> as the stimulus packages have been targeted towards basic infrastructure and assistance programs for lower income groups.
This made me chuckle. If anyone is curious, this is where the money went [0]. To say that the money was focused on lower income groups is laughable. 2.9 out of 12 trillion allocated went to asset purchases, basically buying treasuries and mortgage backed securities. How many lower income groups hold treasuries?
[EDIT] If anyone is curious about an alternative view, I've been kind of obsessed on this topic over the last few weeks are wrote about it extensively [1] and tried documenting the ridiculous rise in asset price levels to levels much higher than even that of pre-covid [2]. To say that there's nothing going on when nearly all asset prices are 30+% past their pre-covid peaks is ridiculous.
You have to think indirect effects though. Staving off a bond market crash probably is a good thing even if it does not directly help poor people. Ill-liquidity in the corporate bond market makes it hard to raise capital, which means less hiring, and hurts workers of all incomes. A bond market crisis is bad for everyone.
I agree to an extent. But that amounts to basically "trickle down economics" that protects the incumbents (large banks, many of which are foreign, mortgage issuers, etc). Notice how you don't really see any new banks being created? Why are bank stocks up 30% from pre-pandemic levels?
Put this into context. The 12 trillion in new spending/money allocation due to covid results in $36,000 for every man, woman and child in the United States. The government could have cut a 5 figure check to every person in America to deal w/ the fallout, or a fraction of the people most affected. Instead we decided to give it to large institutions. And we're arguing over 1,200 vs 1,600 stimulus checks.
This is key. GP is right that a bond crash would hurt everyone, but generating stimulus and routing it away from the working people is just trading pain now for more pain later - the bill will come due. There's no magic here.
Handing everyone a check directly increases inflation. There is no increase of the supply of goods, so everyone would competing for the same things and prices, raising prices. Poorer people spend more money paying off debt or purchasing consumer goods, so most of that money flows straight to the top anyways. Since this money comes straight from the money printer rather than through taxes, this means that the wealth gap gets exacerbated through stimulus checks.
Purchasing assets introduces liquidity, but isn't equivalent of handing people money. The Fed receives the equivalent value in the form of debt.
In theory, the increased demand that might cause inflation could be partially or fully cancelled out by a tax increase. (In practice, Congress is unlikely to do it.)
It looks like we are seeing supply bottlenecks in certain areas. The price of lumber is bottlenecked by sawmills and electronics are bottlenecked by fabs.
But I wonder what’s not bottlenecked that could absorb more demand?
Market corrections are natural and useful. Every time we print huge sums of money to rescue equities and make debt cheaper, who benefits?
Those with a high ratio of assets/credit to living expenses.
While market corrections create a higher degree of short term pain, allowing them for the last five decades would have gone a long way in preventing the increase in wealth inequality.
It doesn't make sense that investing in SPX is a guaranteed long term 10%/annum investment while nominal GDP growth is under 3%. It's an engineered phenomenon and benefits those who already have a lot of assets.
Correct. My assertion is that the Fed overshot this by increasing the money supply by ~24% in a single year, causing all asset prices to skyrocket (see link in original post). All the money sloshing around the market is exactly what makes it a bubble. Nearly all assets and industries are considerably higher in valuation despite having a much grimmer outlook with everything that has happened over the last year
It's not a bubble. If there's 25% more money, money is worth 25% less. It's not a bubble when things cost 25% more - it means your pay stayed the same - but the money is worth 25% less. This is great if you own assets and employ people and have "capital gains". It's not so great if you don't own assets and "earn income".
Yes and no - unless the cost of food, gas, electricity, housing and clothing also increased by 25%, it's hard to argue the dollar is worth 25% less.
Come to think of it - if the things that are predominantly bought by the 1% are devalued by 25% due to stimulus increasing the supply of money, but the things that are bought by everyone are not becoming much more expensive, isn't that empirical proof that trickle down economics doesn't work?
Most commodities like corn & lumber & gold - are up over 25%.
Consumer prices don't change as fast. It will be interesting to see if commodity prices go down, or how much of the increase is passed on to consumers.
In the US - 41% of electricity generation is mostly debt-financed - Nuclear and renewables - which is cheaper because of the Fed setting the price of debt. Another 40% is natural gas, which is also getting cheaper because its production is largely financed with debt - which is also set by the Fed.
So the price of electricity & housing is largely price fixed by The Fed. I would expect inflation there to stay "stubbornly low" indefinitely.
On your first statement, it's less that the dollar is not losing value, and more that scarce items are gaining value compared to non-scarce things. So your Netflix subscription is staying the same, but the house near the coast has doubled. Inflation is never the same across the board. All it means is that a smaller group of people are laying claim to the scarcest items, and they are crowding out the hopes of an increasing number of people to one day be able to afford those scarce items.
Yes and...crucially, assets are 25% more expensive to buy. I.e. if assets are things that are "bought by everyone" and not just by the 1% or .0001%, then the dollar is worth 20% less for that purpose.
Presumably, to decrease the money supply, the mechanism must be the same but in reverse: selling treasuries and private assets back into the market for cash and then eliminating its existence.
If the securities don't sell for much more than it was bought, accounting for fractional reserve banking, the money supply increase is effectively permanent.
So if we take in the permanence of the increased money supply, can we really say we are still in a bubble if the value of the dollar against securities is simply lower?
That's a tough question to answer. I think it will come down to consumer prices but there are a lot of other things that can skew that. For instance, businesses don't want to raise prices so sometimes they'll cut corners to reduce costs. You've seen this in chocolate bars where the typical bar shrinks over the year and then eventually introduce king size to allow for some price inflation.
Measuring cpi is also incredibly complicated. I was shocked it's been so low forever considering over 50% of the index is housing, healthcare and education, three products for which we've seen high price growth for decades. So the official number may be "managed" especially considering that trillions in pensions and social security cost depends on it's reporting.
But the money supply grew so fast, i don't think any massaging of the data will be able to hide it indefinitely
There's no political will for things like higher interest rates or reduced spending, among either political party. The new generation has never seen mortgage rates in double digits
I see future price controls and other draconian measures to try to deal with the fallout. Example is gas lines in 1970s. It'll eventually hurt the real economy as artificial scarcity from price controls hurts business.
Only thing is somewhat certain about is something will happen. This seems insane that a unit of account can just grow 25% in one year with no signs of stopping with no consequences
It's not just politicians and "the new generation" who don't want double-digit mortgage rates. Surely it is also regarded as a present impossibility by the banks.
I mean, barring massive inflation, a double-digit mortgage rate would put so many home owners in default that it would make the global financial crisis of 2008 look like a birthday party for small children.
The "something will happen" part I agree with. I think we will need to come to terms with the fact that our world has crossed the inflection point on the S-curve that all growing populations are confined to. And that will mean dismantling current financial mechanisms such as "interest rates".
I'm dead serious - I don't know how the financial system will look like in 2100, but I'm convinced that "interest rates" as we know and use them today will be something taught only in "history of economics" class.
Most US mortgages are fixed rate mortgages, so increasing mortgage rates would not affect the monthly payments people have to make for their homes, therefore it would not cause home owners to default (in the US).
In May 2019, adjustable rate mortgage applications were only 6.2%:
Sure, there has been very little reason to take out an adjustable rate mortgage when you can lock in a historically low rate which has been the case the last couple of years. However ARMs were one of the things that caused the market to collapse in 2008 and as rates tick back up over time it's likely that they could become an attractive option again. The other thing is that at some point people need to sell and what is barely affordable to so many now at 3% will surely become unobtainable for many more when rates are 7 or 8%. At some point doesn't it turn into a mobility crisis as there's less and less people who can afford to buy.
If we are asking the big questions, it's worth considering what the macro-economic impact would be if taxation was ended, and the government funded itself solely through printing money. The discourse is all about lowering the tax burden on the rich so they can innovate. But my intuition is without taxes, the rich would be hit harder with inflation than the middle class. So even a strong progressive taxation system can be seen as a giveaway to the rich.
> I mean, barring massive inflation, a double-digit mortgage rate would put so many home owners in default that it would make the global financial crisis of 2008 look like a birthday party for small children.
Not necessarily. The percentage of new mortgages that are ARMs (adjustable rate) is very low.
> ARMs accounted for just 2.6 percent of mortgage applications in recent weeks and fell to 2.2 percent this week, according to the Mortgage Bankers Association.
Not sure about existing supply but I think it would be single digits as well. And most ARMs are longer (e.g. 7-1 or 10-1) meaning the floating rate portion doesn't kick in until 7 or 10 years in (respectively). Mortgage rates have been low so long I imagine most people with older arms refinanced long ago or built up enough equity where they'll be able to refinance at higher rates if they had to.
So existing mortgage holders wouldn't be hit with higher costs. However the valuation of their home would likely tank making a lot of mortgages effectively underwater (you owe more than the asset is worth). You will see a lot of people do strategic defaults or try to re-negotiate their balance. If I owe 500k on a home worth 450k, I might be fine with it, but if the home was only worth $250k, I would definitely consider a "strategic default", walk away from my mortgage, take a hit on my credit and buy essentially the same home at half the price. But lenders aren't stupid more realistically they'd negotiate down my balance and there would be federal programs to encourage refinancing.
>You will see a lot of people do strategic defaults
Worth noting that not everyplace is California (although half of HN may live in CA, I donno).
There are 12 non-recourse states in the US: Alaska, Arizona, California, Connecticut, Hawaii Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington.
Outside of those states, you couldn't necessarily just walk away.
> This seems insane that a unit of account can just grow 25% in one year with no signs of stopping with no consequences
The equation of exchange is MV=PQ, not M=PQ. The velocity of money (V) is falling right now as the money supply (M) is growing, that’s why increasing the money supply hasn’t had consequences (yet).
Bitcoin will happen. This injection of money can be seen as a cashout of the current system, selling as much USD as the market can take while it is still possible.
My opinion is that the stock market is setting the tone for what is going on and that at some point the major players might want to cash out their position causing stock prices and consumer sentiment to drop. Although I wonder if it’s more profitable for them to cash out slowly as prices keep getting pushed up thanks to the relative lack of a bond market and other manipulations.
Higher rates are the solution, not the danger. The danger is the economic waste from artificially lowering rates, causing bubbles and massive misallocation of resources.
Is it reasonable to conflate the actions taken by the Federal Reserve and the phrase "stimulus package"?
I tend to default to not doing it, as "package" has some implication of legislative action, and the Fed is somewhat separated from the rest of government.
Like in your comment, Congress didn't allocate the money the Fed used for asset purchases, the Fed did.
First of all, when did $12 trillion did allocated?
You can either choose to count spending or liquidity injection. Otherwise, you are double counting. If the government spends $3 trillion in stimulus financed entirely by debt, that dries up the liquidity for businesses, which creates a liquidity trap that sends us into another Great Depression. To think of it another way, the treasury could have just printed $3 trillion to pay for the stimulus without issuing bonds, which would have a similar effect.
Whether or not we are in a bubble is increasingly the wrong question to be asking in an age where failure for sufficiently-large institutions is no longer permitted.
The question used to be pretty simple: "has a sufficient portion of the market been priced out to the extent that demand collapses"?
As we've seen in equities / derivatives (and increasingly, commodity) markets - the answer to that question is now perpetually "lol, number go up" because large investment banks have essentially infinite access to free money and will be bailed out if they get in trouble.
On a long enough timeline the end result of this is that more and more Americans write their rent checks to institutional investors. [1]
Sure, many Americans own their homes now (or have a nice cushion of equity). But what happens as wage growth continues to stay relatively flat while cost of living rises dramatically and folks need money for medical bills or their kid's college tuition (or w/e)? They sell and become renters.
There's a pretty bleak future for American housing absent regulation in this space.
> more and more Americans write their rent checks to institutional investors
Homes as a wealth vehicle has been the standing wisdom for a while. That being less and less true (by virtue of requiring a higher and higher degree of wealth to even play) is scary in that there isn't an immediately obvious alternative with nearly the same odds. Also scary in that a lot (a lot a lot) of rules have been written and enshrined with the assumption of that fading wisdom.
At what point does it cross a type of pandemic level where fighting it isn't the best strategy but mitigating it and finding alternatives is the only route forward?
I mean, regulation is why the housing market is so bad (SFZ environmental review etc), so really what we need is forced deregulation.
Edit:
Some people might have misunderstood what I said so here's what I mean:
What we really want is states to force localities to reduce zoning restrictions on new construction
Based on your subsequent comments, it seems like what you specifically mean is "reduce (probably zoning-based) restrictions on the construction of new residential buildings".
Phrasing this as "forced deregulation" is...not going to get people to recognize what you actually mean, because 95% of the time, when people say they want "deregulation," what they mean is they want big businesses to be allowed to exploit the middle and lower classes however the hell they want with no consequences.
If you do, in fact, mean specifically "reduce zoning restrictions on new construction", I suggest using phrasing like that, because it'll communicate your intention much more clearly. (If you don't, then I have misunderstood you, and apologize for the confusion.)
Also just as an aside, I'm in favor of large, expensive intervention for both climate change and the environment in general but Environmental review at least in California is basically worth nothing compare to investing a billion dollars in solar cell research or building a nuclear power plant.
In NYC, people call for multi-year environmental reviews to stall putting in something as good for the environment a new bike lane. Not sure where you live, but if you just look up where SEQR is referenced NYS lawsuits or sit in any local CB meetings on buildings and zoning, you'll see it often come up around both buildings and bike lanes as a way to kill momentum on a project for years.
Maybe not environmental review, specifically (which differs quite a bit state to state), but zoning and onerous building regulations more generally are a significant factor. At this point the burden is really on detractors to explain why artificially limiting supply for decades didn't affect prices.
I mean, there are specific regulations we can point to that are making houses and housing more expensive, I don't see how "allowing people to build more houses" could destabilizing living?
Oh come on. Obviously people aren't clamoring for bringing back asbestos or dumping sewage into the street.
Regulations are written for a wide range of reasons- legitimate safety issues, quality of life concerns, propping up values, funneling money to groups favored by the politicians or bureaucrats crafting the rules, political grandstanding against imaginary problems, particular rules favored by coordinated special interest groups, etc.
I once lived in an area where several suburbs all met, you could drive a few blocks and cross imaginary lines separating different legal cities. They had different regulations for minimum lot size, how close structures could be to the property lines, how trees on the property needed to be handled, whether you could put two separate structures on one property, etc. Obviously none of these things impacted safety, but did impact density, home prices, etc.
Less safe does not mean unsafe. Marginal gains in safety after a certain threshold may not be worth it. People wear helmets on bicycles, but no one wears a helmet just walking around.
Several years ago I read a German interview with a construction engineer who complained about the industrial lobby that pushes more and more regulations that, incidentally (/sarc), increase a (forced) demand for their products.
He gave several examples, of which I remember one. It is now law in Germany that new homes with French windows must have extra strong glass in them. The reason? What if a toddler on a tricycle ran into the glass and suffered serious injuries or death?
Now, said the engineer, there are no cases in Germany of this actually ever happening, or at least we do not have any records of them. But this what-if theoretical scenario increases construction costs of new German homes by a thousand euro or so. (And increases a basically guaranteed demand for products of a few certified safety glass vendors A LOT!) Take forty or fifty such extra requirements together and their cumulative effect on price of the finished home starts being significant.
But no one wants to be known as a potential child killer, so it is not worth opposing such measures.
The level of safety gained by such measures is nevertheless dubious. People didn't die in homes built to the less stringent standards of 1990 like flies.
Yeah, just to be clear, I was specifically talking about land-use regulations. I don't know anything about how stringent material requirements are for building houses, but i'd wager we have some dumb ones on the books in the US.
>The securities that were so instrumental in triggering the financial crisis of 2007-2008, asset-backed securities, including collateralized debt obligations (CDOs) were practically non-existent in 1978. By 2007, they comprised $4.5 trillion in assets, equivalent to 32% of U.S. GDP.
This is a total nosequitor, building more apartment buildings would make apartments cheaper, being allowed to build two houses on your one house lot would make houses cheaper etc. Like do you have a reasonable path from "people have more latitude to build on their own property" to putting families or individuals in a dangerous financial situation.
Ownership of single-family residential properties by large financial institutions should be limited to their traditional role - i.e. custodial ownership of a home for the duration of a mortgage.
We certainly need to build more, but that's no panacea. If you want the market to be efficient we first need to account for the systemic inefficiencies.
There exist good arguments for the existence of rentals in some capacity. However, the rentier class have abused their power enough to distort the market in their favor without adequately maintaining their properties. Once property has decayed too much to provide an adequate return the owners are left with a few options: massive capital investment that they won't make back for ages and in many cities won't justify a rate hike, insurance fraud, go bankrupt and walk away clean leaving a toxic eyesore to rot while keeping the all the illgotten profits. Holding corporate stakeholders personally liable for their properties externalities, and management failures, would help chill the burgeoning rentier class buying up everything they can rent, flip, or airbnb without a thought about how their actions effect everyone else. Sure, people will take a bath on their misguided 'investments', but that's what happens in efficient markets. 90% of Americans shouldn't suffer so a small class of people can make gains out of inefficient distorted and government reinforced markets.
Development companies aren't innocent here either, the crap they get away with doing and not doing is insane and dangerous. I don't think regulation is the answer to developer fraud, instead I believing strengthening the rights of owners/tenants and funding actions against bad developers to chill the industry against taking shortcuts is a better solution. If a developer knows that their own house can get taken for cutting corners they're going to be very invested in doing things right, and having the paperwork to prove they did it right, the first time. Sure massive companies building cardboard boxes might go bust, but that's what we want in an efficient market right?
As anyone recently or currently going through the house shopping process this is nothing like 2007. Buyers are competing against other buyers with seemingly unlimited cash offers. Which is nothing like the subprime, stated income loans prior to the financial crash. You have to be in great financial shape to even qualify to buy a home. And then you have to do it timely enough to beat other offers. There is more cash moving around these days and not a lot of places to put it. Conservative banks, investors, and pensions are placing them in the few sure things left on the market, bonds and property.
Also, inventory is drying up because construction has been heavily affected by the pandemic. Now that the warehouses have been exhausted it's just starting to ripple through supply chains. While the millions of lives lost were felt immediately the long tail of JIT supply chains means we'll be feeling the effects a hell of a lot longer.
"Buyers are competing against other buyers with seemingly unlimited cash offers. "
So this should be the alarm bell that contradicts the argument.
In 2008 the Fed took what was then seen as a 'generational' bump in assets on it's balance sheet, namely bad real estate, effectively bailing out banks and home-owners, and arguably exasperating inequality.
But the money printing going due to COVID has dwarfed everything, to the point of multi-generational consequence, and what we might argue is a 'New Financial World Order'.
The Central Bank realignment due to COVID may be as significant as the start/end of Bretto-Woods etc. because the degree of social intervention is on an unimaginable scale. Aside from the 'raw numbers' it means social intervention and governmental direction of the economy like we have not seen since WW2 but this time without the obvious and easy infrastructural and educational adjustments to make: in the 1950's there were no highways - so they got build, and nobody had College degrees so getting former Officers/NCO's into College was a no-brainer.
Interest rates have been going down, and historically lower since the end of Bretton Woods, and they are now in the range of where it's causing considerable strain with massive leveraging, negative central bank overnight rates etc..
The result of this is a 'primary driver' of the Housing Boom, and it's the same thing happening in almost all asset class.
Or in other words: we are playing flirting dangerously with real, scary inflation, it's just happening in our homes so we think it's all good.
COVID has caused us to 'look the other way' with regards to financial reality, which is understandable, but that can't go on forever.
I am not a supporter of Crypto, BTC or any of the like, and I generally loathe the anti-fiat fanaticism etc. because I don't think these arguments are data driven or made in good faith, however, COVID has brought a lot of credibility to the fiat debauching concerns.
> Or in other words: we are playing flirting dangerously with real, scary inflation, it's just happening in our homes so we think it's all good.
Home prices have gone up way more than incomes over the last 10 years. Economists don't seem to want to call it inflation until incomes are rising. I'm glad I bought a house for $180K in 2011 that's worth $360K now 10 years later, but I really wonder how folks who are entering the market now are able to deal with the much higher monthly payment. That's going to divert spending away from other parts of the economy for quite a while.
> I really wonder how folks who are entering the market now are able to deal with the much higher monthly payment.
I’m simply choosing not to play, I’ll keep renting my place for $9900 a year in a metro area of 3.5 million, I’m not tripling my housing costs just to get ‘equity’, I’ll dump the extra 20k a year into VTI and come out ahead in the long run, equities don’t require roofs or furnaces.
The thing is, the person owning the place you rent is looking at their asset appreciating under you. They are going to either: raise your rent to keep pace, or, sell it out from under you to someone who will rent it out for much more than you are paying. You should not count on your rent being stable in your calculations. They may still make sense, they may not.
Rent is a cost that is going to need to be paid whether you live in the place, or rent it out.
If you live in it, you pay (or lose) imputed rent anyway. If you currently can rent for lower than the cost of capital, you are ahead (except for taxation, which does change the equation - cost of capital for investment is cheaper, usually, than for home residence due to tax incentives).
Maybe. IF the inflation predictions are right this time your rent will jump to $50k/year, while the mortgage of those who bought stays the same, so they have the money to invest not you.
That is a big if, and there are lots of different ways things can turn out. God doesn't advise me, so only time will tell what really happens...
There is typically a lag between wages going up an inflation, and that lag will catch a lot of people, but in general it does work that way in the long run. The long run can be 10+ years though, which isn't good for the person caught in the cycle.
But seriously US indexes like the SP were down big at most for like 6 months. If you need the cash just hold and take out at 6 months. Keep 6 months emergency and you're set.
There are a few indices for which that has not played out. Look at QQQ 20 years ago. I'm not trying trying he argumentative, just suggesting that past performance doesn't always dictate future performance, and past sell-offs were not always critically damped.
Depends on location. I was charging $850/mo for a detached 3BR/2BA house in 2010. I'm charging $1500/mo for the same now - and I could easily be charging $1800/mo, but I like the renters and don't want to lose them.
That's exactly it, maximizing profit. Lots of rental units, at least in my area, aren't owned by individuals anymore. They're owned by corporations or private equity who have an obligation to their shareholders to maximize profit. If I stop renting, someone else will pick up the bill.
The landlords' operating costs haven't gone up significantly either. They own the property outright, the same maintenance crew is around, they're down a leasing agent and manager from a year ago, and property tax increases are capped in this city. Any rent increase they can push beyond inflation directly lines their pockets.
> If I stop renting, someone else will pick up the bill.
aka, they are charging the market rate, which other people in the market are willing to pay for the use of the building.
The increase in rental income for landlords mean that there should be pressure to build more buildings to let out. Market forces _should_ cause stablization, if only it is allowed to work long term. Short term, there will be pain, because you can't build a new building instantly, but this pain is what causes new buildings to spring up. Market-distorting forces, such as building density/height regulation, and local residents' complaints (NIMBYism) is the cause for the lack of stablization imho.
> And then you have to do it timely enough to beat other offers.
This is an understatement. My mother's neighbor sold their house within 2 hours of it going on the market and for $20k over the asking price just last week. There are realtors asking around my neighborhood if anyone is getting ready to sell because there are buyers looking to purchase in here. This is even with developments going up like crazy. This is in a northern state away from the big cities.
> Also, inventory is drying up because construction has been heavily affected by the pandemic.
My two-layers out suburb of an attractive city had a coworker sell their starter-esque home purchased a few years ago for $350k sell for $620k-ish in the matter of three days. Meanwhile, I'm languishing hoping to buy my first home before I'm too old. About to permanently give up.
If the builders haven't locked in their supply chain yet you'll see it in the coming months. At the moment there is very little slack in the supply chain.
> My mother's neighbor sold their house within 2 hours of it going on the market
I have to wonder, though - where are the people who are selling their homes moving to? They're stuck in the same insane buying spiral everybody else is.
I'm currently in the market and I can affirm that it is super-bananas.
With Covid rules, you get ~15 minutes to view a property. You basically have to decide to put an offer down as you are walking out the door. My SO and I saw a place we liked and were considering an offer. Before we could even drive home, the place had gone under contract. Our location has homes on sale for ~36 hours, starting Thursday at noon (it seems that's the time most have settled on). You cannot sleep on this decision, there just isn't the time to do so.
Sellers will get ~14 offers, all very much over asking. A property listed for ~$450k go for ~$550k now. ~$650k go for ~$800k. Three years ago, that same house was ~$400k.
To be competitive, you must waive inspections outright. Health and safety objections used to be a thing, but it's so competitive that you just can't anymore. Inspectors are booked for showings as a result, with ~15 min to check on things.
All cash offers are ~1/3 offers, per what my RE friends say. If you are doing a mortgage, the new time to close is ~20 days, not 30. Banks/credit unions are not having a fun time with such a crunch, as buyers are walking away for higher rates due to the time crunch and the very low rates to begin with.
Appraisal gaps are ~18% or so. Meaning that the bank will appraise the house for about the listed price still, but buyers must state they will cover the gap in price. That is ~18% more than what the bank will give out. Thus the 20% downpayment becomes the appraisal gap coverage. A lot of people are going to 5% down-payments or less.
Open-ended escalation clauses are a thing to. You just put in the contract that you'll automatically bid ~$5k over the next person, no ending, no need to contact. As such, things are getting pretty wild when more than one party has that in their contract.
They really cannot build houses fast enough, and those that are come with special taxes that are ~2x the normal ones, forever. This is due to the need for materials that Coivd has affected and the speed needed just to lay the pipes and roads. Again, inspections are waived to stay competitive.
As the article talks about, the main driver of this mania is the historically low interest rate coupled with low returns from other investment sectors. So unless the cost of borrowing money in another country is in a similar situation, I would suspect not.
That said, Canada is in a similar situation despite the pandemic (or maybe because of it?) and the housing costs there are likewise crazy, if not more so than in the US.
I don't know. There are many reasons people may not sell or move. Literally the only reason my wife and I are not selling our home in Mountain View is that I have a vesting event in the early spring and I need to be physically present until then. Otherwise we would absolutely be selling now.
Millennials, apparently. The generation has a huge population that is at the prime home buying age (nowadays). Being stuck at home with parents or in an apartment is not where a lot of people wanted to be during a pandemic. Combine that with low interest rates, and also investors that see property as a relatively safe asset.
The wait and see camp is probably most people, but those that aren't comfortable with their home situation and being stuck in it are likely itching to move.
Cash offer doesn’t necessarily mean the buyer has cash. There are services like https://www.flyhomes.com/ that will make a man all cash offer then help you refinance it.
In addition, if you waive all financing and appraisal contingencies that’s often called a cash offer as you’re obligated to close even if you can’t get financing.
I'm confused about this point. Why does the seller care about cash offers? Even if the offer requires a mortgage, the seller gets the cash from the lending bank, do they not?
Banks are conditional and have 30 days. Cash offers have no conditions, literally sign, wire money, and hand over the keys. Conventional loans, backed by HUD, need to go through a process. Because ultimately it's HUD who owns these loans and they are, well, slow as any government bureaucracy.
Before these times, cash offers came with a slight 5-15% discount because of the convenience and speed. Now, cash offers are overbidding other cash offers who are overbidding conventional loans. This happens in the hottest markets; South Florida for example.
It's not just convenience and speed. In hot markets, the appraised values can't keep up with market prices (since the comps are a half year old). If the buyer doesn't have resources well above the minimum to make up for the difference between the appraised value and the sales price, it's likely a loan cannot be approved. Before 2009, appraisers would just appraise at the sale price because the real estate agent that hired them wouldn't hire them again if they didn't.
Most mortgages are made by mortgage originators who resell them. If I remember how it worked before the crash, the agent, mortgage originator, and title agent would work together to make the deal happen. There were some kickbacks. The mortgage originator would hire the appraiser directly. Now the appraiser is assigned by a 3rd party, with one consequence being that appraisers generally don't know the nuances of local markets and are unable to properly price in a hot market.
Where I am, the appraisal gap is is ~18% of the sale price. So the houses are listed at ~$450k, get 12 offers for ~$530 in 36 hours, and get appraised at ~$450. Such is the competition, that buyers have to just pay the gap outright, turning the 20% downpayment into the appraisal gap.
As long as the problem is 30+ years away most banks don't particularly care about sea level and water table rise. On a 30 year mortgage they will have recovered their money. Now, when it's 10-20 years out that's when you'll see banks being more cautious. And by then it will be someone else's problem.
Depends. The new timeline is ~20 days to close in this market. Banks are getting huge pressure to up the tempo. Interest rates are so low that an extra 0.5% is worth it for the faster close.
1. There's no financing to approve. Pre-approvals fall through all the time, and the seller knows that. They'll take cash to avoid having to start over.
2. Appraisals are coming in low right now because prices are changing so quickly that finding good comps is hard, and lenders cannot or will not loan for more than the appraised value. This could lead to the seller having to either start over or accept a lower amount. A cash offer is usually not contingent on an appraisal.
"Can't get financing" for an offer doesn't necessarily mean no financing. A bank won't loan 1.1x (or whatever the offer is) for a property appraised for 1x, so an offer without a financing contingency means the buyer has to cough up .1x in cash to make up the difference.
It means the deal is more likely to close and not get held up by financing, and the seller might pick it over a slightly higher offer that does have a contingency.
Aren't flush institutional investors just gobbling up real estate and inflating the prices for "normal" homeowners?
Something will have to give eventually. We're going to get to the point that only hedge funds and millionaires can afford to own houses in mid tier cities and just compete against themselves. This is no way to build a community anybody actually wants to live in.
I'd really like to see the breakdown between investors and bona fide homebuyers. The main reasons supply is low is that a) people don't want to move in the middle of a pandemic, and b) construction was slowed. This should mean that the proportion of investors and first-time buyers is higher now than pre-pandemic, and who is more likely to win the resulting bidding war: investors, or the young people trying to buy their first home? I believe that the lions share of the housing spike is being driven by speculation, and eventually, the market will run out of "the greater fool" and you'll be left with mostly real home buyers, and prices will fall back to earth.
With all the newly inflated home values, I don't expect planning and zoning committees to be able to approve anything other than single family housing.
Can you help me understand? My friends in New York tell me that house prices are down more than 20% from 1 year ago. Real estate agents are desperate for sales. Most houses in New York have been taken off the market because prices are too low. My place in Manhattan is down 20%. Where is the bubble???
More cash because everyone with half a brain knows this money printing won't hold the market up forever, and they're terrified of runaway inflation.
The insane market speculation going on is also a symptom of this. It's reasonable to assume USD is losing 8-10% of its value every year from 2020 onwards, thanks to Fed policies. I know about their bullshit CPI numbers, and anyone who is gullible enough to believe "there is no inflation" deserves what's coming.
I do agree the CPI vastly undercounts inflation but we loose credibility when we through out numbers so far off from reality. 8-10% is realistic for real estate over the last year or two. But, we need to look at longer term trends to establish inflation as a huge problem.
Even 4% actual inflation would be very very high, as that would be 2% per year over CPI, which would compound to 80% over the CPI in just 30 years or so.
Let's take a look at some actual values:
- the big mac index shows inflation at about 4% for the last 20 years.
- Cape shiller housing index for US has been showing inflation at about 4% over the last 20 years. This is a real problem that will affect rents as well because the rent to own ratio spread can't continue to increase forever.
- housing of course is now 10%+ over the last year.
And yes, those quality adjustments made by the boys in the labor department are very questionable: I don't know how they sleep at night.
Pundits have been making this argument since 2010 about runaway inflation and about prices being unsustainable. Yet prices keep going up and inflation remains low. Maybe it is best to just ignore those people. There is no evidence either of USD decline either. Foreign currencies, especially currencies of emerging markets, have fallen considerably against the dollar in recent years.
If there is runaway inflation, real estate would be a good hedge. Inflation is not really a concern for Americans because all global wealth tends to be measured in US dollars anyway. It's not like Americans become poorer due to inflation, because all their wealth is denominated in dollars.
We need more data on what prices really are. things like the big mac index, that measure prices independently and actually report just the prices, without quality adjustments. This will give us a good upper bound on what inflation actually is, instead of having to rely on the CPI's questionable "adjustments"
These numbers don’t seem plausible. Compared to nominal GDP statistics, they would imply negative real growth since 1980. This is incompatible with some periods of low unemployment that occurred since 1980 (eg. the late 90s). It implies that the US has constantly been in a recession for decades. Also conflicts with other hard-to fake stats like increased power generation and freight shipping since 1980.
Edit: found this quote from the creator of Shadowstats that they don’t actually calculate their own inflation numbers, but instead add a fudge factor to the official numbers. http://econbrowser.com/archives/2008/10/shadowstats_res
Technological improvements make this so hard to measure, even if we ignore the temptation to game the numbers.
New products, better products, many old products replaced by new ones... it’s so much more complicated than the classical economics textbook case of guns & butter.
> Yet prices keep going up and inflation remains low.
I’m struggling a bit with this. Isn’t “inflation” defined as the state where prices for the same good keep going up?
It seems to me you’re focused quite narrowly on currency inflation, which like you point out isn’t that much of a concern for the average American. What they care about is inflating prices of the things necessary for a decent living: food, housing, utilities, clothing, etc. “I have to do more work to afford the same things”. Colloquially, that’s the fear most people are referring to when they discuss “inflation”. Maybe people who have actually lived through inflationary spirals think of it differently though.
I think there's some disagreement on whether the CPI is really an accurate representation. For example, healthcare can vary wildly and can be very expensive.
On what do you base that opinion? To hear the Chinese government you'd think Belt-and-Road is next to perfection in terms of infrastructure, while oppositional organizations tend to portray it as a relatively hastily rolled out, poorly constructed shambles. The truth is likely in between. And regardless, you still have to show how that might cleave petro from USD.
Definitions: There are two sources of demand for USD. One is the ability to purchase oil, and the other is organized international crime. I would consider crime a fair-weather investor, so the big demand for USD is really based on the ability to purchase oil.
First, examine the history of shipping tonnage [1]. Observe how quickly Chinese ports have come to dominate all world shipping. This is representative of the general trend of global supply chains coming under the centralized control of the Chinese government. Nothing presently happening in the US will improve our trade balance in the near term.
Second, examine the beneficiaries of belt-and-road [2]. All of these countries will have an incentive to have reserves of CNY. Some of these countries are significant oil exporters. If oil exporters start hoarding and regularly trading in CNY, then it's a small stretch for, at least some of them, to start trading oil for CNY.
Third, since oil is fungible, any nations trading oil for CNY will peg oil to the Yuan in addition to the Dollar.
Fourth, the governments of some nations, notably Iran, publicly believe that petro-dollars have motivated the government of the US to engage in warfare in and near their countries. They are furthermore publicly opposed to this, and publicly supportive of China ousting US hegemony.
Then, my argument. Belt-and-road gives a large number of nations a reason to hold and trade in CNY. It's a small stretch for some of those nations to start trading CNY for oil as well. Belt-and-road nations will have an expanded connection to the Chinese military, and success of belt-and-road is a face-saving issue for the Chinese government. That means efforts to oppose it could spark military tensions with the Chinese. This makes it plausible that wars to preserve petro-dollars are unlikely to succeed in belt-and-road nations.
There is almost no international demand for USD to acquire US produced goods or labor. This means USD is unlikely to succeed in an environment where it has to compete with CNY as a reserve currency for oil.
The US has a higher nominal export value of any country except China. Both economies are not highly dependent on exports, but their economies are so huge that they still dwarf the next highest countries on the list.
This is possible only because of the general demand for dollars. If the demand for trade with the US was based only on our goods and services, then we couldn't import as much as we do. If demand for dollars dried up, then our spending would be constrained and our quality of life would drop. So I think, anyway.
“Yet prices keep going up and inflation remains low” <- this is logically impossible.
Also, fiat currencies can fluctuate against each other and still go down as a group. The Dollar can get “stronger” by losing value slower than other currencies. From a straight-forward point of view, wealth is denominated in dollars. But in reality, it’s denominated in value, in good things you can buy.
By this definion, we’re all richer than Crassus in some ways, affording things like global connectivity and vaccines with ease. In land, gold, and influence old Crassus was still in a league of his own, however.
The survey actually states,
"Four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money." https://www.federalreserve.gov/publications/2018-economic-we...
Nevertheless, that doesn't strike me as having wealth.
The key point is that most of the people "borrowing money" have the means to pay cash but choose not to. It is a question of how they could pay, not if they could pay.
I borrow money all the time when I could easily pay cash. Credit is more convenient and doesn't cost me anything. Similarly, I have a car loan even though I could have paid cash for the car. It is sensible finance.
borrowing money right now to buy something is not a bad idea... (i think) If they have just printed a ton of cash (they did) that means at some point it will correct. Meaning you in the long term might beat the interest rate if inflation gets higher than that. just an idea.
a loan (with interest?), on a depreciating "asset", which obligates higher risk-premium (ie:insurance) does not seem sensible to me (and never has when I run the numbers).
It absolutely makes sense as a matter of elementary finance to use a loan when interest rates are low rather than paying cash -- I was buying a car regardless. The interest rate on the loan is far below my average rate of return investing the same amount of cash. The profit on the invested cash exceeds the loss from loan interest; I get to keep the remainder.
Similarly, I put all of my daily expenses on credit. I pay off all of that credit at the end of the month. I am still borrowing money but I am paying no interest on it.
What the survey _actually_ says (and what the politifact fact-check does not dig into) is that if you ask people how they would deal with an unexpected $400 expense, given them a list of possible options, and tell them to select all options that would apply 40% select at least one of the "selling or borrowing" options. Note that if you add up the percentages for all the options in that survey, it adds up to 143%, because you can select more than one option.
The problem is that it's impossible to tell what's actually going on due to this survey design. For example: what is the overlap between the set of people who check "just pay it out of checking/savings" (50%) and the set of people who check "charge it and pay off in full at the end of the month" (36%)? I would rate both answers as "these people have the $400 on hand". The fraction of people who checked at least one of these options is somewhere between 50% and 86%, depending on how much overlap there is. And you can't tell, from this survey, where it lies in that range.
Similarly, you can't actually conclude the "Four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money" thing from these numbers, so the executive summary is rather misleading. Politifact takes that summary as an accurate summary of the survey results, but it doesn't seem to be. As far as I can tell, that 40% comes from adding up non-mutually-exclusive percentages. It's the equivalent of claiming that 86% of people would just pay it off based on the above 50% and 36% numbers.
I should also note that the survey included full-time students under "adults", and if I had an unexpected $400 expense at various points as a student I would have absolutely had to borrow money to cover it. Looking around briefly, there are ~20 million full-time college students in the US as of 2020, which is ~6% of adults. While it would obviously better if college students had larger cash cushions, a college student borrowing money from parents to pay $400 is not the mental image most people have when reading the executive summary here...
Now the fact that no matter how you slice these survey results no fewer than 8%, and maybe up to 50% of non-college-student adults don't have $400 on hand if they need it is still a significant problem from my point of view. Especially because I really doubt it's as low as the 8% option. But I am also quite certain it's nowhere close to 40%....
> what is the overlap between the set of people who check "just pay it out of checking/savings" (50%) and the set of people who check "charge it and pay off in full at the end of the month" (36%)?
The report plainly states:
> When faced with a hypothetical expense of only $400, 59 percent of adults in 2017 say they could easily cover it, using entirely cash, savings, or a credit card paid off at the next statement (referred to, altogether, as "cash or its equivalent") https://www.federalreserve.gov/publications/2018-economic-we...
The 4 in 10 comes from the very next paragraph of the report:
From this data, it is reasonable to conclude that "Four in 10 adults would not use 'cash, savings, or a credit card paid off at the next statement' to cover such an expense."
Now it's possible that there is additional data that they have but are not presenting in the appendix but are using to generate their conclusions, including data like how many people marked both "pay with cash" and "pay with credit card now, pay off at next statement". If that's the case, I wish that data were actually available.
For example, given the "could easily cover it, using entirely cash, savings, or a credit card paid off at the next statement" phrasing it's not clear to me how they code someone who checks both "pay cash" and "borrow from family". Are they included in the 41% or the 59%? Or were there just 0 such respondents so this is irrelevant?
I would love to trust that people are drawing the right conclusions from their data, but would really prefer that raw data were published so the conclusions can be indepedently verified...
I think it is interesting that the writer of that article pointed out that the total adds up to 143% because multiple choices were allowed, but then argues that the real number [of people who can actually afford $400] is 86% by adding two of the choices. The entirety of the 36% could potentially be included in the 50%.
> It's reasonable to assume USD is losing 8-10% of its value every year from 2020 onwards, thanks to Fed policies.
Since dollar prices of final goods and services can be tracked, and don’t show that trend, its not reasonable at all; nominal price levels of goods and services haven’t generally increased by about ~2.5× over the past decade.
> I know about their bullshit CPI numbers,
CPI is BLS, not the Fed. And its a whole lot less bullshit than what you’re spreading right here.
> and anyone who is gullible enough to believe "there is no inflation" deserves what's coming.
The idea that inflation might be coming at some indefinite point in the future is, of course, unfalsifiable, and its been a constant refrain from the same segment of society for as long as I've been alive.
The claim that there has been massive inflation since 2010, OTOH, is both falsifiable and false.
>The claim that there has been massive inflation since 2010, OTOH, is both falsifiable and false.
Depends where you live and what lifestyle you live. If I took the total amount spent on all the things and services I have purchased over the years and compared them to their price in 2010, I would have spent far less in 2010. Spending on land, healthcare, retirement savings, taxes and education eclipse the total spent for everything else.
Is that not inflation (for me, at least)? All I know is that to buy the things I need or want to buy in the future, I need to ensure I am earning more and more because I am betting the price will be higher in the future. At least it's been true during my adult life of ~15 years.
> Spending on land, healthcare, retirement savings, taxes and education eclipse the total spent for everything else.
buying land as an asset is not spending - it's investing.
Healthcare+education - i agree, it has become more expensive overtime.
Taxes - you earn more, hence pay more taxes. It's not due to inflation.
Retirement savings - ditto with land, it's an investment, not spending. And you choose how much to invest here, and the increase is not due to inflation (but expectation of inflation might affect your decision, but that's not a causal relationship to inflation).
My comment is in the context of trying to figure out how much you need to earn to accomplish your goals or what kind of quality of life you can expect from your earnings.
>buying land as an asset is not spending - it's investing.
It's an expense for people. They need to spend money to purchase land to live. If the land you're interested in living on goes up 100%, you need come up with the extra money you're going to need to spend in order to purchase it. It has to be factored into your budget. You can model it as an investment for some purposes, but when I need to figure out how much money I need to come up with, it's clearly spending.
>Taxes - you earn more, hence pay more taxes. It's not due to inflation.
Tax rates can (and have) gone up for me.
>Retirement savings - ditto with land, it's an investment, not spending. And you choose how much to invest here, and the increase is not due to inflation (but expectation of inflation might affect your decision, but that's not a causal relationship to inflation).
If you predict you will need to $5M at your retirement date rather than $4M, then you need to spend more of your income on your retirement savings, but the important point is you will have less money for other things. What is raising the retirement age, if not inflation?
Benefits have continuously been reduced since I was a child, and I see no reason for that to not continue. There will be more and more means testing, which means if you have something that can be taken, and you can't politically defend it (I estimate roughly for those in the 80th to 95th percentiles), you should expect to pay more.
If the numbers were really that off in the past wouldn't quality of living be much less than it is for most people in the US? I am skeptical of inflation staying low in the future, and I think they do sometimes make questionable quality adjustments in the inflation data, but if inflation was actually much greater than they've claimed you would see a gradual immiseration of the population.
> If the numbers were really that off in the past wouldn't quality of living be much less than it is for most people in the US?
Yes. Absolutely. I saw an interview of someone who talked about living in the 60s. He was saying how a painter could own a home, afford a wife and six kids with no problem without the wife even working a 2nd job. Today, a single painter could barely afford himself, let alone a family of six and a house. I know it's anecdotle, but the difference is so vast and stark, I think it's obvious there's been a huge difference in quality of life over the last 60 years.
I understand this argument, and I am somewhat in agreement with it. But here's where I'm skeptical. Where I live, there are some homes from this time period. They are very small, around ~1000sq ft. Maybe slightly bigger. Now people want much larger homes. They tend to have at least two cars and possibly more if they have kids. They go out to eat much more frequently and spend a lot more on entertainment.
Obviously, some of that you can't avoid. No one is making 1000 sq ft brick homes anymore for new homeowners, so you don't have an option of a small, cheap home in many areas. You only have the option of the bigger, more expensive home. But some of it is a personal choice. I think there is something to the argument you're making, but I also think people are underestimating the frugality of people in the past.
> No one is making 1000 sq ft brick homes anymore for new homeowners, so you don't have an option of a small, cheap home in many areas. You only have the option of the bigger, more expensive home
The bigger home is inherently cheaper, though. (At least, in the US).
A ~1800sqft new home (the average new low-end build out here in the midwest) takes way less resources and labour to construct than that old 1000sqft brick home did. Houses today are made out of the cheapest plastic and twigs (many don't even have a single piece of real wood in them anymore). Houses back then used bricks and real-wood timber (expensive to purchase, expensive to move, expensive to lay, etc). Your old brick house probably had expensive copper pipes, new builds use plastic PEX straws so cheap they're practically disposable, and so on.
Homes built today are made using far less labour, less materials, and far cheaper materials than before. If land and asset valuations had stayed consistent, homes today would be drastically cheaper than before. Yes, homes are "bigger", but those extra open empty spaces cost practically nothing extra, the fixed costs are mostly fixed and the variable costs are trivial.
Houses in my neighborhood have to be built strong enough to survive hurricane strength winds. The homes back in the day weren’t that much better. The ones you see survive to this day we’re either exceptionally well built or well maintained. But there is still plenty of trash with fresh paint being bought and sold everywhere.
You're getting cause and effect backwards. New construction small homes don't exist because they aren't as profitable for developers to build not because there isn't demand for them.
I can guarantee you there are effectively zero millennials living with their parents or with roommates in a small apartment who would turn down the chance to own an affordable small home.
"Frugality of people in the past". Or, looked at from the other side, "extravagance of people today".
Or, more neutrally, our standards and expectations have changed from the 1960s. If you want the 2020 life on the kind of job that got you the 1960 life, you're in for a disappointment.
I'm in the process of moving (new job), and so I'm looking for houses. There are 1000sqf houses that aren't trashed for $100,000. I'm expecting to spend $500,000 for a 2500sqft house anyway, and only part of that is houses close to work are bigger. (there was a 1200sq ft house near work for $250k - not that I would have bought something that small)
> No one is making 1000 sq ft brick homes anymore for new homeowners
Well, the single-family detached suburban California home I bought as new (not complete when we signed) construction in 2006 was 997 sq. ft. on 0.1 acres, so other than “brick” that was certainly possible to find new not that long ago.
Yes, average home size has increased, but that's mainly for NEW homes, not existing homes.
You have to remember, those new homes are only bought up by about 1% of the population. So, to say that 1% can afford much larger homes is not saying much about the other 99%.
Which is precisely what's been happening. Just take a walk around any major urban center in the U.S. There is misery in the streets. The opioid crisis is another manifestation of the same despair. Historic civil unrest, "eat the rich" / "billionaires shouldn't exist" rhetoric heating up. Etc. etc.
Interesting -- "immiseration", as far as I know, originates with 19th century socialist theory regarding rising misery among the working class due to relatively lower wages as capitalists accumulate wealth and subjugate them[0,1]. Granted, the term is obscure and jargonesque enough that in modern use it does generally mean, specifically, "impoverishment". Which in other words could be called misery from economic causes.
Please, allow at least a little breadth in the scope of rhetorical wordplay: immiseration is fundamentally about misery, and the links I gave are examples of the broad misery felt by the average American. That misery is not sourceless: my entire point is that that misery is due to the increasing relative impoverishment of the average person.
On the surface it is just misery, but when you think about the causes, it is apparent that it is immiseration, in the jargon sense: the people are poorer than they have ever been, and they are visibly angrier and more upset because of it.
The George Floyd protest and the Capitol Riot are each outpourings of rage, directed at "the system". One was directed at the ongoing and increasing seeming criminalization of simply being Black in America, and one was directed at what the people involved thought was an unfair and stolen election, designed to take from them what little they have. Different people, different plights, different ideas: same root cause.
Happy, wealthy, comfortable, safe people who believe a bright future is in store do not take to the streets, burn buildings down, and get into large scale fights with their local police force. They don't throw bricks through coffee shop windows, hang out in tear gas clouds, or crowd up during a pandemic.
Their willingness to do so, over clearly expressed feelings of hopelessness and loss of control or participation in the system, over a feeling that they are losing out overall, it's coming from a place of desperation. It is coming from a place of misery. You've got to be pretty miserable if you think fighting the cops sounds good.
I'm sorry that you see very little connection there. It may unfortunately be that you see very little overall, or that you're intentionally looking away.
Ignoring your gratuitous insults in the last paragraph...
> Happy, wealthy, comfortable, safe people who believe a bright future is in store do not take to the streets, burn buildings down, and get into large scale fights with their local police force. They don't throw bricks through coffee shop windows, hang out in tear gas clouds, or crowd up during a pandemic.
Yeah, see, they could be wealthy, and still not safe because of skin color. That's the point of the George Floyd protests. If you see people like yourself getting shot by police for reasons that seem absurd, over and over, you don't feel safe. You don't believe in a bright future. You aren't happy. And economics has very little to do with it.
27 unarmed black men were shot by police in the US 2020. Most liberals think the number is 1,000+, and a large portion think it's 10,000+ [1]. Maybe you should factor this in to your analysis?
I tried to be careful in how I worded what I said. If I were black (I'm not), and I saw news accounts over and over about police shooting blacks for what (at first report) seemed to be trivial reasons, I would not feel safe. The number doesn't have to be statistically significant; the reasons can be better than they appeared at first report. None of that matters. What matters is that the media is beating into my head that this is going on, so I think I'm not safe. Doesn't matter whether I am or not. If I think I am unsafe, everything I said in my post follows. (Including the main point - that this isn't about economics.)
We were never talking about policy, so I don't know why you bring that up. We were talking about the George Floyd protests, and whether it was caused by peoples' poverty.
One doesn't have to be black to feel unsafe. We also have to define the term unsafe. It depends on how often the issue is occurring and what that individual's risk tolerance is.
I'm sorry. I didn't mean to be _gratuitous_, nor particularly insulting to you.
I wanted to acknowledge the possibility that our respective political beliefs, whatever they may be, might lead us to look for different types of issues in different places as root causes.
My own beliefs lead me to characterize choosing to believe that economic inequality is not integral to the Black experience in America as tantamount to wilfully ignoring a root component of the problems people face. If that belief is insulting to you, we may tragically be living in different worlds of experience, and might not ever have a meeting of the minds. That's what I was going for.
Despite that concern, from what you said, it seems like we might actually agree on a lot -- as you put it,
> If you see people like yourself getting shot by police for reasons that seem absurd, over and over, you don't feel safe. You don't believe in a bright future. You aren't happy.
That sounds spot on to me, and I absolutely agree that the fear of violence affects wealthy Black Americans too.
Regardless, the outpouring of rage from the community certainly transcended just the fear of violence from police. Violence is one particularly horrifying aspect of how the system hurts people, but people are being crushed all over, and people are mad about all of it.
Here is one quick example[1] of this being stated, sourced in one of the Wikipedia pages I originally linked (which explicitly lists "inequality and racism" as a cause of the George Floyd protests). This article is an interview with the Surgeon General of America, and says:
> The surgeon general pointed to Covid-19 disparities and other health care gaps among communities of color including maternal mortality rates and the opioid crisis, saying these issues and the frustration surfacing across the country are intermingled.
> “It's on the top of my mind as a black man, as a father, as a brother, as a son,” Adams said.
The brutality of the police is certainly the salient, focusing point of the protests, but the overall causes and broad outpouring are larger than that. The protestors have often called out the broad systemic aspects of racism, like healthcare access, home ownership rates, debt levels, access to quality education, and investment in communities of colour. Those sorts of things impact Black people's lives daily on scales far greater than police brutality, and they are economic issues at heart.
Police violence is uniquely horrific in its instances, and is the central igniting issue here, but the issues as a whole are much bigger than it alone.
Had a look at those. I see a lot of political discourse, which is certainly related to economic prosperity, but only vaguely... Has the quality of life declined in the US? Have future prospects generally declined? If either of those is yes, we could be in big trouble..
On a zoom call with a group of ~12 friends from undergraduate school, there was an awkward moment where one of the friends jokingly congratulated 2 of the 12 on being able to afford a homes (recently purchased) and start families.
In mid 30s, all women, all have bachelors and have been employed long term, 3 of the 12 are married, 2 of the 12 have children, another 4 are paired up with long time partners, but there was a palpable unease and underlying depression about the future income prospects and lack of security about where they would be able to live.
Let me guess, they all want to live in a major urban center?
There are plenty of places in the US where housing is still affordable. Sure, maybe it’s not your first choice and maybe you won’t be keeping up with the Jones’.
Places like Austin, Denver/Boulder hell, even Seattle were affordable not that long ago. But they weren’t cool (which is why they were affordable). Suddenly they become desirable, housing prices go up and people complain they can afford to buy where everyone else is buying.
Yes, no one wants the tradeoffs of moving east of the Rockies, and everyone wants to be within 45min of an airport. But that's the awkwardness I'm talking about, caused by the gap in the group of friends of those who can afford to continue living where they want to live without making tradeoffs that the others would have to.
Years ago, buying a home seemed like something you can easily share and celebrate with acquaintances. Recently buying a home in the Bay Area, I felt that's passed and I try not to bring it up. I don't feel any satisfaction from celebrating or bringing up something that 20 people in a gathering have very dim prospects of ever affording, and questions about it make me feel uneasy about their possible uneasiness.
I agree, because it's expensive. But a modest American home was never that expensive for most adults, hence "house warming parties", and thus I'm fairly sure was socially acceptable.
I mean, I went to house warming parties 5 years ago when housing was not a lot cheaper in the Bay Area. As long as you don’t throw it in peoples faces you’re probably fine.
And “can never afford” seems like an extrapolation of the last ten years ignoring corrections that came before that.
For those of us who lived through 2008 it’s amazing how quickly we went from “i’ve never over pay for a house again” to “housing only goes up”.
Some people are so lucky, but let's say you each have university debt, and you have 2 kids, and you need to pay for childcare, and you have 2 cars so you can each get to your jobs, and your 3-4br apartment rent is 2-3k/month -- good luck saving 20k/year on ~70k take-home!
And that's all if you can live in a small-town-enough place where homes "only" cost 400k -- in many cities in the last 5 years (i.e. places where there are easy jobs to find), that's just not a realistic house price anymore.
I was a brick/stone-layer's labourer back around 2005, and we built a home that cost ~400k at the time, on the edge of a mid-sized town in southern Ontario. It was a mansion. Stonework, 4-car garage, big lot, 3 stories tall, 5 bedrooms, 3+ baths, the works. Today, I think that house we built could sell for ~1.5-2M.
Having 2 kids by 30 without being financial stable is kind of bad planning. They deserve to get crunched.
Where would you need cars and have to pay 2-3k for an apartment?
Prob like 1.5K/month, two economical cars. Pay off debt and build a nest egg, married at 30, kids at 32. Cook cheap and healthy meals. Outdoors for fun. No big drinking or expensive hobbies.
They can easily make it happen if they do the above.
It’s not my fault that people can’t prioritize and strap down.
Because they're not willing to make the tradeoffs that come with a $200k to $400k house. I don't even think there are houses for $400k though, even before 2020.
The numbers below are one year commodity price gains, as of today rounded to the nearest tick (view the individual graphs, 1 year timeframe as % gain):
Who should I believe, a government agency conducting a methodical survey of the country's economy, or some guy with a list of numbers that's possibly cherry picked?
But I don't because it literally takes an entire government agency to do it right. The incentives might be misaligned, but the BLS is a large enough entity that if there really were problems with their methodology, it would be publicized. Short of that, I'm more inclined to believe the BLS over a random commenter.
> But I don't because it literally takes an entire government agency to do it right.
It doesn't really. If you track your expenses consistently over the years (gnucash et.al.) you can trivially plot the increase in cost of living and the acceleration of that increase last handful of years.
That's fraught will all sorts of biases. What if your shopping habits changed? eg. you started becoming more health-conscious and started buying healthier (and more expensive) foods. The BLS accounts for all of that by measuring the price of a fixed basket of goods, which mitigates those effects. The same can't be said of your budgeting spreadsheet. Or maybe your area is undergoing gentrification and the discount supermarket got replaced with a whole foods. Your grocery spending might have went up 50%, but that doesn't mean it's a meaningful representation of what's happening across the country.
They're also anonymous, so you should assume the worst. This is especially true when the supporting evidence is suspect (ie. a bunch of arbitrary picked numbers). On the other hand the BLS's methodology is documented (https://www.bls.gov/opub/hom/cpi/), so I'm willing to give them a pass even though their incentives might be skewed.
>(what would it be?)
their beliefs? "agenda" here doesn't have to be something nefarious. an anti-vaxxer's agenda is anti-vaccine, but that doesn't mean they're scheming to get everyone infected.
Your statements are contradictory. If there will be 8-10% inflation then people will park their money in assets like stocks, thus keeping the market up.
Houses around here have been going up in price 5-10% year over year around here since, like, 2012 or 2013. Foreclosures aside (now long gone, but widely available for a few years), they never dropped all that far from their '08 peak, really, either. I'm in probably a third- or two-and-a-halfth-tier US city, so this isn't NY or SF or CHI or LA or even Austin or Denver. New housing is going up fast and everywhere, and has been non-stop aside from a very brief period after the '08 bubble. 2020 happened, and the prices went up even faster, and everywhere in the city, not just in certain areas.
WTF is going on, if not inflation? (serious question, I'd like to know what other explanation there could be)
don’t think so. look at canada’s housing market, look at NZ. those markets are truly insane compared to the US, and they’re not printing a ton of money or experiencing major inflation. housing has become a good investment simply because the supply isn’t great enough in desirable areas, and people with money recognize it. inflation is up, but not on the scale you claim.
I dunno about NZ, but Canada printed pretty hard for COVID relief[0,1].
Regarding inflation, anecdotally food etc prices in Toronto seem much higher this year than last, and did last year too, but the CPI data doesn't share my opinion.
Our groceries seem to be at least 2x what they were in '05. Meanwhile, if anything, our tastes have gotten cheaper and we're better at bargain-shopping.
US CPI tells me they should only be 35% higher. LOL. Bullshit.
Money laundering raising comps and everyone else then using those comps to justify prices. Incredibly cheap money, and everyone wanting to live in a house instead of condo/apartment. Demand is >> supply - limited supply means the prices rise. Doesn't explain everything but certainly points to some of the what I will say is insanity in the market.
You are referring to a very specific asset market in which essentially millions of people participate in legal, open, price-fixing conspiracies. There are potentially whole armies of people whose job is to keep those prices high, and to raise them higher. Year-over-year price increases in these asset classes (housing and stocks) may be baked into our whole economic model at this point. If the graph ever flatlines, it would trigger our slumbering debt crisis to go nuclear again, because of the way things are structured.
There is an entire segment of our economy (the FIRE sector) which is based on running these operations as ponzi schemes, and they are both funded and then bailed out by massive acts of private debt-as-money creation - it is like a recurring Marshall Plan, which guarantees the major players can always outrun the ever-looming debt crisis which is engulfing we, the little people.
The point is that we never have to actually fix the debt crisis or solve the problem of stagnant wages and decreasing demand, if balance sheets can always be corrected with fresh currency injections at the highest levels. Maybe you saw the gent on here who posted the Atlantic article about private firms owning 1 in every 5 American houses.
Yet your analysis would seek to use these (home) prices as an innocent, quasi scientific marker of the purchasing power of the dollar. I get the motivation there - housing is a key basis of human experience. But there is so much market manipulation going on in these asset classes that using them as a measurement of the value of the dollar is IMO not correct. The most powerful corporations around have chosen to backstop some of these assets, and that has supported a speculative boom on the part of anyone who can get bank money to 'invest' in bidding up property prices. Price discovery does not happen in that scenario, because everyone is buying things with the Bank's money, not their own. And if they don't buy it - guess what? The Bank will. Through a shell company, basically. These are some reasons not to measure the dollar's purchasing power by looking at the price of housing in America.
Yes! Housing on its own would be one thing. Might just be housing being housing (though... way more than it usually is, so, there's that). Now. How are other assets doing?
People who want to tell the old Austrian story about money will always find supporting evidence to do this. If you are seeking to view everything as a nascent currency crisis, because thats the only economic narrative that appeals, then there will be things that tie into that.
A modern iPhone, price converted into 1970s equivalent technology, has many millions of dollars of 1970s technology on it [see YT link below]. Now available for 600 dollars. An older gentleman I was speaking with yesterday told me about how nickels and dimes had become worthless.. indicating a decrease in value of the American currency. On his lap he was holding, what would have been for the era he had in mind (60s), a sleek, miniaturized supercomputer. These are now available for less than 1000 dollars with a monthly operating cost less than 100 dollars, including power. The same 10 dollar bill that in the past might have bought more food, now buys an unending amount of technical gadgets and do-dads mass-produced from the Chinese market, which can be shipped to one's doorstep for either free or an additional 5 dollars. Those products and markets didn't exist or were not open in this golden age of nickels and dimes he was referring to.
I may have misread your comment, but if you are leading me down a primrose path to speculate on the relative worthlessness of the dollar, because some asset prices have increased - I'm not going there. I've seen people parroting these arguments for 20 years now online. Stocks and housing are special cases. Cars are actually also weirdly price-fixed to support the auto industry. Everything else is getting relatively cheaper. This guy has some worthwhile thoughts on it: https://www.youtube.com/watch?v=dSw41MqPFoM
It's probably not going up quickly in the suburbs or other less desirable areas. The problem that happens in pretty much every city is that the local government prevents development. And now that cities are becoming more desirable you have an ever growing number of buyers chasing a relatively fixed number of homes.
It's not inflation. It's classic supply and demand.
> It's probably not going up quickly in the suburbs or other less desirable areas.
I assure you, they are. Also you're way out-of-touch with common sentiment if you think the suburbs aren't desirable, if for public school quality if nothing else (for the record: I hate the 'burbs). Source: I've bought several houses in my city (serially, I'm [sadly, in the current market] not a property investor or landlord) since the '08 crash, all in the 'burbs, keep up with a couple real estate agents, and have had many friends and family buy all over the city over the same time period, including within the last year. There's been non-stop, extensive housing construction for damn near a decade now, and prices are still doing this. People are being bid out by over-asking cash offers on day two of a property being on the market in very mediocre areas. Lots are selling over-asking in the same manner. It's nuts.
Also, if it's not inflation and is "classic supply and demand": what's up with all other assets then? If demand for all assets is up, such that prices are all way up, even and especially through 2020, what do you call that? Housing was just an example.
Yeah, and I'm trying really hard not to read it as "it's inflation but for some reason we're going to not use that word once in this whole article", but can't. They write about a bunch of things that sure seem inflationary ("borrowing money is basically free"—OK, right, so why would that be, and why would it stay so cheap so long, and what effect does that have?), and then also write about how middle-class folks are pulling lots of money out of the stock & bond market to buy houses, so that's why houses are getting more expensive... but the market's gone up like crazy over the last year! It's not like it even had a normal year, despite, you know, a pandemic, and all this supposed shifting of money from it to housing. Crypo's booming. Approximately all asset prices are booming.
If all assets are going up, seemingly nonsensically, what is that? It's a really, really broad-based bubble, or it's the leading edge of an initially-unbalanced-but-surely-it-won't-stay-that-way inflationary wave, no?
It seems like equities do not (long term) perform well relative to currency in inflationary markets because companies' costs also rise. Apple, e.g. would be spending more per unit iPhone and would eat margin or require a price increase, which leads to fewer sales etc.
There are exceptions, like energy companies, for example. IIRC Exxon went up in the 1970s while the market as a whole stayed flat and lost value relative to the USD.
At the extreme, in the Weimar republic, the stock market did what the US is doing today... until the stocks flatlined relative to the currency[1].
I understand how it can look that way. But from my perspective, being long USD is a much more dangerous gamble. I'm young and have a high risk tolerance, we will see.
It really strikes me that we've basically re-invented old-school landed aristocracy on a small scale in our big American cities.
anyone who was lucky enough to have bought a home 25+ years ago in a city like San Francisco or Seattle or Boston or NYC is a millionaire now, and home ownership is completely out of reach for the average inhabitant of a city. Buying a home is a pretty big reach even for very high earners, like the average audience of HN.
Ultimately, housing cannot be both A) an appreciating, scarce investment and B) equitably and humanely distributed.
It's worth noting that a lot of people continue to borrow on their homes or take out equity.
I bought a home outside NYC in the fall, and the owners got very little cash out of the deal, in spite of having been here for 35 years.
Which means, that many of those that look like millionaires now may be struggling to keep up with property taxes and can't afford to relocate near comparable.
Sorry, to clarify: where I live, let's say that 3% is roughly $2k per month. And, if you've continued to borrow against your home you'll still have mortgage payments.
That can be unsustainable housing expenses in retirement for many people.
As an advocate of houses as an investment, I've always been against A, except to the extent that the appreciation matches inflation, and even then it should only match inflation because you don't count the investment in keeping it "nice"
Houses are an investment in shelter over your head. They work out well long term if you live in them long term, but you should never look at what they are worth if you sell, except when calculating your net worth. Even then a renter should have a higher net worth because rent is increasing with inflation, while the house payments are not: the renter needs to have more to cover future rent.
> the renter needs to have more to cover future rent.
If you're comparing like for like, then a renter with the same amount of capital as a house owner would work out just as well, because the renter would have invested that capital into the stock market (which, i believe, have out-paced real estate).
If you're comparing a renter who don't own any capital, to somebody who owns a house, then of course the house owner is better off - they have more capital!
One small detail, because the home owner has less rent he needs less capital.
I fully agree that you can do just as well renting as buying in the long run. Which is better is different for each person, and partially depends in things not knowable in the future.
Up here in Canada, there is absolutely no doubt that we're in a bubble. By every measure we're in trouble... consumer debt levels, income-to-price and price-to-rent ratios... This infographic has been making the rounds and pretty much sums things up: https://twitter.com/i/status/1377353707478601729
Even the apologists who previously tried to to explain this in terms urbanization, desirability, immigration, etc have capitulated.
It remains to be seen whether we're just an odd case (along with maybe NZ and a few others), or a canary in the coal mine for our neighbours to the south, but the situation here at this point is virtually guaranteed to end badly for everyone involved.
From my understanding, Canada's housing market is largely being influenced by foreign investors. I've read that lots of foreign investors are buying homes in cash, over market rate, and then letting them sit vacant.
If Canada's laws don't discourage this and others see it as a safe way to store their wealth, this could be a possible explanation for the insane rise in home costs compared to other countries.
It's what drives the price increases in the Bay Area in California, as well. When 20% or more of the purchases in a given year are by foreign persons, it is problematic. They don't live here, they buy properties and let them sit vacant or rent them out. We need to basically prohibit ownership of anything but a primary residence by any entity that isn't a citizen or permanent resident (corporate entities would qualify if 100% of their true beneficial owners meet the same standard).
> I've read that lots of foreign investors are buying homes in cash, over market rate, and then letting them sit vacant.
This is used to launder illegally acquired assets that are brought in the country. Then as a bootstrap toward acquiring western passports.
> If Canada's laws don't discourage this
It encourages it. Out of control immigration quotas as well as lax regulations regarding birth tourism and a liberal-party friendly immigrant base has made it a no brainer for the current party to keep the bubble expanding.
Hasn't that been the case in places like NYC for a bit now? I remember reading about like single digit occupancy rates in massive luxury apts. I'd imagine that would have only increased but would love a check on my understanding.
"Not a bubble" is exactly what people think, when there's a bubble. Otherwise there would be no bubble. People find ways to rationalize why 'this time it's different'. Sometimes it is, sometimes it's not.
In my experience, bubbles are made from greed not ignorance.
In 2007-8 there was a lot of acknowledgment of the real estate bubble but there was always somebody to say well real estate isn’t really a national market so it won’t all pop at once. Ha.
Similarly everybody knew it was a bubble in 1999. That’s why you had companies rushing to ipo like lemmings off a cliff.
Personally I don’t think we are in a bubble right now and all the early bubble callers (since 2013 or so) have no credibility left.
Ignorance was a theme of many past bubbles. In the 20's it was the common man not understanding stocks. In the 80s it was "Savings and Loans are just banks, they're safe!". '08 it was "They wouldn't give me a mortgage if it wasn't a good decision". In all bubbles you see a few shrewd hawks and millions of lemmings - that's where all the money comes from.
In this scenario its, "There's nowhere else to put my money", but not having a better alternative doesn't necessarily make it a good investment.
In my opinion, we are in a bubble now. In stocks, P/E ratios are extremely high, and many companies are IPOing, many more than two years ago. All asset pricing is going through the roof, and money is chasing money. Speculative assets have become trendy again with cryptocurrencies, ARK, and memes like dogecoin.
We're all flush with cash and either terrified of inflation or riding a euphoria of asset inflation.
> either terrified of inflation or riding a euphoria of asset inflation.
Why not both?
At this point, the biggest risk I see is a materials shortage that the Fed can’t fix by adding zeros in a database. Such as gas prices spiking, or food shortages, or some other critical infrastructure failing.
The lumber shortage is forcing homes to be built largely with pressed wood. Ironically this makes home building even more expensive, as pressed wood prices have skyrocketed... passing traditional lumber because of availability issues.
What do you do to prepare for a crash? I follow the asset and commodity price increases. But, I can't see the next logical step. Save more money that is worth less over time? Are we on a train towards hyperinflation that can't be stopped?
A drop in IPOs seems like a lagging indicator (they will drop off after the economy has cooled off), but it's not clear to me if a boom in IPOs is a leading indicator or not.
It's not greed. The chair of the Fed sat on national television and said they flooded the system with cash and will not stop until everybody gets it while ignoring any stretched valuations or inflation signals. All bubbles are policy decisions by the Fed to spark risk-taking and optimism, guided by the "less than honest" intermediaries on Wall St.
There is a lot of greed driving home sales right now. Every homeowner I know has at least considered making bank in this market. The only thing stopping them is they'll then need to buy a home cheaper and further out or lose that profit.
Completely off-topic, but I was just watching a YouTube video about lemmings with my 6 yo to answer some questions she was asking.
Lemmings to not commit suicide from cliffs, en masse. This is a myth that came about from a staged incident in a Disney documentary about the arctic wilderness. It's completely made up.
Myth notwithstanding, lemmings are the proverbial manifestation of "following your friend off a cliff". Disney did this brilliantly. Here is a fun podcast on it:
My definition of a bubble is not just prices going up. It's not even people investing based solely on prices going up, rather than on the merits of the investment. To me, it's only a bubble when people are investing solely because the price is going up, using borrowed money.
And that's why bubbles are dangerous. When they pop, they don't just destroy the investors. They can destroy the lenders, which can damage the overall economy.
This is a little like "they thought Gailileo was a crank." Yeah but they thought a lot of other people were cranks and you don't know them because they were.
This isn't 2006 Las Vegas or some shitty 50 year old Florida suburb propped up by tourism, we're talking about every major metropolitan area that has jobs. People are buying because rates are rock-bottom, yes, but also because that's where the jobs are. This is different from last time, and aside from the Fed raising interest rates (and boy do they need to), there's no end in sight to the insanity.
This article did little to convince me we’re not in a bubble. The housing supply argument doesn’t hold up to me, as older people leave their homes newer people should be able to take there place. Base asset prices increasing because interest rates are down? Sure that’s finance 101. All asset classes (houses, stocks, cryptocurrency) only ever increasing in value? That’s too good to be true.
> The housing supply argument doesn’t hold up to me
Strongly disagree with you , I'm in Europe. I'm in the 25% richest of my state , I can't manage to rent a home because every time I contact a landowner for a property to rent there is 30+ person who applied before me within 4 hours...
Covid-19 has created a "remote economy" boom as well as accelerated household project to move to another state and acquire a property or just to invest in real estate.
Thus real estate market is performing just as expected... As long as the supply does not meet the demand the price goes up.
For crypto it's different , 99% of crypto transactions are speculation base. It's by design.
>Strongly disagree with you , I'm in Europe. I'm in the 25% richest of my state , I can't manage to rent a home because every time I contact a landowner for a property to rent there is 30+ person who applied before me within 4 hours...
> The housing supply argument doesn’t hold up to me, as older people leave their homes newer people should be able to take there place.
Not only are populations growing, but there is a net migration toward high demand areas.
Look at real estate listings in many smaller Midwest cities and you’ll see large inventories of very nice, very affordable homes. Older people are moving out but no one is there to buy them.
Meanwhile, many popular cities are fully built out. It’s musical chairs with existing housing inventory, plus a few high density reconstruction projects here and there.
We thought remote work would enable people to move away from expensive cities, but it turns out many people choose to live in popular, high-demand areas once they no longer have to live near their office.
As long as supply is fixed and demand continues to grow, prices will go up.
Look at real estate listings in many smaller Midwest cities and you’ll see large inventories of very nice, very affordable homes.
What? No, it’s the opposite. Suburban and rural homes have seen major price jumps in the past year while the most expensive cities have stagnated or dropped. For example Western MI has seen more price growth than the city of SF in the past year.
> Look at real estate listings in many smaller Midwest cities and you’ll see large inventories of very nice, very affordable homes. Older people are moving out but no one is there to buy them.
Not in my small Midwest city. Many houses are being sold in hours. Most of the time I see a new realtor, it is already sale pending. I have little doubt houses are being sold without being put on the market. There are realtors asking around my neighborhood if anyone is looking to sell because they have buyers interested in the area.
As the others are commenting I half agree with your comment - there is a supply issue in high density areas AND there is a supply issue in low density areas.
I don't know where you're looking. I'm looking in relatively small midwestern towns (Illinois, Michigan, Wisconsin, Minnesota) and I see listing for homes valued 20% greater or more compared with last year. A small four-plex that would have listed at $400k and sold for $380k (or so) last year is likely to have listed over $500k and may sell over-asking this year. It's ridiculous.
But in almost all 1st world countries, the demand is shrinking (negative population growth in all countries). Not to mention the top heavy population in Americas that is approaching EOL (Baby Boomers) which will rapidly shrink the demand in the next 10 years. But it actually appears from sales data that demand is increasing by a great deal. My hypothesis: speculators have been driving this market for quite some time in order to try and escape the inflation they thought "is coming any minute" since 2008.
Here in my city, the rents are decreasing since COVID started and the prices keep skyrocketing. It also supports my hypothesis. Investors are just buying up properties and renting them out, lowering rents everywhere. It may come to a head sooner rather than later, once someone finds the mortgage is way higher than the renter is paying. But even then, I think many owners are willing to take a hair cut on their mortgage because they feel like "the market has performed so well, its worth it". But how long?
This does not seem to be true, most of them have small (< 1%) but positive growth I think.
What were you basing it on? Some of them have negative birth rates, but that isn't the same thing - and to lead to an overall decline in population immigration would have to be reduced by more than the delta.
Yeah sorry I meant negative birth rate. But my assumption of negative growth is based on post covid, since border flow is severely restricted and people are just avoiding moving for the last 1year+. So I have assumed negative growth since covid and I have no source to back it up, yet the real estate market hitting record highs in my country, as a kind of hint that the prices are not driven by immigration demand but purely speculation. I would love to see population growth data for the last 12 months. I will look it up.
...as older people leave their homes newer people should be able to take there place.
Here in the UK, older people have not been leaving their homes because of covid lockdowns which is one of the reasons why there is a shortage of houses to buy. The one exception is retirement apartments.
Some areas in the country experience major population growth because that’s where the jobs are. In those areas not enough older people leave their homes to compensate for the influx of new residents. It’s not even close.
The housing supply argument is completely accurate.
> In those areas not enough older people leave their homes to compensate for the influx of new residents. It’s not even close.
This is true. The question is, why would they? Generally, with a few exceptions like Florida, the places where the jobs are are also the best places to be old.
> The system may be fundamentally broken, but the market is not. This gives me some level of confidence in saying that as of April 2021, I don’t believe that we’re in a housing bubble.
Markets have the remarkable ability to function right until the very moment they crash.
If functioning markets really were to preclude bubbles then, by definition, bubbles would only form in non-functioning (crashed) markets. This is, of course, ridiculous.*
*That is, unless non-functioning markets can somehow be distinguished without the hindsight of a crash.
One thing I find odd about the current housing market is how many people aren't paying rent right now.[0] Once evictions are allowed again surely that is going to have some impact on prices. Especially if, as many people suspect, many of these homes are investments rather than owner occupied. Maybe it won't affect the housing market much though because the problems are mainly in low-income housing? That seems like a sketchy assumption.
[0]: I couldn't find a good number for this in my quick search for it, but I remember seeing something about how a fairly high percentage of renters aren't paying rent currently.
There is also a ton of commercial real estate operating in “extend and pretend” mode. It seems unlikely that all of that just stabilizes with no drama. But I think the policies of the moment are not really aimed at solving that problem, they’re aimed at delaying the worst of the housing crisis until the worst of the pandemic crisis is behind us.
The article says that single family zoning rules are causing the shortage that drives up the price we're seeing right now. So they argue that the solution is to open up those restrictions so that more multi-unit buildings can be built and that this will "break the restrictions on homeownership in America." Multi-unit buildings are overwhelmingly more common to be rentals than occupant-owned condos, so how is this a solution that actually increases people's ability to own their homes?
Seems like its just a bait-and-switch in favor of landlords.
It would be a lot easier and more marketable to take the more run down single family homes that have become too expensive for most people and do rebuilds that turn that lot into two homes. The financial model for a developer is easier too, you do the transaction and you’re done, as opposed to needing to be a landlord for a long time, or find just the right kind of investor to buy a 4-unit apartment (which is really rare).
There is an entire spectrum of housing types that are generally referred to as the “missing middle,” which are common in old cities and European cities but virtually non existent in post-ww2 America.
That’s what removing or relaxing single family zoning should allow.
I saw some analysis a while back that said 2-3 story garden apartments are the most economically and environmentally sound level of density to shoot for. Would be neat to see those available as condos. You could double or triple density without pricing people out or creating urban environmental problems.
> I saw some analysis a while back that said 2-3 story garden apartments
A big part of the "American dream" of homeownership (for me at least) is to not have any connected walls to anybody else (no condo, no apartment, no townhouse). I am going to guess a lot of people feel similar to me. 2-3 story garden apartments might be efficient, but I am willing to bet a lot of families selfishly want a single family home.
1. Tap into an ever-rising, yet completely safe investment asset with massive leverage.
2. You can get more space owning than you can renting.
3. You have more certainty (can't be evicted, etc)
4. You enjoy home improvement as a weekend hobby.
1, 2 and 3 are ponzinomics.
1. This is obvious, and the main factor. It is only true because of the artificially constrained housing supply. Without this artificial scarcity, housing wouldn't increase in price any more than copper or pork bellies. Spending all of your net worth and going deep into debt to invest in a single pig farm would be considered very foolish and undiversified. Investing in a single housing property would be the same without the artificial market distortion. Existing homeowners have created this market distortion by pushing through ever-tighter zoning regulations at the local level. They are always ranting about conspiracies of "landlords" and "developers". Businesses that increase the housing supply are their natural enemy.
2. This is related to the factor above. You can't really get more space buying than renting, you just feel that it is safer to spend a large portion of your income on a mortgage since it's such a "safe investment".
3. Eviction wouldn't be an issue in a market with sufficient supply. Your rent wouldn't go up any faster than inflation, and might even go down. A landlord wouldn't want to evict you any more than a business would want lose you as a customer.
4. I guess I will have to concede that renting is a worse option for hobbyist carpenters.
I think you're really missing the mark on 4. This is not about enjoying home improvement as a hobby, it's about being allowed to improve your own living conditions.
I can do whatever I want with my property, within building codes, without having to ask a landlord. Want to knock down a wall, upgrade the stove to gas, build a shed in the backyard? You have the freedom. If my faucet is leaking, I don't have to beg someone to send a plumber.
Try owning in SF, where it's impossible to get a plumber to come out for a small job, but a big enough landlord will have a guy that can come reasonably quickly.
Housing should be a low margin, boring business. Smalltime landlords buying, renting, and flipping properties on leverage is another symptom of a distorted market.
More units available means lower rental prices (in general), which means renters should be able to save more money to purchase a home later. There's a big assumption baked in there that condos & houses don't get snapped up by existing landlords or rise in price faster than the savings rate of renters. But that's the thinking.
Yeah I don't get it. People want to buy a home so that they have more space and privacy, including outdoor space. Sure, some condos have roof decks, balconies, or shared yards, but so do rentals.
One of the best pieces of financial advice I have learned is, is to ignore all predictions of bubbles. They are almost always wrong or premature. Even if you sell, prices may never fall to where you sold even if the bubble bursts. For example, had you sold your stocks in 1996 because of fears of a stock market bubble, when the market did crash in 2000-2003 and again in 2008 it would never revisit the price you sold. You would have also missed out on all the dividends. Pundits also said Facebok was a bubble in 2012 after it went public and Google in 2004 too and Amazon and Tesla, etc. .The list goes on.
I started house shopping in 2019 in a high cost of living suburb.
Prices seemed high. The market seemed frothy. I was very cocky and told my agent I wasn't in hurry. Prices would surely normalize. We must be in a bubble! Everyone seemed so irrational.
COVID hit and I was beyond smug. See, Mr. Agent, I told you. World wide pandemic will burst the bubble and I'm going to get a house for nothing.
$450/foot houses are now $650/foot. We've been priced out of multiple neighborhoods.
If you don't have an offer on a house within 3 days of the first showing, don't even bother.
Add $100k to the listing price to even begin thinking if you can get the house.
And then pray you aren't up against 5 all cash buyers.
Meanwhile, I've had the down payment sitting in a savings account for three years and its buying power decreases every month. Should have YOLOed into BTC. Would have turned into one of those damn all cash buyers.
Ouch. You didn’t even have to do anything crazy with that money (like YOLO BTC). If you just kept it in VTSAX your down payment would have gone up 57% in the last three years.
There is only one real question here: why is that 1916-1980 Fed stimulus would tend to raise wages, whereas since 2000 Fed stimulus has no effect on wages but instead becomes asset inflation?
The Fed increased the money supply last year. A lot. So asset prices are going up. That much is straightforward. But in another era the same stimulus would have manifested less as asset inflation and more as an increase in wages. The only important question is why that has changed. As we saw in 2019, even very low unemployment no longer leads to rapidly rising wages. What is holding wages down?
> There is only one real question here: why is that 1916-1980 Fed stimulus would tend to raise wages, whereas since 2000 Fed stimulus has no effect on wages but instead becomes asset inflation?
Because recent Fed monetary policy occurs in a different fiscal policy environment, and fiscal policy has a lot more impact on distribution of returns than monetary policy.
> What is holding wages down?
4 decades of fiscal (both tax and benefit) policy starting with Republicans and then joined by Clintonian Third Way Democrats which has focussed on taking support away from the poor and working class and concentrating gains in the narrow, major investor class in the notional hope that those at the bottom will get trickled-down-upon by the wealthy (a hope which has been realized more in the form of golden showers than showers of gold.)
Lyn Alden does a deep dive into money printing and inflation and describes the difference between the money printing in the past and what is going on now:
Anyone want to start a city with me? Find some overlooked land near decent water and with good fiber and explicitly build out with unregulated zoning and minimal city planning. City only owns utilities and emergency services. Municipal fiber. A remote work hub.
I have no idea how but willing to figure it out as we go. The idea has been crossing my mind more and more frequently of late.
Great idea! So many nice communities across the country. I often wonder why more companies don't just take over - giving their employees quality of life options.
The nation is seeing extreme increases in price, maybe that’s a bubble. HCOL areas like the Bay Area, LA, and Seattle I doubt are in a bubble.
There has been a lot of liquidity injected into the market. A portion of it has gone to tech stocks and people wanting to hedge against inflation. Guess who gets that liquidity when they vest?
Last year buying a home in the Bay Area was something I planned to do in a few years. A year later I own a home.
I’m not the only one, there are tons of all cash offers out there right now.
You need 40-50% liquid of the home you’re making an offer on right now to be competitive. No contingencies, cover appraisal gaps, etc.
I honestly don’t care if it’s a bubble at this point. If my home value drops 50% whatever I have a home where I want to be. I have equity and other investments like I did while renting.
> The nation is seeing extreme increases in price, maybe that’s a bubble. HCOL areas like the Bay Area, LA, and Seattle I doubt are in a bubble.
I generally agree. The highly paid workers living in these regions continue to be highly paid, and the quantity of housing continues to be constrained.
I think a lot of small/medium cities will see corrections if lumber prices go back down. There will be a building boom, new subdivisions will flood the market and drive prices back down on the fundamental costs of producing housing. In larger cities, we're too space constrained (and building high density is illegal) so this feedback loop has been broken and will continue to be broken, thus prices are set by whatever can be afforded with a local wage.
Are we running out of people with the incomes to support the higher monthly payments? That's what we have to be asking. A house across the street from me just sold in a couple of days for $555,000 ($20K over asking). Previously sold in 2018 for $424,000. The similarly sized house next to it sold for $149,000 in 2012. This is looking pretty bubbly to me.
>The similarly sized house next to it sold for $149,000 in 2012. This is looking pretty bubbly to me.
But 2012 was also the absolute bottom of the worst housing slump in US history. If you averaged out the appreciation of a median priced home at the beginning of the housing bubble in 1998, which was $175,000 [0], at 3.8% annually, the historical average [1], until 2021, the median price would now be just shy of $400k. We currently stand at $350k median price, and that's with a generational tailwind of millennials (the largest generation in US history) now just starting to buy homes. The fact is that it's still the single best financial decision an average person can make, even at what seem like inflated prices.
We are probably not yet running out of buyers, because interest rates are low (and hence monthly payments are low). In a way, right now is a bad time to buy if you have cash in hand _because_ interest rates are low causing prices to skyrocket and the overall amount of money you would spend on a mortgage to increase over a 30 yr period.
Despite this, I think whales and normal people are buying property all over the place anyways because its one of the few safe, good remaining investments left, and as the article pointed out, people prefer investing in their own homes more than any other asset.
2.3 million homeowners are in forbearance. It's been over a year, people are getting use to NOT paying.
Banks just also flat out STOPPED foreclosures. So we have millions of homes in forbearance and we don't know the true number of loans that are delinquent. Meanwhile in some markets prices have gone up 30 percent in 1.5 years which for a normal first time home owner means higher loan costs, bigger down payment and more interest. We also have homeowners who WANT to sell but won't until we get back to a normal market. If interests rates go up, we start foreclosing, homeowners start selling, and all those millennials who regretted overpaying for their homes start selling ALL at once, we could easily be in a buyers market.
No, I think boomers with assets are doing fine. Everyone else is fucked.
I don't want to push the generational narrative too hard(I'm 46), but it does seem like that generation is willing to do everything they can to keep the party going until they die. After they're gone, it will be up to my generation and younger to figure out what to do with the massive debt and distorted economy. From what I can see, they just don't give a shit.
Yes, perhaps I should have clarified that by "we" I meant my generation (I'm a millennial).
And as someone with a significant chunk of savings who still can't afford a house, the possibility of being both left without my own property and having my life-savings essentially rendered moot by runaway inflation is deeply concerning.
That's exactly the situation I find myself in. I'm 46, divorced and remarried. I joined a FANG and lost my soul so I could have a chance after starting over from scratch at 43. I now have $200k in the bank, which is awesome and I am thankful for it. But it's nowhere near enough to buy a house. I'm already running out of steam, mentally speaking, and can't make the safe bet that I'll be able to keep my FANG job for even another year or so. I guess I just put it all in a TIPS ETF and hope it works out? IDK... Meanwhile I just have to watch while the rich get richer and the folks in the middle get pounded.
I'm not an economist and don't claim to understand what's happening, but what I do know is that I considered entering the market before the pandemic but abstained because I felt the prices were inflated by all this "free money" from cheap loans, and I was competing with people who seemed to have no limit on what they wanted to pay. Then, the prices went up by more than 20% during one year, a period where most economies stalled and went into recession.
I'm not touching this with a ten foot pole, I don't care if I have to rent for decades. I'll spend my money on something else in the meantime.
“Investors” aka speculators are pouring into the market and gobbling up what little supply exists. They are trying to monopolize and destroy the secondary housing market in a similar way to how carvana, vroom, carmax, and others have taken over the used car market and are now demanding insane prices for used cars. Zillow and others are all in on the current feeding frenzy. If it continues unabated the only houses you will be able to buy private party will be low end hovels. Everything else will be owned by the Zillows of the world and command a kings ransom to purchase.
> This isn’t just suburbs, as has been historically been associated with single family zoning. Major cities like Seattle, Charlotte, and San Jose dedicate 81%, 84% and 94% of their land, respectively, to SFZ.
Live in San Jose: I can't imagine if they increased the density of the housing without also going gangbusters on light rail or some other means to keep the freeways from just getting any more congested than they already are.
Higher density would mean you could live closer to work which solves some of the congestions problems. Because of the big sprawl commutes are long and it's harder to make efficient public transport. But you're right, how to go there after everything is already sprawled out is a good question.
Their solution is ADUs(accessory dwelling units), which amount to putting sub-par 'granny flats' into the backyards of existing suburban sprawl. That's more or less a bribe to the homeowners to allow densification without changing the fundamental carrying capacity of a neighborhood. Homeowners, who are already likely wealthy due to asset appreciation, are now able to become landlords. Of course this won't change the fact that you'll need a car to commute, so traffic and parking will get worse.
I live in what used to be a very affordable metro. After years of saving and getting out of debt, I am finally able to buy a house. Well I would have been under normal market conditions.
When I moved to my neighborhood 7 years ago the average price of a 1500sqft home was 130K. Prices on those homes have gone up slowly up over the years but the last 18 months where price have skyrocketed. Those same homes are now being listed for 240-250k and closing above asking.
I've had multiple realtors in my area tell me, that unless I have an extra 50k available beyond my down payment it is unlikely that I will be able to buy right now. Why? None of the houses are being appraised for as much as they are listing, so you have to cover that gap and then you will want to offer 20K+ over asking to make sure you get the house.
The last few homes that I have looked at already had offers on them before they were put on the market. These homes open on a Saturday and close Sunday evening with 15-20 offers. And who exactly are getting these homes? Out of towners, usually from the west coast, with cash only offers.
I wonder what effect the work-from-anywhere environment we've created, and pushed further with COVID-19 workplace closures, will have? Lots of the places where housing is being built en-mass now are previously rural areas, without onerous zoning restrictions. Houses are being built, just not in the usual areas. Building material costs are rising, as the author notes, but could it be because the demand for them has exceeded the supply?
I recently asked a friend (software dev) whether he thought his employer was going to ask them to resume working in the local office and he was skeptical that they ever could do so. Too many of the strongest devs had already moved away, and he felt the chances of replacing them now with local, office-based developers of the same quality would be basically zero.
Not everyone can work remote, but enough that it could alleviate pressure in the traditional centers.
This article totally neglects the alarm bells blaring in late 2019/early 2020. The Fed lost control of an obscure but crucial corner of the bond market (the repo market), slinked away from Quantitative Tightening with its tail between its legs after a timid venture into normalizing its balance sheet, and was generally starting to brace for impact.
Then, the pandemic and a Niagra Falls of liquidity. Unprecedented in all of American history with the possible exception of WWII.
The country has just fought a war. Wars bring inflation and price bubbles. In the aftermath, prices normalize and the speculators get washed out. And by that point, almost everyone is a speculator.
The question is not whether evidence for bubbles can be found in every corner of the economy, but to what lengths will the country go to keep the music playing.
I wonder if the US can manage to drop the load onto the weaker recovering economies. At the end of the day, are you trading your depreciating dollar for another currency? To me, it seems like the US can keep the music playing until the rest of the world gets out of their shutdowns.
One of the more robust ways to detect a bubble is by constructing a price index that summarizes market activity without getting distorted by short term changes. Perhaps the most respected housing price index is Case-Schiller house price index which currently indicates the market is somewhere between 150% to 200% above historic valuations. Since housing is something all need and is generally supported by incomes there is no reason to think that the current relatively high prices are robust and will endure. This article also points out that there is an imbalance between demand and supply which means that any large scale increase in supply is likely to moderate demand and market prices.
One thing I don't understand. I hear a lot of stories about a house being sold within a few days (or hours..) for $x over asking price. In these cases, why do sellers not wait for a few weeks, or list the house for a higher asking price?
I suspect many times the seller is also a buyer of a new house, and facing the same kinds of competition. So they need to close quickly on their sale to cover the close on the buy.
It isn't really a bidding war, it is everyone guessing at what the next best offer is and trying to beat it. I never understood why, if you have 20 offers on a house and $500k is the best, the realtor doesn't go back to the other 19 and say they need to offer at least $505k, and repeat the process until there is a single offer remaining.
Risk reward ratios are skewed for the realtor. It might make sense for the owners but it's easier to forgo the extra $150 you get as the realtor and just close the deal right now as is.
Same here. I've never bought a house so I don't quite know the details about it, but if people are getting 15-20 offers on a house within 24 hours of it going on sale, why not just raise the price?
I could be wrong, I am by no means well versed in this, but I think they are limited by appraisals and inspections. If the house gets appraised significantly less than the offer, I believe that the buyer can leave their offer, effectively wasting two weeks of the seller's time. The goal then is to get a cash offer that goes through an expedited process where an appraisal is not needed. In addition, for all of the sellers that believe we are in some degree of a bubble, they want to hurry to sell before it pops/deflates.
I believe this is correct. And even if the buyer is willing to pay the price, the bank may not be willing to offer the mortgage over the appraisal amount. Cash is king, but not all offers for the same price are equal, such as VA loans with requirements and such.
Pre-2008 crash, lenders could pick their appraiser and it was easier for them to have the appraisal match up with the asking price. The lender was likely selling off the loan, anyway.
Appraisals are now assigned to a pool. Doesn't mean there are not any shenanigans though. They all still know each other.
Any advice for someone looking for their first home?
Based on this article and others I've read, it seems like many of these factors (low interest rates, limited new supply, etc.) are likely to continue for at least the next several years. The only change that could help a first-time buyer would be if the end of the pandemic leads to favorable conditions (reset preferences, end of eviction moratorium, etc.). I feel like I could wait another 3-5 years for it to flip towards a buyer's market, but that's certainly not guaranteed and who knows how high prices will have gone in the meantime.
I just bought and sold a house in a very hot market. The things that people are doing right now to stand out in my market were,
- Get pre-approved.
- Write a personalized letter why they should get the home.
- Offer above list price and be willing to pay above appraisal (part of your offer).
- Put your offer in right away. Most people who viewed my home put in an offer within a few hours of seeing it.
- Forgo an inspection to get a faster close date.
- Pay cash if you can.
- Buy new construction, we bought new construction and didn't have to compete with anyone. It costs a little more up front, similar to a new car I imagine, but we plan on staying >10 years if we can help it.
As long as you are financially secure I wouldn't wait for a better market. IMO it doesn't matter if the market is high or low, it only really matters if you leave the market.
Right now you're almost certainly not the first offer, and even if you are, they'll have 5+ more by the end of the day. This means that your letter could theoretically be the deciding factor in which offer they pick, which does have the potential to run against fair housing laws.
Yes, my realtor asked me to write a letter pre-COVID when housing was less of a seller's market, and we refused. We're a gay couple and didn't want that biasing our seller.
> we bought new construction and didn't have to compete with anyone
In my market this isn't the case. Some builders are having literal blind auctions on small lot starter homes - after the X months wait list gets you there.
If the area you’re looking at has land supply (I.e, empty lots and not all built up) I would wait - there is a new house supply crunch caused by inflated materials cost caused by drops in production during covid.
Those at least should level out at some point and supply in those areas increase.
All bets are off in built up metro areas. Be sure you won’t have regrets if you end up having to stay there 10+ years.
location.
find some other place. where the community has what you need, and what you like. As with many other things such as fads, sometimes all you have to do, is look across the street. It's also mud if a long term thing. So think about what a community could look like in the future. If it is run down, but people are renovating, that's a good sign for the future.
Isn’t there just way too much money floating around and people have no productive uses for it? Looking at the stock market and the housing market this seems to be the most reasonable explanation.
I like the author's analysis and appreciate the breakdown of his sources, but I think he took some shortcuts that makes me question his conclusion.
Some examples:
"With more money being saved, and investments yielding higher returns, the more there is to spend on homes."
I tried dig up more information about how exactly BEA calculations the Personal Savings Rate, but it seems to be an estimate based on aggregate consumption. This savings rate doesn't necessarily imply that this money is invested in the stock market. Even if it was and they bought and then sold investments to pay for their homes they still have to pay taxes on those short-term sales. An increasing savings rate by ~26% over < 12 months is interesting but doesn't seem to be a strong argument. I think we need to go deeper here to see if this is a median number and how it would break down by demographics.
"We are in a record low rate environment, we’ve experienced unprecedented support via fiscal stimulus, and mortgage underwriting standards are far stronger than in the oughts, which has lead to less leverage and reduced the likelihood that a pile of cards built on risky mortgages will collapse the economy."
Generally with more expensive homes people are left with fewer options with who underwrites large loans, driving them to jumbo mortgage lenders. People may have stretched themselves to be able to buy a home given the low rates and the need for more space.
I am currently going through the process of selling my current home and buying a new one. Last year, my real estate agent said she would list our house at 180k. I'm in a rural area so that's a modest 3 bedroom which needs some work on the bathrooms but is otherwise pretty nice.
We just signed a contract without ever listing our house for 220k.
We're buying a house that was listed at 230k in February of last year but didn't sell and was rented out. It was listed again recently and we made a full price offer for 259k. As far as I'm concerned, we're still coming out ahead because we got 22% more for our house and are only paying 13% more for the house we are buying.
I was in the market for a house in 2007/8 as well and the market feels completely different. We might still be in a bubble but the underlying market is NOT the same and the causes of the bubble (if it is one) are different.
in 2007 there was not as limited housing supply. There was bad money being used to buy houses via overfinanced buyers and banks willingness to lend to them.
Today, there are cash offers all over the place. Lower income buyers are being priced out of the market. Also labor and material prices for new houses are skyrocketing which is increasing the demand and prices for existing housing inventory.
Currently living in my second home financed ~2010 post-crisis 369,000 or so. Looking at 500-600 listing.
First home was a 1000 sq ft'er and I've rented it for 11 years.
Just closed on a new home 505,000 10k over asking, 4 other offers, never listed on MLS. We beat a higher offer because I wrote a hand written thank you note. (psy-op evilness). No contingencies other than appraisal and home inspection. Home was on the market for 18 hours, we made an offer after 4 hours. Market is nuts. Rural Southeast USA.
We might not be in a true bubble, but the set of circumstances that have lead to the market increase have been a "perfect storm". I think once we get to the other side of the pandemic much of what is driving housing prices will revert to or trend towards precovid norms. It's likely there will be a market correction when (if) that occurs, so it's a bit missing the point to say "well technically it's not a bubble".
>90% of Americans prefer their primary residence as an investment over the stock market. People are likely to move funds from savings and the stock market into their homes, as they believe this to be the best strategy.
The way the housing market is structured, it is a vastly superior investment for most Americans. Housing is the only asset where every American can be highly leveraged with a fixed downside. As a house buyer you need only 10-20% down and can mortgage the rest. So if the house price goes up 10%, your return on principle is more than 50%. In California and some other states, first mortgages are non-recourse -- if there is a short sale the homeowner is not personally liable for the difference between the sale price and what is owed on the loan -- this is not true if you buy equities on margin. For these reasons, historically the returns for Americans of modest means has been astronomically larger than the returns on equities. The "all cash" phenomenon is partly investors realizing there are excess returns in this market.
>As a house buyer you need only 10-20% down and can mortgage the rest.
Or less. Zero down mortgages are absolutely a thing right now. You can get $250k of margin on an appreciating asset for nothing more than your signature, credit score, income history, and a few thousand in closing costs. There's truly nothing that even comes close in terms of wealth building for an average person.
HN: unaffordable housing is among the top-5 problems facing my generation. Where are the career opportunities? What are the specific startups and companies working to decrease the cost of housing who might hire me on?
I understand much of this is an issue of policy (e.g. zoning), but that doesn't mean there aren't other avenues by which to attack the problem either.
As wild as the housing market currently feels, I tend to agree with the author that we are nowhere near 2007 levels of overextension. Here's a chart that complements the data presented by the author, showing that there is still relative demand for housing as a place to live at current prices, relative to the last few decades: https://fred.stlouisfed.org/series/RRVRUSQ156N
So there are two problems. One is addressed by the author: build more homes. There aren't enough. Can the federal government do this? Probably not; it's more of a local zoning thing.
But while the author touches on high construction costs, they miss an opportunity to identify the most dangerous root cause: inflation.
While CPI might say the US has only experienced 2.6% inflation since the pandemic began, that number is faulty beyond repair. Random length lumber futures are up 200% since the pandemic began. Copper and soybean futures are both up 60%. Industrial steel is up 133%. Industrial silicon is up 70%. Sunflower oil +114%. Wheat +20%. Platinum +29%. Gold +20%. Aluminum +32%. Energy futures +30%. Natural gas +42%. SPX is up 25%, despite almost certainly being less productive. You get the idea.
Historically, there is a modicum of hysteresis to prices at the early onset of hyperinflation, especially in a large economy like the US with multi-year contracts at pre-defined prices. But when the raw materials are are growing in price by 30%+/annum for all of your products, consumer prices are sure to follow.
This is a historic moment. While the government has had to choose between more severe short term recession and long term debt/wealth inequality many times before (and usually chosen the latter pair), the decision in 2021 feels different. Inflation is already here. The money printing has been unprecedented, and the only way to avoid real inflation will plunge millions into unemployment. Do we have the political will to forestall a major inflation catastrophe?
Isnt hyper inflation on the order of 1000% and not 100%? I think we are looking at somewhere below hyper inflation, but I definitely agree CPI is not showing it. Its not like we lost a war or have impossible debts to pay to our enemies. Everyone else is in the same boat. Do you really think we will see hyper inflation like Zimbabwe and Germany? Im foreseeing large inflation in previously cheap COL areas and low inflation in the already expensive places like SF, NY, DC.
It seems like the asset in shortest supply is where can I store my money against inflation.
Vacation home housing is one of the best products for that.
Yes, hyperinflation is a universal regime-ending event, but 50% annual inflation (a more plausible target while the USD is the world's reserve currency) is no joke, and would be on a completely different level than stagflation of the 70's. How it would play out in the world's largest economy is anyone's guess. Replaced hyperinflation with "major inflation" in my conclusion.
Reminded me a bit to the classical NY Fed paper before the subprime crisis [0]. Each bubble is different as much as each bubble is the same. I guess the main invariant is that what goes up must come down at some point, because of "reasons" and principles of human nature on complex individual and group behavior. Usually those are only clear after the fact.
Many are arguing we are not in a bubble because it is different than the last bubble. What defines a bubble? Is it simply that prices drop from a high after significantly increasing?
If the conditions that they argue are resulting in current prices ease (supply, material, labor shortages are a few listed here), and prices drop, isn't that a bubble?
I guess they could simply plateau and return to "normal" growth patterns.
There are multiple contributors who have made the housing market as it is now. The general trend which characterizes the situation is that wages of average folk are rising at A% whereas the housing prices with B%. At the beginning of the 1970s, a teacher in the UK earned decent housing in 5 years, whereas today, it would take around 40 years under a mortgage.
In practice, we see that wages had stagnated over the last decades. From a political perspective, it is a change of economic philosophy from supporting consumer demand to supporting the supply of producers. On the other hand, there is a factor of migration. People coming from lower-income regions are putting pressure on local folks to negotiate wage increases, partly also supplemented with not fully accepting immigrants in labor unions.
The factors which make B% high are the increase of loans VS wages and guaranteed state protections for nonperforming loans to squeeze everything out of the debtor. Then there are urbanization and speculation on it. Common folk more likely getting better loan conditions in places where it is expected that the property price will grow. That, in turn, stimulates urbanization and vice versa.
Also, a factor is capital scarcity in the housing market. In the environment where central banks are buying stocks of nonperforming mega corporations to refloat them (optimistically saving pension funds), there is no better investment than owning such a stock. Hence the housing market is incentivized to serve those whose income grows with B% or known also as the wealthy 1%.
Correct. The value of the dollar is dropping, and seems unlikely to recover. If anything, we should be measuring the value of the dollar against the cost of housing, not the other way around.
The authors exclusion of this most obvious economic factor raises my suspicions of an agenda.
But I think the main driver is severe asset inflation, so when the bubble pops we'll find it only unwinds a year or two, at most, of the insane price-growth we've seen... well, ever since the recovery from '08, actually.
Bubbles aren't defined by, as some commenters suggest (not TFA), poor lending practices. Please see investopedia's excellent article on asset bubbles [1].
Houses require maintenance, they go out of style, newer buildings have more amenities, etc. In general they retain their value well, but they do become used over time. Historically (hundreds of years) the value of property is highly associated with income, which is highly associated with inflation. Real estate is conventionally considered to be an asset class that maintains its value relative to inflation.
Presently, enormous amounts of money have been poured into real estate. Housing costs are now disconnected from the ability of people to afford it, or from the potential of the property to extract rents. Price-to-Income ratios and Rent-to-Income ratios are completely out of line right now.
TFA repeats the complaint that housing supply is the issue because wealthy people and financial instruments are buying all the housing and letting it sit empty to appreciate in value. In other words, TFA claims that speculation on housing price increases is evidence that there is no asset bubble. The fact that there is widespread speculation on the price increase of an asset class is, in fact, evidence of a bubble, which is why I called the article ignorant.
The fact is that ~11% [2] of housing in the US is currently vacant. But this isn't just a US issue. If this was a supply constraint it would be a geographically local problem. It's not. It's not even isolated to a single nation. Housing prices are exploding globally [3]. This is a speculative asset bubble. The fact that it's not a bubble based on unaffordable leverage doesn't mean it's not a bubble.
Finally, it's impossible that this issue resolves without a crash [4]. Since we've had inflated prices for maybe a decade now, I expect that it will take somewhere between 5 and 10 years after the crash for prices to normalize. Put it another way: do you expect housing prices to increase exponentially forever? If not, do you expect prices to remain the same, adjusted for inflation? In other words, have we reached the maximum ability of people to afford houses, and this is just the new price? If neither of those things are true, then there is only one other option.
You make some excellent points, but your comment would be much better without the first line. The article isn't "completely ignorant". It may have parts that are wrong, it might be misguided, or the conclusion may be unjustified, but there are many parts that are insightful and accurate. Calling it "completely ignorant" undermines the strength of your rebuttal.
You're right, that was probably unnecessarily inflammatory, and isn't a good way to communicate persuasively. I thought I'd justified the statement later, and that would be sufficient. I'll try to allow what I communicate to stand on its own going forward.
Indeed this does seem to be global in nature. There's been no shortage of articles recently about the same level of mania in both Australia and New Zealand as well:
Interesting. Investors parking money in real estate because returns are so low everywhere else, and thereby 1) reducing the stock available for people to live in, which 2) makes everyone bid up the price of the stock available, which 3) makes it have been a really good investment.
But I quibble a bit with your source [2]. That shows the amount of vacant units up sharply since 2020, but still lower than any point from 2005 to 2019. That doesn't seem to support your point, because this price run-up has been more than just the last year.
Links [2] and [3] suggest that the proportion of housing that's vacant is, as of the end of 2020, well below its level for the 2010s. So it doesn't seem like there's been an increase in speculating in (and not using) housing?
An article about housing on hacker news, let's see, let me put on my Carnac hat and guess this article is about zoning. Anyways, I think the pandemic has shown that the monomaniacal focus on zoning reform isn't actually well suited to what people want out of their housing. Hasn't this pandemic pretty well proved that when people aren't at the office they want a little more space? And not just inside but outside too. Yards are nice, people like yards, the single family lot in the suburbs is the American dream. I think the focus on zoning always takes the same rhetorical trick, "Build where people want to live" and abuses the hell out of it. Do people actually want to live in highrises in megacities? Or do they just do it so they can land a decent job? Maybe the problem isn't moving more housing into cities, it's moving more jobs out of them. The zoning reform people only ever look at one side of that equation.
> Hasn't this pandemic pretty well proved that when people aren't at the office they want a little more space?
Yea, and they want a pool and a free pony too. Given that people can't all get the housing they want, how do we solve for the housing problems we've run headlong into?
Building more housing is absolutely a meaningful way to attack the problem, and zoning reform is a part of that.
> Do people actually want to live in highrises in megacities? Or do they just do it so they can land a decent job?
Of course jobs are the driver here, but that means that incidentally, yes they do want to live in high-rises in megacities. There's no real sign of large cities releasing their hold on productivity and good paying jobs, the current remote work in a pandemic thing not withstanding.
> The zoning reform people only ever look at one side of that equation.
As someone who has faced the SF Bay Area housing crisis over the last ten years, I'd be fine with people moving out. But it's not a realistic solution, given that the good jobs are still here. Not to mention, there's not much we can do to reverse the economic incentives that bring people to places like San Francisco, but there is something we can do about local zoning rules. So it's entirely rational that people focus on building housing in these cities rather than trying to convince people not to move here in the first place.
This x 100. It’s a good thing is development of nice places to live and work is pushed out of the current center so that more of the country is livable.
I feel like there's some relevant factors not really mentioned in the article, and each of these could have consequences.
Unlike in 2008 there is now a limit to how much interest you can write off on your loan. That limit is $750K. Anything you mortgage above that you can no longer deduct from your taxes.
Housing has appreciated in some markets up to 11% in the past year. This in no way seems sustainable. As a new home purchaser your will not likely not see that same rate of appreciation.
If you do sell your house then you likely need to buy something else. That means that you will also need to compete in that same cut throat buyers environment and you will also need pay much more in taxes on your new even more expensive house. I also think that there's many people who will need to sell first before they can buy because whatever they are going to buy also got much more expensive and so would not be able to get a loan without first selling.
Some of the shortage is also likely due to Boomers who in a normal year would have downsized going into their retirement who understandably did not as they would be concerned about strangers walking through their houses during a pandemic. Once the pandemic subsides there will likely be a boost in supply as these folks resume the normal downsizing cycle.
There's a lot of people who fled the cities for the "country life" because of the pandemic. And while a lot of these people will probably stay, I think there's a lot of people who will decide that "country life" was not for them and head back to the cities in kind of reverse flight when the pandemic recedes. This will likely have ripple effects in those suburban markets that experienced a hot money influx over the last year.
Another major change is that for most people of moderate income the standard deduction is now so high that there’s no point in itemizing mortgage interest.
Count me among people that bought a house in 2020 (late December) partially because of the "practically free" cost of borrowed money due to low interest rates.
This made me chuckle. If anyone is curious, this is where the money went [0]. To say that the money was focused on lower income groups is laughable. 2.9 out of 12 trillion allocated went to asset purchases, basically buying treasuries and mortgage backed securities. How many lower income groups hold treasuries?
[EDIT] If anyone is curious about an alternative view, I've been kind of obsessed on this topic over the last few weeks are wrote about it extensively [1] and tried documenting the ridiculous rise in asset price levels to levels much higher than even that of pre-covid [2]. To say that there's nothing going on when nearly all asset prices are 30+% past their pre-covid peaks is ridiculous.
[0] https://www.covidmoneytracker.org/
[1] https://mleverything.substack.com/p/where-did-the-12-trillio...
[2] https://mleverything.substack.com/p/where-did-the-12-trillio...