Hacker News Reader

Comment by samwillis | Hacker News Reader

Disclaimer, I have no idea if this is even slightly logical, I'm not an economist.

House prices have increased significantly above inflation for decades to the point of absurdity, many multiples of a households income. People in their 20s (and 30s) increasingly don't believe they will ever own a home.

If we have a period of inflation, with increased wages (obviously with a painful lag), but house prices remain stagnant with no increase, would that bring them down in real terms without a "housing crash"? Could this be a "good thing" and does that even make sense?

View on HN

No, the fundamental reason for lack of housing affordability is a lack of supply relative to demand. Since 2008 we've dramatically under built new housing units relative to household formation. Playing with inflation or interest rates may change who loses out, but it still doesn't change the fundamental problem that we don't have enough housing to go around.

This is one of the problems with rate hikes. They reduce production and investment. New home builds are down. Manufacturing is down. All of this is exactly the opposite of what we should want, which is low prices due not to a scarcity of money but to an abundance of wealth.

The problem is people don't use the cheap money to build more. They are being showered with it and then laws prevent building housing. It looks like a money problem because money moves faster than real estate but this isn't a 2022 problem, it is a problem that has been creeping up since the 70s.

Exactly. Look in the recent Canada thread for an exhaustive discussion about this. https://news.ycombinator.com/item?id=34216118

Summary: Governments and local landowners/homeowners benefit from increasing prices, so they prevent homes from being built or for density to be increased in areas with existing homes and services. This causes supply not to be able to meet demand, which causes rising prices.

The number of housing units in the United States has been growing year on year and in 2021, there were approximately 142 million housing units in the United States. 1.43 million is the average annual new house starts since 1959. Houses sold is around 6 million so only 25% of the sales are new houses. Lack of building is probalby no the main reason. If the interest rates was 8-10%+ a few million houses would come for sale. With low interrest rates many people would rather have more houses than they need to protect against inflation.

Explain how housing prices remain stable while labor enjoys increasing wages without some other changes?

Write in complaint about never affording a home. I’ll be 40 next year and in an apartment. Largely, still, because my sub-generation got absolutely knee capped by the Great Recession and just general crap conditions.

As household wages have increased (especially with increasingly two full time professional incomes now, which was very rare 30 years ago) and internet rates have been low, the monthly cost of housing hasn’t changed as a percentage of take home py, it’s just you need two full time incomes to do it.

This is the fundamental problem though, because there is a shortage of housing, as wages increases, housing costs (either rent or mortgage) increase to suck up every available penny that’s earned.

What is needed is for housing supply to be able to meet housing demand.

>> the monthly cost of housing hasn’t changed as a percentage of take home pay,

That is by design. Banks figure your monthly payment as a percent of income. Then based on interest rates they figure out how much you can borrow. Then everyone - the sellers, the agents, even the bank - push you to borrow the max allowed and spend it. This is why lower interest rate cause higher house prices.

Interest rates are going up. Home prices have slowed. Speculation is over. Still waiting for the drop. The economy seems to have gotten really good at moving ahead in spite of pressure to slow. I fear there may be built up negative pressure that's about to give. Not sure though.

   > Then everyone - the sellers, the agents, even the bank - push you to borrow the max allowed and spend it.

You are not forced to spend above your ability to pay. People used to be ok with buying smaller homes, or in less hip neighborhoods. If you can afford a $500k house you can also afford a $350k house. People need to stop making excuses for living above their means.

You are ignoring the reality many are facing, where essentially all the available options are above their means.

Back in the late 80s Elizabeth Warren and coauthors showed that the most common reason American families went bankrupt was because their high housing costs were an attempt to get their kids into better schools.

The blunt truth is the 20 major metro areas are where nearly all the high income jobs are, so we've seen a decades long pattern of migration towards them. This is a huge underlying force in so much of US economics, politics, and culture. At the same time, these metro areas have not come close to matching demand with increased housing supply.

The result is increasingly people facing the dilemma where the best economic option for their family is for them to spend 3+ hours of their day commuting to an urban core from an outlying area they can just barely afford to rent in. And god help you if your kid gets sick or your car gets totaled. This is the reality for most working class Americans. It's not a matter of them living above what they can afford, it's about our society becoming so broken many people will never reach a threshold of affording anything like middle class prosperity.

And I am entirely out of patience for folks that earn tech industry money while moralizing about how poverty is just people overspending in some purely hedonistic stupid way.

   > You are ignoring the reality many are facing, where essentially all the available options are above their means.

Again, this just simply isn't true. Go to Zillow, and set your filter to houses under say $150k and check the metro areas of Kansas City, St Louis, Dallas, Little Rock, Memphis, Cleveland, Charlotte, Detroit, Milwaukee, Pittsburgh, Cincy, etc. etc. and you will get hundreds of hits in every one of those metro areas. These are not rural communities, millions of people live and work in these and other metropolitan areas.

People who say this are convinced they need to move to SF/LA/NYC/Boston/Seattle. Yes, real estate is prohibitively expensive in San Francisco, we get it. So don't move there.

The bottom end of the housing market is usually junk or otherwise tied up legally. Just because you get hits, doesn't mean that's a viable option.

I just did a housing search recently and found this out the hard way.

Look at the median for an area and then figure that you can go 10-20% below that for a "fixer upper". Even that isn't an option if you don't have DIY skills.

See above, and try it yourself. On a $150k house a first time buyer can use FHA to put 3% down, and if FHA approved the sale then by definition it is not a fixer upper.

That means a first time buyer can get into a $150k house with FHA for $4,500 down and $1,300/month (which includes property tax and home insurance).

This means someone making $25/hour can afford to buy one of these homes, right now, today.

>The result is increasingly people facing the dilemma where the best economic option for their family is for them to spend 3+ hours of their day commuting to an urban core from an outlying area they can just barely afford to rent in. And god help you if your kid gets sick or your car gets totaled. This is the reality for most working class Americans.

The average commute time for Americans in 2019 (pre-pandemic) was 27.6 minutes each way: https://www.census.gov/newsroom/press-releases/2021/one-way-...

Yes, there are supercommuters out there with very long commutes, but saying 3+ hours a day describes "most" Americans simply isnt true.

> If you can afford a $500k house you can also afford a $350k house.

Those numbers seem insanely high to me. I would've thought people are looking for more like $100k.

You won't find houses for $100k unless they are in poor condition or a bad location. That is roughly the price you would expect to pay for an average condominium in Germany.

Yeah, that's what I mean - not what houses are selling for, but what people are looking for/able to buy. Median income in the US is somewhere around 40k-70k/year depending on the source, and the general recommendation is not to exceed 2.5x that for the price of a home - so around 100k-175k.

Yes, as shown elsewhere on this thread, thousands of those types of houses are available in countless metro areas around the US. They're just not in San Fran or LA or Seattle so people don't want to take advantage of it. They must think jobs only exists in like 5 cities. Or really they just don't think it sounds cool to say they live in Kansas City or Dallas or whatever.

Or maybe living close to friends and family matters more ? Moving 2000km away from family and friends is an uprooting move.

Think about what you're saying logically. The US is huge and the vast majority of humans do not live in those same handful of high COL cities so no, everybody's friends and family don't all live in SF/LA/NYC/Seattle. It's simple - if you want to live in San Francisco then you need to have income to support it. If you want to be able to afford a 3,000 sq. ft. house in your 20's then there are countless places you can do that, but they're not San Francisco.

This reads like people complaining that a new iPhone is $1,200 and then saying "BUT I NEED A PHONE!". Yes, you need a phone. No, you do not need the $1,200 phone. Take the blinders off, there is a whole ass world out here.

Don't take it on me old man, I am just stating a fact you don't like. I am not even saying they are logical, right or advisable (see behavioral economy and all that).

> This reads like people complaining that a new iPhone is $1,200 and then saying "BUT I NEED A PHONE!". Yes, you need a phone. No, you do not need the $1,200 phone. Take the blinders off, there is a whole ass world out here.

And you read like an angry and sour person who wants to rub people's nose in it just to say "told you so" by deliberately missing the point I made. Maybe it makes you feel good but you are not helping anyone.

Except I'm right, which matters more. The best way to help people is to be honest with them. Validating their feelings might make you feel good, but it does them a disservice. I'd rather be right and sound like an asshole than tell them it's ok to keep heading towards their own demise.

I don't understand your beef or where that chip on your shoulder comes from.

All I said was:

> Or maybe living close to friends and family matters more ? Moving 2000km away from family and friends is an uprooting move.

Which is basically a fact that explain why it's hard to move for some. I don't see how it can - or needs - to be argued. I am not even claiming it's a valid reason not to move.

> Except I'm right, which matters more. The best way to help people is to be honest with them. [..] I'd rather be right and sound like an asshole than [..].

Oh but you just don't sound like one. Pretty sure you've already been told that.

Because they're not moving away from San Francisco, they're moving to San Francisco. And they're moving away from those friends and family that you were referring to, to do so.

The solution is simple. Stop moving to the same 5 overpriced cities. Or, don't expect to be able to buy a house there if you do. These are facts, ignoring them causes problems.

> Because they're not moving away from San Francisco, they're moving to San Francisco. And they're moving away from those friends and family that you were referring to, to do so.

No.

> Or maybe living close to friends and family matters more ? Moving 2000km away from family and friends is an uprooting move.

I was talking about why some people would find moving away from SF to more affordable places hard.

It wouldn't make sense to point that living close to friends and family matter more to some when moving to SF than moving to Dallas or Kansas City. What difference would it make to move 2000km away from family and friends to SF or to Kansas City ? Both case you miss friends and family.

You seem to have this preconceived notion in your mind that the Bay Area is the real world, and it's not. The vast majority of the country has affordable housing and available jobs, which means people don't need to move to the same 5 cities driving up the cost of living on those cities, they are choosing to do that because it sounds cool to say they moved there or they believe the lies that all the jobs are in the same handful of cities. And then they complain that they can't afford to live there.

You don't hear people from Dallas or KC or Cleveland or Pittsburgh or wherever complaining they can't afford to buy a house there, because I can go to Zillow and show you hundreds of houses in every one of those metro areas (and more) that are under $150k, and affordable to first time home buyers with an FHA mortgage putting less than $5k down and having a mortgage of around $1,300/month which makes it affordable to anybody making over $25/hour. In short, people are making excuses nd pointing to extremes in the Bay Area or NYC or wherever to validate their feelings.

Those are facts, and that is the math. Everything else is just feelings.

> You seem to have this preconceived notion in your mind that the Bay Area is the real world, and it's not.

Your insistence on trying to paint me into the object of your obsession, that people think the Bay Area is the real world and they are entitled to things you believe they have no rights to, while being wrong and out of place, is preventing any progress on your side in understanding what I am trying to tell you:

> Moving 2000km away from family and friends is an uprooting move.

It's hard, it hurts. That plays a role in people's behavior. You may not like it but it is what it is [0].

All the while you keep trying to convince me of something I don't disagree with (prices of real estate and houses in the US market). Quite frankly it's tiresome and I'll let you have the final word (another copy-paste of a napkin plan to become a homeowner or a rant against the youth-of-today and their damn iPhones I suppose).

[0] That being said, I can understand how frustrating it must be for you since according to your posts you don't seem to hold feelings in high regard or even have some, which would explain it all.

I gave you the math, which you couldn't challenge. It's the reason people continue to buy homes every day. You want it to sound impossible, but that's simply not backed up by the data.

Inflation has been really insane for the last few years, driven by cheap money from the Central Banks. Asset prices have been going parabolic.

> Then everyone - the sellers, the agents, even the bank - push you to borrow the max allowed and spend it.

Of course those groups urge you to spend the maximum: they're all being compensated if you do exactly that.

At the end of the day, it's still you who is signing the contracts, responsible for how you spend your money, and has to live with the outcome of your decisions.

Sure, personal responsibility still matters in an individual level… but that’s irrelevant to the point you’re replying to! I’m not sure of your point.

If those groups can convince a decent percent of people to spend the max that they can get away with, it doesn’t matter what you do personally. Prices will inflate because most others are still spending big.

It most certainly matters what you do personally. What that might mean in consequence is that you decide to buy a cheaper house than you could maximally afford, put a greater percent down, or you might delay buying a house for a while.

The differences among households' incomes are already higher than the reasonable ratio between the max approvable to borrow and the sensible amount to borrow. (A household making $300K can already sensibly borrow more than one making $100K can be approved for and one making $100K can sensibly borrow more than someone making $30K can be approved for.)

Households are still competing with others to buy individual properties, of course. That competition doesn't mean that you should YOLO it with the largest purchase most people will ever make just because others are willing to do so.

>Then everyone - the sellers, the agents, even the bank - push you to borrow the max allowed and spend it.

That only applies if housing demand exceeds supply because buyers are competing. When sellers compete they try to reduce the price to cost plus profit where the profit is no lower than 3-5% because at some point other industries pay more.

Yeah that is exactly what I think needs to happen in a perfect world.

Allow a wage-price spiral of about 6% a year, which would raise long rates, allow short rates to increase eventually without a recession and that would cut off the cheap money supply. Asset prices would fall in real terms because of persistently higher rates across the yield curve. In nominal terms they would be able to maintain more of their price while wages would inflate to the point where people would be able to buy houses and be able to pay back debts (particularly college loans).

Instead the Fed jacking up short rates right now is going to cause a recession, create high unemployment and cap wage growth and break unionization. This will be combined as usual by massive tax cuts for the rich as a bailout package, which will be the only thing possible to get past the Republican House. And the Fed will have to then sharply cut short rates and the cycle will continue. I doubt we'll be able to maintain rates at 0% for another ten years, but they're firmly opposed to trying to wage-inflate our way out of this, so we'll probably see shorter cycles between boom and bust as inflation starts to come back faster. There are no signs that they're going to start to give up on the way they've been running the economy though, I don't think there has been a massive fundamental shift in the economy -- other than no more 10 years of 0% with no CPI inflation.

"Allow a wage-price spiral of about 6% a year, " - Fed cannot create this wage-spiral. Fed only controls interest rates. From 2009-2016 interest rates were below 0.2% - and wages did not move.

Only employers can create this type of wage spiral - and I do not think they will do this. Employers are now looking into automation as much as possible to replace labor (supermarket checkouts, at fast foods order kiosks, online ordering, robots for cleaning hotel rooms, etc...)

> From 2009-2016 interest rates were below 0.2% - and wages did not move.

From 2009-2016 the unemployment rate fell from 10% to 4.7%, it is now at 3.5%

> Only employers can create this type of wage spiral

They don't create a wage spiral, they would naturally want to pay people less, they don't wake up one morning and give people raises without a reason.

And the reason is the jobs overhang. When you have twice as many jobs per job seeker then employers are FORCED to pay more just by supply and demand laws.

That only happens though when unemployment is near its lower bound (which we seem to have empirically determined is around 3.5% at least for our economy right now).

>If we have a period of inflation, with increased wages (obviously with a painful lag), but house prices remain stagnant with no increase, would that bring them down in real terms without a "housing crash"? Could this be a "good thing" and does that even make sense?

It's still only part of the equation since interest rates are much higher now so mortgage payments are double what they were a year ago. So even if the home price isn't rising, the costs to finance it are.

This is a good point. This is also somewhat dependent on how a particular country does mortgages. The USA does 30-year fixed rate, but that is not the norm in most countries. The main benefit of lower house prices (even if the monthly finance costs are the same) is that the amount you have to save for a deposit is reduced, which is often a significant barrier for young people.

That's more or less where my thinking comes from, I'm in the UK and most people fix for 2-5 years at a time.

Interest rates will come down again so the effect of them being a barrier will reduce. But the fundamental problem for most people here in the UK is getting a 10-20% deposit together when the average house price is £296k, average salary is about £27k, and average household income is £31k.

Newest mortgages. Those that paid off significant amount of principal aren't that high.

I'm not so sure it would bring housing prices down as the owners can just rent them out for more than their mortgage as rent demand is also high. Rents have accelerated upwards along with the price of homes. Additionally I see most current owners just staying where they are as the cost to move is too great with increased borrowing costs.

Anecdotal but I have 150k of equity in my house that I bought ~3 years ago and a 4.15% interest rate. Not a great rate but if I was to refinance I am looking at 6%. Even if I was to sell, and get 150k out, any house I want to buy afterwards has appreciated at the same rate as my current one, so it is more expensive as is the loan.

I think the only fix is building more housing but now the loans builders need to take out to build are more expensive as well as are building materials so even new construction is very expensive. In addition, the rate at which new houses are built in so low that they don't appreciably affect existing supply in a hard enough way to even approach demand so prices stay high. The only real fix would be a government financed program that dropped hundreds of billions in near 0 % financing to builders to build hundreds of thousands of homes. That isn't happening.

> House prices have increased significantly above inflation for decades to the point of absurdity, many multiples of a households income

True and yet, compared to house price/income multiples in other developed countries, the US metric is remarkably low (yes, Fannie Freddie etc). Perhaps Americans are just catching up

> If we have a period of inflation, with increased wages (obviously with a painful lag),

This isn't obvious, wages can drive as well as lag inflation.

> but house prices remain stagnant with no increase, would that bring them down in real terms

Yes.

> without a “housing crash”?

Perceptually? Likely. Substantively? Only if it was a long, slow inflation, and therefore a long, slow real-value decline.

> Could this be a “good thing” and does that even make sense?

It’s the same thing, requiring the same conditions, as the real-value decline without inflation, but with inflation.

What I think you actually want is wages rising greater than both inflation and housing prices (not real decline in housing prices as such), so that wages rise with respect to housing. But the problem isn’t defining the output on that level, anyway, its dealing with housing supply/demand to make either scenario happen.

You could as well single out the average cost of a new car in the U.S. At $47K I suspect that too has fast outpaced inflation. I am not aware of an automotive parallel to a "housing crash" (aside from the obvious joke that, though it begs, I will not stoop to giving voice to).

> I am not aware of an automotive parallel to a "housing crash"

New car manufacturers don't like to drop prices, but they do like to offer cash back and below market rate interest incentives. Especially towards the end of the model year. Very low cost leases show up from time to time as well.

You also see things like pausing production when supply is outpacing demand. Sometimes it's subtle like stopping the line a few weeks before the scheduled stop, or starting it back a few weeks later, and sometimes it's a month off during the model year.

> If we have a period of inflation, with increased wages (obviously with a painful lag), but house prices remain stagnant with no increase

This would require heavy regulation of the housing market. For example, we could add a hefty tax on any home that isn't owner-occupied. Otherwise, housing will remain one of the better places to invest earnings and the cost of housing will continue to rise with earnings. However, such a tax would likely increase the cost of renting.

No, that tax would disincentivize renting single family homes and similar. Corporate landlords wouldn't be taxed with it and are the meat of that market.

>For example, we could add a hefty tax on any home that isn't owner-occupied.

But why are home prices going up? Is it because non occupying buyers are bidding with each other to drive up prices beyond what is rational? If so, banning those buyers might indeed bring prices down to a saner level. However, if prices are high as a result of supply and demand (ie. more people want to live in desirable places and we can't build more homes to accommodate), then banning non occupying buyers won't do much. Given how the overwhelming majority of home purchases are still done by owner occupiers, I'm very skeptical that it's the former, and it's much more likely that it's the latter.

> However, if prices are high as a result of supply and demand (ie. more people want to live in desirable places and we can’t build more homes to accommodate), then banning non occupying buyers won’t do much.

Non-occupying owners are a factor in supply and demand; banning them (or even just increasing costs on them, e.g., via taxes on long-term vacant units) reduces the number of prospective non-occupying owners buying and causes existing ones to sell. Similar factors applies to owners with residences used exclusively as short-term rentals rather than residences, which I would expect are usually more of an issue than units held vacant by non-occupying owners.

> Given how the overwhelming majority of home purchases are still done by owner occupiers

The share purchased by investors has gone up much higher than usual to 24% of single family homes nationally last year, with Georgia leading the nation at 33%: https://www.pewtrusts.org/en/research-and-analysis/blogs/sta...

>Non-occupying owners are a factor in supply and demand; banning them (or even just increasing costs on them, e.g., via taxes on long-term vacant units) reduces the number of prospective non-occupying owners buying and causes existing ones to sell.

The problem with this analysis is that it ignores that homes owned by non-occupying owners (ie. landlord) are still occupied by somebody, and is therefore suppressing demand for buying houses. Or put another way, if you got a landlord to sell a home, there would be one more home on the market, but at the same time whoever was previously renting that home will get kicked out and will also need a home, so the net effect on supply/demand is zero.

In a supply shortage (which is the housing market in most areas), prices follow the purchasing power of the buyers, not the goods' value. And since we've had years of 0% interest rates and accompanying mortgage rates, purchasing power was astronomically high even for owner-occupier buyers. Property investors add even more high-power buyers to the market, and further reduce the supply.

The only way to bring down housing prices is to out-build the demand -- which no constructor will do voluntarily, because it's a guaranteed loss proposition. Personally, my only hope is that remote work will even out prices between low-value and high-value areas -- but I'm aware that proximity to the job is not the only factor determining the value of an area.

To lower house prices would require heavy deregulation of the housing market. Zoning regulation and building constuction regulations.

> To lower house prices would require heavy deregulation of the housing market

There's no actual requirement for deregulation.

Austrians made prices affordable and improved housing quality with public intervention, and it worked well[0]. I yet have to see an housing deregulation experiment that worked.

.0: https://www.youtube.com/watch?v=41VJudBdYXY

Did you see housing deregulation experiment that didn't work?

Reply on news.ycombinator.com