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Comment by phkahler | Hacker News Reader

>> But rising home prices are just one factor impacting affordability. High interest rates are another.

I believe that statement is in error. Higher interest rates should lower home prices, just like lowering them from 1980 through 2000 contributed to rising prices. There are economists scratching their head right now wondering why the recent rate hikes have not resulted in lower prices in some areas.

IMHO There is definitely something else going on in the real estate market. I'm sure those benefitting most are laughing maniacally as people scurry around trying to figure it out.

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This is my very American-centric view on the housing prices continuing to rise despite high interest rates:

Large investment companies are beginning to leave the Commercial Real Estate sector due to the consequences of the pandemic. While commercial RE was seen as a stable investment strategy, that is no longer the case. The residential market is the new (somewhat) stable investment. Not everyone needs an office, but everyone needs somewhere to live.

These investment companies are now beginning to purchase newly-built communities of hundreds of single-family homes and turning them into rental-only communities. Removing homes from the sale market and locking them behind rentals.

Rental prices are much more stable during a recession or contraction in a market. When the market is great and homes are "affordable", it's still a competition of wealthier, older generations that can outbid those in their 20s or early 30s, locking the younger generation into rentals. And when the market is bad and everyone is getting foreclosed, rentals become more in demand, increasing those rental prices.

My city has built over 1,000 new homes in various communities in the past 2-3 years but they were all purchased by investment firms before construction was completed and they are now rental-only neighborhoods.

The recent prices aren't being lowered due to the rate hikes because of these investment firms. To sellers, demand is still high (they don't care whether the buyer is a person or a company), so why lower prices?

EDIT: This is specifically noticeable in suburban metro areas due to the higher average income of residents and the high demand for housing.

> These investment companies are now beginning to purchase newly-built communities of hundreds of single-family homes and turning them into rental-only communities. Removing homes from the sale market and locking them behind rentals.

I always see takes about how the only solution out of a housing crisis is "building more housing" and not any sort of control or regulation over the accumulation of housing stock. But yeah, when even new construction is immediately snapped up... I mean, is there anything to do but regulate the buying side?

The problem is the government. Have you not realized that all of the absurdly priced industries also happen to have the most government intervention? The government needs to sit back and just do the basics like preventing collusion and monopolies (which they absolutely fail at) and get rid of regulations that prevent more housing being built.

And then when private equity comes in and buys an entire new development to turn all the units into rentals, what do we do then? Nothing?

Private equity will only benefit if the supply of housing is artificially restricted or they are able to capture a substantial portion of the market. Both these problems can be solved by adjusting the local regulatory levers to make construction easy and collusion/anticompetitive behavior hard.

"Buying an entire development" is arguably anticompetitive behavior and can be prevented by the government.

Unfortunately, many communities and cities restrict home building to ensure that rents and values are artificially inflated.

My city's housing development department is run by the Chairman's (our version of a Mayor) nephew, the husband of a previous member, an owner of the largest property management company in the county, and an owner of a landscaping business. I attempted to join the housing development department but the positions are specifically appointed by the "Mayor". Our "Mayor" is also not elected via public voting, since they are a Chairman they have to be removed by the Board, and the Chairman has held this role since 1975.

Ultimately, until this Chairman passes or is (somehow) removed from their role, there is nothing that anyone in our city can do to rectify this. And I believe this is a common problem across many cities outside of Metro areas (where the housing supply issue is more apparent).

Sounds like a terrible local government. Have you considered moving away? Local governments compete with each other to attract taxpayers, and if enough people leave they'll be forced to change their political structure.

This town has the best school districts in my state, close proximity to interstates since I work in the core of our metro area, and (somewhat) affordable housing prices as it's not the "wealthy" community. Plus I've locked my rent in at pre-pandemic levels and moving away would cause my rent expenses to almost double due to the surging rent prices everywhere else.

It's a terrible local government, but right now I'm not in a position to move anywhere else without ending up driving 3hrs a day to go to work and paying way more than I can afford.

The policies preventing housing being built are immensely popular with the voters who already live there, so it's very much the government representing (some of) the people.

I love it when people blame the government for shit private equity is doing.

The government made housing an absurdly lucrative investment. So yes, I blame the government for making people want to buy houses as investments.

Let me make sure I'm getting this right, your position is that the government somehow forced or guided private institutions to throw every sane guideline for underwriting mortgages out the window and then lever their positions up to lets-tank-the-global-economy levels of exposure? If anything the government is guilty of grotesque inaction in this instance but I don't get the feeling that's what you meant.

Municipalities can require new builds to be own-only or place requirements on rentals. I live in a new development with such a stipulation. The land has a couple different developments, there's townhouses, a set of smaller lot houses, medium lot houses, and then some commercial zoning.

The medium and small lot houses have a no rental stipulation. I forget the exact terms but the houses have to go to individual owners and there's some residency requirements before you can offer it as a rental.

Ironically, "building more housing" still solves this problem.

The corporations are buying and renting because it makes business sense. If we just keep building houses, the market values for rents and home prices will reach an inflection point. Investment companies aren't going to keep buying houses if they have a high vacancy on existing stock, they're going to start selling houses or lowering rent.

The fundamental problem is "too little supply". Regulating the demand side is at best a bandaid. The solution is to change regulations to allow faster, cheaper, easier building until the equilibrium market price of housing is something reasonable.

As long as cheaper lines of credit (or straight-up massive amounts of cash on hand) remain more available to RE corporations than regular people looking for their first home then no, building more housing will never solve the problem.

There are structural problems with the demand side that also need addressing.

> building more housing will never solve the problem.

It only seems that way because in many popular metros around the country, demand has far outstripped supply for decades.

The problem is "solved" in areas that aren't as popular, with zero regulation on who's allowed to purchase homes; ordinary people can buy ordinary homes on ordinary incomes. But aspirational young people don't tend to move to such areas.

> demand has far outstripped supply for decades

Why has this been the case in every area in our country? Because we have a policy at the national level that encourages speculation and hoarding. The problem is not just supply, we have a national aversion to shaping demand.

> The problem is "solved" in areas that aren't as popular,

The problem is absolutely not solved, in any place in our country[1]. You used to be able to maintain a minimum standard of living on a single wage earner's salary. That is not the case, literally anywhere in this nation any more.

1. https://www.vox.com/2015/5/28/8679889/minimum-wage-housing-m...

>> Ironically, "building more housing" still solves this problem.

Raising interest rates may help too. How many of those purchases are financed? I'm guessing a lot. The commercial side got screwed when they needed to refinance underperforming properties at higher interest rates.

Builders rely heavily on financing, so high interest rates hurts the supply side too.

Investment firms have finite purchasing capability, and would certainly stop buying if they expect home prices to drop. In addition, if the houses are expensive to hold, they’ll either be rented out or sold.

Speculation is a symptom of price issues, not a cause.

The 2008 crisis would like a word...

The problem is that "investment firms have a finite purchasing capability" is only true over the long term. (like, "many decades" long) Investment firms have effectively unlimited purchasing capability in the medium term (like, for the next 5 years).

Which is why "just build more housing" isn't really working, because you can't just overbuild human demand (we already do that in lots of cities, especially in the midwest), you'd also have to also outbuild the entire public and private investment appetite for housing, which is effectively unlimited at the moment.

I don't have well-defined reasoning for this, so maybe somebody else can expand on it: But it feels fundamentally wrong that detached, single-family (zoning restricted) homes are allowed to be purchased by investment firms & exclusively used as rentals.

> But it feels fundamentally wrong that detached, single-family (zoning restricted) homes are allowed to be purchased by investment firms & exclusively used as rentals.

I know what you're saying, and I agree, but playing devil's advocate here, you could imagine a society where there are no owner occupied dwellings at all, everyone rents. In theory, it would actually be a great equaliser because anyone could invest in the property owning corporations for a return of that income, and you wouldn't have some people becoming stupidly rich for no reason other than sitting in a house that happens to increase massively in price.

(I am of course speaking of an imaginary world where tenants rights were at the top and they couldn't just be removed from a home at the whim of the landlord).

> an imaginary world where tenants rights were at the top and they couldn't just be removed from a home at the whim of the landlord

On the contrary, strong tenants' rights are correlated with higher rents and worse availability of rentals; or it is at least in the real world, where neither tenants nor landlords are angels.

It's funny how that feels wrong for undefined reasons, but it doesn't feel wrong when that happens to apartment buildings, isn't it? We associate houses with property ownership and apartments with renting, even though owning an apartment or renting a house aren't in any way inherently less reasonable.

AFAIK the higher interest rates led to less inventory on the market because people who sell and night buy elsewhere would also be getting higher interest rates. So they don't sell. I also bhave friends who actually bought a new home, but are renting out the previous one because the mortgage is so good. That said, I've not seen actual numbers on this.

Demand also can't really go down. What option do people have? Become homeless or move a 4-hourb flight away from work?

Just a couple days ago I was walking behind a couple here in NYC, probably in their mid-50s, talking about how they really couldn't justify moving because they'd have to ditch their 2%-ish interest rate for a much higher one. I definitely have friends in the same situation.

Must have been nice to get all that nearly free money when they were passing it out!

This is also really bad for the economy because it reduces mobility. It drastically raises the barrier for relocating for a better job. It makes our job-to-worker mappings much worse.

There was a sweet spot about 10 years ago when mortgage rates hit bottom but people were still afraid to buy and house prices were affordable. Mortgage rates today are still extremely low by historical standards, but unfortunately at the same time that mortgage rates have been rising, so have house prices (somewhat oddly), so affordability is horrible.

I think the comment you overheard is pretty typical - people are stuck in houses since if they sold and moved elsewhere their monthly payment would be double or more. People retiring and wanting to move from good job locations to cheaper retirement ones are not able to do so.

When you're in a situation where you incur heavy charges for "selling your house and buying it back" (or selling it and buying the identical one next door) beyond the 5-10% you lose in transaction costs, you're basically going to stay put.

There are ways to avoid some of the downsides, but they involve additional risks many are not willing to take. The most common is to rent out the house you're living in (the "good location" one) and use the proceeds from the rental to both pay the mortgage and help with a new purchase elsewhere. Then you're effectively running arbitrage on your low rate loan.

I'm in that situation. We bought a starter home not knowing we'd get priced out of ever upgrading. If I knew then what I know now we would have bought the biggest house we could possible have gotten a mortgage on. But like you said the economy was shaky and we were afraid to overextend.

To upgrade would mean paying more than double what we pay now per month and starting a new 30 year mortgage in my 40's, which I'm just not going to do.

Such a short-sighted comment. In 1995, when these mid-50s people were considering making their first home purchase, mortgage rates were around 7.93%, higher than today.

https://www.bankrate.com/mortgages/historical-mortgage-rates...

I'm not understanding, can you elaborate on your thought here? What makes you think these people were considering buying a home in 1995? They clearly were talking about their 2% interest rate loan they got during the pandemic. Just because they're in their mid-50s doesn't mean they were trying to buy a home in the 90s.

Also, in the 90s in Brooklyn you could get a condo for quite a lot cheaper -- the building I live in in Williamsburg was built a couple years before 1995 and the condos sold for $40k then (about $80k with inflation). Today they go for about $1.2 million. A 7.93% loan on $40k is quite a lot more affordable than on $1.2 million.

What makes you think they weren't trying to buy a home when they were younger? You clearly want to own, why do you think they didn't?

Williamsburg (and most of Brooklyn besides Park Slope and Brooklyn Heights) was cheap because it was pretty much a hellhole in the early 90s. Starbucks? Lol. Quality restaurants or cool nightlife? Train to Manhattan. Professional jobs? None. Murder & crime rates at their peaks. Williamsburg costs a lot because current residents benefit greatly from 30+ years of gentrification, community building and services.

Exactly, we can't speculate on what they did in their 20s. All we can do is go from what they said, which was basically "We can't justify moving because we'd have to get a mortgage at a much higher rate". I don't think that's uncommon. I have plenty of friends that bought with 2% interest rates, and they wouldn't be able to afford the places they got with 7% rates. It's also not uncommon for people to be in their 40s and 50s without owning a place in NYC, I have plenty of friends also in that boat.

And yeah I've been in BK for almost 20 years now, I remember hanging out in Williamsburg in 2000 when I was in college, it wasn't that bad. I actually prefer the old version of it to what it is now. Sure, it wasn't the Los Sures of the 80s by the time I got here, but it was a lot more fun. I only had my life threatened once and we deescalated quickly!

Wait, so you're in your 40s? What was the point of mentioning that the people you overheard were in their 50s?

You've spent your entire adult life, 20 years, living in one of the most "cool, hip, upscale" neighborhoods in the world, obviously that location and lifestyle comes with a high price tag. If somebody repeatedly bought brand-new Ferraris for 20 years, you'd shake your head if they started complaining about money.

Adjusted for inflation, housing was significantly cheaper in 1990 than it is today.

Not the point. OP was jealous of the "nearly free money," i.e the low interest rate, not the amount borrowed.

I'm actually not jealous, I'm happy for my friends that were able to buy. I just think it was a silly, shortsighted policy move. The 2% rate that people are locked into is only part of the problem of course. There's just not much inventory in NYC or in many other cities.

Sure, but in 1995 you could also get a nice house for like 40k. An equivalent home today costs about 400k.

8% interest on 40k is only $63k interest paid (A 1995 home had a total cost of $123k)

8% interest on 400k is $633k (that same home in 2024 has a total cost of $1.2 million dollars)

You wouldn't expect to get a nice house for $40,000 in 1995 in the United States. The median sale price for a house was $133,000 in Q1 1995:

https://fred.stlouisfed.org/series/MSPUS

> in 1995 you could also get a nice house for like 40k

Ummm, where?

And the parent comment was about the low interest rate ("nearly free money") not the amount.

What I do know is that many professional-class students can start their careers, i.e. first-year salary, at $100k and often significantly more. In 1995 nobody earned even $50k straight out of school. Economy-wide inflation numbers are weighed down by low-paying jobs, therefore greatly under-estimate how much professional (i.e. most likely to be home buyers) salaries and early earning potential has grown over the past 30 years.

The subprime crisis is why there is a lack of supply. Home construction cratered for years after the 2007-8 shock. When recovery took hold, we had a enormous deficit in available supply and are nowhere near closing it.

Figure 3 tells the tale: https://cre.moodysanalytics.com/insights/cre-news/one-good-y...

Interest rates increase the cost of financing. This means that given the same monthly budget, you're still going to spend your whole budget. You get less house for the same amount of money. The difference is that the money goes to the bank instead of the previous owner. At some point housing prices do drop, but the reality is that demand exceeds supply. The problem isn't financing itself. Places with supply exceeding demand massively benefit from cheaper financing as it makes the cost of living smaller.

Pretty sure house prices have fallen a bit in most places if you take inflation into account. One reason they haven't come down more is probably that most people think the current interest rate is just a temporary anomaly caused by recent disruptions to global supply chains (Covid+war in Ukraine). Fundamentally little has changed and I guess people are betting once this blows over house prices will continue up like they've done the last three decades.

They have. I have occasionally looked at this site to see what is happening in areas of the UK I am interested in and there are far more real terms drops:

https://houseprices.io/

its lagging data BTW. Based on government data that takes time to be reported.

In the USA there is a lack of inventory due to those people who locked in 30 year fixed rates in the 2-3% range. Those folk might want to move but they're not moving when rates are currently 7%+. The supply won't improve until rates come under 5%.

Presumably, this will eventually even out as people have to move for one reason or another and 7% mortgages become more normal (and historically, they aren't unusual).

But, yeah, right now, the number of people I know who have paused plans to move? A lot. Both within the area and others who were contemplating relocation.

We were considering a move to a smaller city, but prices there have gone up just as fast as our current area (DC metro). Along with the interest increases, it's not viable any more (would require wife to find new employment, probably at the lower prevailing wage for that area).

It also doesn't help that there are now taxes to pay on house appreciation whenever you sell, so you can't sell and take the proceeds to buy elsewhere since the taxman will take a large chunk of it.

It used to be that if you sold one house and bought another for same price then there would be no appreciation taxes, but that stopped a few(?) years ago.

Until something changes, many people are stuck in their homes, unless they are willing to accept the huge downgrade in what they can afford if they moved.

You can still build 500k$ of equity for a married couple in the USA.

> It used to be that if you sold one house and bought another for same price then there would be no appreciation taxes, but that stopped a few(?) years ago.

The IRS's 121 Home Sale Exclusion still applies which allows you to exclude $250,000 ($500,000 if married) of capital gains on the sale of your primary residence. For an investment property, you can also do a like-kind exchange to defer taxes.

If you really need to, there is a tricky path via that to avoid some tax.

You convert the current appreciated house into a rental (this is a non-taxable event).

You rent for whatever the required timeline is, and then 1031 exchange it to a more manageable rental in the area you desire (going from overvalued house in the Bay Area to triple-net commercial elsewhere, for example).

Then you die and pass it on to heirs.

> It used to be that if you sold one house and bought another for same price then there would be no appreciation taxes, but that stopped a few(?) years ago.

If you're referring to Section 1031 exchanges in the US, that never applied to houses you actually live in, only investment properties (and it still does).

> It used to be that if you sold one house and bought another for same price then there would be no appreciation taxes, but that stopped a few(?) years ago.

In the US from 1964 to 1997 you could upgrade your home (i.e., buy one equal or more expensive) and avoid capital gains taxes and after age 55, you could downsize once and not pay capital gains taxes.

From 1997, we've had the current regime of $250K/single, $500K/couple exclusion if you lived there 2 of the previous 5 years from the sale.

The problem is government intervention on behalf of home owners. The cost of housing is the #1 highest impact thing that is affecting all non-property owning Americans and politicians are not talking about it. I don't understand how the cost of living crisis is not the #1 conversation topic in presidential debates.

The reason why is because the older home owners are the most important voters so campaigning on lowering property prices by eg building homes and getting rid of regulation is perceived as political suicide.

I perfectly understand it. The reality is that the USA has quite an large middle class. It's not just the ultra wealthy that have privileges, due to housing.

While I don't understand everyone's financial situation, in the USA a TON of people own homes. It's not just them, but some of their friends and family influenced by

In the USA, owning a home is considered a status symbol and a sign of competency. The culture is such bullshit. I've seen so many people buy a home and suddenly turn into scrooges. It creeps me out.

It's gotten to the point that I've just figured: "Buying a home and starting a family turn you into a bad person." I'm sick of watching people change and treat their homes as proof of their value in society.

I was reading something about oxytocin ("the love chemical") being tied to racism. I'm not at all surprised by this anymore. Especially when you see how much "bonding" can be tied to territorialism and selfishness. When it's "us against the world", that's a big fuck you to the whole entire world.

There are multiple possible explanations, that differ in different places (bearing in mind this affects most developed economies).

1. cash buyers 2. people holding off selling in hope of a recover in prices 3. inflation turning real terms declines into currency terms rises 4. demographic changes (smaller household sizes) increasing demand for the number of units 5. population movements both within and between countries 6. laws and regulations that slow down building.

That's only part of the issue though. The other issue is that inflation is going up from everything going on in Europe (Ukraine/Russia) and Middle East (Israel/Suez Canal pirates/blocks) and then after the great financial recession many of the blue collar workers who were part of the home building industry changed careers, cities/states have increased housing zoning laws and requirements, and inflation on materials has made building a home more expensive. All these factors are pushing prices up.

Hopefully economists are not scratching their heads but armchair economists may be. What is said on the news may not always be the large change some may expect and it could be false yet they got someone-anyone on a show to say it was true.

There are real estate investment trusts available to invest in that perform quite well. A recent statistic for a major city: 40% of homes are unoccupied.

We need to look into failed states that diverge from us to see what could happen or may be done to prevent it.

> A recent statistic for a major city: 40% of homes are unoccupied.

[citation needed]

Might be true in Detroit or something. Usually there's a qualifier, like 40% of non-owner-occupied housing is unoccupied, and in the area that's 1% of houses or something.

(As a baseline, rentals are assumed to be unoccupied 10-20% of the time - so the total number of dwelling units in an area would be (number of owner occupied) + (number of remaining families) + (10% of remaining families) or so).

> Might be true in Detroit or something

Not a chance. At least not for habitable housing. And by the way, the population density in metropolitan Detroit is 10th highest in the US. It's hardly the empty wasteland that people imagine.

I think the reality is that there is not yet enough sale pressure. So units are not coming to market. This will likely change when the recession actually hits.

This is most of it, right here. Home sales will be normal when interest rates are stable. If they drop, home sales will stay normal or rise, because you can "get out of your high rate loan AND upgrade" at the same time.

But now, when rates are climbing? You'll be selling your house AND your 3% mortgage to buy a ... 7% one? Since "selling your house and buying it back" would result in a larger monthly payment (swapping the loan from 3% to 7%) the first thing we should expect to see is sales slow down. After they've slowed down for awhile, the prices might begin to drop - if people need to sell.

    > There are economists scratching their head right now wondering why the recent rate hikes have not resulted in lower prices in some areas

House prices were not stagnant before, they were rising YoY and higher interest rates might just slower the rise but not revert it due to the existing pressures which probably have a much larger impact than the interest rate at the moment.

It's really not hard to understand... Extreme undersupply due to regulation/bureaucracy and extreme overdemand due to lack of opportunities elsewhere.

I live in the capital city of my country, just checked the situation in my hometown - average jobs pay 1/2 and the job I do would pay 1/5 - while the rental and property prices are just 10-20% lower; schools are terrible, no night life, no interesting restaurants, literally zero startups of any kind, people are (voting for) racists and conservatives... What the hell would I do there? I like my nice cheap (compared to my buying power) apartment in the middle of a nice progressive cosmopolitan city.

I agree with nearly everything you say. I'm of the opinion that regulation/bureaucracy are being scapegoated to an extent. Supply of knowledgeable builders and development finance is not very elastic and does not increase easily even when there is less regulation.

The real reason I feel is the higher risk = higher reward equation is broken. Building fewer units means increasing scarcity, allowing increased prices despite there being lower (due to building less houses). Developers are chasing good profit margins rather than revenue. Less regulation just means even better profit margins for these developers.

Where I live there would be 100 people waiting to buy an apartment you just built, giving you absurd amounts of money for it. There is no reason to build less than the absolute maximum possible. There are many developers and builders who want to do it, could do it and eventually will do it - but getting an approval takes 11 years.

The timeline is a killer, because 11 years (and more) from beginning to end means you could end up with your new building opening just as the area goes into a slump.

When the turnaround time is shorter, the builder is taking much less risk, and so they're more willing to build. (They can still overextend as happened during the last housing bubble, mind you.)

I just spent 10 days in the town I grew up in north of Boston to take care of a family member. Was completely surprised that people are putting homes on the market in my old neighborhood for nearly $1 million. Rents are not even that far off from what you could get in Bushwick, Brooklyn and you would need to own a car. The restaurants were more expensive than my regular spots in Brooklyn, and just way way worse quality. It's not a bad place to live, but it's ridiculous that everything is this expensive everywhere.

My parents always tell me I waste so much money by going to restaurants all the time and that taxis are absurd luxury - yeah but my taxi costs 3x less than in the hometown, my restaurant meal is 1/2 cheaper and much better than anything I could make myself (or buy anywhere in the hometown) - and in this city I can actually spend the time working and making a lot of additional income instead of killing time in a shopping mall and cleaning.

"Affordability" usually refers to cost of ownership, generally as a proportion to some sort of income metric, not the full value of the home.

If home prices don't fall in unison with increased rates sufficiently then of course monthly mortgage payments (or imputed rent) goes up and affordability metrics worsen.

I don't think this is making economists scratch their head so much, if so it's like how "experts don't know how the pyramids were made" -- we know many ways it could happen, we just can't prove which one. Even in the simplest model of valuation, it's not the current interest rate that determines the home prices, it's the full expected rate over the lifetime of the asset. Of course if interest rates are 5% today but expected to be 1% next year, the price will be based mostly on the 1%. The longer term bonds and hence longer term mortgage rates can capture a consensus expectation, but there can still be divergence of expectations by the marginal seller. My dental hygienist on selling her house "The government needs to cut rates back so that people can afford to buy my house" with unsaid portion as I heard it "at my arbitrary zero-interest-rate-phenomenon based expectation of value".

People who have cashed out equity in their home also have an interest in the price of their home going up.

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