Home Prices Are Now Higher Than the Peak of the 2000s Housing Bubble
npr.org
npr.org
> The average price of American homes, in real terms, is now the highest it's ever been
Of course, you really need to be looking at mortgage rates to understand housing affordability: http://www.freddiemac.com/pmms/pmms30.html
July 2021 average 30-year mortgage rate: 2.87% (with 0.7 points)
2008 12-month average 30-year mortgage rate: 6.03% (with 0.6 points)
To put that in perspective, a $500,000 mortgage (excluding down payment) would require a $2,073 monthly payment today, but a $3,007 monthly payment at 2008's 6% mortgage rates.
In other words: Houses are still way cheaper, in actual out-of-pocket terms for average people, than they were in 2008. Today's interest rates are way too low.
EDIT: Updated with 2008 numbers, thanks to comment below
Compared to a 3% interest rate today, on a $300,000 loan that's about $700/month difference in payment, about 50% increase.
Housing prices have not increased by 50%. At these rates, they often still cheaper.
Also a conflating factor is if borrowers were perceived as riskier in previous years, but for whatever reasons, are now perceived as less risky.
Also, this is data is from a Freddie Mac website, so is it only for conforming loans? Could it be that many homes have moved up in price such that their mortgage information would no longer be reflected in this average from Freddie Mac because their mortgages are no longer conforming?
Houses in Seattle area are mortgaging for 1.2M. Property taxes are low.
Houses in NY are mortgaging for $500,000. Property taxes and interest rates are higher.
You shouldn't apply 8% interest rate from 2000 and think that it somehow is the correct rate when prices are 5x higher.
The real (inflation adjusted) median household income hit an all-time high in 2019. At $68,700 it was approximately $12,000 higher than 2012, and roughly 10-11% higher than the peak of the housing bubble. Incomes shot up rapidly from 2014 to 2019. For the people at the median or above, things have continued to be great in terms of income position (Covid didn't roll back those gains), as labor supply remains tight for most median pay and above jobs.
So if mortgage rates have declined considerably (cut in half), and we're just now back to home prices being inflation adjusted where they were during the housing bubble peak, and real median household incomes are also 10% higher, and the US household disposable income to debt service payment ratio is near decades lows, that leaves a lot more room for higher mortgage payments - which fully explains the upward trajectory in housing prices.
To understand if housing became more affordable you'd have to look at nominal income levels versus nominal housing costs.
Look at median income for example here: https://fred.stlouisfed.org/series/MEHOINUSA646N
That's a 50% increase since 2008. It's not the top 1%, it's not an average where the high-earners jack up the average. It's a median, the middle-earning person in the US, now earning 50% more yearly than 2008. Combined with much lower interest rates and consistently bigger homes, housing is much more affordable compared to then.
... which is itself an antipattern, just as it is for cars.
Therein lies the rub. It’s true that inflation adjusted average monthly mortgage payments have remained surprisingly constant over the last 40 years [*], since as you point out, low interest rates generally offset high home values (and vice versa). However, accruing enough cash in the first place to afford huge down payments keeps a lot of people out of the market who could otherwise afford the monthly payment.
As an aside, the quality of housing stock has improved dramatically over the last few decades, so that roughly constant average monthly payment actually buys a much better quality product today than in years past. I’m not sure how much of this is accounted for in hedonic adjustments.
[*] with the exception of the early 80s with its super high interest rates, and the housing bubble of the mid 2000s, with its super inflated home values without a commensurate drop in interest rates
However, if we took steps to make down payments easier (by lowering down payment requirements or through something like Biden's first-time homebuyer credit) then we're also pumping more money into the housing market. That will drive prices up again, further raising prices and making it even harder for future buyers to enter the market.
The only real way to push affordability down, long-term, is to build more. I'd personally like to see incentives targeted toward something like all-new construction (no tear-down rebuilds, only new houses where previous houses didn't exist).
Give people money to spend on new construction and the new construction will follow.
Firstly, the people with the most political power are not coincidentally those who would lose the most if housing prices decrease. NIMBYism therefore inevitably wins.
Secondly, building additional housing in regions that need it most (i.e. dense urban areas) would require dramatically improving public transit in those areas. The transportation networks of e.g. San Francisco, Boston, or even New York (which has by far the best public transit in the country) are already at a breaking point and simply cannot tolerate the influx of people more housing stock would bring. Sadly, I don’t think the US has the ability anymore to build large infrastructure projects at reasonable prices.
The tricky part is that home owners will knowingly defend the interests of real estate corporations because they want their own tax bill to be low.
In an economic downturn many people get stuck with a house that's underwater and unable to sell while also needing to look outside of the area for a new job.
Also, if your income (or family size) changes, its a lot easier to trade up (or down) when you rent than when you own.
Instead of mandating that everyone buy a house whether they want to or not, I'd rather see renter protections, particularly in capping rent increases.
Of course it could all collapse but I sincerely doubt it.
I assume "tear down 1 unit, build 5-10 units" is OK? Otherwise, what you're suggesting just leads to more suburban sprawl. There isn't room in SF, NYC, etc for infill development (from vacant lots) at the scale necessary to make a dent in housing prices.
I think that not a lot of people are well educated on homeownership and think that you need to have a huge down payment or an all cash offer, when thats just not true, and often don’t know about the benefits offered to first time homeowners by multiple levels of government.
Not sure why this is surprising. You can only afford a certain % of your income on housing, and if it gets too high you simply don't participate in the housing market
[1] https://wolfstreet.com/2021/07/27/most-splendid-housing-bubb...
The affordability is determined by monthly payments, which are a function of home price and interest rates. If home prices are up but interest rates are way, way down (which is currently the case) it can be possible that houses are still more affordable.
You have to consider home costs as down payment + monthly mortgage payment (+ taxes if you're getting specific) to understand affordability.
And a good reminder of how much exposure housing prices have to interest rates. To frame the same math another way:
If you bought a house for, say, $580k with a $500k mortgage... You paid $80k down payment + $20k closing costs and your monthly would be ~$2,073/month.
If interest rates go up to 6%, and the person buying your house also wants to pay the same ~2,073/month, they would only be able to afford a $344,649 mortgage. Assume the same $80k down payment and $20k closing costs... and they should be willing to pay $444,649 for your house ($135,351 less than you paid!).
Obviously with inflation the person may be willing to spend more than you spent! But there's a lot of risk for homeowners who need/want to sell if/when interest rates go up. That's why the 30 year fixed is such a fantastic bet if you are willing + able to hold and lock that fixed price... but housing is a pretty lousy investment if you need to sell.
In California, people generally buy the absolute most house they can possibly afford. Houses are extremely expensive and people don't want to live in shacks, so they stretch their budget as far as they can. Home prices in these markets are extremely sensitive to changes in interest rates, as you've described.
However in other markets, interest rates can wiggle up and down without having as dramatic an effect on prices, because livable homes aren't as expensive and people have more slack in their budgets.
In markets with lots of cash buyers, home prices may also be somewhat isolated from interest rate swings.
I'm not sure which markets are at the opposite end of the spectrum, but you could probably get a good idea by looking at the ratios between median household income vs. median mortgage payment in any given market. Households (currently) spending a smaller fraction of their paycheck to pay their mortgage should be able to better absorb some price increases.
According to this visualisation on Zillow[1], California is indeed the worst. The median household in San Jose would have to allocate 53% of their income to pay a median mortgage, compared to the national average of 17.5%:
[1] https://www.zillow.com/research/q2-2018-affordability-21286/
Interest rates have less impact on that price than houses that are priced at 10x annual salaries.
Because once the house is paid off there would be more equity for the more expensive house.
It is much harder to deduct interest these days with the higher standard deduction. Interest deductions on a cheaper house might only a few years unless you have something else going on with your custom deductions.
The equity aspect is also questionable. Cheaper markets are cheap for a reason, and while they might hit a growth spurt, it is far from guaranteed. A booming market with high prices might also continue to...boom even more. Anyways, the market is actually efficient, you can't find a loophole that everyone else is missing.
> In October 2019, the median mortgage payment would cost the typical American 18.21% of their income. Apart from a few months in the early 1970s and 2011–2013 period, homes have never been more affordable. [0]
>That's why the 30 year fixed is such a fantastic bet if you are willing + able to hold and lock that fixed price... but housing is a pretty lousy investment if you need to sell.
That's not necessarily true because if rates go up you can bet that property values would go down as home ownership would become less affordable. And if you bought a home for $300k and rates go up and now your home is only worth $250k, that's not a great value, because had you not bought, you would be able to buy the same home for less, although that might be offset with the higher payment
[0] https://mleverything.substack.com/p/buying-a-home-in-the-us-...
If interest rates rise, or something else happens that reduces the value of the property, then that $500,000 mortgage might be against a house worth less than $500,000. At that point people have to start playing chicken with the banks again, trying to mitigate the losses with strategic defaults.
It’s one of the few investments where:
* you can get a huge loan with a tiny interest rate
* you can actually enjoy the investment by living in it
* everyone around you is doing everything they can to keep house prices up and therefore keep your investment growing
I mean seriously, the only other option is dumping all your money in a stock market that you can’t touch and have no control over.
The biggest reservation I can think of with housing as an investment is that it's singular in terms of economic sector and geography.
With the market people can diversify, although there's no guarantee they will.
Being able to leverage a small down payment for a more valuable asset can also be advantageous or disadvantageous depending on what the value of the asset does.
Most municipalities will first establish how much tax revenue they need, then look at the total property values that's taxable, and then set an appropriate rate. If property values double but municipal expenses don't, they can and do lower the property taxes. It's not a 1 on 1 relationship but given average property tax income as a percentage of total income has slightly come down over the past decades, it's clear that tax rates are being reduced as property values go up.
Banks deciding they want to own more real property.
1) you still have to correct the nominal monthly fees for nominal income levels of households, roughly 50k in 2008 to 70k today.
https://fred.stlouisfed.org/series/MEHOINUSA646N
2) the monthly fees is not a full expense figure. A 30 year mortgage that gets paid off 100%, has 3.3% of principal paydown per year on average, versus 2.8% mortgage rates.
That means a good chunk of the mortgage payments are in essence savings, rather than money you'll never see again like interest.
That's always going to be true, but the share of your monthly fees that goes towards principal paydown (i.e., equity that is building up, money that you actually own) is now much larger, as the interest payments per dollar borrowed came down.
Interest on the first $750K is tax deductible, so you will see up to half that money again :)
11.4% of taxpayers itemized in 2018*
* https://www.irs.gov/statistics/soi-tax-stats-tax-stats-at-a-...
Only true for a small minority...Although your calculations are correct, its not how it works. What matters is average house price to income ratio and the Housing Affordability Index, that measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home, at the national and regional levels based on most recent price and income data.
There are also huge variations in housing markets, as they are also very much specific to local laws, regulations, job markets, and at the moment Europe is in a much worst situation than the US.
I like this definition:
"A housing market is defined by the ability of residents to reach employment by daily commutes. Generally this can be defined as a maximum 60 minute one-way commute time, while average work trip times tend to be about 30 minutes in most areas. Housing markets are thus also labor markets, which are also called metropolitan areas. In a well-functioning market, middle-income households should be able to afford the median priced house."
Its not as bad in the US as in the other parts of the world but its getting worst.
"Demographia International Housing Affordability" http://www.demographia.com/dhi.pdf
"Housing affordability has deteriorated materially in recent decades, which has been a principal factor in an internationally observed reduction in middle-income standards of living."
Its pretty bad in Australia
"Dramatic rises in house prices in Australia"
https://www.globalpropertyguide.com/Pacific/Australia/Price-...
Very very bad in UK:
"House price affordability at its worst in a decade"
https://www.financialreporter.co.uk/mortgages/house-price-af... https://archive.is/OGV5g
"UK house price affordability worsens over past decade"
https://www.ft.com/content/afead1e2-3143-11ea-9703-eea0cae3f... https://archive.is/G5zV3
Dramatic in the Netherlands
"Average Joe can only afford one of 5 homes in Amsterdam"
https://nltimes.nl/2021/08/20/average-joe-can-afford-one-5-h...
The other links I haven't all studied, but for example in the Netherlands where I'm from Amsterdam, the situation (and the article) is entirely not in line with your definition.
For one, jobs aren't all centralised around Amsterdam. The Netherlands has a concept of the Randstad which includes all the four major cities in the country, which all happen to be within a 60 minute commute from oneanother. All the little towns and villages within and surrounding this area comprise of about 60% of the country's population, again, all within a 60min commute. It's thereby silly to look at the housing market of just Amsterdam, when the majority of the country lives in a close commute from jobs centres and doesn't need to live in Amsterdam. Note that from the centre of the country, the closest border (of the country) is 57km away and the furthest border is 175km away, that's how small this place is. It's misleading to look at prices of a single capital city and ignore the fact most of the country lives around the corner with prices that are <50% of that place.
But supposing we look at Amsterdam, the article then makes a crucial mistake by comparing a single Dutch person to an average Amsterdam house. Since when is a single Dutch person an average Amsterdam household? The average household in the Netherlands has 2.2 people, so you may double the borrowing capacity. And second, Amsterdam's owner-occupied homeowners aren't making average money because they've got Capital city above-average jobs. If you live in Amsterdam as a home-owner, you're exposed to jobs that pay far more than the average joe jobs outside the capital. The average income is about 55% higher (see CBS figures).
In short you're looking at double incomes which average 55% higher in the average Amsterdam owner occupied household, or 3x the income. Given how the borrowing capacity works here that translates to about 3.5x more purchasing capacity than the article mentions.
The article also fails to differentiate between average income in the Netherlands (which includes people on welfare, people without jobs, students, people who work 20 hours a week etc) to average full-time salaries, which are typically the group looking to buy a home.
One thing people often fail to acknowledge is that when a claim is made that X is unaffordable, that the fact prices are so high actually may signal the opposite. The fact home prices have increased by hundreds of thousands despite borrowing rules not having changed much, means there's actually a lot of demand at these prices. If nobody could afford these expensive homes, prices would've come crashing down. There's been a record amount of homes sold in the Netherlands last year, the majority of the country is home-owner, and LTI and LTV rates have been trending down the past years (indicating people are actually using less and less of their borrowing capacity).
Why do you think this?
False. Actual average people are making significantly less today than they were in 2008. Their buying power is therefore also significantly less too.
Median household income is greater than it has ever been.
> Actual average people are making significantly less today than they were in 2008.
This is simply not true. Median household income is greater today than any time in American history in real terms.
There can be other reasons that homes are not affordable, but the average person making less than in 2008 is not one of them.
I understand that the price of a stereotypical suburban home is well out of reach for many and this isn't great and should be worked on in a smart way. The middle class has continuously been hammered for many reasons and it would be healthier for America for this to be improved dramatically and better for individual communities for people to have a real stake in the well-being of the area.
Just to throw a few devil's advocate points into the mix, I believe a full and complete economic analysis may show that the price per SQ foot of residential living space per person may actually be about the same or even less than it was in the past. I think some variables that need to be considered are the increasing sizes of homes, the decreasing average family size (many siblings in the past had to share bedrooms, which I believe is far less common today), and inflation, among others.
I don't disagree generally, but one niggle: housing prices do effect downpayment sizes, which may be a problem for people to save for if prices get too high (relative to wages).
Adjusted monthly payments are the cheapest they've been since 1989:
* https://awealthofcommonsense.com/2021/03/what-if-housing-pri...
Though, there's a lot of bidding so good luck actually landing a purchase to take advantage of these low monthly payments:
* https://awealthofcommonsense.com/2021/05/has-there-ever-been...
I have been patiently waiting for the next "bubble" to pop, even as my realtor insists that oh no, we're not really in a bubble, this is just the new norm.
Surely this cannot continue forever, right?
I know this guy, and he's not smart. One of the stupidest people I've ever met actually. Washed his clothes with dish soap stupid. He bought a house 2 years ago with less than 10% down and he's got equity totaling more than 150% of the value of the house when he bought it. Even monetary inflation aside, if an investment can bring windfalls to anyone who can fog up a piece of glass, something isn't right in that market and it isn't sustainable.
There's an anecdotal indicator, but housing prices are rising significantly faster than monetary inflation and population nationwide, that's pretty good evidence for a deviation from fundamentals.
The reason for price increasing is always supply curve of the house you might want is not keeping up with demand curve of people with more money who want that house.
There are lots of places in the US with house prices that are stagnant or increasing much slowly than elsewhere. But that is because there is lower demand.
First sentence from wikipedia:
>Capitalism is an economic system based on the private ownership of the means of production and their operation for profit.
How does this predicate "on the idea of perpetual and infinite growth"? I mean, it'll be nice if the economy grew infinitely, but I'd still want to invest my money into production even if that didn't exist.
So, it's not "nice" if the economy grows, it's an absolute requirement to keep investors interested.
"The single most important question in investing this year is whether the rampant inflation of the moment is temporary, as the Federal Reserve believes, or marks a historic shift. I argued last week that we are on the cusp of a major change and long-run inflation is now more likely."
https://www.wsj.com/articles/if-inflation-is-coming-here-is-...
Central banks target positive inflation because of the inability to cut interest rates below zero.
The math does not check out. 1.03^16 = 1.6, not 2 like you'd expect if it was "double".
Moreover, inflation only necessitates that the money supply grow infinitely, not economic activity and/or resources. If we doubled the bank balance of everyone overnight, and the price of everything doubled, that's not really "growth" in any meaningful sense.
Suppose we've reached a point where the population has stabilized and all natural resources were being used at the sustainable rate. What production would you be able to buy? Would the current owners sell it to you? Would you be able to accumulate enough capital to induce them to sell?
Obviously the definition of capitalism doesn't include "perpetual growth", but it does seem like a reasonable extrapolation about the world. At the time capitalism was defined, indefinite growth was realistic, and easy to assume axiomatically. I'm not sure what capitalism looks like if that assumption fails.
I'm also not sure what it looks like for that assumption to fail, since "production" also includes creativity which isn't limited by natural resources. You can always invest in new books, video games, etc which are effectively unlimited.
Or I'd invest in games/movies/art. People are always interested in something new even if the plot 3000 years old.
We might be able to guarantee infinite creativity... but will you be able to invest in it? If you're not the one writing the game/movie/novel, why would the artist permit you to invest and reap the benefit of their creativity?
Until recently, you could gain that power by owning key industries: the cinemas, the advertising agencies, etc. But those middle men are increasingly squeezed out; what would you offer that they can't get elsewhere? They'd cut your marginal return to the bone by playing you off against other people who have money to invest but nothing of their own to invest in.
In the best case, the resources would be distributed well enough that you could write your own novel, or whatever creative project, and not care about who will pay for it. In the worst case, you could find that all of the money ends up in the hands of a very few, who would out-compete you for any investment opportunity that arose.
AAA games are expensive to make, so are blockbuster movies. Even for non AAA/blockbuster movies, you'd still need some sort of financing. If UBI isn't a thing you'd need to finance your living somehow, which limits you to working part-time or requiring a substantial savings fund. novels might be fine, but you'd still might want a publisher for an advance or PR.
See Japan? They're doing fine without growth.
Economic growth does not imply consuming more resources. Developing a more fuel efficient car is also growth, for example.
> Developing a more fuel efficient car is also growth, for example.
One of the major economic concerns about electric vehicles is that they have fewer moving parts and maintenance requirements, and might cut auto worker jobs in half.[1] I don't think the article got into numbers of job loss in gas stations, oil production and distribution, etc. So the most fuel efficient car possible may prove to be bad for growth in general.
> Economic growth does not imply consuming more resources.
Technically true, but in practice, if your product is not 100% recycled and 100% carbon negative to produce, you'll need to extract more of the earth to sell it.
I will say that with some industries like meat production potentially moving to vats and away from farmed animals, there is a possibility. But you also have to consider the economic damage of eliminating cattle farmers, farm vets, slaughterhouses, meat packing, etc.
[1] https://www.nbcnews.com/business/autos/electric-vehicles-pos...
That is simply wrong. If you cure cancers, you save human lives, which is worth a lot of money. You are basically falling for the broken window fallacy - breaking a window is like somebody getting cancer. You think the economy benefits because lots of doctors, nurse, undertakers and whatnot get business out of it. But you are wrong.
"Technically true, but in practice, if your product is not 100% recycled and 100% carbon negative to produce, you'll need to extract more of the earth to sell it."
Another fallacy to think the economy only consists of producing things. Also you have to think longterm - sometimes it can be worth it to replace old things with more efficient things, sometimes not.
The country that spends the most GDP per capita has the worst outcome for life expectancy of any industrialized nation[1]. There is no inherent monetary value to a human life in the capitalist system, as the data clearly demonstrates. The most ideal scenario in a for-profit healthcare system is to extract every dollar possible from each individual until just before they die, regardless of how old they may be at that time.
America does one better, and debtors can pursue the children of the deceased for certain medical bills in certain states.[2]
> Another fallacy to think the economy only consists of producing things
You can't consume digital goods without a physical computer. You can't get a service that is magically free of dependencies on infrastructure or electricity. There's certainly a scale of environmental sustainability, but you're always dependent on something in meatspace.
[1] https://ourworldindata.org/grapher/life-expectancy-vs-health...
[2] https://www.thebalance.com/debts-from-the-estate-of-a-deceas...
This does not imply the quality of the medical services is to blame. One issue of the US could be that people have too much surplus (the US is the richest country of the world), so they can eat a lot and get fat (they also have cars and don't have to exercise). Obesity then shortens their lifespans.
"There is no inherent monetary value to a human life in the capitalist system, as the data clearly demonstrates"
That's just stupid. I bet even the US spends a lot of money on protecting lives, for example install bridges and traffic lights. There is an established science to calculating the value a society assigns to human lives.
"You can't consume digital goods without a physical computer. You can't get a service that is magically free of dependencies on infrastructure or electricity. "
If a doctor saves your life, you have "consumed" his service. Maybe saving more lives would consume marginally more resources. But that also is not a given, as for example the production of medication can become more efficient. Look at the price of penicillin, or at artificial insulin. Iirc in the beginning insulin was extracted from tons of animal livers, a very wasteful process that has been replaced with something much more efficient. So now you can save more diabetic people at a fraction of the energy.
What is needed is a money system that lets the economy grow as much as is sustainable, not 3% per year because that is what someone wrote into a contract 20 years ago.
Growth does not mean that things get better. Growth means that things get more. More is not always better. More humans, for example, seems to destroy habitability of the Earth. Is that better?
You can have 2 classes: property owners and non-owners.
The property owners have real estate that they can sell or collateralize to purchase different or additional real estate. This is why, for example, current California owners have no problem buying in e.g. Washington: even if a house in both places were $1billion*, they can just trade.
Obviously, non-owners may be priced out, but this doesn't affect the owners, and they, as a class, can ask for any amount to transfer the ownership.
TL;DR: In musical chairs, so long as there are no new chairs produced and nobody on a chair is forced to stand, there's no ceiling on the asking price for a chair.
*Neglecting transaction costs.
If it's your primary residence, you can't trade one from California to Washington because you would have a large tax bill when selling one. You can't even trade within California itself. If you bought a home for $500k 20 years ago and now discover it is worth $2M, you cannot even trade your $2M for a different $2M a few blocks over. You would have to pay taxes on a $1.5M gain.
If instead the home s an investment property which you rent out (which have higher interest rates), then you could do a 1031 exchange.
And this person with the $2M home in California can, even after taxes and transaction fees, recover their original investment, plus have enough left over to e.g. buy a $1.5m home in cash, or a much higher priced home with a mortgage?
Suppose you haven't worked for the past 20 years.
The inherited low property taxes always seemed pretty egregious to me (almost like an aristocracy of landed wealth). The whole thing is pretty dismal, honestly - I'm not opposed to low property taxes, but a tax regime where people pay vastly different taxes on similar properties causes all kinds of problems (and is fundamentally unfair, in my opinion).
Much of the change to the law, though, was driven by real estate agents who want to increase transactions. The previous law preserved low property taxes as long as elderly people didn't sell and left the house to an heir. Now, people 55 and and over can sell repeatedly without increasing their taxes, and there's more incentive for heirs to sell the house. That's as much was 4 commissions where there used to be none.
Supply and demand. There are way more people that want to live in these places than houses available. And we keep making new people every year.
That said, prices will change. SFH owners move once in a while. Even if you live in the same house for 50 years (about the max possible given human lifespans), someone else on your block will move every few years. When someone moves a developer will look at the location and decide if it is wroth buying the house for the lot, tearing down and building something else. Right now in the Bay you could buy a lot of SFHs, tear them down, replace with a 10-plex and rent it out for enough to make it worth it. (Assuming zoning codes would allow this without a large cost over the cost of labor and materials) Eventually though housing will catch up and rent will fall until it isn't worth it.
We can't prove the above because of course zoning codes won't let you do it.
That's like the saying "government bonds are 0 risk." It's usually true, til it isn't.
These problems with housing costs in these cities absolutely will make the cities less desirable, I think we will see a large deurbanization period in north america very soon and you'll see most of these cities that are constricting supply of housing crumble like Detroit.
Not banking on that.
And if it does, we've entered some kind of new era for the haves and have-nots. :(
Unlike any other investment a home has direct utility for the buyer as shelter. You should buy what home you can afford and don't try to time the market. You are much more likely to end up worse off by waiting.
Here's a hypothetical scenario for an SF home: A home that would have sold for 1.7m in 2015 blows up to 3.1m today, then the supposed bubble "pops" and it drops over the next year to 2.5m. Then over the following 5 years it recovers to 2.8m.
At no point was it a good idea to wait. Buying in 2015 was the best move. Buying today (at the supposed top of the bubble) only loses you 300k, while waiting to purchase cost you up to 1.4m. Buying post-pop costs you at least 800k, far more than you'd lose buying at the peak. All while paying rent instead of building equity.
Waiting for a bubble to pop assumes you have excellent timing, you invest $(mortgage - rent), that investment gains enough to offset the dead weight loss from paying rent, and that the pop is so catastrophic that home prices revert to the mean... all while this catastrophic scenario doesn't hurt your income/investments such that you are well-placed to take advantage of the pop (as opposed to laid-off or suffering from 50% losses on your investments).
I tripled my investment when I sold last year, but I would probably have done 3.5x now... lets see what happens next year. The wood prices went back down a lot, at least: https://ns.reddit.com/r/HomeImprovement/comments/p7rfsq/ever....
The moratorium on evictions (due to COVID-19) still lingers on. When it once and finally ends, things will change.
Companies switched to remote work, allowing people more flexibility in where they could live, and giving them fewer expenses. Those companies will either 1) Require their people to switch back to in-office work, or 2) Start to ask why they need to hire US workers in high cost-of-living cities, when remote world could be done from countries with far less expensive employees.
In either case, you'll start to see people shifting where they live, either because it's no longer practical to live in that area, or because they can't really afford it.
So hold tight. I can't tell you exactly what all the changes will look like, but things will certainly change, soon.
Of course, the very low rates, high construction costs, demand to leave cities, and various other factors also come into play. However, yesterday I was very surprised to learn that the eviction moratorium that is preventing landlords from selling their properties is actually an order from the Centers for Disease Control. When and why did that organization get that sort of power?
It is being litigated.
> Five justices — the three more liberal justices, plus Chief Justice John Roberts and Associate Justice Brett Kavanaugh — supported keeping the moratorium in place. However, Kavanaugh emphasized in his appended statement that he agreed to continuing the moratorium only because it was about to end. As a matter of law, Kavanaugh wrote, he thought extending the moratorium further was unconstitutional.
> Biden said on Tuesday he had sought out constitutional scholars to determine the CDC’s legal authority and “what could they do that is most likely to pass muster constitutionally.” The “bulk” of the scholarship reviewed by the White House said additional action by the CDC would not pass muster in the courts, Biden said, adding that there were some “key scholars” who said it could.
https://www.politico.com/news/2021/08/03/eviction-moratorium...
The bulk of constitutional "experts" said it wasn't constitutional. He found one or more that didn't agree with that assessment, so he went with the few against the majority.
https://www.supremecourt.gov/opinions/20pdf/20a169_4f15.pdf
The actual text of the ruling is simply: "The application to vacate stay presented to THE CHIEF JUSTICE and by him referred to the Court is denied." The additional wording that follows is simply Kavanaugh's personal feeling on the matter which for now doesn't carry the force of law, as well as several judges lamenting they would've vacated the moratorium if they had the votes, which they didn't.
(Note: I happened to agree that Biden should not have extended the moratorium. And it may yet prove to be that he will be overruled by the US Sup. Ct., but that hasn't happened yet.)
https://www.nbcnews.com/politics/white-house/trump-gives-cdc...
Even I, an average Joe, pay the minimum payment on my mortgage and invest the rest. It would be foolish to pay it off early.
New construction is temporarily extremely expensive due to supply chain issues. Prices of everything from lumber to copper are (or were) elevated because COVID shut down factories and supply chains.
New construction is still happening, but it's slowed down and expensive for a short while.
There's a secondary problem that the new construction is happening in the suburbs and outskirts where there's still land available. Meanwhile, the trend is to move toward city centers and popular areas, where housing prices continue to climb.
I don’t have data, but if there was a market where this is happening less than usual. It’s this market
Edit: edited to include year
This report from Brookings [1] titled "The Washington, DC region has built too much housing in the wrong places", lays out a strong case for what is happening in my general geography. All politics aside, this is very accurate anecdotally as all the major housing developments I know of were fairly distant from work. We have housing going up, but not in the right place for the employees. Had colleagues commuting > 90 minutes one way for work, pre-pandemic. COVID changed all that for the better.
Before getting married, my wife & I rented individually, and our combined housing expense (mortgage) for a medium sized TH in a good neighborhood is fairly close to our rents, previously. This is thanks to the low interest rate environment which has increased affordability despite the higher prices.
[1] https://www.brookings.edu/research/the-washington-dc-region-...
Fredburg to DC isn't quite so bad - at least there's commuter rail and slug lines. But exurb-to-suburb commuting should never be something that's encouraged.
And FWIW, we downsized to a TH to be closer to work. Couldn't be happier. I now walk to work; my wife cycles. We're in walking distance to all local schools. And a short bike ride to dining and shopping. I don't know why more people don't do the same. The house cost was in the same ballpark as the single-family we owned previously.
People talk about adjustable rate mortgages and such from the last bubble, and these sorts of thing played a role and helped nail in the people at the bottom, but they aren't what caused that crisis. Turning a market for an inelastic utilitarian asset into a speculative market is the fundamental cause, everything else is just an instrument of that perverted market.
In the Sunbelt, I see homes getting bought all cash by the wealthy and retirees (with some or all contingencies waived), driving up values beyond what income driven mortgagees will support. When asked how long this can go on for (by people who, naively, believe this to be a repeat of the 2008 housing bubble and are waiting on the sidelines to acquire property either as a home or investment), I respond "Until that wealth is depleted."
Go look at current and historical prices of homes (as well as appreciation rate velocity) in Dallas, San Antonio, Houston, Tampa, Orlando, Miami, and major North Carolina metros (as well as parts of Western North Carolina such as from Asheville to the NC-TN border) to see this. Rents are no better [1].
[1] https://www.bloomberg.com/news/articles/2021-08-18/housing-h... | https://archive.is/VGtt4 (Bloomberg: Landlords From Florida to California Are Jacking Up Rents at Record Speeds)
Also inflation is not necessary for people to act like it will happen. You may see investment firms looking to 'park the cash' into something they can just borrow against. Not enough inventory to cover that would make the problem worse. It is like the oil crunch a few years ago. We had plenty of oil. The problem was not enough oil to cover real usage and speculative usage at the same time so prices went up.
So if (when) more inventory happens. Then you will see a decrease in price. As that could spook the investor crowd and cause inventory to grow. Something akin to what 2008 looked like could easily happen. It will not be the same cause but the effect will probably be similar.
The rental market in these cities is in an unprecedented state, with hundreds of applicants for each of the precious few listings.
People with money in the bank are finding nowhere to live.
It’s obvious that high home prices are supported by inflation, low interest rates, laws, birth rates, nimbys, prop 13, AND speculation. And more in concert.
A “no, it’s really this one thing in isolation…” argument is not realistic.
It's obvious that the the initial post didn't agree with that proposition.
>Pedantry does not persuade. It’s the whole point of the technique.
It wasn't pedantry. It was half the content of the comment.
I really hope this technique isn't being popularized this way. A person doing this outside of very specific brainstorming-type processes reads like a person willing to lie or say whatever in order to get agreement (even if they won't stick to it).
> The average price of American homes, in real terms, is now the highest it's ever been
I bet if you adjust by the price of SPY as inflation instead of CPI you'd get a different story.
The argument is that booms and busts tend to be caused by a real change in fundamentals that people then become too optimistic about.
For example: people knew "super-star cities" (SF, Seattle, etc) were going to attract more capital and jobs than other cities, so in the 2000s they piled into investments in these areas. However, they were so optimistic that they overshot, causing a bubble that ended in 2012.
That they overshot, however, does not mean that there were not real fundamental changes that made these cities valuable. So these super-star cities, even though they had a real-estate crash, did really well because the fundamentals kept being in their favor from 2012-2020. Places like Vegas did not do as well because the fundamentals are not as favorable there (fewer high-paying jobs, more space to build).
The question now is whether we are seeing a real estate mania in response to the idea of working from home. Prices in the suburbs have shot way up. Are people over-estimating this change? Perhaps, and if they are, it means that the suburbs could face more of a bubble popping than the city. But it may also mean that if WFH becomes a long-term trend, that even if prices collapse more in the suburbs (after having shot up in a frenzy), that we may still see a permanent shift in equilibrium between being in the city and in the suburbs.
So, if you believe WFH will be a long term, real fundamental shift, you may want to buy up some suburban places when, and if, a bubble pops in those markets.
Interesting. Clearly an uptrend.
Skewed supply and demand does not a bubble make.
You must look at how many people have cash in their banc accounts to cover mortgages if the stock market dives 50% and rates go up 2~4%. Can that generate a cascade of foreclosures?
https://ir.firstrepublic.com/static-files/1a464a0b-9396-4bd4...
In 2008 we even saw people pro-actively defaulting because they didn't want to make payments on something that was worth half of what they paid.
I'm not predicting any of this, but it is a possibility.
The narrative of 2008 has made lots of people believe that it was improper risk assessment, but the cycle of leverage and asset price fluctuation is the core mechanic and it acn easily repeat itself.
My comparison would be as if I took a "low/mid/top end tv" in 2000 and compared it with a "low/mid/top end tv" in 2021. In that case, it is still about the same price, especially adjusted for inflation.
And 11% was vastly better than just 10 years or so before that.
ten years after the 8800 GTX, I bought a 1080 ti not long after launch for about $650. that card is more than 2000% faster, for roughly the same inflation-adjusted price.
It’s okay to hire an Indian fresh off the boat (with a visa) to code at Facebook (probably after an older or more expensive domestic worker is unhired) without a license but it is unthinkable that say public school teachers face the same competition.
e.g. housing: https://awealthofcommonsense.com/2021/03/what-if-housing-pri...
This is just general apparel, of course. Likely prices have dropped due to cheap factories that have higher production capabilities and sweatshops.
Unlike many past peaks this time it actually feels like there is a fundamental change that supports the increasing prices.
I guess you could say quantitative easing was not unprecedented in human history, but it was unprecedented in the USA.
QE basically buys the bond off the bank and gives the bank central bank reserves. It increases liquidity and that is about it. The bank doesn't own the bond it sold, it owns a claim to a small portion of the bonds the central bank has on its balance sheet. It doesn't have to buy the same bond back. (the same way you can use your borrowed money to repay a different debt). It helps banks get bad debt off their balance sheet but in no way does it encourage people to borrow more money.
Even if the numbers analyzed are inflation adjusted, the article doesn't explain in what proportion are those prices higher than in the 2000s. If a house value was 60% up before the bubble bursted and then house values crashed 60% you have a baseline which is the deflated prices after the burst.
> The average price of American homes, in real terms, is now the highest it's ever been
Inflation is really an indirect measurement of the rate of change in a currency's value. It usually is approximated by sampling the price of a "basket of goods", including labor, real estate, and other commodities. If the prices of those goods are going up, overall, we have inflation.
Sometimes, though, the prices of some things are going up and the prices of other things are going down. In that case, it can be hard to discern between "the value of this good is increasing" and "the value of the money spent on this thing is decreasing".
In the current situation, we have both inflation (by some measures at a ~5% annual rate) and shenanigans in the real estate market (to some extent related to very low interest rates for mortgages) that are causing prices to rocket.
Take into account that salaries are not rising at an equal level. This may be correcting itself: "minimum wage" jobs are paying near/over double to get employees. If this wage increase is temporary homes would be way overpriced. If it is not temporary "white collar"/"blue collar" jobs have to increase their salaries to be competitive; which would allow property values to stay or rise over time.
Increase new home supply. Given that the demand is extremely high and home supply is limited there will likely be an increase in new home supply. On average it will take a few years before new homeowners develop some equity in their homes. During those years are where new homes have a really good market. This would lower the value of homes faster. Especially in states that had the most migration during the pandemic.
Something that negate everything and allow house prices to sore is the upcoming wealth transfer from the boomer + gen x wealth transfer to millennials. This will hurt a lot of minority communities as they didn't have the time to develop as much wealth(segregation being a big hindrance for black communities, and a large of first generation unskilled immigrants who's kids are now starting to improve the situation). Ultimately, this may lead to a larger wealth gap which can destroy a lot of things and how civilizations fall.
Let me leave it with this: Millennials and Gen-Z are going to be living in very interesting times.
I know it is a bit seasonal and all and anecdotal but prices are stabilizing in several TN areas where it was growing XX%, we'll see I guess.
Eventually we could get a voting shift where sufficient power is held by people priced out of owning, which could result in improved housing policy. Those eventual changes will be calculated to not disrupt the market, though.
So, a bubble? Once the "overoptimistic" part kicks in I fail to see how there's any substantiative difference between the two scenarios. All markets grow on fundamentals til they don't, and when they don't you have a bubble.
Sounds like people creating distinction where there isn't any to justify their "this is fundamentals" position. The article is a whole lot of noise about nothing.
We are currently in a housing bubble, 100%. Add on top of that massive monetary inflation. To what degree the prices reflect the housing bubble or the increase in money supply, I don't know. But I do know the best thing that could happen is the bubble pop, because the alternative is much much worse.