9 ms·

I think you have missed a source of demand, and I think it's important. As housing became more and more expensive to young professionals, some people in this g

by lmt55 4y ago

I think you have missed a source of demand, and I think it's important. As housing became more and more expensive to young professionals, some people in this group have worked harder and harder to buy property, even to the point where it no longer seems rational. For example, parents taking a lot of wealth out of their retirement savings or their own homes to assist children in buying. Professionals are working more than otherwise makes sense for their stage in life (young families with two full-time parents). They are committing a large share of their monthly budget, often right until the start of retirement. They do this because they believe in the importance of owning property - beyond any reasonable narrow economic justification. Of course, there is an inequality aspect to this - not everyone's parents have capital, not everyone can command a high enough wage. But crucially, the presence of this group of people arguably turns the bubble into something else. These buyers put a floor on the market. If prices drop even a little, or something else changes to make mortgages slightly more affordable, they rush in and buy the dip. By doing this, they sustain the high prices for everyone else in the market. This will probably happen now. Higher rates will make current prices unsustainable. As soon as they correct to the point where monthly payments are back to what they were last year, there will be buyers, only too happy to overextend themselves to get out of renting. It's inaccurate to characterize these people as likely to default. They are actually very good mortgage risks - they have already shown themselves to be very committed to ownership. And the resources which got them into a position to buy mean they will keep on paying short of a disaster. The truly unrealistic borrowers of pre-2008 have never been let back into the market.

hans1729 4y ago
I did not miss those people, but my wording was loaded and so the point got lost in translation. I implicitly captured them under b) "[...] it's dumb to buy estates where the price is set by people and institutions that have n times your own income/net worth", where dumb is a loaded term for your >"to the point where it no longer seems rational". >But crucially, the presence of this group of people arguably turns the bubble into something else. I agree with this, it's not a bubble in the sense of 2008. I said so in the comment you replied to! We're in the same boat here. By the way: I'm precicely in that demographic. I just turned 30 and do well for myself as an employed consultant, but I wouldn't consider buying the dip, unless the dip is at least ~100% of the current market prices (which I don't see happening, but who knows). Going in debt for 30-40 years has zero appeal for me, it just seems like a terrible move. The counter-argument I hear from people my age group is always the same "but then you'll never own anything!" -- then so be it, whats the point?! Even if someone gave me a million Euros, I wouldn't spend 600k of those on a house and then another 300k on renovations, that seems like a terrible waste of resources. With that kind of money, you can buy three small companies in Germany, or stop worrying about retirement, etc. Buying estate = de facto being in debt for the entire career and then some, plus having to pay all repairs, anything. I don't see how that would ease my life at all. If someone wants to give me a house, nice, but buying a house just for the sake of doing so reminds me of a signature I often read on market-ticker.org -- leave the rats race to the rats.
- lmt55 4y ago
  This is fair, you didn't miss those people. But I think it was worth me highlighting them because they are, as I argued, very important. I somewhat agree with your argument. Housing costs more than other assets compared to its economic value, exactly because people have an emotional reaction to the idea of owning it - or the idea of not owning it. However I have seen middle-class people overextend themselves to 'buy the dip', while their equally wealthy peers sit it out, for over 15 years now. Many of the people who did the former now consider themselves to have got a bargain, while many of the latter changed their minds and ended up buying several years later and at much higher prices. I'm definitely not arguing that this makes buying right and renting wrong! Just that so far, this is how that choice played out.
  - pooper 4y ago
    A real estate investment newsletter suggests that for a successful real estate investment, as a rule of thumb you should be able to charge almost one percent of the cost of the house as rent because a rational investor shouldn't count on the value of the house going up. I am curious what you guys think of this statement. I think the idea is if the potential rent you get out of your investment is too much under one percent, you might be better off investing in something else? Now imagine a smallish 4 bed, 2 bath, 1,638 sqft built home on a 5,861 sqft lot in Longmont, Colorado (so not exactly a city but my preference because municipal fiber) that has a sticker price of USD 499,900. I can't imagine paying USD 4,999 every month in rent for this house at the moment. What gives? Is rent too low? My instinct is home prices are way too high but it can't just be "dumb money" keeping prices high, right? Eventually, there should be more supply causing prices to drop? Is something preventing this correction? If so, how do we fix it?
    - lmt55 4y ago
      An old rule of thumb was 'buy at 10, sell at 20'. That's the ratio of price to annual rent. So if you could get 0.86% of the house price in monthly rent, it was a big bargain. If you couldn't get more than 0.43%, then it wasn't worth owning. The rule of thumb is now obsolete, and 30-40 times rent is perfectly common in lots of places. The newsletter is quite a lot more aggressive than even the rule of thumb from the 'good old days' when interest rates were much higher. I used to pay around 0.2% of the market price of my apartment per month. The landlord was a professional property management company, and this situation persisted through several new contracts.
throwaway0a5e 4y ago
The real irony is that these people putting a floor on the market are mostly the same demographics screeching about how housing shouldn't be an investment. Yet another case of how society would be better off if people practiced what they preached.
mring33621 4y ago
Thank you for your comment. I think this is interesting: "Higher rates will make current prices unsustainable. As soon as they correct to the point where monthly payments are back to what they were last year, there will be buyers, only too happy to overextend themselves to get out of renting." So, higher rates are effectively a transfer of wealth from homeowners to banks? How does this serve to combat the current inflation issue?
- lmt55 4y ago
  I don't understand how you draw this conclusion from what I said. Regardless of high or low rates, banks borrow low and lend high, and live on the difference. High rates, if you want to express yourself in those terms, a transfer of wealth from people with debt to people with assets.
stevenhuang 4y ago
This captures my assessment on the matter. With the housing shortage and unmet demand, we are at the margins whereby the ones buying are well-off. The question to ask is if the rate of new housing and the rate of capable buyers will diverge. As long as supply is low enough that the supply of capable buyers keep outbidding each other, housing prices will keep rising or at least plateau. Higher rates will have an affect on diminishing the rate of capable buyers entering the market, but if supply is still low and the demand for home ownership remains high, I don't foresee anything drastic happening to the housing market.

by lmt55 4y ago

hans1729 4y ago

I did not miss those people, but my wording was loaded and so the point got lost in translation. I implicitly captured them under b) "[...] it's dumb to buy estates where the price is set by people and institutions that have n times your own income/net worth", where dumb is a loaded term for your >"to the point where it no longer seems rational". >But crucially, the presence of this group of people arguably turns the bubble into something else. I agree with this, it's not a bubble in the sense of 2008. I said so in the comment you replied to! We're in the same boat here. By the way: I'm precicely in that demographic. I just turned 30 and do well for myself as an employed consultant, but I wouldn't consider buying the dip, unless the dip is at least ~100% of the current market prices (which I don't see happening, but who knows). Going in debt for 30-40 years has zero appeal for me, it just seems like a terrible move. The counter-argument I hear from people my age group is always the same "but then you'll never own anything!" -- then so be it, whats the point?! Even if someone gave me a million Euros, I wouldn't spend 600k of those on a house and then another 300k on renovations, that seems like a terrible waste of resources. With that kind of money, you can buy three small companies in Germany, or stop worrying about retirement, etc. Buying estate = de facto being in debt for the entire career and then some, plus having to pay all repairs, anything. I don't see how that would ease my life at all. If someone wants to give me a house, nice, but buying a house just for the sake of doing so reminds me of a signature I often read on market-ticker.org -- leave the rats race to the rats.

lmt55 4y ago
This is fair, you didn't miss those people. But I think it was worth me highlighting them because they are, as I argued, very important. I somewhat agree with your argument. Housing costs more than other assets compared to its economic value, exactly because people have an emotional reaction to the idea of owning it - or the idea of not owning it. However I have seen middle-class people overextend themselves to 'buy the dip', while their equally wealthy peers sit it out, for over 15 years now. Many of the people who did the former now consider themselves to have got a bargain, while many of the latter changed their minds and ended up buying several years later and at much higher prices. I'm definitely not arguing that this makes buying right and renting wrong! Just that so far, this is how that choice played out.
- pooper 4y ago
  A real estate investment newsletter suggests that for a successful real estate investment, as a rule of thumb you should be able to charge almost one percent of the cost of the house as rent because a rational investor shouldn't count on the value of the house going up. I am curious what you guys think of this statement. I think the idea is if the potential rent you get out of your investment is too much under one percent, you might be better off investing in something else? Now imagine a smallish 4 bed, 2 bath, 1,638 sqft built home on a 5,861 sqft lot in Longmont, Colorado (so not exactly a city but my preference because municipal fiber) that has a sticker price of USD 499,900. I can't imagine paying USD 4,999 every month in rent for this house at the moment. What gives? Is rent too low? My instinct is home prices are way too high but it can't just be "dumb money" keeping prices high, right? Eventually, there should be more supply causing prices to drop? Is something preventing this correction? If so, how do we fix it?
  - lmt55 4y ago
    An old rule of thumb was 'buy at 10, sell at 20'. That's the ratio of price to annual rent. So if you could get 0.86% of the house price in monthly rent, it was a big bargain. If you couldn't get more than 0.43%, then it wasn't worth owning. The rule of thumb is now obsolete, and 30-40 times rent is perfectly common in lots of places. The newsletter is quite a lot more aggressive than even the rule of thumb from the 'good old days' when interest rates were much higher. I used to pay around 0.2% of the market price of my apartment per month. The landlord was a professional property management company, and this situation persisted through several new contracts.

throwaway0a5e 4y ago

The real irony is that these people putting a floor on the market are mostly the same demographics screeching about how housing shouldn't be an investment. Yet another case of how society would be better off if people practiced what they preached.

mring33621 4y ago

Thank you for your comment. I think this is interesting: "Higher rates will make current prices unsustainable. As soon as they correct to the point where monthly payments are back to what they were last year, there will be buyers, only too happy to overextend themselves to get out of renting." So, higher rates are effectively a transfer of wealth from homeowners to banks? How does this serve to combat the current inflation issue?

lmt55 4y ago
I don't understand how you draw this conclusion from what I said. Regardless of high or low rates, banks borrow low and lend high, and live on the difference. High rates, if you want to express yourself in those terms, a transfer of wealth from people with debt to people with assets.

stevenhuang 4y ago

This captures my assessment on the matter. With the housing shortage and unmet demand, we are at the margins whereby the ones buying are well-off. The question to ask is if the rate of new housing and the rate of capable buyers will diverge. As long as supply is low enough that the supply of capable buyers keep outbidding each other, housing prices will keep rising or at least plateau. Higher rates will have an affect on diminishing the rate of capable buyers entering the market, but if supply is still low and the demand for home ownership remains high, I don't foresee anything drastic happening to the housing market.