7 ms·

This is what happens when you keep printing money and keep mortgage rates incredibly low. All that money's gotta go somewhere. Hey, at least the CPI isn't goin

by adflux 5y ago

This is what happens when you keep printing money and keep mortgage rates incredibly low. All that money's gotta go somewhere. Hey, at least the CPI isn't going up right? Its only the most expensive thing in most people's lives that has doubled in cost in about 10 years. Same thing for stock prices, and slowly other commodity prices are catching up as well. Non-homeowners are being shafted by this fed/ecb policy. Every year the gap between poor and rich grows larger as a result.

rektide 5y ago
upvoting but also this just feels like yet another contributing factor to the accumulation of wealth that was happening anyways.
xapata 5y ago
> Its only the most expensive thing in most people's lives that has doubled in cost in about 10 years. Most people pay for housing by monthly payments, making the nominal value of the house irrelevant if the monthly payment stays the same. Further, you should consider the home owner's "basket of goods" to include the hypothetical rent they'd be paying for an equivalent house. Their mortgage payments and home ownership are then more like taking a loan to buy a fixed-income asset that gets renegotiated annually. A home owner who lives in their home is both a landlord and a tenant. I'm not a home-owner, and I don't feel shafted. My stock market holdings have kept pace or done better than if I'd purchased a house.
- adflux 5y ago
  Non homeowners are paying way more whilst getting less in return. I really dont understand the logic of being OK with paying double for a house, just because the buyer can sell it for the same amount (or higher) afterwards. I could purchase a 150m2 house with my salary a decade ago. Now I could find a 75m2 house that would be too expensive for me. I dont care about being able to sell the house for more money afterwards, it doesn't matter, because I have to live somewhere anyways. So any profits gained will (probably) be factored into the purchase price of the next house I'm buying.
  - em-bee 5y ago
    i am confused by your first sentence. what do non-homeowners sell?
    - adflux 5y ago
      Some people say "Well, you're paying more but you can also sell it for more afterwards". But non-homeowners are still paying more for less. That's the argument I am trying to make (poorly)
      - xapata 5y ago
        My rent doesn't change with interest rates.
        JKCalhoun 5y ago
        That's true, rent keeps going up? A fixed loan doesn't change with interest rates either.
        xapata 5y ago
        Rent increases are a cause of inflation (as part of the basket of goods that defines inflation), which in turn causes interest rate increases, which then cause home price decreases. Homes are like fixed-income securities. When interest rates go up, the value of existing securities goes down.
        sremani 5y ago
        So does my mortgage that is why it is called 15 year FIXED.
        xapata 5y ago
        Yes, as I said, you care about the monthly payment, not the lump sum price of the house.
        5y ago
- ItsMonkk 5y ago
  Here's why this matters to you. When the Fed funds rate is at 10%, the mortgage rate is 13% or so. That says that the risk that you have is 3% above the risk free rate. When the Fed funds rate is 0%, your mortgage rate is 3%, that same difference in the Fed Funds rate. But wait, think of that like we think of absorption. If I have a capacity to absorb of 1L and can absorb 50% of a liquid, then I will break when 2L is poured. If I bring my absorption rate to 98%, then I now break at 50L. If the government can absorb at 99.99% rates and you absorb at 97% rates, they can absorb 10000L while you can only absorb 33L. If you want the government to control every decision regarding money in the future, you want the interest rate to be as low as possible. If you want people to use free markets to decide where money flows, you want high interest rates. Why is politics so contentious? Interest rates are dropping.
  - xapata 5y ago
    > ... that same difference in the Fed Funds rate. The differential between mortgage rates and the federal funds rate is only driven in part by regulation. The rest is market forces and the perceived risk of rising inflation. If we had certainty on how inflation would change for the next 30 years, mortgage rates could be pushed to a negligible margin above the federal funds rate. > If you want the government to control every decision regarding money in the future, you want the interest rate to be as low as possible. If you want people to use free markets to decide where money flows, you want high interest rates. You haven't explained this assertion. I see it a different way. If we want consumer demand to decide how capital is invested, then we want more inflation. Inflation transfers wealth from creditors to debtors. Debtors spend their money, which indicates what's useful to produce. If we want a handful of bankers to make guesses (and often guess incorrectly) about what people will want to buy, then we want low inflation, transferring wealth from debtors to creditors. The problem with (excessively) low inflation and supply-side economics in general is that the suppliers must make their choices with a decreasing level of information on what will be demanded. It's only through consumer demand and its pressure on supply that reveals what's important through market forces. Otherwise we may as well go back to central planning. Note that I'm not advocating for fluctuating inflation. All parties benefit from stable inflation rates. Uncertainty is dead weight loss.
- wallacoloo 5y ago
  > Most people pay for housing by monthly payments, making the nominal value of the house irrelevant if the monthly payment stays the same. Except homeowners get price exposure to the value of their home on the market. If you purchase and then go through a downturn which devalues your house, now you’re in the hole: you can’t use the sale price of the home to pay off the loan, so you’re stuck in that home until its value climbs again or you earn enough to pay off the loss. Higher values means it takes longer for you to cover any % decline with wages, so you lose mobility for longer in a downturn. Irrelevant if you truly want to live in that place for 30 years, but not many people can actually make that commitment.
  - xapata 5y ago
    > Except homeowners get price exposure ... you’re stuck in that home until its value climbs again or you earn enough to pay off the loss. > ... Higher values Higher values at the time of purchase or at the time of sale? The latter doesn't jive with the idea of being "underwater" on the loan, since you'd have benefited from the price exposure. Higher values at the time of purchase is relative to what the home was worth in the past, but our efficient market theory tells us that the price today can be considered neither high nor low (yes, Shiller might disagree). I guess you're pointing out that interest rates are near zero, so that there's really only one way for them to go. I'm not so sure, because in some ways it's a Zeno's Paradox situation. I don't always care about the number of basis points the interest rate has changed, but the percent change of the interest rate. I get more benefit from the rate going from 4% to 3% than I did when it went from 5% to 4%. We can always get closer to 0%, because there's an infinite number of subdivisions we can make.
alert0 5y ago
Right now interest rates are low, they cannot use them as a tool in a crisis, for this reason they are printing money to lower the overall debt obligation of the US. Inflating away our debt. This will eventually lead to inflation at which point the interest rates will rise again (prediction, at the end of the decade). This is the correct play for where we are in the long term debt cycle. In my opinion, this is happening a little earlier than it should, but it might just be a sneak preview provided by the pandemic. Stock prices are rising because the interest rates are so low. A ton of institutional money that was in bonds is now out seeking yield. This moves a ton of money into stocks and, as we see in the article, real estate. The labor class has been shafted for years by the US dollar being the global reserve currency, causing us to run persistent trade deficits. This has off-shored manufacturing and gutted our capabilities. If the US weakens the dollar and rebuilds the manufacturing base, which they appear to be trying to do with the investment in semiconductors, I think we will be in a much better position. I am happy with the stimulus because it does both, weaken the dollar and invest in US capabilities. We just need to make sure it flows to the correct places.
- fb13 5y ago
  > We just need to make sure it flows to the correct places. That's the key, and also something that's unsolved. History shows that a lot of the money will be squandered in increasing "clever" ways, and it may take until the end of the decade before the public even realizes that it happened.
- dragonwriter 5y ago
  > Right now interest rates are low, they cannot use them as a tool in a No, interest rate are low because they are using them as a tool in a crisis.
  - gowld 5y ago
    They were already used as a tool, and so can't be used further (due to irrational fears of nominally negative interest rates). Printing money is effectively equivalent to lowering rates.
JKCalhoun 5y ago
Not arguing with you, but are you suggesting that raising mortgage rates and/or stopping the printing of money will get rid of the Blackrocks and make housing affordable to the working class?
- whoisburbansky 5y ago
  The argument might be that in that event, housing becomes less attractive as an investment to the Blackrocks of the world, and they have alternative lower risk sources of return in a higher interest rate environment?
deleted 5y ago
[deleted]
dragonwriter 5y ago
> Its only the most expensive thing in most people's lives For homeowners, it is the most expensive thing, but homeowners are winning on it because they get the value of the asset appreciating. For non-homeowners, the reason CPI isn’t going up is that rents aren’t rising with purchase prices, its the purchase:rent ratio going up. So it isn’t hurting them, either.
- evan_ 5y ago
  but homeowners can't actually access that value because they would need to immediately use the money to buy another house. They don't let you continue to live in the house after you have sold it.
  - dionidium 5y ago
    You could rent after selling. Or you could move to a cheaper market. Or you could downsize in your current market. There are of course many ways to access the value of the house.
spamizbad 5y ago
The root cause here isn't really the Fed. We've been under-building housing since 1990, back when rates were 5-8%. If you track new housing starts against adult population, you'll see some pretty terrible things. Granted this is lower than rates were in the 1980s. But if the answer here is you need to keep rates at 10-15% to build sufficient housing I don't see how that's politically tenable.
- notJim 5y ago
  Low rates are effectively a demand-side subsidy for housing I think, similar to other policies. But as you point out, if you restrict the supply-side, demand-side subsidy can be counter-productive.
- nunez 5y ago
  Based on US Census data, it actually looks like we're building about the same as we had in the past, if not more: https://tradingeconomics.com/united-states/housing-starts https://tradingeconomics.com/united-states/housing-starts These are building starts (i.e. permits obtained, but construction not having broken ground yet), but the more complete US Census data at the .gov website shows that completions haven't been far behind starts within the last five years.
conscion 5y ago
> This is what happens when you keep printing money The problem isn't "printing money", inflation is a good thing as it encourages investment and maintains the movement of money. The problem is that printed money is only being put towards one purpose - capital markets - so the capital markets are what inflates (at the expense of everything else). If the printed money was being used on infrastructure payments, or some other distributed investment, the inflation would go to general labor first, which then would spread the inflation across the entire economy as they made individual purchase decisions.
nly 5y ago
It's tempting to say house prices and interest rates are opposite sides of the same coin, but the situation is messy. I mean ultimately what I want is to pay 35-40% of my take home salary on a mortgage, just I like I pay now in rent. The reality is though, here in the UK, that I need to save 2-3 years of take home pay, to put down on a deposit for a mortgage that will see me pay 50% of my take home pay, and I will still end up living in an inferior property to what I'm renting. Meanwhile my landlord, who bought the place I'm in the 90s, is making a profit.
mywittyname 5y ago
I doubt they are getting mortgages on these properties if they are overpaying the half. More likely is that they have no where else to part their money anymore.
headbee 5y ago
The illusion of realty appreciation transcends recent quantitative easing.
dcolkitt 5y ago
I don't really agree. Japan has had very easy money and QE for ten years longer than the West. Yet, it's one of the few housing markets in the world where prices have not risen in 25 years.[1] Runaway housing costs are everywhere and always a phenomenon that results supply constraints. Usually entirely zoning/regulatory driven. Usually due to NIMBY activism. Given supply constraints, I agree that easy money probably does drive up prices. But without artificial constraints, any rise in price would just dissipate back into higher supplies. That's why you see QE result in higher housing costs, but not higher car prices. [1]https://www.wsj.com/articles/what-housing-crisis-in-japan-home-prices-stay-flat-11554210002 https://www.wsj.com/articles/what-housing-crisis-in-japan-ho...
- onlyrealcuzzo 5y ago
  Japan's population is declining. What's your point? Why would you expect house prices to go up when there's a ridiculous oversupply of housing. There's only 55M households in Japan, and there's ~9M vacant homes. That's ~14% of homes. Housing is an expense unless there's someone to live in it and pay rent.
  - dcolkitt 5y ago
    Tokyo is growing faster than New York, London, or most other major Western metros.[1] (It's true Japan as a whole has slow growth, but Tokyo still has robust growth because or rural to urban migration.) Yet real housing prices have not risen in Tokyo in 25 years. [1]https://livejapan.com/en/in-tokyo/in-pref-tokyo/in-tokyo_suburbs/article-a0002533/ https://livejapan.com/en/in-tokyo/in-pref-tokyo/in-tokyo_sub...
    - onlyrealcuzzo 5y ago
      Tokyo had THE BIGGEST property bubble in the history of the world 30 years ago: https://en.m.wikipedia.org/wiki/Japanese_asset_price_bubble https://en.m.wikipedia.org/wiki/Japanese_asset_price_bubble It arguably has STILL not deflated. At one point, the Emperor's Palace alone was worth more than all the real estate in California: https://www.scmp.com/magazines/style/news-trends/article/3091222/japan-1980s-when-tokyos-imperial-palace-was-worth-more https://www.scmp.com/magazines/style/news-trends/article/309... I guess if you believe those valuations made sense, then sure.

by adflux 5y ago

rektide 5y ago

upvoting but also this just feels like yet another contributing factor to the accumulation of wealth that was happening anyways.

xapata 5y ago

> Its only the most expensive thing in most people's lives that has doubled in cost in about 10 years. Most people pay for housing by monthly payments, making the nominal value of the house irrelevant if the monthly payment stays the same. Further, you should consider the home owner's "basket of goods" to include the hypothetical rent they'd be paying for an equivalent house. Their mortgage payments and home ownership are then more like taking a loan to buy a fixed-income asset that gets renegotiated annually. A home owner who lives in their home is both a landlord and a tenant. I'm not a home-owner, and I don't feel shafted. My stock market holdings have kept pace or done better than if I'd purchased a house.

adflux 5y ago
Non homeowners are paying way more whilst getting less in return. I really dont understand the logic of being OK with paying double for a house, just because the buyer can sell it for the same amount (or higher) afterwards. I could purchase a 150m2 house with my salary a decade ago. Now I could find a 75m2 house that would be too expensive for me. I dont care about being able to sell the house for more money afterwards, it doesn't matter, because I have to live somewhere anyways. So any profits gained will (probably) be factored into the purchase price of the next house I'm buying.
- em-bee 5y ago
  i am confused by your first sentence. what do non-homeowners sell?
  - adflux 5y ago
    Some people say "Well, you're paying more but you can also sell it for more afterwards". But non-homeowners are still paying more for less. That's the argument I am trying to make (poorly)
    - xapata 5y ago
      My rent doesn't change with interest rates.
      - JKCalhoun 5y ago
        That's true, rent keeps going up? A fixed loan doesn't change with interest rates either.
        xapata 5y ago
        Rent increases are a cause of inflation (as part of the basket of goods that defines inflation), which in turn causes interest rate increases, which then cause home price decreases. Homes are like fixed-income securities. When interest rates go up, the value of existing securities goes down.
      - sremani 5y ago
        So does my mortgage that is why it is called 15 year FIXED.
        xapata 5y ago
        Yes, as I said, you care about the monthly payment, not the lump sum price of the house.
      - 5y ago
ItsMonkk 5y ago
Here's why this matters to you. When the Fed funds rate is at 10%, the mortgage rate is 13% or so. That says that the risk that you have is 3% above the risk free rate. When the Fed funds rate is 0%, your mortgage rate is 3%, that same difference in the Fed Funds rate. But wait, think of that like we think of absorption. If I have a capacity to absorb of 1L and can absorb 50% of a liquid, then I will break when 2L is poured. If I bring my absorption rate to 98%, then I now break at 50L. If the government can absorb at 99.99% rates and you absorb at 97% rates, they can absorb 10000L while you can only absorb 33L. If you want the government to control every decision regarding money in the future, you want the interest rate to be as low as possible. If you want people to use free markets to decide where money flows, you want high interest rates. Why is politics so contentious? Interest rates are dropping.
- xapata 5y ago
  > ... that same difference in the Fed Funds rate. The differential between mortgage rates and the federal funds rate is only driven in part by regulation. The rest is market forces and the perceived risk of rising inflation. If we had certainty on how inflation would change for the next 30 years, mortgage rates could be pushed to a negligible margin above the federal funds rate. > If you want the government to control every decision regarding money in the future, you want the interest rate to be as low as possible. If you want people to use free markets to decide where money flows, you want high interest rates. You haven't explained this assertion. I see it a different way. If we want consumer demand to decide how capital is invested, then we want more inflation. Inflation transfers wealth from creditors to debtors. Debtors spend their money, which indicates what's useful to produce. If we want a handful of bankers to make guesses (and often guess incorrectly) about what people will want to buy, then we want low inflation, transferring wealth from debtors to creditors. The problem with (excessively) low inflation and supply-side economics in general is that the suppliers must make their choices with a decreasing level of information on what will be demanded. It's only through consumer demand and its pressure on supply that reveals what's important through market forces. Otherwise we may as well go back to central planning. Note that I'm not advocating for fluctuating inflation. All parties benefit from stable inflation rates. Uncertainty is dead weight loss.
wallacoloo 5y ago
> Most people pay for housing by monthly payments, making the nominal value of the house irrelevant if the monthly payment stays the same. Except homeowners get price exposure to the value of their home on the market. If you purchase and then go through a downturn which devalues your house, now you’re in the hole: you can’t use the sale price of the home to pay off the loan, so you’re stuck in that home until its value climbs again or you earn enough to pay off the loss. Higher values means it takes longer for you to cover any % decline with wages, so you lose mobility for longer in a downturn. Irrelevant if you truly want to live in that place for 30 years, but not many people can actually make that commitment.
- xapata 5y ago
  > Except homeowners get price exposure ... you’re stuck in that home until its value climbs again or you earn enough to pay off the loss. > ... Higher values Higher values at the time of purchase or at the time of sale? The latter doesn't jive with the idea of being "underwater" on the loan, since you'd have benefited from the price exposure. Higher values at the time of purchase is relative to what the home was worth in the past, but our efficient market theory tells us that the price today can be considered neither high nor low (yes, Shiller might disagree). I guess you're pointing out that interest rates are near zero, so that there's really only one way for them to go. I'm not so sure, because in some ways it's a Zeno's Paradox situation. I don't always care about the number of basis points the interest rate has changed, but the percent change of the interest rate. I get more benefit from the rate going from 4% to 3% than I did when it went from 5% to 4%. We can always get closer to 0%, because there's an infinite number of subdivisions we can make.

alert0 5y ago

Right now interest rates are low, they cannot use them as a tool in a crisis, for this reason they are printing money to lower the overall debt obligation of the US. Inflating away our debt. This will eventually lead to inflation at which point the interest rates will rise again (prediction, at the end of the decade). This is the correct play for where we are in the long term debt cycle. In my opinion, this is happening a little earlier than it should, but it might just be a sneak preview provided by the pandemic. Stock prices are rising because the interest rates are so low. A ton of institutional money that was in bonds is now out seeking yield. This moves a ton of money into stocks and, as we see in the article, real estate. The labor class has been shafted for years by the US dollar being the global reserve currency, causing us to run persistent trade deficits. This has off-shored manufacturing and gutted our capabilities. If the US weakens the dollar and rebuilds the manufacturing base, which they appear to be trying to do with the investment in semiconductors, I think we will be in a much better position. I am happy with the stimulus because it does both, weaken the dollar and invest in US capabilities. We just need to make sure it flows to the correct places.

fb13 5y ago
> We just need to make sure it flows to the correct places. That's the key, and also something that's unsolved. History shows that a lot of the money will be squandered in increasing "clever" ways, and it may take until the end of the decade before the public even realizes that it happened.
dragonwriter 5y ago
> Right now interest rates are low, they cannot use them as a tool in a No, interest rate are low because they are using them as a tool in a crisis.
- gowld 5y ago
  They were already used as a tool, and so can't be used further (due to irrational fears of nominally negative interest rates). Printing money is effectively equivalent to lowering rates.

JKCalhoun 5y ago

Not arguing with you, but are you suggesting that raising mortgage rates and/or stopping the printing of money will get rid of the Blackrocks and make housing affordable to the working class?

whoisburbansky 5y ago
The argument might be that in that event, housing becomes less attractive as an investment to the Blackrocks of the world, and they have alternative lower risk sources of return in a higher interest rate environment?

deleted 5y ago

[deleted]

dragonwriter 5y ago

> Its only the most expensive thing in most people's lives For homeowners, it is the most expensive thing, but homeowners are winning on it because they get the value of the asset appreciating. For non-homeowners, the reason CPI isn’t going up is that rents aren’t rising with purchase prices, its the purchase:rent ratio going up. So it isn’t hurting them, either.

evan_ 5y ago
but homeowners can't actually access that value because they would need to immediately use the money to buy another house. They don't let you continue to live in the house after you have sold it.
- dionidium 5y ago
  You could rent after selling. Or you could move to a cheaper market. Or you could downsize in your current market. There are of course many ways to access the value of the house.

spamizbad 5y ago

The root cause here isn't really the Fed. We've been under-building housing since 1990, back when rates were 5-8%. If you track new housing starts against adult population, you'll see some pretty terrible things. Granted this is lower than rates were in the 1980s. But if the answer here is you need to keep rates at 10-15% to build sufficient housing I don't see how that's politically tenable.

notJim 5y ago
Low rates are effectively a demand-side subsidy for housing I think, similar to other policies. But as you point out, if you restrict the supply-side, demand-side subsidy can be counter-productive.
nunez 5y ago
Based on US Census data, it actually looks like we're building about the same as we had in the past, if not more: https://tradingeconomics.com/united-states/housing-starts https://tradingeconomics.com/united-states/housing-starts These are building starts (i.e. permits obtained, but construction not having broken ground yet), but the more complete US Census data at the .gov website shows that completions haven't been far behind starts within the last five years.

conscion 5y ago

> This is what happens when you keep printing money The problem isn't "printing money", inflation is a good thing as it encourages investment and maintains the movement of money. The problem is that printed money is only being put towards one purpose - capital markets - so the capital markets are what inflates (at the expense of everything else). If the printed money was being used on infrastructure payments, or some other distributed investment, the inflation would go to general labor first, which then would spread the inflation across the entire economy as they made individual purchase decisions.

nly 5y ago

It's tempting to say house prices and interest rates are opposite sides of the same coin, but the situation is messy. I mean ultimately what I want is to pay 35-40% of my take home salary on a mortgage, just I like I pay now in rent. The reality is though, here in the UK, that I need to save 2-3 years of take home pay, to put down on a deposit for a mortgage that will see me pay 50% of my take home pay, and I will still end up living in an inferior property to what I'm renting. Meanwhile my landlord, who bought the place I'm in the 90s, is making a profit.

mywittyname 5y ago

I doubt they are getting mortgages on these properties if they are overpaying the half. More likely is that they have no where else to part their money anymore.

headbee 5y ago

The illusion of realty appreciation transcends recent quantitative easing.

dcolkitt 5y ago

I don't really agree. Japan has had very easy money and QE for ten years longer than the West. Yet, it's one of the few housing markets in the world where prices have not risen in 25 years.[1] Runaway housing costs are everywhere and always a phenomenon that results supply constraints. Usually entirely zoning/regulatory driven. Usually due to NIMBY activism. Given supply constraints, I agree that easy money probably does drive up prices. But without artificial constraints, any rise in price would just dissipate back into higher supplies. That's why you see QE result in higher housing costs, but not higher car prices. [1]https://www.wsj.com/articles/what-housing-crisis-in-japan-home-prices-stay-flat-11554210002 https://www.wsj.com/articles/what-housing-crisis-in-japan-ho...

onlyrealcuzzo 5y ago
Japan's population is declining. What's your point? Why would you expect house prices to go up when there's a ridiculous oversupply of housing. There's only 55M households in Japan, and there's ~9M vacant homes. That's ~14% of homes. Housing is an expense unless there's someone to live in it and pay rent.
- dcolkitt 5y ago
  Tokyo is growing faster than New York, London, or most other major Western metros.[1] (It's true Japan as a whole has slow growth, but Tokyo still has robust growth because or rural to urban migration.) Yet real housing prices have not risen in Tokyo in 25 years. [1]https://livejapan.com/en/in-tokyo/in-pref-tokyo/in-tokyo_suburbs/article-a0002533/ https://livejapan.com/en/in-tokyo/in-pref-tokyo/in-tokyo_sub...
  - onlyrealcuzzo 5y ago
    Tokyo had THE BIGGEST property bubble in the history of the world 30 years ago: https://en.m.wikipedia.org/wiki/Japanese_asset_price_bubble https://en.m.wikipedia.org/wiki/Japanese_asset_price_bubble It arguably has STILL not deflated. At one point, the Emperor's Palace alone was worth more than all the real estate in California: https://www.scmp.com/magazines/style/news-trends/article/3091222/japan-1980s-when-tokyos-imperial-palace-was-worth-more https://www.scmp.com/magazines/style/news-trends/article/309... I guess if you believe those valuations made sense, then sure.