It's unfortunate how much people need to sacrifice to afford housing.
And I dont know how else to read this except -- home prices will go down.
And I dont know how else to read this except -- home prices will go down.
We americans have been living beyond or means and much better relative to the rest of the world, and the world is starting to equalize. Makes sense.
Not really...
There are 2 big things that are skewing the housing market now:
1. In any given market, all-cash investors make up about 20-30% of the demand. [1] They will buy at almost any price. Even though they make a small percent of existing owners (iirc, its like 1-3%), they make an 20-30% portion of demand right now.
2. Inventory (houses that are for sale now, not just total stock) is at historical lows. This is bc of interest rates going higher - nobody who has 3-4% fixed rate locked in will sell (until they have to). The shortage that people refer to is not a shortage in homes that exist, its a shortage of homes for sale.
Now imagine those 2 dynamics flipped the other way - what happens to prices then?
Also food for thought - every market boom/bust cycle was caused speculative demand. What happens when 20-30% of demand goes away?
More food for thought - the folks that feel like they are locked out of the market and have been screwed (the young) are growing increasingly resentful. How will they vote?
[1] https://www.corelogic.com/intelligence/us-home-investor-shar...
[2] https://tradingeconomics.com/united-states/total-housing-inv...
Operative word being "If"...
What if rates go up?
Look at it from the perspective of the fed:
- Home prices up (or neutral)? Check...
- Stock market at all time highs? Check...
- Strong labor market + low unemployment? Check...
- High inflation? Check...
^^ The combination of the above make the case for rate increases, not cuts. [1]
[1] https://nypost.com/2024/02/20/business/larry-summers-said-th...
If the rates go up… then the dynamics you were discussing become more prevalent
> This is bc of interest rates going higher - nobody who has 3-4% fixed rate locked in will sell (until they have to).
And the asked
> Now imagine those 2 dynamics flipped the other way - what happens to prices then?
And I told you if interest rates went lower then priced would rise.
That's not what I meant.
I meant - what if:
- the 20-30% investor demand in the housing market would go away (demand down), and
- sales inventory went back to historical mean (supply up)
^^ then house prices go down bc demand goes down and supply goes up.
You’re also conflating demand with quantity demanded, so this chain of reasoning is not correct.
This is a way bigger than non-homeowners realize and is keeping prices high. I would love to sell my midsize (slightly under 2500 sq ft) for something around 3500 sq ft and maybe a little bit bigger lot. I’d pay something like an additional 50% over my existing mortgage for a property like that. Online mortgage calculators show that I’d pay around 2x-2.5x for that property now. I know play the worlds smallest violin for me but this affects people downstream who are looking to become homeowners.
But I think it's worth considering there are many that subscribe to the theory the Fed has almost no control over long term rates (mortgage rates being one type of these), which are set by the market alone based on inflation + growth expectations. [0]
I think it is inevitable that issues like this thread and others whereby many businesses and individuals cannot cope with debt service (see record high credit card delinquency rates) [1] and inflation, along with near record low unemployment means economy will hit a brick wall and prices and rates will fall, regardless of what the Fed wants or does or says.
This is already part of the reason long rates have been underneath short rates, as market has been pricing a slowdown for a while, and Fed wasn't able to set long rates above where they put short.
Additionally, to the degree Fed can influence long rates at all, some would argue raising short rates very high very fast (yes of course to counter inflation) itself can depress long term growth thereby beyond some threshold lowering longer term rates if market expects lower growth.
[0] https://medium.com/the-investors-handbook/why-the-fed-doesnt...
I disagree, but...
Putting aside the fed and the degree they can set interest rates at the long end of the yield curve - what you are saying is that rates will go down bc the economy can't sustain the debt (in your words - "economy will hit a brick wall and prices and rates will fall"). In other words, there would be a recession bc interest rates are too high.
By the time that recession hits, people will be losing job - people sell assets (houses + stocks) when they lose their jobs.
In the event that the fed lowers rates, it will be bc of a recession, not to prevent one. By then, the damage is done.
I do think Fed will lower because of recession yes. The damage will be done yes. It sounds like you do agree.