I just got an update from my realtor that, compared to 2021, houses are now getting 5-10 offers instead of 10-20. Every open house I go to is packed and has an offer deadline at noon the day after (they aren't bluffing - it goes straight to under contract the next day). It's impossible to have any contingencies - even home inspection. Most are going for $50-$100K over asking. This is even with 7% interest rates, the stock market down 20% and tens of thousands of layoffs in my relatively tech (and Amazon) heavy area. The rental market is so tight - there's basically nothing on the market and the few dilapidated homes that go for rent are between $5-7k/mo. And this is late-March 2023.
This is huge! I looked at every home listed on Zillow in my area for months before checking out 2 in person and submitting an offer on 1, which was thankfully accepted.
That was before the major housing shortage. The US is short about 6M homes by some measure [2], and the Bay Area is short a staggering quantity all by itself, so much so it has its own Wikipedia article. This remains the fault of onerous zoning rules and NIMBYs. [1]
[edit] No supply + high demand = prices go up. Higher interest rates only help at the margins because it doesn't actually change the demand factor which is that the humans in America need a place to live, and the more they make, the more they can afford to pay. And it certainly doesn't change the supply factor!
FWIW in my East Bay neighborhood, I'm noticing in the last couple months it's taking closer to a week (rather than a day or 2) for "Coming Soon" real estate signs to change to "Sale Pending".
This is about 1 mile from where I live in Overland Park, KS. PV is all single family homes with near zero apartments. Of course the city is trying to re-zone to put in higher density housing, and the population is vehemently opposed to it; I don't blame them. People move there for that reason. Higher density leads to more crime and other frustrations. People learned their lesson from the pandemic.
Why would higher population density lead to higher crime rates? Do you have a source for that?
Poverty and general desperation leads to higher crime rates as people resort illegal means to get by. And that's what happens when there is not enough housing for people.
In the United States, we have a whole bunch of terrible housing policies, so maybe people are conflating density for poverty. But you can find many examples across Europe and Asia where there is little correlation between density and crime.
It makes a kind of intuitive sense. If a certain % of human interactions are crime, and you create circumstances where there are more interactions (packed night club, large convention, dense city, etc), you could expect more of all kinds of interactions including crime. Whether that's how it works in reality is another question.
- "Hm, ok, how about we build new houses in the places people want to live, increasing supply to meet demand"
- "NOT LIKE THAT"
It's just like the "no take only throw" dog meme.
If you don't want to live next to other people, buy the land around you. If you can't afford the land around you, move further away. There's no reason your tastes should dictate what I can do with my property. I'm sorry, I thought this was America.
The cultural bifurcation however is increasingly pronounced. Ironically, all the more so as communications technologies improve, because those improvements are concentrated increasingly in dense metropolitian areas. Not necessarily city centres, but the urban metro areas net of suburbs around wealthy regions --- many along the coasts, but also urban areas within otherwise rural states (e.g., the blue-red division within the South and West between cities in those regions and urban areas).
The height of homogenisation probably came about with general availability of rail-based package deliver, direct postal mail delivery, rural electrification and telephone service, major broadcast television and radio networks, and the US Interstate Highway System buildout.
At some point between the mid-1940s and mid-1970s, there wasn't a whole lot of difference between what general culture was available within a broader metro region and a rural area. Broadcast and print culture (e.g., magazines) were fairly uniform (there weren't enough networks to support hugely divergent micro-targeting), goods and communications could spread well. Yes, major cultural hubs such as New York, Los Angeles, and San Francisco had their own specific cultures, and there was information for which you'd probably have to physically visit a major university campus or library to access. But overall, cultural diversity was hitting a low point. Flyover regions might wait a few weeks or months longer for first-run films (distributed as actual film prints), or see less coverage by major performing acts, but that was largely it.
That's been walked back with increases in direct-cabled broadband communications infrastructure, probably starting with cable TV (the fact that cable TV wasn't yet available was a laugh line in Fast Times at Ridgemont High, 1982, with the book it was based on published in 1981).
Now, the distinction between broadband in the tens of Mbit (or lower) vs. 100 Mbit to Gigabit ethernet, 5G vs. 3- or 4-G mobile networks, and general reliability of network infrastructure, as well as installation and maintenance costs, is a major distinguishing feature between first-tier and tertiary markets. In a world where work is performed remotely, being able to participate in full-video conferencing or download or upload content matters.
Maybe those differences will get ironed out. But as with postal mail, intercity rail and bus service, interstate highways, telecoms, and electricity, it all but certainly won't be market mechanisms on their own which do so. All of the listed services I've just named were brought to rural regions through government programs, projects, organisations, and/or subsidies.
Indeed, but the speed of it has accelerated massively in the last two decades, particularly with "smart farming" and big agriculture investors buying up entire areas and consolidating the fields, and by the aforementioned globalization allowing the devastation of mining and heavy industry as it was now possible to shift all of that to China and other places with lax environmental regulations.
> In the 90s it was typical for a house to be on the market for 3-6 months before selling. Sellers generally received 1 offer.
I wonder if there's been a material shift in who is making offers that won't revert to 90s behavior. Specifically, investment firms specializing in single family housing, who might have more incentives to make a lot of lowball offers and not worry too much whether they win or lose a specific bid.
Obviously you have imitators like Zillow trying to edge in as well, and step back after taking heavy losses, so its hard to say for sure where the new equilibrim will end up at.
> Specifically, investment firms specializing in single family housing
I dont think I have seen good data that includes or calls out "investors" rather than "investment firms" I suspect that a lot of property ends up in the hands of individuals be it a vacation home, rental, air BB or flip.
Interest rates in the 90s started in double digits and ended just below that. Also things that weren't mortgages (like cars) still had double digit interest. In 1999 I paid 13% interest for my car.
That must be specific to your market. That's not what I'm seeing in the Denver area, speaking as someone who has been casually looking for a house for over a year.
As soon as interest rates started rising, conditions went from what you describe, to, in a lot of cases, houses sitting weeks or months on the market. They go through, sometimes, multiple prices drops before going under contract.
I'm speaking specifically of homes that are in the range of those I'm considering purchasing, so maybe it doesn't apply to the overall market. For me, though, it is now much more of a buyer's market than it was a year ago.
That's because people are still not shedding the mentality of hoping to get top dollar. The market is going back in the buyer's direction. You need to be looking at recent comparable sales and pricing at or below surrounding current inventory if you want to move it quick. The mania did a number on people's perception of how the housing market should work. It will pick back up just as soon as the Fed officially backs off on rate increases, or even makes a slight cut, likely soon here.
I'm near you in Boulder area and I am seeing the same thing, huge drop in interest on houses in the market, last year places would get under contract within a week, now its houses sitting on the market for weeks and even months. I talked to our realtor(we are planning on moving again for a work related job) and she said average days on the market has doubled from last year in the Boulder metro area.
I'm in Boulder, too, and you can't ignore the "housing stock" problem here. There are a lot of crap houses in boulder that really need to be demolished. A late 90s house on my street sold in 1 day over asking, while an '87 house with a mid aughts renovation has been sitting fort 6 months. They were priced very differently relative to quality. I think what's happening here is not that the market has cooled overall, but is reflecting the vast annoyance that is boulder's building department, mixed with bad housing stock.
I would say, even further, here in the rust belt there is a whole other problem:
Inventory is gone. Not low. Gone.
In the 45 mile radius we are looking in for an area with a pop of ~100,000, at houses under $350k (90% of listings)...there are weeks with ZERO listings.
This has lead to an insane situation where offers end up way over asking but there are so few comps that virtually all FHA is back out, not because of issues with the offer but because the appraisal issue: no house actually apprises near the price it goes for.
If you take a look at Zillow, most houses that sold last in 2019 after a renovation, with zero changes since, are listing at $330k. This has crunched the rental market as one would expect. Rental prices, in absolutely a low cost of living area have multiplied overnight from ~$700 to $1500+. I know most in this area are absolutely not paid like us so I'm pretty sure the area is about to hit a wall.
One might expect a market to limit itself as homes that cost too much wont sell..but the other side of it is that I think we are getting to a flexible point of 'well everyone needs a home', I mean...is this a housing bubble coming? When that bubble pops, what happens to all the people with $350K loans on houses that are back down $200K?
I think that’s the downside of raising interest rates. Obviously I’m no economist, but if rates are high and I’ve already got a home I will not move. If people don’t move inventory is low and needs to be built. High interest rates probably put a crimp on new buildout. Just my thoughts.
Homeowners sometimes die, get divorced or have to move to a different area. Number of sales will go down, but not to zero. The prices of those sold due to exigencies will drop because of inflation.
I left the Bay Area in 2020 and started working remotely because I didn't want to enter the real estate market at the top, right before a crash.
I've never believed in doing something just because everyone else thinks its the default thing to do. Putting 1.5M to 2M into a small average house didn't make sense to me when that is enough money to retire in many different beautiful places in the world.
So I left. Switched jobs and started working remotely. I now live in a MCOL area and things are about 30% cheaper than the Bay Area. Better schools. Nicer environment. More diversity (including economic diversity). More access to activities (like gymnastics) for my kids at a reasonable price. More free time.
I make a little less money in cash. And a lot less money in equity. But all in all its a better life.
I hope more people open their eyes and realize these tech hotspots are actually hell.
I think that critiques of the Bay Area are overstated (probably because of cognitive dissonance). Yes, it's extremely expensive, but it's also very nice. If you can afford it I don't think there's any inherent reason to expect to like anywhere else more. Of course if you can't afford it then, yes, you should probably leave, but that's not some crazy revelation.
I'm curious where you live that you find more diversity? I also moved out of the bay in 2020, have lived a few places since and the diversity of the bay area is pretty much the only thing I miss.
Anecdotally, I follow many smaller markets in the Midwest and the South (plus Chicago). I wouldn't call it a buyer's market anywhere. But I'm not seeing anything like this.
I also have a few friends shopping on the East coast - and they're in a similar situation. It's not a buyer's market. But also not crazy.
My understanding was that The Bay, SoCal, and Seattle had massively slowed down. So I'm just wondering where this could be - or if things have recently turned around a lot.
The house around the corner from me in Cupertino just sold. It's 1700sq ft on a small lot, and they were asking $3M for it. It sold for $3.2M four days after the open house. It sold so quickly they cancelled the second open house. Apparently they got 20+ offers.
So at least here in Cupertino, things are still nuts.
Cupertino is a unique case as you have extremely rich Chinese investors as well as apple HQ in that city. Also it is known to have the best schools in the bay area besides Palo Alto. But yeah totally crazy nonetheless.
Interestingly only 10% of Apple employees live in Cupertino. And we actually don't have many foreign investors, Chinese or otherwise, as most houses are owner-occupied. But you're right about the schools!
$3.2M for a measly 1700sq ft?! Nuts. You can have a bigger, probably better house near the new Apple campus in Austin -walking distance, through a beautiful park no less!- for $600k or $700k.
You pay $700k for the house and $2.5M for the weather, stable power grid, and lower taxes (yes, people in Cupertino pay lower overall taxes than people in Austin).
> people in Cupertino pay lower overall taxes than people in Austin
Only because most people who can afford to buy in Cupertino aren't paying for it with earned income, right? Google tells me a $2.5M mortgage has minimum payments of $230k a year, anyone who makes enough to afford that is probably paying at least $50k/year in CA state income tax, on top of ~$25k in property taxes. Austin has high property taxes but I don't see them coming anywhere close to that, and the sales tax is lower.
Property taxes are a lot lower in California because of Prop 13. For a new buyer, they are about the same. But after just a few years, the Texas property tax will be much higher because California property tax pretty much doesn't go up after you buy. Also energy taxes soak Texans because they use a lot more energy than in California due to the hotter summers and colder winters.
One might pay less in taxes in Cupertino, but if the mortgage service is 3.5x what it would be in Austin, then one is still paying a tremendous amount in what amounts to a tax of sorts. Sure, if you have a mortgage you'll be building equity, but also paying more interest than you'll ever build in equity, and you'll depend on ever-increasing property values to begin to make this a worthwhile trade-off.
But basically the higher property taxes and additional taxes and fees that Texan's pay on consumption, like energy taxes, end up more than making up for the lack of income tax, unless you're a top 1% earner (which is somewhere around $700k/yr). Energy tax is a big one because Texan's use a lot more energy since they have hotter summers and colder winters.
The question was about a Cupertino homeowner vs what that corresponding homeowner would see in Austin. You're linking an article about the median Californian vs median Texan, which -- even accepting its assumptions -- is only superficially relevant, and very unrepresentative for the comparison under discussion.
Even at the lower rate, the property taxes on the Cupertino house alone dwarf any tax difference they would pay for a comparable lifestyle in Austin [1].
To be blunt, but it looks like you deliberately chose a misleading comparison to push the narrative you already settled on. That's below the standard I've come to expect of your comments.
To which one must add interest if one has a mortgage. It's nuts. Not I'm wondering what the shelter situation is like for the bottom 10% in California vs. Texas. And if affordable shelter == long commute, one has to value that time, and the mileage and gas or public transportation costs, etc.
"About the only Texans who fare better than Californians are the wealthy. The top 1% of earners in Texas — those making $617,900 or more annually — only pay 3.1% of their income in state and local taxes. That compares to a rate of 12.4% for top earners in California, who make $714,400 or more per year."
So if you're a top 1% or more, you save at least 4X in taxes. I'm sure you come out on top in TX financially for the vast majority of people reading this site, $100k+ earners. Everyone I know that moved to Austin from CA did so to avoid paying taxes on cashing out stock options.
I think these people making these choices are in another universe from most of us working folk, so understanding this behavior from one data point isn’t going to make sense. This could even be a second convenience home. It can be hard to wrap your head around that much wealth if you’re in more down to earth class.
I haven't met the new owners yet, but most of my other newer neighbors are not what you'd consider wealthy. It's mostly families with two working adults where one works or worked at FAANG and sometimes both. Most people's story start with "my FAANG stock made my down payment, and the salary pays the mortgage".
The older neighbors are generally people who have owned for 30+ years and bought when things were still reasonable. The houses in our neighborhood are all about 60 years old, and we even still have some original owners!
But the point is for the most part people here are not so wealthy they can stop working, they just have high paying local jobs to pay for their really expensive house and don't have a lot left over after housing expenses.
San Francisco condos are down a lot, many going for less than $1000/sqft now. But that's also the political climate and the increase in crime that is contributing to all that. I might come in when condo prices fall to about $600/sqft.
Things cooled somewhat in the fall but have definitely rebounded. On Friday the 10th I placed my townhouse in Loudoun on the market. Choose from 17 offers on Sunday evening. Accepted an all-cash offer with a quick closing for well above asking. Moving on Saturday.
I've been looking around the suburbs of Philadelphia, it's been a frenzy since summer of 2020. I guess it's slightly better in the sense that houses stay on the market for a few days instead of a few hours, but it's still absurd. My uncle, who is also in the area, put his home up for sale about a month ago and got a multimillion dollar offer same day without anyone even looking at the place. Even though prices have tripled and mortgage rates have doubled, a mortgage is still cheaper than rent.
entirely anecdota but a house me in the peninsula bay area, got bought for 1million (3/2) 8 months ago. got reno'ed- listed for 1.698 a month ago- went for 1.755
I have noticed the same trend where I live and among my close group of acquaintances and friends. Some couples are buying houses way north of 600K even while still having a mortgage on a perfectly nice home a few blocks away. My wife and I look at each other completely puzzled. Like what is going on? Are people making this much money? Or are they getting into terrible deals due to FOMO? We could certainly afford a new home now but no way in hell we are jumping on this market, our money goes to buy discounted stock or sits on CDs.
It could be an inflation hedge. You buy a house at a fixed rate, you pay your $5K/mo mortgage for 30 years. Meanwhile inflation makes this $5K less and less in real value. But you can rent it out for more and more.
in other words, shorting the dollar. it's the same reason you buy just about any asset that's not bonds or cash AKA real assets. People know, it's only a matter of time before the feds default on the value of the dollar.
i mean by having inflation run hot at 5-10% for many years or decades, they're defaulting on their obligation to provide a stable value currency for the people.
Because if you make the seller think the market is hotter than it is, then they price the house too high, and the house doesn't sell. That results in $0 commission.
I could see them telling buyers that the market is hotter than it is. But even that might backfire, if they make qualified buyers think that they can't afford to buy in the current market.
What is the average selling price? Median for my county is ~$325k and our experience matched yours exactly up through and including the $800s. You really had to be looking at stuff 3-3.5x the median price to have a reasonable experience where you could do an inspection or expect them to replace the 19 year old furnace (or at least credit most of a new unit).
We hear this ALLLLL the time. I've heard it for nearly half a decade as I waited and waited and waited forever to buy a house, and yet through all of the disasters, house prices just kept going up and up and up.
The assumption is, since almost no one can afford a house, prices MUST fall.
Here's the thing no one gets: the "almost" part is very important. If, in a city of 100,000 people, only the richest 100 can afford (less than 1% of the population) a house but there's only 10 houses on the market, then prices can still continue to skyrocket.
Overall demand does not need to be super high for prices to go up. It's Demand relative to supply that matters. And in markets where supply is really really tiny then demand doesn't need to be very high in order to outstrip supply.
I've felt kind of similarly. My wife and I are young--graduated college in 2018--and I feel like I've been a bit lied to about what constitutes "good financial decisions" over the past couple years. We've been squirreling away cash to have an emergency fund, long enough to support us being out of work for 6months, paying down her student loans, trying to wait on buying a car, etc--but our friends have been buying houses, cars, etc etc, and it seems like that's been the more prudent decision time and time again.
We delayed buying a house to have a bit more in savings? House prices skyrocket, our friends who leveraged the crap out of themselves look genius.
We wait to buy a car to have a bit more in savings / wait for the used market to come down? The used market goes up, our friends who bought new cars look like geniuses.
There's part of me that keeps waiting for a correction, esp. in the housing market, both so that houses come back into our budget range, but also maybe because there's part of me that feels vindictive about the fact that everyone who, to my sensibilities, seems to be acting recklessly are making out better than we are.
Some of that is reasonable, I suspect: we're very financially conservative relative to our peer group, which means we're going to miss out on some opportunities, and I don't want to be "proven right" in saving for a rainy day by everyone else having economic hardship, but I do feel rather confused about how we're "supposed" to behave in this market.
We're also remarkably well off, as is our peer group, which will obviously skew the data radically, but it also scares the crap out of me: if these are the thoughts we're having with a household income just barely under $200k this young, what is everyone else thinking?
I know someone from FSU (former Soviet Union). Their grandparents saved for decades, literally keeping their cash under their mattress. The grandmother wanted to buy a car but the grandfather said it’s better to save. One day they woke up in December of 1991 and that money was almost worthless. “We should have bought a car”, that grandmother never let her husband live it down.
Financial decisions are not so black and white. IMO only basic rules apply: live below your means, save more than you spend, avoid debt, etc. Any advice beyond that is a crapshoot.
Banks push this to the limit by making it comparatively expensive for individual buyers to build, preferring to offer loans for already overpriced homes.
Edit: At least this has been my experience. Have people found otherwise themselves?
The funny thing is, people were saying that in 2021... and then... interest rates doubled/tripled crippling affordability, people's net worth plummeted due to decrease in stock prices, and more people got laid off... And everything keeps on trucking straight through it. I visited my realtor when she was showing a house for sale, and it was astounding the traffic and people coming up whispering to her how they wanted to make an offer that moment. And then on top of that the offers that came in with escalation clauses, waiving of all contingencies, etc. And this is March 2023.
I’m in a suburb of LA and while prices are still up quite a bit from mid 2020, houses in my immediate neighborhood are selling for hundreds of thousands less than they did at peak.
In hot markets with thin inventory there are still enough affluent buyers who can afford to pay cash using gains from other investments or family wealth. Prices are set at the margins so it only takes a few such buyers in each neighborhood to keep market prices high. Ultimately people need somewhere to live, and if they have to be in a particular area due to work or family obligations then they'll pay whatever it costs regardless of the underlying value.
With interest rates rising, the volume of buyers is dropping. In high demand areas, the folks who got lucky with a windfall or whatever, can still buy.
But the normal buyers will get more and more priced out, and the affluent area will end up with less and less volume as sellers start waiting it out because the volume of available buyers gets thinner and selling gets riskier.
Yeah but a lot of those 08 mortgages had much higher rates and even variable rates in the subprime division. Labor market is holding strong rn so even if it happens it’s gonna take much longer than a few months
If you mean dentists, lawyers, and doctors. Yeah, they were giving too many prime borrowers with great credit scores way more debt than they could sufficiently manage.
I don't think 2008 was nearly the same in terms of the fixed rate mortgage positioning. A seller in 2008 could likely move and get a mortgage at a practically the same rate as the one they were leaving. That meant that trading down in housing cost would improve their cashflow.
Sellers now with a 2.75% fixed-30 mortgage could trade down a significant amount in housing cost and end up with worse cashflow if they take on a new mortgage at 5+%.
The reality is that home prices are buoyed by a number of systemic factors that cause supply to be constrained. Prices will go down in total value due to interest rate rises. Homes will not be more affordable.
> Prices will go down in total value due to interest rate rises.
As somebody with the cash, I'd settle for even seeing this much. So far it's been high interest rates with the same high prices (in much if the Northeast).
Pressure is on supply, demand relatively strong as ever.
Supply: low and expensive new builds, heavy rate lockin.
Demand: muted due to higher rates, but sometimes people gotta move. So a slight haircut, but in many areas most likely less haircut than supply constraint.
We are seeing some sifting in the market but I personally believe sales volume is driven by supply lockin, meaning its still a seller's market.
There's a general sense that housing is not affordable for the middle class who does not already own a home. You predict falling prices with the thought that it's not sustainable and some changes in public policy will occur, as we will not allow for middle class people to be unable to afford a home.
I think this is generally correct. This is the situation in my area: Prices can never fall, because if the situation was such that prices would fall, no one sells. So there's basically little to nothing available, so buyers are stuck competing no matter the macroeconomic situation.
That’s why short sales, foreclosures, ‘mailing the keys in’, etc. were a thing.
With housing, it’s NEVER a thing that someone just sells at a loss just because.
They sell at a loss because they don’t have a choice, and the bigger the loss, usually because the less choice they have.
If labor market is still doing well, then there is little pressure. Usually that happens a bit later anyway - construction workers out of work because housing isn’t being built, or folks employed by tech workers get laid off because tech isn’t so sure about those bonuses, etc.
We’ll see though - maybe the fed will pull off a soft landing this time.
I bought into a new community northwest of Houston, closed last summer. It's about 75% built out, and the new houses are sitting available for some time.
Anectdotal, but the same is happening in the mid-Willamette Valley, Oregon. We've recently seen houses listed and sell next day for over asking. How those prices line up to historic averages, I can't say, but after a maybe 5 month cooling period, I can say things have definitely picked up in our neighborhood. We have two close realtor friends and they confirm the same.
A) Tune out anything realtors tell you if you want to be an intelligent consumer.
B) Volume has collapsed because people in homes with low rate morts can't move. These prices are "less solid" because liquidity is poor.
In Austin prices are def. down ~ 8%, after this hike and sustained layoffs I am betting it will shed another 8 by the end of summer...
Inventory is still below demand in most places. People are just freaking out because the mania has subsided. I'd call this current market about normal.
I follow the market for Seattle East side pretty closely and prices have definitely dropped compared to a year ago. A ton of houses that were listed with ridiculous early 2022 prices have been re-listed multiple times to lower prices, in many cases dropping the price by well over 6 figures. One example a house in my neighborhood initially listed for 1.8m ended up selling for 1.45m
No, which goes to say the price-escalations and white-hot housing markets are still a thing across North America, straight through the tech crash, bond crash, layoffs, and now banking crisis.
There are obviously huge distortions in the housing market.
- how many buyers are investors from private equity or foreign investors vs residents (who intend to live in the property)?
- What is the true population including undocumented people? this will be off by 30-50% in some areas
- What is the true vacancy rate? In my area there are many houses sitting vacant. I’m assuming they are investments or tax dodges
It baffles me at how critical the housing market is and that no one takes responsibility to understand what is affecting prices. We just accept prices as a force of nature.
I'm not sure what to make of it but my little sister lives in Boise, ID, and has 3 AirBNB units. She goes to 'RE investor meetups' regularly and told me that the gist of the message is to take full HELOCs out and roll over into more property. She says she has the least # of units and everyone there has a minimum of 10s of units and a handful of people have hundreds, all purchased the same way. I have to imagine this doesn't end well but who knows.
I understand the economic incentives in place, but as someone stuck on the rental train right now, it's so infuriating to hear these stories. All I want is to buy a house someplace I actually want to live and start building equity instead of burning money on rent. And this class of investors is ruining housing prices with insane price competition based on insane AirBnB revenue.
I can only hope that multiple home ownership and AirBnB's externalized costs get regulated and taxed out of existence. There are a lot of young people with much less money than us tech workers who are barely scraping by and will never be able to own their own home or even afford starting a family if these trends continue.
When there are millions of Americans who literally can't afford rent living on the street or in their cars, owning even a single "investment property" or vacation home or AirBnB is repugnant.
I think it’s reasonable to be upset at both the people who implement bad policies and the people who intentionally profit from those bad policies at others’ expense.
> I think it’s reasonable to be upset at both the people who implement bad policies and the people who intentionally profit from those bad policies at others’ expense.
It's not who profits from bad economic policy but who pushes for it. It's not always the same set of people.
> I think it's reasonable to be upset with all of them
That's unreasonable to be polite... don't hate people wanting to save some money, humans were always selfish first and I havent seen this changed, anywhere, ever.
Change the system if you hate it so much, don't hate the little man for using means legally available to him. Just don't think you would be above the others if you were the owner/investor, folks that want change are often just the last ones coming to the party
It is not. It's the defacto stance of most people (to be upset at multiple groups), regardless of the specific reasoning. Everyone I've ever talked to (40+ years), has a lifetime of people they passionately disagree with. This isn't just democracy, it's humanity.
It’s both. And making it too easy to overextend oneself making for a bigger crash.
Easy money == can multiply consumption == eventual consumption of all supply == eventual starvation of options == competition for options (rapid price increases) == eventual topping out at a higher equilibrium == trying to get easier money, etc.
The cheaper the money, the more options get ‘consumed’.
Making more options works, to a point, but people find a way to leverage if they can to consume those too.
Eventually, the ability to leverage more ends. Often this causes a corresponding crash, as a lot of the drive to go higher is driven by the trajectory of ever increasing prices. When the trajectory changes, the math inverts, and now it becomes scary risky to buy instead of scary risky NOT to.
I have this (totally unprofessional and mostly unverified) theory about liquidity in general: that it's a conduit and amplifier for many things, but chief amongst them is exploitation.
Highly liquid markets mean that value of one kind can be translated into value of another kind easily. Every time money changes hands, there's an almost unavoidable difference in the pricing each party does for the transaction (an example is the company of migrant workers offering to mow your lawn; each dollar is likely worth more to them than to you, so you can play with the margins to save a buck and they'll probably still take it). This leads to an asymmetry that creates an imbalanced power dynamic.
Put another way, liquidity allows the projection of this power imbalance. For each dollar you have, you can externalize so much of your costs. This is something you almost don't have to decide to do; because markets represent aggregated pricing power, you can take advantage of it simply by buying goods or services.
If you aggregate this projection over a large and highly liquid market, what you have is a massive shifting of externalized costs from the haves to the have nots. Insert picture of a fish eating a fish eating a fish here.
From this perspective, it seems as though the system as a whole is given to a collapsing instability, from first principles. I believe that what we've seen in terms of periodic financial crisis is an expression of this system being propped up by the actors at the "heavy end", despite it's inherent tendency towards catastrophic failure.
Which is why I'm always a little curious when folks start talking about credit collapsing like it would be the worst thing in the world - a global cooling of liquidity could very well be the thing that saves us, by cajoling the system into playing fair at scale.
I've lived through two. I was working as a roofer through one and a bartender in the next, and honest, didn't notice much of a difference other than middle class folks freaking out about their mortgages and wall street screaming for the government to bail them out.
I am willing to bet this next one will be no different. Also, almost by definition, a recession is a depression that almost happened but didn't. Had we allowed the larger banks to fail and large-cap liquidity to cool, we wouldn't be back in this place with banks playing cowboy with people's deposits.
Not really. The ‘have not’s’ go from having an under the table job that lets them eat decent and have a roof over their head (even if they don’t own it), to homelessness or death. Or someone already homeless to just be, well, dead, as more predators are coming out and support options dry up.
The have’s can generally insulate somewhat against the worst case scenario - even bankruptcy for instance will protect a primary residence, car, and other things necessary to work and earn income.
The more you have, the more you can prevent the worst outcomes, and the more you can leverage what you have to take advantage of favorable long term conditions because you don’t have a gun against your head.
They haves by definition may lose more net worth in absolute terms (someone with $10 in the bank can’t lose $10 million by definition), but that doesn’t mean they’re at the most risk of the biggest real losses. Things like marriages, health, life, wealth (in a life altering way), etc.
Even if musk loses 10’s of billions, he’ll still be wealthier than all but a small handful of people in the world for instance, and won’t likely have any meaningful change in his day to day or long term circumstances.
Those are the same people. People holding properties have capital, thus more political power than the average Joe. Which they then use to influence city governments.
Many of my childhood friends have given up on the idea of ever owning a home, which is really tragic. Home ownership is a key driver of upward economic mobility, so the fact that a larger proportion of the most recent generation is locked out of this option is troubling for society generally. The wealth gap is only increasing.
I think landlords provide a necessary service in many circumstances, but these should be carved out in a way that separates them from speculative real estate investing. I think I agree with the idea that individuals that own more that 2 homes should be heavily taxed as a disincentive.
We also need major efforts to increase housing supply. I'm not seeing this in cities like SF or NY, but whenever I visit family in Texas or Indiana, it seems like they're building as fast as they can.
> Many of my childhood friends have given up on the idea of ever owning a home, which is really tragic. Home ownership is a key driver of upward economic mobility
Can housing be affordable and a “key driver of upward economic mobility” at the same time? I guess if housing prices are flat at least you are getting equity for your money.
This. Home ownership should not be a driver of upward mobility. It's great for a lot of reasons, but buying a house is not supposed to be a profitable investment in general, unless you want exactly the situation that we have now.
There will always be the need for landlords in some circumstances. Not everyone wants to own a home and sometimes life dictates the need for flexibility. Where do you draw the line? I'm not sure what to think of it, but the idea of owning investments isn't going to dissolve any time soon and physical assets (homes) are one investment vehicle.
Coming from a person who has rented for a long time, currently owns one home and does not rent.
Yes, but AirBnB units are not that. The prices are an order of magnitude higher than prevailing monthly rates, if they're even available on a long-term basis. And yes, short term, furnished rentals probably also have a place in the market. But it's a small place. The vast majority of people need a location that's stable on an annual+ basis and whose price has a reasonable relationship to local wages.
The problem I ran into when I lived in Chicago was there were quite a few renter protections built into the city statutes. So landlords were quite weary of renting to someone like me with bad credit and rental history, as eviction could be burdensome. AirBnB allowed long term residents like me to actually get a place to stay by side-stepping renter protections and allowing a landlord to take a chance on a bad apple. Without AirBnB I would have been homeless.
I think you would have been even better off with the cheap halfway houses that used to exist in American cities in the early 20th century. AirBnBs are so expensive I'm not sure they really fill the economic gap you're talking about -- very, very few people who can afford to stay in an AirBnB long-term also have poor credit and rental history.
Yes the place I stayed was a crammed together house of people that can only be described as a slightly upgrade over a crack house on the South side. It was in the hood with people selling loose squares on the corner. My presence was only tolerated in the area because I had "business" in the area as a paying tenant to a known member of the neighborhood.
There's no way in hell this was some place that pleasant white upper class families were staying on vacation or something. The people that rented it were happy to have market penetration to people who weren't in the neighborhood to cause problems, and most of the "tenants" were working class people who had one foot in the hood and one foot working their way up in legitimate jobs closer to the loop.
Agreed. But we could remove some of the economic incentive for investment properties and short-term rentals. No reason they should benefit so much from inflation AND rent. Drawing that line is a difficult one, but I think it's clear that right now there are way too many incentives towards rent-seeking to the point where it's actually hurting folks who don't rent-seek.
> Housing is a tough problem in the same way the medical care is a tough problem. There are economics at play and individuals finances. I don't have a good solution but have trouble accepting blanket statements that sort of hand wavily ignore real market demand for things.
These are not hard nor tough problems. Every industrial nation and many developing nations have the medical care issue solved. The US ignores solutions to the medical care issue due to our corrupt political system. Remove Legal Bribery from the political system and the US would implement a number of solutions that would solve about 80% of the medical care issues.
They are hard problems because of the political landscape in the US. Sorry but I thought that was implied by my statement. Clearly there are simple implementations that can solve the problem.
In California the problem is mostly that over time if you've held property it's become insanely cheap to be a landlord. Prop 13 applies to every parcel in the state. Even Florida tackles this more sensibly. A person's primary residence can get a homestead exemption and that's it.
John Paul Stevens on Prop 13[1]:
In comments from the bench, Blackmun called California’s tax system “distasteful, unwise and not likely to be copied by others.”
Justice John Paul Stevens, the lone dissenter, called the state’s longtime homeowners “squires” who voted themselves “a tremendous windfall” at the expense of young people and new residents.
“Simply put,” he said, “those who invested in California real estate in the 1970s are among the most fortunate capitalists in the world.”
Have there been any attempts to modify Prop 13 to a homestead exemption over time? It seems like it should be relatively straight forward to start narrowing it down bit by bit.
As frumper says, there was a recent attempt to remove Prop 13 for commercial properties, but it narrowly failed because the argument was that the reform movement was coming for homeowners next.
> There will always be the need for landlords in some circumstances.
Landlords do not need to be private individuals :)
> but the idea of owning investments isn't going to dissolve any time soon and physical assets (homes) are one investment vehicle.
Singapore, a country that scores higher in the Capitalism Index than the US, has no private landlords and all land is goverment owned. You buy your house from the goverment for non market rates, and if you wanna sell it or move elsewhere, you sell it for the price at that point.
It is no longer an investment, and people have more space, smaller rents and an easier way to go through the housing ladder (from starter home -> family home -> retirement home) than in almost any US metro.
Another alternative is Vienna. The Austrian capital has ton of communally owned houses. This means everyone in the block, owns the whole block, therefore the prices are not market prices but fair prices. Despite this houses representing only 40% of the total market, by having a non market offering of housing prices, this cools down market prices and they have some of the most affordable private owned houses in European capitals.
A third alternative is UK 1950's scheme of council housing. A percentage of every new build is done by the goverment and they allocate those houses with reduced rents to its owners. The differece with the modern "social housing" is that is not a block in the ghetto for poor people, but a mixture of houses for everyone in the council to apply. For example The Barbican, a now iconic buulding, was built by the council for high skill workers, lawyers, CEOs etc (with an average rent that would be too high for minimum wage renters). Despite this target audience, they froze rent for 5 years to help families grow and settle into those homes.
There are a million better ways to supply housing than private landlords and letting companies buy entire blocks as investment vehicles.
Well, the problem is easily solved by just amplifying the amount of places built. Unlock some massive economic and human benefits.
Everyone has one pet peeve or the other that is predicated on a false belief: that the amount of housing is limited.
If Airbnb people will buy everything, you could build one million units vertically and sell them for $750k each and you would have almost a trillion dollars to build homes for others. Just farm those people for money.
I might have misread your post somewhat. My point was that just because the AirBnB happen to have the highest willingness-to-pay (mostly due to budget set constriants, not their preferences) doesn't mean that they're the most deserving from a social or moral perspective.
> All I want is to buy a house someplace I actually want to live and start building equity instead of burning money on rent.
You and everyone else, pal.
See, you’re looking in places you can’t afford. Move somewhere you can afford. Sure it won’t be as “cool”. But millions of people live in those uncool places and do just fine.
One hot take -- If the fed loses appetite or ability to continue increasing interest rates, I think those carrying large amounts of debt on hard assets are going to look like geniuses in the face of runaway inflation.
Real estate investors and even regular old homeowners have always looked liked geniuses for exactly this reason. When the dollar loses value every year, loans are cheap, mortgages are subsidized and largely purchased by the government, and the supply of new housing is constrained, the absolute smartest investment to make is in real estate.
Seems like a housing price crash and AirBnB regulation would make them look a little bit less like geniuses, no? A lot of people have a hard time spending >$500k on very basic or even dilapidated homes across the USA. I'd enjoy seeing the speculators left holding the bag on massive losses if those prices return to normal AND they lose their main revenue stream.
> Seems like a housing price crash and AirBnB regulation would make them look a little bit less like geniuses, no?
Idk, I know of a ton of RE investors who would love prices to go down, precisely so that they can pick up more properties. And even if the town you're operating in outright bans AirBnBs, there are ways to pivot into other short-term rentals like furnished 3-month rentals for traveling nurse.
> If the fed loses appetite or ability to continue increasing interest rates
How does the Fed lose the ability to increase (or decrease) interest rates? I was under the impression that (ignoring the consequences of doing so), they can set them as they please.
The Board of Governors is appointed by the President, and Governors can be dismissed by the President. If your increase is summarily reversed by the apparatchik board that replaces you, can you still be said to be capable of raising rates?
The Fed chair is appointed by the President. He or she may decided it is better for their re-election to have rates go down and appoint someone who agrees, or they my pressure the Fed chair accordingly.
Yes this is what my banker friend told me when he bought his house last year. The inflation will be a much greater discount to any premium he paid over asking.
No offense to your sister, but I really wish profits from REIT or folks with multiple rentals were taxed 90+%, or at least progressively increase rate with each additional rental beyond.
Here's the thing, they're not profiting much at all, if any. The whole group believes RE can only go up, so when the value of the home increases, they yank out all the equity and dump it into another property. AirBNB just keeps them afloat.
And a bunch of people doing that means that the property prices keep going up. Nice self-reinforcing cycle - while it works. Once it fails, though, there's going to be panic selling as all those people get wiped out.
Or interest rates increasing faster than Airbnb price elasticity.
A whole bunch of these Airbnb based re “investors” also don’t account for home prices going down in there models so will likely get very underwater very fast.
I’m surprised it hasn’t happened yet and think this spring real estate season will be very enlightening.
> don’t account for home prices going down in there models so will likely get very underwater very fast
If their cash flows remain positive, that’s just an accounting curiosity. The core bet is on tourism cash flows to Airbnbs in that area exceeding the cost of financing the properties.
> This is a leveraged bet on that region’s tourism
Not based on tourism. The region is Boise ID. This is a leveraged bet based on immigration patterns. The number of people moving to ID has been massive, over the last 5 years.
Blackrock owns a ton of rental property in the USA and I remember some report they put out when interest rates hit 6% that they were still bullish on the property market.
Their explanation was that since 2008 housing has been built in the USA at half the rate needed to house everyone. Our population is still growing, and there are fewer units per person every year. Additionally, the interest rate makes construction loans more trouble the same way it makes buying an existing property more trouble, so there isn't any relief in sight.
If thats true, and it is coming from blackrock, then it could still be reasonable to buy more property.
If you have the cash to acquire properties now, high interest rates are great for you because it runs off some buyers and depresses prices somewhat. You can expect to refinance them in the future.
AirBNB has really compounded the problem - another reason houses are being treated as purely an investment by people who don't live in them. Even worse they are off the rental market.
The interest on my BOA HELOC is about 8% now, not sure how borrowing at that rate makes any sense unless rental yield is about 10% and up ( which is insane!)
Had a former coworker who was buying an apartment a month. Basically putting all profits into the mortgage for the next one. Seemed like she was printing money but I always wondered what would happen if the airbnb market slows down.
Ca you imagine people's reactions if gas prices dropped 10%? Or if food prices fell 10%? Or car/university prices fell 10%? Society functions best when it actively tries to minimize cost of living. Unfortunately we have created an political-economic system where half the population is incentivized to push housing costs as high as possible, or at least prevent it from falling, because it will enhance their personal wealth.
I hope for my childrens' sakes that there will be a massive boom in medium/high density housing construction over the next few decades, that brings house prices and rents to all-time lows. But this will never happen because homeowner-voters will never allow their personal nest egg to be threatened.
The great irony is that high density housing dramatically increases the value of the real estate, which is the actual investment. A single family home is in fact a wealth sink - you're constantly maintaining it and even with great effort it will probably be an undesirable building to live in within a few decades. While someone may pay to live in the building you currently occupy, at some point someone is going to buy the land to do something else with it. Like imagine if you owned an acre of downtown Manhattan with only a ranch style house on it - the skyscrapers around you are not going to lower your property value.
There is concern that lower rent places will allow lower income individuals to reside in these communities, and that will lead to undesirable conditions like crime, despite the fact that if rent were lower than a person of a given income level would have more cash in pocket and thus be less inclined to things like crime, and nearby affordable housing means local businesses could find people to work for lower wages, lowering the cost of living for everybody.
If people invested in making their communities desirable places to live, genuinely increasing the value of their real estate, rather than relying on scarcity to increase the value of their house, everyone would be better off.
Its counter intuitive at first glance, but in my area (west coast) it is actually the renter-friendly voters who scare off development. Too many rental protections lead to developers opting for development in red-er pastures.
I'm banking on the middle-ground: commercial real-estate being re-built/re-zoned into medium and high density housing
It would appease pretty much everyone: struggling downtowns with existing infrastructure can start to revitalize, former commercial landlords start seeing revenue again, and NIMBYs dont have to worry about new neighbors
It doesn't work that way because if house prices dropped 10% people would just buy bigger/nicer houses. Houses today are so luxurious today, granite countertops, ducted A/C, beautiful wood floors its just become normal.
The fact that people still associate stone kitchen counters with "luxurious" is a holdover from 50 years ago when homes were actually affordable. When houses cost $25k, a $50 stone was a substantial expense. Now it doesn't amount to anything. Nothing about the modern American home market is in any way influenced by the marginal cost of slightly nicer materials.
Gas prices were unusually low during the 1990's and that's when the SUV exploded in popularity. Look at an inflation-adjusted chart and you'll see a big dip between 1990 and the early 2000s.
I really think we're going to see a classic bubble blowoff here in the next year. Home values were crazy relative to median incomes from a historical perspective, and the number of investors using "free" loans to buy homes was out of control. As the market turns, there's going to be a run for the exits as it turns out that rents don't always go up, and as people realize it may take 10+ years for home values to return to where they were last year.
All in all, I'm getting big 2008 vibes with the bank failures and now the housing market turning. By the fall we might be right back into a similar crisis too, the banks are holding billions in assets that are no longer worth what they claim they're worth.
At the same time, we have a historic undersupply of homes and have been building less than we need to for a very long time.
So in a few markets with oversupply, there might be a bubble pop, but in many areas with strong economies there's not much to pop.
Vacation homes or other areas with highly variable supply seem more likely to pop, but in the economic power houses of the economy we are still undersupplied and this it self has been a huge limiter on national GDP, by denying people access to higher paying jobs.
Bunch of new homes being built here in socal and the developers have doubled the prices since beginning of the pandemic. As long as the developers can hold on to empty units longer I can see them holding out in hopes people cave and pay. Seems to be working.
What you call a "bunch" is far less than historical norms. We have been in a crunch for so long that even small amounts of building seem like "a bunch" but it's nowhere near building enough for what people need.
While this has been going on for longer in California, and the need is far deeper than most areas, it is a national problem now too.
Not even close to enough. California is a good million units short of where it needs to be. Socal needs to convert the endless supply of ranch houses into 2 and 3 flats.
External consultants (McKinsey, I think?) estimated 3.5 million homes short, and Gavin Newsom campaigned on building that much.
He's going to fall far far short of this goal, because he ignored it for the first years of his governorship, and is only making small moves now, but people trying to accomplish this goal are glad that he's starting to make these small moves.
However, any change will take multiple years to start having effect, and at least 5-10 years to actually solve, so even if he does all the right stuff, Newsom won't be able to say he solved until he's out of office.
>there's going to be a run for the exits as it turns out that rents don't always go up
No, but they tend to stay up when they get there. I have only seen them go down once in my life in a town where the major employer left and about 1/4 of the town was economically impacted.
It is not easy for many people to come up with a down-payment for a house. I know that there are programs to help people, but generally, renting is the only option for many people no matter how much the price of houses goes down (within reason).
So people with money can just snap up cheap houses if the prices fall or sit on their money for now and collect rents if interest rates skyrocket.
It's tempting to think so but there are a couple huge difference to 2008. For one, all the loans from before mid-2022 are quite affordable, so owners generally have little incentive to sell, limiting supply.
Second, the critical aspect making 2008 so bad was the contagion effect throughout financial markets - MBS were so pervasive that suddenly no one knew if their bank's assets were worth anything at all. Uncertainty is the worst for financial markets - they tend to assume the worst which can lead to credit just seizing up. That was a trigger for some of the worst of the economic damage. Despite the recent turbulence for banks, the situation isn't comparable. There banks were holding some of the most widely traded assets, generally considered extremely safe - they simply had too long of a time horizon (which is still poor risk management). No one is worrying that the banks' assets might actually be totally worthless and, with the support signals coming from the Fed and FDIC, it's doubtful the crisis of confidence blows up the way 2008 did.
We saw last time that there’s no political appetite to allow home prices to ever fall on a nominal basis. The politicians went about inflating a new, even larger, bubble ASAP.
If basic homes become unattainable for the working class and the middle class -- teachers, nurses, construction workers, etc. -- we either have to raise wages so folks can afford the new prices, or drop house prices back to a reasonable level.
I guess it's a race between "rent-seeking folks who own investment properties" and "people who actually want to live and work in a community." Should be an interesting battle -- while the rent-seekers surely have the most lobbying power, literally everyone needs a home.
We could just create "mortgage perpetuals" where you perpetually pay an interest on the land value without ever paying the principle on the land itself. For the improved structures above the mortgage period could be the expected life of the structure itself.
There's room to squeeze people a lot further than they're already squeezed.
I’m actually cheering for the investment buyers. A fall in homeowners as a percentage of voters is the only way out of the mess that’s been created. With a supermajority of voters owning homes of course we see a higher is always better dynamic among politicians.
I'm sure this will happen eventually as the Boomers retire and die off.
I suspect people who actually live in homes aren't as attached to rising house prices as politicians think. Personally I'd happily buy a house for $500,000 and drop the price to near-zero if it meant I didn't have to pay $10,000 a year in property taxes. At some point it's not about "building equity," it's about having a place to live that you control, where the rent won't skyrocket 20% per year, where you can raise a family or own a dog or install a patio or whatever.
Home prices did fall though after 2008. In some areas by as much as 30-40%. The real difference between this time and last time is that the Fed was trying to prevent deflation in 2008. That's why the cut to zero. This time, the fed is trying to prevent further inflation so they can't really cut without setting the economy on fire.
Agree with the sentiment, not sure about the timing.
Apartment REITs are already 30%ish below their 52w highs https://www.google.com/finance/quote/RESI:NYSEARCA?window=1Y... so it seems like the market has anticipated that move and priced their yields in line with risk-free interest one can get on Treasuries.
Sell it and do what with your dollars though? USD is in a free fall with massive inflation and equities are in turmoil. Furthermore the fed is signalling the end of raising rates so bonds aren't going to do you much better.
If I had property I'd be holding onto those sweet sweet negative real interest mortgages for dear life.
The problem is that 2008s slow down created a major housing shortage as we missed 2.5 years of building as we sorted out the financial crisis. We haven't been able to get caught up.
According to the U. Michigan survey of consumers there has never been a worse time to buy a house in the 65-year history of the survey. It's a 2-sided market so you can't really expect houses to sell briskly under those conditions.
But they are. Houses prices have fallen slightly but things have been so insane for the last 24 months that plenty of people who "need" to buy a home are even more desperate now.
By need I mean people who have a kid and are about to have their second or third but live in a one bedroom or some other situation that makes buying a larger home more important that someone like me who would just like to buy a home but doesnt really have any motivating factors other than home ownership == good.
That force runs both ways, though. People don't just increase family size as a fact and force themselves to buy a house at any cost. The cost of housing suppresses household formation and household size.
When life happened before, you sold out. Now they'll just rent it out. Even the divorce lawyers will realize it's more profitable to have a two party rental income arrangement.
Death is when houses go on the market and add to the supply. People live longer, when they die their children are already established with their own houses or they are drug addicts, either way the house is going on the market. Or the offer of rentals are to increase a lot.
Worst scenario is inheritors will prefer to let the house rot rather than sell, like how it is today.
They could fall for a while and still not be down or close to flat over the past 2-3 years. Home prices were up 25%+ in many areas from 2020 to 2022. One of the craziest things I've seen. There are so many entrenched interests in housing that barring a crazy downturn they aren't going to fall much, unfortunately. A home which was $250k around my area in 2017 is now going for $500k, despite the current conditions. Make that make sense. The Fed, zoning boards, entrenched investors, and builders royally screwed everyone.
Homes should be depreciating assets, like in Japan, and like every other item. Furniture depreciates (with few exceptions, like antiques). Clothes, motor vehicles, electronics, carpets, gym equipment, lawn mowers: name it. With rare exceptions, everything depreciates over time. That's how it should be.
But what about mortgages ending up underwater? Well, that's life. And if home prices were low enough, it wouldn't be a concern. I don't expect to turn a profit on the above items. I buy them for their intrinsic utility, not as a speculative instrument, an investment vehicle, or a way to finance my future retirement. So should it be with housing. If you want to save for retirement, open a 401K, a Roth IRA, and a non registered account. Small time landlords are okay. There is a market need for rental units. But corporate landlords need to be broken up.
(Small time landlord here) homes are absolutely depreciating assets. On your taxes you can write off the whole value of your home over 30 years due to depreciation - the assumption is that your home will only last your that long and will essentially be “rebuilt” through all the maintenance expenses. Your home is just a pile of scrap wood and nails which rots and depreciated just like your car.
What does not depreciate however is that pesky patch of dirt under your home. That goes up and up in value because folks want to own a piece of this great blue ball and the value on that desire only goes up as population and standard of living increases.
> What does not depreciate however is that pesky patch of dirt under your home. That goes up and up in value because folks want to own a piece of this great blue ball and the value on that desire only goes up as population and standard of living increases.
The land under the house doesn’t depreciate like the house does. Can always put a new house up. Hard to get new land, so unless regional demand goes down it’s a value-growth proposition.
Indeed. And the neighbourhood, the schools, the nearby jobs or leisure activities or woodland or whatever it is that makes that location valuable also don't change, or not as quickly. If they get better, does the house appreciate? Does it also appreciate if I paint my house?
If so, why not let the market calculate that depreciation or appreciation? What's the point of second-order accounting when you can just expose the asset on a free market?
It's kind of annoying that people bring up Japan so often. Japan has had a history of catastrophic earthquakes that destroy everything. Necessarily they feel that physical structures should serve a more transient purpose. Regardless, the underlying land still appreciates, it's just that the structure isn't really that valuable.
Even in the United States the structure depreciates. You can go to any county assessment site and see how the assessed value of a property (structure + land) changes over the years. What you'll notice is that the structure goes down a little, and land goes up a little.
The main issue with United States, unlike Japan, is a culture of investing in real estate. As long as that's true nothing will change.
The other part of Japan is that in the 80s and 90s it had the highest, most unaffordable houses anywhere. Much of the reason they're cheap now is that that bubble exploded. Demographics are different to.
This makes no sense. Property/land doesn't depreciate. The actual home structure does but you forget that homes aren't static assets. They are continuously being improved. In essence, from the day a house is built, it needs to be rebuilt piece by piece over time. This affects the price.
Also you need to consider the lifetime of materials VS the inflated cost of new materials and labor to built an equivalent today.
I mean houses built several decades ago are cheaper than new ones. It’s just that overall growth in prices more than completely offsets that.
Anyway unlike all of those things you mentioned there are usually no objective reasons for homes to depreciate to zero (you’d need renovation prices to be higher than the cost for building a new house, which does in fact happen sometimes).
Also houses are most often built on land which can’t be a depreciating asset and Japanese homebuyers have different preferences due to certain (possibly irrational reasons).
Physical artifacts depreciate over time because of wear and tear. They lose value because the object itself is actually degrading. (Though even this isn't cut and dry because they also gain intangible properties like age and history which are meaningful and valuable to some.)
Digital or conceptual artifacts are not subject to the effects of physics and entropy, so do not naturally decay. The text of Moby Dick today is the exact same as it was 100 years ago.
A "home" is a combination of those: a physical building sitting on a legally enshrined plot of allocated land. The former depreciates while the latter naturally appreciates.
I agree but part of me is also starting to think that for many people having a big chunk of their wealth tied up to an illiquid asset is not a terrible thing because otherwise they would "invest" it in JPEGs.
Folks who are good at real asset economics: If real estate prices decrease does rent increase? (less $$ here = push for more $$ there?) or do more renters have access to ownership? Curious about these dynamics.
I think you want to look at cost, not price, i.e., you want to add in that interest rates have risen to the equation. Does the decreased price more than make up for the increased mortgage?
Given the Fed's stated intent with interest rates is demand destruction: raise interest rates, make mortgages more costly, which (to them) hopefully causes some people to not pursue mortgages, and ultimately not buy houses. This would lower the price of homes (less demand) and there would presumably be some new equilibrium.
But people gotta live somewhere, and if they're not buying homes, then there's a chance they're renting instead. So if there are more renters than before, I'm not going to hold my breath on rent going down.
Although,
> “Surprisingly, we are finding that the buyers are still out there,” despite the increased mortgage rates
IMO, the housing crisis is a lack of supply. Fixing it will require more homes.
I'm not sure this comparison is as clear cut as it's always made out to be.
People can continue to live with their parents. In many cultures multiple generations live under a single roof. You may not want to do that, but it can be done.
None of this is to say that I think people should be forced to live with their parents or that it's a solution, I'm just saying if you were looking at this from the perspective of destroying demand to right the ship then it's not impossible that it creates a situation where a lot of people find a way to make it work in the short term, which might in itself be enough to create a drop in asking prices/rent.
Even then, the problem isn't even remotely a lack of homes, it's a glut of poverty profiteers in the form of landlords, but good luck getting a political class that's on the take to fix that the just way (by taxing rentals enough that it's no longer palatable).
The opportunity cost of living with your parents (what jobs are available in that area) is high in many places, especially in a country as spread out as the US. The economy pays a price when it allows housing costs to prevent worker mobility.
In one sense, you're clearly correct. Most people living rough aren't doing so because there are no homes available for them to live in, so given that our kids aren't generally homeless, clearly they're living with parents, or roommates, or something.
Fannie Mae says, for example, that we are lacking 3.8 million homes for people to live in[0]. That's a serious undersupply! Build more houses! The NYTimes is on the case, too[1].
Conversion of homes into rental units is definitely a big part of the problem, but there are numbers on that, too. Turns out there are more vacant homes than Fannie Mae said the undersupply is, 17 million by one reckoning[2]! Not all of those are vacant due to landlords being involved, but a lot are.
Almost never. Real estate prices going down does not affect the costs to the landlord (assuming it is an investment property), their mortgage expenses are fixed. If they don’t have a mortgage, it’s still unlikely, because having a lower property value doesn’t translate to pressuring them to find renters more easily by lowering the rent.
You are thinking in the short run. Rental contracts and mortgage contracts are difficult to extricate yourself from,
and make prices "sticky." Demand cannot immediately respond to market changes.
But in the long run, it is based on your alternatives. If prices are falling, that means lots of people are able to get mortgages more cheaply. More people getting mortgages means less people renting... which means less demand, and lower rental prices.
If a landlord is locked into a 30 year mortgage at one rate, and feels that the "have" to rent a certain price, that doesn't mean that this landlord will be able to find someone willing to pay that price.
Sort of - higher interest rates make your monthly mortgage payments higher, so if there's a fixed monthly payment you can afford, higher interest might offset the lower price and actually make it harder for you to buy in. This of course depends on how much the house prices and interest rates change and how much you have available for a down payment.
That's true, and beyond the simple observation that the two options (mortgages and renting) will maintain a kind of general equilibrium, there is a more complicated issue called the Law of Rent which shows that land value is based on the productivity that is possible at that location, over and above the alternatives.
It is for this reason that what you can afford is key. So land prices respond to the amount of disposable income that the potential buyers have. You are right that the affordability on the mortgage side includes interest rates, and it is possible for price changes to purely be making up the difference there.
But it could also be a broader phenomenon. If rental prices are falling, it is an indication that prospective buyers and tenants have less ability to afford that land, or that the location provides less value. Either way, a bad sign. But since land is so essential, it responds in such a way that no matter how prosperous a society becomes, it will always adjust to make itself about as difficult to obtain as always. The number of labor hours needed to buy a computer has fallen dramatically. But land values just kind of keep pace with the progress (or regression) of civilization.
People who have ownership over the natural world thus get to claim a growing share of the progress of civilization, purely by owning. Even if they only perform idle speculation.
> Real estate prices going down does not affect the costs to the landlord (assuming it is an investment property), their mortgage expenses are fixed
Silly question but the fact that their mortgage expenses are fixed works to their benefit unless they bought at the peak, right?
Talking specifically about the big US city I live in - most landlords who already owned property since forever still jacked their prices up many hundreds of dollars in the past couple years because the market would bear it, not necessarily because they needed it to cover costs.
I'd imagine that the renters paying the largest rent (a few thousand, let's say) would be the likeliest defectors to buying a house. So buyers in the the top end of the market collapse, and those landlords begrudgingly start lowering prices - they can still make a profit. Maybe the low end stays the same.
I have zero understanding of the economics involved here, just pontificating.
I think this analysis is generally correct, but we already saw it happen during Covid, and prices in cities didn't really drop during that time, they just flattened. There seems to be an equilibrium in which landlords are preferring to hold out and leave units vacant for a little longer, knowing that they will make more money in the long run if prices don't drop. this has been ongoing in commercial real estate for a long time, so it's not surprising that the same would happen in residential.
Supply in the number of rental units available is what drives down prices. This is extremely obvious to anyone who visits Dallas or Houston Texas where developers are allowed to build as much as they want vs the bay area where supply is extremely restricted.
I thought what the OP was suggesting was if people are not buying houses then they are renting them, which may put pressure on the supply of rental properties which are not the same set of homes. In the short term a given house does not instantly transition from for-sale to for-rent.
> their mortgage expenses are fixed. If they don’t have a mortgage
The article is about the US but if it's interesting, there are quite a few countries around the world where variable rate mortgages (for example following Euribor) are the default, so in this environment their payments would've actually gone up (with higher interest rates), at the same time as the property value would go down.
Mortgages with a rate fixed for >5 years are not really widely available in Canada (for example). So it's not like you have a choice.
From another perspective, 25 year fixed mortgages seem like a subsidy to homebuyers that protects them from the market. Who ends up paying the losses on a low rate 25 year fixed mortgage when central bank rates go up?
How does this impact home prices and the affordability of homes? If I bought my current (US) home on a 5 year mortgage, my payment would have been above $12,000 per month, which seems pretty unapproachable for the majority of buyers. Or is it a 5 year fixed / 25 year variable deal? How does refinancing work under those circumstances?
Certainly a 30 year fixed mortgage is an amazing deal for a homeowner. If the rates go up, you are protected. If they go down, you can refinance into the lower rates, and likely at a better LTV ratio (as you've paid more equity into your home). At this point, with my interest rate, I am better off putting excess cash into a bank account or Treasury bonds than paying my loan faster.
It's a 5 year term on a 25 year mortgage. Basically you refinance the remainder of the mortgage every 5 years under new terms (and possibly a different financial institution). If you choose a fixed rate for the five year term, your interest rate will change when you refinance based on the market rates at that time.
Edit: Also if you choose a variable rate mortgage, your monthly payment doesn't automatically change (unless the payment is insufficient to service interest) as the rate changes, instead you end up paying off less of the principal which makes refinancing even more painful.
25 year fixed mortgages seem like a subsidy to homebuyers that protects them from the market.
Can you explain how this is a subsidy when it's a private lender offering me the mortgage? Why would they offer it to me at that rate if it was a bad financial move?
The private lender is most likely just making a commission on doing the paperwork to create the mortgage, but they're selling it to the government a la Freddie Mac and Fannie Mae. It's what a "conforming loan" is. https://www.rocketmortgage.com/learn/conforming-loan
To take a different perspective on this - why would it make sense to subsidize the purchase of larger than necessary homes because they're able to lock in low rates for a lifetime? It would make far more sense if homeowners had more skin in the game, and had to make rational choices about the size and location of the home they purchased.
Fixed-rate mortgages are actually an incredibly bad deal for the lender when rates are low like they were last year. The lender ends up holding debt that - in 30 years - is worth hardly more than what they lent out.
Landlords can hold property portfolios through downturns - they aren’t forced to realize losses, like, say a bank whose depositors are asking for their cash back.
Landlords won't willingly drop their asking rate, and in most cases wouldn't be able to do so as their mortgage is separate from the market value of the property, but that cuts both ways - the market doesn't care about the landlord's mortgage any more than it cares about your ability to make rent in a month. The asking rates for rent will drop when landlords are forced into it or repossessed.
What indicators do you see to make this look likely? It seems to me that if you take home ownership off the table, you increase the number of renters which in turn increases demand. Rising rent seems inevitable at least in the short term. People gotta live somewhere and increased interest rates means less new construction of newer rentable properties - not like the US is any good at building affordable housing anyway.
Buying homes is a substitute good for renting. So if buying becomes cheaper, it will decrease demand for renting. Of course it's unclear if buying is actually cheaper now, since sales price is only one factor.
Because of rental pricing cartels [1], rent only every goes up in the US. I just got done talking to my landlord, they use this or similar software, not only did they increase the rent between initial showing/discussions and lease signing based on my income verification results, but I've already been told that there are /no circumstances/ in which rent will ever go down, and that at renewal they cannot negotiate.
This is actually blatantly illegal price-fixing, but in the US we have effectively no regulation of how business behave. Because essentially every landlord (most of which are large corporate landlords) in my metro area use this or similar systems, there is no real alternative, so even if I wanted to suck it up and deal with the stress of moving, there is no upside.
Renting is a scam in the US, buying a house isn't a scam, but it's ridiculously overpriced currently. Housing in the US is super-fucked currently.
Do you mean real-estate prices decrease? Or real-estate supply or demand?
Price decreases: More people can buy homes and exit the renters market. Rent, in theory, should flatten/decrease. This may not be the case because as we've seen in the past couple years, corporate landlords are raising and holding rents in sync.
Supply decreases: Lower supply, same demand, rents go up
Demand decreases: Lower demand for real-estate should decrease prices as fewer sellers can sell at the price they bought at or at whatever price point they feel their homes are worth. This could take a long time to play out though. Lots of options for owners to hold-out on selling til a better market and many have very good interest rates on their homes with very little reason to move, especially for a much more expensive monthly payment. Anyways lower demand should in theory equate to increased supply, which should lower prices on homes and on rents. With the caveat again of the corporate landlord cartel.
That's not true at all. Mortgages are based on a combination of interest rates and principal. This combination (plus taxes) create a monthly cost to purchase and live in a home. As interest rates go up, asking prices will go down so we end up at the same monthly price. Unless there's a big change in what people can afford per month.
Rent is based simply on what people that want to live in a property are willing/able to pay. Again, if there's a big change in what people can afford (lots of unemployment would drive down, inflation of wages would drive up) then rents will change. Otherwise they won't.
In the end, the price of a house going down as interest rates go up just means that the bank is getting more of the monthly payment.
I stand by my original statement, which admittedly did not cover the complexity of what is going on in the market.
Falling home prices will cause falling rent prices, all else being equal. However, rising mortgage costs from higher interest rates will cause rising rent prices (also via substitution). Rising mortgage costs will directly cause home prices to fall, so the effect on rents will be somewhat mitigated. How much of the home price decrease that comes from mortgage costs versus other effects will determine what happens to rent prices.
As you say, if most of the decrease on home prices is caused by rises in interest rates, then it likely that rents will increase rather than decrease even if the direct effect of lower home prices would be to lower rents.
But each day people make the decision to rent or buy and which they do is a function of how much each costs. While the mortgage doesn’t necessarily change the principal does and what we call housing prices is the price of houses people currently trying to sell. If rent is cheaper today it will depress housing prices today.
Oof, so many things wrong with this tweet, starting with the fact that the chart doesn't address the claim of the the image to which he's responding.
The claim is that all of those things could be afford on a single income. The chart doesn't look at individual income, but uses "family income" in both cases, hand-waving away protests by saying two-income homes were already common in 1953. That is debatable, and the tweet offers no evidence or basis for comparison, but again, does not address the claim of the original image, which involves a single income.
Smugly pre-declaring that you've made a case you haven't made, and gently mocking people trying to point out your error, it's not a good look.
Fair. Income vs. home price isn't much use because monthly mortgage payment is what matters to most people. Rent v. income is a good comparison, but might have the growing preference for more people living in fewer places (e.g. top cities) embedded in it.
A 50% drop would wipe out millions of households, ruin the economy for decades, and take housing prices back to ~2015 when they were already unaffordable to most.
Letting the housing shortage/bubble spiral out of hand was a mistake we’ll be regretting for a long time.
Wipe out millions of households? You mean these people will have to start working for a living instead of borrowing money against their house? Like the rest of us? Who have been "wiped out" for decades.
Though I doubt they fell even close to far enough to makeup for the increased TCO due to rising interest rates.
60%. That how much higher my monthly payment would be
at today’s interest rates than when I took a small equity loan at the bottom of rates a few years back
Prices are still way, way up over the past decade. This seems like data mining at its finest. I don't see how this is so newsworthy. Unless prices never fall at all, some down months or even down years are inevitable . Every few years it's like this--prices fall, like in 2020 during Covid or in 2018, or whatever, commenters and pundits start to prematurely celebrate a supposed new regime of housing affordability, ignoring or losing sight all the earlier accumulated gains--and then prices come roaring back when least expected, sorta like GameStop stock today. It's the same pattern over and over.
This is a US average, correct? In the areas I'm looking at to purchase, prices dipped a little, then increased again this past month. One house I was about to tour sold prior to the weekend open house.
I don't know who can afford US$1.2+ million houses (not me), but they seem to be quite active and prices are not wavering, thus causing many houses that I thought were affordable to go up in price.
I mean it should've gone down more but you always have PE funds buying up inventory and holding them. There'll be a point where they will probably have to sell and that will truly bring home prices down. Maybe when unemployment increases too because it takes 6-9 months for those effects to hit
Yeah, title is clickbaity but correct. Out of all the Februaries in the previous years, this february is a february that monthly price increase is negative.
What all of you are not understanding is that if house prices drop, large property hedge funds will swoop in and buy them. They can't let the rest of their portfolio plummet, so they are going to keep buying to prop up prices. So it might drop a little, but heavily invested ares of the country like Sacramento, Phoenix, etc will not fall too much.
