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Comment by seibelj | Hacker News Reader

The price of the average house in the USA is based primarily on the government-guaranteed 30 year fixed rate mortgage. For a given interest rate and income, the house will cost exactly the maximum amount of loan the borrower can get. Banks no longer have any skin in the game - they go through a massive checklist, gather tons of documents, and once they can fulfill their legal mandates they immediately approve the loan and flip the note to investors.

With interest rates so low for so long, a significant increase in rates would decrease the real value of homes as the monthly payment would exceed what someone can afford.

As home ownership is a political football, you can be sure the price of homes will only go up. 2008 was a blip in the steadily increasing price of homes.

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Are you saying in the USA your fixed rate lasts for 30 years? Its there a significant premium on the duration? In the UK fixed rates last 2 or 5 years.

The USA is unique in that the standard mortgage is 30 years with a fixed rate. We also have a huge refinance industry, as everyone who gets locked in at a higher rate wants to refinance when rates drop.

Also the rates are artificially low as the government backstops the vast majority of residential home mortgages. In a free market the rates would be a lot higher, but they are subsidized by the government.

> The price of the average house in the USA is based primarily on the government-guaranteed 30 year fixed rate mortgage. For a given interest rate and income, the house will cost exactly the maximum amount of loan the borrower can get.

This implies that very poor people can buy houses for very cheap. The price of a particular house is not set by reference to the person purchasing it. The price comes first, and the buyer second.

No- but you need the number of houses in a given price range to more or less match up with the number of buyers who can afford them.

Look what the jumbo loan and other federal loan limits are within a given market, and if you plot real estate listings/sale prices, there will be clusters grouped just below each limit, especially the jumbo.

If a buyer has $100k income and ~75k post tax, then they will be able to afford (at most) $45k per year out of pocket, or ~$2k per month. Based on the interest rate, you can work backwards to see the house they can afford, and the people buying at that price point will all have similar incomes.

> and the people buying at that price point will all have similar incomes.

This isn't true.

>The price comes first, and the buyer second.

The price is determined by the intersection of supply and demand. With a bull market in real estate, demand is greater than supply. Buyers have a greater effect on price than sellers. In the extreme, market prices converge to the maximum loan as GP described. In practice, people with higher incomes, liquid investments, or previous home equity can out bid individuals who assume the largest mortgage they can.

> The price is determined by the intersection of supply and demand. With a bull market in real estate, demand is greater than supply.

These two sentences cannot simultaneously use the same meanings of the words "supply" and "demand". In the sense of supply and demand required by the first sentence, the second is gibberish.

> In the extreme, market prices converge to the maximum loan as GP described.

What is the maximum loan? Prices cannot converge to "the maximum loan" because there is no such value. Different people can obtain different quantities of financing.

> Different people can obtain different quantities of financing.

And the people that can obtain the most get the best houses, and the people that can get a little bit less get the next tier of houses... until no houses remain (or no buyers).

Here in seattle (for example) we have a lot of SDEs making ~150k. A mortgage company will give you like 500-750k mortgage for that income. Maybe 1M if you have a couple with that income each. Most houses in areas where software engineers want to live all start at 650-700k for decent homes. Because that's the top end of what the buyers can afford, so that's what sellers ask, knowing there is a cohort of buyers that can afford that as a minimum buy price.

>These two sentences cannot simultaneously use the same meanings of the words "supply" and "demand".

The second sentence is technically incorrect. During a bull market, demand is increasing relative to supply. (If supply was decreasing relative to demand, prices would increase, but that would not be a bull market)

>What is the maximum loan?

The GP comment I credited described the "maximum amount of loan" as a function of buyer income and interest rate. Obviously, the house is sold to the highest bidder.

In a hot market, the average price of real estate will approach the largest mortgage available to the average winning bidder (plus some quantity of household wealth).

> The GP comment I credited described the "maximum amount of loan" as a function of buyer income and interest rate.

But the price of the house is set without reference to buyer income or interest rate. It therefore cannot depend on "the maximum amount of loan", which is an incoherent concept anyway.

The government program juices demand by making financing more available than otherwise. This raises the price of homes. But that's the limit of what we can say.

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