House prices surpass housing-bubble peak on price-to-rent ratio
stlouisfed.org
stlouisfed.org
[0] - Which is gatekeeping/charging for land (finite natural unimproved resources like space, spectrum, water, wildlife, oil, etc)
We have a land value tax here in Australia which doesn't apply to owner-residents. That said, most places are excluded.
Owner-occupiers do pay land tax in Australia — local council rates are effectively land taxes as they are based on the unimproved value of the land (but they often include stormwater and waste charges as well).
Housing prices will eventually mean revert like they always do. However, interst rates are so low right now that it still can make sense to buy now.
One thing that should not be overlooked is the basic economics of supply and demand.
Right now the supply is extremely low compared to much of our historical data. This at the same time as demand has been red hot (due mostly to Covid). Check out the data below, especially over the last year.
https://fred.stlouisfed.org/series/MSACSR
We are seeing the same macro level forces impact the used car market. In that case, the supply is off ~30% due to rental car turnover being nonexistent.
Tip: hire a UHaul instead. Much cheaper.
I see everyone recommending this, but the U-Haul's I'm used to charge per mile so watch out for this if you're planning a roadtrip
There should be all kinds of incentives for first time home buyers. But it should be made very expensive/very painful from second home onwards. I don’t care that I can’t afford a luxury car or overpay for Google stock. But it annoys me to no end that the so called “investors” (not just rental companies but small time landlords too) buy properties with the sole aim of jacking up the rent and pushing first time buyers out.
Housing is not a luxury, it is a basic human need. People can own a hundred Ferraris for all I care, but there should be some sane policy on letting individuals and companies own entire neighborhoods and blocks.
Along the same lines, Bill Gates owns 242,000 acres of farm land. What for? I don’t know. It is just plain ugly to let someone own huge lands, water supplies (there are companies buying up large water sources) etc. This amount of monopoly on basic human needs is just bad.
I know this is an unpopular opinion here, as many HN readers see real estate as a way to get rich and likely own rental properties themselves. But across the world, in many urban areas, there is severe housing shortage (artificial in most cases, and houses sit empty because “investors”, see Canadian cities for example).
On top of all this, most cities and towns have extremely unfriendly policies towards tiny houses. That is whole another level of unfairness.
How can you say this is morally right? It is all find and dandy for the Chinese buyers, but what of Canadians?
It’s mostly Canadians driving up the cost of housing. I mean, how many foreigners are buying in Winnipeg where prices are way up?
Oh wait...
Any taxes that you pay on your second home onwards simply gets factored into the rent and gets passed on to the tenants. It is just cost of doing business, nothing more. The tenants suffer, not the buyers.
But if every landlord's costs go up, then everyone's rent probably goes up, since the landlords are competing with each other.
But, yes, with relatively recent changes to the tax code, it's a lot harder for most people to hit the standard deduction and therefore mortgage interest is often not deductible unless someone has a higher end home in an expensive area.
A solidly middle class benefit would be cash given to the middle class. A benefit for existing home owners selling their homes to middle class buyers is a cash benefit given to middle class buyers. A subsidy for borrowing money is a benefit for the person lending money.
It’s not that the deduction went away, it’s that everyone got a bigger standard deduction so no need for the mortgage interest.
lol, how magnanimous of him!
The point of freedom is that it doesn't matter why he wants it, he's free to buy it if the owner chooses to sell it. There's a chilling implication in your stance that people should need approval for basic freedoms like buying land. That's how you end up with a dictatorship.
That escalated quickly. Nobody argued you need approval to buy land. We’re talking about purchasing thousands of acres of land, and exerting that kind of influence.
This is exactly a temporarily embarrassed millionaire example - you wanna buy yourself some investment properties, so you’re sitting here arguing on behalf of the richest man on earth.
Let me ask you another question - recently (2019 I think), Bill bought 14,500 acres of land for 171M in a single deal. 171M is pocket change for Bill. According to your logic, he can continue to buy farmlands across the country (because "freedom") with nobody asking any questions. What happens if he ends up owning half (or 75% or whatever) of all available farmlands? You want one single man to control your food supply?
He can buy all the Ferraris/Picassos/megayachts etc on the planet, that would make zero difference to anyone (except maybe other billionaires). It is when he starts buying water sources, land etc it becomes a problem. It has nothing to do with dictatorship.
Normal people don’t often buy 269,000 of acres of land, only influential people like Bill Gates can.
If someone is making that claim surely they can clarify exactly what too much is and why.
How do you expect anyone to take this suggestion seriously? How do you expect actual policy to be set without clearly defined boundaries of acceptable behaviour?
But hey, you seem very sure of yourself. Do you think there is any amount you consider too much?
Will every single private transaction be subject to scrutiny by some sort of administrative panel that takes into account the current holdings of the prospective buyer?
It's curious to me that there is such a visceral opposition to Bill Gates owning some farm land in a place neither of us have ever heard of when he has so much more direct power over all of us through Microsoft.
I don't think that there is a specific quantity of stuff that is too much stuff for one person to own. I think that there are issues with wealth concentration but I don't think it's absolute.
The issue isn't that one person owns a lot of stuff the issue is that one person owns a lot of stuff while most other people own nearly nothing or are in debt.
There are alternatives to every Microsoft product. Comparing vital resources like food/water supply etc with a computer operating system makes no sense.
I don't think anyone is proposing any laws here, at least not yet. Simply pointing out the fact that one individual is in the process of amassing insane amounts of a vital resource which will result in him having insane influence on something as basic as food. You seem to be more concerned about causing a minor inconvenience to someone with crap ton of money (if and when some laws are enacted) than the risk of one individual having power over vital resources. Already some 80% of meat in US is controlled by 3 companies, 50% of seeds are controlled by one company and so on. The situation is only getting worse.
I am going to stop arguing. By all means, please support billionaires with hideous monopolistic past/insane amounts of money and let private, unelected individuals influence policies etc if that is what you believe in.
For example, Larry Ellison's island in Hawaii, vs rural undeveloped landlocked farmland.
It is amazing that you're arguing in support of a billionaire with a monopolistic, predatory past. He might be doing good things today, but he is also a big supporter of companies like Monsanto. He also has the arrogance of influencing things his way using his money, even when a majority of people/voters don't agree with him. Here is an example : https://www.prwatch.org/news/2016/04/13085/charitable-plutoc...
I do not know if you are arguing in good faith at this point. No single person, especially an unelected person, should have as much influence as Bill has. He is just one example. There are other super shitty examples. At least Bill is doing some good, there are other billionaires that are much, much worse.
Also, that’s nearly 12k per acre for every acre, even the ones you can’t farm. That’s a very good price, hard pressed to find a farmer who wouldn’t sell for that.
I dunno? Maybe to grow food?
Seems similar on the west coast where I live now.
By my back of the envelope calculations, 3000 acres of good farmland would cost around 15 million easy.
https://extension.umn.edu/farmland-rent-and-economics/farmla...
You can take out a mortgage against your own 401(k) for your first home.
You can use a VERY low down payment loan (like 0% in some cases) for your first home.
Tax rates are lower in many places for homeowners than renters -- in Boston and Somerville MA, this comes out to a pretty substantial tax credit.
If the government wanted to help buyers, they could just give them cash and/or increase supply of housing in the in demand areas.
This helps noone short term because the banks just pocket the subsidy, and long-term it just drives prices even higher.
Rental yields on residential property are around 3% in most of the UK, which is roughly where interest rates are. This means landlords are now entirely dependent on leveraged price appreciation to make a decent return.
Many landlords have already sold up because the returns no longer justify the hassle or risk (bad tenants, rent arrears, etc).
Of course, one advantage to having your wealth in rental properties is rents are usually linked contractually to some measure of inflation.
And we pay = we MUST HAVE A PLACE TO LIVE.
Easy to fix = make an income property subject to business taxes in addition to the usual real estate taxes. All the small retail shops pay business taxes as well as realty taxes. Make it a law that increased business taxes can not be passed to the people who live there. Exempt people who rent rooms in their own residence. This would kill the spread and make houses affordable again. Of course powerful corporates vesteds would whine away = WGAS for them, the people need this racket to be broken NOW.
Agreed. While not immediately intuitive, this is unfortunately very true for all taxes that are imposed upon institutions, corporations, investors, etc.
I wish this is something that could be fixed in a fair manner…
EDIT: typo
But indeed, when you negotiate a higher salary, your employer pays more taxes. And this cost is passed on to the end-users of your employer’s business.
A great example is Apple/other electronic products in the EU. They’re just straight up 30% more expensive, which is approximately the extra taxes they incur in EU vs USA.
This includes higher VAT, taxes, and even labor/payroll.
My suggestion to apply a business tax to the rental of each suite IN ADDITION to the real estate taxes is to make corporations have a greater burden than a person living and owning it to create a disadvantage to the corporation to offset the rent seeking aspect whereby corprations can borrow large sums, pay the spread and have the tenants pay for their equity gains. This has driven property values for a 2 bedroom home to $1 -2 million and in essence makes ownership impossible.
If you think that would raise rents by a huge %, I don't think so, as it would be completely impossible for people to pay.
If set properly it'll be impossible for large landlords to pass those taxes on to tenants, because they'll be undercut by smaller ones and buyers who just want a place to live.
It also added trillions of dollars of government borrowing without creating offsetting trillions of dollars of production in the economy, leading many to worry about an uptick in inflation. As inflation fears increase, borrowing money and buying productive or hard assets makes an increasing amount of sense.
Five: record low interest rates are here to stay so borrowers can pay more up front for the same payment.
It's a high demand low supply time so prices increase and interest rates don't have much to do with that.
This doesn't tell the whole story. Low interest rates don't make people offer 150k over asking while waiving all contingencies. I'm closing on a home soon and I saw this kind of stuff. I myself went 25k over with all contingencies waived on a condo in a 100 year old multifamily building. Relatively speaking, I was quite lucky to get this condo for this cheap.
There's a legitimate demand here: people, like myself, who renewed a lease on a tiny apartment shortly after the pandemic started then spent a miserable year indoors. Informing each other of your meeting schedule so you aren't loud in the kitchen while your partner is presenting in a meeting. Wishing your relaxation space wasn't the same as your work space.
I'm now roughly doubling the square footage of my living space, adding a garden and a patio. I'm thrilled. And yeah, I'm paying a million bucks for it.
Paying above offer always struck me as strange. In my housing market its very common as well, to the point I believe under-pricing the home is intentional. There's no reason the home should be priced considerably below the market price. Sometimes you get it wrong but homes consistently selling above ask tells you the sellers are under-pricing intentionally. The upside for the seller is that bidders enter blind bids where the top bidder could bid significantly higher than the next highest bid.
I think systematic under-pricing could happen when prices increase a lot in a short period and it takes the brokers a while to adjust their pricing as the trend becomes more clear. But it could also be cultural to a market where brokers feel comfortable under-pricing homes to encourage a bidding war, but that obviously doesn't work in all markets.
As for waving contingencies, that's just another form of incentive in lieu of cash.
Partially because you comp against recent sales in the area to determine market rate, it takes a while to close so the comps you have available are usually a few months old, and the price moved a lot in a few months
This happened to me multiple times. Recent sales as late as January suggested X could win this house, I put in an offer at X+15, I'm later contacted that there's an offer at X+50 and I can put another bid in if I want to one up them
Of course in this example X is already over asking so you're right I think that this is done intentionally.
I would disagree with the part about the bidding war. Purchasing works more like a blind auction. Everybody puts in one bid on the offer date. Often buyers agents will avoid situations that can turn into a bidding war, and I got the sense that shopping offers (by sellers) is considered bad form among agents and can lead to reputational damage.
Imo widespread underpricing has more to do with getting eyeballs on Zillow, Redfin, Trulia, etc. People set list prices to show up in searches.
You don't need to be a citizen of this country in order to buy our land? Just money, and a email will buy a house.
The federal government could stop some of the insanity of buying a home, if they just made it a bit harder for foreigners to buy our land?
Isn't the federal governments purpose to put Americans first?
Also would this have any affect outside of places like Manhattan?
You could campaign to change that, but since it goes strongly against the free market and countries like money it's unlikely to go anywhere.
I fully empathize with how you feel, and I see the same sentiments in various countries. But I think it’s important to not bring the immigrant straw man into this discussion, when it is easily shown that the problem is much much larger than that. Institutions and investors are the real perpetrator, not an immigrant middle class.
The only other country I've specifically looked at, Mexico, only has restrictions on non-citizens owning land near coasts or international borders, for the vast majority of the country anyone can buy land.
And because getting the % deposit is a big factor in whether you can afford a house, it pushes lower income people out of the market.
And if you bought in 1980, the high rates kept the lid on prices. However while you may have started with the same payment but the rates have been steadily ticking down since then. Creating a massive generation gap between those who bought while rates were high and those who didn't have the opportunity.
And I am sure this is only one of the factors in housing affordability but in my fairly uneducated opinion it seems like the largest.
Median downpayment is 6%, a common low end is 3%, some places and programs go lower. Median house price sold in 2020 was 347k, well over 25% of houses sell for under 250k [1].
So, for a starter home, saving 3% of say 200k is 6k. If someone can pay this mortgage without killing themselves (30%, say 4%, monthly payments ~1K) then they can save a 6K downpayment over a reasonable time. So downpayment should not be keeping many people out of homes that want one that can afford a mortgage.
If their income is so low that they cannot even afford a mortgage, then yes, they are pushed out of the market, but there is no way they could enter anyways.
[1] https://www.census.gov/construction/nrs/pdf/quarterly_sales....
Not if they are paying rent - there would be no surplus every month to save.
IF someone is so on the edge that they have zero extras, then they should not get a mortgage, because they're one hiccup away from losing it all.
This is why I put in the phrase "without killing themselves."
And, if you want to save that 6K mortgage downpayment, downsize life by a little - it really is not much to do. If you're so poor you cannot do this, there are federal programs to assist.
Again, this is a non-issue for pretty much every person that is also capable of paying a mortgage.
I am surprised at how crazy low those US ratios are. Thats just bonkers.
So, what a lot of people do is either just eat that extra cost (for lower cost homes, it more or less comes out to the equivalent of an additional 0.8-1%) for the life of the loan, or refinance out to a conventional loan once they're below 80% LTV.
There is also the shady case of the 80/20 Mortgage. Basically, you take out one 'primary' mortgage for 80% of the home's value, and then a second mortgage or HELOC on 20% of the rest.
This can in some cases be cheaper, but arguably goes against the whole spirit of PMI in the first place. (Not saying I don't have issues with the way PMI/MIP works...)
And in the US, below 20% you get an extra insurance called PMI.
Sounds like the two countries work the same because money works the same.
Here in the UK you can't even get fixed rate mortgages of more than 10 years and all of those require substantial deposits.
>20% down is where the best interest rates are.
Most people are on variable rate deals or short term (2 year) fixed deals.
Median house prices in the UK are something like 8x median incomes, and banks will only lend a maximum 4-5x earnings. This means average Joe need to save something much closer to 3/8ths, not 5%
As a real world example based on my current circumstances:
- At rough ballpark property prices, with ~15% down, market mortgage rates are about 3.5%.
- At 3.5%, with most I am comfortable paying every month (about 40% more than my current rent), I can only borrow around ~60% of what I need to buy the kind of home that I want (and rent now). On paper this means I have to save 40%.
- However, reality is somewhere in the middle. If I have 25% to put down, mortgage rates drop dramatically to 1.5%, allowing me to afford the same home.
So the long and short of it is you realistically need 20-25% here in the UK.
Over the life of a loan the interest portion is negotiable while the principal payments are not. A buyer in improving financial circumstances can accelerate payment on the principal and avoid future interest payments. The buyer could also refinance if interest rates came down.
Interest payments in the US were also tax deductible while principal payments were not. This preserved some purchasing power early in the mortgage when interest dominated the payment. Renters can deduct both interest, depreciation and upkeep while homeowners can only deduct interest. Lower interest rates skew the market more towards renting versus buying.
The result of lower interest rates is that today’s buyers are making a very different financial bet then buyers over the last 50 years. The only option buyers have to avoid payments on principal is to default. They won’t be able to accelerate repayment and reclaim future purchasing power like previous generations did.
For those that think buying a house is a good hedge against inflation, it is worth considering that the best tool to combat inflation is to raise interest rates. And considering most buyers budgets are created by working backwards from the monthly payment that they can afford, higher rates naturally translate to lower prices.
And as you alluded to, in a rising interest rate environment, there are no more "escape hatches" for folks that might be struggling to make ends meet. In a rising rate environment, refinancing is off the table, selling might be off the table if you are underwater on the mortgage, etc...
I have been waiting for an opportunity to buy for quite a while now. It has always felt like our household income was a few ticks too low to comfortably afford anything but the dregs of the market. And as our pay increased, the market would rise another 20% and slip out of reach again. And right now I am seeing a few niches in the market that might work for our budget, but the interest rate situation has me spooked, so once again, I am leaning towards sitting this one out. I guess on the plus side, I can buy cryptocurrency at a 100-1 leverage ratio which was something that wasn't available to my parents generation!!!
Big second order effect of a potential housing crash: There's a non-negligible part of the population that uses their homes as their own lines of credit. As their home increases in value, they occasionally will do a 'cash-out' refiance of their property. Or will open up a HELOC. If the market tanks, people who rely on this tactic will find themselves in a crunch quickly.
If you're willing to spend a minute or two on me, please say so.
You can email me at mac@quartyard.us
or message me on twitter @mac01021
or we can go off topic and talk right here!
One specific circumstance of the UK is a tax break introduced last year to incentivise home buying. Beyond that, as others pointed out, some shared causes are more people on the market for a new home due to the pandemic, and historically low interest rates.
[1] https://www.theguardian.com/business/2021/may/26/value-of-uk...
There are other factors at play.
Bonus depreciation rules from the tax cut and jobs act. Real estate investors can depreciate 100% of an investment within the first year until 2022.
Low interest rates. Borrow money cheaply now and secure cash flow later.
Interest only financing. Financing schemes that allow investors maximum leverage. More leverage means more buying.
All together the current market is tilted heavily toward real estate investors. Unless the tax law changes, I wouldn’t expect things to fundamentally change until 2025.
https://www.apartmentguide.com/blog/apartment-guide-annual-r...
'The following cities have experienced the biggest increases in one-bedroom rent prices year-over-year. None of them make the 10 most expensive markets for one-bedroom apartments by rent prices. Three of them — Gilbert, AZ; Buffalo, NY and Durham, NC — have populations of 300,000 or less.
Kansas City, MO (+33.5%)
Gilbert, AZ (+26.0%)
Las Vegas, NV (+25.3%)
Riverside, CA (+24.9%)
Buffalo, NY (+23.3%)
Columbus, OH (+22.1%)
Durham, NC (+20.0%)
Detroit, MI (+18.6%)
New Orleans, LA (+18.3%)
Virginia Beach, VA (+15.3%)
Goodbye.
The next Fed chair will have no choice but to pull a Volcker
You are not owed anything. You have a shot at an offer. That is it.
No, increasing the supply will do nothing, speculators already own most of the available real estate so that will only drive the prices up further. Look at the number of single family home that are being bought and immediately rented out, in new construction the renters far outnumber the owners.
Until speculation is banned or the government locks in reasonable prices, prices will continue to rise in perpetuity.
I'm not sure I see the problem. People are living in the property one way or the other. It's not like there is some infinite pool of renters not living someplace who will absorb any supply.
What would be (and is in some places) a problem is if speculators/people parking cash bought property and let it sit empty.
I don’t see why only parked properties are a problem? Rentals are always more expensive than the underlying mortgage - that’s what makes it an investment opportunity. This is a big problem since most people could’ve afforded the original property if they weren’t priced out by investors.
the mortgage could have been locked in a long time ago at a much lower valuation. the rent would still be above the underlying mortgage, but that doesn't mean I would have bought the house when I was a child.
the landlord might own the building outright, or the valuation might be increasing so fast that the rent only needs to offset the rent. either way, the rent could be pushed below the mortgage (or what the mortgage would be).
there are some us cities with extremely high price-to-rent ratios. some of those properties must be renting for below the underlying mortgage.
This doesn’t change my point that renting needs to be profitable to happen, and the proof is in the pudding/reality.
Never?
Second, just because those houses from 2008 recession are now worth more than in 2008 doesn't mean they have been steadily increasing in value since 2008. There have definitely been downturns in the property market. One in particular that springs to mind is the impact of Brexit on house prices in London. Sure, eventually the price might recover to the point that homes are worth more than pre Brexit. But if you are trying to sell in the meantime that drop can have a significant impact on your ability to move.
If you can find anywhere housing prices are less then in 2008 please say so.
The Brexit thing is just guesswork on your part those properties will be sell at the same prices they were listed at probably nobody actually purchased them in the first place just for speculation.
Certain regions of the country are hot, certain regions are nowhere near. Even the differences in the regions of the US where house prices are rising exhibit a wide range from many areas only experiencing slight changes to others in the hundreds of thousands of dollars.
It depends if your region has the amenities people with money are looking for or if it has access to large numbers of high paying jobs.
You can argue the real/nominal value, but housing cost are a cause of inflation in this regard not an effect, all prices are relative to the price of shelter for individuals.
How old are you?
https://www.nytimes.com/1981/08/17/opinion/housing-boom-goes...
1981: > A word to the wise: The great Los Angeles housing boom is over. The real estate price explosion in southern California, which sparked a national boom still continuing elsewhere, has stopped. The bubble that everyone said could never burst has burst. All over Los Angeles and Orange County, home buyers can buy a property for less than it would have cost a year ago
Of course, prices recovered. Just in time for the 1990s!
https://www.forbes.com/sites/johnwake/2018/11/02/the-next-ho...
> In real prices;
Boston didn’t get back to its 1987 peak until 2000 (13 years);
New York didn’t get back to its 1987 peak until 2002 (15 years);
Los Angeles didn’t get back to its 1989 peak until 2002 (13 years);
San Diego didn’t get back to its 1990 peak until 2000 (10 years); and
San Francisco didn’t get back to its 1990 peak until 1999 (9 years).