Generational Luck in the Housing Market
awealthofcommonsense.com
awealthofcommonsense.com
My wife and I purchased in 2015. A short bit after, there was some regret as prices were still falling.
I recently went to pick up my child at a classmate's house. They just purchased last year. I walked in and, sure enough, roughly the same house with minor differences in the layout...except it cost $300,000+ more.
Not sure how my kids are ever going to own a house in the US and I feel like I am locked into this house and mortgage forever.
In retrospect, we purchased near the bottom. Truly some generational "luck".
Same.
We bought in Dec 2017, and were really conservative in choosing a home that we could easily afford - it was less than my annual income, on a half acre. It's five bedrooms but we really need more storage and just more "space" in general.
We don't plan to sell it in the foreseeable future. Even if we could find the home and property that we want, it just makes no sense. It would be a better financial decision to use the equity as a down payment on our next home and rent this one. Given that home prices have doubled since we bought, renting it at market rates here would pay for our existing mortgage, an equity loan, and ~$400 of positive cashflow per month.
(EDIT: Inverse of) Median income to the average house price, across America, is at its highest point since the 80s (when we started measuring) [1].
1/(Median Household Income in the United States/All-Transactions House Price Index for the United States)both indexes next to each other are maybe more intuitive: https://fred.stlouisfed.org/graph/?g=1jzxK
But that doesn't account for mortgage rates, or competition in down payments right?
If you make 5% more inflation adjusted than the person 5 years ago, but mortgage rates are 2x, than you're still way behind right?
And if all those who bought starter houses 5 years ago have a ton of equity to drop in the down payment to trade up, you might not even be able to buy a house where you can afford the monthly mortgage payment.
Imagine not owning a home, not being able to afford a home, and having both rent and house prices accelerate faster than wages.
I’m pretty sure that’s correlated to income.
> A house going for the median price is going to be purchased by someone well above the median income.
Which proves the point?
Have you try to inflation-adjust that? You may find the price jump is not that great for the last ~10 years.
Insanely good if you have a home and a low rate (or refi into one)
Insanely bad if you don't have a home.
It's not a natural construct, it's an artificial loan that only exists because the fed is the counter party.
In an natural economy, mortgages would all be variable rate, or fixed rate but much higher than what is available today.
This would also mean that the housing rush of 2021 would have been crushed by rate increases in 2022/23. In fact there probably wouldn't have been much of a rush at all.
> This would also mean that the housing rush of 2021 would have been crushed by rate increases in 2022/23. In fact there probably wouldn't have been much of a rush at all.
Interestingly, you described almost exactly how mortgages work in Canada: you pay more for a fixed rate, and even then, you can only get a fixed rate for a term of up to 10 years. And the average term is more like 5 years. People's mortgages have been going up now that interest rates are up. This was not impossible to predict.
And that certainly didn't stop the housing rush of the last 15 years.
Yes, they are super expensive, but they were even more super expensive 15 years ago. Canada didn't get the 2008 crash that the US did.
[0] https://www.gvrealtors.ca/market-watch/MLS-HPI-home-price-co...
https://globalnews.ca/news/2531266/one-chart-shows-how-unpre...
Those numbers look a lot closer to my experience than yours.
All three lines show a ~50% price increase.
The Fed doesn't originate mortgages. (And it's increasingly getting out of even holding them.)
This isn't how the mortgage market works. Qualifying mortgages are guaranteed by Fannie and Freddie. The Fed's participation in the mortgage market has been for liquidity, not credit, purposes.
Kill Fannie & Freddie and the 30-year mortgage goes away. Ban the Fed from buying mortgage securities and rates go up a bit.
Probably not; without them, the norm wouldn't have been created, but while rates for them may change those going away won't remove the expectation and, given the expectation, the market will find a rate af which it can fill it.
Mortgages in general will be less attractive, though.
Fixed-rate 30-year mortgages don’t exist, except for the very rich, in most of the world. The unsubsidised price of the instrument likely collides with popular conceptions of usury.
If this had been true, then 30 year jumbo loans would not exist (F&F cannot buy non-conforming mortgages).
Fair enough, the 30-year mortgage wouldn't exist for the average American. I don't believe the Fed buys mortgage securities containing them either.
It doesn’t work without the implicit guarantee. If you run a neutral pricing model, you’d get a rate roughly double where they’re priced now. The only solution is to let the rate periodically reset.
Modelling non-jumbo loans provided without support. I have a jumbo mortgage. I also had substantial assets when I took it out, substantial income and opted to put 25% down. Remove those factors and your credit component starts interacting with duration in complex ways.
Remove that part of the market--the massive number of guaranteed, conforming mortgages--and the securitisation and hedging infrastructure that supports jumbo fixed 30-year loans falls apart [1].
[1] https://www.tandfonline.com/doi/full/10.1080/15214842.2020.1...
I was showing why 30y-fixed jumbos exist as a result of F&F. You argued an incorrect connection between jumbos within the current system as a proxy for unsubsidised mortgages in a non-F&F system.
> if F&F did not exist, another firm could have done exactly the same securitization, as many do on non-government controlled markets right now
Show me a single one that does for fixed-rate 30-year mortgages to average Americans at scale. Or a single other country that does this.
F&F can do that at the scale they do because they have an implicit guarantee. That creates securitisation and hedging infrastructure for that product that niche firms, like those doing jumbos, can piggyback on. Take out F&F and there isn’t the mass market which means you lose the product. (And no, another firm can’t trivially mint an implicit guarantee from the U.S. government.) Going back to the original point of this thread: they’re far more critical to this process than the Fed.
Genuine question: have you or someone you know traded mortgages?
I understood that. But showing that something is a result of something else needs some kind of logic, stating both things exist does not establish a casual relationship. You can try it for yourself by applying your own argument in the reverse direction: if your logic had been sound then it would also be true that F&F exist because of 30 years fixed jumbo loans.
>F&F can do that at the scale they do because they have an implicit guarantee. That creates securitisation
What? Securitization is turning something into securities, it's a process that is not caused by any guarantees, you can do it yourself.
It's the ultimate victim blaming religion - you're poor because you were a bad person in a previous life.
Very awkward to jokingly say "I wish I were a puppy" when I play with my dog and to see the look of abject horror on my Buddhist partners face. I'm told even wishing for something like that significantly increases my chances of becoming a dog in the next life - which is permanently an undesirable fate.
If you have positive karma in this life you will be rewarded in the next but the manner of the reward is more or less beyond your control
And that's assuming you believe in that sort of thing to begin with
As a free person, I can choose my religion and blame God for a change. The difference is that if you place locus of control further to yourself, that gives you (and not an external entity) enormous power. Yes, you might not be able to change what happened, but you can influence what is going to happen, even if it's not immediately obvious and if some links of the casual chain are hidden.
A slight misunderstanding, or an inconsiderate person may use it for victim blaming, but that's not what lays down. It gives guidelines that our actions have consequences, good or bad even if they are not immediately visible to us. On HN, people talk about the role luck plays in the success of startups. Two different people working hard, with brilliant ideas: one of them gets to build a billion $ company, while the other may go bankrupt. What we call luck, or randomness here is explained as karma (good, or bad deeds accumulated from earlier lives). Used with right understanding, and compassion, this provides good guidance for those who seek it.
You don't think Calvinism is worse? There, you're poor as an indicator that you're destined to go to Hell.
On top of this, even if prospective buyers are considering less desirable neighborhoods further from place of work, the used car market is still a mess with anything that doesn’t already have a foot in the grave (and thus, is a reliable efficient commuter) carrying an inflated price, which chips away at the savings that can be had there.
Wealthy old homeowners tend to control those.
Do you know the situation depicted from the movie "Up" where there's a house surrounded by parking lots of malls and stuff? That's what low regulation building gets you. I'm not talking about NIMBYs, I'm talking about lax zoning laws.
not sure I understand how you came to such conclusion..
Zero-down, no-income-no-credit-check mortgages, OK yeah those were a problem.
Credit cards are the degenerate financial product that shouldn't exist, if anything is.
People don't live in houses on interest only mortgages, they use them as leveraged investment vehicles to speculate, rent out, and then roll them into even more leverage as time goes on.
I have nothing against classic mortgages where you pay the principle off, I have one myself, but I will maintain my opinion that interest only mortgages shouldn't exist despite the unpopularity.
But even on a traditional mortgage, in the early years the vast majority of the payment is interest. How much lower is the monthly payment on an interest-only loan? Are they easier to qualify for? Are the rates the same, or higher than, a traditional mortgage?
I'm not sure I'd want to ban types of financing for types of properties, that seems heavy-handed.
They are normally inaccessible to people who don't already own their own property, even more so by the nature of the higher than usual deposit required, so it's an investment vehicle for already well off people to leverage more money into property and extract money from tenants
It puts upwards pressure on housing prices because you don't just get the family that wants to own a home or the occasional landlord who wants to own and rent out a second holiday house, it's a purely synthetic financial product that lets you take a house out of the market and arbitrage on the difference between your interest payments and the tenant's rent
It is not uncommon for people like this to own tens or hundreds of properties in their portfolio this way, and these are the people crying first and loudest when interest rates go up because their rental yields can no longer cover the interest only payments on the houses they "own". Whatever happened to being on the hook for bad investment decisions? They think they should get special treatment because they're providing a so called service to the tenants
Using the word "responsible" to describe something that is good for an individual but bad for society is... a choice.
Like why that sort of insanity was possible in first place. There should be something going towards principle. As not doing it means that increasing rates can be destruction.
Like, at all? Or for individuals? Maybe only for poor individuals?
The most obscene part of this is when asset-holders try to blame the problem on their victims (the people who must pay higher prices for the pumped assets). The leverage is not generosity, it is a curse.
How are the latter, those procuring assets, not also asset holders?
Eventually it implodes. People who got in early on the ponzi walk away with windfalls but the last generation is the largest generation and it gets to hold the bags.
You're describing a housing-price decline as if it didn't happen less than two decades ago. It's painful, because of the leverage. But a lot of Americans are uniquely equity rich in their homes right now. The missing pieces in your equation are (a) default, which wipes out the debt and (b) real economic growth. It's a tragedy that so much of (b) gets funnelled into real estate prices, but that's a policy choice and far from unsustainable in general. (Versus at specific price points.)
Or maybe replacing our workforce with robots is actually deflationary enough to make it different this time. Who knows.
(I don't believe this, but I do believe it is the most common unstated thought on the subject so I feel compelled to get it on record.)
Obviously this effect is outweighed by supply/demand, and mortgage rates have a major impact on the size of the pool of buyers (and hence demand) as well.
If you do not buy in to the housing market, you are on the wrong end of every fiscal and monetary policy operating in the US.
One way to reduce the pressure on the housing market to act as a secret pension is to reform social security. It's ridiculous that such a heavy tax on workers pays out such a pathetic amount at the end. The way that it works, the payroll tax money just gets embezzled by Congress, and then a tiny amount is squirted back into the accounts of the taxpayers once they are done embezzling it. Housing is important for reasons beyond just providing a pension-equivalent combined with shelter.
However, there is little pressure to fix these things because the hidden housing benefit is so extravagant and so broadly held by so many voters. It really flips the switch on life to make it EZMode at the cost of mobility. There are still ways to screw up your life, of course, but you kind of have to go out of your way to do it.
Gen Z just missed that run-up. (Unfortunately, it looks like a lot of my peers discovered their inner NIMBY the moment they signed their first mortgage cheque.) Alpha will be fine--they'll benefit from boomers unwinding their real estate to pay for senior care. Unfortunately, that's likely to financially impact us Millenial homeowners.
I'm also not where I should be financially despite the lucrative field, compared to others in my field, due to several setbacks (and also in part because I never had a Silicon Valley job).
But thankfully I did choose the fairly lucrative field of software engineering, so even though I'm behind most other software engineers (including those younger than me), I'm still better off than most people around my age.
I also lucked out and finally bought my first house in 2018 before the big run up in prices. I had to get lucky on cryptocurrency to help afford the downpayment though (bought ~$300 worth of Ethereum at ~$20 and sold it at $1300 just before it crashed hard).
Keep in mind though that I didn't buy a house until my late 30s. My parents, in contrast, bought their first house in their early 20s. Also they had me in their early 20s, and my brother in their late 20s. I'm in my 40s and I still haven't had children yet (might not ever at this rate).
Huh? I assume a few private equity executives who own vast, national senior care businesses will benefit the most from the passing of the Boomers, followed by Millennial children of Boomers who die with assets (and despite Boomers being the wealthiest generation ever, there's plenty of inequality there as well) and without being drained by the medical industrial complex first.
If watching my grandparents go taught me anything, it's that all deaths suck, but the quick heart attack really rips the bandaid off so to speak.
Sure. But the Boomers will pay them by selling their homes.
Where do you think the investment firms get their money? Pensions. Pensions are the principal institutional investor's source of capital. As Boomers retire, pensions wind down. We're already starting to see them dump private equity [1].
[1] https://www.ipe.com/pension-funds-expected-to-become-largest...
In contrast, all of my younger sisters are much worse off right now. ZIRP may be great if you actually have money because you work in software, but most of my family is in construction. Hacker News loves to wax poetic about the trades, but the reality is its a non-stop boom/bust cycle and all my cousins and uncles have had LLCs go bankrupt over the years so many times I've lost count, to say nothing of those who got hurt and couldn't work, which usually ended up in giving in to drugs.
Amusingly enough, my oldest niece is the only Gen Z I know and she's also doing seemingly pretty well. Probably not buying any time soon but she just got her first solo apartment and landed a job within three weeks of graduating college, at my youngest sister's employer but getting paid $10k more a year than her.
It's important to be thankful for what you can. I suppose it depends on where you came from, but I was the last generation of Californian who experienced $11 per credit hour community college, which was how I started out and became the first person in my family to ever graduate college. Everyone holds a grudge against Boomers, and sure, my parents bought a $50,000 house when I was born they eventually sold for just shy of a million, but that took 40 years. I make that much money every three years. My dad got a nice, dependable job with a pension, which is wonderful, but he also did physical labor his entire life and can barely enjoy his retirement because his knees, hips, and back are all shot to shit.
We all experience both good and bad luck and I struggle to lament my generation. I'm just grateful to have been born in the late 20th century at all. I had a bad enough lung infection as a child that I'd have almost certainly not lived to see 5 if I'd been born before penicillin was discovered. That was the reality almost all of my ancestors lived with.
One hundred percent. Every generation today is blessed. To be clear, we’re complaining about owning an asset that has historically been a marker of the elite.
There's other things at fault, of course - zoning, economy, interest rates, etc. etc., but the current stress on the housing market lines up pretty nicely 80s-born millennials (particularly those that graduated into the great recession) finally hitting their stride and having the wealth to move out/stop renting/have kids, after most of a decade of that being suppressed.
I'd expect this to continue being a problem for the rest of the decade and peter off in the 30s - it feels like governments are taking action (years late as usual, but better than not); movements like YIMBY have matured, boomers are hitting the age where they start to pass, and housing construction has ramped up slowly in the last 8-10 years, and millennials will have mostly bought by then, with gen Z being the new, smaller crop of buyers by that point.
Will be the biggest issue facing American politics for the next 10+ years I think while the Boomers age and try to cash out.