Signs of impending financial crisis?
While I don't like that type of rule of thumb, I can clearly feel why it makes sense.
I am on the brink of buying my first home as it is. And having seen peers having earned several hundreds of thousands from their houses over the past 4-5 years really adds pressure and FOMO.
I guess that is the sign to be extra cautious on buying. And I also think that this feeling is quite prevalent creating the perfect storm for a financial crisis.
If demand falls, then prices go down.
Otherwise, they track inflation (multiplied by desirability of the area you're looking in).
Which basically means: buy in areas with growing populations, good economies, and good achool zones.
The commercial real estate crisis is a different problem based on the pre-2020 assumption that it was a good investment because remote work would never be widespread.
Provided you can carry the payments, what do you care?
Buying now: interest is deductible on itemized taxes, can refinance when rates drop, build any home value appreciation
Buying later: your rent money is literally doing nothing for you, you've missed home value appreciation, and you need to pay more for a home in the future
Systemic home valuation decreases is the bigger threat to watch for (i.e. keep an eye on prices:incomes, etc).
So on top of this, if you decide to buy a house at 500k, you lock up 100k and still pay more in interest + HOA than ren for comparative apartment.
In conclusion: It only makes sense to buy right now, if I have an expectation that the price will go up on the home.
/edit: Added the conclusion
What if someone does not want to deal with the volatility of a landlord, such as rental terms changing, or the property being sold, or the owner not maintaining the property?
At a minimum, being able to ensure you don’t have to move your family due to landlord changing their mind is worth something.
also, renters I am referring to are commercial renters (so definitely not the cheapest ones).
Looking at residential property as a forever home is wrong.
You're buying an asset, that happens to also let you not pay rent. Consequently, you want (1) value stability (see earlier qualities) and (2) leverage (as you get to keep all the profits and offset the interest).
80% LTV = 5x leverage of down-payment
95% LTV = 20x leverage of down-payment
Given that your net rate of return should also be against your down-payment, shrinking that substantially boosts effective return at time of sale.
1. Variable rate short-termed loan - these are adjusted to the index called CITA.
2. When the rate is sufficiently low, refinance with a fixed rate loan.
3. If the interest rate increases, sell of the fixed rate loan at a discount and refinance with either a higher fixed rate or variable rate, depending on risk profile. (In Denmark a lot of people sold their loan at rate 80 last year due to increasing interest rates).
in 2006 this was sold for 2.365.000, in 2015 for 2.195.000. Is, the apartment lost 130k (roughly 20k USD) in 9 years.
(In Denmark we can see previous prices all apartments was traded for back to 1992 online)
Right now some places I look at would be ~5k + per month to purchase (factoring in taxes etc.), but rent for ~3.5k.
Your rent money is, but your down payment is not. Its getting at least a 5% return, and at best much more than that. And renting is cheaper than buying right now, because interest rates are high for current buyers BUT NOT current owners; supply and demand will presumably change that over time, but i.e. I can rent out our Austin home pretty cheap as is; if I'd bought it today and rented it out, I'd need to charge MUCH more to break even.
I agree you should buy what you want and use the payments as the guide; and maybe you can re-finance in the future. But when I plug payments into investment calculators, buying the home isn't coming out ahead of investing the down payment and renting instead.
Where are they moving to? My aging parents do not want to go to a condo or apartment, they have gotten used to living alone and don't want to deal with neighbors stomping on the floor above them, for instance.
It sure would be nice if selling out of financial desperation meant lower housing prices. This sure isn't the case though, even today.
That would make the case for higher cash to loan ratios. People still bought houses in the early 1980s when rates were dramatically higher than today.
First and foremost shouldn't housing be seen as a public need vs a profitable asset anyway? This sort of thinking is what leads to so many average Americans becoming obsessed with home values. I don't think real estate as asset squares well with we need real estate to live adequate lives, but I digress
For all the talk of the Fed “printing money” this is literally printing money because there is no offsetting asset on the Feds balance sheet. Eventually the hole in the balance sheet is supposed to be closed by interest earned that would normally be paid to the US Treasury.
In other words the Federal Reserve has figured out how to directly bail out banks without the consent of Congress to the tune of $10B+ per month. The higher they raise interest rates, the bigger the subsidy. That should leave a lot of banks well capitalized to pick up assets of small regional banks and REITs that will eventually fail. Roughly $10B in bank subsidies can translate into $100B in loans with required 8% capital ratios.
The Federal Reserve considers their “ample reserve” policy a “public good” as in it is good for the public to see savings eaten away by inflation and higher public debt burden of interest payments to subsidize banks.
This was sanctioned by the Congress in 2008. And the banks could earn more in the interbank market. That’s why the Fed pays that interest: to keep those excess reserves out of the market.
When you change this definition to
- communal kitchen
- communal bathrooms
- no window access
You solve many issues
- college costs (by bringing back dormitories instead of every college kid having an apartment)
- housing costs for early 20s that don't want to manage a whole apartment (and Uber eats 90% of meals)
- a small degree of homeless that are similar to the category above (especially the temporary homeless)
- baby boomer (now early gen x) "retirement" not quite to assisted living (yes, this group don't always need a private bathroom and kitchenette - when they have central dining halls)
I'm active in a multifamily investor group and what I am hearing is that it is damn near impossible to make this work and actually cheaper to just build new multifamily vs convert.
Also, it sounds like you’re proposing building adult dormitories. Is there any evidence people want that?
For example, Egypt has decided to ditch the US dollar and join BRICS.
It’s a matter of time before things catch up with our economy.