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They cite the numbers in "real terms", which would mean inflation adjusted: > The average price of American homes, in real terms, is now the highest it's ever

• lotsofpulp 5y ago
  I think the article is referring to 2007/2008 as peak of the 2000s housing bubble. Not 2000’s housing bubble.
  • PragmaticPulp 5y ago
    Thanks! Great point, thanks for catching my mistake. I updated my post
  • ineedasername 5y ago
    They were still about 6.8% in 2007. Compared to a 3% interest rate today, on a $300,000 loan that's about $700/month difference in payment, about 50% increase. Housing prices have not increased by 50%. At these rates, they often still cheaper.
    • lotsofpulp 5y ago
      Is it possible that proportionally more mortgages were lent to riskier borrowers in years past, and as the years have gone on, for a variety of reasons, mortgages in general are now lent to less risky borrowers than before? Also a conflating factor is if borrowers were perceived as riskier in previous years, but for whatever reasons, are now perceived as less risky. Also, this is data is from a Freddie Mac website, so is it only for conforming loans? Could it be that many homes have moved up in price such that their mortgage information would no longer be reflected in this average from Freddie Mac because their mortgages are no longer conforming?
• strangattractor 5y ago
  Agreed - I personally just refined to %2 at 15 years. Never could afford to that until now.
  • grogenaut 5y ago
    I refied at 2.87 at 30 years but am just paying at the 15 year rate, it actually worked out better somehow and I have the option to drop payments as well. The mortgage broker was a bit surprised it worked out that way.
• fridif 5y ago
  No, I disagree. Law of big numbers. Houses in Seattle area are mortgaging for 1.2M. Property taxes are low. Houses in NY are mortgaging for $500,000. Property taxes and interest rates are higher. You shouldn't apply 8% interest rate from 2000 and think that it somehow is the correct rate when prices are 5x higher.
  • mdorazio 5y ago
    I don’t think you understood the parent post’s point. Most people don’t buy a house based on the sale price, they buy based on what their monthly payment will be. Historically low interest rates mean that people can afford a lot higher price house than they could in 2008. That’s obviously not the whole story, but it is a big factor in what’s going on.
    • fridif 5y ago
      But also salaries have risen and additionally so has the value proposition of owning a home compared to living in an apartment. Why? Because they've stopped building homes for the most part in desirable areas close to big tech companies.
      • wonnage 5y ago
        Salaries have not risen outside of certain industries like tech
        • adventured 5y ago
          Salaries have climbed. Particularly for the home buying demographics. The real (inflation adjusted) median household income hit an all-time high in 2019. At $68,700 it was approximately $12,000 higher than 2012, and roughly 10-11% higher than the peak of the housing bubble. Incomes shot up rapidly from 2014 to 2019. For the people at the median or above, things have continued to be great in terms of income position (Covid didn't roll back those gains), as labor supply remains tight for most median pay and above jobs. So if mortgage rates have declined considerably (cut in half), and we're just now back to home prices being inflation adjusted where they were during the housing bubble peak, and real median household incomes are also 10% higher, and the US household disposable income to debt service payment ratio is near decades lows, that leaves a lot more room for higher mortgage payments - which fully explains the upward trajectory in housing prices.
• MontyCarloHall 5y ago
  > excluding down payment Therein lies the rub. It’s true that inflation adjusted average monthly mortgage payments have remained surprisingly constant over the last 40 years [*], since as you point out, low interest rates generally offset high home values (and vice versa). However, accruing enough cash in the first place to afford huge down payments keeps a lot of people out of the market who could otherwise afford the monthly payment. As an aside, the quality of housing stock has improved dramatically over the last few decades, so that roughly constant average monthly payment actually buys a much better quality product today than in years past. I’m not sure how much of this is accounted for in hedonic adjustments. [*] with the exception of the early 80s with its super high interest rates, and the housing bubble of the mid 2000s, with its super inflated home values without a commensurate drop in interest rates
  • PragmaticPulp 5y ago
    The down payment hurdle is indeed a problem. However, if we took steps to make down payments easier (by lowering down payment requirements or through something like Biden's first-time homebuyer credit) then we're also pumping more money into the housing market. That will drive prices up again, further raising prices and making it even harder for future buyers to enter the market. The only real way to push affordability down, long-term, is to build more. I'd personally like to see incentives targeted toward something like all-new construction (no tear-down rebuilds, only new houses where previous houses didn't exist). Give people money to spend on new construction and the new construction will follow.
    • MontyCarloHall 5y ago
      While I 100% agree with you that matching demand with a commensurate increase in supply is the only true fix to the problem of housing costs, in practice I don’t see it happening for a couple main reasons: Firstly, the people with the most political power are not coincidentally those who would lose the most if housing prices decrease. NIMBYism therefore inevitably wins. Secondly, building additional housing in regions that need it most (i.e. dense urban areas) would require dramatically improving public transit in those areas. The transportation networks of e.g. San Francisco, Boston, or even New York (which has by far the best public transit in the country) are already at a breaking point and simply cannot tolerate the influx of people more housing stock would bring. Sadly, I don’t think the US has the ability anymore to build large infrastructure projects at reasonable prices.
• chasebank 5y ago
  Look up Case-Shiller home price index. In most markets, home values are much higher than they were in mid 2000's. [1] https://wolfstreet.com/2021/07/27/most-splendid-housing-bubbles-in-america-july-2021-update/ https://wolfstreet.com/2021/07/27/most-splendid-housing-bubb...
  • PragmaticPulp 5y ago
    Right, but most buyers finance with a mortgage. The affordability is determined by monthly payments, which are a function of home price and interest rates. If home prices are up but interest rates are way, way down (which is currently the case) it can be possible that houses are still more affordable. You have to consider home costs as down payment + monthly mortgage payment (+ taxes if you're getting specific) to understand affordability.
    • chasebank 5y ago
      Yes, I understand. I'm saying a $500k house in 2007 is now $1M in many markets.
      • rebelos 5y ago
        No, you don't understand. A combination of normal housing price inflation and lower mortgage rates can easily explain that result.
  • Armisael16 5y ago
    Did you mean to respond to a different post? Yours doesn't seem to address what the post you responded to was saying.
• meterplech 5y ago
  100% true. And a good reminder of how much exposure housing prices have to interest rates. To frame the same math another way: If you bought a house for, say, $580k with a $500k mortgage... You paid $80k down payment + $20k closing costs and your monthly would be ~$2,073/month. If interest rates go up to 6%, and the person buying your house also wants to pay the same ~2,073/month, they would only be able to afford a $344,649 mortgage. Assume the same $80k down payment and $20k closing costs... and they should be willing to pay $444,649 for your house ($135,351 less than you paid!). Obviously with inflation the person may be willing to spend more than you spent! But there's a lot of risk for homeowners who need/want to sell if/when interest rates go up. That's why the 30 year fixed is such a fantastic bet if you are willing + able to hold and lock that fixed price... but housing is a pretty lousy investment if you need to sell.
  • api 5y ago
    I've wondered if we are in a regime today where interest rates simply can't go up. I can't imagine a scenario where they can go up more than a point or two without blood in the streets... possibly literally.
    • Retric 5y ago
      Even minor changes to inflation can deflate asset bubbles without blood in the streets. 2% inflation might make your existing how less valuable for a few years but it’s also rapidly making your mortgage payments more affordable. The real issue is this sets up golden handcuffs where buying an equally valuable house elsewhere would be a huge financial hit for much longer.
    • imtringued 5y ago
      Interest rates must go down when inflation is low. If you insist on high interest rates you will also need higher inflation to justify them. Think about it this way. Interest raises the cost of borrowing, it makes reproducible assets more expensive. Over the long term you see cost push inflation. If interest rates can't be passed onto consumers then the borrower will default. That's not a good thing.
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• throwdecro 5y ago
  Affordability is only part of the picture though. A higher value loan means higher risk as well. If interest rates rise, or something else happens that reduces the value of the property, then that $500,000 mortgage might be against a house worth less than $500,000. At that point people have to start playing chicken with the banks again, trying to mitigate the losses with strategic defaults.
  • b9a2cab5 5y ago
    2008 had a lot of variable rate mortgages. That's not the case today. Most people (at least I'd hope) don't use their house as an investment so if their mortgage is still the same payment each month and they can afford it there's no reason they'd default and tank their credit. The losses are purely paper losses.
    • deleted 5y ago
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    • symlinkk 5y ago
      Why do you hope people don’t use houses as an investment? It’s one of the few investments where: * you can get a huge loan with a tiny interest rate * you can actually enjoy the investment by living in it * everyone around you is doing everything they can to keep house prices up and therefore keep your investment growing I mean seriously, the only other option is dumping all your money in a stock market that you can’t touch and have no control over.
      • omgwtfbyobbq 5y ago
        To be fair, people don't have that much control over home values either. The biggest reservation I can think of with housing as an investment is that it's singular in terms of economic sector and geography. With the market people can diversify, although there's no guarantee they will. Being able to leverage a small down payment for a more valuable asset can also be advantageous or disadvantageous depending on what the value of the asset does.
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• long_time_gone 5y ago
  Any idea on the average down payment for each year? That’s a big part of affordability. If banks are requiring more money down, a lower interest rate also makes sense.
• vondur 5y ago
  I wonder how long before interest rates rise as inflation levels rise. That would really put a damper on the market. Would also kill car sales too I'd imagine.
• IkmoIkmo 5y ago
  Yep, two points to add to the monthly costs approach: 1) you still have to correct the nominal monthly fees for nominal income levels of households, roughly 50k in 2008 to 70k today. https://fred.stlouisfed.org/series/MEHOINUSA646N https://fred.stlouisfed.org/series/MEHOINUSA646N 2) the monthly fees is not a full expense figure. A 30 year mortgage that gets paid off 100%, has 3.3% of principal paydown per year on average, versus 2.8% mortgage rates. That means a good chunk of the mortgage payments are in essence savings, rather than money you'll never see again like interest. That's always going to be true, but the share of your monthly fees that goes towards principal paydown (i.e., equity that is building up, money that you actually own) is now much larger, as the interest payments per dollar borrowed came down.
  • arcticbull 5y ago
    > That means a good chunk of the mortgage payments are in essence savings, rather than money you'll never see again like interest. Interest on the first $750K is tax deductible, so you will see up to half that money again :)
    • brewdad 5y ago
      Assuming you itemize, which most taxpayers don't do anymore. 11.4% of taxpayers itemized in 2018* * https://www.irs.gov/statistics/soi-tax-stats-tax-stats-at-a-glance https://www.irs.gov/statistics/soi-tax-stats-tax-stats-at-a-...
    • IkmoIkmo 5y ago
      True but that hasn't really changed compared to before.
• belter 5y ago
  > "...Houses are still way cheaper, in actual out-of-pocket terms for average people, than they were in 2008. Today's interest rates are way too low." Only true for a small minority...Although your calculations are correct, its not how it works. What matters is average house price to income ratio and the Housing Affordability Index, that measures whether or not a typical family earns enough income to qualify for a mortgage loan on a typical home, at the national and regional levels based on most recent price and income data. There are also huge variations in housing markets, as they are also very much specific to local laws, regulations, job markets, and at the moment Europe is in a much worst situation than the US. I like this definition: "A housing market is defined by the ability of residents to reach employment by daily commutes. Generally this can be defined as a maximum 60 minute one-way commute time, while average work trip times tend to be about 30 minutes in most areas. Housing markets are thus also labor markets, which are also called metropolitan areas. In a well-functioning market, middle-income households should be able to afford the median priced house." Its not as bad in the US as in the other parts of the world but its getting worst. "Demographia International Housing Affordability" http://www.demographia.com/dhi.pdf http://www.demographia.com/dhi.pdf "Housing affordability has deteriorated materially in recent decades, which has been a principal factor in an internationally observed reduction in middle-income standards of living." Its pretty bad in Australia "Dramatic rises in house prices in Australia" https://www.globalpropertyguide.com/Pacific/Australia/Price-History https://www.globalpropertyguide.com/Pacific/Australia/Price-... Very very bad in UK: "House price affordability at its worst in a decade" https://www.financialreporter.co.uk/mortgages/house-price-affordability-at-its-worst-in-a-decade.html https://www.financialreporter.co.uk/mortgages/house-price-af... https://archive.is/OGV5g https://archive.is/OGV5g "UK house price affordability worsens over past decade" https://www.ft.com/content/afead1e2-3143-11ea-9703-eea0cae3f0de https://www.ft.com/content/afead1e2-3143-11ea-9703-eea0cae3f... https://archive.is/G5zV3 https://archive.is/G5zV3 Dramatic in the Netherlands "Average Joe can only afford one of 5 homes in Amsterdam" https://nltimes.nl/2021/08/20/average-joe-can-afford-one-5-homes-amsterdam https://nltimes.nl/2021/08/20/average-joe-can-afford-one-5-h...
  • IkmoIkmo 5y ago
    I like the definition you mentioned as well. The problem is that it's very hard to get good data on it. The first link certainly doesn't do a good job of anything, I immediately see it has the common problem of looking at prices rather than monthly payments. That's just bad academics. In the Netherlands for example I get 1% interest rates. In Denmark interest rates are negative. In the US they're 2.8%. In NZ they're >4%. That leads to wildly different affordability at the same price-to-income ratio. The graphs of the affordability ratings (based on only price-to-income) declining are a complete joke as it completely ignores the interest rates dropping hard, leading to higher borrowing capacity and lower payments per dollar borrowed. The other links I haven't all studied, but for example in the Netherlands where I'm from Amsterdam, the situation (and the article) is entirely not in line with your definition. For one, jobs aren't all centralised around Amsterdam. The Netherlands has a concept of the Randstad which includes all the four major cities in the country, which all happen to be within a 60 minute commute from oneanother. All the little towns and villages within and surrounding this area comprise of about 60% of the country's population, again, all within a 60min commute. It's thereby silly to look at the housing market of just Amsterdam, when the majority of the country lives in a close commute from jobs centres and doesn't need to live in Amsterdam. Note that from the centre of the country, the closest border (of the country) is 57km away and the furthest border is 175km away, that's how small this place is. It's misleading to look at prices of a single capital city and ignore the fact most of the country lives around the corner with prices that are <50% of that place. But supposing we look at Amsterdam, the article then makes a crucial mistake by comparing a single Dutch person to an average Amsterdam house. Since when is a single Dutch person an average Amsterdam household? The average household in the Netherlands has 2.2 people, so you may double the borrowing capacity. And second, Amsterdam's owner-occupied homeowners aren't making average money because they've got Capital city above-average jobs. If you live in Amsterdam as a home-owner, you're exposed to jobs that pay far more than the average joe jobs outside the capital. The average income is about 55% higher (see CBS figures). In short you're looking at double incomes which average 55% higher in the average Amsterdam owner occupied household, or 3x the income. Given how the borrowing capacity works here that translates to about 3.5x more purchasing capacity than the article mentions. The article also fails to differentiate between average income in the Netherlands (which includes people on welfare, people without jobs, students, people who work 20 hours a week etc) to average full-time salaries, which are typically the group looking to buy a home. One thing people often fail to acknowledge is that when a claim is made that X is unaffordable, that the fact prices are so high actually may signal the opposite. The fact home prices have increased by hundreds of thousands despite borrowing rules not having changed much, means there's actually a lot of demand at these prices. If nobody could afford these expensive homes, prices would've come crashing down. There's been a record amount of homes sold in the Netherlands last year, the majority of the country is home-owner, and LTI and LTV rates have been trending down the past years (indicating people are actually using less and less of their borrowing capacity).
• xadhominemx 5y ago
  > Today's interest rates are way too low Why do you think this?
• inetknght 5y ago
  > In other words: Houses are still way cheaper, in actual out-of-pocket terms for average people, than they were in 2008 False. Actual average people are making significantly less today than they were in 2008. Their buying power is therefore also significantly less too.
  • dlp211 5y ago
    Um, no: https://fred.stlouisfed.org/series/MEHOINUSA672N https://fred.stlouisfed.org/series/MEHOINUSA672N Median household income is greater than it has ever been.
    • belter 5y ago
      What matters is the Housing Affordability Index, not income levels. Houses prices might rise in price more than income plus it needs to be in the area where you live/work. See my post in this thread.
      • dlp211 5y ago
        But that wasn't the claim I was addressing: > Actual average people are making significantly less today than they were in 2008. This is simply not true. Median household income is greater today than any time in American history in real terms. There can be other reasons that homes are not affordable, but the average person making less than in 2008 is not one of them.
• 34679 5y ago
  A big part of the reason the housing market collapsed in 2008 was adjustable rate mortgages. People took on loans at affordable rates and then when things started going south for the banks, the rates were ratcheted up on the high risk buyers who had been getting easy credit.
• logicalmonster 5y ago
  > The average price of American homes, in real terms, is now the highest it's ever been I understand that the price of a stereotypical suburban home is well out of reach for many and this isn't great and should be worked on in a smart way. The middle class has continuously been hammered for many reasons and it would be healthier for America for this to be improved dramatically and better for individual communities for people to have a real stake in the well-being of the area. Just to throw a few devil's advocate points into the mix, I believe a full and complete economic analysis may show that the price per SQ foot of residential living space per person may actually be about the same or even less than it was in the past. I think some variables that need to be considered are the increasing sizes of homes, the decreasing average family size (many siblings in the past had to share bedrooms, which I believe is far less common today), and inflation, among others.
• SilasX 5y ago
  Color me un-reassured. It never ends well when you have a massive market driven by people who only think in terms of monthly payment.
  • IkmoIkmo 5y ago
    Why? In a country with mostly variable rate interest rates like NZ, and at most 5y fixed loans, that's disastrous. But in markets like the US where you can fix your payments for 30 years, driving your purchasing decision by the affordability of those monthly payments which are fixed for the entire duration of the contract, is a very decent foundation for a market.
    • SilasX 5y ago
      I didn't mean it's necessary a bad choice for the individual, just that it's a systemic issue. When people only think in terms of monthly payment, then total prices become unmoored from fundamentals. But I agree I haven't (and probably can't) spell out this intuition rigorously.
• nly 5y ago
  None of that matters if house prices inflate outside of the income multiple that a bank will lend and you can't get a mortgage to begin with.
• throw0101a 5y ago
  > In other words: Houses are still way cheaper, in actual out-of-pocket terms for average people, than they were in 2008. Today's interest rates are way too low. I don't disagree generally, but one niggle: housing prices do effect downpayment sizes, which may be a problem for people to save for if prices get too high (relative to wages). Adjusted monthly payments are the cheapest they've been since 1989: * https://awealthofcommonsense.com/2021/03/what-if-housing-prices-arent-as-high-as-they-appear/ https://awealthofcommonsense.com/2021/03/what-if-housing-pri... Though, there's a lot of bidding so good luck actually landing a purchase to take advantage of these low monthly payments: * https://awealthofcommonsense.com/2021/05/has-there-ever-been-a-worse-time-to-be-a-homebuyer/ https://awealthofcommonsense.com/2021/05/has-there-ever-been...