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Comment by pushcx | Hacker News Reader

There's a great history of this, The Great Beanie Baby Bubble: Mass Delusion and the Dark Side of Cute by Zac Bissonnette. It's a quick read, almost entirely original reporting. Aside from the colorful characters, it's really compelling to see the way some individuals' and limited information combined with mass media fell together to create the bubble. It seems like it couldn't have happened at any other time because it needed cheap independent publishing (both print and web) before ubiquity eroded the perceived legitimacy.

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Oh, bubbles can surely happen even in the era of widespread information. Look no further than housing.

A few points on housing:

- real home prices have now surpassed the 2000s peak

- household formation and population growth has been decelerating, while building has been accelerating.

- there are 1.1 homes per household, same as the year 2000. We are not at historically low supply as some claim. Only low in terms of active listings.

- mortgage rates are climbing at a historically fast pace... If inflation doesn't abate we can expect 5-6% mortgages within a few months. Rates were kept low due to the belief in transitory, but confidence in this is quickly eroding. Mortgages roughly correlate with 10y treasury which is at 2%, while inflation at 7.5%. typically these values are close together

- all in affordability will reach record lows within a few months, if inflation and mortgage trends don't abate

- there's clearly a mass FOMO/psychological phenomena going on right now. Buyers aren't acting rationally from a financial perspective

Home prices can avoid a correction if we quickly return to 0 or negative rates, which could happen. If inflation persists, they will correct in a big way within a year or two as rates adjust to inflation

Sources:

https://fred.stlouisfed.org/series/QUSR628BIS

https://fred.stlouisfed.org/series/UNDCONTSA

https://fred.stlouisfed.org/series/SPPOPGROWUSA

https://www.mortgagenewsdaily.com/mortgage-rates/30-year-fix...

EDIT: And the fervent denials that it's a bubble is surely a hallmark of bubbles too :). Please refute with actual data if you disagree

Whether or not housing prices are in a "bubble" in the sense that the prices are going to correct and drop at some point, they're not a bubble in the Beanie Baby sense of seeing 10000% price appreciation in the span of a few years. Nobody's 4-bed condo is selling for $500 million. There needs to be some acknowledgement of the gap between probably mispriced and tulipmania. Conversely, if prices correct, they're still going to be back where they were in another decade because houses have actual value. You're never going to see a bag full of 150 4-bedroom condos being thrown away on an episode of hoarders because the owner can't even sell them for a few bucks each. There's a difference between "price is going to drop a bit for a while" and "will totally collapse and be worth marginally close to zero dollars for the rest of time."

I really appreciate this comment. The $1M house I bought last year at 2.75% (now supposedly valued $1.1M) might go down to $600-700k if we have some kind of major correction, but it's in a desirable area and never going to zero. I'm prepared for it to drop, but over the long term I expect to be fine. My house is a place to live for the long term, not something I'm looking to day trade. The only day I care what it's "worth" is the day I need to sell it. Thinking of your primary residence as a speculative investment seems so strange to me.

If you buy something that is comfortably affordable for you now where you're willing to stay for the long term, with a fixed rate loan, I don't see the benefit of waiting until the peak comes. I'd rather be building equity than paying rent waiting for the market to peak. People have been predicting another crash every year for the last decade, and I'm sure it will go down again at some point, but I wouldn't plan my life around anybody's ability to call the top accurately. Just buy what you can afford and get on with your life.

Having equity can be important for:

1) Cash out refis. e.g. if you want to renovate, purchase a rental property or better yielding investment with the funds. Say you can take out cash at 2% rate, and buy a SFH rental with a 6% cap rate... you can build net worth faster (at more risk)

2) Being able to move without writing the bank a check. If you're underwater, you will have to pay out of pocket to sell, and then save a new down payment. If you don't ever plan to move, then this doesn't matter.

I consider valuation before purchasing property, rather than just whether I like it. But many don't, and that's fine too.

Commercial RE will definitely be driven by the fundamentals though, so I'm sure we will see cap rate expansion there unless rates begin to fall again. Residential can move out of line with fundamentals, for sure

I think it makes sense to have a different approach for your primary residence vs your real estate investments. If I were a real estate investor, I probably would be hoarding cash waiting for deals, licking my chops at the prospect of another housing crash.

Something with intrinsic value will never collapse to 0. A bubble to me is real prices far exceeding intrinsic value, particularly driven by psychology rather than fundamentals. Housing fits the bill to me.

There's a good argument that crypto presents similar to beanie babies, given that there is no intrinsic value to the coins themselves.

People buy crypto because they think they can sell it to somebody else for more later, not because it unlocks some value by holding it. But don't want to sidetrack the discussion.

Sorry, I think I'm not following.

I think you're saying that housing prices are too high. Then you're saying that if inflation continues housing prices will drop?

I totally get that most home sales are based on the monthly mortgage bill, so when interest rates are high, house prices are lower. But, if we have 7% inflation why wouldn't rates increase AND prices increase? I don' think the outcome is obvious when high inflation is coupled with high rates - though I'm sure there are several experts ready to jump in with information about how the US 70's and 80's worked :)

It's a common misnomer.

Inflation is good for assets once those assets have been valued using an inflation appropriate discount rate. Housing rate now is priced based on a 2% discount rate, not 7%.

After the asset is priced appropriately for the current discount rate, then inflation is good for valuations.

Median wages drive home prices in the long run. It's possible home prices can be sustained if we see median wage rapidly gain over the next few years. Gasoline going up and driving CPI inflation doesn't make housing more affordable. Only increase in incomes/buying power.

Example: the 10y treasury was recently at 1%. If you bought that as an inflation hedge you would have lost a lot of money. Once people realize inflation is here to stay, they won't accept lower rates of returns.

Now it yields 2%, and soon likely 3%. Holding cash is better than holding a treasury during the repricing phase. Same logic applies for other assets.

Real home prices were super low in the 70s relative to today. Also wage inflation was very strong. I believe wages doubled over the decade. That alone implies a 2x gain in prices ignoring changes in discount rates. Not the same at all.

When the Fed starts raising rates to try to counter inflation we'll see mortgage rates follow. If mortgage rates go up to, say, 7% (pretty close to the average mortgage rate over the last many decades) that's going to impact the monthly payment. If people are just barely able to afford a house at a certain price with 3% mortgage rates, they're not going to be able to afford it at 7% - it all comes down to monthly cash-flow. As fewer people can afford to buy at current prices with higher rates that limits demand at those prices and something has to give - either prices will fall to accommodate, or the market will just stagnate. Even so, a stagnant market can only last for so long before some sellers start lowering prices because they have to.

This is essentially what happened in the early 80s when we had mortgage rates in the upper teens. If you look at home price sales history during that era there were some quarters where average selling price went down 10% or more.

I vaguely remember knowing that we had a mortgage rate of ... 16% when I was a kid (we moved in 1982). But ... it was a direct note with the previous owner, and when rates fell, they wouldn't refinance at a lower rate. And it was hard to get a bank to lend because we were relatively close to the edge already, financially (it's been.. 35+ years - I'm getting some second hand stories through family). When I first bought a home in the late 90s with a mortgage, I think it was around 8% which - didn't really feel high or low, as it was my first. I just refinance last fall at 2.75%. Insane.

It is crazy how much rates have fallen. But the historical average for mortgage rates has been around 5-7%. The 70s in particular had very bad inflation that was pretty abnormal relative to history.

Also important to note that rate only matters in the context of price. Rates by themselves don't provide you much info. e.g. 0% on 10 million is still expensive, just as 1000% rate on 1 dollar is pretty cheap

We'll find out in a couple of quarters or so if this inflation is "sticky" or just a temporary result of the pandemic. My feeling is that it's mostly the latter, but it's important to note that there were already inflationary trends in play prior to the pandemic - the push to return more manufacturing to the US and the resulting trade wars, for example, were going to lead to some inflation. If this inflation proves to be "sticky" like the 70s/early 80's inflation then we're likely to see some relatively high mortgage rates for a bit. Probably not as high as they were in the early 80s, though.

We'll see. I was pretty sold on the transitory belief earlier, and while I believe there are transitory components, like car prices, I expect core/wage inflation to continue.

We had an almost 9% annualized wage gain last month using the MoM numbers. Unemployment is too low right now for core inflation pressures to abate, unless we have a recession or similar drop off in employment IMO. I think a lot of these core economic principles were forgotten due to how high unemployment went after GFC and how long it took to reach full employment once again.

It looks to me like we've entered a wage price spiral... but certainly it could play out in a number of ways. Perhaps the Fed will use falling nominal CPI YoY numbers to hide the structural inflation that has developed. That could keep rates artificially suppressed for another year, if they're able to convince markets of it.

Due to base effects, CPI is likely to peak either in Feb or March. But it would be premature to extrapolate a fall from 7 to 6%, for example, as evidence that structural inflation hasn't taken hold.

I expect inflation to persist around 4-5% longer term, absent intervention by the Fed... which still brings us to 6-7% mortgage rates.

Prices will stay high as long as buyers are not paying out of pocket. Once they have to pay more out of pocket with rising mortgage rates, they will notice that they weren't able to afford it in the first place and people will need to get rid of what they can't afford to keep paying.

I don't know about the US but the next move in the UK is to deregulate lending criteria. Allowing more people to borrow 5-6x income with tiny deposits.

People have always over extended themselves here to buy property.

They should tighten rather than deregulate. Tightening would result in lower prices as well.

If a 20yr mortgage suddenly became the only option, prices would decline in a big way. Of course, things might go the other way with 40yr mortgages etc

There's another factor going on in housing right now, which is corporate home ownership. There was some pressure on the market when landlords moved from long-term rentals to short-term airbnb style rentals. But last couple years saw an influxed of "iBuyers" like Zillow and OpenDoor. These companies have been purchasing homes at above market prices - which tends to move the market price in the process. Their goal was to get inventory without much regard for profitability.

https://www.cnn.com/2021/11/08/homes/zillow-ibuyer-homes/ind...

> while building has been accelerating massively

Nope, we have a decade of underproduction that led us to this crisis

Builders have been working as fast as they can (and sometimes faster than they should) around here non-stop since maybe 2011 or 2012, and it's not enough. Tons of new neighborhoods, probably half the apartment buildings I know of were put up in the last ten years, and so on, but house prices and rent are nuts and still increasing faster than inflation anyway.

We're at the end of what sure looks like about a decade-long housing construction boom, in my city, which is not trendy or growing very fast, and prices have done nothing but go up at 2-5x the rate of CPI the entire time. It's possible the under-supply was so bad that all the construction still isn't enough to catch up, but then why did prices not start higher than they did? I find it hard to believe that this city's gained new residents faster than it's gained new housing. Something else is going on.

> Something else is going on.

Growth.

In the last 40 years, the US population has picked up 100 million people. 227M vs 329M [1].

By 2050, the US population is estimated to be 379 million (+50M), and by 2100, it will be 434 million (+ an additional 55M) [2].

That's a lot of housing need to fill.

[1] Google "US population"; I'm not sure if these figures includes those here on non-permanent visas, but if not, it would probably increase the growth even more.

[2] https://en.wikipedia.org/wiki/Projections_of_population_grow...

Do you think education could also be a factor? More university degrees than in prior decades leading to relatively fewer people with low wages in cheap apartments and more high earners desiring luxurious housing, which takes more material and labor to construct? And of course the pandemic generated a desire to get into less-dense spaces with home offices.

Households to number of homes built is exactly the same as it was in year 2000. You can compute it yourself using FRED data.

1.1 homes per household (or vice versa).

People who count from 2010 are cherrypicking the underbuilding decade while ignoring the overbuilding decade, 2000s.

There is no "shortage" of homes, there's a shortage of homes listed currently.

Couldn't there also be a shortage of homes where people want them to be? A house in the city and a house in the boonies are not exchangeable

That could apply to some local markets, sure. But we are seeing massive price increases rather universally, which implies it's a more widespread phenomena than just local undersupply.

But it will be true for certain markets. Most homebuilding is concentrated in the SMILE states (southern, areas where people are migrating to)

I don't see the data about 1.1 homes per household in your links. What is accounted as a "home" whenever you are taking this number from? Given that the rate of home ownership is about 65% it is probably counting rentals, unless an average household owns 1.7 houses.

On the other hand, https://fred.stlouisfed.org/series/COMPU1USA shows that the number of SFHs completed in 2021 finally reached levels of 1994, when population had been 100M less than now. I might be just too dumb to see where there are enough houses.

Total Households: https://fred.stlouisfed.org/series/TTLHH

Total Housing Units: https://fred.stlouisfed.org/series/ETOTALUSQ176N

Divide one by the other to get housing units per household. You can see ratio in 2020 is roughly the same as 2000.

You have to consider multifamily construction too (which can include SFH-like duplexes, or full apartment buildings). Housing is fungible to a certain extent. If rents fall, that will reduce demand for purchasing and vice versa.

Completions is a backwards looking metric. Look at pipeline, not completions to predict forward trajectory. Housing in pipeline now matches the 2000s peak, and looks to surpass the 70s peak within a few months

Okay, so it does include rentals and the number seem pretty normal - the ratio of units to households will always stay close to 1.

And yes, the housing is fungible to an extent: the dearth of SFHs cause the price of SFHs to rocket and pushes the rest of the market up as the people who are priced out of SFHs can as well go and buy a condo or a townhouse.

Yeah, but SFH aren't the only housing type appreciating. This theory doesn't really hold when you consider both Condos, inner city locales, rural locales etc have also experienced rapid price appreciation.

Rental or not doesn't really matter. Fundamentally people just need a place to live, and depending on locale will make the tradeoff between renting and buying. If rental stock doubles overnight, housing prices would decline too, as cost of a mortgage becomes relatively less appealing. In this sense it's fungible.

But it's true there may be some subset of people who would only buy SFH regardless of price

>Yeah, but SFH aren't the only housing type appreciating. This theory doesn't really hold when you consider both Condos, inner city locales, rural locales etc have also experienced rapid price appreciation.

What theory? That people who are priced out of SFH buy condos, townhomes and other type of housing? What do they do, keep renting and enjoy 30% yoy rent bumps instead?

No, I think we are in agreement. I may have misread your post.

People priced out of one housing type will bleed into others.

Has building been accelerating in the areas where people want to live, though? e.g. lots of Californians wanting to move to MT or ID, but is building catching up there?

Most building is concentrated in the migration destinations. You can find the breakout on the FRED website for different metro areas.

I would be particularly concerned about sustainability of prices for places like Boise or Phoenix. Lots of building there, and prices are far detached from local median wage.

Also lots of land and few regulations preventing further building.

Phoenix was one of the places hit hard in GFC. Prices fell 50-70%

Are people making that move because they prefer the location if their current location had enough housing? I guess more "Are they moving b/c the building is happening there and not in CA?".

As someone who just sold their home and is currently renting while waiting for a correction, I definitely want this to be true. Why are you confident those factors, absent a rate intervention, will produce a correction?

If inflation persists rising mortgage rates will push affordability to record lows. We're already close

If inflation abates quickly, then current prices can maintain and become the new normal.

The rate shock will price out pretty much every primary buyer. Investors will stop buying and even sell if they fear it's a peak.

On top of this, huge amount of backlogged supply is about to come into market in a big way in southern cities. The majority of the building is concentrated there. I would be very worried about Phoenix for example

Why wouldn't housing prices drop if the mortgage rate increased and keep affordability about the same?

Sure, it could. But it's better to buy a lower priced item at a higher rate.

Just look how that worked out for homebuyers in the 80s paying 10%, who were able to refi at 2% later down the line.

What is your argument on mortgate rates? That lenders will be unwilling to lend out at (still low) central bank rates due to inflation? I don't follow the reasoning.

Mortgage rates historically track the 10y treasury rate. This is market driven, not Fed driven (outside of QE impact)

10y treasury yields 2% while inflation is 7.5%. Ergo mortgages will almost certainly run to 5-6% within a few months once the market perceives that inflation is not transitory and start selling off the 10y treasury en masse.

We have seen this move already starting. It's why mortgages have run from 3-4% in just two months. But not even close to pricing in inflation.

Mortgages were 5% in 2018 when inflation was significantly lower. We may even get to 6-7% in a shorter period of time

Fascinating. Thanks for the info. I'm in northern Europe (Norway), and very curious how this could spread east of the Atlantic. Historically, our central bank has given everyone the impression that they decide the mortgage rate, but history has shown that foreign rates have much higher impact.

In the previous 20 years, whenever rates have spiked abroad, the central bank has made interventions to prevent domestic rates from going up. But those interest rate spikes have been transistory, so I have no idea how things would play out this time.

Also Beanie Mania on HBO, not as insightful as the book but still a good documentary. The Beanie Baby bubble was essentially a textbook example of mania.

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