, and a filter option to show price reductions.
I'm from the UK where mortgages can fixed for a definite period, usually 2-5 years, then it changes to a variable rate mortgage (with the same provider), but there's always the option of choosing variable from the start. The variable part is a margin + the Bank of England base rate.
I now live in Europe and here it's the same, except basically nobody chooses a fixed rate mortgage. The monthly repayments are recalculated every six months using the current EURIBOR rate - which is set by a group of banks themselves, not the European Central Bank (it sounds a lot like a cartel).
Either way, I'm buying a house now when interest is the highest it's been for over a decade, but it doesn't really bother me as it will drop at some point and my monthly payments will go down.
There is a unique market for long-term rates hedging among American mortgage traders. And the government backstops the risk.
Keep in mind, too, that America uses capital markets. Most of the world uses banks. (The U.K. being a puzzling counterfactual.)
https://himaxwell.com/resources/blog/30-year-fix-3-gse-refor...
It's policy. The New Deal created a secondary mortgage market through Fannie Mae (and later Freddy Mac) that normalized mortgages to 30 year fixed. There are many ways to structure mortgages in the US and not all mortgages are fixed, but the typical mortgage is because those mortgages are the most liquid given the structure of the US secondary mortgage market.
Mortgages in the US generally don't have a payoff penalty after a certain amount of time (and some don't have one at all) so in a falling interest rate scenario you can simply refinance.
To answer your question: the ultimate buyers (or should I say ultimate lenders) are taking the interest rate upside risk in exchange for stability. Mortgages just don't lose much money. When defaults are high they lose out on future interest and may take principle haircuts but they don't evaporate. Even most of the garbage from the 2007 financial crisis eventually recovered as housing recovered - comparatively few of the actual mortgages were written off.
If you want that kind of stability you can buy US Treasuries to earn 1% (or even less). Or you can get into mortgages and earn 2.5% for almost the same risk. Those rates would be higher today of course since the fed is raising rates.
You might rightly say that LIBOR or whatever rates don't fluctuate that much... in which case the same argument applies to the risk lenders take on in the US market.
It says that the effects are "particularly [pressuring] firms like Rocket Mortgage that thrived on loan refinancings" but I don't know if it's reading in too much to assume that the WF pipeline it's talking about is including both.
(If it includes refis that's still bad news for the mortgage interest but way less indicative of soon-to-fall prices since rates have generally been below the current point for about 20 years, so no small wonder nobody would refi now.)