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I think of pricing as a probability distribution, and while it's possible that prices continue to increase, in my view the downside risk on house prices predomi

I think of pricing as a probability distribution, and while it's possible that prices continue to increase, in my view the downside risk on house prices predominates. Here are a few possibilities: 1. high interest leads to an increase in rates, significantly increasing payments and making current prices less affordable. 2. A recession drops wages 3. Stock prices drop precipitously, devaluing a lot of paper money in some markets (e.g., RSUs) 4. Previous 'hot-markets' have their use-value decrease substantially due to greater availability of remote work 5. In concert with a rate increase, if house prices look to be dropping housing as an investment vehicle may become unappealing, causing a flight and a downward spiral All of this has to be balanced with the risk of holding onto cash or putting the money into other vehicles. Inflation is eating at the cash pretty aggressively right now and many other more liquid investments suffer similar risks as housing, but you don't get to live in your stock portfolio. If inflation doesn't get reigned in, housing may hold its nominal value or even increase and there's probably a sizable contingent of policy makers that would rather inflate than suffer significant nominal housing value decreases. For me, I'm basically watching what happens with inflation and how policy makers look to be acting. I'm holding a decent amount of cash, but I'm looking for a place to put it near-term and have limited patience on housing in the face of continued high inflation.

algoatecorn 5y ago
All perfectly valid points. May I ask what you mean by #1? Interest rates are historically low and a fixed mortgage will only change based on property taxes and insurance. #2 is something I thought about a lot as I was buying my first home, but I couldn't see how a drop in wage would change anything, since my mortgage is now less than what I paid in rent for just a modest apartment.
- tmnvix 5y ago
  Not OP, but as I see it, this is not so much about existing mortgages. New purchases will be funded by loans on terms with higher rates. Because most borrow close to the limit of what they can service, future purchases will be for less. If you and your neighbour both purchased for $1M a year ago and your neighbour sells theirs for $800K this year (because that is all any new purchaser can afford), then your house is also now valued at $800K.
deanmoriarty 5y ago
Do you have any evidence that #1 would actually happen, if interest rates rise? I was listening to a podcast a while ago where an economist was discussing that if we go back in history and look at the times when interest rates rose, rarely/never we find that housing prices actually went down. They counterintuitively stayed flat or continued to rise (in the US).
- AnimalMuppet 5y ago
  Depends on how stringent of evidence you want. Supply and demand in housing doesn't work on the purchase price. It works on the monthly payment (and the down payment), because that's the limiting factor for most buyers. If interest rates rise, the monthly payments rise for the same total house price. So fewer buyers can pay those prices. The demand curve shifts, so the price point shifts. I saw this with our first house. We paid $61K, at 9% interest. Two years later, interest dropped to 7%, and our house was worth $90K. If we had bought the same house two years later, our monthly payment would have been the same. Yeah, I know, that's anecdote, not data...
  - ipaddr 5y ago
    Those account for first time buyers only with the min down payment.

algoatecorn 5y ago

All perfectly valid points. May I ask what you mean by #1? Interest rates are historically low and a fixed mortgage will only change based on property taxes and insurance. #2 is something I thought about a lot as I was buying my first home, but I couldn't see how a drop in wage would change anything, since my mortgage is now less than what I paid in rent for just a modest apartment.

tmnvix 5y ago
Not OP, but as I see it, this is not so much about existing mortgages. New purchases will be funded by loans on terms with higher rates. Because most borrow close to the limit of what they can service, future purchases will be for less. If you and your neighbour both purchased for $1M a year ago and your neighbour sells theirs for $800K this year (because that is all any new purchaser can afford), then your house is also now valued at $800K.

deanmoriarty 5y ago

Do you have any evidence that #1 would actually happen, if interest rates rise? I was listening to a podcast a while ago where an economist was discussing that if we go back in history and look at the times when interest rates rose, rarely/never we find that housing prices actually went down. They counterintuitively stayed flat or continued to rise (in the US).

AnimalMuppet 5y ago
Depends on how stringent of evidence you want. Supply and demand in housing doesn't work on the purchase price. It works on the monthly payment (and the down payment), because that's the limiting factor for most buyers. If interest rates rise, the monthly payments rise for the same total house price. So fewer buyers can pay those prices. The demand curve shifts, so the price point shifts. I saw this with our first house. We paid $61K, at 9% interest. Two years later, interest dropped to 7%, and our house was worth $90K. If we had bought the same house two years later, our monthly payment would have been the same. Yeah, I know, that's anecdote, not data...
- ipaddr 5y ago
  Those account for first time buyers only with the min down payment.