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Comment by AndrewBissell | Hacker News Reader

The runup in real estate prices is fundamentally driven by the huge amounts of money printing by the Fed earlier this decade. The Bay Area has just been the canary in the coal mine on this because the strong job growth and self-injurious housing policies caused the price pressures to show up earlier than elsewhere, but it will become an undeniably nationwide phenomenon soon enough.

High real estate prices & rents are the price we're all paying for keeping JPMorgan & Goldman Sachs solvent during the financial crisis.

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Why do you need this indirect theory when much simpler numbers like the disparity between increase of population and lack of increase in housing units are available?

This would explain a lot, but wouldn't explain the general great performance of assets all around, nor seems enough to explain that this effect is global.

There is a consensus that 'everything is overpriced', its just doesnt look like it will have a hard correction.

Because there's not the same dynamic at work in other metro areas, like those cited, where real estate prices are also ramping higher.

Are you sure? Have you looked at population growth vs. housing growth in those areas, or how restrictive the zoning is?

Absolutely. Take a look at Sacramento's real estate / rental prices.

And the percent housing unit growth versus percent population growth is..?

And I'm pretty sure low density zoning is in effect in every city in CA.

Yes, Sac’s a great example of a city that is largely in line with housing costs versus median salary increases.

What's indirect about the link between money supply and prices?

It can't explain shortages.

If the price of one thing increases relative to the price of everything else (including the price of labor, i.e., how much you get paid) that cannot directly be explained by a money supply change. A shortage being caused by something else is a much simpler explanation.

True, shortages can be caused by a number of circumstances, including housing supply vs. demand. That said, approximately 2 Trillion of the 3 Trillion increase in the Fed's balance sheet over the last decade went to purchases of Mortgage Backed Securities (MBS). This had multiple effects, including: 1) boosting real estate prices by putting the Fed's fresh capital in competition with wage earners for real estate, and 2) supplying banks with 2T in capital that they could use for other purposes, for example VC investments in Silicon Valley. It's not just that the money supply increased; it's that the increase was targeted at house prices.

A shortage is supply vs. demand by definition.

Shouldn't real estate developers be able to make even more money on top of this by increasing the housing supply? Wouldn't the "banks" have cheap loans for real estate developers? This can't explain a shortage.

> A shortage is supply vs. demand by definition.

Capital dollars (from VC's) are easier to come by in SV than wage dollars. You prefer to think of the shortage as one of houses. I ask you to consider the idea that it is a shortage of wage dollars.

What do you call shortages in this context?

Simple shock to demand can create shortages if supply is inelastic(which it is on RE in general due to the length to put a unit on the market, and it is so in San Francisco with its constrained supply)

Because that theory allows the person promoting it to cling to an assertion that markets are perfect and never produce a bad result, and anything bad that does happen must be the fault of a government which got in the way of the perfection of the market.

Yes, if there are two things that have been driven solely by laissez faire market dynamics in this country, they're mortgage credit extension and the construction of new housing in the Bay Area.

I know this is not reddit, but I smell the charcoal from over here.

This is a lazy response. One can criticize a specific governmental policy without being an anarcho-capitalist.

Bingo. I do wonder why people insist on seeing house price inflation as being solely caused by rising value of houses - due to increasing demand, constrained supply ... kitchen renos? - without acknowledging the role of the falling value of money - increased supply via deregulated debt creation, artificially low interest rates and QE.

The capital gain on housing then becomes a self-reinforcing loop as capital seeks yield in a low interest rate environment, and investment flows towards these unproductive assets instead of creating productive capacity. Regular buy-to-inhabit buyers are dragged along in the cycle as long as they can obtain sufficient credit.

In a system like ours (the world's that is - I'm not American) where money is created when banks write loans, debt increases more quickly than the money supply (because debt has interest, money doesn't, and in a housing boom relatively little new real value is being created). So the debt can never all be repayed, and at some point there must be a financial crisis.

Unless this time is different?

I buy into the increased supply by the fed, but i falter to understand what the prediction on that model is.

As someone that worked in RE, housing has been sensibly overpriced based on wages since at least a few years ago and globally. But its also not clear it would crash, because housing has met genuine demand.

It's been 10 years since the housing bubble burst! (Except in constrained markets where it never burst. It's been 20 years of Fed printing money and pumping up housing prices.

I'm not necessarily pro-big banks, but JP Morgan and GS were two of the banks LEAST in need of a bailout. GS was short MBS at the time, so your description is .

Those MBS shorts that Goldman Sachs held were with counterparties who couldn't have paid up had they not been bailed out. The same goes for JPM and their monstrous derivatives book, which would have lost enough value to make them insolvent many times over in the absence of a bailout.

The idea that these banks were perfectly healthy is a lie propagated by bailout apologists.

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