I don't think most people who invested in housing in the last couple years, are ready to believe that yet.
I don't think most people who invested in housing in the last couple years, are ready to believe that yet.
Current renters will have lower potential to save on a monthly basis, only to get 30-40% off on their first home with a >7% interest rate. If you sum the lost savings from rent plus the additional interest payment, it is uncertain whether that is the best strategy. That is also assuming real estate prices in certain regions wont hold stronger value, which they probably will. Some areas in the South East, Midwest, and Front Range will likely not see such a drop in value with respect to interest rates and mortgage payments. The demand is just too high.
Not to mention that rent is collected by people who are now in a better position to purchase newly discounted real estate without loans, further fueling price demand by competing against each other and shortening supply.
It's cheaper to rent than to buy in many markets and if you own you have to factor in maintenance, property taxes, and insurance. It's definitely not as black and white as you're making it out to be.
Around here, if you rent, your landlord factors those things into the rental price. Admittedly not necessarily the insurance; that typically is just a requirement of the lease.
There's so many predictions but my take is simple, the only thing for sure is that prices are not going up anytime soon again.
I'm still renting as I moved around a lot for jobs. I've saved hundreds of thousands of dollars, and intend to strike in 2023. I'm still looking for deals in the meanwhile, but most of these sellers are bitter that the market from even at ~5% in the summer is gone. And by and large the buyers disappeared in March in my region.
At a certain point, prices do have to match the cost of borrowing money. That's the trap of cheap loans. Those that got ~3% loans are stuck in whatever home they chose without a loss. They can't sell because most used that cheap money to pay ahead on decades of gains. Finding a sucker at 7%+ is going to be impossible, because short-term minded people simply don't have the money or means. And there's only so many generous and wealthy fathers to go around. Even those dads or investors don't want to take a risk in a market that hasn't bottomed out yet.
Once again, as always, cash is king.
But taking it at face value, selling when prices are high is often a net-zero since you have to buy back into the same hot market (likewise, selling in a cold market can make sense if you want to upgrade into the same cold market). Selling in a hot market is only a net win for investment properties or second/third homes, and those people often can wait out cold markets (but sometimes they are leveraged like crazy and can't!).
One way to look at this is to ask people what they plan to do. Another way is to look at what they've done.
According to this article, the average length of time spent in a house is 8 years:
> https://www.thezebra.com/resources/home/average-length-of-ho...
So unless those people you know just moved in, they're X years into a average 8 year occupancy.
>
> https://www.thezebra.com/resources/home/average-length-of-ho...
Okay, using your own reference, they also say that the median was 13.2 years.
Anyway, from that article you cited, a stunning 76% of homeowners stayed longer than 8 years.
It seems what more than 3/4 of homeowners do is simply live in the damn thing.
As long as there's someone in the vicinity selling at a lower price your house would lose value either way. And there's always someone selling.
Your second statement I wanted to agree with but you never really win with any mortgage (other than getting a home, which is important).
You'll pay for any house at any rate 2-3+ times over if you just pay the minimum payments. When you go to sell it at the end, your home will not have doubled in value or more. Not for anyone born after 1980 at least.
The only way to win financially is to pay off the house, or beat out usury by producing reliable market gains or other income to outpace it. Easier said than done, I would just pay off a home as fast as possible.
Maybe not at 7%. Maybe not at 3,5% either. But at 1-2% fixed for 10-20 years and you don't have to refinance, you win. So your statement is a bit broad.
I think it's a good exercise to compute the total interest over the time of the credit and relate that to the cost of renting.
Maybe that's the problem - making only the minimum payments?
The people making only the minimum payment due would probably have screwed themselves in other ways, financially, even if interest remained the same.
I bought my house in Dec-2016[0]. My outstanding principle owed to the bank right now is just a hair over 17% of what the original principle was when I was granted the loan.
Whenever my circumstances improved (wage increases due to moving jobs, cash bonuses in employment, etc), the extra money each month always went into my mortgage, despite complaints from my wife that we could do with a nice holiday in some other part of the world (or that she could do with a new car[1]).
That's basically 6 years. Now perhaps there are people who did not have their income improved over 6 years, but I don't think that the majority of borrowers experienced no income improvement[2].
The real problem is that borrowers have been making the minimum monthly payments, and spending the increased income elsewhere (new iShinies, new cars, new furniture, expensive holidays ... whatever).
People underestimate just how much inroads they could make into their principle if they didn't have high monthly car payments, or "need" a 24-month cell plan that basically sells them the phone at twice the price because "Look, I get all these minutes and data for free each month".
[0] I'm not in the US, although in the country I am in, I'm in a fairly middle-class and desirable area
[1] As someone who can rebuild just about anything in an ICE car, I keep her car running just fine, even though it's a 2011 hatchback.
[2] I admit, I experienced drastic income improvement (roughly 40% increase) when I switched from being an embedded developer to a backend developer. Completing an MSc didn't hurt either.
If you do sell, and the prices are higher, then you have won.
If you do sell, and the prices are lower, then you have lost.
So it really depends on how large the amount of people who don't want to but have to sell is compared to the amount of people who are looking to buy.
The risk here is a home's value dropping a lot, putting somebody underwater, and then life circumstances forcing them to sell. That's bad. But for the rest of us that happily make our mortgage payments it doesn't mean a thing if the spam emails from Zillow show a new number.
Doesn't help if rent eats all your paycheck, but if people are able to save they should be rewarded for doing so, and allowed to use that for a first home purchase.
https://www.investopedia.com/ask/answers/081815/can-i-take-m...
That said, both of those generally sound like poor choices, but if you truly need it they are options(if your company allows loans). Saving for retirement is really meant to help you in retirement.
The conventional wisdom that borrowing from your 401k to buy a house is always a poor move seems... overly reductive and a bit patronizing.
If someone isn't able to fund their 401k and save for a down payment, who am I to tell them that using a tax advantaged vehicle is a bad way to become a homeowner?
Mortgage rates, local rental prices, local home prices and inventory, living situation and likelihood of moving, tax situation, etc. all impact, and I don't know anyone's situation.
Besides, who wants all the money in the world if you have to spend most of your life living in a place you hate?
Not just that but looking further out at retirement, downsizing and staying in the same area is not looking possible. The house might be worth $X on paper at that point but if you sell you are then thrust into a market where everything is much higher. Its financially more palatable to just stay put even if you don't need the space. I imagine people within a couple years of this decision are staying put right now and this will keep demand up regardless of rates.
Most people don't plan on selling their house when they buy it. Life usually forces you into the situation.
I mean, most of us aren't even able to afford to buy a home, let alone casually upgrade to a "forever" home. In my high COL area, even starter homes are only affordable for top 20 percentile earners. Everyone else either lives with roommates or parents and rents.
> In my high COL area
Yes, it is a problem that Millenials refuse to live anywhere other than Instagram-worthy locations. God, what would Becky think if I posted a TikTok from flyover country? And imagine shopping at Walmart, I would literally die frfr no cap.
How we could ever solve this vexing self-inflicted problem, I have no idea. What a quandary.
> seems like a very outdated concept
Yes, much like the outdated concept that building tangible wealth in underpriced assets is worth the cost of a slightly lower number next to the heart icon. Fucking boomers, amirite?
Frankly, I'm vexed by the trends as well, but from the opposite direction - I liked when South Texas was the backwater and Austin was a weird little city, but I don't think there's any going back. My property taxes sure aren't. I'm just hoping that I can make enough to retire somewhere cheaper and cooler in the summer eventually.
Probably because I don't even use Instagram, so I wouldn't know what it looks like to be in one.
> And imagine shopping at Walmart, I would literally die frfr no cap.
I'm glad you were able to find Urban Dictionary on the internet, and not get lost. If only I was such a digital native like you.
> Yes, much like the outdated concept that building tangible wealth in underpriced assets is worth the cost of a slightly lower number next to the heart icon. Fucking boomers, amirite?
Yes, you are right. Not sure what about, though, since I'm not going to waste any effort parsing your word salad.
https://www.zillow.com/homedetails/319-N-11th-St-Nebraska-Ci...?
$125,000 -- 4 bd, 4230 sq. ft.
https://www.zillow.com/homedetails/31237-County-Highway-62-U...?
$80,000 - 4 bd, 1547 sq. ft.
https://www.zillow.com/homedetails/711-W-North-St-Norton-KS-...
$149,900 - 5 bd, 1980 sq. ft, on 10 acres
https://www.zillow.com/homedetails/N4675-State-Highway-52-Br...
$104,900 -- 4 bd, 2300 sq. ft.
https://www.zillow.com/homedetails/316-E-Franklin-St-Clinton...
$55,000 -- 6 bd, 2198 sq. ft.
https://www.zillow.com/homedetails/4554-Holly-Ave-Saint-Loui...
Zillow links don't prove whatever point you were trying to make with the low effort post.
If this keeps supply low, why does anybody have hope housing prices will fall in a meaningful way over the next 3 years? (aka, people on the sidelines waiting for a pullback)
1) Mortgages dropped below 3.5% in ~2019. The median duration of home ownership in the US is 8 years. So: asserting that "most people I speak to who have locked in <3.5% are not planning on selling in the next 10 years" is kind of like... That's normal. Statistics assert they weren't going to sell independent of rates.
2) People severely underestimate how many houses in the US have no mortgage against them. Its somewhere around 35-40%. That's oftentimes because: the typical home seller in 2021 was 56 years old. The friends you queried are (probably) an anomaly in the market.
3) The reasons cited for why home owners sell their properties is far more varied than financial. The most typical reasons are: current home is too small, want to live closer to friends or family, moving for work, the neighborhood is becoming undesirable, and... death. Even in lower interest rate environments, most of these reasons would have resulted in a higher monthly payment; that's reasonably normal. The monthly payments today are, well, much higher; but the fiction that "I'm not selling because I'll end up paying more" doesn't really have basis in the core motivations for home sales (they might in the absolute pits of a recession, but that doesn't usually last long; certainly not as long as elevated interest rates; and even if they did, plenty of people end up being forced to sell because of money; but they're not going to go buy a new home in this market).
4) Happening simultaneously with rising interest rates is: the largest transfer of wealth in the history of the united states. Boomers are dying. Its estimated that, as their deaths accelerate over the next ten years, $30T-$60T in wealth (most of it in: real estate!) will be inherited by younger generations. Those numbers are mind-boggling. Its estimated that millennials, as a generational cohort, currently hold something like $10T in total wealth.
Point being; there's a lot going on right now. Its really difficult to draw single-post conclusions about any of it.
https://fred.stlouisfed.org/series/MORTGAGE30US
https://www.thezebra.com/resources/home/average-length-of-ho...
https://www.forbes.com/sites/brendarichardson/2019/07/26/nea...
https://www.nar.realtor/research-and-statistics/research-rep...
https://www.forbes.com/sites/josephcoughlin/2021/11/16/mille...
And a lot of people end up having to sell.
As someone who was too young to climb aboard the price bubble of the last 5 years: here's hoping.
Even if they stay in their home, people over-levered on their fake housing equity through HELOCs are in trouble.
Wolf Richter shows some nice graphs in the article linked below. He states that mortgages in Q2 were $11.4T and HELOCs a mere $320B.
https://wolfstreet.com/2022/08/04/trip-back-to-reality-start...
Don’t forget there’s a small but still notable number of homeowners with ARM mortgages.
Sounds like a supply issue.
But the same people that are usually against corporations buying properties, are usually against new home development and increased housing density. I saw many housing activists in the Bay Area who were against new housing at market rates and thought all new housing should be at below-market-rate prices--which simply isn't possible.
In other words, there aren’t enough homes and corporations sitting on some percentage of them is making the situation that much worse.
So those who have recently bought a property, even corporate buyers, are far far more likely to keep a property occupied than most landlords.
This caused management funds, BlackRock Berkshire etc, to start purchasing the homes as investment vehicles. These vehicles then will either sit on a house or simply rent the house out at a rate that makes fiscal sense, regardless of the economic realities.
This artificially restricts supply as they take these houses off the market, they don't care if the house sits empty for years as long as they can sell it at their target price, and then at the same time causes rents to be raised as the rental prices are set by an internal ROI formula and not what the local market can bear.
But I can not for one moment understand a cooperate buyer not renting it out; they have more than enough capacity to rent out homes, they can spread risk across lots of properties, and any time not spent renting is merely money left on the table, which would come back to bite any manager that is leaving a lot of money on the table.
SFH are a pretty insane choice of RE investment for institutions because they are so incredibly inefficient compared to apartment and office buildings.
Private owners would also sit it out if they can. Unless they can't. You think that's better? People having to sell at a big loss?
I think a far bigger concern is shortages of housing as individual homeowners and landlords act as a group to suppress local supply of housing. Local city councils tend to be controlled by such real estate interests. Corporate purchasers can piggy-back on that sort of regulatory capture without expending a single dime.
This also ignores the fact that the Fed's stated goal with raising interests rates is to increase unemployment to slow inflation. You are already seeing the results in quarterly financials. Once layoffs start happening people won't have an option but to sell when they can't make payments
(not legal advice, educational purposes only)
Apparently, there are only 10 non-recourse states as of 2009: Alaska, Arizona, California, Hawaii, Minnesota, Montana, North Dakota, Oklahoma, Oregon, Washington, and Nevada. The tricky thing is that only the initial mortgage is non-recourse. A refinanced mortgage becomes recourse, but interestingly, they don't seem to be required to disclose that in the disclosures.
Washington isn't really non-recourse, lenders have the option of recourse or non when pursuing foreclosure, non-recourse is significantly faster and is predominantly chosen; but if it was known you had assets, they might choose to go recourse.
Yes?
Why wouldn't you?
It seems pretty short-sighted to just put your arms in the air, give up, get foreclosed on, lose your home, and have your credit be absolutely wrecked for the next 7 years.
Just keep making your payments and ride it out. The market will eventually recover.
I think the only reason to give up is if you fell for the scam that is an adjustable-rate mortgage and your payments are skyrocketing and you can't afford it anymore.
Well, you could ask the very large number of people who defaulted on their underwater mortgages in previous housing crashes.
Does everyone do it? No.
Do a significant number of people do it? Absolutely.
As a relatively new first-time homeowner (a year), do you know whether a mortgage lender requires higher or additional insurance coverage for an underwater property?
If the loan goes underwater later, usually because of market conditions, maybe because of creative loan features, then the lender has no leverage to require anything.
You are required to have insurance when you have a loan on a property. The insurance rates could actually drop due to lower cost to replace your house.
Underwater property just means you owe more than it is worth. However, if your interest rate is low, you might be paying less than someone who is not underwater.
"Eventually" is doing a lot of work in your comment.
Buying a house is akin to putting your retirement into the stock of a single company. In that situation, it doesn't matter what the S&P500 tends to do on a long enough timeline.
1. People that buy a house will stay in it for 10+ years. This assumption being wrong means you're more likely to be affected by market swings.
2. Market swings won't be massively significant, for some definition of "massive", and I consider 275k -> 115k massive. Meanwhile, the Z-estimate of my house peaked at $618K this April, and is now at $561K. I would not consider that one massive.
3. That people stopping making payments because it's underwater, and not some extenuating circumstance, like losing your job and being unable to afford payments, or having a need to relocate that is unrelated to your home being underwater.
But it's #3 that really gets me. I fail to understand the "My mortgage is underwater" -> "I should stop making payments" logic jump.
I think it's because I do not see my house as investment or even an "asset". It's my HOME. I agreed to pay $338K in 2015 to have a HOME. If there was a real estate crash immediately afterwards and I was underwater, my only regret would be that I could have bought the house cheaper if I had waited a little longer. I would not in any way feel incentivized to stop making payments and walk away, because not only would that mean I would still owe the bank money, but I wouldn't have a home and my credit would be destroyed, making it hard to get another mortgage.
That being said, I don't expect 2022-23 to be like 2008-10 for housing.
Is that part repeating now too?
Your second question is interesting, I really don't know whether the securitization of mortgages is still happening today at the same level it was then. I would presume so? With a different risk model being employed to assess those mortgages, maybe?
Your comment misses what created the popping of the bubble. The sibling comment talking about sub-prime mortgages talks about them, and I think they're right.
I was always under the impression that the crisis began with people that couldn't pay their mortgages because banks were handing them out to people that couldn't afford them. This created downward pressure as foreclosed houses flooded the market, and irrational people decided to abandon their mortgages because they were underwater, exacerbating the problem.
> Perhaps you're too young to know this story, but this is what happened.
I'm 40, if that helps. Though in 2008, when I was 26, I was managing a Subway restaurant for $10/hr and living in a $650/month apartment (Which is now a ridiculous $1,300/month, literally double), whereas now I own a house and work in cybersecurity for an order of magnitude more.
Because it's upside down? You can buy another place and owe less on it?
Yes? Our home keeps the rain off our heads. I’m not going to risk that by not paying my mortgage just because I couldn’t sell my house right now for enough to cover the mortgage.
The payments might be comparable to if they got a current rate mortgage at the current value.
There's reasons it would be nicer to have a lower loan balance at a higher rate and the same stream of payments, but it's probably not worth the cost of moving and a foreclosure on your record.
Now it we are facing truly cataclysmic long term situation down the road never ever seen before (or at least comparable to 1929) that's a different story, but few insiders believe that now.
This means that prices are more likely going to be determined by the supply-demand balance between first time buyers, investor activity, new home builders, life events (death, divorce, etc...) and immigration vs emigration. I personally think that if employment holds steady, we will see more of a sideways market with some regional variances, but if employment starts going down then do does housing.
Because it isn't going to happen. The people who invested in houses years ago locked in a low interest rate, and will happily just rent them out to cover the cost until they appreciate again.
Employers are having trouble finding labor, the government has its foot on the neck of the non-green energy sector, the world is not producing like it used to when prices fell in the past.
The price at the margin will never exceed what the marginal buyer is able to pay, regardless of supply.
What you get in a case like thiswhere even parts of the middle class may be essentially homeless, is widespread social unrest. At that point, expect regulators and governments to take measures to make sure the supply of housing becomes big and cheap enough for at least the lower middle class to be able to afford a place to live (even if they have to rent). Unrest is more damaging to them than some unhappy homeowner lobbyists.
And by cutting the red tape, it's possible to make housing MUCH cheaper than it is today (at least per housing unit, if not by area).
I'm not at all following why it's obvious that mortgage payments will have to be the same for the same house as they were at ~2021 for rate hiking to stop.
If you "invested" in housing, you get what you deserve.
My house serves a functional purpose. It is not a status symbol, it is not a means of extracting rents from others. It shelters and operates as a home base for my family.
Real estate "investors" who lose everything in this next cycle will elicit precisely zero tears.