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Maybe, but it's hard to predict. I don't think real estate prices are going to crash unless mortgage delinquency rates go up dramatically, which hasn't started

Maybe, but it's hard to predict. I don't think real estate prices are going to crash unless mortgage delinquency rates go up dramatically, which hasn't started yet: https://fred.stlouisfed.org/series/DRSFRMACBS https://fred.stlouisfed.org/series/DRSFRMACBS At least not nationally, maybe in some metro areas it has. Mortgage lending standards have started to loosen though, but I think it'd take a while for that to have a substantial effect. Housing prices tend to increase because good land is scarce in most places people want to live.

ra1n85 8y ago
>prices tend to increase because good land is scarce in most places people want to live. Prices are driven by demand. A crash will inevitably reduce demand. Just like equities, real estate involves speculation. It may not be as bad as 2008, but we will still see a significant drop in real estate prices.
- jeffreyrogers 8y ago
  I don't think this analysis tells the whole story because it doesn't explain where the crash would come from. Demand is high (and likely to remain high) because good land is scarce. Developers can't create large amounts of new housing because of zoning and also because if they create too much they won't be able to make a profit (they take out loans to finance their projects too). So supply is likely to be less than demand for the foreseeable future in most locations. Supply could increase rapidly if the mortgage delinquency rate rises rapidly. There aren't signs of this happening soon that I'm aware of, although mortgage lending standards have lowered a bit. I don't see good evidence for an imminent crash, and saying prices will decline if a crash occurs is tautological.
  - ra1n85 8y ago
    House prices are the most expensive they have ever been relative to average income in 41% of markets [1]. Further, in 83% of markets the ratio of home price to income is growing. For the majority of US counties, we are seeing prices increase in both absolute and relative terms. At the same time, wage growth is nil and household debt has now exceeded 2008 levels [2]. We can argue about the implications of the trends, but the gist of my point is that an increasingly smaller pool of individuals is capable of affording houses in the majority of US markets. If the demand of that small pool of individuals, which is strongly tied to the health of the industry providing their wages, declines then we are in for a significant correction in home prices. [1] https://www.attomdata.com/news/market-trends/home-sales-prices/home-affordability-report-q1-2018/ https://www.attomdata.com/news/market-trends/home-sales-pric... [2] https://qz.com/1280927/us-household-debt-has-hit-an-all-time-high-of-13-2-trillion/ https://qz.com/1280927/us-household-debt-has-hit-an-all-time...
- dragonwriter 8y ago
  > A crash will inevitably reduce demand. No, a crash will occur iff demand collapses. You've reversed cause and effect.
  - mcguire 8y ago
    I'm not sure about that. The direct cause of the 2008 crash was unavailability of loans once the risks of mortgage-backed securities became apparent, no?
    - dragonwriter 8y ago
      No, the direct cause was the drop in demand. Cutting off the spigot of loans was itself a direct cause of the decrease in demand: less financing means less quantity demanded at any given price. Demand, remember, is the function mapping price to quantity demanded.
      - ra1n85 8y ago
        Credit was no longer available as a result of cascading failures triggered by defaults. The house of cards came tumbling down.
        dragonwriter 8y ago
        I don't disagree; the crash in the housing market was a direct result of a demand decrease which resultrd from credit tightening, which was itself a result of the wave of defaults which both revealed that current lending practices were unsustainable (which on its own would have led to tightening) and collapsed the huge market for mortgage-backed securities (which, itself, would have led to tightening). And so, as you say, the whole house of cards collapsed.
gizmo385 8y ago
As a side note, holy hell I didn't realize that the delinquency rate made it up to 11.5% after the financial crash... As someone in my early 20s, I remember that the crash was bad, but it's hard to appreciate the scope of it sometimes.
germinalphrase 8y ago
My wife and I have been looking to purchase a house, and it’s amazing how many people tell us “it’s a terrible time to buy. Don’t do it”. That’s fine advice, as far as it goes, but what would we be wait for - another crash? This chart does suggest that prices are inflated, but what do I do with that information? Wait for a downturn in two years? Ten?
- derekp7 8y ago
  The best advice I can give you is to not buy more house than you need (too expensive will run the risk of negative equity). But also make sure what you get will meet your needs for at least a decade or so. And watch out for potentially high property taxes. One guy I worked with had an issue where his family outgrew the house he bought, but he couldn't get enough out of it for a down payment on a bigger place (even though the bigger house was cheaper than what he bought his small 2-bedroom for). So you don't want to get into this situation either. Another situation that just happened to someone else I work with, she bought a house that she thought was reasonable. However her property taxes took a bit of a jump (the previous owner had lower taxes due to some senior discount). And it will be a few more years before she gets enough equity in it that can be used towards another house.
- lazerpants 8y ago
  This is a complicated question, depending on your cash position, where you want to buy, alternatives to buying, risk tolerance, future interest rates, and forward plans (5-10 years). No one else can tell you that you shouldn't buy right now, if you can afford a house, need a house, and are willing to potentially be stuck under water for 5-10 years if prices go down, there are good reasons to purchase in this market. Just know going in that inventories are at historic lows, prices are very high, terms for purchasers are bad (in many markets), and many people are going to regret rushing in and purchasing homes in haste because they are worried about missing out, due to how quickly homes are selling.
- germinalphrase 8y ago
  Reasonable advice. Thank you both.

ra1n85 8y ago

>prices tend to increase because good land is scarce in most places people want to live. Prices are driven by demand. A crash will inevitably reduce demand. Just like equities, real estate involves speculation. It may not be as bad as 2008, but we will still see a significant drop in real estate prices.

jeffreyrogers 8y ago
I don't think this analysis tells the whole story because it doesn't explain where the crash would come from. Demand is high (and likely to remain high) because good land is scarce. Developers can't create large amounts of new housing because of zoning and also because if they create too much they won't be able to make a profit (they take out loans to finance their projects too). So supply is likely to be less than demand for the foreseeable future in most locations. Supply could increase rapidly if the mortgage delinquency rate rises rapidly. There aren't signs of this happening soon that I'm aware of, although mortgage lending standards have lowered a bit. I don't see good evidence for an imminent crash, and saying prices will decline if a crash occurs is tautological.
- ra1n85 8y ago
  House prices are the most expensive they have ever been relative to average income in 41% of markets [1]. Further, in 83% of markets the ratio of home price to income is growing. For the majority of US counties, we are seeing prices increase in both absolute and relative terms. At the same time, wage growth is nil and household debt has now exceeded 2008 levels [2]. We can argue about the implications of the trends, but the gist of my point is that an increasingly smaller pool of individuals is capable of affording houses in the majority of US markets. If the demand of that small pool of individuals, which is strongly tied to the health of the industry providing their wages, declines then we are in for a significant correction in home prices. [1] https://www.attomdata.com/news/market-trends/home-sales-prices/home-affordability-report-q1-2018/ https://www.attomdata.com/news/market-trends/home-sales-pric... [2] https://qz.com/1280927/us-household-debt-has-hit-an-all-time-high-of-13-2-trillion/ https://qz.com/1280927/us-household-debt-has-hit-an-all-time...
dragonwriter 8y ago
> A crash will inevitably reduce demand. No, a crash will occur iff demand collapses. You've reversed cause and effect.
- mcguire 8y ago
  I'm not sure about that. The direct cause of the 2008 crash was unavailability of loans once the risks of mortgage-backed securities became apparent, no?
  - dragonwriter 8y ago
    No, the direct cause was the drop in demand. Cutting off the spigot of loans was itself a direct cause of the decrease in demand: less financing means less quantity demanded at any given price. Demand, remember, is the function mapping price to quantity demanded.
    - ra1n85 8y ago
      Credit was no longer available as a result of cascading failures triggered by defaults. The house of cards came tumbling down.
      - dragonwriter 8y ago
        I don't disagree; the crash in the housing market was a direct result of a demand decrease which resultrd from credit tightening, which was itself a result of the wave of defaults which both revealed that current lending practices were unsustainable (which on its own would have led to tightening) and collapsed the huge market for mortgage-backed securities (which, itself, would have led to tightening). And so, as you say, the whole house of cards collapsed.

gizmo385 8y ago

As a side note, holy hell I didn't realize that the delinquency rate made it up to 11.5% after the financial crash... As someone in my early 20s, I remember that the crash was bad, but it's hard to appreciate the scope of it sometimes.

germinalphrase 8y ago

My wife and I have been looking to purchase a house, and it’s amazing how many people tell us “it’s a terrible time to buy. Don’t do it”. That’s fine advice, as far as it goes, but what would we be wait for - another crash? This chart does suggest that prices are inflated, but what do I do with that information? Wait for a downturn in two years? Ten?

derekp7 8y ago
The best advice I can give you is to not buy more house than you need (too expensive will run the risk of negative equity). But also make sure what you get will meet your needs for at least a decade or so. And watch out for potentially high property taxes. One guy I worked with had an issue where his family outgrew the house he bought, but he couldn't get enough out of it for a down payment on a bigger place (even though the bigger house was cheaper than what he bought his small 2-bedroom for). So you don't want to get into this situation either. Another situation that just happened to someone else I work with, she bought a house that she thought was reasonable. However her property taxes took a bit of a jump (the previous owner had lower taxes due to some senior discount). And it will be a few more years before she gets enough equity in it that can be used towards another house.
lazerpants 8y ago
This is a complicated question, depending on your cash position, where you want to buy, alternatives to buying, risk tolerance, future interest rates, and forward plans (5-10 years). No one else can tell you that you shouldn't buy right now, if you can afford a house, need a house, and are willing to potentially be stuck under water for 5-10 years if prices go down, there are good reasons to purchase in this market. Just know going in that inventories are at historic lows, prices are very high, terms for purchasers are bad (in many markets), and many people are going to regret rushing in and purchasing homes in haste because they are worried about missing out, due to how quickly homes are selling.
germinalphrase 8y ago
Reasonable advice. Thank you both.