Ask HN: What is the main argument for a housing market crash? | Hacker News Reader

Ask HN: What is the main argument for a housing market crash?

8 pointsbestinterest17 comments

It seems to be a pure supply and demand issue. Are we less efficient at building houses due to red tape? Or are houses being inflated for another reason which will cause a crash?

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My assumption is that once rates go up significantly, then people won't be able to afford the current prices. Especially since most of the recent wage growth is t the bottom end of the income spectrum, meaning the middle class might even see their wage value eroded through this inflation (for example I got a 4.5% cut due to inflation).

I highly doubt this is going to happen, prices are not going to go down in my opinion, especially in desirable coastal areas. I would almost bet on mortgages being extended past 30y just to keep the monthly payments possible than housing prices going down significantly. This country (US) is too obsessed with housing, and the demand will always outpace the supply.

How did that work in 2008?

Every area will be slightly different, but I don't think it's realistic to say prices will never go down. Over the long term it will continue to increase, but there will be periods of volatility.

I've made the argument that rates cant go up without significantly affecting how much the US pays on it's outstanding 30T debt. This keeps rates low, housing prices at the very least stable, and inflation pervasive. I'd love to hear a counter argument.

The Government is not a monolith. The rates are driven by the Fed decisions, and the Fed is subject to a congressional Act that establishes a dual mandate (inflation and unemployment). The Fed does not care about the budget deficit, or at least not in a direct way, as they care about the inflation indicators (like CPI). The US Treasury does not care about the deficit either. They simply have to enact what the Congress says. If the Congress is ok with a $5 trillion deficit per year, the US Treasury will raise the required debt at whatever prevailing rates are out there. The Congress does not pass the budget bill in a vacuum, they start with a proposal coming from the Executive.

So you have 4 actors, the Fed, the US Treasury, the Congress, and the President. Only the first one can manipulate the rates, and that one has only an indirect interest in how the long term debt of the Government looks like.

Why does the debt prevent rates from going up? The Fed as already signaled an appetite for increasing rates multiple times this year.

Personally I liked these two videos on the current macro economic scenario that the Fed is currently facing: https://www.youtube.com/watch?v=ka_tLlJt-NU https://www.youtube.com/watch?v=jpdSR5AdgwI

Strongly recommend everyone seeing this comment watches these, as I found the information very enlightening as someone who heavily invests and is not too well versed in economics.

Can you give us an executive summary for why the debt would prevent rate increases?

I have a bit of economics background, but generally try to stay away from YouTube investment videos with titles including stuff like "Red Alert".

Agreed it may be off putting but he is an experienced financial investment banker and former CTO just playing the youtube game. His argument is that basically the Fed is going down a rough path right now and they don't have a lot of good options due to the massive debt. Raising interest rates just 1% adds 300B to their payments. Where is that money going to come from? Options he lays out: 1) Higher taxes (bad idea for a host of reasons) 2) Cut from other budgets to pay it (Military, Medicare, etc) 3) Go back to printing more QE basically creating a cycle of printing money forever as interest rates go up over the next few years. This will sink the value of the dollar.

Also he read Ray Dalio's new book where he talks about long term debt cycles (ones that span ~70+ years) where governments basically need to restructure their debt because it has gone out of control. Nobody is old enough to go through stuff like this so he says most people are unaware of this possible macro scenario. This is Ray Dalio's opinion though and he has been wrong before. But if this comes to pass it will _crash_ the market and drop around 5% of GDP. Great financial crisis was 2.5%. The Fed has some important decisions to make and if they mess up real badly the US might just get a devalued currency, get less foreign and bond investment and eventually (this is extreme) be replaced as the reserve currency.

So we will see how things go over the next 2-10 years. Again I would recommend watching the videos as he lays it out in more detail.

I think they intend to, but my point is I'm not sure they can raise rates with any significance. eg above 5 or 6% These a correlation between fed determined interest rates and how much the govt pays to service it's debt. Another person said they're not related, but I don't think the fed will want to balloon payments on $30T.

5-6% is still very hefty. I doubt they'll go above 3% this year. Some of the inflation is actually transitional, so it shouldn't be above 5% once that settles down over the next year. Those are all guesses, or based on professionals who have written stuff (who are also sort of guessing).

Aren't bonds sold at a fixed interest amount for x number of years?

In that case, why would a higher interest rate affect the ability to pay historical debt?

A lot of the Government debt is short dated, so it needs to be rolled. For example according to [1] (the official source), about $4 trillion of the debt is in T-bills, so they mature in less than 2 years, and about $13 trillion in T-notes, which mature in less than 10 years.

[1] https://www.treasurydirect.gov/govt/reports/pd/mspd/2022/opd...

Seems like a classical case of supply and demand.

Prices will match demand, no?

Not exactly. Most people require mortgages. The original owners might be underwater on their mortgage. People who can make it work generally aren't going to sell for a loss. The people who can't make it will be foreclosed, providing some affordable options but probably not enough.

So yes, prices will move with demand, but it won't be quite as simple due to the debt instruments involved. Essentially, prices will drop due to the lack of demand from a lack of affordable debt. Just my hunch.

So how do you feel about buying a used car right now? (i.e. buy one at this moment, after 40% YoY appreciation, because who knows what tomorrows price will be) And if it's not good advice for used cars, why is it good advice for a house? After all, there's a fixed supply of platinum for catalytic converters and they're not making any more of it!

My opinion is that the current housing surge is being driven by people who need more space for screaming children and home offices and are willing to pay whatever they need to for it. I know it's why my brother bought a house he thought was $250k overpriced - just to keep his wife happy during Covid.

These factors and the state of Covid WFH are, IMO, not permanent though. Time will tell. If we're never headed back to the office maybe these prices are here to stay.

"just to keep his wife happy during Covid."

If one needs to overpay a quarter million to keep the wife happy, implying house size is a factor in the quality of the marriage, then perhaps there are other issues to look at here.

But I do agree that some people were upsizing, moving out of cities, or just not wanting to delay purchasing for a few more years.

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