I bought a house recently so I'm theoretically on the losing side of any drop in home prices resulting from this, but I still support it. I'm of the opinion that the government putting a ceiling on the price of money by controlling interest rates leads to all sorts of market dysfunctions, not the least of which is asset inflation of the kind we've seen recently.
I think we're seeing the culmination of a long-term trend of declining interest rates. Interest rates have been declining for 400 years, and have finally reached the point where they bottom out at 0. (or even negative interest rates, in European bank policy!).
The bad part of this I think, is that valuations of long-term cash flows start becoming more and more sensitive to rates. The difference between a 2.75% mortgage and a 3.75% mortgage is bigger, relatively, than the difference between a 3.75% mortgage and a 4.75% mortgage; because people buy the largest, longest mortgage they can afford, small changes in small interest rates result in large changes in the monthly payment. I feel like this ends up making the whole housing market more volatile.
If you can assume long-term stable interest rates and have access to a 30-year fixed mortgage - the difference between a 2% mortgage and a 1% mortgage is the same as the difference between a 12% mortgage and a 6% mortgage.
Every percentage points that central banks artificially reduce interests by exponentially distorts the markets.
A 0% mortgage with a 1% property tax - theoretically - costs you -2% (x 5 for leverage per year). On a million dollar house - you'd get paid $100k per year to live there.
The effects of this policy have been a moral hazard unseen before, and if it ever has to end, we're in for wild times.
I'm guessing it's offsetting the mortgage and property tax with an average inflation calculation. If money gets 3% less valuable ever year and you only pay 1% on top of the value of the home (property taxes), you're effectively paying 2% less every year on the principal, IIUC.
Considering the Fed single-handedly controls the value of money and demands that it declines by 2%+ per year, and home values have outpaced money devulation for the last 50 years - this seems like a reasonable long-term assumption.
This probably manifests from increasing income/wealth inequality, in conjunction with inequality of how popular some places are relative to others. If your goal is to obtain housing that the top 20% or 10% are competing for, then you will experience prices rising much quicker than housing that the bottom 80% are competing for.
I do not think it is reasonable to assume a random piece of land will appreciate at 3% per year over a period of 30 years. Not to mention the maintenance and renovation costs on a $1M home.
Maybe in the most popular areas, it would sell for 1.03^30 = $2.4M after 30 years, but in the vast majority of the US, that has not historically been the case.
Doesn't matter what a random piece of land does; the $200k you owe on your house is $200k more money you have to do other things. If the value of that money goes down by more than 1% per year, then the person with the 0% mortgate and 1% property tax is better off using any money in pocket for literally anything other than paying down the mortgage.
That is exactly how it works for millions of people who bought or refinanced with record low rates. If you borrow $1million at 2% interest, and inflation is 10%, you are profiting $80k/yr if you put the money in an asset that goes up in value with inflation.
Maybe I dont understand your central point, but your data seem to agree with me.
>I do not think it is reasonable to assume a random piece of land will appreciate at 3% per year over a period of 30 years.
It seems very reasonable to assume that average real-estate will at least increase with inflation.
Your links show that average home prices have increased 100% in 20 years, which is a little over 3% per year during that period. They also show that prices have increased faster than inflation.
>Maybe in the most popular areas, it would sell for 1.03^30 = $2.4M after 30 years, but in the vast majority of the US, that has not historically been the case.
Your link literally shows that the majority of US homes doubled in price in the last 20 years, (which is even faster than 30).
Sure, This level of overperformance releative to inflation is likely unsustainable. However, it is reasonable and conservative to assume that housing and land will at least increase with inflation on average. Population keeps increasing in the US and land is finite.
are you saying that 3%/yr increase in price is too low, and the real number is likely higher? This is better supported by your data.
Sorry, you are correct. I was reading the graphs on mobile which are cut off, and I did not check the x axis and thought the graph showed 50% increase in 20 years.
That's more or less what the data you linked to[1] demonstrates: a us average 3.5% increase per year. Not a median though, a mean. The median increase is probably more like 2% per year, but a lot of that seems to be localized to areas that didn't recover after 2008. If your area recovered after 2008, we can assume it's in demand and likely to continue to appreciate faster than the median, or closer to the 3% figure.
> because people buy the largest, longest mortgage they can afford, small changes in small interest rates result in large changes in the monthly payment. I feel like this ends up making the whole housing market more volatile.
In the US, I think 90% of home mortgage loans are fixed rate loans, so borrowers do not have changing monthly payments. I cannot find an easy source for it, but I think I read it from an Ellie Mae report.
And ARMs come in 5/7/10 year, but the longest mortgages are fixed rate at 15/20/25/30 years.
> Interest rates have been declining for 400 years
This is surprisingly easy to explain: interest rates are a combination of the time factor of money (a dollar in hand is more useful than a dollar tomorrow) and the risk of default. Geopolitical stability and security has increased in the aggregate over the past few centuries, so it follows that interest rates have declined in aggregate.
Makes you wonder what the implications are, now that we've hit zero. ;-)
> bought a house recently so I'm theoretically on the losing side of any drop in home prices
Same. I live in Wyoming. Our county has "workforce housing." It's exclusively for sale or rent to workers in the local area. (Versus remote workers or holidayers.)
I'm not advocating for this policy, though I think it's brilliant. But it highlights our desire, perhaps need, for non-market demand-side moderation. We presently put all the non-market moderation on the supply side. From the meaningful, like capacity, design and environmental reviews, to the useless: neighborhood bitching sessions and meaningless permits from every politician who needs petitions signed.
Instead, the Teton model points to a hybrid approach. Less regulation on the supply side. But more non-market requirements on the demand side. One approach is ring-fenced supply for groups the community deems desirable, like critical workers, disadvantaged groups, et cetera. We have good reason to be wary of this government-picking-the-winners approach. But if we want to maintain a community feel and keep housing affordable, the solution must be rationing.
Centralized rationing leads to patronage. (See New York City.) De-centralised rationing, where supply is held back for certain groups who have a market to themselves, looks more resilient. The process of choosing who's in the non-market group and how much of the market they get to themselves will be fraught. But it looks more plausible than convincing Atherton to build sky-rises or homeowners to accept rent and price regulation.
That's interesting. Thanks for bringing this up. I'm generally of the opinion that "maintaining a community feel" is a fool's errand, especially when it comes to highly desirable locations like Jackson Hole; but it also looks like that most (all?) of your county is some kind of national park, so perhaps the usual approach of allowing the market to build more does not apply.
I share your wariness of government picking the winners, and posit that this Workforce Homes program appears to be maybe a slightly cleverer version of state-imposed price control, which does not escape the core fact that the in-group (those who qualify for the program) gets below-market price housing at the expense of the out-group (those who don't qualify for whatever reason) who either must bid higher than they would have without this program or are priced out entirely. And if belonging to a "disadvantaged group" is one of the qualification criteria, then I'm afraid that the underlying economic facts may exacerbate tensions along racial lines.
That said, this is only one person's opinion from thousands of miles away; and I can only say that I'm jealous of what must be the view from your window. :-)
> generally of the opinion that "maintaining a community feel" is a fool's errand
It's code for maintaining low density. (Historically, and still in some places, it codes for race, too.)
Combined with supply restrictions, low density requirements mean (a) skyrocketing prices, (b) rationing or (c) more density. A lot of the conversation has been focussed on (c), which I approve of in e.g. Cupertino, where I grew up. (Turning suburbia into a city solely impacts human concerns in a way paving over nature does not.) But (b) might have more angles to it than the traditional public housing model. (I've also been a favor of public housing built to own, where the government e.g. builds housing and sells it to first-time home buyers at a subsidized price. This not only builds wealth and avoids the patronage problem, it also creates mixed-income housing of the type that's less noxious to NIMBY's than solely low-income housing.)
The town doesn't want to be all remote workers, or remote workers and $100 cocktails because that's what it costs to keep a bartender. Remote workers (like me) are welcome. We must simply pay market rate, versus having dedicated supply. This seems fair given, as remote workers, we have more choice with respect to which housing market we descend upon.
>> I bought a house recently so I'm theoretically on the losing side of any drop in home prices resulting from this
There are situations where this doesn't matter. Obviously if you bought with a lot of borrowed money, and home prices drop significantly, and you try to sell while still owing money you may be in trouble.
But if you pay it off (or didn't borrow) you will own the home free and clear. When you own one home free and clear, the price is almost irrelevant. If you measure your net worth in houses as opposed to dollars, you have 1. If you move you'll sell one and buy one at whatever the going rate is - unless you're looking to upsize or downsize the price is not relevant.
What if I held off buying until prices drop?!?! Well, if you borrow nearly the full amount, it makes little difference. Housing as a percent of income has remained unchanged for 50 years (I saw something recently confirming this). In other words, your monthly payments are determined first and then the bank tells you how much house you can buy - which is exactly why prices vary inversely with interest rates.
In the situations above, the biggest problems stem from rate changes during the course of a low equity housing loan that is paid off early. IMHO we need to get back to 10-15 year terms as the norm.
Still, IMHO it is a bad time to buy. Also IMHO interest rates need to be a LOT higher to fix our economic problems, which would mean big drops in home prices still ahead.
> When you own one home free and clear, the price is almost irrelevant.
What does this look like in a state like California for property taxes? My understanding is, due to prop 13, your property taxes are a function of the initial price you paid and increase slowly (much slower than housing inflation in recent decades).
That suggests paying a lower price later could have long term impact on cost of ownership beyond just mortgage payments.
Apparently there is a prop 8 that allows the property tax to be reduced if the house value goes down. I wonder if this has actually been applied in practice (2008 crisis?), but the process seems to be a lot more bureaucratic (annual revision of home value) so I wonder if it's even feasible to do this in a down market.
EDIT: This [0] seems to be a concise explanation with an example. Essentially, if you pay P, that's the base value for property tax. On year k you will pay property tax as if the house was worth min(assessed_value, P * (1.02 ^ k)).
If housing prices go down, you may temporarily pay lower property taxes, but in the long term, if house prices keep increasing faster than 2% a year, your property tax will be tied to the P you paid initially.
Yep. The temporary tax reduction is a thing. Back during the 2008 crisis we got the reduction... Had to fight for it as the city wasn't so keen on just handing it out... But got it until prices rebounded.
> When you own one home free and clear, the price is almost irrelevant
This ignores opportunity cost. Moreover, depending on your community's funding model, your quality of life could be impacted by over-leveraged neighbors defaulting on their property taxes and/or being foreclosed on.
I don't philosophically disagree with you, but I think it's worth pointing out, that if we just woke up tomorrow and the Fed announced it was immediately letting the market set rates, it would be so bad (the resulting global market implosion) that it would be a humanitarian crisis IMO. I literally, non hyperbolicly believe that
I agree with you, and it really is too bad that the Fed dug itself so deep -- there is and always will be another crisis that requires unprecedented Fed intervention.
Historical evidence points to innumerable recessions and bank failures even after the advent of the Fed, so it's unclear if they add value above and beyond what the market setting rates would do, but I don't believe that I'll ever get to find out in person.
> I bought a house recently so I'm theoretically on the losing side of any drop in home prices resulting from this
Are you actually? We recently bought a house pre rising rates. We got a great financing. And if we refinance now we immediately cut 10% of the debt. We don’t intent to sell anytime soon. Looking at the market, even with lower prices now, it would still have been more expensive to finance a purchase after interest increases.
From our perspective it looks like recently having bought is the best position you could be in, except of cause for having bought a decade ago or a decade before etc.
Are you on the losing end of it? If you're not looking to sell your home while rates are high, it doesn't really impact you.
While your home might decline from $500k to $450k, when interest rates lower your home value will climb back up as buyers see lower monthly payments. If interest rates are permanently high, then you got to lock in an amazing rate that will effectively make your housing cheaper - even if your purchase price was higher. If/when rates come back down, your property value will go back up and unless you're forced to sell while rates are high, you won't experience anything bad.
Even if you're worried that maybe you could have gotten a better deal with a lower price and higher interest loan, I wouldn't be. Let's say you buy a home at $500,000 at 4% interest. Interest rates hit 6% and your home's value declines to $450,000. The person who buys at $450,000 at 6% will be paying $2,150 vs. your $1,900 ($250/mo more, 13% more). Let's say interest rates go back down to 4% in 2025. They can refinance at 4% and their purchase price was $450,000, but they've already paid $49,700 in interest. They'd have payments around $1,750/mo (assuming they did a 28-year term) which is less than your $1,900. Ultimately, they'd be paying around $641,000 over the life of the loan against your $687,000 so it's not really that different. Of course, that doesn't consider the fact that the other person would also need to pay the loan closing costs a second time and that if they sold the house after 5 or 10 years, they wouldn't have that 4% interest rate for as long. So you're probably still in a significantly better position financially - unless you're quite sure you're going to stay in the home for 30 years. If you're only going to be there for 5 years, you'd rather pay $1,900/mo ($114,000) than $2,150/mo for the first 2 years 4 months and then $1,750 for 2 years 8 months ($116,200).
Plus, because interest gets front-loaded, you end up with more equity with the lower rate. At 6%, you're getting 0.0008% equity per month instead of 0.0012% per month. With the 4% loan, you've paid off $38,210 over the first 5 years (9.5% of the loan principal). With the 6% loan, you'd pay off $25,004 over the first 5 years (6.9% of the loan principal). Even if you assume that the home is really worth $500,000 and not the $450,000 purchase price, the higher rate still means that you only own 26.9% of the home rather than 29.5% of the home (assuming 20% down). They've been paying a higher monthly and they own a lower percentage of their home!
Again, if you're going to stay for 30 years, buying at a lower price and a higher rate might end up better if you can refinance. However, it does mean that you end up with less equity (paying more interest) earlier in the loan.
Basically, you're probably in a way better position than someone buying at 6% while getting the benefit of downward pressure on housing prices.
<6% mortgage interest rates were only available for a short period of time since the 1970s; from 2010-2019 they were kept low because the federal reserve wasn't seeing the inflation it was looking for. We finally found a decade of inflation.
But 6% mortgage rates may be a best case scenario for the long term.
Tell me more about your house, what your mortgage rate is, etc. I'm looking at houses in the Boston area but I can never seem to grow enough balls to buy one even though I could.
Funnily enough, I left a comparable (to Boston, in incomes, house prices, political attitudes, etc.) metro for a smaller city in a stereotypical "red state", which the residents of my former city are fond of describing as a third-world country. My quality of life has increased in almost all the ways I care about.
I entered into a 30-year mortgage at slightly above 3% last year, with a reasonable amount of money down, and my mortgage payments plus tax on a bigger and newer house are substantially less than what I used to pay in rent. Plus I deal with less traffic, I encounter more diversity in my day-to-day life, and people, even the less well-to-do, are happier here. The only real downside has been that overall the availability and quality of fine dining is less here.
Naturally, people don't move solely for the ability to buy a cheaper house, but it is something worth considering, depending on your circumstances. I was in a similar boat as yours before I moved, where I could theoretically have afforded a house where I was, but I didn't want to.
>Funnily enough, I left a comparable (to Boston, in incomes, house prices, political attitudes, etc.) metro for a smaller city in a stereotypical "red state", which the residents of my former city are fond of describing as a third-world country. My quality of life has increased in almost all the ways I care about.
I'm having anxiety about moving from downstate New York to Lexington, Kentucky. I've spent time there, I enjoy the city and the surrounding area, but I keep coming back to "If I don't like it I can always move back", instead of "The upsides far outweigh the downsides. You'll like it."
If you like the outdoors, Lexington is great. Plenty of hiking, kayaking, fishing, rock climbing, etc. within a short drive. It is a college town, so it is way more progressive than the backwoods parts of the state. You will hear different accents for sure. Neat seasonal events like Keeneland, plenty of scenic drives to the smaller surrounding cities (things like bourbon distillery tours and small museums in/around Frankfort) and lots of Mexican food.
Cincinnati is close and has even more amenities like Jungle Jim's (2x giant grocery stores, 100% go here), CAM, theme parks, Union Terminal and niche museums (Sign Museum, VOA, Air Force Museum in Dayton), various pinball arcades, and places like Microcenter.
== Funnily enough, I left a comparable (to Boston, in incomes, house prices, political attitudes, etc.) metro for a smaller city in a stereotypical "red state", which the residents of my former city are fond of describing as a third-world country.==
I won't name them out of privacy concerns, but I went from a major coastal city (metro population over 3 million) in a state that reliably votes blue to a small city (metro population under half a million) in a state that reliably votes red.
Not sure how you have privacy concerns in metros that large, but I’d be interested to hear what the people in your new metro area say about your old metro area.
Either way, you still moved to a city, so the local politics aren’t likely all that different. Though you did make sure to mention it a few times.
From the point of view of my new city, there's typical banter about how silly/crazy/whatever "those people over there" are, though there is a general consensus that the people of my old city are richer. There's no equivalent to the people of my old city dismissing this region as a "shithole" or "third-world country", I guess because objectively there is more wealth there. People here generally feel that they are freer here and prefer to make that tradeoff against more money.
I’m fascinated by how different people define being “free”. From my perspective legal sports betting, legal medical and recreational marijuana, not banning books, not dictating what teachers can/can’t teach, freedom to protest without being run-over, biometric privacy, and choice for women makes for a “freer” place than having loose gun laws and slightly lower taxes.
Look for deals; some places need work, or don’t have AC, but can be had for cheap. Most buyers in the GBA don’t want a house that needs even a new kitchen, much less some walls knocked down.
^This is a great piece of advice in any market. Where I do business, loads of potential buyers are hardly willing to paint let alone do more substantial updates, so they continue to rent and believe they are getting priced out of the market. Meanwhile, I could show them dozens of perfectly good starter homes if they were willing to build some sweat equity. Too many people believe their first or even second home purchase should be their "dream home" but that's not a realistic perspective on housing for the majority.
I just got off the phone with a first time buyer. Thinks he has to be in expensive area X, where his budget will get him a junker, but I could take him a ten minute drive away to area Y where he could buy a great starter home. But no, that area isn’t cool enough. And rates of appreciation in both areas are basically the same.
The real estate trilemma: affordable, high quality of life, near good jobs; pick no more than two. (Or have the government mandate that it's all three, somehow.)
I don't think you should buy a house unless you really need one. The transaction and maintenance costs are usually downplayed, and you don't know how it will do as an investment. If you don't need a house save and invest.
I don't care so much about paying rent. What I care about is what happened to me, back in 2020. During the pandemic, the wealthy fled Manhattan and created a buying frenzy in Upstate NY, where I live. My landlady decided it was in her interest to cash in on that; and, so, when the whole world was being turned upside down, I got the news that I would have to look for another place to live. I bought a condo solely for the control it offered me. As far as I'm concerned, nobody gets to do that to me again.
It's usually a trade off between paying someone for rent, or paying someone else interest (and others for tax, maintenance, etc.)
You can't really take the investment aspect or any of these others out of the analysis if you want to understand what's best for you. Particularly in countries with policies to encourage/subsidize home ownership the answer is often, "buy a place", but not always.
Agree a investment property is a whole other can of worms, but not really relevant on the "should I buy or rent, personally" decision. For that one, you need to compare to other investments, which is in many ways more straightforward.
However you can write off your mortgage interest payments as a tax-deductible expense, which you don't benefit from as a renter; plus you're building equity that you can then resell later. There are always exceptions, but generally in the long run, at least in the US, you're much better off owning than renting.
Mortgage interest deduction is only available for people who itemize, i.e. people who owe more federal income tax than the standard deduction. Per IRS statistics, only 11% of tax filers itemized in 2019. I would bet this deduction does not benefit anyone who is struggling to decide between renting or buying.
With increasing housing costs and property taxes; it's getting easier and easier to surpass the standard deduction. If your state has income taxes, even easier.
Example scenario: New >$3000/mo mortgage, $2000/mo to interest and property taxes = $24k. Have a 5% state income tax?, on $60k, that's another $3k deduction.
This is only true if you assume the same housing at the same cost/mo (including everything). And assume timelines. Usually this isn't the case, so there are definitely scenarios where you are better off renting.
I guess I don't follow - if you rent, for any period of time (sure, I'm slightly assuming a longer period of time - say, >1 year), you will give the landlord rent money over that duration, and walk away with ~nothing at the end. I'm not saying it's impossible to lose LESS with buying unwisely / unluckily, of course.
You have to factor in everything. It's not just rent payment vs. mortgage payment, it's everything you spend on housing (taxes, repairs, etc.) in two scenarios.
In any situation where the rental scenario results in extra cash flow that you then invest, you can end up ahead in total, sometimes significantly so. It's all complicated by the fact that you are rarely comparing rent vs. buy on the actual same property.
Remember also in the "buy" scenario you have to include closing costs etc. which can affect your timeline. Your 1yr is unrealistic, you'll eat 5-10% of sale price on just that, typically, which may be way more than rent.
Bringing house prices down either means increasing the supply or decreasing demand.
The FED only has a demand-side lever, and "decreasing demand" is exactly equivalent to "reducing affordability".
It would be nice to see more attention paid to increasing housing supply, but that is a much more complex problem, so I'm not surprised that we see less emphasis on it.
And, of course, it really doesn't help that many people in urban areas find any excuse they can to reduce new housing supply: "that building is too tall", "it doesn't fit the character of the neigbborhood", "there aren't enough affordable units", etc etc. The ur-example is of course San Francisco, where it seems like the only way for a new building to happen is for people to sue the city to force it to be allowed.
I'm mixed on this, because US cities + towns are already at a significant disadvantage when it comes to their inherent pleasant-ness/beauty when compared to a lot of cities and towns in European countries. If we didn't defend some level of standards it'd be a far worse utilitarian mess.
I do love the US but so many of our cities really are garbage... they stink, buildings are dirty from pollution, roads are littered with potholes and trash, etc. I really don't get why people love NYC that much unless you grew up in the environment and view it as normal.
The NIMBYism is one of the reasons US cities suck. The primary aim of NIMBY is to lower density because less supply=higher prices. All these efforts to block new construction and multi-use development yield sprawl and car culture.
> The primary aim of NIMBY is to lower density because less supply=higher prices
I don't think this is actually true. If you spend enough time on Nextdoor and read what nimby's complain about, the chief concerns are traffic, parking, and congestion (after crime and safety). Obviously, there are nimby's who are concerned with their property values, but the average 75 year old nimby isn't interested in selling/moving their property.
Lowering supply is an instrumental goal[0], not a final goal.
If you hate traffic, want more parking, or the like; the easiest way to do that is to just stop building housing, throw up your hands, and say the city's full.
But because doing that also makes your own property more valuable, both complaints are intermingled: people who want more money in their pocket can concern-troll about traffic to sound prosocial. In fact, this commingling has happened for so long that it is difficult to separate out the two concerns.
[0] AI ethicist jargon for "prerequisite you have to do to accomplish a lot of disparate or conflicting goals".
I don't really have any evidence for this, but I always imagined the nimby's who care most about property values would concern-troll about housing projects being "affordable", or their "environmental impact".
You don't need to be selling immediately to be interested in property values. HELOCs are popular, refinancing is popular, and there's the estate to think about. People may not explicitly say "I'm propping up my property value", but actions speak louder than words.
Exactly, and plenty of people like the ego boost of an unrealized gain going up and up, even if they plan to never realize it. The homeowners I know only talk about their property values every chance they get and every other breath.
Sure, some old cities in Europe look great, but a lot of what was rebuilt after WWII looks like shit.
NYC is actually a really pleasant place to live in a lot of respects, and I've lived in several other places. The real problem here is that housing is so expensive. You could drop a bunch of 8-10 story buildings on corners near trains here and you wouldn't really even notice at street level but it would add a lot of housing.
The supply of commercial buildings rise precisely because they're exempt from many of the nonsense that residential construction is subject to. Moreover, a lot of the labor and material inputs to commercial construction is the same as that of residential construction, so residential construction gets even more expensive as those factors are bid away to commercial.
There's also increasing a lot of supply. Without building.
The biggest problem in the country is that investment capital is swooping in any buying any valuable property up and re-selling it for a lot more OR renting it out for a lot.
Because investment is just buying everything for cash, they don't really care.
We need a massive tax on investment property, something that'll require the house to become completely unaffordable to re-sell, so investing will have negative returns due to taxation.
Then suddenly a ton of houses will fly back on the market because investors will be trying to dump inventory.
ALSO property taxes can help: If you live in a house, your property tax is identical to today. If you don't, your property tax is say 10x'd.
Being a real-estate investor won't be very lucrative. Meanwhile this won't affect regular homebuyers since they won't have this tax.
>We need a massive tax on investment property, something that'll require the house to become completely unaffordable to re-sell, so investing will have negative returns due to taxation.
Or far easier, just eliminate the Section 1031 like-kind exchange (U.S. tax provision that allows tax on realized gains on investment property to be deferred indefinitely). There's really no policy justification for it since long term capital gains already have a favorable tax rate, and in fact like kind exchanges for personal (non-real-estate) property have already been recently eliminated.
> Or far easier, just eliminate the Section 1031 like-kind exchange
I don't agree this is the best way. Section 1031 benefits the usual homeowners as well as the investors. Do you own a primary home and want to upgrade? Too bad because when you sell, you will have less money to buy a bigger house. Most people will opt to upgrade when they can and rent out their old home, which won't solve the supply issue.
Section 1031 does not apply to primary residences, there's the primary residence exemption ($250K per person / $500K per couple) for that. So it would not affect the usual homeowners.
The big banks & investment funds will figure a way around it, meanwhile individuals and small businesses trying to grow will struggle. I know people who've used a 1031 exchange to sell a smaller location and move to a bigger/better version of the same. How about limiting 1031 exchanges to small business(es) (for some definition of small businesses that's actually meaningful).
> The big banks & investment funds will figure a way around it
What does this mean? How would they be able to postpone paying capital gains tax if the government said they had to pay capital gains tax at time of sale?
How about eliminating it, removing an avenue for corruption and extra costs for auditing said avenues for corruption, and giving cash to someone if the goal is for the government to help someone?
The same way that Trump, Bezos et. al. seem to be able to avoid paying taxes on most of their wealth, in that they generally find a way to recover profits without it being considered "income".
All I'm saying is that by eliminating the 1031 exchange, I suspect it'll hurt far more individuals and small businesses (resulting in stifled growth) and the "big boys" will simply use some other vehicle to continue avoid the taxes.
I think I agree, except I think it should explicitly be a vacancy tax. We need investors who buy builds to manage and rent out to residents and businesses. Investors who buy buildings to avoid inflation are a problem. I know many local buildings that have been vacant, but available for rent for over 15 years. That tells me that they are asking for too much. They need an incentive to rent it out cheaper, or sell, or forfeit the land. Most (all?) real estate ownership chains go back to someone just putting down a fence anyway, if you essentially abandon a part of a town you should lose the right to claim it as your own. But I do think the local municipalities should make these rules for themselves instead of being mandated by the state.
Investment groups aren’t in it for the resell. They’re incentivized to hold the asset as they’re leveraging against it to buy more homes. Selling assets is pretty uncommon in SFR for this very reason. The game is more about cash flow to service their debt. That means rent rates. Selling the homes has a 2 part effect: reduced your cash flow to service your debt and further forced asset sales that were bought with debt. If you really want to get homes back into the retail market, you have to target the cash flow.
> and re-selling it for a lot more OR renting it out for a lot
See, you're almost at the real problem: why is that a good investment in the first place? Because there isn't enough housing stock. If there was, investors wouldn't be able to leverage it like that.
Soooooort of. Space is finite. Sure we have a ton of unused space, but space near harbors, is a premium. New York City cannot expand, not without a massive rail infrastructure.
Anything that "brings in more space" in any shape or form requires a really solid investment in rail. But unfortunately this is not something the US can do effectively.
New York City, even Manhattan, is not terribly dense compared to other major world cities. You can see in this map[0] that vast swathes of Manhattan are occupied by buildings 10 stories or less.
How dense do we want it to be? Density becomes misery after a certain point. Manhattan isn't dense enough, we're showing, but do you enjoy taking a crowded train during rush hour? Have you ever been to a supermarket where the entire inside is one long line of people pulling items into their baskets as they go, ending up in another line where numbers are called to registers.
How about a big apartment building with 10 apartments on the floor, with at least one neighbor per weekend having a party, and half the people letting their doors slam whenever they come and go at night or early morning?
Folks, good news for you - one unit will be available soon, I'm happy to add a vacancy to this delightful city as I age out of it.
Density is not one size fits all. A walkable city guy my whole life, my mental health has taken a real beating. Density is for the young, that's the bottom line. Anyone who is a light sleeper or doesn't enjoy going out a lot at night is just taking one for the team.
Paris is the best example of how you can get very high density without actually needing very large buildings, just by being extremely consistent about having apartments and condos be the default mode of urban construction.
Look at the neighborhoods outside of Manhattan and you'll see plenty of places already near transit stations that could easily double or triple capacity just by putting in townhouses or triplexes.
This is also complex though; REITs are one of the biggest builders of new housing stock in the US, so you'd reduce creation of supply (and therefore put upward pressure on prices) if you broadly tax this sort of investment. I think you need to do some careful calculations to be sure that this nets out as a positive effect on housing prices.
I think it's clearly problematic for investors to be holding properties vacant as a speculative investment, and we should definitely tax that (probably at the local level) so heavily that the neighbors are happy to have someone contributing so much while not being a drain on services. It's not clear to me what % of housing stock is actually being held back like this though.
In the middle you have the house-flip; buy property, improve it, sell it for a profit. AFAIK most of the time this involves actually doing work on the property, rather than just sitting on it and waiting for the value to appreciate; in that case a real service is being provided, as many families don't want to buy a house and have to wait to improve it themselves. So again, if you don't target your proposed tax well enough, you might actually decrease supply at the mid-/high-end of the market and therefore put upwards not downwards pressure on housing prices.
To be clear I'm not arguing against making any investigation into the policy you propose, just suggesting that it's more nuanced than you appear to be stating.
These kinds of shenanigans only make sense to me once you have exhausted every other option and given that it's currently illegal to build apartments on the majority of parcels in the United States I'd say that we've mostly been busy foreclosing options, not exhausting them.
On the face of it, this makes no sense. Vacancy rates are incredibly low everywhere in the US, and what you're describing would push prices down as much as up.
The weird part is, in New York vacancy is because the rent is so high or the price is so high that investment firms are unwilling to let people live there for fear that it'll drive down prices. They rather make 300% gains on 70% of their properties and let 30% go vacant, than let those 30% get sold/rented and let all prices drop to normal rates.
Mortgage rates are demand side. But rates also influence all sorts of supply-side inputs, from the cost of developer financing to the cost of holding inventory for suppliers.
The difficult part about increasing supply is that it usually involves dialing back state intervention, and there's very little incentive in the political system for anyone to do that.
People do not buy houses based on price but upon payment of a mortgage that fits their relatively fixed income.
People who can afford to pay $2K mortgage to live in a X percentile house will continue to pay exactly $2K to live in the same X percentile house. What does change when the interest rate varies is cap gains/losses for everyone involved. There are also some transactional fee variations, obviously a 3% real estate agent commission will be more on a $500K sale than a $250K sale, but the monthly mortgage payment will remain identical. Also fixed transaction costs (inspections, certain taxes and near-taxes) will be a higher percentage of the sale price.
My prediction would be the transactional fee middlemen will demand higher percentages to maintain their revenue stream as interest rates rise. They're certainly not providing any additional value, so I would imagine there will be more competition among middlemen, opportunity for startups to disrupt the market, etc.
I haven't worked in the home sales/mortgage industry, but I bought a house in 2006 and what I remember was the huge number of people getting into the industry in the boom years and then a mass exodus after the crash. It felt like everyone who didn't already have a good career was getting a realtor's license in 2006. I would expect this go around to be similar, they may want to raise their fees to account for dropping prices, but there are probably too many others trying to compete in the market for a slice of the shrinking pie to let that happen.
I've never seen any policy actions in the US that indicate housing is supposed to be affordable. There's a whole bunch of talk and politicians largely proclaiming how their going to solve things, but I've never seen it play out.
Its been a pretty big focus since at least the Reagan era, actually. As the post-WWII boom came to an end, many past presidents viewed home ownership as the primary pathway to being "middle-class" and made it a focus.
Bill Clinton, in particular, made increasing home-ownership a primary objective of his presidency [1].
Unfortunately, many of the Clinton-era policies, however well intentioned, ended up making homes less affordable due to greatly increasing demand for homes (by making it easier for more people to get mortgages), without increasing housing supply.
Skimming the FRED data [1], we've had lots of ups and downs since the 60's, but are basically flat since 1980. It does look like Clinton's policies had an effect, but mostly to cause a small boom / bust cycle. The entire graph only takes place between 63% and 69%, so not that big of a change.
The Clinton-era policies did seem reverse the trend in the 80s, so that's something. Hard to say if post-pandemic inflation will disrupt that though.
That chart says "The homeownership rate is the proportion of households that is owner-occupied."
Affordability does not mean "owner occupied". People who mortgage 99% of the value of a home count under that category. Having a mortgage that will take you the rest of your adult life to payoff is not affordable under any real use of the word.
To be fair, the GI bill was originally passed in 1944 and HUD was created in 1965, so the GP's statement "I've never seen any policy actions in the US that indicate housing is supposed to be affordable" could still hold true for anyone under 57.
Does anyone know if there are any active organizations/agencies/startups working on solution to match empty nester with young renters?
I have an uneducated hunch that due to houses becoming more of an retirement investment, older people with no dependants are not downsizing, causing downward pressure and not allowing younger people to move into larger houses to raise families.
The "increasing demand" lever also reduces affordability over longer timescales as prices rise faster than wages, so people without a home are priced out of ever buying one.
Removal of mortgage interest deduction could reduce prices without involving (private bank, not government employees) Federal Reserve. I don't expect demand for housing would change much, once prices adjust lower.
Maybe not as much as you'd expect. I assume you are talking only about homeowner mortgage interest deduction, not landlord (investor), so that is a large chunk of the inventory that would not be affected.
Also, with the temporary (TCJA) increase in standard tax deduction, fewer people than ever get any tax benefit for their mortgage interest, not to mention those who don't have mortgages because they've lived there so long.
I wonder at what point this stops. We have a certain subpopulation saying these things in Europe while companies actively vest in cities.
But hey, apparently the answer is to burn 10 hours of your workday instead of feeling 'entitled' to a modern, average-sized apartment while earning far above median. Next up, stop feeling entitled to a personal toilet and kitchen, middle class plebs.
The people screaming the loudest about the need to build are exactly the same people who recoil at the thought of living more than 100 meters from their heckin' microbreweryarinoes.
Life is all about tradeoffs. The United States is extremely large. It's not anyone's fault but your own that you, who can literally write adtech spyware for $300k from anywhere, refuse to entertain the notion of living outside the bugman bubble.
Like Boston, Chicago, Seattle, and countless other hellholes that the Urbanite loves nonetheless? The weather sucks, in different ways, pretty much everywhere other than the California coast. Most parts of the Mountain West are much more pleasant than most cities.
> no interesting things to do outside
Good point. A postage-stamp-sized overcrowded city park with human feces and needles is definitely preferable to actual nature.
I'm not sure if you're being sarcastic, but remote work aside, there are many second- and third-tier cities in the US that will pay a comfortable living wage relative to the cost of living and give you outdoor recreation options; pretty much just pick any population center that's not big enough to show up on the map when zoomed far out. Bonus points in areas deemed socially unacceptable to those living in coastal urban areas, because you get a discount on the number of people wanting to live in such places.
Unless your opinion is that it's a human right to be able to take free public transit 20 minutes to breathtaking mountains and 20 minutes the other way to pristine beaches and have it be 75 degrees and sunny every day, and everyone is paid a "living wage" no matter what they do?
> Not everyone gets to live in San Fran or Chicago.
Chicago is actually cheap because the city has historically allowed buildings. Huge swaths of the city are made of mostly 4 flats and 10+ unit apartment buildings, which means that my rent in one of the hotter neighborhoods is $1500 for a 3 bed.
I'm fighting the urge to time the market and put an offer for a house I like in the next few days. The high mortgage rates are putting my monthly payment estimates in uncomfortable territory, but I also know rates are unlikely to go down for a year at least, especially not to historical lows of 2-3% we've seen recently.
Only saving grace is home prices are falling in my local market (Austin, TX) and builders are willing to negotiate more for inventory homes. But it's not falling fast enough proportional to the rate hikes.
I guess this is working exactly as designed for the Fed, but it sucks.
End of the season in a different market so YMMV, but the markets I follow (Reston, VA and some of the towns along the Blue Ridge Mountains) have flatlined in the last two months. Prices are steady or falling and I'm seeing houses that went under contract in early August return to the market.
People definitely seem unsure. Funny, I remember the early 80s, when rates were around 18%. The house my parents bought back then was, in part, selected because the existing mortgage was transferable and at a lower rate (~9%).
The last decade of rates below 5% are an anomaly. Average over the last 40 years is somewhere in the 5-6% range with many periods well above.
They mostly phased out in the 80's because banks wanted to make more money from fees and rising interest rates. The main reason a buyer would choose to assume a mortgage is because rates have risen, which means the bank would get more money if the buyer got a new loan instead.
Same here. I've been on the housing market for the past year, though my local market is the Monterey Bay Area, with parts of the Bay Area and the Central Valley as backup options. Interest rates were considerably lower last year, but the market was an absolute frenzy, with homes receiving multiple offers at prices considerably above asking. At a budget of only $550,000, it was highly discouraging; there were few listings that met my price range to begin with, and all of them ended up selling well above asking. Once the 2022 interest rate hikes began, it's been less frentic; not only are there fewer above-asking bids, but homes are sitting on the market longer, and many sellers have made modest 5-10% cuts in their asking prices. However, a mortgage on a $525,000 home at 6% interest is still larger than a mortgage on a $550,000 home at 3.5%.
Even though 6% interest is still low by historical standards, today's home prices in my areas of interest are the highest they've ever been. However, I'm still interested in purchasing now because I don't believe prices are going to drop substantially in my area. There needs to be more housing in order to meet the demand, but Santa Cruz and Monterey counties (less so San Benito County due to the growth of Hollister) have historically not been keen on large-scale development. Thus, supply hasn't increased very much, while demand has been increasing, especially when the pandemic started when the prospect of working from home made commuting to Silicon Valley less of an issue.
Willing to negotiate more. Hah. You know I've seen both sides, was getting an introduction to a construction job from a Central American, guy was long-term very solid, told me yeah wages are $20 but they charge $75 dollars per hour to the buyer. Dude willing to negotiate. All about making things more expensive and charging cost-plus. Dude like hospitals $120 for a box of tissue paper. Negreation.
Very negreated market. Everybody squeezing, everybody trying to corner, everybody seeking to conspire, everybody out to fuck you. Less so as you go inland, but to an extent still. Just considered easy money. You and me, anybody who hasn't bought in yet gets negreated. Anything but supply and demand. Dude that's why startups attempt to take on this kind of markets and always fail, that medicine and education, always nosedive, why? Highly negreated. Negreado, treated like a source of free labor, ie like negros especially bozales (direct from Africa) were exploited in Chile. It's supposed to be real estate agents just make shitloads of free money. Like three phone calls boom 60000 USD. No effort. Just sleazing. Connections. Access. So it can't be disrupted, really. The whole industry is set up as an economic army prepared for disruption with...with anything. Everything on the table. You think the entrepreneurs before 2006 couldn't see inefficiencies? Couldn't say hey I can do it better? Didn't have the internet? There were phone lines, there was fax, sneakernet, there was tons, and there was internet going back to the 80's. A professor told me of a spreadsheet business online in the 80's. Dude, the reason disruption can't happen is because everybody backstabs it right away. The industry is that. Also sometimes build houses, also sometimes prescribe some pills, also sometimes actually hand out sheepskins. But the intent is to deny, not supply.
> The high mortgage rates are putting my monthly payment estimates in uncomfortable territory...
And they are doing the same for everyone else who needs a mortgage to be able to buy. So, what's going to happen is that in a month or so, house sellers are going to realize that they can't get the same price now that they could six months ago.
Offer a price that makes your monthly payments comfortable, even if it's less than the seller is asking. If everybody else is in the same boat, and nobody else offers more, then the seller has a decision to make - your offer, or nothing. It can take a while for them to decide to bite that bullet, though.
Note well: I'm not a realtor, nor a real estate investment guru. This is just the way I think this plays out.
Mortgage rates will change more quickly than housing prices. Mortgage rates are a function of the Fed, Treasury Rates and tons of banks/lenders across the nation. National scale influenced, sure, in part by national demand for mortgages.
You local housing prices are more of a function of local supply/demand which is partially disconnected from the national scene. So yes, national mortgage rates going high will knock out some potential buyers. At the same time (at least in my area)... rates have gone up... local inventory of available homes has gone down (people just choosing to not sell) and thus housing prices are remaining mostly flat even as national mortgage rates rise.
In my local market, prices are definitely dropping [1] and available inventory is up to pre-pandemic levels [2]. But even with price cuts, it's still only at Jan-Feb 2022 levels (I think prices peaked around April-May). It's the lag between rates rising and that being reflected in prices that makes the timing less ideal.
At a macro level, mortgage rates impact the market. At a local level, things may be very different. In my area, 2008/09 impacted the price point I was in by about 5-10%. There was too much growth in the area for the downturn to affect prices that much. We did see volume go down, but prices overall stayed relatively the same.
No. It's putting pressure on anybody who can't buy a house with cash and not requiring a mortgage. For the mortgager, housing is as expensive as ever - even now more expensive. Who cares that the selling price is dropping when the loan expense is greater? Maybe some day they'll be able to refinance at a lower rate but we don't know when that day may be.
For those who are buying cash then it's great! Housing prices are falling!
This works both ways, though. How many people realize, for example, that housing affordability for anybody with a mortgage has actually been mostly increasing for decades:
The conventional wisdom is literally the opposite of what's been happening. The recent run-up is notable in that it wiped out a bunch of those gains and took us back to levels last seen in 1989. In other words, housing has been getting more affordable since 1989 -- again, literally the opposite of what people think -- and we've just now gotten back to those levels after a historic run-up in prices (and, of course, things were much worse before 1989).
Every generation thinks they have it worse than anybody before them, but you should always be extremely skeptical of such claims.
To be fair to the authors of the article the majority of people who buy homes are buying with a mortgage. Cash buyers are the minority.
To add to that if you were a cash buyer, yes its cheaper than last year but I would probably hold because theres lots more to come out of this market as the rates go up and the sustained pressure of higher mortgage rates filter through peoples personal costs.
I'm just happy that people buying home property strictly for speculative purposes are feeling heat. I'm looking at REITs etc.
They're feeling a lot less pain than people who need to take out mortgages for property. Rents are skyrocketing, and with home prices dropping all cash buyers who are renting the properties out are laughing all the way to the bank while everyone else suffers.
Well yes, someone with >1M of extra cash on hand is going to be not hurting too much.
That’s at least 35k of interest alone if they they don’t buy a house and put it in a treasury bill.
If the interest rates continue to raise, which they might suspect or a recession happens, then house prices would drop and their 1M house may be a 950k house in a year. A net loss of 85k versus safe treasury bills.
Maybe if they rent they can only be out 50k in that scenario.
This isn’t definite but people comfortably sitting on piles of cash do have reasons to pause too.
I agree with your sentiment of concern but I don't think there's all of a sudden a lot of cash buyers converting homes to rental units and making a killing. Thats a lot of risk, work and capital being put to work for not a particularly great return. Especially into one asset thats currently devaluing pretty quickly.
And looking at it from the other side. If your budget for a house (no T&F) was $1,300/month you could afford:
- On this day in 2021: $300,000 house
- Today: $210,000
- After two more rate hikes: $180,000
...what's going to happen when people who bought a house during the last 12-18 months need to move? Home prices haven't appreciated enough to offset the dramatic reduction in purchasing power, and rate hikes are dampening demand which will eventually put downward pressure on prices.
This makes me happy that I didn't try to buy a house despite the rents going up in my area. I'm in an apartment so this isn't a big issue but it's still significant. In 2015, my apartment rent was 680/mo. Last month, the rent was 965/mo. I've moved into a renovated apartment in the same complex which moved me up to 1015/mo. So, I've seen some major jumps in the last few years there but it seems they're minor compared to the current changes happening for home owners.
Edit: Also, I don't pay for water, heat, or trash, so these prices with that in mind are a bargain in my opinion but for anyone else that isn't making my salary or similar it's still a pain.
You only "lose" in this scenario if you bought a year ago and need to sell now or sometime in the next 12-18+ months. Even if you're underwater temporarily it won't matter unless you need to sell.
> what's going to happen when people who bought a house during the last 12-18 months need to move?
They'll maybe need to rent out their houses instead selling; which might include them finding a smaller temporary housing.
But this should be a minimum exception of people, right? Sure, relative to the quick flips, 7 years is a long time, but the majority bought to stay, right?
Technically 8% inflation and 6% interest rates should be a great time to load up on debt and buy hard assets. Affordability seems to drive everything though which is why I've been wrong for 20 years about this. Who knows what'll happen next.
OK, assume they don't. Assume they stay the same. Then you've borrowed money at 6% in an 8% inflation environment forever. That's not bad.
Or, assume rates go up. Then you've borrowed money at 6% in a 10 or 12% inflation environment. That's not bad, either.
Personally, I'm not sure that I like "load up on debt" as a strategy, even if it makes sense financially. But it can make sense financially.
Note well: The hidden assumption here is that interest rates track reasonably well with inflation, and also that your income tracks reasonably well with inflation. The first assumption is probably reasonably solid. The second one... your mileage may vary.
That is the good thing about it. If rates to up you're protected, if rates go down you can refinance. Its a great deal for US consumers that other countries dont have.
Yup, I bought a house at 2.7% last year. At current rates, my house would have to be 20% cheaper to keep the same payments. I don't think I'll ever be able to beat the rate so I'm pretty happy. Even if the market explodes and my house drops by 20-50%, it was still a good deal with those interest rates.
Thanks I figured it out while my friends (who bought a lot of property) got rich and I waited for the crash. That's the problem right markets can stay irrational until you're dead.
I spent 10 years in the same boat.
Sometimes it is hard to distinguish a irrational market from one you simply dont like.
Hosing prices have always been higher than I would like them to be. However, there has been no shortage of people willing to pay those high market prices.
At the end of the day, I had to ask if it was the market that was irrational or just me.
Yeah my problems compounded because I grew up in a small unloved city where property was always cheap to big cities with expensive real estate that seemed crazy but maybe makes sense.
I was shocked when I was talking with my grandma and she mentioned her mortgage when she bought her house was 18%. This was a couple years ago when I was looking and rates were around 4%. Blew me away.
You'll often see financial advice websites claim that one extra mortgage payment a year will reduce your loan term by 11-12 years on your 30 year mortgage. This was technically true for a brief period in the 1980s. Not sure why this ephemeral factoid made it's way on the the early web and survived as it became less and less true over the years, but I guess it dove tails nicely with the other nonsense about the "huge tax savings" from deducting your mortgage interest*
*Was still sort of true if you had a VERY expensive house.
My parents paid their house off after 7 years, but that is quite a lot easier to do with most of your payment is high interest rates and you have a much smaller principle to attack.
I have only one data point to go by, and that's from memory, but I'm not so sure about what you're saying.
The house I grew up in is a raised ranch ("high ranch") in a suburb within easy commuting distance to Manhattan (Rockland County, NY). My parents bought the house in 1969 for $40K, which seemed high to them at the time. Right now it probably fetches $450K easily, in this arguably inflated market. But I remember conversations from the last '80s where the house was thought to fetch $350-400K. The price dropped a bit after that period, and then went back up.
Maybe my memory is faulty. But I do remember a period in the "go-go" days of the waning Reagan Era where prices in that area were quite high.
Do you think I'm going to refinance today? No. The bank is stuck with 2.3% from me for the next 15 years. Its a bad deal for them, and a great deal for me.
As long as interest rates go up, there's no refinancing to occur. Its financially the wrong move for the property owners.
Banks loan out the "same" dollar multiple times since each borrower ends up keeping their money at the bank. Interest rates don't have to be above inflation for the bank to make money on the loan.
Do I love my 5br house in Seattle that I pay only $3200 a month for? Yes. Low rates and low prices made that possible for a brief moment in 2020.
Will we be here forever? No… I don’t think I want to raise kids in the city. Everything is densifying and that’s not for me. But as rates continue to rise, the financial cost of moving seems increasingly large. We might be stuck here for the entire mortgage term if prices drop below 2020 prices, which is feasible if rates continue to rise for the next few years. Payment a few thousand a month higher, purchase price a few hundred k lower.
I could always rent it out. I really do want to preserve this old house and it would need to go the right tenant that takes care of it, likely for a below market rent in exchange. However, given how absolutely unfriendly rental laws are in Seattle and how little choice I’ll really have in a tenant as a result, I’m very averse to that. Maybe I’ll just leave it empty once enough time passes for the payment to be inflated away to a negligible amount.
I suspect inventory will stay low for these reasons. People either can’t move, don’t have an incentive to rent out their place, or will rent and not sell to avoid catastrophic losses.
An empty house will turn bad faster than a rented out house. Give it to a property manager for the time it's rented, and when you move back in, do a remodel.
With tenants in the house, you'll be doing regular maintenance anyways, especially at turnover. You might find some damage once in a while and repair it over the years. This is damage you probably wouldn't find if you lived in there yourself, because you wouldn't have the "turnover" event triggering a deep check. But also, you might avoid the damage in the first place, who knows. Overall though, it's minuscule expense in comparison and it's not like the house will be ruined out of it. A decade or two later you'll want to do work on the house anyways before you move back in.
I think renting out is actually a lot better than you'd think. A good property manager will help you find good tenants and save you a whole lot of headache, save you from getting yourself into iffy legal situations, etc.
I don't think wear-and-tear (or even outright damage) from tenants is the big concern. The real danger is someone who truly wrecks your property, doesn't pay rent, in a legal environment where it takes you two years to evict such a person, all the while they might continue to do inflict more damage.
Additional legal protection for renters usually decreases the supply of rentals for this reason, and it's the exact same reason why unemployment rates are higher in countries where employees are very difficult to fire.
Seattle seems to have some affordable pockets now, back when we were in the market in 2018, the townhouse we were in skyrocketed in value and the rent kept going up. We finally bought a place in Renton, which was affordable.
Now it seems that Seattle prices dipped (ignoring Queen Anne) and all the neighboring suburban towns skyrocketed: Carnation is hitting >US$1M? Monroe pushing $700k-$800k? Homes in Kirkland have always been high, but looking at $2M-$3M. Insane. I want a quieter neighborhood for my family, but doesn't look like I can move, ever. I feel trapped in, and if I'm not alone in my situation, inventory will remain low, keeping these prices high and unaffordable.
Even if I do retain a profit when selling, we’re going to be trading down to a worse house. Payments for the same house now based on the Redfin estimate and current interest rates are more than double.
Given how bad the tech sector is doing now that the real world is back post lockdowns, I’m not comfortable taking on that much more of a payment.
Yeah, but don’t forget to take in all variables (total cost of ownership as it were) - the mortgage is one factor, taxes, schools, commute all play into it.
Moving to a more expensive monthly payment in a school district where you don’t need to send kids to private school to get a good education can save thousands of dollars, for example.
But I know how it is. I had an underwater house in CA for 10+ years before I could refinance.
Over here in germany it is insane how long inheritance disputes take. I cannot speak for other countries but there is a large number of places staying empty because the legalities do not allow selling or renting it out. I wonder how long the average process takes. I'm looking at 4 perfectly fine apartments that have been empty for 5 years.
No, it's overstrained because every major metro area in the US has policies in place that keep enough housing from being built. Housing would need to be built at literally twice the current rate just to cover the current deficit of housing compared to number of families in a reasonable timeframe [1].
Cash just means no financing contingency. Some sellers don't ask for proof of funds. People were risking their deposits on the possibility that they may not get financing, others had outright cash. Both fell into the same statistic here.
It seems like the western world has the exact opposite housing policy to China.
China has completely built out cities just waiting for hundreds of millions of people to move in, but we enrich boomers by subsisting and effectively subsidizing mortgages from the same suburbs built in the 60s and 70s.
The other thing to mention is just that a lot of people have taken a 20%+ wealth haircut too, from the stock markets. With that much abated m2, there's considerably less money supply to buy with.
I think the rates increases are putting pressure on the housing market, but what I'm curious about is how this affects housing prices in context. If rents are very high (as they are), and high interest rates cause builders to build fewer homes and/or only build higher margin homes (McMansions and such) at higher price points, what is going to happen? Are people just going to be trapped with high rent and never escape to buy a home? Or are interest rates going to rise but prices will also either stabilize or rise?
I personally expect increasingly desperate attempts by state and city governments to do literally anything except actually allow enough housing to be built. I don't know where that will lead, but favelas and multigenerational inherites rent contol contracts seem likely.
People move to where there are jobs. Ohio has about 5.4 million jobs currently (going by the Current Employment Statistics survey) and a population of about 11.8 million, and while there's obviously some wiggle room there because jobs aren't a zero-sum game, "get everyone to move to Ohio" ultimately isn't a very helpful plan.
You don't have to go all the way to Ohio. In the (former farmland) of Morgan Hill they are turning out subdivisions. Mountain View keeps looking more built up. Just not much progress in San Francisco, Palo Alto, or Atherton.
High rents in many places. The cost of homes going up because of lack of supply and now because of mortgage rates. Where I used to live the cost of starter homes has gone through the roof, and there's tight supply. I rented them out for $1k-ish and now rents are double that...all in about 5 years.
Add in landlord unfriendly policies, and rents go up even more. In some areas, these policies are driving out individual landlords, leaving only institutional investors who look for any excuse to raise rents.
Rents are expensive now with no end of increases in sight.
EU is getting hit by a double-whammy. Higher interest rates increase the cost of the mortgage (especially since much of the continent is floating-rate), and at the same time, higher energy costs are massively increasing the cost of ownership.
"higher energy costs" increase costs of everyone and everything: ownership, renting, producing anything, moving anything (except on foot or using a bicycle) etc.
Modern civilization is extremely dependent on affordable energy.
There are also a lot of people who built empires, renting out tens of flats bought on huge mortgages. They can't raise the rents too much, the law limits it, and a lot of them need to refinance after 10 years, which may crash the housing prices as they may have to pay more for the mortgage than they receive from the rent.
If you are buying a new house, most construction materials (bricks, concrete, steel, ceramics) require huge amounts of energy when produced and therefore are now more expensive than before.
If you are buying an older house that needs renovation, you need to invest a lot more into insulation etc., lest your heating bills become terrible.
Lower interest rates shouldn't result in higher list prices. Yes, as a homebuyer you can offer a higher number on a house to win a bidding war, but why are banks allowed to appraise the house so damn high? It's collusion between banks to keep profits high, plain and simple.
The price should not be a function of the interest rate, it should be an independent variable.
It would be largely independent if interest rates represented market rates. However, given the power and actions of the Federal Reserve, that will never be so while that institution exists.
House prices would not be independent of interest rates if "interest rates represented market rates". House prices may be different but the math above still holds. If interest rates are 1%, house prices are "high", because people can "afford more house". If interest rates go to 20%, house prices drop (by about 20%) because more of their money goes to interest.
Your point that if the fed didn't control rates that somehow house prices would be independent of interest rates, but that's not how house prices work.
>Lower interest rates shouldn't result in higher list prices.
For the vast, vast majority of homebuyers the only number that matters when purchasing is the monthly mortgage. If the totally monthly payments of a $550,000 house at 6% are the same as a $800,000 house at 3%, well, technically you can pretty much "afford" both houses. In the end, the total paid cost for the house after 30 years is more or less equivalent (assuming your rate is locked and you don't refinance ever).
I understand what the responses are saying, I think I am not communicating my position clearly, which ultimately is a matter of values and opinion. I personally don't believe that housing should be an investment vehicle, or at least, not the primary investment for individuals.
I am not an expert by any means, and perhaps I am overlooking details.
Housing is currently viewed as an asset, however the system in place provides an asymmetrical risk/reward profile between buyer and bank.
Whether a bank finances a house at low price/high interest rate versus high price/low interest rate is of little consequence to their cash flow, in the end, they will make the same amount on interest. The buyer will pay the same amount month over month.
Once the homebuyer pays off the home and owns it, when they go to rent or sell, do they benefit from a changing interest rate? No. If the interest rate is now higher, then their list price is now lower. If the interest rate is lower, then their house price goes up yes, but the buyer demand now decreases.
The bank has the interest rate as a tool to mitigate their risk, but the individual does not have that tool, so they are exposed to the risk of changing rates, with no upside.
If appraisal values were regulated from increasing rapidly, then the bank would be taking some risk away from the buyer. The home seller in that situation would sell for less, but the result would be smoother and more stable of an asset for all individuals.
In the current system, the individual is more at risk of over leveraging than the bank, who should know better. The risk of over leveraging should be shifted to the bank, as they have significantly more resources and wisdom to mitigate that.
What should appraisers go by other than "what other people were willing to pay recently for similar homes"?
Look up "appraisal gaps" in 2021 news. Appraisers and banks already try to curb this some - the bank doesn't want to loan more than they could get back if the market changes an over-leveraged buyer goes bust and they owe more than the property is now worth in a new situation - but guess what else happened recently? The stock market went up up up, crypto went up up up, etc... buyers had enough cash to cover the gaps.
The difference between now and 2008 is that people had much more numerically-sound financial footings to drive these bidding wars. So I don't expect it to implode without other things imploding first, this time around (you could argue that they had those sound financial footings because of inflation in other markets, like stocks, but the stock market has merely corrected to pre-2020 trends, not imploded).
