10 ms·

I don't know what the risk calculus is for these home developers, but I do know that in particular areas of the US, you just straight up cannot afford a home an

I don't know what the risk calculus is for these home developers, but I do know that in particular areas of the US, you just straight up cannot afford a home anymore on median income (or even the top 20%ers looking for fair pricing!). I anticipate that mortgages will continue to push past 30 years into a strange 45-year+ territory, and we'll begin to see Japan-like multi-generational mortgages. Actually, in reality this is already happening, because people buying homes past the age of 37 (think retirement at 67, but these people are still working and trying to figure out estate handling late in the game) are passing on their mortgage to their children. I am personally seeing this with my friends. No headroom for paid off inheritances! Alternatively, if the federal government does not prevent it from happening, residential REITs will buy them all up and force people to rent.

Workaccount2 6y ago
The financial/economic forest is way overgrown and no one wants to be the one to set it on fire.
- andrewmcwatters 6y ago
  I agree. Politicians have weak incentive to push back I assume? If you do, you put average people at REITs out of work. This isn't a terrible thing if you ask me, because not much of it is real estate specific. REIT HR people can find work at other companies, developers and salespeople, too. But it's not a good look, I suppose? Real estate is a real problem that no one seems to want to touch. "The rent is too d*mn high!"
  - tryptophan 6y ago
    REITs are not the problem. Land speculation is the problem. Worst part is that the gov promotes this, and voters eat that shit up as well("Your mortgage is an investment"). https://en.wikipedia.org/wiki/Land_value_tax https://en.wikipedia.org/wiki/Land_value_tax is the solution.
  - toomuchtodo 6y ago
    A fun question we kick around and model in a financial forum I participate in is, “How much insolvency occurs economy wide for every 100 basis points (1%) the Fed increases their interest rate target?” If interest rates go up, real estate and equities prices come down, and US gov borrowing costs increase. Borrowing costs go up for zombie firms and they fail. How much appetite is there for any of that? The same as long term central back interest rate policy: zero.
    - Der_Einzige 6y ago
      No, if interest rates go up, the acceleration of real estate and equities prices will slow. There are too many real factors which are causing the acceleration of housing prices for interest rates hikes to totally cancel it out.
      - reader_mode 6y ago
        Interest rate hike would probably cascade to a recession blowing up realestate in the process
paulpauper 6y ago
if home prices keep surging on a real basis , a 30-year morttgage becomes attractive proposition, especially given how cheap it is to borrow .
- kokanator 6y ago
  Does anyone remember this type of home buying craziness is what happened just before the bust of 2008?
  - nick_kline 6y ago
    It's different this time ;-) In 2008 there was a lot of new construction that wasn't yet sold, and people bought houses out in the boonies sometimes, but they got loans they could never pay for - expecting the house would appreciate and they justify a new loan, or sell it soon for more money. Prices fell and they couldn't get a new loan or pay their old loan. Today there is a housing shortage, & that's driving up prices. I'm sure there are some people hoping to flip their houses, but all I read is there is much more stringent mortgage requirements than before and in hot markets at least there are multiple offers. So it's similar in a vague way, but it's much different in it's the housing shortage that is driving a lot of the price increase today. Still, eventually I expect the shortage to ease, builders will make more houses, so that should lower the pressure or lower prices, eventually, at least somewhat. If people aren't buying so many houses they can't afford, then shouldn't the problem of mass loans going back to the bank be avoided?
nradov 6y ago
Median incomes are irrelevant to housing developers. All that they care about is whether there are enough customers to buy their products. The developers typically don't lend to customers so the only risk is that demand might collapse in the middle of a project. A lot of small developers went bankrupt during the last recession because they had borrowed to build new projects and then couldn't sell the completed homes. The federal government wouldn't really be able to prevent REITs from buying up homes.
- ericmay 6y ago
  > The federal government wouldn't really be able to prevent REITs from buying up homes. Why wouldn't it? If this was bad enough the government could just pass limitations on it. Hell, the government could probably ban REITs overnight if that was wildly popular.
  - throwaway0a5e 6y ago
    Even if the industry is unpopular there's not that much appetite for legislatively killing it at the drop of a hat because everyone knows that's not a good precedent to set. More realistic would be substantially increased taxes on non-primary residences.
  - pbronez 6y ago
    If you want to support individual home ownership against well-capitalized REITs, I think you basically need local governments to impose some kind of vacancy tax and/or an non-owner-occupancy tax. Otherwise individuals will never have the financial firepower to keep up.
    - sokoloff 6y ago
      If that's your goal, you should also support the mortgage interest deduction (to put owner-occupied borrowing on the same footing as commercial borrowing) and the deductibility of state/local real estate taxes on your federal return (for the same reason).
- 6y ago
gnopgnip 6y ago
High prices in some areas is about the price of land and not about construction prices. Residential REITs need to profit when they buy a house. An individiual homeowner doesn't, they can pay more if they want to. And individual homeowners get subsidized loans, and in many states subsidized property taxes, they can have a much lower monthly payment, and afford to offer a higher sale price. So for move in ready homes, the seller will almost always go with an owner occupant. The real problem is with investors buying homes that aren't move in ready. Rehab loans are expensive and risky, individual buyers can't compete with investors, and the sellers are the ones with the short end of the stick.
- mlac 6y ago
  Private Equity funds are using homes as a store of funds - to diversify their holdings and as a long term move. This can be in cash or financed, but they can afford to eat the loss because there is excess capital right now. It's been this purchasing for years that is contributing to the crunch right now. From an article in September: "Blackstone Group, which blazed a trail for Wall Street in 2012 when it formed Invitation Homes and became the largest owner of single-family rental homes in America, has returned to a familiar watering hole." [1] It's another way to milk the middle class. [1] https://www.housingwire.com/articles/blackstone-gets-back-into-the-single-family-rental-game/ https://www.housingwire.com/articles/blackstone-gets-back-in...
forrestthewoods 6y ago
> but I do know that in particular areas of the US, you just straight up cannot afford a home anymore on median income Correct. The national median income is insufficient to purchase a home in the most expensive cities in the country. That seems reasonable? The national median household income is about $65,000. That’s enough to afford a mortgage of somewhere in the $300,000 to $350,000 range. Is that enough for San Francisco? Absolutely not. But that will buy you a nice house in the vast majority of the country. California has garbage housing policies. San Francisco is even worse. You can buy a lovely place in Dallas, Kansas City, Atlanta, etc on national median income.
- jbay808 6y ago
  > Correct. The national median income is insufficient to purchase a home in the most expensive cities in the country. That seems reasonable? It's not clear if the GP was referring to national median income. My interpretation was that they may have been referring to local median income. Is the median family income of SF ($136k, I think) enough to buy a home there?
- andrewmcwatters 6y ago
  People have different definitions of "affordable." To me, a gross $65,000 household income, less after taxes, is not enough to be able to afford a home within that price range. It's probably closer to below $275,000. I do agree with you regarding location, though.
  - DavidPeiffer 6y ago
    Completely agree. A lender in Iowa told us they approve up to 35% of gross income. Not certain if that was total servicing all debts, or their limit on the mortgage percentage payment. 65k could buy a ~300k house at a 3.25% interest rate. I talked with an attorney from San Francisco on a plane once. When they bought their first house, 70% of their income was going towards the house. Raises helped that become a more reasonable percentage over the year. Fast forward a few years, their family grew and they wanted to be further towards the edge of the city. They sold the house at a huge profit and put that money towards a bigger house further out. Different perspective in different markets.
croutonwagon 6y ago
The Federal government has a TON of subsidies for first time buyes and even more for veterans. The issue is part land scarcity driving up the cost of land and part the transition of our economy out of production and into consumerism. Building has never been cheaper, and even quality has improved, including working through some pretty bad materials changes (like PEX plumbing, or chinese drywall). We no longer really do nearly as much blue collar work as we used to, and many of the unskilled blue collar jobs have seen ridiculous wage stagnation. Companies have offloaded that to China, Mexico, Vietnam, etc, where they havent automated it. Heck our population doesnt WANT those jobs. Theres a TON of demand for trades work and more are retiring than filling those gaps, but our society has pushed hard to posit that college is the only path to success and trades work is to be looked down upon. Add to that our population has never been higher. In fact its growth has stagnated the worst since the Great Depression based on the intials of the 2020 Census, which is not a good omen.[1] https://www.pbs.org/newshour/nation/census-texas-gains-congress-seats-california-loses-for-the-first-time https://www.pbs.org/newshour/nation/census-texas-gains-congr...
- maxerickson 6y ago
  I am under the impression that the change to PEX was good? It sure was adopted fast. Do you mean it was a significant change?
  - croutonwagon 6y ago
    There’s been a number of lawsuits involving PEX over the years. Namely defects etc that are failure prone and once installed is a nightmare to repair/replace. And once failed is equally costly to fix.
- deleted 6y ago
  [deleted]
- andrewmcwatters 6y ago
  Total building costs are more expensive than ever. Regulations, IBC, and consumer feature demand dictate it to be so. I don't know what you're talking about. Quality also hasn't improved, only marginal cost of production of materials has dropped. The actually structural integrity of those materials has worsened over time.

Workaccount2 6y ago

The financial/economic forest is way overgrown and no one wants to be the one to set it on fire.

andrewmcwatters 6y ago
I agree. Politicians have weak incentive to push back I assume? If you do, you put average people at REITs out of work. This isn't a terrible thing if you ask me, because not much of it is real estate specific. REIT HR people can find work at other companies, developers and salespeople, too. But it's not a good look, I suppose? Real estate is a real problem that no one seems to want to touch. "The rent is too d*mn high!"
- tryptophan 6y ago
  REITs are not the problem. Land speculation is the problem. Worst part is that the gov promotes this, and voters eat that shit up as well("Your mortgage is an investment"). https://en.wikipedia.org/wiki/Land_value_tax https://en.wikipedia.org/wiki/Land_value_tax is the solution.
- toomuchtodo 6y ago
  A fun question we kick around and model in a financial forum I participate in is, “How much insolvency occurs economy wide for every 100 basis points (1%) the Fed increases their interest rate target?” If interest rates go up, real estate and equities prices come down, and US gov borrowing costs increase. Borrowing costs go up for zombie firms and they fail. How much appetite is there for any of that? The same as long term central back interest rate policy: zero.
  - Der_Einzige 6y ago
    No, if interest rates go up, the acceleration of real estate and equities prices will slow. There are too many real factors which are causing the acceleration of housing prices for interest rates hikes to totally cancel it out.
    - reader_mode 6y ago
      Interest rate hike would probably cascade to a recession blowing up realestate in the process

paulpauper 6y ago

if home prices keep surging on a real basis , a 30-year morttgage becomes attractive proposition, especially given how cheap it is to borrow .

kokanator 6y ago
Does anyone remember this type of home buying craziness is what happened just before the bust of 2008?
- nick_kline 6y ago
  It's different this time ;-) In 2008 there was a lot of new construction that wasn't yet sold, and people bought houses out in the boonies sometimes, but they got loans they could never pay for - expecting the house would appreciate and they justify a new loan, or sell it soon for more money. Prices fell and they couldn't get a new loan or pay their old loan. Today there is a housing shortage, & that's driving up prices. I'm sure there are some people hoping to flip their houses, but all I read is there is much more stringent mortgage requirements than before and in hot markets at least there are multiple offers. So it's similar in a vague way, but it's much different in it's the housing shortage that is driving a lot of the price increase today. Still, eventually I expect the shortage to ease, builders will make more houses, so that should lower the pressure or lower prices, eventually, at least somewhat. If people aren't buying so many houses they can't afford, then shouldn't the problem of mass loans going back to the bank be avoided?

nradov 6y ago

Median incomes are irrelevant to housing developers. All that they care about is whether there are enough customers to buy their products. The developers typically don't lend to customers so the only risk is that demand might collapse in the middle of a project. A lot of small developers went bankrupt during the last recession because they had borrowed to build new projects and then couldn't sell the completed homes. The federal government wouldn't really be able to prevent REITs from buying up homes.

ericmay 6y ago
> The federal government wouldn't really be able to prevent REITs from buying up homes. Why wouldn't it? If this was bad enough the government could just pass limitations on it. Hell, the government could probably ban REITs overnight if that was wildly popular.
- throwaway0a5e 6y ago
  Even if the industry is unpopular there's not that much appetite for legislatively killing it at the drop of a hat because everyone knows that's not a good precedent to set. More realistic would be substantially increased taxes on non-primary residences.
- pbronez 6y ago
  If you want to support individual home ownership against well-capitalized REITs, I think you basically need local governments to impose some kind of vacancy tax and/or an non-owner-occupancy tax. Otherwise individuals will never have the financial firepower to keep up.
  - sokoloff 6y ago
    If that's your goal, you should also support the mortgage interest deduction (to put owner-occupied borrowing on the same footing as commercial borrowing) and the deductibility of state/local real estate taxes on your federal return (for the same reason).
6y ago

gnopgnip 6y ago

High prices in some areas is about the price of land and not about construction prices. Residential REITs need to profit when they buy a house. An individiual homeowner doesn't, they can pay more if they want to. And individual homeowners get subsidized loans, and in many states subsidized property taxes, they can have a much lower monthly payment, and afford to offer a higher sale price. So for move in ready homes, the seller will almost always go with an owner occupant. The real problem is with investors buying homes that aren't move in ready. Rehab loans are expensive and risky, individual buyers can't compete with investors, and the sellers are the ones with the short end of the stick.

mlac 6y ago
Private Equity funds are using homes as a store of funds - to diversify their holdings and as a long term move. This can be in cash or financed, but they can afford to eat the loss because there is excess capital right now. It's been this purchasing for years that is contributing to the crunch right now. From an article in September: "Blackstone Group, which blazed a trail for Wall Street in 2012 when it formed Invitation Homes and became the largest owner of single-family rental homes in America, has returned to a familiar watering hole." [1] It's another way to milk the middle class. [1] https://www.housingwire.com/articles/blackstone-gets-back-into-the-single-family-rental-game/ https://www.housingwire.com/articles/blackstone-gets-back-in...

forrestthewoods 6y ago

> but I do know that in particular areas of the US, you just straight up cannot afford a home anymore on median income Correct. The national median income is insufficient to purchase a home in the most expensive cities in the country. That seems reasonable? The national median household income is about $65,000. That’s enough to afford a mortgage of somewhere in the $300,000 to $350,000 range. Is that enough for San Francisco? Absolutely not. But that will buy you a nice house in the vast majority of the country. California has garbage housing policies. San Francisco is even worse. You can buy a lovely place in Dallas, Kansas City, Atlanta, etc on national median income.

jbay808 6y ago
> Correct. The national median income is insufficient to purchase a home in the most expensive cities in the country. That seems reasonable? It's not clear if the GP was referring to national median income. My interpretation was that they may have been referring to local median income. Is the median family income of SF ($136k, I think) enough to buy a home there?
andrewmcwatters 6y ago
People have different definitions of "affordable." To me, a gross $65,000 household income, less after taxes, is not enough to be able to afford a home within that price range. It's probably closer to below $275,000. I do agree with you regarding location, though.
- DavidPeiffer 6y ago
  Completely agree. A lender in Iowa told us they approve up to 35% of gross income. Not certain if that was total servicing all debts, or their limit on the mortgage percentage payment. 65k could buy a ~300k house at a 3.25% interest rate. I talked with an attorney from San Francisco on a plane once. When they bought their first house, 70% of their income was going towards the house. Raises helped that become a more reasonable percentage over the year. Fast forward a few years, their family grew and they wanted to be further towards the edge of the city. They sold the house at a huge profit and put that money towards a bigger house further out. Different perspective in different markets.

croutonwagon 6y ago

The Federal government has a TON of subsidies for first time buyes and even more for veterans. The issue is part land scarcity driving up the cost of land and part the transition of our economy out of production and into consumerism. Building has never been cheaper, and even quality has improved, including working through some pretty bad materials changes (like PEX plumbing, or chinese drywall). We no longer really do nearly as much blue collar work as we used to, and many of the unskilled blue collar jobs have seen ridiculous wage stagnation. Companies have offloaded that to China, Mexico, Vietnam, etc, where they havent automated it. Heck our population doesnt WANT those jobs. Theres a TON of demand for trades work and more are retiring than filling those gaps, but our society has pushed hard to posit that college is the only path to success and trades work is to be looked down upon. Add to that our population has never been higher. In fact its growth has stagnated the worst since the Great Depression based on the intials of the 2020 Census, which is not a good omen.[1] https://www.pbs.org/newshour/nation/census-texas-gains-congress-seats-california-loses-for-the-first-time https://www.pbs.org/newshour/nation/census-texas-gains-congr...

maxerickson 6y ago
I am under the impression that the change to PEX was good? It sure was adopted fast. Do you mean it was a significant change?
- croutonwagon 6y ago
  There’s been a number of lawsuits involving PEX over the years. Namely defects etc that are failure prone and once installed is a nightmare to repair/replace. And once failed is equally costly to fix.
deleted 6y ago
[deleted]
andrewmcwatters 6y ago
Total building costs are more expensive than ever. Regulations, IBC, and consumer feature demand dictate it to be so. I don't know what you're talking about. Quality also hasn't improved, only marginal cost of production of materials has dropped. The actually structural integrity of those materials has worsened over time.