Another U.S.-Wide Housing Slump Is Coming
bloomberg.com
bloomberg.com
Now there are pools where arbitrary supply constraints have created massive price increases above inflation (SF, NY) but those markets are historically the ones least affected by a downturn anyways. With that in mind, it's clear that in SF and NY the price of housing is tied to the economic productivity of the area, and frankly, the chances big tech is going to cut pay is below zero.
The dot-com bubble only took 10% off the average house price in SF. The 2008 mortage crisis took 27% over the entire time period -- which was followed by an 88% increase. [2]
[1] https://www.supermoney.com/inflation-adjusted-home-prices/
[2] https://www.bayareamarketreports.com/trend/3-recessions-2-bu...
Inflation as we talk about it colloquially is supposed to measure price changes of the same thing. Like an apple. What actually happens in most discussions is that we measure wildly different things and then say 'look, prices changed'.
Not just have homes gotten bigger, the heating and cooling is better, they're safer, they're equipped with more amenities etc. My grandparents didn't have a shower, but went to the communal bathhouse once a week. My parents didn't have central heating in one of their homes.
I see the same discussion in healthcare. Life expectancy in many western countries grew by 20-30 years since the second world war, which is a radically improved outcome which proxies health throughout life, yet we are shocked this outcome is much more expensive than before.
College is trickier, there's tons of inflation there and you can wonder if education really improved. By some measures, it worsened, by some it's much better. What's clear however is that educational attainment has never been higher.
That's not to say there's no inflation in any of these areas. But rather that it's much more nuanced if corrected for some values.
There’s been more than 300% increase in the last thirty years. How much better off are we health wise than 1990? 1945, sure, but 1990?
Seriously:
Life expectancy Cuba: 79.18 years.
Life expectancy US: 79.11
Cuba is a poor example because it prioritises health over everything else. That's not a value judgement, rather that it's just an outlier. If you mandate in a dictatorial government that people should be doctors and work for a humble salary, then of course you'll see good healthcare outcomes for little money.
This isn't true for much of western Europe which doesn't have a single-payer model. Subsidies and regulations are more abundant than in the US, certainly, but for example everyone where I live in western Europe has to pay out of pocket for insurance premiums and deal with deductibles, etc.
Your article begins with: "Wealth and health are correlated because greater wealth can buy better health care."
Wealth is not the only way to obtain good health outcomes, Cuba has a ton of doctors and they don't get paid massive, overwhelming salaries. Just because they don't get paid outsized amounts doesn't mean they're bad at their jobs.
Based on all the OECD charts, there's very much a point of diminishing returns re: spending on healthcare and outcomes -- and very much so re: life expectancy. [1] It's pretty clear that spending 8X as much money didn't make people live 8X longer.
[1] https://ourworldindata.org/the-link-between-life-expectancy-...
The corollary is of course also true, which is that healthcare has improved due to many interventions not typically financed through healthcare costs / insurance. e.g. public health campaigns to stop smoking.
> My grandparents didn't have a shower, but went to the communal bathhouse once a week. My parents didn't have central heating in one of their homes.
So what are you saying? In 2008 people started throwing out their showers, and a few years later they built in jacuzzis with disco lighting, and that explains these wild swings?
If you look at median home sales prices in the US in general however, you get this picture (just compare the peak of 2007 till today):
https://fred.stlouisfed.org/series/MSPUS?utm_source=series_p...
I'm not seeing an 88% increase. Now if you correct that picture for median household income in the US, for the same period:
https://fred.stlouisfed.org/series/MEHOINUSA646N
You'll see, income-adjusted home prices haven't shot up that much since the last peak.
Then you have to contextualise further, and look at interest rates. After all, you're not buying homes in cash. For almost all of us, when we 'buy' a home, we're really just signing a rental contract for cash (a loan), and our housing costs consists of servicing this loan, the mortgage payments. The principal sum matters of course, which went up as prices grew, but so does the interest rate, which is at a historic low and responsible for the prices growing. You can't just ignore interest rates.
So if you actually look at monthly payments, which is by definition corrected for interest rates, and correct that for income increases, really what we talk about when we say 'housing costs', really isn't anywhere near the record levels usually talked about in the media, discussion forums etc.
And THEN you correct that for the larger homes etc.
Now I tried to give a longer historical perspective of price increases for a few generations beyond mine, but if you want to nitpick that and make a joke about jacuzzis, fine by me.
My point is that if we break down what a 'change in housing costs' really should mean, we typically want to talk about:
income-adjusted, monthly (periodical) cost for a square foot.
What we tend to do is: ignore the fact our incomes rose greatly in nominal terms, yet express increases housing in nominal terms, ignore interest payments dropping for decades reducing the costs to finance these homes, and then ignore the fact these homes have doubled in size in the post-war era and typically have much better amenities.
And that's not a fair representation, I think.
One of the links you posted goes from 1963 to 2018, the other from 1984 to 2019. Not the same period. For the record, comparing the values for 1963-01-01 and 2018-01-01 gives an increase of 2.8x in median income and 4.2x in median house price sales. You're right that other things like amenities and house sizes might factor into this in some way, but I doubt that explains everything.
It's especially interesting to note that median incomes from 2007 to 2008 did not decrease, and only decreased about 2% from 2007 to a local minimum in 2010. Yet house prices decreased by 19% from a local maximum in Q1 2007 to Q1 2009. You will find it very hard to argue that that had something to do with a very sudden shift to smaller/less well equipped homes.
I find it a lot more likely that the main reason is speculation. Yes, including speculation related to interest rates.
It actually does, the link I provided shows the average square footage went up 50% from 1600 sqft to 2400. This accounts perfectly for the difference you cited (4.2x is 50% larger than 2.8x).
> It's especially interesting to note that median incomes from 2007 to 2008 did not decrease, and only decreased about 2% from 2007 to a local minimum in 2010. Yet house prices decreased by 19% from a local maximum in Q1 2007 to Q1 2009.
Not sure if you heard there was a mortgage crisis with tons of defaults ravaging neighborhoods. Macroeconomic conditions were responsible there. The entire market for lending and consequently for housing broke down.
The article at https://www.supermoney.com/inflation-adjusted-home-prices/ talks about the sizes of "new homes" that have increased in this way since 1979. But the median price increases seem to take into account all home sales. If most homes sold are not "new", then the comparison is invalid. For example, if 80% of homes sold in this period were not new, then "total square feet sold" only increased by 20% of 50%, i.e., 5%. Indeed it is an easily observable fact that the prices of old houses and apartments go along with general price rises in an area. Without the old house's size changing.
> Not sure if you heard there was a mortgage crisis with tons of defaults ravaging neighborhoods.
I did hear. And this showed that at least 20% of a home's sale price is not determined by its value as measured in units of surface area. Rather, it's a vulture economics seller's market in which prices are determined by what people are able to pay for a necessary good, not by what is a fair price for that good.
Yep, good point.
> And this showed that at least 20% of a home's sale price is not determined by its value as measured in units of surface area. Rather, it's a vulture economics seller's market in which prices are determined by what people are able to pay for a necessary good, not by what is a fair price for that good.
IMO what it showed was that house prices are dependent on people's ability to obtain financing, and when the financing market ground to a halt, people weren't able to obtain the leverage necessary to sustain the price point. That doesn't mean anything about the intrinsic value of the home, IMO.
2008 is not a good example because there was fundamental, structural problems in the market facilitating such transactions. I think the dot-com pop was a much better comparison because there were no structural issues fundamental to the market but rather a drop in desirability.
I doubt this. It is not like Google/Facebook are not affected by the market downturn. When recession comes, advertising is the at the frontline to be cancelled.
Unfortunately, a buyer can't get a 33% discount by only buying 66% of the house.
I think we both know you can :) you can either buy a larger house and portion off an in-law unit, which you can then rent. You could buy a smaller house. You could even build on a fresh plot of land.
Wouldn't that make it even more expensive to buy the larger house? You have to get the larger mortgage and pay to remodel the home on top of that. Plus I'm pretty sure there can be zoning restrictions on turning single family homes into multifamily buildings.
> You could buy a smaller house.
If what you claimed is correct [1], then that implies that smaller houses are relatively scarcer than they were in 1978, and thus harder to find. Just "buy a smaller house" isn't actionable advice if the houses available to buy are larger.
[1] The price per square foot has stayed constant adjusted for inflation, and the price increases are due to houses "getting bigger."
I immediately knew that within the next few months rent would drop a ton, because this management company had never given a single shit about us previously, and I'm sure they're only offering this to lock in another year for everyone.
The sick dynamic of governments trying to increase the cost of housing is largely because ownership is so widespread. As much as we like to talk about the political power of deep pocketed corporations, that pales in comparison to the political power of homeowners when they are more than 65% of the population. Bring that number down significantly and we might see a much more reasonable policy environment.
On the other hand, "human flourishing" is unlikely tied to real estate. Real estate is an investment vehicle, and one that is pretty broadly indexed to inflation on average in the US. It's often the case that renting somewhere cheaper will leave you economically advantaged as compared to ownership. I'd suggest playing with the variables on the New York Times rent vs. buy calculator from a few years back [1]. Owning is by no means a "clear win" but rather part of the American wealth-building narrative.
[1] https://www.nytimes.com/interactive/2014/upshot/buy-rent-cal...
The only satisfying thing about the pandemic is before the it hit our companies new landlord told us he was raising the rent to $4/sqft. We've just scored a better for us place a block away for $1.5/sqft. We're taking one of his other tenants with us too.
I hear you but owning isn't a solution to that for most people. When you take into account the interest on a 30-year fixed-rate mortgage, HOAs, property taxes, homeowners insurance and 1% per year in repairs/upgrades, and periodic remodels. As a renter you're on the hook for none of that.
A 1-bedroom 700sqft apartment in downtown SF rents for ~$3750 in my building.
It's worth about $840K. You're out:
- The opportunity cost on a $168,000 investment.
- $2080/month in interest.
- $870.00/month in HOA fees.
- $83.33/month in homeowners insurance.
- $1260/month in property taxes.
- $700/month saved up towards your 1%/year repair bill.
That means you're paying $4700 per month in what amounts to rent, and you're setting aside $1000 per month in principal saved in the first year. Once you deduct those from the salary you need to afford it in the first place, we're talking right around what rent would be.
In general, especially in these areas, not only are your PITI payments really, really high -- rent tracks all-in expenses. Basically the cost of renting an apartment is approximately what the non-recoupables would be owning, for much of the first decade of ownership.
As the return on investing that $12k will be so low (in dollar terms), it is perfectly rational to own if you believe the condo will increase in value by even a little more than 1.4% per year. And as our government goes out of its way to prop prices up, that seems like a safe assumption over the long term.
That’s the major difference between stocks and homes. In the first case the government sharply limits private lending, in the second it has nationalized the industry and subsidizes it significantly.
(1) renting doesn't necessarily automatically have to put you at a disadvantage to owning (so long as you're investing what would have gone to principal) as there's a lot people forget to factor in.
(2) house prices per square foot on average are the same now factoring in inflation as they were in 1970 and
(3) house prices in major metros are governed not by anything other than artificial supply constraints imposed by city councils acting on behalf of landowners to the detriment of renters. They are unlikely to change substantially as a result of this financial ... hiccup.
That's the problem. Real estate can't perpetually be both affordable and a good investment.
all of this amounts to textbook deflation. those with debts to service (mortgage, auto, student) are going to be feeling a lot of pain in this environment. good news is gov’t just needs to print money to bring nominal prices up.
bad news is there’s no free lunch for young people hoping to buy homes. imo wages are largely going to move in unison with home prices.
The coronavirus is one of many of paths to an ugly slump. The level of debt is a story in itself; it is a creeping horror that comes to a head suddenly at difficult moments. Somebody is expecting money to come to them that is not going to.
[0] https://en.wikipedia.org/wiki/National_debt_of_the_United_St...
It's a bit like someone talking about his salary as an amount, without specifying whether it's per hour, per year, per minute, in a world where the unit of time is constantly changing. That'd be completely meaningless.
Fact is that interest rates reached levels between 10-20% in the post-war era. Today they've reached 0-3%. Higher debt levels aren't necessarily a problem if interest rates drop meaning debt servicing is low, and inflation mitigates rising nominal debt levels meaning debt in real terms stays low.
I'm not saying that debt is not a problem at all, but that it's completely taken out of context by looking at nominal debt figures rising. Even if you express debt as a percentage of GDP, you're still missing interest. Debt servicing as a percentage of GDP isn't at particularly high levels.
Second, we must consider what the alternative is: less debt the past decade, or decades, would've likely meant we'd see a deflationary cycle, inhibited investments, research, development and growth. As long as there's a bail-out for the 'reasonably' losers of systemic crises (which is not trivial, but mostly feasible and which we're seeing now), the use of debt the past few decades has probably been a net benefit.
[1] And yes, I understand that the US govt cannot default on debt since it can simply print more dollars. But private lending is also very low interest historically, and even the US might "default" in other ways such as having runaway inflation.
It's not a small gap (with various factors leading to it), but it's not like millennials don't own anything or previous generations even owned mostly at that age. (But the data is not the most recent, so actually previous generations might have had more than 50% ownership at that age in the US)
But getting started with ownership in urban areas? Next to impossible without financial assistance from parents. 500k minimum for a 3 room/60 m2 is the ultimate lowest of the low you'll get in Munich. 10% downpayment is 50k plus closing costs of 35k (17k taxes, 17k realtor) which means prospective owners have to save at least 85k (and better 100k to account for moving costs, furniture, repairs)... which means that if you want to own an apartment at 35 you have to save 10k a year beginning with 25 - and no one I know here in my age group can put aside 900€ a month, not with regular rents gobbling up 50% or more of your paycheck!
And... even with 1% interest rate you'll end up with 1.100€ mortgage payment at least plus hundreds of euros a month in HOA fees (if applicable, usually only in condos/bigger private developments), insurances (fire, weather, ...), some emergency fund for issues such as heating or renovations), that is next to unaffordable.
I can't say much about my friend group, as we don't talk about buying houses often. The few I talked to have an even split between the ones that want to buy (or just did) and the ones that don't even want to, even though we're in an income segment where it would be affordable.
I was surprised to find that home-owner rates in Germany have been quite low compared to other countries, but I couldn't find data before 2005 (it was 51-55% overall). It's really interesting to look into these kinds of things!