> Consider what that means for the home buying market. Those of us fortunate enough to have 30 year fixed rate mortgages at about 3% are about to see our mortgage “debt” give us better returns than our stock holdings.
Does this mean we should have borrowed as much as possible to buy a house when rates were low ?
It's wrong though. Home prices are likely to fall quite substantially if you actually look at all the fundamental data and cast it in the light of significantly higher mortgage rates.
Higher inflation also raises the risk free rate which devalues assets. The stronger effect of the two will win out, and with valuations multiple standard deviations above the mean, the end result is pretty clear
This has been attributed to the high cost of housing. [1]
The secretary of HUD was here a month ago taking a tour, talking about affordable housing.
We started a family last year and despite needing to move out of a duplex, we would not seriously consider a purchase.
Prices and terms of sale have been outrageous.
Deciding our best bet was to rent, we found the rental market for single family homes a disaster.
The only way we found something was because we know a postal worker who saw a for rent sign while walking their route.
The place never hit the internet.
The house needs a ton of work and the only way it can be priced the way it is is because the market is so totally busted.
My wife tracked pricing and made a spreadsheet of comparable rentals when we signed the lease. I’d guess our rent was at least $400 under market.
I grew up in Portland. I went to a portland public school and college in Oregon. I had wanted to live here.
However, we need housing to show clear indications it will turn, an unexpected windfall, or we will move away from family here and toward other family in the mid-west.
Regular people are desperate here, valley folks are coming in doing the same thing we would do to wherever we could land in the Midwest.
Housing is broken.
[1] https://www.wweek.com/news/city/2022/05/27/new-census-number...
We need to get a federal level right to build housing on your land. We also need to overturn Euclid v Ambler.
I have also known quite a few people have recently left California. And not a single one of them left a vacant house behind.
Urban offices aren't filling up and essential workers have less money than ever.
Interest rates have gone from 2.75 to 5.4%, meaning monthly payments on purchases have gone up almost 40%. Not all that will transfer to the rental market, but I be surprised if rents don’t continue to go up; barring a general collapse in house prices.
If a significant fraction of landlords have financing costs that greatly exceed rental income, that is their problem. They can't just pass that cost on to renters because they feel like it.
Purely anecdotally, a large proportion of the housing available for sale in Plymouth (UK) seems to be rental property. Tenants are being thrown out while landlords sell up.
I have been wondering if the drive to cash out at a time when holding cash isn't necessarily such a great idea is exactly what you suggest - that those with buy-to-let mortgages are looking at the potential of interest rates rising faster than rents.
Yes, they aren't 100% interchangeable (down payment requirements and transaction costs can change the equation renting all things being equal ) and some markets (the bay area in particular) seem to have a bizarre separation in the cost of renting versus buying, but in general this holds true.
Now that real incomes have been falling rapidly for months, we can expect household contraction and rent stagnation or decline.
FL fell 60% in the 2000s, and I wouldn't be surprised to see 40% this time around
While there are likely supply constraints at the margins, the house price gains have been a result of the amount you can borrow at a certain monthly payment being abnormally high.
Was there a reason to expect it to happen in the first place? Aside from ex post facto reasoning?
Housing is a tough market to crash because people need to live somewhere, so if prices fall people just avoid moving, and liquidity drops. For prices to fall substantially requires that people express a liquidity preference -- they'd rather have the money, even discounted, then keep the house. And the primary way that happens is that people can no longer afford to service their mortgages.
This doesn't happen easily, but when it happens, things can break very dramatically.
Ideally demand will go down because things as it stands are just not affordable to most. The rent also is going way up, so that drives housing prices too.
Where have those properties all come from?
Consider that all properties are either investments or owner-occupied. By definition owner-occupiers don't keep empty (or underutilised properties - assuming second homes and holiday homes can be categorised as investments). Therefore, if there are more investors active (or more correctly, investment properties) in the market, the proportion of empty or underutilised homes is going to be higher. Investment activity in the market has undoubtedly been increasing for some time.
What appears to be happening is that our underutilised housing stock is now being revealed as investors panic. The same thing happened in Ireland during the GFC.
There are many reasons investors will leave properties empty or underutilised during a speculative boom (renovating to flip, on the market, good old fashioned landbanking, a convenient city pad or holiday home, etc). There is much more of this about than people realise.
I am very confident that rising interest rates are going to turn out to be a good thing for renters and first time buyers. It'll just take a bit of time and some economic upheaval.
People used to live a whole family in a one room apartment, and now we have single divorced boomers living in whole houses alone. I think people adjust a lot here depending on the economy
It's interesting that for the past 15 years or so the average household size in NZ has remained at about 2.7 despite a housing crisis with more people living in cars, converted garages, etc. I always assumed that the more crowded households were 'balanced out' by an increase in the number of smaller dwellings with fewer people (specifically apartments) but it could also be an increase in the number of people living just 1-2 in larger dwellings.
People touting supply issues don't understand the difference between number of housing units and inventory.
The number of housing units per person is at an all time high
During the past 25 years the number of residences relative to the number of households has increased substantially from roughly 3.5% more residences to something like 6.5% more. All while the number of people per household has declined slightly and prices have increased astronomically.
Very frustrating this past decade to have the entire debate framed around building more houses as the only solution to deal with this 'undersupply'.
In my opinion a speculative boom has created excess demand and increased the number of underutilised properties. Thankfully rising interest rates appear to be dampening that excess demand (to put it mildly).
Divide columns B7 on sheets 2 and 3 in the NZ data (https://www.stats.govt.nz/information-releases/dwelling-and-...). The all-time high of 1.06 happened in 2012 and the ratio has since fallen back down to around 1.043, just a bit above the 1.04 value from the 1990s.
My prior is that there is an undersupply, signalled by prices, and I’m afraid this method tends to underestimate it. First, household formation (as in, moving out and starting a family etc.) depends in part on housing availability. Second, internal migrations due to urbanization cancel out in national level data – for every move to a city, there may now be an empty rural unit, and a crowded urban unit.
PS Remember too, that there’s a natural churn to housing – people sell/renovate/etc. on average once every X months – therefore we need at least 1/X of excess housing to smooth it out. This is an absolute lower bound that assumes people don’t differentiate between any two houses, but are willing to randomly swap e.g. a 120 sqm in the central business district for a 30 sqm in a rural area. This assumption is obviously wrong.
I notice that they have revised some of the more recent household estimates. I had 1991 at 1,307,000 private dwellings and 1,252,600 households. A difference of 4.16%. And 2017 (or rather Q4 2016) at 1,855,500 private dwellings and 1,734,800 households. A difference of 6.5%. This - at least a few years ago when I first looked this up - was the most recent period where both figures were available.
They have indicated the revision to the household data and I am almost certain that they have revised the dwelling data as well.
The long and the short of it is, we still have a higher ratio of dwellings to households than we did before this price boom started to take off.
If I am reading you correctly, and you are indeed saying that rising prices are enough to assume an undersupply, I would have to both agree and disagree. I think it is only enough to indicate an undersupply relative to total demand, but that demand is both for homes and investments. As interest rates fall, monthly mortgage payments stay roughly the same while the size of mortgages rises as people are able to bid more for a house. With rising prices comes speculation and extra demand. We are about to find out what happens when that type of demand is removed or at least severely curtailed.
Your point about churn is definitely true. I mentioned in another comment in this thread that 'on the market' is one of many reasons that a house can be empty. I take your point but also believe that turnover is more frequent when speculation is at play.
If you are interested in measuring supply/inventory/utilisation of residential property, I'd recommend that you look up the 'Speculative vacancies report' published by Prosper Australia, a Georgian group based in Melbourne. They have an interesting methodology whereby they gather water usage data and use that to determine if a property is underutilised/vacant.
[1] Total US Households: https://fred.stlouisfed.org/series/TTLHH [2] Total US Housing Units: https://fred.stlouisfed.org/series/ETOTALUSQ176N#0
Shortage narrative is propagated by people who don't look at the data
What matters is the fundamentals relating to number of dwellings vs number of people
Fewer developers will build new apartment buildings because financing is getting much more expensive. Fewer new apartments with a growing population means rents will not be getting cheaper unless we have a deep recession and lots of people lose their jobs entirely.
Same goes for housing -- fewer houses will be built by builders.
Existing housing prices will probably go down, but the people buying them with mortgages will pay just as much, if not more for them each month because debt is getting more expensive. But instead of that money going to the old owner, it'll go to the lender.
I couldn't handle moving that often, but there are folks who do.
However if you look long term then housing inflation out paces interest rates. This is always the case. So taking a 30 year loan with low rates is a pretty safe bet that you will come out on top over this long term time period.
I refinanced my morgage in spring 2020, up to the maximum allowed at the lowest interest rate bracket. The main reason was to ensure that I had liquidity, in case the economoy would crash much harder than it did in 2020, the secondary motive would be to take advantage of investment opportunities that might show up even if the credit market would crash (potentially making it hard to borrow).
Until now, I've been paying about 1% over the floating interest rate, but made a good profit from the money, most of which was put into index funds, even if half the profit has been lost this year. I've moved half my index fund holdings into index funds focusing on commodities, hoping that these will hold better than generic index funds if inflation stays high.
I don't belive central banks will be able to bring inflation under control on the first attempt. Instead, I predict that interest rates will go up until a moderate/strong recession causes people to enter the streets, and that QE and lower rates will follow for a time period, causing drawn-out stagflation, which is why I dont want to have too much in cash. I do have about 30% in cash, still, in case the market falls much further than it already has.
Sort of. You should have borrowed as much as possible up to the level that, under nearly any circumstances, you could have still serviced that debt(i.e. made the payments). Historically, those were really cheap rates to borrow money and we might not see them again for a few years(or a few decades).
Like, say, a USD$25T federal debt?
Deflation (or even undershooting inflation) isn't an option.
For example, Having assets on a fixed loan of 3% when you can get a CD of similar duration for 3.5% means you are making money by owing those assets and owing that loan.
It is why deflation is such anathema to the financial industry. They don't want anyone but themselves to benefit from financial conditions.
The path to beating inflation is (a) borrowing at fixed low rates before it kicks in & (b) buying some asset that appreciates at greater than inflation rates (or at least paces it).
Taking on as much debt as possible is rarely the best idea, especially if your income could at all have been at risk at any point. But yes, with interest rates as low as they were for years, more than average was probably a pretty good idea as long as it was within one's means to support. The Fed lowers interest rates as a means of stimulating the economy, and as the old adage goes, "Don't fight the Fed."
Prices were also high. Time will tell.
Wait, what? Americans can fix for 30 years?!! The longest I've seen in Australia is 7 years fixed, but the usual home loan is 3-5 years fixed and then a renewal at the new market rate.
It might have been a pretty good deal for the people who bought homes with 25 year 0.7-0.9% interest rate mortgages these last few years.
https://sdw.ecb.europa.eu/quickview.do?SERIES_KEY=304.RAI.M....
Another question - with a normal fixed interest loan for 30 years, does that normally include paying off the principal? I.e after the 30 years, the loan is paid off?
Here, fixed interest usually don't pay down the loan whereas a variable loan pays down 100% of the principal after the 30 years
Also you always own the home as long as you are meeting the terms of the mortgage contract.
Fixed for 30 years plus paying down the principal is genuinely mindblowing to me, especially at the fixed interest rates of last year.
Because the money supply is in some sense linked to house lending by the banks these days (not the entire source, but a lot of it), house prices will increase in tandem with the money supply, that is fairly guaranteed.
For the rest, look to the latter part of the 1970´s, which is what happens in the US, when following a long period of low inflation, inflation and higher interest rates kick in to create this situation. TLDR, it isn't pretty for the lenders (banks, savings and loan, pension funds) who get stuck with the low interest rate long term loans. But that's prequelling the next financial crisis, not the current one.
Of course the reality is that the 30 years aren’t over and it’s all about risks, this is a gamble where the buyer was lucky.