When some people wants one, and there aren't enough, suddenly everyone wants one. Herd mentality.
>and when might that go down.
When there is enough for everybody, price will fall, and all of a sudden people will just decide to wait a little longer. ( So Called Demand disappeared )
>what’s causing supply to be low
Chips, COVID, Shipping, Containers Shortage, Gas Price, GeoPolitics and War. It is quite literally the perfect storm on Supply Chain.
>when might that go up?
When we over estimate the so called demand and over invest into the supply capacity.
Works the the other way too: lowering prices causes people to wait to buy, which causes production slowdowns, causes layoffs, causes fewer people making purchases, causes price cuts.
Ditto housing. I just can't believe that people are able to afford the prices of the past 1-2 years and many must be paying beyond their means? I know Blackrock and other parasites are scooping up housing too, but that's not the majority of buying.
The FTHBs of today got into the hot growing fields in 2011-2015 (tech, finance, solar, renewables, payments, artificial food, etc.) and have been saving large portions of their paycheck over the last 5-10 years. 5 years ago you'd hear about Millennials that all live the same lifestyle, but some were making $50-70K/year in "old line" professions and others were making $200K/year in tech. That adds up over time, but you generally won't hear about it if your friend is sitting on a million in index funds or cryptocurrency. They now get to trade inflated financial assets for inflated home prices.
In my experience people aren't paying beyond their means, but their means are high, and have been for a while. Where I live, in a small suburb of Silicon Valley, new FTHBs have been 100% tech for about the last 10 years.
Techies as FTHBs, because no one else can afford to buy a home. Or they already have one -- like the lawyers and doctors, or they already have several -- like the CEOs.
To what extent are prices driven by first-time buyers? I would expect it's mostly people who experienced the extreme home-price appreciation of the last 10 years, trading with each other.
It's mostly FTHBs, investors, and purchasers of second (+ more) homes. Existing homeowners who are trading one home for another net out of the supply and demand calculations - for every house they take off the market, they add one back in. They also tend to net out financially as well: if home prices are high, they receive a lot for their home but have to spend a lot to get a new one, while if prices are low, they won't get a lot for their home but can buy a new one cheap.
Existing homeowners have a pretty critical role in spreading high prices throughout the country, though. If nobody traded out of their existing homes prices would be sky-high in the Bay Area and Seattle, like they were in 2018, but this pool of buyers would have little effect on Boise and Charlotte. But because someone in the Bay Area can get $2M for their home and now has it available to retire to Boise, prices in the Bay Area end up marginally lower and prices in Boise go through the roof.
San Francisco has about 400,000 homes. Suppose they are each worth $100k.
Only about 5,000 of them sell in a given year. Suppose Facebook shows up all at once, with >5,000 new millionaires from the Midwest. They run an auction with each other for those 5,000 homes. The price they settle on is $1.5 million. This becomes the comparable for every existing home.
So the system started with $40bn in home equity value. We injected $7.5bn worth of tech money. And we wound up with $600 billion in home equity value. 395,000 people got $1.4 million in home equity out of thin air. And they can use it to trade with each other, generating many more than 5,000 transactions at the "Facebook millionaire" price.
Perhaps. But that still has an influence on prices. With housing, the real estate agent will price based on other similar sales in the area. So one sale can, at least in theory, influence the price of multiple other homes in an area. And so on.
Along the same lines, in theory, Blackrock could purchase strategically such that it drives up the value of other inventory it owns in the same area. Not quite a pyramid scheme but you get the idea.
Probably, but what I'm getting at is that Blackrock can afford it. What I don't understand is how so many individuals and families have been affording (or at least committing to) these prices.
Agreed. But let's not be naive. Little has changed since circa 2007 / 08. The Fed is still goosing the market with low cost money. The stock market is erratic so perhaps real estate for some is safer?
Unless Blackrock is buying and leaving the houses empty it doesn't significantly affect the price of housing stock, because rentals do offset a huge portion of the purchase market.
Actually, it does. Value is based on perception in the market - empty or not. This is how the bubble works. Sure, leave a unit empty and it'll effect supply and thus price. But no one is knocking on doors checking occupancy. What is looked at is recent sales in the area.
The seller prices off that. The buyer gleams value the same way. Housing prices are subjective. Very much so. And this is why sale prices are so effective.
> Ditto housing. I just can't believe that people are able to afford the prices of the past 1-2 years and must be paying beyond their means?
As someone who bought a house in the Bay Area last year, no. I think I could have spent 2x what I paid but I hate spending money and settled for something more reasonable.
Now I have a large safety net and more money to put into retirement. This is on top of having kids and paying for daycare.
I can’t imagine I’m that unique. I think there is a disconnect with people who don’t work at these companies and understanding how much you can be paid.
At what level did you feel OK to take the plunge? I work at a top bay area company but only have 3 YOE and <1M NW. I have no idea when I would be able to afford all these multi-million dollar bay area houses, all I know is that it would require a lot more promotions.
Firstly, if prices crash people stop selling unless they absolutely have to. The supply of houses greatly diminishes which limits your choice. You might be able to afford a cheaper house, but it might not be where you want it.
Secondly, unless you're buying in cash you might find it hard to get a mortgage. Lenders tend to be reluctant to lend when the market is crashing.
Thirdly, (and this is me speculating), if the market crashes the investment companies who are buying houses will buy a lot more houses, very fast, in cash. You'll be competing with the ideal buyer.
I don't believe a housing market crash would be good for consumer buyers at all.
A lot of people talk as if a correction is inevitable but, for example, Canada hasn't had a housing correction since the early 1990s. How long are you willing to wait?
there's a reason the world economic forum calls it the "Great Reset" and why Justin Trudeau was one of their young global leaders, one of many that have penetrated governments.
I will tell you about housing price situation in Noida and NCR (of India). There are shitton number of newly built houses. They cost a fortune. There is literally no demand but the prices never ever drop. People thought that no demand would drive prices down but the construction mafias have a mutual agreement that no one would sell those houses at a discounted price. Same thing with diamonds and their artificially inflated prices. So I don't think there ever will be a big crash that you are hoping for.
Housing prices are unlikely to come down. Too many Americans have almost their entire NW locked up in the house and are very adamant on it not losing any value.
The best thing that could happen is that apartments become cheaper because no one gives a shit about those getting cheaper besides developers. Homeowners are generally SFH owners - not condo or apartment or townhouse owners.
Thus, I think the decrease in cost will only ever come for apartments, townhomes, and condos. SFH prices are here to stay.
A large landlord is not a "parasite". He makes money by fulfilling a vital need for housing. Blame housing regulation, not landlords, for high rents and home prices.
You could also view it hoarding supply for a limited resource, driving up rent and transferring wealth from the poor to themselves for no additional value.
Capturing the supply to raise rates is about as parasitic as you can get when talking about something that people absolutely need to have. The town I live in didn't get substantially larger population-wise, but home prices have risen almost 45% in the past 2 years because Zillow and other large corporations have been plucking up homes for sale left and right to squeeze the market.
In some areas they're buying up entire subdivisions, raising market prices by buying up all of the supply and out-competing individuals who are looking to buy. That sounds more parasitic to me than filling any "vital need".
A Federal Reserve is not a "parasite". He makes toilet paper by fulfilling a vital need for QE. Blame foreign policy, not the Federal Reserve, for high inflation and home prices.
true, and Boston (GPs username) is certainly one of those places where historical districts and small multi-family housing units prevent affordable high-density housing.
IMO there is a big difference between the landlord that owns a few buildings and _lives in the community_ vs a faceless corporation that's buying up whatever they can find wherever they can find it without regard to what it's going to the local economies.
How does reducing the already limited supply even further, drive prices down? I always thought that when demand is high and supply is low, prices go up?
Some of it is probably caused by supply chain disruption. Some of it could be related to people moving due to the pandemic related changes - leaving some areas (crime/health/political concerns), moving for work or because it's remote now, more room for home/remote schooling or work, etc. Some of it could be minimized using inflation adjustment.
I think many people are living at or beyond their means. There are a lot of people (still a small minority though) that have a lot of money and are willing to use it. Who bothers saving suffiently for retirement? Many people don't make enough to adequately save for retirement. Most of the people who do have the income would rather have a bigger or fancier house and a brand new Tesla/BMW/etc, possibly because they think they will always be making that level of money or are out of touch with reality.
For example, I had a manager who had a big house in a nice area, Tesla, another EV, 3 kids with college funds, etc. He said something like everyone (at the company) should be contributing the max ($20k) to their 401k every year. WTF? Most of us make under $100k and can't afford to save that much, especially with a family to support and a mortgage. We aren't all managers with a physician for a wife. Completely out of touch.
So you are simultaneously arguing that most people are irresponsibly spending their money instead of saving for retirement, and also that it's impossible for them to save more for retirement? Then your example is a manager who epitomizes wasteful spending while still maxing out his 401k? I really have no idea what you're saying in this comment.
"Many people don't make enough to adequately save for retirement. Most of the people who do have the income would rather have a bigger or fancier house and a brand new Tesla/BMW/etc, possibly because they think they will always be making that level of money or are out of touch with reality."
Many people don't make enough to adequately save for retirement. You could probably say that this could in fact be most people when you look at things like Fidelity or Vanguard stats on the state of retirement accounts and savings in the US.
Then there are still many people, but not a majority, who do make enough money to adequately save. Of these, a majority of them seem to live beyond their means with respect to purchasing houses significantly above the rule of thumb (2.6x yearly income) or historical average (5x yearly income), or buying fancy cars/vacations/etc.
The other part of the group that does make enough money are making so much that they can actually save the max (like the example I gave), but are out of touch with the reality that most people don't have enough income to save that much. The example I gave fits in this group. I suppose the most pertinent part of the example was left out - the looks we employees gave each other about how he's crazy to expect us to be able to save $20k per year. So it's not just an example of that rich individual, but also of the group's affirmation that the savings level is unattainable.
JP Morgan reckons things will be back to normal by 2025. I imagine the war in the Ukraine and its impact on neon production (necessary for the lasers that are needed make chips) will push that out a bit further though.
(tdlr: US ~800, Central european countries ~500, some big countries much less eg Ukraine ~250)
Also, EVs still have such big CO2 footprints that they don't really solve the problem, to make a dent we'll need to curtil the growth of cars globally - considering the developing countries catching up and getting more cars there, this means radical changes. The emissions from EVs also pile on top of the emissions from burning all the oil we pump up, so in a way they're increasing emissions if we consider the oil supply to be limited.
It is worth noting that the average age of cars in the United States has been going up every year for decades now [1]. Cars continue to get more durable and thus Americans aren't scrapping them at high rates.
In many comparable countries, mandatory inspections/maintenance force older cars off the road and into scrap heaps at a much higher rate - certainly at a higher rate than necessary.
Yup. Converted to gallons and the US dollar in Switzerland you have to pay $9.35 for gas (CHF2.3 per liter). Yet there's no shortage of cars on the highways here.
It's always hard to compare value internationally, but...
The median income in Switzerland is about $125k USD. That's more than twice the median in the US. It sounds like the affordability of $9/gal gas is greatly different. US politicians are actually suggesting things like a stipend or stimulus payment to help people pay for gas. Ridiculous, but that's how it is.
"The median income in Switzerland is about $125k USD."
I don't believe this for a second and sure enough the first few sources produced by a google search show a far different situations. The Swiss office of Federal Statistics says the median income is 50,120 CHF per year which is $53,880 USD at current exchange rates. Even the top 10% of the country's earners are only in the mid $90k, nowhere near $125k.
"It is measured by the median equivalised disposable income, after adjustment for differences in price levels between countries. This means that despite the high price levels in Switzerland, the population's financial situation, after deduction of obligatory expenditure, was in 2020 more comfortable than that of its neighbouring countries and countries in the European Union."
So the disposable median in Switzerland is about the same as the gross median in the US. It looks like the equivalised disposable income for the US is not calculated, so we can't compare that. Having a median disposable income that is about the same as the gross median of another country still seems to support my implication that the Swiss are more wealthy and can better afford the cost of gas as compared to the US.
It seems it's hard to get "good" sources for Swiss median income. They do list the median monthly wage as being around 6500. This doesn't include other income sources, and is still about double the US median income.
Distances driven in the US are often much higher as well. People I know regularly commute 30 to 60 minutes one way to get to work. Some tradesmen I know are driving 2 hours to get to the jobsite.
I feel like we keep hearing this every time something big happens in the world and within a year or so, it's back to normal. Not that I believe either statement.
Back to normal, as in, new oil just magically appeared? Regardless of international situations, and I feel strange needing to say this, we will run out of cheap oil. We will also run out long before the creation of a good petrol alternative for ICE vehicles. Alternatives are how the less than wealthy are going to make it thru. For example, I have arranged my life to not need a car. Wasnt easy and I need to spend my car money on a house but it is what it is.
New oil "magically" appears all the time as drilling companies find new fields and improve extraction technology. Most recently the invention of fracking made a huge difference in supply. We will never run out, but over an extended period we can expect prices to gradually increase (with some temporary fluctuations). There's still a lot of room to increase the fuel efficiency of ICE vehicles with hybrid power trains and lighter parts.
Wait, are you saying we will never run out of cheap oil? Sure, there will still be drillable oil in my lifetime but it isnt going to be used to push cars around. I am also willing to bet, insofar as getting rid of all my ICE vehicles and getting solar going etc, that petroleum products are going to be prohibitively expensive in the next 10-15 years. There is more intrigue to oil than just the cost of turning it into gas.
I am saying that in 15 years, gasoline will still be affordable for routine use by middle class people in developed countries. It will be a little more expensive but not prohibitively so. Look at long term trends for consumption versus proven reserves. More oil is found every year, and technical advancements keep making it economical to squeeze more out of existing fields.
Solar power doesn't do much to reduce petroleum demand.
That actually means gas prices haven't gone up, or not by much. In the 20 years from 2001 to today, inflation roughly doubled everything. If gas went from $1.9x then to $4 today, that's actually not far out of line.
The Russia supply shock this month is unusual, but the mid-$3 pricing plateau over the preceding year was quite normal by historical standards.
> That actually means gas prices haven't gone up, or not by much. In the 20 years from 2001 to today, inflation roughly doubled everything
"Inflation" is a nebulous word, if you're referring to CPI, isn't oil price (via transportation, fertilizer costs) a major contributor to that increasing?
I'd expect a historic fuel price chart corrected for CPI to be roughly a horizontal line, because fuel prices majorly contribute to it.
Well a little inflation is always bound to happen. We had >$4 gasoline in the 00's when I got rid of my Tahoe as fuel was inching towards $5.
> "...captured a gas station with its prices in view ..."
Where was this footage taken from, NY or NJ? Back then NJ always had stupidly cheap gasoline compared to NY. I always waited until NJ to fill up on road trips.
I think what is happening is that in a normal economy, new cars are readily available, and the market for used cars is replenished not only with individual owners selling the cars they originally bought new, but also with off-lease and fleet sales. However, there has been supply chain problems that led to problems in the new car market. Many dealers have fewer cars available (and in many cases dealerships tack on large surcharges), and if you want a car with the exact feature you want, you may need to place a special order, which can take many months to fulfill. If you can wait for the special order, this may be a reasonable approach. However, many people on the car market need a car immediately. Thus, with the problems facing the new car market, more people are looking at used cars. But with increased demand combined with decreased supply, used car prices have skyrocketed. I also imagine that the demand for fuel-efficient cars and EVs will increase due to very high gas prices.
I don’t imagine the situation returning to “normal” until the supply chain issues are resolved. Even then, it will take a while for used car inventory to get replenished. This is anecdotal, but in my experience price inflation tends to stick; unless there is a glut of cars, I don’t expect used car prices to drop to pre-pandemic levels.
I am currently sitting at a Honda dealership in Los Angeles, just talked to a salesman.
Info:
- ~25 new cars on the lot compared to 200+ before shortages. He said they have a good amount of used cars. Funny enough 15 minutes after they took my car they call me and ask if I want to sell my car to them!
- Lease prices are double what they were 2 years ago when I looked. Specifically Civic sedans were ~$250/month with $3k down but now are closer to $600!
- $5k over MSRP on everything which they say "can be worked on" but that seems to be the current standard. I went to Subaru few months back and it was the same.
- For financing, manager said around 3.9% interest is around the lowest they do in-house (assuming max perfect credit). Not sure what auto loans are like with big banks at the moment.
So until shortages normalize buying a new car is just not a wise financial decision (at least for me). $30k+ for a Honda is just pretty bad. With $700/month to finance I'd rather get a Model 3. With gas prices and the $800 maintenance I'm paying just for today it's looking like a good option.
If anyone is interested in current maintenance cost breakdown on my car I will update this post when i get my bill in an hour or so ballpark $800 total.
Maintenance in terms of something being broken/fixed, or is this is suggested work by the dealership?
Curious what scheduled $800 maintenance would be on a civic, I've had several hondas and they haven't needed much more than gas, fluid, tire and brake changes.
No repairs just maintenance. $300 is just for two new tires + $100 for alignment check. Around $125 each for transmission check and brake fluid. $60 for oil change but you can buy a $120 package for 2 additional ones in the future so I did that. Cabin and engine filters as well not sure what those cost yet, still waiting!
I definitely waited a bit too long so all this stacks up but their prices are actually pretty comparable with independent mechanics (would love to be corrected if anyone gets better in LA :). I should probably replace the air filters myself next time though.
Most people buying large trucks and SUVs are not thinking about the monthly cost (or minimizing such) of ownership (beyond a few minutes of "negotiating" while purchasing to get a payment they are comfortable with).
If you drive 12,000 miles / year and get 15 mpg, $3/gallon is $2400, and $5/gallon is $4000.
What is an additional $1600 / year for a car you're already paying $12,000 / year for (assuming $60k, 60 months)?
So while demand might decrease (particularly if EV pickup truck production capacity grows rapidly), I would not expect $60k vehicles to quickly become "cheap."
It's the second hand market that will be most affected by increased fuel prices. Assuming 18% depreciation a year that car will be $22K for the next owner. Then that extra $1,600 per month becomes more significant.
Asking about prices normalizing is a different concern than affordability or availability. Do you regularly buy AND sell, flip cars, or are you concerned about regret after purchase when prices change?
Fortunately we have the market mechanism to fluidly adjust to this, weirdness can just flow through the system and cause trouble minorly and incrementally.
To address the question as asked:
Normalize? Welcome to weirding.
> What’s causing demand to be so high, and when might that go down, and what’s causing supply to be low, and when might that go up?
Geopolitical instability, from cutting back of American power projection, covid-19 slowdowns & supply-shock echoes, at least, all have a place. Hopefully global warming response movements, and walkable cities make the question less relevant.
When demand grows more, or inputs (including shipping) get cheaper (including more predictable, forecastable)
I know some of the supply side difficulties come down to electronics supply issues: We had a bunch of new, built cars just sitting in parking lots here (MI) that were complete except for some of their electronic components. It was bizarre to drive past dozens of unused shiny cars while people in town can't buy a car at a decent price.
I'd expect this aspect of the problem to stabilize in a few years at most, because if the components continue to be a problem, the car companies will either start making cars without them again (I wish but unlikely) or secure their own components' supply.
Right now we're playing the gambling game of sinking the cost of fixing our old, high mileage car rather than paying the inflated prices. The question of course is how long do we hold out (or will the car hold out) in the cost of fixing becoming more expensive then the inflated costs.
I mean with the surge of gasoline/electricty going through the roof, I'm only considering monthly subscription based options now I can just cancel if the cost of using the car is too much.
I always loved cars, but what's the point of them now?
Car prices are normalized, this is the new price, and unless people stop buying them, that price is not going to change even if supply chain issues are fixed.
When some people wants one, and there aren't enough, suddenly everyone wants one. Herd mentality.
>and when might that go down.
When there is enough for everybody, price will fall, and all of a sudden people will just decide to wait a little longer. ( So Called Demand disappeared )
>what’s causing supply to be low
Chips, COVID, Shipping, Containers Shortage, Gas Price, GeoPolitics and War. It is quite literally the perfect storm on Supply Chain.
>when might that go up?
When we over estimate the so called demand and over invest into the supply capacity.