4 ms·

> Hence the loan is only enabling demand. > The only reason prices change is because supply or demand changes. We are living in year 16 of the era of governme

> Hence the loan is only enabling demand. > The only reason prices change is because supply or demand changes. We are living in year 16 of the era of government pushing loan prices lower than the market would set them. 8th year since they've been pushing the loan pricing down VERY hard (ie. essentially to the zero bound, where you're only paying for the (also artificially lowered) risk of the banks, admin (ie. people employed to check payment and tax and ...) and a small profit margin for the banks). While of course it is not really known how high the market would set loan prices, it seems the long term average is 4%. Since we've been below that for a while, let's call it 6%. Add the 3%-4% of risk, admin, tax and bank profit and mortgage rates should be somewhere between 8% and 10%, if you have really good credit. What would house prices be with 9% interest rates instead of 3% ? That's quite normal a rate for mortgages, long term. My back of the envelope calculation says that they'd be, with the same monthly payment, a bit more than double what they should be, in market prices. Prices should be 60% less, or put it another way houses are 120% overvalued. At a very optimistic 7% (the long term average), house prices would be about 45% less, or they're 75% overvalued. (example calculation: with 3% mortgage payment, a 4000$ monthly payment will get you 1.12 million dollars, at 9% it will get you 0.52 million dollars, or a little less than half. At 7% it will get you 0.8 million dollars, or 45% less) Hence I strongly disagree with your notion that house prices are determined by supply and demand. House princes are as high as the government can get them, and damn the consequences.

dlss 10y ago
I mean, in some sense you're right. The literal USD figure is determined that way. However, if you doubled the number of dollars in circulation, and so "doubled the cost" of every home... you've also changed nothing in terms of real cost to consumers. As you say, they're still working just as many hours on the job, still giving the same percentage of their labor to the lender, and they still end up with a house at the end of ~xx years. If the banks weren't giving the same risk adjusted rates to everyone, you can at least make the argument now that you've got two consumers (the bank is essentially donating money for the purchase to the buyer). But I don't see where that gets us here.
- branchless 10y ago
  Nope. They change lending from 3 times primary income to way over 3 times household income. People are literally working longer for the same pile of bricks. The cost of carry remains associated with wages just as rent does because we have to pay more, however as the cost of other items falls (due to efficiency / progress) the bankers hoover up the rest. http://imgur.com/XS99m5v.jpg http://imgur.com/XS99m5v.jpg We work longer, we work harder, and the bankers kick back.
  - dlss 10y ago
    Banks don't get to decide what people will pay, people get to decide what people pay. People make this decision in terms of real cost, not in terms of USD (since real cost determines their access to USD). People are not making that decision because the banks are putting a gun to people's heads and forcing them to pay more. This is a separate point from real estate costs increasing historically -- that is caused by supply and demand. People are (as your graph nicely shows) choosing not to move as more people enter a given area, driving up the cost of real estate. This is to say that their demand is inelastic. Unless you are suggesting banking as an industry is engaged in trust like behavior, they're not able to set the terms of rates in a way that will change their risk-free profit from a given individual at a given market price. If the price rises due to a supply and demand imbalance, they may be able to charge more to offset the increased risk of the purchase they are financing.
    - branchless 10y ago
      Banks set the amount. If banks start lending $1MM to employees on the basic wage that is how much basic housing costs. For example recently in the UK the govt said they would "help" buyers by contributing a certain % for buyers. Housing went up by that amount. Available credit sets prices. This is a waste of my time, I'm out.
      - dlss 10y ago
        > Banks set the amount. Banks can't magically choose to write loans at unprofitable terms. They also can't write loans at noncompetitive rates in any sort of realistic quantity. These two forces (fear of principal loss through nonpayment/default, and loss of customers due to competition) dictate bank rates. > If banks start lending $1MM to employees on the basic wage that is how much basic housing costs. No. It will only cost that much for people unwilling to move away from highly competitive markets where construction is barred. For those living in areas which can be developed, housing prices will also be dictated by the cost of construction, which is presumably less than $1MM. Buyers will be pocketing the difference between the available $1MM and the cost of construction. This is to say that banks do not dictate prices for housing, but rather are only (sometimes) enabling (fools?) to go higher in an auction. If banks did set prices for housing, they would have to also be setting the price of, for example, construction. Which is not the case, as that is dictated by the supply and demand of labor and materials. Put another way: I'm sure in wherever you are, not every housing option is the same price. Do you honestly believe that banks are somehow dictating those price differences? If not, what is that force, and does accounting for it also account for the effect of increased credit availability on house prices? (A: supply and demand, yes) > recently in the UK the govt said they would "help" buyers by contributing a certain % for buyers. Housing went up by that amount. Yes, just like if you give everyone a raise by x% you'll see housing jump by that amount. As I've said in this thread several times already. This jump does not, however, represent a change in real cost to consumers (a change in the what percentage of their labor is being spent on a given good). As I've also said in this thread several times already. > This is a waste of my time, I'm out. Cya.

dlss 10y ago

I mean, in some sense you're right. The literal USD figure is determined that way. However, if you doubled the number of dollars in circulation, and so "doubled the cost" of every home... you've also changed nothing in terms of real cost to consumers. As you say, they're still working just as many hours on the job, still giving the same percentage of their labor to the lender, and they still end up with a house at the end of ~xx years. If the banks weren't giving the same risk adjusted rates to everyone, you can at least make the argument now that you've got two consumers (the bank is essentially donating money for the purchase to the buyer). But I don't see where that gets us here.

branchless 10y ago
Nope. They change lending from 3 times primary income to way over 3 times household income. People are literally working longer for the same pile of bricks. The cost of carry remains associated with wages just as rent does because we have to pay more, however as the cost of other items falls (due to efficiency / progress) the bankers hoover up the rest. http://imgur.com/XS99m5v.jpg http://imgur.com/XS99m5v.jpg We work longer, we work harder, and the bankers kick back.
- dlss 10y ago
  Banks don't get to decide what people will pay, people get to decide what people pay. People make this decision in terms of real cost, not in terms of USD (since real cost determines their access to USD). People are not making that decision because the banks are putting a gun to people's heads and forcing them to pay more. This is a separate point from real estate costs increasing historically -- that is caused by supply and demand. People are (as your graph nicely shows) choosing not to move as more people enter a given area, driving up the cost of real estate. This is to say that their demand is inelastic. Unless you are suggesting banking as an industry is engaged in trust like behavior, they're not able to set the terms of rates in a way that will change their risk-free profit from a given individual at a given market price. If the price rises due to a supply and demand imbalance, they may be able to charge more to offset the increased risk of the purchase they are financing.
  - branchless 10y ago
    Banks set the amount. If banks start lending $1MM to employees on the basic wage that is how much basic housing costs. For example recently in the UK the govt said they would "help" buyers by contributing a certain % for buyers. Housing went up by that amount. Available credit sets prices. This is a waste of my time, I'm out.
    - dlss 10y ago
      > Banks set the amount. Banks can't magically choose to write loans at unprofitable terms. They also can't write loans at noncompetitive rates in any sort of realistic quantity. These two forces (fear of principal loss through nonpayment/default, and loss of customers due to competition) dictate bank rates. > If banks start lending $1MM to employees on the basic wage that is how much basic housing costs. No. It will only cost that much for people unwilling to move away from highly competitive markets where construction is barred. For those living in areas which can be developed, housing prices will also be dictated by the cost of construction, which is presumably less than $1MM. Buyers will be pocketing the difference between the available $1MM and the cost of construction. This is to say that banks do not dictate prices for housing, but rather are only (sometimes) enabling (fools?) to go higher in an auction. If banks did set prices for housing, they would have to also be setting the price of, for example, construction. Which is not the case, as that is dictated by the supply and demand of labor and materials. Put another way: I'm sure in wherever you are, not every housing option is the same price. Do you honestly believe that banks are somehow dictating those price differences? If not, what is that force, and does accounting for it also account for the effect of increased credit availability on house prices? (A: supply and demand, yes) > recently in the UK the govt said they would "help" buyers by contributing a certain % for buyers. Housing went up by that amount. Yes, just like if you give everyone a raise by x% you'll see housing jump by that amount. As I've said in this thread several times already. This jump does not, however, represent a change in real cost to consumers (a change in the what percentage of their labor is being spent on a given good). As I've also said in this thread several times already. > This is a waste of my time, I'm out. Cya.