6 ms·

> house prices have a fundamental ceiling, and it is determined by the size of the monthly payment that banks will allow the typical homebuyer to assume when ap

by derefr 5y ago

> house prices have a fundamental ceiling, and it is determined by the size of the monthly payment that banks will allow the typical homebuyer to assume when approving a loan. In the more irrationally-hot markets, why assume that housing is even being purchased on a mortgage by your average home-buyer, rather than being purchased cash-in-hand by a private or corporate investor looking to park wealth they've already generated? (Even if that isn't the majority of houses in those markets, the sales like that that do happen would still have an impact on property values in the affected neighbourhoods.)

trident5000 5y ago
Because the real estate sector is like 30-40 trillion. 2007 was the result of a massive infusion of debt by unsophisticated retail "investors" who bid prices up far higher than even their rental value. Lending standards dont allow this today. If big institutional money is going to cause a frenzy it would need to be irrational money managers that somehow clear their purchases through a panel and none of them say anything. Some point out that blackrock is on the other side of this zillow unloading but they have trillions in assets and only 60 billion in real estate. This is the largest money manager in the world and thats all the exposure they have.
- copenja 5y ago
  According to this article[1], large investment companies accounted to 16.1% of all single family home sales in the US in Q2. I'm not an analyst. But, I would think that would be plenty of extra demand to influence the price?
  - trident5000 5y ago
    Investment companies are far less likely to lead a speculative bubble than retail buyers. They are professional investors who go through a valuation process. They have also always been part of the market.
    - dd36 5y ago
      Institutional investment in single family housing stock is brand new. Less than a decade old.
      - rsj_hn 5y ago
        Nevertheless they are not buying houses for emotional reasons, but for the income stream. FYI, the reason this is happening is that interest rates are so low that people are desperate for yield, and rental yield fits the bill. There are a lot of benefits: - professionally managed properties. Most small time landlords are incompetent -- the horror stories you see about landlords being petty or vindictive is from the small time landlord, not the professional manager. - lower rental prices for properties people want to own. Institutional investors can move funds more quickly to increase rental stock where it is most in demand. Here, too, the yield will fall, which is another way of saying lower rents. Moreover despite the moral panic by journalists that ordinary households are being priced out, this doesn't actually happen because most institutional investors operate in unconstrained areas, where home prices track construction costs, at most with a small delay. In these areas, an increase in renter demand will result in more property built much more quickly if the institutional investors participate. This actually drives down prices over the long term by increasing supply. However in constrained areas, this would drive up prices for SFHs. But I thought people weren't supposed to buy SFHs in constrained areas - and institutional investors have been in the multi-unit market for over a century.
        satellite2 5y ago
        > home prices track construction costs But construction costs track home price so this doesn't prevent an unbounded faster than inflation growth.
        rsj_hn 5y ago
        Yes, the correlation is not necessarily causation, but we can add some other data points -- for example the size of new construction has been steadily growing at roughly 2%, which does not suggest any kind of odd explosion in house size as a result of the price going up. Of course ultimately, ability to pay determines the price of housing and also house size.
  - ashtonkem 5y ago
    Perhaps. Unlike in 2008 though, those buyers aren’t typically hoping to sell those houses for a short term profit, most of those investors are hoping to turn them into rent income. This could easily distort prices, and have pernicious social effects, but might not be an asset bubble. After all, if those investors manage to actually charge enough rent to make a profit, is the asset really over priced then?
- RNCTX 5y ago
  > Because the real estate sector is like 30-40 trillion. 2007 was the result of a massive infusion of debt by unsophisticated retail "investors" who bid prices up far higher than even their rental value. Lending standards dont allow this today. lol. 2007 was the end of a long road, paved by unsophisticated "money managers" and doubly unsophisticated "bank regulators" and even more unsophisticated "politicians" since WW2. There are people buying houses for more than their rental value right now where I live. Because there's one crime-ridden trailer park maintained on the freeway nearby to make them all within a certain distance of a "disadvantaged zone" and thus every former manufacturing country factory boss looking to move to the US only has to lose $400-$500 dollars a month to buy his way to the top of the green card list.
  - sollewitt 5y ago
    What is this green card prioritization mechanism you allude to?
    - iudqnolq 5y ago
      EB-5 investor visas > Under regulations ... an EB-5 investor would need to invest ... a minimum of $1 million normally or $500,000 in economically disadvantaged areas... > You'll need to plan on having your money tied up in the business for several years. When you first get your green card, your permanent resident status will be conditional for two years. During the 90-day period before the end of the two-year conditional residency, you'll need to submit a petition to remove the conditions—to show you invested the required amount and created ten jobs. These two years and government processing times result in your money being parked until you finally get your unconditional permanent residency. https://www.alllaw.com/articles/nolo/us-immigration/investment-based-eb-5-green-card-eligibility.html https://www.alllaw.com/articles/nolo/us-immigration/investme... Edit: Not OP, just guessing
      - RNCTX 5y ago
        That's the one. So practically it's pretty cheap to get yourself to the top of the list for permanent residency. All you have to do is buy a couple of $500k houses, rent them for whatever rent you can get for them, claim you created 10 jobs by hiring maintenance guys and landscapers and whatever else to maintain them, and then when you've got your paper from the US government you can turn around and sell them for what you paid for them (or even a little less, who cares, you bought your American residency). The rules were changed from the original law to not only allow properties in economically disadvantaged areas but near them. As I said, that's why there's a trailer park which resembles some "third world" country slums right on the freeway in the wealthier north Dallas suburbs where I live. All of those realtors selling rental houses to Chinese factory bosses, Russian mobsters' children, South American cartel finance guys, etc need them to be near the trailer park to qualify for the program. Similarly, via a ridiculous string of foot paths and bike lanes, Hudson Yards in NYC was determined to be economically disadvantage due to its proximity to Harlem, so they could also sell apartments that no one else wanted to Chinese factory bosses, children of Russian mobsters, South American cartel finance guys, etc.
deleted 5y ago
[deleted]
naniwaduni 5y ago
Why not buy in on Ponzi schemes? It can work out great for you if you get the timing right!
selcuka 5y ago
If the current value of something is over a "fundamental ceiling" it means that it's already inflated. Why would an investor park their wealth in such an asset?
- nradov 5y ago
  Sometimes there's just no good alternative. And real estate has less strict AML/KYC laws than other asset classes so we have some shady foreign money coming in.
  - eru 5y ago
    > Sometimes there's just no good alternative. You can always just stick your money in an ETF.
    - kgwgk 5y ago
      Which may not be a good alternative.
      - eru 5y ago
        Well, you can also put your money into short-selling strategies, if you think stuff is overvalued. (Of course, taxes and regulations complicated this discussion.)
        dagw 5y ago
        Of course, taxes and regulations complicated this discussion. It doesn't complicate the discussion, it is the discussion. Basically the only reason foreign investors are buying real estate in North America is because of issues directly related to regulations and taxes.
- oarabbus_ 5y ago
  P/E ratios of much of the S&P500 would indicate prices/values far over the fundamental value, yet investors continue to flock to large-cap equities in droves.

by derefr 5y ago

trident5000 5y ago

Because the real estate sector is like 30-40 trillion. 2007 was the result of a massive infusion of debt by unsophisticated retail "investors" who bid prices up far higher than even their rental value. Lending standards dont allow this today. If big institutional money is going to cause a frenzy it would need to be irrational money managers that somehow clear their purchases through a panel and none of them say anything. Some point out that blackrock is on the other side of this zillow unloading but they have trillions in assets and only 60 billion in real estate. This is the largest money manager in the world and thats all the exposure they have.

copenja 5y ago
According to this article[1], large investment companies accounted to 16.1% of all single family home sales in the US in Q2. I'm not an analyst. But, I would think that would be plenty of extra demand to influence the price?
- trident5000 5y ago
  Investment companies are far less likely to lead a speculative bubble than retail buyers. They are professional investors who go through a valuation process. They have also always been part of the market.
  - dd36 5y ago
    Institutional investment in single family housing stock is brand new. Less than a decade old.
    - rsj_hn 5y ago
      Nevertheless they are not buying houses for emotional reasons, but for the income stream. FYI, the reason this is happening is that interest rates are so low that people are desperate for yield, and rental yield fits the bill. There are a lot of benefits: - professionally managed properties. Most small time landlords are incompetent -- the horror stories you see about landlords being petty or vindictive is from the small time landlord, not the professional manager. - lower rental prices for properties people want to own. Institutional investors can move funds more quickly to increase rental stock where it is most in demand. Here, too, the yield will fall, which is another way of saying lower rents. Moreover despite the moral panic by journalists that ordinary households are being priced out, this doesn't actually happen because most institutional investors operate in unconstrained areas, where home prices track construction costs, at most with a small delay. In these areas, an increase in renter demand will result in more property built much more quickly if the institutional investors participate. This actually drives down prices over the long term by increasing supply. However in constrained areas, this would drive up prices for SFHs. But I thought people weren't supposed to buy SFHs in constrained areas - and institutional investors have been in the multi-unit market for over a century.
      - satellite2 5y ago
        > home prices track construction costs But construction costs track home price so this doesn't prevent an unbounded faster than inflation growth.
        rsj_hn 5y ago
        Yes, the correlation is not necessarily causation, but we can add some other data points -- for example the size of new construction has been steadily growing at roughly 2%, which does not suggest any kind of odd explosion in house size as a result of the price going up. Of course ultimately, ability to pay determines the price of housing and also house size.
- ashtonkem 5y ago
  Perhaps. Unlike in 2008 though, those buyers aren’t typically hoping to sell those houses for a short term profit, most of those investors are hoping to turn them into rent income. This could easily distort prices, and have pernicious social effects, but might not be an asset bubble. After all, if those investors manage to actually charge enough rent to make a profit, is the asset really over priced then?
RNCTX 5y ago
> Because the real estate sector is like 30-40 trillion. 2007 was the result of a massive infusion of debt by unsophisticated retail "investors" who bid prices up far higher than even their rental value. Lending standards dont allow this today. lol. 2007 was the end of a long road, paved by unsophisticated "money managers" and doubly unsophisticated "bank regulators" and even more unsophisticated "politicians" since WW2. There are people buying houses for more than their rental value right now where I live. Because there's one crime-ridden trailer park maintained on the freeway nearby to make them all within a certain distance of a "disadvantaged zone" and thus every former manufacturing country factory boss looking to move to the US only has to lose $400-$500 dollars a month to buy his way to the top of the green card list.
- sollewitt 5y ago
  What is this green card prioritization mechanism you allude to?
  - iudqnolq 5y ago
    EB-5 investor visas > Under regulations ... an EB-5 investor would need to invest ... a minimum of $1 million normally or $500,000 in economically disadvantaged areas... > You'll need to plan on having your money tied up in the business for several years. When you first get your green card, your permanent resident status will be conditional for two years. During the 90-day period before the end of the two-year conditional residency, you'll need to submit a petition to remove the conditions—to show you invested the required amount and created ten jobs. These two years and government processing times result in your money being parked until you finally get your unconditional permanent residency. https://www.alllaw.com/articles/nolo/us-immigration/investment-based-eb-5-green-card-eligibility.html https://www.alllaw.com/articles/nolo/us-immigration/investme... Edit: Not OP, just guessing
    - RNCTX 5y ago
      That's the one. So practically it's pretty cheap to get yourself to the top of the list for permanent residency. All you have to do is buy a couple of $500k houses, rent them for whatever rent you can get for them, claim you created 10 jobs by hiring maintenance guys and landscapers and whatever else to maintain them, and then when you've got your paper from the US government you can turn around and sell them for what you paid for them (or even a little less, who cares, you bought your American residency). The rules were changed from the original law to not only allow properties in economically disadvantaged areas but near them. As I said, that's why there's a trailer park which resembles some "third world" country slums right on the freeway in the wealthier north Dallas suburbs where I live. All of those realtors selling rental houses to Chinese factory bosses, Russian mobsters' children, South American cartel finance guys, etc need them to be near the trailer park to qualify for the program. Similarly, via a ridiculous string of foot paths and bike lanes, Hudson Yards in NYC was determined to be economically disadvantage due to its proximity to Harlem, so they could also sell apartments that no one else wanted to Chinese factory bosses, children of Russian mobsters, South American cartel finance guys, etc.

deleted 5y ago

[deleted]

naniwaduni 5y ago

Why not buy in on Ponzi schemes? It can work out great for you if you get the timing right!

selcuka 5y ago

If the current value of something is over a "fundamental ceiling" it means that it's already inflated. Why would an investor park their wealth in such an asset?

nradov 5y ago
Sometimes there's just no good alternative. And real estate has less strict AML/KYC laws than other asset classes so we have some shady foreign money coming in.
- eru 5y ago
  > Sometimes there's just no good alternative. You can always just stick your money in an ETF.
  - kgwgk 5y ago
    Which may not be a good alternative.
    - eru 5y ago
      Well, you can also put your money into short-selling strategies, if you think stuff is overvalued. (Of course, taxes and regulations complicated this discussion.)
      - dagw 5y ago
        Of course, taxes and regulations complicated this discussion. It doesn't complicate the discussion, it is the discussion. Basically the only reason foreign investors are buying real estate in North America is because of issues directly related to regulations and taxes.
oarabbus_ 5y ago
P/E ratios of much of the S&P500 would indicate prices/values far over the fundamental value, yet investors continue to flock to large-cap equities in droves.