Good. America needs to stop trying to make the existing rich richer by artificially propping up house prices, and therefore preventing those who want to build wealth from being able to buy a house and start doing so.
This would not be a problem if the entire US economy, right from nearly every tax incentive, to the schools you send your kids to, to the opportunities that are available to you and your kids, etc. wasn't based on home ownership and making home ownership the primary source of building starting wealth.
The other alternative is to find a high paying FAANG or finance job and/or starting a company. The former is available to a select few, and the latter also is built on owning a home, because many people who start companies will often find funding to start, maintain, and/or grow their company by taking loans against their homes.
Because, once again, the entire US system is built around rewarding home ownership, and so it's the only source of wealth building available to the vast majority of Americans.
The huge advantages to home ownership aren't an issue, if home ownership is available to all. Obviously you can't have everyone living in San Francisco, and you can't just hand out houses like candy, but it used to be that if you were willing to relocate and hold down a job, you could own a house somewhere in the USA, even on "minimum wage".
That possibility is gone; houses in the Midwest are now a significant fraction of the prices of houses in California.
> therefore preventing those who want to build wealth from being able to buy a house and start doing so . . . . . . many people who start companies will often find funding to start, maintain, and/or grow their company by taking loans against their homes.
Let’s stop pushing the idea that buying a house always builds or increases wealth. There are many good personal reasons to buy a house and many alternatives to getting debt for ventures.
Your advice is only for those with a high risk tolerance.
That's....okay? Most home prices are up well over 20% over the last couple years, so no real net loss for anyone that bought before the pandemic. Most likely, the folks that bought at the peak will feel squeezed for a bit, and might be slightly underwater (which feels terrible), then time and inflation will even this out over a couple years.
It does suck for anyone who's in a position where they _must_ sell their property right now, and not buy another one. It sucks, albeit somewhat less, for someone who got a nice APR on their mortgage and needs to move; their purchasing power is reduced, and they'll pay a premium on the new mortgage until the market's in a place that refinancing will make sense, which could be a while.
But we're not seeing a 2008 right now, or a 50%+ drop in valuation, or anything crazy like that. We could get there! That would be scary! But this feels more like a correction than "tanking".
It's not okay because rising rates and dropping prices kill liquidity for a couple of stupid reasons.
- people get stuck in a house because moving would cause them to lose the favorable rate they currently have. Everybody would benefit from some measure of mortgage portability -- the producer, the consumer, the mortgager, the mortgagee but instead we have this massive deadweight loss.
- price drop causes house building to drop dramatically. We're in such a mess today because builders stopped building in 2008.
In a normal market you'd be right. This isn't a normal market and regulators need to step up.
It is not just ok, but it is necessary. The prices are artificially high due to partially FED insistence on stupidly low rates for much longer period than it was reasonable.
My personal anecdata, our house practically doubled in value since we bought it over 5 years. That is not normal. That price needs to go down. The liquidity here is imaginary just like liquidity in just about anything else. It is worth what people are willing to pay for it.
Finally, the change in rate will mean that they will be willing to pay less, because it will be harder to borrow more.
Sorry, poor phrasing. Yes, the prices need to come down. That causes secondary problems and we should fix the secondary problems themselves rather than propping up the price.
My parents' place was up 30% over the last 12 months earlier this year.
Unscrupulous home buyers are hitting us, the children, up with text message ads. Last one I got was Saturday, so they don't seem to concerned about the market yet.
Yeah, but consider the source. :) Bloomberg writes for the investor class.
It does suck for anyone who's in a position where they _must_ sell their property right now, and not buy another one.
It's important to note that investments can lose money. It's a risk one should understand. If you think this sucks, this is just capitalism. There are winners and there are losers.
> It's important to note that investments can lose money. It's a risk one should understand. If you think this sucks, this is just capitalism. There are winners and there are losers.
Yeahhhhhh....and many of these are people's homes. I don't have a good solution without a socioeconomic reboot, but I do have sympathy for individuals whose primary reason for purchasing a home is to live in it. That houses have turned into an Investment Asset has a lot of knock-on effects, many of which are negative for the non-wealthy.
Banks and funds can deal with losses. It's their job.
Note that this doesn't necessarily mean home purchases are more affordable. For example, $1M home at 3% interest(30year) = ~$4200 monthly payment. $800k home at 6% interest = $4800 monthly payment.
It just means more of the home is going to pay interest, and less is going to the seller.
Let me introduce you to a scary concept of mortgages in foreign currencies :)
We had that in Poland over a decade ago: People would get loans in Swiss franks, and when exchange rate went from 2 PLN per 1 CHF in 2007/8 to 4.8 PLN today the amount owed (expressed in PLN) more than doubled. Of course right now such loans were deemed illegal and courts are invalidating them now, one by one, but for a long time it was a real burden for people.
So what happened to the property? Did people with an invalid loan get a free property? Or it was forced to be sold to repay the loan in PLN?
Or the owed value was calculated in 2007/8 PLN value?
Sorry for having so many questions, but this seems to open a pandora's box of complications
No, no one is forced to sell. The two available options (depending on some nuances of how your loan was actually set up) are:
- Your loan is converted to PLN, you get a refund of all the extra costs incurred by the currency exchange rates, and you continue to pay off your loan in PLN.
- Your loan is considered invalid and is abolished, which means that you have to pay back the original sum to the bank, and the bank has to repay you all the payments you made over the years. If your loan was issued a long time ago you typically will come ahead (over years your payments add up). This means you keep the property and are debt-free. If it turns out you still have a significant amount to pay off you can refinance it.
It used to be, in rare cases, when banks did not resell mortgages forward, that you could renegotiate the principle amount in lieu of foreclosure.
Basically, everyone would recognize that the bank could take a $50k wash if they foreclosed, so for the right deal they'd take a smaller wash, and you'd have a lower principal amount and a longer payment term or similar.
It still happens with big commercial loans at times.
It's the difference between a $250k and a $200k down payment. That said, shelter costs have more than doubled in real dollars over the last 25 years in my location, so 20% off the sticker price would only be a good start, not a good final state.
The most recent sale of a home near me was a completely unremarkable 100-year-old detached house for $2.6 million. This market has a lot of cooling it still needs to do.
I bought in 2016, and, if Zillow is to be believed, its resale value has increased by over 30% in that time. That's crazy, right? The minor improvements I've made in the last few years can't possibly be worth that much. Philly is not a 30% nicer place to live than it was 5 years ago, to put it nicely. If prices go down and I'm "only" up 10% over when I bought that's still pretty good.
Asset prices, particularly homes, have been puffed up by ZIRP and other factors for a long time, and are overdue for a correction.
You’re fundamentally misunderstanding how prices work (as does the vast majority of people, including journalists who report on these things). The price of anything is dependent on one thing alone: how much someone else is willing to pay for it. Any improvements you made might entice someone to pay more, but if they don’t care about the things you changed, they won’t pay for them and therefore the changes didn’t add any value.
If people are willing to pay 30% more from you doing nothing, then the value still went up simply because that’s the definition of value.
Indeed, this is the goal of rising rates: asset repricing downward. Some people will stay put because they locked in a low rate, but motivated sellers will set the comparables going forward. As long as someone sells, the market will perform price discovery.
You're still competing against the other people who are in your similar economic circumstances. The reasons that you got outbid today aren't going to get dramatically better when you and millions of other people now have a 20% downpayment instead of a 16% downpayment.
(This is the general you, not the specific you, of course.)
Higher interest rates will discourage the investor class from snatching up homes they don't intend to live in though. Not all of them of course, but the demand for living in homes is far less elastic than that of those using them to make money
Only if you kept the down payment in cash. All other asset prices are crashing as well, so if your savings are in stocks, bonds, crypto, etc your down payment has probably shrunk by more than home prices.
Sure, but "actively shopping for a home" is different from "waiting for prices to fall so you can afford one". If you'd kept your down payment in cash since the last housing bottom a decade ago, you'd have missed out on ~3x appreciation vs. putting it in an index fund.
and we'd likely have a healthy housing market if more people were rational like this.
But no, let's take a loan out against our RSU's so we can get a $1M bi-level because the schools in this district are amazing /s. Now a house in North Carolina is worth as much as one in New Jersey.
Given the choice, I would much rather live in North Carolina than New Jersey so that makes sense. Everyone I know who lived in Jersey at any point lived there because they had to, or because they were already established. Not because all things being equal they would choose to be there.
> $1M home at 3% interest(30year) = ~$4200 monthly payment. $800k home at 6% interest = $4800 monthly payment.
Over a 30 year term, your interest rate has much more impact on affordability than the purchase price does. 20% down is a drop in the bucket when your rate necessitates paying 1.5-2x the purchase price in interest because it's spread out over 30 years, especially at higher price points and at the edges of people's budgets.
You can refinance in a few years, however you cannot change what the house price was when purchased.
If the house prices is lower, every extra payment to the principal will drastically decrease the interest over the entire term, much more-so than the initial larger loan/principal.
if you have 20% now, you had 16% before and 3% mortgage rates. Now you have 20% and 5% mortgage rates or an ARM. ARM might work to lower monthly if you think Fed will chicken out and you are happy to pay refi cost.
Higher rates mean that the interest on that 20% cash that you would to give up is higher, so you are giving up the opportunity cost of having a a cash flow.
People need to live somewhere, you’re applying an efficient financial model mindset to someone who needs a roof and four walls. First time and new home buyers don’t care about the spread, they want a home.
Irrelevant. I'm just saying that interest rates determine the cost of borrowing money and the interest you can earn by having money, it does not really matter what you are borrowing money to buy.
Didn't they "bail on their communities" to improve their situation? Won't these people who stayed put generally be in worse shape to buy than those who left or those who left other areas?
And I'm sorry but people left communities which abandoned them, not the other way around.
Buying a home is a vastly overrated experience. Especially now with interests rates up, even with lower prices it's less sensible to buy now than a year ago. You shouldn't tie up your net worth in a huge illiquid asset.
I'd argue this is pure cultural bias. It's been beaten into our heads the home ownership is part of the American Dream. Owning a home felt to me like a massive burden. The house owned me more than I owned it.
Everything psychological has a cultural bias, that doesn't make it less real.
With who I am, from my culture and upbringing, it was near impossible to be happy without a home. I tried for 15 years without success. I grew up reading Walden and love building and improving things. I was never going to be happy in a rental without substantially changing my personality, and couldn't do so when I tried
I don't get that argument. Refinancing exists. If you can swing it, buying at peak interest rates is a great idea. All of those Boomers who whine about 18% rates from 1981—rates which by the way persisted for only 2 months—got the deal of a lifetime.
In addition to what jeffbee said, because when the rates go down, not only can you refinance, but also the value of the house goes up. (Because the demand side of the supply/demand curve is set by monthly payments, not by total value, and when interest rates go down, the same monthly payments can fund a higher face value loan.) So you get the lower payments and capital appreciation.
By the way, the same "increase of face value" is true of buying long bonds at peak interest rates.
Of course, the trick is knowing when the peak is. But if the Fed's actions have their intended effect, we may be somewhat close currently. (Note well: I am not an investment advisor! Follow at your own risk.)
You are very likely to get a lower rate after a year or two. Anyone who bought at that peak 1981 rate had refinanced to cut their payment by half within only 5 years. Even if they had refinanced after just 1 year, their payments were already 20% lower.
This analysis assumes that rates would decline from exceptional highs, which is implied by the phrase "exceptionally high".
A Boomer who bought a house with 10% down and a $56k loan on fixed 30-year terms at 18% in October 1981 was initially paying $844/mo but in 1982 they could have refinanced down to just $700/mo. By 1986 their home was worth a nominal $80k and their payment was potentially down to just $450/mo.
If you're a cash buyer and considering upgrading, it might be your chance soon. It's hard to make this work perfectly within life circumstances of course, but the ideal timing is to upgrade when the sticker price drops, and downgrade when it's high. Mortgage buyers are usually doing the opposite, since they're the reason the prices are moving in whichever direction in the first place.
We've still got a way to go to shave off the bloat of the past several years (my home value has gone up 50% since I bought it 4 years ago), but I planned on giving the market a good look in a year or so. A casual glance at Zillow in my area already shows several times the listings count from this time last year. So, it's definitely happening right now.
How is a scarce resource going to devalue in a high inflationary environment? The cost of building homes continues to go up, the availability of land has not changed, restrictive housing policies are not being lifted, wages are growing, the population is growing... Where does the decline in price come from?
Demand side prices can come down if lots are divided. But supply side profit remains the same or grows. High rates will not help first-time home buyers. More housing will.
You really need to look at real prices, rather than nominal prices. Housing is after all the largest component of CPI, which determines inflation.
Scarcity also does not guarantee value. For one thing, housing demand is baseline proportional to the number of people. Population growth is really slowing [1]. The decades of home price gains might mostly have been due to a population surge, which is ending.
Depends on if you mean in real terms, or nominal terms.
In nominal terms, guaranteed it will tank home prices, if given enough time. This is because trade involves two items, and it's entirely possible to make dollars more scarce than houses. I mean for hyperbole, it'd be impossible to sell a house for 300k+ dollars, if there was only 2 dollars in existence in the entirety of the world. Again, that was hyperbole, but the Fed raising interest rates and reducing their balance sheet, literally work to remove money from existence, and works to move us closer to that regard.
The first major decline in price will come from investors shedding inventory to "get ahead of the curve". The second will come from rentals being turned into owner-occupied.
I grew up an area with a lot of "vacant" housing. They are vacant largely because nobody would want to live there. After a year or two, they are uninhabitable and the cost to remove the place exceeds the value of the land. Lots of them ended up mysteriously burning down.
In the end, demand for "housing" seems pretty inelastic. I would think this would push a lot of would be home-buyers back onto the rental market, where landlords will capture the slack/gains.
… case in point, my apartment's rent is going up 10-80% YoY, depending on lease.
Even with the paywall in place, you can read the first sentence of the article which indicates high mortgage rates are driving the decline. People literally can't afford the monthly payments at current prices, now that interest rates are higher. Thats why prices will fall.
Housing isn't a scarce resource. If it was, there would be far more homeless people living on the streets.
What is scarce, however, is affordable housing. The problem with housing is indeed the artificially propped up prices which makes it impossible for people to buy new housing.
Btw, this does not counter the YIMBY argument, which argues that we can drop housing prices by making housing easier to build. Part of that would be by increasing supply. But another major part of the YIMBY argument is that if housing was easier to build, everytime a developer got an opportunity to build new housing stock in a desirable area, they wouldn't always need to go for the highest value, i.e. luxury housing, build. They could actually look at market needs and build affordable and/or starter housing.
Right now getting the right to build a property in desirable areas is a once in a decade opportunity, so they're willing to keep their built housing empty for many years, because they won't get a similar opportunity until much later, if ever.
That's the lifecycle that has been constrained - the affordable supply hasn't been happening because prices have been rising too fast (in the cities, but even in the 'burbs).
Here in Texas that means lower property taxes so I am excited about it. When your home value triples in 8 years due to no fault of your own I can stand for a reduction in what I pay the local government.
This would not be a problem if the entire US economy, right from nearly every tax incentive, to the schools you send your kids to, to the opportunities that are available to you and your kids, etc. wasn't based on home ownership and making home ownership the primary source of building starting wealth.
The other alternative is to find a high paying FAANG or finance job and/or starting a company. The former is available to a select few, and the latter also is built on owning a home, because many people who start companies will often find funding to start, maintain, and/or grow their company by taking loans against their homes.
Because, once again, the entire US system is built around rewarding home ownership, and so it's the only source of wealth building available to the vast majority of Americans.