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I'm tempted to blame ultra-loose monetary policy, but I'm not so sure. I live in the Bay Area where house prices are also out of control, but I'm not sure why w

I'm tempted to blame ultra-loose monetary policy, but I'm not so sure. I live in the Bay Area where house prices are also out of control, but I'm not sure why we focus on prices (rather than monthly debt payments) since what, 90% of the market is payment buyers? In any case, I do believe the current interest rate environment has distributional consequences that haven't been well-studied. It seems the biggest beneficiaries of this environment will be people with lots of debt-financed assets who manage to sell for high nominal prices. On the other hand, a lot of people think rates aren't coming down any time soon (check the yield curve on US treasuries, the 30-year rate is like 3.4%) so maybe this will be a one-time shock where people who took on a ton of debt ca. 2008 will reap big one-time profits as cheaply-acquired assets realize big capital gains. In any case, I think it's naive to assume holding rates so low, for so long, doesn't have major wealth transfer effects.

trapperkeeper79 10y ago
Agreed. The question is what does a young person do? Take on an asset that is known to be overvalued or wait for the rate climate to change. As a data point, condos in Toronto (condos in Toronto are generally tiny and not the most desirable place to raise 2 kids) appreciated by 9-10% this year despite continuous bubble talk by various levels of govt. You and I both know this will not stop until rates rise; and they won't - at least in canada - because of a significant problems in the oil sector of our economy. Is the right thing to do to buy into this "ponzi" scheme and try to time the exit? Or continue to hold the course of staying out of it and waiting for rates to rise. I have rented since 2008 when I graduated and I'm tired of shoveling my money into the fire :'(
- shostack 10y ago
  Doesn't logic on trying to time the market apply here?
maxerickson 10y ago
The problem might be 40 years of tight monetary policy. The inflation that comes with a higher growth economy gives wage earners opportunity to move to new, better jobs. In a low growth economy, they fight over jobs and lose earning power. A better national economy also probably has fewer people chasing the wealth in the valley.
- dnautics 10y ago
  "The inflation that comes with a higher growth economy gives wage earners opportunity to move to new, better jobs" Crack the whip! The best way to motivate those slaves is by making their cost of living higher! That'll force then to get better jobs!
  - maxerickson 10y ago
    I love the attitude you've imputed there, the way I see it the alternative is that they get stuck with stagnant wages or no job at all. Way better. You know, the stagnant wages that we have seen for the last 30 years of low inflation.
mahyarm 10y ago
Bay area housing prices are created by prop 13 incentivizing people not to sell houses (reducing supply) and creating low property taxes (reducing cost), very strong NIMBY blocking of development (reducing supply), some foreign money investing in the area (increasing demand) and a tech economic boom (increasing demand). Mortgage rates do not cause it as much, a percentage point increase in a typical bay area mortgage will only add ~$300/mo to a 560k house mortgage. The mortgage interest deduction reduces it by your tax rate. SF is an area where people rather have an economic recession vs growth because the system can't handle growth.

trapperkeeper79 10y ago

Agreed. The question is what does a young person do? Take on an asset that is known to be overvalued or wait for the rate climate to change. As a data point, condos in Toronto (condos in Toronto are generally tiny and not the most desirable place to raise 2 kids) appreciated by 9-10% this year despite continuous bubble talk by various levels of govt. You and I both know this will not stop until rates rise; and they won't - at least in canada - because of a significant problems in the oil sector of our economy. Is the right thing to do to buy into this "ponzi" scheme and try to time the exit? Or continue to hold the course of staying out of it and waiting for rates to rise. I have rented since 2008 when I graduated and I'm tired of shoveling my money into the fire :'(

shostack 10y ago
Doesn't logic on trying to time the market apply here?

maxerickson 10y ago

The problem might be 40 years of tight monetary policy. The inflation that comes with a higher growth economy gives wage earners opportunity to move to new, better jobs. In a low growth economy, they fight over jobs and lose earning power. A better national economy also probably has fewer people chasing the wealth in the valley.

dnautics 10y ago
"The inflation that comes with a higher growth economy gives wage earners opportunity to move to new, better jobs" Crack the whip! The best way to motivate those slaves is by making their cost of living higher! That'll force then to get better jobs!
- maxerickson 10y ago
  I love the attitude you've imputed there, the way I see it the alternative is that they get stuck with stagnant wages or no job at all. Way better. You know, the stagnant wages that we have seen for the last 30 years of low inflation.

mahyarm 10y ago

Bay area housing prices are created by prop 13 incentivizing people not to sell houses (reducing supply) and creating low property taxes (reducing cost), very strong NIMBY blocking of development (reducing supply), some foreign money investing in the area (increasing demand) and a tech economic boom (increasing demand). Mortgage rates do not cause it as much, a percentage point increase in a typical bay area mortgage will only add ~$300/mo to a 560k house mortgage. The mortgage interest deduction reduces it by your tax rate. SF is an area where people rather have an economic recession vs growth because the system can't handle growth.