July 2021 average 30-year mortgage rate: 2.87% (with 0.7 points)
2008 12-month average 30-year mortgage rate: 6.03% (with 0.6 points)
To put that in perspective, a $500,000 mortgage (excluding down payment) would require a $2,073 monthly payment today, but a $3,007 monthly payment at 2008's 6% mortgage rates.
In other words: Houses are still way cheaper, in actual out-of-pocket terms for average people, than they were in 2008. Today's interest rates are way too low.
EDIT: Updated with 2008 numbers, thanks to comment below
And a good reminder of how much exposure housing prices have to interest rates. To frame the same math another way:
If you bought a house for, say, $580k with a $500k mortgage... You paid $80k down payment + $20k closing costs and your monthly would be ~$2,073/month.
If interest rates go up to 6%, and the person buying your house also wants to pay the same ~2,073/month, they would only be able to afford a $344,649 mortgage. Assume the same $80k down payment and $20k closing costs... and they should be willing to pay $444,649 for your house ($135,351 less than you paid!).
Obviously with inflation the person may be willing to spend more than you spent! But there's a lot of risk for homeowners who need/want to sell if/when interest rates go up. That's why the 30 year fixed is such a fantastic bet if you are willing + able to hold and lock that fixed price... but housing is a pretty lousy investment if you need to sell.
In California, people generally buy the absolute most house they can possibly afford. Houses are extremely expensive and people don't want to live in shacks, so they stretch their budget as far as they can. Home prices in these markets are extremely sensitive to changes in interest rates, as you've described.
However in other markets, interest rates can wiggle up and down without having as dramatic an effect on prices, because livable homes aren't as expensive and people have more slack in their budgets.
In markets with lots of cash buyers, home prices may also be somewhat isolated from interest rate swings.
I worked in the mortgage industry for a couple years, and it was common knowledge there that California home prices were the most tightly coupled with interest rate changes.
I'm not sure which markets are at the opposite end of the spectrum, but you could probably get a good idea by looking at the ratios between median household income vs. median mortgage payment in any given market. Households (currently) spending a smaller fraction of their paycheck to pay their mortgage should be able to better absorb some price increases.
According to this visualisation on Zillow[1], California is indeed the worst. The median household in San Jose would have to allocate 53% of their income to pay a median mortgage, compared to the national average of 17.5%:
I can't, but as prices go lower more people can just save money rather than borrow to purchase. So an exponential curve, the higher the rate the smaller the effect on asset price.
I've wondered if we are in a regime today where interest rates simply can't go up. I can't imagine a scenario where they can go up more than a point or two without blood in the streets... possibly literally.
Even minor changes to inflation can deflate asset bubbles without blood in the streets. 2% inflation might make your existing how less valuable for a few years but it’s also rapidly making your mortgage payments more affordable. The real issue is this sets up golden handcuffs where buying an equally valuable house elsewhere would be a huge financial hit for much longer.
Interest rates must go down when inflation is low. If you insist on high interest rates you will also need higher inflation to justify them. Think about it this way. Interest raises the cost of borrowing, it makes reproducible assets more expensive. Over the long term you see cost push inflation. If interest rates can't be passed onto consumers then the borrower will default. That's not a good thing.
It's going to be quite interesting how the bay area fairs if more companies leave over time. I've refused to buy a house thus far and have been looking into more economical (and practical ways) to live on the move given that I've had to move so much in this industry.
I went down a rabbit hole and analyzed Fannie Mae data and found buying a home is increasingly affordable when you consider low interest rates and the median income.
> In October 2019, the median mortgage payment would cost the typical American 18.21% of their income. Apart from a few months in the early 1970s and 2011–2013 period, homes have never been more affordable. [0]
>That's why the 30 year fixed is such a fantastic bet if you are willing + able to hold and lock that fixed price... but housing is a pretty lousy investment if you need to sell.
That's not necessarily true because if rates go up you can bet that property values would go down as home ownership would become less affordable. And if you bought a home for $300k and rates go up and now your home is only worth $250k, that's not a great value, because had you not bought, you would be able to buy the same home for less, although that might be offset with the higher payment
It is much harder to deduct interest these days with the higher standard deduction. Interest deductions on a cheaper house might only a few years unless you have something else going on with your custom deductions.
The equity aspect is also questionable. Cheaper markets are cheap for a reason, and while they might hit a growth spurt, it is far from guaranteed. A booming market with high prices might also continue to...boom even more. Anyways, the market is actually efficient, you can't find a loophole that everyone else is missing.
Exactly - low interest rates mean higher house prices. The UK gov paused stamp duty for six months, so guess what - there was more money to spend on the bid price.
Therein lies the rub. It’s true that inflation adjusted average monthly mortgage payments have remained surprisingly constant over the last 40 years [*], since as you point out, low interest rates generally offset high home values (and vice versa). However, accruing enough cash in the first place to afford huge down payments keeps a lot of people out of the market who could otherwise afford the monthly payment.
As an aside, the quality of housing stock has improved dramatically over the last few decades, so that roughly constant average monthly payment actually buys a much better quality product today than in years past. I’m not sure how much of this is accounted for in hedonic adjustments.
[*] with the exception of the early 80s with its super high interest rates, and the housing bubble of the mid 2000s, with its super inflated home values without a commensurate drop in interest rates
A lot of people still buy with like 5% down and pay pmi even in hot markets. There are also first time homeowner benefits. My city offers a down payment loan where you can pay 1% down up to like a 750k home if you are lower income.
I think that not a lot of people are well educated on homeownership and think that you need to have a huge down payment or an all cash offer, when thats just not true, and often don’t know about the benefits offered to first time homeowners by multiple levels of government.
The threshold for loan size which requires a jumbo loan is set per county and is much higher in the expensive coastal states. In California it's $548,250 in the rural counties where homes are around $250/square foot, so the vast majority of homes will qualify for conforming loans. In the sf bay area it's $822,375, which is well below the average price in some but not all cities.
Loan originators who specialize in west coast markets can get qualified buyers a 15% down payment + 5% HELOC for Jumbo Loans, up to at least $2mm, which covers most comfortable condos in San Francisco and even some smaller single family homes.
> inflation adjusted average monthly mortgage payments have remained surprisingly constant over the last 40 years
Not sure why this is surprising. You can only afford a certain % of your income on housing, and if it gets too high you simply don't participate in the housing market
However, if we took steps to make down payments easier (by lowering down payment requirements or through something like Biden's first-time homebuyer credit) then we're also pumping more money into the housing market. That will drive prices up again, further raising prices and making it even harder for future buyers to enter the market.
The only real way to push affordability down, long-term, is to build more. I'd personally like to see incentives targeted toward something like all-new construction (no tear-down rebuilds, only new houses where previous houses didn't exist).
Give people money to spend on new construction and the new construction will follow.
no tear-down rebuilds, only new houses where previous houses didn't exist
I assume "tear down 1 unit, build 5-10 units" is OK? Otherwise, what you're suggesting just leads to more suburban sprawl. There isn't room in SF, NYC, etc for infill development (from vacant lots) at the scale necessary to make a dent in housing prices.
While I 100% agree with you that matching demand with a commensurate increase in supply is the only true fix to the problem of housing costs, in practice I don’t see it happening for a couple main reasons:
Firstly, the people with the most political power are not coincidentally those who would lose the most if housing prices decrease. NIMBYism therefore inevitably wins.
Secondly, building additional housing in regions that need it most (i.e. dense urban areas) would require dramatically improving public transit in those areas. The transportation networks of e.g. San Francisco, Boston, or even New York (which has by far the best public transit in the country) are already at a breaking point and simply cannot tolerate the influx of people more housing stock would bring. Sadly, I don’t think the US has the ability anymore to build large infrastructure projects at reasonable prices.
Build more and ban investment properties. No more AirBnB, no more rentals. Prices will come down and those people who previously had to rent, will now be able to own and life will be better for everyone except the poor souls who bought in the last 20 years.
There are lots of valid reasons besides "I can't afford to buy" to rent. I've been a renter for most of my life because I liked the freedom of being able to move to a new area (either locally, or in an entirely new region) with little hassle. I'm a homeowner now, but I was renting even when I could afford a house.
In an economic downturn many people get stuck with a house that's underwater and unable to sell while also needing to look outside of the area for a new job.
Also, if your income (or family size) changes, its a lot easier to trade up (or down) when you rent than when you own.
Instead of mandating that everyone buy a house whether they want to or not, I'd rather see renter protections, particularly in capping rent increases.
You might think I'm crazy, but it's the generational wealth that I think about most. If you rent, you basically guarantee that your children and their children and so on won't ever be land owners. They'll be serfs and someone else will be their lord.
Of course it could all collapse but I sincerely doubt it.
A lot of people prefer renting though, even if they can afford to buy a home. Many don’t want to be homeowners, or enjoy the flexibility of being able to move at any time without the hassle and expense of selling a home.
Add a progresssive tax on land. The more land you own, the more you pay. This forces developers to focus on denser housing while the average home owner can be left alone.
The tricky part is that home owners will knowingly defend the interests of real estate corporations because they want their own tax bill to be low.
This is pretty damn hard to do. Any legal entity owning land could split it into multiple entities, who're avoiding the progressive tax. There'll probably be a million loopholes for that. Changing zoning is politically difficult, but a much more simple and effective policy approach if you can get it through.
I wouldn’t go as far as to ban rentals outright (people moving to a new city can’t be expected to buy a property before moving), but I would certainly support steep taxes on non-owner occupied properties, with deductions available for maintenance/upgrades (thus making rental businesses de facto non-profits). I would also add deductions for developers building new rental housing stock to encourage new construction.
The affordability is determined by monthly payments, which are a function of home price and interest rates. If home prices are up but interest rates are way, way down (which is currently the case) it can be possible that houses are still more affordable.
You have to consider home costs as down payment + monthly mortgage payment (+ taxes if you're getting specific) to understand affordability.
Affordability is only part of the picture though. A higher value loan means higher risk as well.
If interest rates rise, or something else happens that reduces the value of the property, then that $500,000 mortgage might be against a house worth less than $500,000. At that point people have to start playing chicken with the banks again, trying to mitigate the losses with strategic defaults.
2008 had a lot of variable rate mortgages. That's not the case today. Most people (at least I'd hope) don't use their house as an investment so if their mortgage is still the same payment each month and they can afford it there's no reason they'd default and tank their credit. The losses are purely paper losses.
To be fair, people don't have that much control over home values either.
The biggest reservation I can think of with housing as an investment is that it's singular in terms of economic sector and geography.
With the market people can diversify, although there's no guarantee they will.
Being able to leverage a small down payment for a more valuable asset can also be advantageous or disadvantageous depending on what the value of the asset does.
it's the other way :D, since i bought the house in 2015, my gains are paper gains (~200%), but my property taxes are real loses, since they've grown almost twice as well.
Not sure about that in general, although it can differ for each state and could apply in your state. In general, US tax income from property taxes has not risen, in fact it's slightly come down as a percentage of income. That means that while the tax base (property values) have increased sharply, the tax rate for property has come down.
Most municipalities will first establish how much tax revenue they need, then look at the total property values that's taxable, and then set an appropriate rate. If property values double but municipal expenses don't, they can and do lower the property taxes. It's not a 1 on 1 relationship but given average property tax income as a percentage of total income has slightly come down over the past decades, it's clear that tax rates are being reduced as property values go up.
Ok, I will bite. What will cause interest rates to rise? Do you expect a war that destroys Taiwan or something? (a permanent semiconductor shortage would have a massive impact on modern life). Increasing trust, stability and keeping inflation low will keep interest rates low forever. Japan had decades of deflation.
> In other words: Houses are still way cheaper, in actual out-of-pocket terms for average people, than they were in 2008. Today's interest rates are way too low.
I don't disagree generally, but one niggle: housing prices do effect downpayment sizes, which may be a problem for people to save for if prices get too high (relative to wages).
Adjusted monthly payments are the cheapest they've been since 1989:
> The average price of American homes, in real terms, is now the highest it's ever been
I understand that the price of a stereotypical suburban home is well out of reach for many and this isn't great and should be worked on in a smart way. The middle class has continuously been hammered for many reasons and it would be healthier for America for this to be improved dramatically and better for individual communities for people to have a real stake in the well-being of the area.
Just to throw a few devil's advocate points into the mix, I believe a full and complete economic analysis may show that the price per SQ foot of residential living space per person may actually be about the same or even less than it was in the past. I think some variables that need to be considered are the increasing sizes of homes, the decreasing average family size (many siblings in the past had to share bedrooms, which I believe is far less common today), and inflation, among others.
Is it possible that proportionally more mortgages were lent to riskier borrowers in years past, and as the years have gone on, for a variety of reasons, mortgages in general are now lent to less risky borrowers than before?
Also a conflating factor is if borrowers were perceived as riskier in previous years, but for whatever reasons, are now perceived as less risky.
Also, this is data is from a Freddie Mac website, so is it only for conforming loans? Could it be that many homes have moved up in price such that their mortgage information would no longer be reflected in this average from Freddie Mac because their mortgages are no longer conforming?
2) the monthly fees is not a full expense figure. A 30 year mortgage that gets paid off 100%, has 3.3% of principal paydown per year on average, versus 2.8% mortgage rates.
That means a good chunk of the mortgage payments are in essence savings, rather than money you'll never see again like interest.
That's always going to be true, but the share of your monthly fees that goes towards principal paydown (i.e., equity that is building up, money that you actually own) is now much larger, as the interest payments per dollar borrowed came down.
A big part of the reason the housing market collapsed in 2008 was adjustable rate mortgages. People took on loans at affordable rates and then when things started going south for the banks, the rates were ratcheted up on the high risk buyers who had been getting easy credit.
I don’t think you understood the parent post’s point. Most people don’t buy a house based on the sale price, they buy based on what their monthly payment will be. Historically low interest rates mean that people can afford a lot higher price house than they could in 2008. That’s obviously not the whole story, but it is a big factor in what’s going on.
But also salaries have risen and additionally so has the value proposition of owning a home compared to living in an apartment. Why? Because they've stopped building homes for the most part in desirable areas close to big tech companies.
That's simply not true, in nominal terms income has increased quite substantially. In real terms they haven't climbed much, but then you're comparing a home price increase to an income that's already been adjusted for prices, that makes no sense.
To understand if housing became more affordable you'd have to look at nominal income levels versus nominal housing costs.
That's a 50% increase since 2008. It's not the top 1%, it's not an average where the high-earners jack up the average. It's a median, the middle-earning person in the US, now earning 50% more yearly than 2008. Combined with much lower interest rates and consistently bigger homes, housing is much more affordable compared to then.
Salaries have climbed. Particularly for the home buying demographics.
The real (inflation adjusted) median household income hit an all-time high in 2019. At $68,700 it was approximately $12,000 higher than 2012, and roughly 10-11% higher than the peak of the housing bubble. Incomes shot up rapidly from 2014 to 2019. For the people at the median or above, things have continued to be great in terms of income position (Covid didn't roll back those gains), as labor supply remains tight for most median pay and above jobs.
So if mortgage rates have declined considerably (cut in half), and we're just now back to home prices being inflation adjusted where they were during the housing bubble peak, and real median household incomes are also 10% higher, and the US household disposable income to debt service payment ratio is near decades lows, that leaves a lot more room for higher mortgage payments - which fully explains the upward trajectory in housing prices.
Land is non reproducible. The fact that it goes up in value when money is cheap is not very surprising. Yet nobody tries to tax the problem away. You know, everyone pretends that the government is doing MMT or whatever. If MMT were a recipe book of economic policy (which it isn't) then the government would simply raise taxes on land.
Why? In a country with mostly variable rate interest rates like NZ, and at most 5y fixed loans, that's disastrous. But in markets like the US where you can fix your payments for 30 years, driving your purchasing decision by the affordability of those monthly payments which are fixed for the entire duration of the contract, is a very decent foundation for a market.
I didn't mean it's necessary a bad choice for the individual, just that it's a systemic issue. When people only think in terms of monthly payment, then total prices become unmoored from fundamentals. But I agree I haven't (and probably can't) spell out this intuition rigorously.
I wonder how long before interest rates rise as inflation levels rise. That would really put a damper on the market. Would also kill car sales too I'd imagine.
I refied at 2.87 at 30 years but am just paying at the 15 year rate, it actually worked out better somehow and I have the option to drop payments as well. The mortgage broker was a bit surprised it worked out that way.
> "...Houses are still way cheaper, in actual out-of-pocket terms for average people, than they were in 2008. Today's interest rates are way too low."
Only true for a small minority...Although your calculations are correct, its not how it works. What matters is average house price to income ratio and the Housing Affordability Index, that measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home, at the national and regional levels based on
most recent price and income data.
There are also huge variations in housing markets,
as they are also very much specific to local laws,
regulations, job markets, and at the moment Europe
is in a much worst situation than the US.
I like this definition:
"A housing market is defined by the ability of residents to reach employment by daily commutes. Generally this can be defined as a maximum 60 minute one-way commute time, while average work trip times tend to be about 30 minutes in most areas. Housing markets are thus also labor markets, which are also called metropolitan areas. In a well-functioning market, middle-income households should be able to afford the median priced house."
Its not as bad in the US as in the other parts of the world
but its getting worst.
"Housing affordability has deteriorated materially in recent decades, which has been a principal factor in an internationally observed reduction in middle-income standards of living."
I like the definition you mentioned as well. The problem is that it's very hard to get good data on it. The first link certainly doesn't do a good job of anything, I immediately see it has the common problem of looking at prices rather than monthly payments. That's just bad academics. In the Netherlands for example I get 1% interest rates. In Denmark interest rates are negative. In the US they're 2.8%. In NZ they're >4%. That leads to wildly different affordability at the same price-to-income ratio. The graphs of the affordability ratings (based on only price-to-income) declining are a complete joke as it completely ignores the interest rates dropping hard, leading to higher borrowing capacity and lower payments per dollar borrowed.
The other links I haven't all studied, but for example in the Netherlands where I'm from Amsterdam, the situation (and the article) is entirely not in line with your definition.
For one, jobs aren't all centralised around Amsterdam. The Netherlands has a concept of the Randstad which includes all the four major cities in the country, which all happen to be within a 60 minute commute from oneanother. All the little towns and villages within and surrounding this area comprise of about 60% of the country's population, again, all within a 60min commute. It's thereby silly to look at the housing market of just Amsterdam, when the majority of the country lives in a close commute from jobs centres and doesn't need to live in Amsterdam. Note that from the centre of the country, the closest border (of the country) is 57km away and the furthest border is 175km away, that's how small this place is. It's misleading to look at prices of a single capital city and ignore the fact most of the country lives around the corner with prices that are <50% of that place.
But supposing we look at Amsterdam, the article then makes a crucial mistake by comparing a single Dutch person to an average Amsterdam house. Since when is a single Dutch person an average Amsterdam household? The average household in the Netherlands has 2.2 people, so you may double the borrowing capacity. And second, Amsterdam's owner-occupied homeowners aren't making average money because they've got Capital city above-average jobs. If you live in Amsterdam as a home-owner, you're exposed to jobs that pay far more than the average joe jobs outside the capital. The average income is about 55% higher (see CBS figures).
In short you're looking at double incomes which average 55% higher in the average Amsterdam owner occupied household, or 3x the income. Given how the borrowing capacity works here that translates to about 3.5x more purchasing capacity than the article mentions.
The article also fails to differentiate between average income in the Netherlands (which includes people on welfare, people without jobs, students, people who work 20 hours a week etc) to average full-time salaries, which are typically the group looking to buy a home.
One thing people often fail to acknowledge is that when a claim is made that X is unaffordable, that the fact prices are so high actually may signal the opposite. The fact home prices have increased by hundreds of thousands despite borrowing rules not having changed much, means there's actually a lot of demand at these prices. If nobody could afford these expensive homes, prices would've come crashing down. There's been a record amount of homes sold in the Netherlands last year, the majority of the country is home-owner, and LTI and LTV rates have been trending down the past years (indicating people are actually using less and less of their borrowing capacity).
What matters is the Housing Affordability Index, not income levels. Houses prices might rise in price more than income plus it needs to be in the area where you live/work. See my post in this thread.
Awesome. I've been trying to buy a home since 2015 or so and noting that housing prices continue to rise, without fail, regardless of economic or political climate. Economy is doing well? Price increase! Economy is doing terribly because of global pandemic? Price increase!
I have been patiently waiting for the next "bubble" to pop, even as my realtor insists that oh no, we're not really in a bubble, this is just the new norm.
You can end up worse off for waiting, even if there is a "bubble pop". Even people who correctly identify market bubbles and have good timing can lose in the long run because the gains during the run up of the market compound so much it ends up being smarter to ride out the dips.
Unlike any other investment a home has direct utility for the buyer as shelter. You should buy what home you can afford and don't try to time the market. You are much more likely to end up worse off by waiting.
Here's a hypothetical scenario for an SF home: A home that would have sold for 1.7m in 2015 blows up to 3.1m today, then the supposed bubble "pops" and it drops over the next year to 2.5m. Then over the following 5 years it recovers to 2.8m.
At no point was it a good idea to wait. Buying in 2015 was the best move. Buying today (at the supposed top of the bubble) only loses you 300k, while waiting to purchase cost you up to 1.4m. Buying post-pop costs you at least 800k, far more than you'd lose buying at the peak. All while paying rent instead of building equity.
Waiting for a bubble to pop assumes you have excellent timing, you invest $(mortgage - rent), that investment gains enough to offset the dead weight loss from paying rent, and that the pop is so catastrophic that home prices revert to the mean... all while this catastrophic scenario doesn't hurt your income/investments such that you are well-placed to take advantage of the pop (as opposed to laid-off or suffering from 50% losses on your investments).
In your made up scenario there hasn't been a pop so of course it's been better to buy asap. If you chose 2006-2011 as your 5 years there absolutely is a time when it was a good idea to wait.
> Even people who correctly identify market bubbles and have good timing can lose in the long run because the gains during the run up of the market compound so much it ends up being smarter to ride out the dips.
In a lot of places (where I luckily own a home included), prices hockey sticked hard. It's not natural. I don't see it staying this way. And if it does, my house--which I bought for $285 8 years ago--will be worth a couple million bucks in a couple years and I can sell out and retire on the road.
Not banking on that.
And if it does, we've entered some kind of new era for the haves and have-nots. :(
> I have been patiently waiting for the next "bubble" to pop,
The moratorium on evictions (due to COVID-19) still lingers on. When it once and finally ends, things will change.
Companies switched to remote work, allowing people more flexibility in where they could live, and giving them fewer expenses. Those companies will either 1) Require their people to switch back to in-office work, or 2) Start to ask why they need to hire US workers in high cost-of-living cities, when remote world could be done from countries with far less expensive employees.
In either case, you'll start to see people shifting where they live, either because it's no longer practical to live in that area, or because they can't really afford it.
So hold tight. I can't tell you exactly what all the changes will look like, but things will certainly change, soon.
> Economy is doing well? Price increase! Economy is doing terribly because of global pandemic? Price increase!
The reason for price increasing is always supply curve of the house you might want is not keeping up with demand curve of people with more money who want that house.
There are lots of places in the US with house prices that are stagnant or increasing much slowly than elsewhere. But that is because there is lower demand.
Even if it is a bubble, the market can stay irrational longer than you can hold out/believe. (Disclaimer I do have a vested interest in the housing market, but even if I didn’t I really believe it’s not possible for the average layman to know which way a market will go and when).
Price can't rise literally forever, no, but there really isn't much evidence that we're in a bubble right now. There isn't any reason price need to drop either.
I know this guy, and he's not smart. One of the stupidest people I've ever met actually. Washed his clothes with dish soap stupid. He bought a house 2 years ago with less than 10% down and he's got equity totaling more than 150% of the value of the house when he bought it. Even monetary inflation aside, if an investment can bring windfalls to anyone who can fog up a piece of glass, something isn't right in that market and it isn't sustainable.
There's an anecdotal indicator, but housing prices are rising significantly faster than monetary inflation and population nationwide, that's pretty good evidence for a deviation from fundamentals.
they probably can rise "forever" as long as the rate of increase keeps pace with general wealth and economic growth. now, a bubble can't last forever, but moderate price increases (inflation) are pretty normal.
If you live in a place like the Bay Area/NYC where cities/local zoning boards are preventing almost and and all new construction then in all likelihood your home price will continue to appreciate throughout your lifetime.
Supply and demand. There are way more people that want to live in these places than houses available. And we keep making new people every year.
I'm not sure they'll even drop if building codes are relaxed. After all, those SFH owners also own the land beneath their house. The price per square foot of living space could drop while the price per square foot of land goes up.
Any change will take 20 years to start working through the system.
That said, prices will change. SFH owners move once in a while. Even if you live in the same house for 50 years (about the max possible given human lifespans), someone else on your block will move every few years. When someone moves a developer will look at the location and decide if it is wroth buying the house for the lot, tearing down and building something else. Right now in the Bay you could buy a lot of SFHs, tear them down, replace with a 10-plex and rent it out for enough to make it worth it. (Assuming zoning codes would allow this without a large cost over the cost of labor and materials) Eventually though housing will catch up and rent will fall until it isn't worth it.
We can't prove the above because of course zoning codes won't let you do it.
> There are way more people that want to live in these places than houses available.
That's like the saying "government bonds are 0 risk." It's usually true, til it isn't.
These problems with housing costs in these cities absolutely will make the cities less desirable, I think we will see a large deurbanization period in north america very soon and you'll see most of these cities that are constricting supply of housing crumble like Detroit.
I used to think 'no', but I think it pretty much can.
You can have 2 classes: property owners and non-owners.
The property owners have real estate that they can sell or collateralize to purchase different or additional real estate. This is why, for example, current California owners have no problem buying in e.g. Washington: even if a house in both places were $1billion*, they can just trade.
Obviously, non-owners may be priced out, but this doesn't affect the owners, and they, as a class, can ask for any amount to transfer the ownership.
TL;DR: In musical chairs, so long as there are no new chairs produced and nobody on a chair is forced to stand, there's no ceiling on the asking price for a chair.
> This is why, for example, current California owners have no problem buying in e.g. Washington: even if a house in both places were $1billion, they can just trade.
If it's your primary residence, you can't trade one from California to Washington because you would have a large tax bill when selling one. You can't even trade within California itself. If you bought a home for $500k 20 years ago and now discover it is worth $2M, you cannot even trade your $2M for a different $2M a few blocks over. You would have to pay taxes on a $1.5M gain.
If instead the home s an investment property which you rent out (which have higher interest rates), then you could do a 1031 exchange.
That's largely true, though tax law does reduce the tax hit for people over 55. California recently amended prop 13 so that people over 55 can carry their existing property tax 3 times, and modified it so that they can purchase a more expensive house and keep the lower tax burden on the amount they got for their previous house. They also greatly reduced the extent to which heirs can inherit the low previous property tax (I think it's now limited to 1,000,000 and has to be a primary residence).
The inherited low property taxes always seemed pretty egregious to me (almost like an aristocracy of landed wealth). The whole thing is pretty dismal, honestly - I'm not opposed to low property taxes, but a tax regime where people pay vastly different taxes on similar properties causes all kinds of problems (and is fundamentally unfair, in my opinion).
Much of the change to the law, though, was driven by real estate agents who want to increase transactions. The previous law preserved low property taxes as long as elderly people didn't sell and left the house to an heir. Now, people 55 and and over can sell repeatedly without increasing their taxes, and there's more incentive for heirs to sell the house. That's as much was 4 commissions where there used to be none.
You can use your equity in the first house to buy the 2nd house, right?
And this person with the $2M home in California can, even after taxes and transaction fees, recover their original investment, plus have enough left over to e.g. buy a $1.5m home in cash, or a much higher priced home with a mortgage?
It might not be a clean trade but their are situations where your equity growth in house 1 gives you enough liquidity for a larger down payment on house 2 where your monthly payments might even be lower, especially if it means things like you no longer paying pmi. This is how the property game is played in places with moving real estate markets, I know people who paid more a month for the condo they lived in a few years building equity and seeing gain to afford a down payment on a single family home.
The appreciation also throws you up the economic ladder fast. Say you put 5% down on a 500k house, you are out 25k. Next year you have a 600k house with the same payments. You’ve now gained 75k just by existing, and you can even flip and use that profit on a down payment for a larger house, maybe even getting your monthly payment about the same as the smaller house since your down payment is a larger proportion and you are no longer paying pmi.
Not forever, but longer than anyone who is already able to qualify for a mortgage can wait. It will go on until baby boomers start dying in large numbers. That won't happen until the mid 2030s. By 2050 housing will be a buyer's market.
Capitalism is predicated on the idea of perpetual and infinite growth. Those assumptions are reflected in many ways and we're going to need to rethink our economy and political systems with entirely different assumptions soon enough because we're already running into their limits.
Growth only means that there is more economic activity. If you reduce the quality of houses and cars but increase the price and your profit, that's also growth. If you cure cancers, that's bad for growth if you made more profit on treatments than the cure.
> Developing a more fuel efficient car is also growth, for example.
One of the major economic concerns about electric vehicles is that they have fewer moving parts and maintenance requirements, and might cut auto worker jobs in half.[1] I don't think the article got into numbers of job loss in gas stations, oil production and distribution, etc. So the most fuel efficient car possible may prove to be bad for growth in general.
> Economic growth does not imply consuming more resources.
Technically true, but in practice, if your product is not 100% recycled and 100% carbon negative to produce, you'll need to extract more of the earth to sell it.
I will say that with some industries like meat production potentially moving to vats and away from farmed animals, there is a possibility. But you also have to consider the economic damage of eliminating cattle farmers, farm vets, slaughterhouses, meat packing, etc.
"If you cure cancers, that's bad for growth if you made more profit on treatments than the cure."
That is simply wrong. If you cure cancers, you save human lives, which is worth a lot of money. You are basically falling for the broken window fallacy - breaking a window is like somebody getting cancer. You think the economy benefits because lots of doctors, nurse, undertakers and whatnot get business out of it. But you are wrong.
"Technically true, but in practice, if your product is not 100% recycled and 100% carbon negative to produce, you'll need to extract more of the earth to sell it."
Another fallacy to think the economy only consists of producing things. Also you have to think longterm - sometimes it can be worth it to replace old things with more efficient things, sometimes not.
> You think the economy benefits because lots of doctors, nurse, undertakers and whatnot get business out of it. But you are wrong.
The country that spends the most GDP per capita has the worst outcome for life expectancy of any industrialized nation[1]. There is no inherent monetary value to a human life in the capitalist system, as the data clearly demonstrates. The most ideal scenario in a for-profit healthcare system is to extract every dollar possible from each individual until just before they die, regardless of how old they may be at that time.
America does one better, and debtors can pursue the children of the deceased for certain medical bills in certain states.[2]
> Another fallacy to think the economy only consists of producing things
You can't consume digital goods without a physical computer. You can't get a service that is magically free of dependencies on infrastructure or electricity. There's certainly a scale of environmental sustainability, but you're always dependent on something in meatspace.
"The country that spends the most GDP per capita has the worst outcome for life expectancy of any industrialized nation"
This does not imply the quality of the medical services is to blame. One issue of the US could be that people have too much surplus (the US is the richest country of the world), so they can eat a lot and get fat (they also have cars and don't have to exercise). Obesity then shortens their lifespans.
"There is no inherent monetary value to a human life in the capitalist system, as the data clearly demonstrates"
That's just stupid. I bet even the US spends a lot of money on protecting lives, for example install bridges and traffic lights. There is an established science to calculating the value a society assigns to human lives.
"You can't consume digital goods without a physical computer. You can't get a service that is magically free of dependencies on infrastructure or electricity. "
If a doctor saves your life, you have "consumed" his service. Maybe saving more lives would consume marginally more resources. But that also is not a given, as for example the production of medication can become more efficient. Look at the price of penicillin, or at artificial insulin. Iirc in the beginning insulin was extracted from tons of animal livers, a very wasteful process that has been replaced with something much more efficient. So now you can save more diabetic people at a fraction of the energy.
You can build a money system that maximizes growth without requiring it to happen predictably every single quarter.
What is needed is a money system that lets the economy grow as much as is sustainable, not 3% per year because that is what someone wrote into a contract 20 years ago.
Growth does not mean that things get better. Growth means that things get more. More is not always better. More humans, for example, seems to destroy habitability of the Earth. Is that better?
No your concept of growth is wrong, or you are talking about different types of growth. If a tree grows, it gets better and there is "more tree" afterwards.
>Capitalism is predicated on the idea of perpetual and infinite growth
First sentence from wikipedia:
>Capitalism is an economic system based on the private ownership of the means of production and their operation for profit.
How does this predicate "on the idea of perpetual and infinite growth"? I mean, it'll be nice if the economy grew infinitely, but I'd still want to invest my money into production even if that didn't exist.
Would you be able to invest? I'm trying to work through the thought experiment.
Suppose we've reached a point where the population has stabilized and all natural resources were being used at the sustainable rate. What production would you be able to buy? Would the current owners sell it to you? Would you be able to accumulate enough capital to induce them to sell?
Obviously the definition of capitalism doesn't include "perpetual growth", but it does seem like a reasonable extrapolation about the world. At the time capitalism was defined, indefinite growth was realistic, and easy to assume axiomatically. I'm not sure what capitalism looks like if that assumption fails.
I'm also not sure what it looks like for that assumption to fail, since "production" also includes creativity which isn't limited by natural resources. You can always invest in new books, video games, etc which are effectively unlimited.
In your first paragraph, that's the point that the OP was making: you're assuming that we won't reach a point of diminishing returns. That's not guaranteed.
We might be able to guarantee infinite creativity... but will you be able to invest in it? If you're not the one writing the game/movie/novel, why would the artist permit you to invest and reap the benefit of their creativity?
Until recently, you could gain that power by owning key industries: the cinemas, the advertising agencies, etc. But those middle men are increasingly squeezed out; what would you offer that they can't get elsewhere? They'd cut your marginal return to the bone by playing you off against other people who have money to invest but nothing of their own to invest in.
In the best case, the resources would be distributed well enough that you could write your own novel, or whatever creative project, and not care about who will pay for it. In the worst case, you could find that all of the money ends up in the hands of a very few, who would out-compete you for any investment opportunity that arose.
>If you're not the one writing the game/movie/novel, why would the artist permit you to invest and reap the benefit of their creativity?
AAA games are expensive to make, so are blockbuster movies. Even for non AAA/blockbuster movies, you'd still need some sort of financing. If UBI isn't a thing you'd need to finance your living somehow, which limits you to working part-time or requiring a substantial savings fund. novels might be fine, but you'd still might want a publisher for an advance or PR.
Modern capitalism depends on fiat currency and investment from those with capital. Currency loses value over time to inflation, so investors are always trying to get better returns against a baseline. Even at 3% per year, consumption has to double every 16 years if investors only want to break even.
So, it's not "nice" if the economy grows, it's an absolute requirement to keep investors interested.
>Currency loses value over time to inflation, so investors are always trying to get better returns against a baseline. Even at 3% per year, consumption has to double every 16 years if investors only want to break even.
The math does not check out. 1.03^16 = 1.6, not 2 like you'd expect if it was "double".
Moreover, inflation only necessitates that the money supply grow infinitely, not economic activity and/or resources. If we doubled the bank balance of everyone overnight, and the price of everything doubled, that's not really "growth" in any meaningful sense.
It isn't. People keep credit (aka bank money) in their bank accounts even at negative nominal interest rates. The problem is the insistence on positive interest because of moral attachments to the idea of frugality.
Central banks target positive inflation because of the inability to cut interest rates below zero.
"The single most important question in investing this year is whether the rampant inflation of the moment is temporary, as the Federal Reserve believes, or marks a historic shift. I argued last week that we are on the cusp of a major change and long-run inflation is now more likely."
Why have I been seeing so much attention given to voting in threads on HN these days? Is there an influx from Reddit or something by a bunch of people who didn't take the time to learn the etiquette here? We speak only when there's something to be said, vote only based on the quality of the comment and move on. You don't need to address downvoters. If you had something to address them with it should've been in your original comment, then maybe they wouldn't have downvoted.
> Be kind. Don't be snarky. Have curious conversation; don't cross-examine. Please don't fulminate. Please don't sneer, including at the rest of the community.
You do not understand what a capitalist means by "infinite growth." We do not need to completely re-think our economy because people are about to feel the consequences of their bad financial decisions.
The ongoing eviction moratorium comes up quite a bit in real estate circles as one of the many reasons for current prices.
Of course, the very low rates, high construction costs, demand to leave cities, and various other factors also come into play. However, yesterday I was very surprised to learn that the eviction moratorium that is preventing landlords from selling their properties is actually an order from the Centers for Disease Control. When and why did that organization get that sort of power?
> Five justices — the three more liberal justices, plus Chief Justice John Roberts and Associate Justice Brett Kavanaugh — supported keeping the moratorium in place. However, Kavanaugh emphasized in his appended statement that he agreed to continuing the moratorium only because it was about to end. As a matter of law, Kavanaugh wrote, he thought extending the moratorium further was unconstitutional.
They don't. A case went to the Supreme Court and said Congress needed to make that decision, not an unelected CDC, but that they wouldn't rescind the current existing order...which then expired. Biden basically said as much, and that he was going to do it anyway and extended it after it lapsed. For some reason, the news doesn't really cover that Biden is in direct violation of the Supreme Court with his latest extension and he knew, publicly said so, and did it anyway.
> Biden said on Tuesday he had sought out constitutional scholars to determine the CDC’s legal authority and “what could they do that is most likely to pass muster constitutionally.” The “bulk” of the scholarship reviewed by the White House said additional action by the CDC would not pass muster in the courts, Biden said, adding that there were some “key scholars” who said it could.
The bulk of constitutional "experts" said it wasn't constitutional. He found one or more that didn't agree with that assessment, so he went with the few against the majority.
Your conclusion that "Biden is in direct violation of the Supreme Court" isn't supported by anything else that you said. Nor is it supported by the actual Supreme Court ruling, which you can read for yourself here:
The actual text of the ruling is simply: "The application to vacate stay presented to THE CHIEF JUSTICE and by him referred to the Court is denied." The additional wording that follows is simply Kavanaugh's personal feeling on the matter which for now doesn't carry the force of law, as well as several judges lamenting they would've vacated the moratorium if they had the votes, which they didn't.
(Note: I happened to agree that Biden should not have extended the moratorium. And it may yet prove to be that he will be overruled by the US Sup. Ct., but that hasn't happened yet.)
I keep hearing about a housing shortage. How we are not building fast enough. I personally know several people that own more than one home and AirBnB it when not in use. Also hedge funds are now targeting real estate. I can't help but wonder if this is partially an AirBnB and hedge fund created situation. Of course these are the same people that have access to all this free money. The average Joe still has to pay interest.
I recently listed to an NPR Planet Money podcast regarding the housing shortage. One of the points they mentioned was that the number of people joining construction related trade schools (plumber, electricians, etc) dropped because the construction industry was decimated after the 2008 crash. It takes 5+ years for someone to go to school, get an apprenticeship and become skilled in their trade. This scarcity is also impacting the ability to build new homes (apart from the zoning laws and NIMBYism that prevents building new high-density housing). The pandemic is more of a short term supply-shock which is exaggerating the situation.
Interest rates are historically low. I'd imagine hedge funds are paying interest too. You'd never want to tie up all that capital to avoid a 2% interest rate.
Even I, an average Joe, pay the minimum payment on my mortgage and invest the rest. It would be foolish to pay it off early.
Yes they are maybe %1 - I was able to get %2 at 15 years. And hedge funds get money from investors then leverage that with loans that brings their total cost of capital down even lower. Our previous Secretary of the Treasury (Mnuchin) made his fortune that way after 2008.
> I keep hearing about a housing shortage. How we are not building fast enough.
New construction is temporarily extremely expensive due to supply chain issues. Prices of everything from lumber to copper are (or were) elevated because COVID shut down factories and supply chains.
New construction is still happening, but it's slowed down and expensive for a short while.
There's a secondary problem that the new construction is happening in the suburbs and outskirts where there's still land available. Meanwhile, the trend is to move toward city centers and popular areas, where housing prices continue to climb.
There is a specific locality to housing that is key to think about.
This report from Brookings [1] titled "The Washington, DC region has built too much housing in the wrong places", lays out a strong case for what is happening in my general geography. All politics aside, this is very accurate anecdotally as all the major housing developments I know of were fairly distant from work. We have housing going up, but not in the right place for the employees. Had colleagues commuting > 90 minutes one way for work, pre-pandemic. COVID changed all that for the better.
Before getting married, my wife & I rented individually, and our combined housing expense (mortgage) for a medium sized TH in a good neighborhood is fairly close to our rents, previously. This is thanks to the low interest rate environment which has increased affordability despite the higher prices.
So true. That fact that people consider it normal to commute from Fredericksburg, VA to Tysons/Ashburn/Reston is bonkers.
Fredburg to DC isn't quite so bad - at least there's commuter rail and slug lines. But exurb-to-suburb commuting should never be something that's encouraged.
And FWIW, we downsized to a TH to be closer to work. Couldn't be happier. I now walk to work; my wife cycles. We're in walking distance to all local schools. And a short bike ride to dining and shopping. I don't know why more people don't do the same. The house cost was in the same ballpark as the single-family we owned previously.
It absolutely is a speculation driven market, and has been for a long time, and that is the key driver for housing prices, which is why housing price increases coincided with a massive increase in money supply.
People talk about adjustable rate mortgages and such from the last bubble, and these sorts of thing played a role and helped nail in the people at the bottom, but they aren't what caused that crisis. Turning a market for an inelastic utilitarian asset into a speculative market is the fundamental cause, everything else is just an instrument of that perverted market.
Reminder that US housing prices are cheap and affordable compared to Canadian prices considering most people will never own a home again in Toronto and possible all of Ontario. Average house price in Toronto is 1 million + and it is not out of the norm to see 20%+ price increases every year. I was watching a co-op 2 bedroom condo that was selling for 300k in March/2019. They relisted it for 739k this week. There is also the fact that mortgages in Canada are only for 5 years and the interest can't be written off against your income. Amazing that at the current trend a house in Toronto will be several million dollars in just the next decade while the average salary is typically 60k CAD a year.
To expand on that: the home building rate kept pace with population growth up until the housing crash, and then collapsed. I'm not sure how much of a lag time there is between population growth and the demand for more housing, but eventually all the kids born in the last 20 years will need to live somewhere.
https://www.statista.com/statistics/1041889/construction-yea...
So is this finally the inflation that we were promised for so long? I guess all that money created during covid had to go somewhere. Too bad it's not going into education or healthcare...
It's not inflation from money printing. Its reduced supply along with higher wages from income earners getting smeared across the country instead of inflating housing costs in traditional HCOL locations. Before, lower income earners in the suburbs and more rural areas didn't have to compete against higher wage earners who were previously stuck in cities. No longer.
In the Sunbelt, I see homes getting bought all cash by the wealthy and retirees (with some or all contingencies waived), driving up values beyond what income driven mortgagees will support. When asked how long this can go on for (by people who, naively, believe this to be a repeat of the 2008 housing bubble and are waiting on the sidelines to acquire property either as a home or investment), I respond "Until that wealth is depleted."
Go look at current and historical prices of homes (as well as appreciation rate velocity) in Dallas, San Antonio, Houston, Tampa, Orlando, Miami, and major North Carolina metros (as well as parts of Western North Carolina such as from Asheville to the NC-TN border) to see this. Rents are no better [1].
I would posit that it is a combination of things. To discard inflation all together would be an interesting take. The other bits of your argument are good however.
Also inflation is not necessary for people to act like it will happen. You may see investment firms looking to 'park the cash' into something they can just borrow against. Not enough inventory to cover that would make the problem worse. It is like the oil crunch a few years ago. We had plenty of oil. The problem was not enough oil to cover real usage and speculative usage at the same time so prices went up.
So if (when) more inventory happens. Then you will see a decrease in price. As that could spook the investor crowd and cause inventory to grow. Something akin to what 2008 looked like could easily happen. It will not be the same cause but the effect will probably be similar.
> Go look at current and historical prices of homes (as well as appreciation rate velocity) in Dallas, San Antonio, Houston, Tampa, Orlando, Miami, and major North Carolina metros.. Rents are no better
The rental market in these cities is in an unprecedented state, with hundreds of applicants for each of the precious few listings.
People with money in the bank are finding nowhere to live.
The eviction ban is arguably contributing to the shortage in rentals - people aren't interested in getting locked into a tenant who can stop paying rent at any time and who can't be evicted. A lot of landlords are eating the cost and staying out of the market, which restricts supply and drives prices up.
A trade deficit results in a capital surplus. The exporting countries can use their dollars to buy real estate and financial assets. It's only obvious that this must happen.
That's a different statement, and assuming they meant what they said, a lie. A technique doesn't get credit for being more persuasive if it requires that you throw out your message.
Pedantry does not persuade. It’s the whole point of the technique.
It’s obvious that high home prices are supported by inflation, low interest rates, laws, birth rates, nimbys, prop 13, AND speculation. And more in concert.
A “no, it’s really this one thing in isolation…” argument is not realistic.
>It’s obvious that high home prices are supported by inflation, low interest rates, laws, birth rates, nimbys, prop 13, AND speculation. And more in concert.
It's obvious that the the initial post didn't agree with that proposition.
>Pedantry does not persuade. It’s the whole point of the technique.
It wasn't pedantry. It was half the content of the comment.
I really hope this technique isn't being popularized this way. A person doing this outside of very specific brainstorming-type processes reads like a person willing to lie or say whatever in order to get agreement (even if they won't stick to it).
Core CPI understates localized inflation in certain assets. Real estate happens to be highly inelastic, illiquid, and has a limited supply due to NIMBYism. The federal government has also handed people tens of thousands of dollars in printed money through stimulus checks and extended unemployment benefits. That lets people stay where they live now instead of moving to a place they can afford, which takes supply off the market and brings up prices. Whether you think this is good is a political opinion, but you can't deny that there is an impact on prices.
I bet if you adjust by the price of SPY as inflation instead of CPI you'd get a different story.
It doesn't seem to me that overall, either supply or demand of houses should be more correlated to e.g. the stock price of Alcoa as compared to the price of aluminum.
A few thousand of covid money isn't going to buy you a a house. Low interest rates have a lot more to do with it than covid money: 1% to 2% lower interest rates mean buyers can afford to pay more for a house, they're in demand, and supply is low relative to demand.
For example, compare to the ore-bible burst in 2007, a $300,000 loan with prevailing interest rates at the time would have a roughly 40% or 50% more in monthly payment in 2007 than right now.
The article is a summary of a new research paper that covers real estate prices over roughly twenty years up to the start of the pandemic.
The argument is that booms and busts tend to be caused by a real change in fundamentals that people then become too optimistic about.
For example: people knew "super-star cities" (SF, Seattle, etc) were going to attract more capital and jobs than other cities, so in the 2000s they piled into investments in these areas. However, they were so optimistic that they overshot, causing a bubble that ended in 2012.
That they overshot, however, does not mean that there were not real fundamental changes that made these cities valuable. So these super-star cities, even though they had a real-estate crash, did really well because the fundamentals kept being in their favor from 2012-2020. Places like Vegas did not do as well because the fundamentals are not as favorable there (fewer high-paying jobs, more space to build).
The question now is whether we are seeing a real estate mania in response to the idea of working from home. Prices in the suburbs have shot way up. Are people over-estimating this change? Perhaps, and if they are, it means that the suburbs could face more of a bubble popping than the city. But it may also mean that if WFH becomes a long-term trend, that even if prices collapse more in the suburbs (after having shot up in a frenzy), that we may still see a permanent shift in equilibrium between being in the city and in the suburbs.
So, if you believe WFH will be a long term, real fundamental shift, you may want to buy up some suburban places when, and if, a bubble pops in those markets.
I don't have the source, but I saw recently that if you price houses in gold bars, prices have remained highly consistent over the past 125 years at a price between 225-250 ounces of gold for the average new home in America. It's the dollar that has changed it's value.
I'm grateful for you pointing this out, because it shows a very different picture to what I saw, I'm going to have to dig that up and see what the discrepancy is.
Don't see the important question being answered: is this price rise accompanied by lax lending standards? Almost every sober analysis of thr 2008 crash involved dysfunction in the mortgage market.
Lax lending is not the core issue of a market crisis like 2008, it is the amount of leverage and debt.
You must look at how many people have cash in their banc accounts to cover mortgages if the stock market dives 50% and rates go up 2~4%. Can that generate a cascade of foreclosures?
That's pretty much the same thing I am saying: if banks properly analyzed your assets like you describe and had prudent lending standards accounting for this, people wouldn't be getting the loans to artificially drive up prices. This article gives me no insight as to whether this is or is not the case.
Banks as well as people cannot take the uncertain fully into account. Without the government taking steps in 2020 there would have been massive foreclosures.
If interest rates go up and that causes housing prices to drop, the same monthly payment can now only purchase a lower-cost house. People might not be able to sell for what they paid. Then if they need to move they must bring cash to the table. Even those that can afford to bring cash might still decide to go the foreclosure route.
In 2008 we even saw people pro-actively defaulting because they didn't want to make payments on something that was worth half of what they paid.
I'm not predicting any of this, but it is a possibility.
When housing drops significantly in value the debt is higher than the value of the home, making it underwater: now it is better for the borrower to default than to make payments. If you get defaults, then the bank has to flip the home into the market, increasing supply and dropping price, etc etc.
The narrative of 2008 has made lots of people believe that it was improper risk assessment, but the cycle of leverage and asset price fluctuation is the core mechanic and it acn easily repeat itself.
Adjustable rate mortgages and people who need to move who are now underwater. I couldn’t easily find nationwide stats on ARM issuance, but a quarter of First Republic Bank’s loans are adjustable rate.
Another trend to keep an eye on is “build-to-rent” [0]. Wall Street is hunting for returns. Real estate rental returns at scale are a viable target in an environment of near zero rates, especially at the lower-mid suburban price points.
In MSRP, sure, but cost/performance? Keep in mind there's a second-hand market, my $200 Rx 580 works just fine for 1080p gaming even for recent releases (without maxing settings). That's after accounting for Ethereum over-charging the demand-side.
And how many orders of magnitude more performant are GPUs today? Houses don’t fundamentally change level of luxury (or whatever other apples to oranges comparison you want to draw) every few years.
when? the nvidia 8800 GTX launched in 2006 at $599 MSRP. it wasn't even the top card of that generation. that would be the 8800 ultra which launched eight months later at $829 MSRP. unless I'm mistaken, you would have to go back to the Ti 4600 to find a flagship GPU that launched at/under $400. that was in 2002.
ten years after the 8800 GTX, I bought a 1080 ti not long after launch for about $650. that card is more than 2000% faster, for roughly the same inflation-adjusted price.
As an aside, as an owner of a x1950 pro at the time it's fun to read old reviews of how sick the 8800 GTX was at launch and think reminisce about thinking of maybe buying a $400 almost as good 8800 GTS someday, while now they're $20 on eBay.
On-die GPUs you get for free with the proc are more powerful than 2000s GPUs. Hell, CPUs are so much faster now you can do the same effects as a 2000s GPU in software.
Incidentally also the three areas where the government is most directly pouring money into, via FHA/USDA loans, Medicare/Meidcade, and Pell Grants and Loans respectively.
Those sectors (except construction) are also very well defended by interest groups against foreign workers in the usa.
It’s okay to hire an Indian fresh off the boat (with a visa) to code at Facebook (probably after an older or more expensive domestic worker is unhired) without a license but it is unthinkable that say public school teachers face the same competition.
There are just all kinds of things people don't need to buy anymore bc of smartphones. I think on balance life is cheaper now. The main exceptions are things like housing if you live in a big city.
That's a good example! The technology hasn't really improved that much (it has, but not like TVs), but the cost to deploy solar panels has gone down significantly likely due to manufacturing improvements.
Hmm, not sure if I agree with that. I think the best panels back in 2000 were ~11% efficient. Today we are closer to ~24%? I mean, it isn't a fast improvement, but production for a given area has more than doubled in 20 years.
And 11% was vastly better than just 10 years or so before that.
Not necassarily in Europe. There was a sweet spot of cheap flying after massive expansion of EU in 2004 and lasting the entire decade. Flying was cheaper than commuting to the airport and "security" measures weren't that absurd yet.
You compare like-to-like. You compare the same kinds of bread, not cheap white bread to artisanal. You compare a 27" 1080 TV to another 27" 1080p TV, not an 8k TV.
But like-to-like isn't just "resolution" and "size". I'd never buy a tv with a comparison like that.
My comparison would be as if I took a "low/mid/top end tv" in 2000 and compared it with a "low/mid/top end tv" in 2021. In that case, it is still about the same price, especially adjusted for inflation.
In that case the way you compare things is not the way most people do. Most people care more about what they’re getting then where it falls in the product stack.
The analysis of value by this researcher seems to be entirely dependent on future price. But houses have value even if the price goes down: a place to live, space to own more things, for kids to play, stability where no one can kick you out etc. Someone buying a house during a "bubble" can be deciding that they value these intangibles more than future profit of selling the house later.
A huge chunk of all the
offices in the developed world moved into people’s homes and a not-insignificant fraction of those offices will remain in people’s homes indefinitely. This isn’t just going to work by having the office in bed. People actually need more home space per person.
Unlike many past peaks this time it actually feels like there is a fundamental change that supports the increasing prices.
I don't think it is missed, at least personally, my thoughts are: "When will it stop?". If the argument is interest rates / incentives, then there really doesn't seem to be much turning back unless there are serious wage increases. The response seems to be "It won't stop."...just like housing always goes up in price (except when it doesn't).
When banks grant credit, they create a bond on the asset side and credit (bank money) on their liability side. The debt is your liability, the credit is your asset. You can spend that credit on anything you want, it can even be used to repay a different debt than the one you agreed to. Banks took a contract (debt = promise to sell goods and services) and essentially turned it liquid. Each bank dollar is basically a micro bond with no terms written on it.
QE basically buys the bond off the bank and gives the bank central bank reserves. It increases liquidity and that is about it. The bank doesn't own the bond it sold, it owns a claim to a small portion of the bonds the central bank has on its balance sheet. It doesn't have to buy the same bond back. (the same way you can use your borrowed money to repay a different debt). It helps banks get bad debt off their balance sheet but in no way does it encourage people to borrow more money.
This is adjusted for CPI inflation, but asset prices have inflated far more than consumer good prices. The 12.5 fold [1] expansion of the money supply since 2008 has, according to some analysts, flowed to assets.
Is this inflation adjusted? Because otherwise I don't see the point of that article. Of course home prices are going to be higher 20 years later.
Even if the numbers analyzed are inflation adjusted, the article doesn't explain in what proportion are those prices higher than in the 2000s. If a house value was 60% up before the bubble bursted and then house values crashed 60% you have a baseline which is the deflated prices after the burst.
Inflation is really an indirect measurement of the rate of change in a currency's value. It usually is approximated by sampling the price of a "basket of goods", including labor, real estate, and other commodities. If the prices of those goods are going up, overall, we have inflation.
Sometimes, though, the prices of some things are going up and the prices of other things are going down. In that case, it can be hard to discern between "the value of this good is increasing" and "the value of the money spent on this thing is decreasing".
In the current situation, we have both inflation (by some measures at a ~5% annual rate) and shenanigans in the real estate market (to some extent related to very low interest rates for mortgages) that are causing prices to rocket.
This is really scary as a whole. Even though you have less interest rate you could be overpaying for you house by 100k+ in the current market.
When interest rates do rise in the future(if it doesn't we will have larger problems) more people will be underwater with their homes, some may choose not to pay as they may never be able to be positive on their homes.
Take into account that salaries are not rising at an equal level. This may be correcting itself:
"minimum wage" jobs are paying near/over double to get employees. If this wage increase is temporary homes would be way overpriced. If it is not temporary "white collar"/"blue collar" jobs have to increase their salaries to be competitive; which would allow property values to stay or rise over time.
Increase new home supply. Given that the demand is extremely high and home supply is limited there will likely be an increase in new home supply. On average it will take a few years before new homeowners develop some equity in their homes. During those years are where new homes have a really good market. This would lower the value of homes faster. Especially in states that had the most migration during the pandemic.
Something that negate everything and allow house prices to sore is the upcoming wealth transfer from the boomer + gen x wealth transfer to millennials. This will hurt a lot of minority communities as they didn't have the time to develop as much wealth(segregation being a big hindrance for black communities, and a large of first generation unskilled immigrants who's kids are now starting to improve the situation). Ultimately, this may lead to a larger wealth gap which can destroy a lot of things and how civilizations fall.
Let me leave it with this: Millennials and Gen-Z are going to be living in very interesting times.
We were about to put an offer down on a home in a rural-ish area of north Nashville when we got additional information that showed it was ~120k overvalued. It still ended up with multiple offers in less that 24 hours.
Now I'm just curious which area is considered ruralish (assuming it is outside Williamson). There's a ton of buildable land left in Middle TN since there aren't too many natural boundaries, I've always found that interesting when looking at the possible density.
I know it is a bit seasonal and all and anecdotal but prices are stabilizing in several TN areas where it was growing XX%, we'll see I guess.
I’m talking about Hendersonville (north of Nashville). As for buildable land, not a chance right now. At least not at a reasonable price. My wife and I have been looking for land in Hendersonville for seven years, it’s awful. Old Hickory, the hilly terrain, and poor properly lines make it hard. It’s frustrating because our daughters all go to school in Hendersonville, but we live in White House.
The massive millennial generation are hitting the prime age for buying a home, thirty five, and they are a bigger cohort than the boomers so upward price pressure on homes isn't going to abate anytime soon.
Doing everything we can to ensure house prices/values only go up is going to cause disaster soon enough. It's time we stopped bending over backwards to feed this beast.
It's not clear to me what disaster will happen. It's certainly distortionary and inefficient, but doesn't seem critical.
Eventually we could get a voting shift where sufficient power is held by people priced out of owning, which could result in improved housing policy. Those eventual changes will be calculated to not disrupt the market, though.
It's pretty critical. Housing is probably the only basic need that involves a non reproducible asset (land). Sure, farming needs land but the capitalists willingly sell you food.
While I agree with you that these problems are caused by using houses as a speculative vehicle, "only the initial sale should be profitable" would cause way way worse problems than this. This is a very ill thought out proposal, hammers destroy everything but nails.
The actual solutions to this problem are things like higher taxes on second properties, high capital gains tax on selling more than X homes in your lifetime (similar to the lifetime gift tax cap) or on "short term" speculative buys, reduction in ridiculous code and regulations on what sort of shelters people can live in/build for themselves, and I'm sure others I haven't thought of or heard of.
They don't normally think through the consequences of this type of policy.
What happens when you're barred from selling it for more than you paid?
The seller will have a price cap but will have hundreds of people who want to buy it.
How do they choose?
Maybe lavish off-the-book gifts, or maybe they choose based on how the person looks, or perhaps they arrange consulting contracts to make up payment afterward.
Would you invest in your house if you knew you couldn't get any return on it? Or would you let it run to shambles?
Imagine you were a landlord renting a unit out and a new law prohibited selling it for more than you bought it. How would that impact your decision to maintain it? Would you spend money on updating the interiors, replacing carpets, putting up new siding, if you planned on selling it within a few years?
Suppose every landlord did this. What would a typical city block start looking like?
That's why any sane person only wants to tax the land because taxing land reduces the value of land and increases the importance of the building on top of the land.
When you tax land people don't suddenly stop producing more land.
Agreed on land tax. High taxes on land helps eliminate empty parking lots and other unproductive uses, and so long as zoning cooperates, encourages density.
You can build upward. You can actually "make" land like in Monaco for example. The land is there, its just the way its used. And making it so you can't sell for profit would decincitive new construction projects even more.
i am sympathetic to this viewpoint because the incentives for homeowners are mostly orthogonal to that of increasing home ownership for all. why would a homeowner support increasing the supply of housing when it drives down the price of their home?
Because I have children that I would like for one day to be able to afford a house.
I mean, OPs idea was silly beyond belief. Even the socialists dont say: "The only person who can profit from this are the capitalists (necessarily) who first build this. The buyer can't make a profit from the re-sale".
I met a builder once that you probably have never heard of. He is a billionaire. He can profit from the sale of homes, but my parent's can't? Never mind that the tripling of the price of my parent's home over the last 22 years was driven by silly economic policies. Otherwise the house would have appreciated maybe 50%.
> But, in Kindleberger's theory, investors got over-excited about the economic changes the new technology brought about. They began seeing the sky as the limit. They over-speculated on land near railroad stops, often borrowing from banks and racking up debt in the process. At some point, reality kicked in, and prices began to fall. Once prices fell, investors couldn't pay their debts, and that led to a crisis. It's a general pattern he finds repeated over and over in history.
So, a bubble? Once the "overoptimistic" part kicks in I fail to see how there's any substantiative difference between the two scenarios. All markets grow on fundamentals til they don't, and when they don't you have a bubble.
Sounds like people creating distinction where there isn't any to justify their "this is fundamentals" position. The article is a whole lot of noise about nothing.
We are currently in a housing bubble, 100%. Add on top of that massive monetary inflation. To what degree the prices reflect the housing bubble or the increase in money supply, I don't know. But I do know the best thing that could happen is the bubble pop, because the alternative is much much worse.
> The average price of American homes, in real terms, is now the highest it's ever been
Of course, you really need to be looking at mortgage rates to understand housing affordability: http://www.freddiemac.com/pmms/pmms30.html
July 2021 average 30-year mortgage rate: 2.87% (with 0.7 points)
2008 12-month average 30-year mortgage rate: 6.03% (with 0.6 points)
To put that in perspective, a $500,000 mortgage (excluding down payment) would require a $2,073 monthly payment today, but a $3,007 monthly payment at 2008's 6% mortgage rates.
In other words: Houses are still way cheaper, in actual out-of-pocket terms for average people, than they were in 2008. Today's interest rates are way too low.
EDIT: Updated with 2008 numbers, thanks to comment below