Homes in 97% of U.S. cities are overvalued, Moody's says
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Practically that means paying to build and maintain housing stocks, changing tax incentives so developers are incentivized to build more housing and less luxury housing, charging a premium for unused land in desirable areas (parking lots don't house people), abolish mandatory minimum parking, and upzone neighborhoods (eliminating the "single family home" neighborhoods as a zoning type.)
I'm also of the much more radical opinion that we should protect tenants over landlords in nearly every case, that we should protect the rights of people to live where they've historically lived (eg, one shouldn't be "priced out" of the home they've lived in for 20 years), and we should offer extensive public housing (built as many geographically distributed small apartment buildings and 5 over 1s, not giant tenements or projects.)
This is not a technical problem but a policy problem. The solution is changing the policy. The current policy is to drive up housing prices by creating completely artificial scarcity. All the land is owned and earmarked. Just not for housing. This problem exists in most wealthy nations. There is no shortage of space. Just of access to that space. Mostly that's completely intentional and reinforced by generations of politicians acting on the will of the people they represent to ensure that can never change.
You have NIMBYs and vested financial interests basically. Nobody wants their property devalued. So, social housing always is unpopular with the locals. Places like San Francisco where the homeless take dumps on Market Street are of course a bit extreme. But same principle. No shortage of space there.
But it's all reserved and off limits. So, the homeless are camping out there. In the middle of a city full of some of the richest NIMBYs on this planet. That's not a temporary solution. That's a slum and it is growing. Complete with people just shitting all over the place. Slums are what happens when you let things escalate.
This is true but not in the way that you mean. As you said there is no shortage of space. But it's important to point out that on a global scale there is no housing shortage either. Vacant dwellings outnumber homeless people by far in most industrialized countries where homelessness is rampant (for example: 3 million empty dwellings here in France).
You seem to imply the problem is housing regulations and NIMBY preventing new constructions, but who cares when the houses are already there. I agree with you the problem is that of policy, but i would say the policy responsible for that immense suffering is "private property", the religious belief that land should be owned and that a piece of paper should dictate whether you can sleep under a roof or not and/or have access to food/healthcare/education.
We can eradicate homelessness in under 48h: it's just that no politician cares at all about poverty from their ivory tower! Just give the police instruction not to intervene for "breaking and entering" in *vacant* housing (or even better, abolish police entirely) and we can rehouse every homeless person in the next two days. Of course it would take a few weeks to rehabilitate some of the housing unit and make them real decent, but even in the meantime old housing would be much better than no housing.
There’s a massive housing shortage in the United States and it’s acting like a vacuum, sucking up wealth and diverting it to landowners.
I always wonder about public transportation. It never really took off in the US, but it IS way more efficient. If we had very fast subways / trains, we could theoretically stretch housing way out away from the city. Then there is more equal opportunity for jobs / attending universities without living on campus.
I know this is a bit off topic, but it always seems to me like having QUALITY public transportation is efficient, but I can't quite defend it.
Not even to the exclusion of cars. For example I know a lot of workers who drive their car to the subway station in Toronto (and other cities) and then spare themselves the traffic and gas cost of sitting on the highway for 2 hours. And this is the ONLY solution for a big city, since most can't afford to live by the jobs/colleges (even suburban single-bathroom costs are over a million 40 mins out from downtown).
EDIT: I can see residents downtown paying the most taxes being against it though - all it does for them in personal terms is erode their power. Makes their real estate cheaper (removes exclusivity of quick access to offices / educational facilities) and makes the downtown areas accessible to people who can't live there.
I spent some time in the Soviet Union before the wall fell. It sucked. Idealistic ideas like this destroy housing for everyone.
I think that in order to protect it's ability to offer a first world living by it's communities, the US needs to fatten up it's middle class with better wages. There could be a number of ways to do that, but the basic goal is to get more money into the hands of the average American so they can spend it in the community and make the whole country better.
A better way would be to protect people by not making policy decisions that reward bad behavior and punish those who avoid debt and save. Rewarding terrible behavior may get you elected but it’s bad for society. Like giving candy to pacify a cranky baby.
But such opinions have become verboten now, and actually censored.
That's not the problem either, the scarcity is (with the exception of foreign - i.e. Chinese and Russian - money laundering) natural and not artificial. The true problem is that following mechanization in agriculture many people emigrated from rural areas, resulting in a lack of infrastructure because it was unsustainably expensive for the low population density - particularly high speed internet and accessible (=walkable or within reach with a bicycle) basic infrastructure such as a grocery store, a GP and pharmacy and schools. That lack drives more people away, it's a vicious cycle that will need enormous amounts of money to break through.
If you want to work a modern service-oriented job or even a manufacturing/industry type job, you have to move to an urban or suburban area, and even if you have money and want to provide gainful employment you simply can't because there is no high-speed Internet for your business.
What needs to be done is that the government aggressively invests into "flyover" states to provide perspectives for the people living there and considering moving to a better place - but unfortunately I don't see that happening, not in the US and not in Europe where we have similar problems.
Fix the policy and house prices will drop. That creates a new problem of course for those who then end up with a Mortage that is under water. That's the real reason the policy does not get fixed.
That happened at the latest 40 years ago (in fact it happened more than a century ago), while house prices went crazy roughly after 2000.
Essentially, a big corporation could buy cheap rural land close to a big city, develop a small city there and reap the "overpricing" benefits.
But it's very expensive to build the basic infra. And even more expensive to convince enough people to move there and create minimum network effects for it to become a "real" community and livable space.
Yes, we can and should regulate markets, and we probably all agree that the purpose of the housing is for people to have a roof over their head, as opposed to use housing as an (speculative) investment market. This can easily be regulated via taxes (on ownership and transactions), but it comes with a caveat: if something is over-regulated to benefit the user, then there is less incentive for investor/landlord to build housing, which makes housing scarcer and drives prices up.
There are some commodities we choose to operate as natural monopolies because competition and profit seeking leads to bad outcomes for society. My argument is fundamentally that housing is the same.
No, not at all. We don’t choose natural monopolies. We recognize them. The whole point is they are naturally occurring whether we want them or not. Housing shares nothing in common with the other services you mention which are anything but commodities!
The natural monopoly of the electrical company isn’t electricity, it’s distribution. Power is a commodity, and delivery is anything but.
Your argument that housing is the same is not well informed.
Those payments are the equivalent of rent in the housing market. The thing that isn't a market and isn't being bought and sold is the right to provide those services, it's the power grid and generation plants, or the garbage infrastructure. The monopoly on those is what is anti-market and is the equivalent of not being able to buy and sell property.
I'm not making a political point there, I happen to thing some thing are natural monopolies and that markets have their limit. Housing is a complex issue in this respect. Flats in big city blocks are much like a commodity and limited urban building space naturally reduces competition, while nice houses in the suburbs or country are very much a market with lots of options suiting different needs.
It's not a market for you, but it is to your provider. And it naturally impacts the cost that's layed upon you, whether directly through electricity bills or through taxes if it's subsidised.
This doesn't ring true, it just moves the incentive to people to build housing to live in them selves, and with less competition in the market it would drive prices down.
It's helped a lot here.
I don't think that social housing is a good solution. It's a complete disaster here in Sweden, with 12+ year waiting times, and massive inequality between those who have those rent-fixed privileged first hand contracts and those stuck in the unregulated wild west of second hand renting. Often resulting in the working poor effectively subsidising wealthier, older people to keep their very cheap flats in the city centre, etc.
To expand on this point, and a similar system in Finland called asumisoikeus:
Municipalities have a pool of housing units. The tenants do not buy the house itself, they buy a right to live in that house, which usually costs about 10% of the price of the house, reimbursed when they move out. They also pay a rent that takes care of the energies and depreciation of the house. Socio-economic status is taken into account when figuring out who's eligible
Now, there are some criticisms of the system, mainly that the rents aren't that much lower than commercial properties. However, it does keep house prices in check. 100m^2 (~1100 sqft) house in the capital region is about 9 years of average take-home income - or 5 years for a couple
In the BRF system, you literally do not "buy the place you live in", you instead buy the right to live there. The actual ownership of the property is with the BRF.
The word is "bostadsrättsförening" [1] which roughly translates to "living rights association" or something (Wikipedia uses "housing cooperative" so I guess that's the best).
The word "förening" is hard to translate, the closest seems to be "voluntary association" [1], it is a formal collection of people with some common purpose (like managing a house). There are legally various types with varying requirements, and so on.
Edit: spelling, more linkage.
We ended up paying the same price for relatively similar flats, but in BCN that's much harder to achieve, and they are older and need renovation - and there are thousands of AirBnB slumlords buying up everything.
So yeah, the price increases have been a problem (and hit me badly combined with the interest rate increases) but it's still better than most of Western Europe.
There’s no need to micromanage tenant-landlord relationships or setup governmental panels on who historically deserves to live where, if the government can just make sure there is an oversupply of decent housing at all affordability levels.
The rest really takes care of itself at that point.
The problem is, that is outright impossible in urban areas where almost all space is already built out, not to mention it is immensely wasteful (8% of all CO2 emissions is caused by the manufacturing of concrete!).
Governments should rather look into making rural areas livable again (by subsidizing basic infrastructure such as internet, grocery stores, doctors and public transport).
If you have a pastoralist dream, feel free to build rural housing units. But for the government to spread out the country and then try to connect it using extractive transportation technologies (gas, batteries etc) just seems like roundabout / inefficient way to achieve the same goal.
And schools, churches, youth soccer leagues, parks, and playgrounds
Government 10 bedroom, 9000 sqft seaside mansions? Not just no, but hell no!
In an actual market, margins are competed away and prices drop over time, there's elasticity in supply and demand, and people don't view their 15-year old cars or whatever as "investments", they trade them up for a newer model and pass down the older stuff to people who can't afford them as much.
In housing, we artificially constrain supply with zoning laws and building codes, and we stimulate demand with subsidized mortgages and rent control laws. It's pretty much the opposite of what you want to do if you want there to be more affordable housing.
Also odd is how these HN threads on housing often devolve into redesigning a socialist utopia from scratch in America, as if such a radical revolution has any chance, when Californians can't even organize enough to get Prop 13 repealed. Removing red tape and zoning to get to a more efficient market is much more achievable.
Housing is already barely a market. An actual market would be much better.
We artificially restrict the construction of new housing supply by policy and then act all surprised when demand exceeds supply and prices skyrocket.
The same thing is happening in medicine: we artificially constrain the training of new MDs and then act all surprised when demand exceeds supply and prices skyrocket.
Then people come out of the woodwork with "oh look markets aren't working!" -- but in fact the markets are working exactly as designed: those with control over the supply are acting to constrain the supply, in the process enriching themselves at the expense of all others. But instead of recognizing this fact, we look for other reasons. Sure, there are other reasons and interactions, too, but the primary drivers are supply constraints!
Imagine if we explicitly forbade the construction of new grocery stores, forced farms not to use modern agricultural techniques, causing reduced yield, and then bought up a bunch of farmland just to take it out of commission. What would happen? Food prices would, obviously, skyrocket! That's exactly what we're doing with housing.
Your proposed solutions probably won't hurt, but aside from making it easier to build housing, they're noise. In particular:
> upzone neighborhoods
This is the only one that matters -- and it needs to come with other changes too, including construction "by right", that is, without needing to go through a 3-year process of fighting with neighbors who will try whatever they can to prevent new construction because they've been convinced it will destroy their neighborhood and/or property values.
> changing tax incentives so developers are incentivized to build more housing and less luxury housing
We don't need to change tax incentives to get developers to build more housing, we just need to stop preventing them from building more housing. Developers are not sitting around waiting for incentives, they're actively being denied the ability to build. Let's fix that.
How do you or we decide it's not a market?
If people are paying money for housing, it's a market. And it's not just money, but the largest lifetime expense by an order of magnitude and more.
> I'm also of the much more radical opinion that we should protect tenants over landlords in nearly every case
That's already the case, at least in many places (I know not all). If you take it too far the result is no landlords, thus no rentals. Perhaps that's ok if everyone wants to buy, but if there is anyone who wants to rent, it's useful to have rentals.
That's where everything went wrong. At 0-1% interest you can get insane mortgages for 90-95% of the value of the property, pushing the price up to where people spend every last cent they can on mortgages, but at $xxxx per month you can easily afford hundreds of thousands of dollars in mortgages.
Raise interest rates (happening), go into recession, crash the market, stop people getting mortgages, house prices will drop insanely fast and hard.
Of course no government wants to do this because it will panic the home owning class. Well - you have to chose at this point. Make it impossible for young people to buy a home, or piss off homeowners.
All the forfeited houses from the people who cannot serve their mortgages will flood the market and drive down prices.
Additionally, all the surplus construction infrastructure will be there, fighting for every project, which will make new houses cheap.
It is a mess.
If you like your house and your neighborhood, you probably don’t want demolitions and construction, even if it’s not your house. It’s noisy, it brings uncertainty, and maybe when your neighborhood won’t be the same after buildings get replaced. Maybe the new buildings are too ugly or the residents undesirable or the infrastructure unable to keep up. Or maybe none of those are true but you personally are anxious from the thought of change so you don’t want to risk it.
In any case, the no-change crowd holds all the power except when those pursuing change have a lot of money. This further reinforces negative impressions of what it means to allow change in your neighborhood.
One solution to this would be to guarantee a unit in any multi family or apartment building to the current resident, and pay for their relocation while the new unit is being built.
Alternatively, buy units from people who are leaving or who have passed away.
We do need to knock down some houses to build more housing, but we can do it in a way that is minimally disruptive.
You are just increasing the cost of the building's rent with this stuff. You'll have a few birthright units and everything else will be luxury to cover costs. This is the same problem we currently have with affordable units, huge missing middle.
We can choose to pay for housing for everyone, we just have to adjust the formulas we use to decide who benefits.
We’ve also seen, during this pandemic, what happens to rental prices when landlords are powerless over tenants. They go up. And landlords discriminate harder against tenants who look like they’ll be bad tenants if they can’t easily evict.
And just as my ability to get sued is what allows me to enter contracts, my ability to get evicted is what lets me pay cheap rent.
That's just a loopback to where you started. When government pays, you pay.
Housed people need parking lots though. Tons of places are not, and never will be accessible with public transports. I live in a city with a great public transport network but I still need a car, as much as I'd love not needing one: I need to visit friends or family outside the city, I have to make bulk grocery shopping sometimes and bags are not enough, I sometimes buy big housing furniture, I even had to retrieve parcels outside of the city sometimes... Heck, even to go to work, sometimes I'm late, or I missed my bus, or public transports are on strike, or anything can happen that I need my car to save 1 hour.
> abolish mandatory minimum parking
Same as above, that's an awful idea.
Almost all the problems you present can be solved by planning differently. You don't need bulk grocery shopping with a shop open nearby in walking distance, available at least once every 3 day. Big housing furniture is a rare occurrence and can be delivered, or you can rent a car capable of transporting it. Punctuality can be solved socially. The main problem is density, and cities certainly don't have a shortage of population density.
Car ownership is a huge luxury with a giant price tag, and it's finally catching up to society.
Your experience doesn't match mine. I also live in a city with a good public transport network, but I've never had a car, or felt much need to have one, or even to learn how to drive. For your examples (except the parcel one, which hasn't happened to me and I have no idea how it would happen):
> I need to visit friends or family outside the city
The friends or family I have which live outside the city actually live in other nearby cities. To visit them, I'd take a bus to their city, and then a bus or taxi within that city.
> I have to make bulk grocery shopping sometimes and bags are not enough
Every store large enough that I'd do "bulk grocery shopping" in it has a taxi stop next to it, sometimes even within the store's underground parking floor. So whenever I do bulk shopping on one of these stores, I simply take a taxi.
> I sometimes buy big housing furniture
Every store which sells big housing furniture has the option to send the furniture to your home using their own truck. You might have to wait for the next day (since they batch the deliveries - it's a big truck), but for big furniture, you usually aren't in a hurry.
> Heck, even to go to work, sometimes I'm late, or I missed my bus, or public transports are on strike
If I missed my bus, I wait less than 10 minutes for the next one. If I'm late, public transport is still faster than a car (or a taxi). And if there's a strike, it's true that having your own car might help, but when that happens (and it's not common enough to make it worth it to have a car just for that), the traffic slows to a crawl.
Or use a bike?
The problem isn't supply. We have (practically) unlimited supply. People just don't want to live in Pennsyltucky.
ad. "not a market" - When you do that are you going to also forgive my crazy large mortgage?
ad. "protect tenants" - In Czechia we protect the tenants more than landlords. If you mean that this should scare people from renting that works quite well. People do not have much leverage here to kick out tenants who are problematic or skip payments.
Then how would you recommend houses trade ownership?
>so developers are incentivized to build more housing
How do you prevent the development of shitboxes (it's a technical industry term)? Because that's what builders build when they need to hit a particular price point at scale. Houses that are quickly built out of low end materials and will decay over about twenty year period unless a homeowner invests considerably in upgrades.
>one shouldn't be "priced out" of the home they've lived in for 20 years
I'm in full support of the concept, but when you start to look at the causes of this, it gets complicated quickly and many of the causes aren't even directly related to housing. It's not just as simple as property tax moratoriums.
At least you understand this is radical. Developers/landlords are the ones providing and maintaining housing, not tenants. The government is incapable of doing this themselves which is why it’s left to the free markets.
The only real issue is that the ‘free markets’ are anything but. Governments overly try to dictate policy which continues to hurt us (a well known feature is state run economies)
Examples of this are zoning restrictions (NIMBY) and rent control.
Broad, idealistic government policies are a disease; they will never be as efficient as entrepreneurs.
Maybe you should take a trip to Eastern Europe one of these days to see the final result of what you're advocating. Pros: everyone is given an apartment to live in. Cons: your city's skyline looks like this: https://i.imgur.com/5X1sIeP.jpg
"We collectively decide" just means you decide for me. You think you know better than everyone else and want to impose your values on others.
It's impossible to get an apartment in Stockholm unless you have a 20-year waiting time, buy an illegal third-hand contract or have the wealth to buy an apartment. The housing crisis in Sweden is extreme.
>Due to excellent renters rights meaning the majority of people rent long term
This backfires spectacularly once you realize landlords continue to hold the reigns and put up huge demands to avoid "bad renters". As long as the rights don't cover the entirety, landlords will continue to pressure renters in different, more obscene ways.
And in today's society, renting long term also isn't as great as people make it out to be, when your long term rent is a glorified broom closet and there's a great job opportunity a few cities over.
The parent's position is "housing shouldn't be a market", and I am showing an example of what soviet-style state control over housing looks like in practice.
But "homes have costs" does not axiomatically lead to "housing must therefore be a market."
I'm far from right wing, but let's not pretend the issue here is a market not working. It's that we rigged the whole system and then blame "the market" for the results...
And yes it’s possible to be capitalist and agree with sensible regulations. I’d rather we focus on building amazing companies and utilizing labor effectively.
Mixed economies are not capitalism.
You can say you're a bit capitalist - that's an easy one, we have plenty of data to show that positive economic effect for everyone are linked to free markets - but still believe fairy tales about the government being moral and caring about something which is not being re-elected and stealing money from people.
These are not zero sum games, and people that think they are probably have no skin in the game. Even the people with lots of wealth and resources worry about losing them, and in order to maintain it you need to make concessions when necessary and be pragmatic.
1 and a half year later, we had decided we were going to buy a house in the new city and stay there. I wrote the tenant to inform them, I had decided to sell the apartment, come the 2 year date.
"OK", replied the tenant, "it's just that, I've decided I don't want to leave this nice cheap apartment anyway, and prefer to stay.."
So I start to read up on the law in my country regarding these things. It turned out, in my country it is nearly impossible to make a pre-determined time-limited rental. In fact, there are only 4 scenarios where it is possible. It turns out, our contract should have had the specific wording "I rent out this apartment for a period of 2 years, because after 2 years I am going to move back to it myself, on this date, because I have the following specified timelimited activity I'm doing at location X". Because my contract only stipulated the duration, but not specified the exact legal grounding for the limitation, it was not valid. TL;DR. I ended up having to 'bribe' the tenant with a huge sum of money, to get their written consent to leave the apartment by the originally agreed-upon date. I also ended up losing a significant amount of money on the sale, because the presence of the previous tenants hurt the price I could negotiate on the sale.
In fact, I would have made 5x more money on the sale,So if I had let the appartment stay empty for 2 years instead of renting it out, I would have made 300k instead of 20-50k. Apart from the fact, that those 50k ended up being what I had to pay in "bribe money" to get the tenants to leave. So I basically let two strangers live for free for 2 years in my apartment, in return for them making it very difficult for me to sell my own apartment. A final caveat is, that technically it's even illegal to leave the apartment empty in my country - if it's empty for a prolonged period of time, you have to register it for "public rental", at a reasonable rent price.. So, yes, I definitely want the rights of tenants in place and protected, but it is possible to protect them so much, you actually make the life of people who have bought a single property miserable.
A postscript: I know many won't buy my arguments about "losing money" here, since the money I would potentially earn or lose here, are exactly the sort of 'board game monopoly money' we are arguing about whether anybody should have or be entitled to. IE the money I would make back on the sale of the apartment I have owned for 20 years, are exactly those 'the game is rigged' money, that appear out of thin air, for not exactly doing anything (apart from maintaining my apartment against wear and tear.)
Rent-seeking isn't the same as collecting rent as part of being a landlord.
It's a pretty fleshed out concept:
I think you'll find if you increase housing supply and density you're likely to end up with more natural spaces, not less.
Living where one has historically lived is interesting, take London - you're implying it should be a birth right for natives - what about the immigrant flow into such cities, how would you reconcile the "right of natives" with human capital?
As for tenants v landlords, I believe it should be difficult to evict tenants except in cases where the tenant is clearly a danger to others or to the home itself. If they are vandalizing the property, that should be an eviction. Likewise if they are cooking meth. But I think tenants should be protected if, eg, their income drops due to a layoff or unforseen medical expense.
They should stay if they can't pay? Who takes the loss? It would be sensible to have a government program to help people in such circumstances. But if you'd be asking for the landlord to just take the loss, that's not sensible. The owner is probably barely breaking even on rent vs. costs, so they can't afford it.
With interest rates rising, as buyers who haven't locked in lower rates begin looking at the current payments on offer, they will have to look at lower priced homes or drop out of the market. If this boom has been driven primarily by buyers flush with cash, foreign or domestic, then prices should remain high. Payments are largely irrelevant to cash buyers. Any buyer using debt will be forced into lowering their ceiling of properties they can afford. Home prices should then fall.
If we reach debt saturation due to higher interest rates or some other economic shock then capital gains are not so certain. In that situation it would be a wondrous trick for prices to somehow 'levitate' and not fall.
With investors and home buyers no longer anticipating capital gains - even anticipating falls - what sets the price?
I would say two things. For investors, the income potential of the asset - in this case rent. For home buyers, the cost of servicing a loan relative to the cost of renting (with a markup to account for the additional benefits of ownership over renting).
What are interest rates now? What were they two years ago (pre-covid)? Price falls are likely to take us back to where we were when we had similar interest rates, perhaps further if sentiment shifts enough.
In NZ this is playing out now. 20% down in Auckland city already. That happened within a few months of the peak. 30% would take us to pre-covid prices, but interest rates are likely to reach higher levels than they were then. How long they stay elevated is the million dollar question. Regardless, I think we'll see falls somewhere between 30-50% in NZ in an astonishingly short amount of time. Ireland saw -50% over five years, but that was with the support of global QE and falling rates.
EDIT: Of course we just don't know what central banks and politicians will cook up to try to kick this one down the road again. Thankfully, the correction looks almost inevitable this time. Perhaps inflation is the answer - as unpalatable as it is?
The question is less about today than how risky and how profitable an investment it would likely be relative to other investments.
So I don't consider articles like that a bell ringing "sell sell sell". Until we are overwhelmed with new constructions coming up everywhere, there will be more people willing to buy, than to sell.
Anecdotally, we decided with wife to pull a trigger on $380k house in Florida (decent ZIP code) just a month before COVID hit, in March 2019. We had 90 days to cancel with $2,500 penalty, pandemic scared us with possibility of builder being lawfully able to be stuck on a construction site for up to 3 years. But eventually we decided to go on because we got tired of renting. By end of 2021 I got offer for $475k, cash, and someone "stole" our plans and our builder built exactly same house next street for $450k (we went inside everything was the same so same options were selected). Then "correction" should come and everyone expected Jan-April 2022 to be a 25% cool off since market rose so much. Well, our "correction" was that prices stopped going up, that's it. Now just few days ago I got an offer by mail (they find your address and mass-mail you) for "amazing amount, just to call". Out of curiosity, I called and was told upon doing title and lean research, an Executive Manager can show up overnight with $525,000 check.
Weird times...
When tightening, there arent enough dollars in circulation to do that.
But the bankers get the actual value (homes, collateral, liens on income) regardless. Lenders dont keep seized collateral on their balance sheet, so they sell it at the best price (and they dont need the max price because they already made so much on interest payments). So they push prices down in their firesales.
For the tightening money supplt and people trying to find dollars, think of it like the poison map closing in on Call of Duty Warzone.
So you can base housing prices on that outcome.
We're seeing people moving, and supply limits are influencing both rental prices and purchase prices. It's a weird housing market.
The question of the rationality of the valuation is:
1. Do you expect these migration patterns to continue? 2. If so, when do you expect new construction to pick up the slack for demand? 3. How bad of a recession is the Fed going to cause to break inflation?
> housing that should depreciate over time.
It does, amusingly. Housing stock ages and units you build now will generally be worth less in 10-20 years. Land is the thing that can appreciate in value.
is it not typically the case that, before the price of something goes off a cliff, most people think it's worth the going price?
your first sentence is quippy, but i don't think it's saying anything.
You either believe the market is efficient or you don't.
Crazy if you believe most of our nation should be essentially indentured servants for basic housing.
Something like that, I think.
No.
Hopefully you aren't using that justification to do something stupid.
Sorry but I don't put a lot of stock in what Moody's says about anything.
There's pretty strong evidence that the rise in house values is structural not speculative. This is essentially the constraint of supply. There are multiple causes of this including:
1. The US building very few new homes 2010-2020. There are lots of reasons for this. A big problem is the type of housing being built, particularly in urban center where like NYC where the vast bulk of new housing units are ultra-luxury condos;
2. Permissive policies allowing the rich to park money in real estate. This particularly includes foreign nationals from places like China, India and Russia; and
3. An increase in people owning multiple properties. These include second homes, vacation homes and short-term rentals (most notably for AirBnB). There's strong evidence that AirBnB in particular has huge negative impacts on a lot of metropolitan areas.
A lot of tempted to blame Blackrock and other instituationl investors as constraining suply. this is completely overblown. These account for less than 1% of US homes.
[1]: https://www.ft.com/content/6457f28a-d9fa-11e6-944b-e7eb37a6a...
We here in Canada have been running the interest rate increase experiment ahead of the US. We've also had a much worse run up in housing prices. There are rundown shacks in Oshawa, Ontario selling for more than nice homes in Los Angeles. Where the hell is Oshawa? That's the whole point, it really doesn't matter but it's a former General Motors factory town about 1 hour east of Toronto.
Two months ago the real estate bulls were saying what you were saying now about supply. But the numbers are in for major areas like the greater Toronto area after a single 50 bps increase this past quarter like the one the Fed just dropped down south. Some suburbs of Toronto have already seen median prices drop 10-20% off their January/February 2022 peak prices [1].
The volume of home sales has plunged 41% in Toronto [2] as the market absorbed the 0.5% interest rate hike. And we haven't seen anything yet. A huge chunk of the buyers today have pre-approvals with interest rates from 75 bps ago. Around June 1 these buyers need to commit to a purchase to provide enough time for their lenders to close the deal at the old interest rates before those expire. The Bank of Canada is also expected to make a further 50 bps to 100 bps jump in rates in early June.
Anecdotally, there are already horror stories of over leveraged buyers -- perhaps amateur investors or a family that stretched themselves to the limit to buy -- only for their deal to fall through because the banks won't appraise the home at what they agreed to pay for it.
As a wannabe first time homebuyer myself, I've heard every argument you've said repeated ad nauseum up here in Canada the past half year by real estate bulls -- who I might add, have been totally right in their assessment of our crazy market which could only go up for perhaps the past 15 years -- only for the market sentiment to completely change overnight within a month or two of the 0.5% interest rate hike.
[1]: https://preview.redd.it/w61ns3b7jgx81.jpg?width=1024&auto=we...
[2]: https://www.bnnbloomberg.ca/toronto-home-sales-plunge-41-in-...
In order to stand a chance of working our way out of this, we need to make it easy to build in terms of what happens at city halls to make more supply increasing projects viable in the eyes of lenders. We need to increase the zoned capacity of our job centers so they can actually support the workers they employ versus force the lowest earning workers to far flung commutes or into living multiples per bedroom. It's like a law of physics. Make it possible for developers to build and supply will expand like a gas to fill available zoned capacity until demand incurred by labor are met, and prices should not appreciably rise if there is no need to enter bidding wars far above ask.
1. https://la.curbed.com/2015/4/8/9972362/everything-wrong-with...
Going for the metro area could be even larger.
One huge advantage places like Paris have is that they've been dense for so long that there is older housing available in dense areas; in the US any new density will be new construction, and therefore tend to aim at the luxury/higher-cost buyer.
Our housing market is in deep trouble right now. Big falls in the major cities over the past few months (-20% in Auckland city). Listings where I am are up from 1000 this time last year to 3000. Prices are falling. Rentals up significantly too with prices falling.
A speculative boom creates excess demand. Just like Ireland did, we are seeing that the problem was not on the supply side, but the demand side. Speculative vacancies are now being revealed.
Maybe it has something to do with all the money that has been printed, and the insane low interest rates
No, for the simple reason that (most) people buy homes with mortgages. Take a look at the 30 year mortgage interest rate over the past few months.
The total cost to own a newly purchased home is what matters, not the actual sale price. That's mostly paid by the bank.
Even if buyers are prepared to absorb the massive increase in total cost of ownership necessary to keep prices moving upward, it probably doesn't matter because many prospective buyers will no longer even satisfy the mortgage DTI qualification at current prices.
You may object that some are buying with cash. While that's true, it's not enough of the market to sustain prices.
Second, the big issues is with houses supply. The high rate basically lock most current sellers which have very low mortgage rate (compared to 5%), hence reducing the supply more.
Not necessarily. For anyone who's been working at FAANG and amassed certain amount of financial independence, the advice generally ran along the following scenario:
1) Secure a pledged-asset loan against your stock portfolio. That reduces the need to sell anything and trigger capital gains.
2) Shop around for real estate and submit a cash based offer to signal that you can close quickly.
3) Finalize the transaction.
4) Shop around cashout refi loans with fixed rates. Refi. Cashout. Repay the asset-backed loan.
If those 30% who are cash buyers kept their cash locked up in their houses, you wouldn't see household mortgage debt (that includes refi) skyrocket https://www.emarketer.com/newsroom/index.php/us-mortgage-deb...
People with large sums of spare money always look for ways to park their money. Interest based products (term deposits, bonds etc.) will now become more attractive, diverting some cash flows away from housing.
That's a long way away from predicting a crash or even a significant decline in prices, though. That would require a lot more inventory, and all those folks with 3% mortgages are going to be in no hurry to sell, and the stats on their mortgage amounts vs incomes looks WAY better than it did in 2007.
So my question is, if there is twice as much money in the system, but the same number of assets, why would it be shocking that housing continues to inflate?
In situations like this, where demand is for a vital good and supply constrained, the government should be carful about managing the market. From what I can see, US politicians do care about the housing problem but their solutions thus far just exacerbate it by injecting guaranteed loan money and driving up prices.
They’re not though. Thats the whole problem.
Asset bubbles can inflate the paper value and there might still be some trading activity. But if nobody can actually buy the asset, it’s pretty much useless.
But to your point — things change, you aren’t rich enough, it sucks, get over it.
A lot of people buying houses unfortunately don't really look at aggregate home ownership cost and focus (incorrectly) on monthly payments. So, because they can afford the monthly payment, they think they can afford the house. This of course works works until the music stops.
That makes price discovery harder and means that the market price can lag what is a sustainable long-term price.
It is not a prediction on future prices.
If someone buys an asset for $100B that yields one penny per year with no growth - it is safe to say it's overvalued / a speculative investment. It does not mean that someone won't buy it for $200B tomorrow.
- Disallow foreign investment in residential real estate.
- Disallow for-profit corporations to purchase residential real estate.
- Stop subsidizing speculation by bailing out real estate investors
- Invest in infrastructure so that living apart from big cities is more worthwhile. Especially broadband internet and schools.
- Add a tax penalty to vacant residential real estate.
My suggestion is somewhat simple: return to the early 20th century model where if you own the land, you're free to build homes on it. Even if it means the neighbourhood now has reduced parking, you block someone's view of the mountains (Vancouver I'm looking at you), the building casts a shadow in the local playground, etc.
If we stopped messing with the market and started using a currency with actual backing in physical resources, maybe we would experience less recessions and crises.
Avoiding all the short term pain is not free just because the government say so, you'll have to pay it sooner or later.
In a market without government actors capable of breaking rules probably owning houses wouldn't be that valuable. There is plenty of unused land in the world and without a government starting a new city or profitable businesses would be way easier than now.
Odd that, build enough homes for the population, is not mentioned however.
The rest of your list is good, but I don't agree with this at all. American cities need less sprawl, not more. Denser cities need less infrastructure, which means less stuff to maintain and have to rebuild as it ages.
IMO we should strive to make it so that living far from cities is what is expensive, not in them. I know not everyone prefers that, but it's by far more sustainable, economically.
Something is broken. Homes that wound have been listed at $1,000,000 in 2019 are going for $1.750,000 today. Interest rates going up should cool it off but I fear it will break much of the rest of the economy. There was a massive mismatch in executive policy and fed policy and here we are.
Say it with me:
> “Inflation is always and everywhere a monetary phenomenon...” - Milton Friedman
It turns out years of suppressing rates combined with dumping many trillions of dollars onto a supply constrained economy causes a rise in prices. Huh... You'd think the trained professionals at the fed would know this by now, but they continue to believe they can defy reality.
We are about to pay for 12 years of easy money policies.
They decided to test MMT and it failed so badly.
> They decided to test MMT and it failed so badly.
Not giving either one a pass though because Biden reappointed Powell and failed to give Powell the political direction to raise rates late last year when it was obvious inflation was anything but transitory.
For anyone interested trillion dollar triage is a great book.
The market is being completely rational. What "overvalued" here means is "are homes expensive compared to local wages" not "are homes irrationally expensive." Normally this would drive construction but the market is distorted by credit such that new construction is less economical (a result of 2008.)
This also forms a feedback loop: people are giving up on labor since housing consumes more than they make, driving up the price of construction, driving up the price of housing. It's likely the dollar will crash before middle/lower class hosing will.
https://fred.stlouisfed.org/series/UNDCONTSA
People keep repeating these statements about underbuilding or lack of supply as if they're backed by data, but it's just he said she said. Number of housing units to households is the same as it was in the year 2000, and in line with historical levels.
Home price gains were driven by a low rate induced speculative frenzy. It's inflationary psychology at work. E.g. people spin narratives about why you need to buy now to avoid being priced out, thus everybody starts to panic buy making the prophecy self fulfilling in the end.
But this never ends well. At the root of every bubble is some collective narrative that "justifies" its existence
The supply constraint is old but its not why housing is high - housing prices are high even in places where there is a lot of construction. Monetary policy explains it a lot better, and it predicts that at some point the trend will reverse.
I think the issue is that the United States has been too cheap and finally that era of abundance at a low cost is coming to an end.
The biggest affordability issue I see is that nobody builds starter homes for sale. In most areas, you can easily find a small 1br or 2br apartment to rent, but you can't buy a similar apartment. If you have to continue renting for years after you have settled down, because you can't buy anything smaller than 1000 square feet, it's harder to afford buying that 1000+ square foot house.
In any case, why not just continue the era of abundance? We aren't really running short on space, and there is at least some indication that the lack of housing availability is a policy failure (rather than an expected outcome of some physical process or limit).
Edit: I should say anyone can buy a house for 20% down or less. In much of the world some can do this, but credit is not extended to nearly as many of the population as it is in the US
[0] https://data.oecd.org/hha/household-disposable-income.htm
Essentially, a few hundred rich people moving from SF to some smaller town won't move SF's housing cost but will skyrocket the small town housing cost. However, the few hundred rich won't boost the income significantly.
This is a data artifact made from the fact that "prices" are determined by what's on the book and "income" is determined as a whole. The difference between what's on the book vs. the whole is best illustrated by San Francisco, where most people pay far less for a 1 br apartment than the "going rate for a 1 br apartment".
Even the repeat-sales method for home pricing is not immune to this data artifact because we don't use a new-job method for income. This causes decoupling of the fundamentals when you get the remote-work revolution.
The money has changed, not the property. I’m now curious how undervalued it really is and what a huge accounting trick it was to play on everyone over the past two years.
>Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1.
The change increased M1 by moving common components of M2 downstream into M1. It's why M2 is all anyone should track. And a "definition change" is not in fact the primary reason for a large increase in the money supply in 2020.
Smart source: https://fredblog.stlouisfed.org/2021/01/whats-behind-the-rec... Gonzo source: https://gonzoecon.com/2021/04/m1-and-m2-have-changed/
You are unbelievably far off base.
I love free markets but they don't exist without laws and regulations, and those laws and regulations must match what is being sold.
I mean think about it, people can't get housing in cities without paying a ridiculous multiple of the costs to create that housing. It's like if restaurants cost 10x or more than the cost of goods for meals. I can make my own steak dinner for like $50 in components, but if I want to eat out at a nice place, even 3x is extreme, and really nice. This is like if all restaurants, even cheap ones, were $500+. It's insane.
No, they've instead raised wages to attract employees, which they have to do because of the labor "shortage".
Volume would go down, and whatever is sold will be done at a much lower market price.
Argentina had a RE bubble in 2017, and property prices dropped 40% since. It has happened, it is happening, and it will happen again.
For example, I pay $24k a year on a house worth around $1.4m. This gives a return of around 1.7%, which is nothing compared to cap notes (5%) or dividends (~4%).
However, someone buying our house would only need to put down 20% up front, and could reasonably expect to see the price raise by 5-10% a year if trends continue. So that $280k deposit could theoretically return $500k+ over the course of 5 years because of the high leverage. The rental return over that period would only be $120k - not even enough to cover the interest repayments on the loan.
Of course, that's assuming trends continue. If prices started falling by 5-10% per year, that $280k deposit would turn into a $500k+ loss and the investors would be absolutely fucked.
Don't let NIMBYs think that that is the problem. We need more housing.
That doesn't stop social media from flagging a "millennial crisis".
Investors should be forced to legally go fuck themselves. Same with flippers. Same with landlords. All of these just add extra cost and exfiltrate equity for some rich person to get richer. (I've lived with landlords for 40 years. My hatred is deep here. They've taken my money, built their equity, and charged 1.5x more than the housing would have cost. Damn straight I'm angry.)
there's few cases where landlords of a form make sense - dense housing is needed in cities. Treat them like cooperatives, or do like utility companies where this service is guaranteed and here's the cost. But companies should not be able to unduely profit on the fact that people have to live.
This isn’t good.
https://inflationchart.com/m3-in-home/?time=10%20years&zero=...
Neat website btw. Thank you for sharing.
10% drop - yeah, good luck, noone will notice that.
The combo of slightly higher wages, more young people moving out, and low interest rates does mean more people have the opportunity. And that’s not a bad thing. If you cancel any of those factors, you’re blocking access to people who would love to own a home.
I think the factors that should change are supply and investors. It’s not like we live in an era where housing is cheap and bountiful. Clearly it’s severely constrained. The other part is investment. With low interest rates, it’s easy to justify a house as an investment vehicle.
Legislatively, it needs to be easy to build and hard to buy more than one property.
What gains value over time is land. Poeple only think they invest in houses, but they are fooling themselves and overspend on the construction and interiors. They pay for land.
Easy to prove - construction material and labor are highly mobile. Cement, bricks and imported labor costs the same in New York as in middle of nowhere. The price differs only by transportation costs and temporary lodging of workers. The real difference comes from 1. price of land 2. bribes for construction permits of a respective town. In other words - location is what you pay for.
In Japan, this is more explicit. House value drops to zero in 30 years. https://www.theguardian.com/cities/2017/nov/16/japan-reusabl...
I wish this were true legally - my property tax bill on my 40 year old house would be 0, but sadly it increases every year as my home value appreciates.
Here, the only time I see old homes getting demolished is to make way for a new apartment block.
Hell, the house I am living in appears to have been built some time in the 40s to 50s
That means we know what works. High prices are the result of supply and demand not meeting.
There is very strong evidence that just these work in combination.
1. Building enough housing into cities (by compact zoning, with good infrastructure). Japan is main example. Tokyo has no housing crisis. They just kept building houses until everyone had one.
2. Taxing empty apartments extra (nobody registered to live there for over a year). Taxing undeveloped properties in zoned areas extra.
After these two have been implemented. It just works. It does not matter if it's luxury or not as some claim. When luxury house is build, one frees up somewhere (as long as they are permanent residences). One new luxury house starts a chain where only 3-4 hops away someone with low income gets a new house.
I’m always wary of “this time is different.” But sometimes, times are different.
If we assume a house bought by an exiting San Franciscan must be resold to a local, yes, the home value is askew. But if we assume it will be sold to another tech worker forged in New York or the Bay Area before achieving sufficient seniority to go remote only at high pay, the denominator is different.
I don’t think that explains the gap. And code fixes would burst the bubble; while there has been historical opposition to such tweaks, a carpetbagger-longtime local divide is about the best fodder for it. But local deviations from the national premium may be explained by permanent factors.
Forget SF and just follow the money. More dollars created since 2015 than before 2015. https://fred.stlouisfed.org/series/M2SL. Half the money supply came about in the last 7 years!
Tech workers are closer to the money than ever before (maybe closer than quants etc.) because money is looking for yield at any risk. Tech investment provides that promise.
It was listed for a total price of 2.2M NOK / 235k USD. 12 years ago, it was sold for 240k NOK / 25k USD.
Or this: https://www.finn.no/realestate/homes/ad.html?finnkode=254704...
Which was sold for 2.5M NOK / 261k USD. It is 13 m^2 / 140 ft^2, and 11 years ago, the same apartment was sold for 325 NOK / 34k USD.
As you can see, both of these tiny apartments have increased by around %700-%900, or a 11-12 year gross CAGR of around 20%!
As you can imagine, these apartments are not meant for long-time living. These apartments have been bought and sold 3-5 times since 2010, and if I had to guess, they have been bought by the parents of students, and sold as soon as they've graduated. No-one has lost money on these apartments.
At least here in Norway, more so Oslo, real-estate pricing has slowly but steady outpaced the purchasing power of young people. In fact - over half of first buyers in Oslo are backed by parents / family. The ones that don't get help, probably have to rent and save for a longer time.
It is purely anecdotal, but I've seen this divide in a pretty stark way...those that get help from their parents, buy their first apartment straight out of university (sometimes even while being students), so around age 22-24. People that don't get any help, late 20s / early 30s.
While Oslo would be the worst place here for first-time buyers, most mid-sized cities in Norway are trailing these prices and trends.
1950 - $3,300 - $7,354
1960 - $5,600 - $11,900
1970 - $9,870 - $17,000
1980 - $17,709 - $47,200
1990 - $29,943 - $79,100
2000 - $41,989 - $119,600
2010 - $49,276 - $221,800
2020 - $67,521 - $336,900
God it's depressing. I'm jealous of the generation who bought homes for the equivalent of one year's salary, sat on them while their value multiplied 20x, and then had the economy shut down for two years for their safety. And of course, they received healthy pension increases while the minimum wage remains stagnant.
I think it’s a combination of not enough available housing (and pandemic increasing costs for building new homes), fall in the value of the denominator due to central bank action, and people moving often having lots of equity in their existing home they shift to the new one so the increase in mortgage size isn’t huge.
There won’t be a big crash (unless we see a deep recession with rising unemployment and defaults) but central bank tightening and raising rates will definitely curb house price growth in the next couple of years.
Futhermore, attributing this run up to Covid is revisionist history. The Fed has been goosing the economy for too long. Even my dog knows this. And that has assisted those who are investing in residential homes (because office space has been slipping into the shitter).
This is Moody's and its WS family getting out in front of what's coming. Hear it enough times and we'll believe it.
Where I live, they have an amount of taxes they need to collect, and then they divide that up based on property values. If the value of everyone's property doubles, they still need to collect the same amount of property taxes, so everyone's property taxes stay the same.
I guess in some places, they just do it based on property value, and when house prices skyrocket, the government just says, "Score!".
Wouldn't want to live in one of those states.
It’s kind of funny thing that interest rates did but the escrow portion of my mortgage payment is bigger than the principal and interest.
*I'm currently a beneficiary of this, and I hate it. I dont want my HOME to be overvalued.
> The economist said a given housing market is considered overvalued if property costs in the area are "well above" the historical relationship between home prices and incomes, rents and construction costs.
Which, no surprise there, prices are up in a lot of places!
Whether or not that is "overvalued" or suggests a crash coming seems a lot more complicated. Would historical trends hold if historical conditions have changed? Mortgage rates rising are one of those things you'd expect to certainly arrest some of that price acceleration. If everyone who moved to Boise decides to move out of Boise, that's another one. (Though if a bunch of folks moved back from Boise to SF, that's not gonna cool down the also-seen-as-somewhat-overvalued SF market!)
Maybe a bunch of folks are just spending a bunch of crypto winnings, naturally causing inflation but not necessarily leading to a crash. ;)
Prices are up 50% in the last 18 months.
There are zero out of 615 homes on the market and this is supposed to be high season for transactions.
It makes no sense to me.
Why would rents go down? It might go up?
- now: high price but low mortgage?
- later: lower price but higher mortgage? (or simply take this and later refinance at lower rates?)
;)
Maybe 3rd world countries could start opening up their citizenship/PRs for US/Western Europe/Canada/Japan/Korea/1st world citizens. i.e, Give up your origin citizenship, say US, for Indonesia for example (because Indonesia doesn't allow dual citizenship), and gain these benefits for you:
- Extremely cheap cost of living
- You can own a house and a yard as big as you want, with nice cars, and maids, drivers, gardeners
- You can send your kids to international school that are cheaper than your private school, and also of better quality education wise than your local public school
Meanwhile, Indonesia will gain:
- The new citizens/PRs can help create opportunities/businesses in Indonesia and employ locals
- The new citizens/PRs will spend their money in Indonesia, buying local goods and services
For example, a nice area in Serpong (just a bit south of Jakarta, cluster-style 2 story houses, 3 bedrooms, will cost you around $150.000. Complete with security guards.
I'm sure there are other countries that are ok too, like Thailand, Vietnam, Philiphines.
People have jobs where they live, they know the city or at least the country. The language is not a problem, they are familiar with food, laws, standards, processes.
I worked in many different countries before, developed and less developed. It's "fun" for a while, but in my experience people don't want to stay, they only stay temporarily that for career reasons.
Plus, how long will it take until the local folks will get mad because your kids are treated better (in the international school), you have a bigger house, enjoy a better life? There will be the same "those migrants are taking away our stuff!!!" sentiment that we already know here in the WeSt.